Key Issues for the Review of Equalization and Territorial Formula Financing

ANNEX C: Previous Reviews of Equalization and TFF

The Equalization program was first established in 1957 and started as a relatively simple program measuring revenue capacity in respect of only three provincial revenue sources: personal and corporate taxes, as well as succession duties. The program grew continually in both size and complexity. Today, it tracks some 33 different revenue sources and the formula relies on some three hundred demographic, financial and economic inputs. Moreover, to address issues of stability, it has relied on complicated systems of floors and ceilings.

It has, however, always used the same conceptual approach to measuring fiscal capacity, known as the Representative Tax System (RTS): for each provincial revenue source, it seeks to construct a composite of average or typical provincial tax practices (a representative approximation of what provinces collectively are willing and able to tax).

Equalization has been renewed every five years, after extensive consultations between federal and provincial Finance officials representing all provinces, not just the receiving ones. Decisions are normally made by the federal Minister of Finance, who has the statutory responsibility for Equalization under the Fiscal Arrangements Act, on behalf of the Government as a whole. The decision process has been characterized by some as one of "closed-doors executive federalism", leaving little room for the views of Canadians.

While the program has undergone occasional reviews by Parliamentary Committees (Breau Committee in 1981, Senate Finance Committee in 2002), by the Economic Council of Canada (1982), by the Auditor General (1997) as well as by various academic experts and policy institutes, it has never undergone an independent expert review.

The TFF is a much more recent creation, first established in 1985, to replace what was then direct program-by-program funding received from the federal government. The TFF has relied since its creation on a formula for calculating the shortfall between each Territory's expenditure need and its eligible revenues (own-source revenue capacity and other federal transfers). Like Equalization, TFF has grown continually in complexity. It has undergone a number of intergovernmental reviews, notably when the creation of Nunavut required major changes to the Gross Expenditure Base entering the formula, but never an independent expert review.

Last Updated: 2010-09-06		Important Notices