Equalization Program

• Equalization is the Government of Canada's transfer program for addressing fiscal disparities among provinces.
• The purpose of the program was entrenched in the Canadian Constitution in 1982:
  "Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation." (Subsection 36(2) of the Constitution Act, 1982)
• Equalization is financed by the Government of Canada from general revenues, which are largely raised through federal taxes. Provincial governments make no contributions to the Equalization program. All Canadians are subject to the same federal income tax system and its progressive rate structure, regardless of where they live.
• Equalization payments are unconditional – receiving provinces are free to spend the funds according to their own priorities.
• Since its inception in 1957, the Equalization program has provided benefits at some point in time to every province in Canada.
• The three territorial governments do not receive Equalization. The federal government supports these governments through a separate program - Territorial Formula Financing - an annual unconditional transfer that recognizes the high cost of providing public services in the North.
• Another program, Fiscal Stabilization, enables the federal government to provide financial assistance to any province faced with a significant year-over-year decline in its revenues resulting from an extraordinary economic downturn.
• The legislation governing the Equalization program is reviewed on a periodic basis to ensure the program is meeting its objectives and using the most up-to-date and accurate measures in the determination of provincial entitlements. The federal government consults regularly with provincial governments in support of renewal. The next renewal must take place before March 31, 2024.

• The allocation of Equalization payments is based on a measure of fiscal capacity, which represents the revenues a province could raise if it were to tax at the national average rate.  Equalization supports provinces that have a lower than average fiscal capacity. Provincial spending decisions and overall fiscal results do not affect Equalization.
• Equalization reduces, but does not eliminate, fiscal disparities; the fiscal capacities of non-receiving provinces remain above the national average (Chart 1).  
• The current formula is largely based on recommendations from the 2006 report from the Expert Panel on Equalization and Territorial Formula Financing.
• Fiscal capacity is determined across five broad revenue categories: personal income taxes, business taxes, consumption taxes, property taxes, and natural resource revenues.
• A province's fiscal capacity is not based on its actual tax revenues, but on those it could raise with national average tax rates.
• For natural resources, consistent with the 2006 Expert Panel’s recommendation, fiscal capacity is assessed based on partial inclusion of actual revenue collected by the province.  However, a province’s Equalization payment cannot raise its fiscal capacity above that of a non-receiving province when all resource revenues are taken into account. 
• Equalization payments are calculated on a per capita basis, then adjusted for provincial population.
• To enhance the stability and predictability of Equalization payments, fiscal capacity is estimated based on a weighted three-year moving average, lagged by two years. For example, payments in 2023-24 reflect data for fiscal years 2021-22 (50 per cent weight), 2020-21 (25 per cent weight) and 2019-20 (25 per cent weight).
• The overall Equalization envelope is adjusted to keep the total program payout growing in line with the economy. The growth track is based on a three-year moving average of national nominal gross domestic product (GDP) growth.
• The Equalization formula is set out in the Federal‑Provincial Fiscal Arrangements Act and in regulations made under the Act.  These can be accessed on the Department of Justice Canada website.
• The detailed Equalization calculations are shared with provinces and academics, and with anyone who requests them.

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