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From the time Canada first became a nation in 1867, the federal
government in Ottawa and the provincial governments across the
country have been engaged in regular and sometimes vicious
battles over money. The British North America Act established a
federal system for Canada. That meant that control over issues
was divided between the two levels of government. The division,
in the Canadian case, was not equal. The national government was
responsible for big items of national significance, and the
provincial governments were responsible for small issues of
local significance.
In 1867, defence and finance and commerce seemed to be the big
issues, so they were handed to the national government; health
and education and insurance seemed to be less important, so
provinces were made responsible for these more local concerns.
In keeping with this division, the federal government could
collect money any way it chose, while the provinces could only
tax directly. The federal government’s capacity for income was
limitless, in other words, while the provincial access to money
was severely limited. This made sense given the fact that Ottawa
had what seemed to be costly responsibilities, while the
provinces seemed to have control over inexpensive areas. But it
meant that there would always be battles about which level of
government could collect the money, and which areas each level
was responsible for spending money in.
As the 20th century unfolded, the size of the provincial
responsibilities seemed to grow. The issues under provincial
jurisdiction increasingly seemed to be necessary, and they were
invariably terribly expensive to provide. Government
responsibility shifted from regulating services like health and
education to actually providing them. The costs were huge.
At the same time that provincial responsibilities became more
costly, the ways that were available for them to collect money
became even more constrained. For example, both federal and
provincial governments can impose direct taxes; a federal
example of a direct tax is the income tax, while a provincial
example is a sales tax. However, once one level of government
begins to tax a particular area, it closes it off, for all
intents and purposes, to the other level of government. When
Ottawa moved into the income, corporate and estates tax fields
during World War II, all direct taxes, the provinces lost a
major source of income. The federal government compensated the
provinces for leaving these fields, but the provincial
governments lost important flexibility in accessing money for
themselves.
Ever since the federal government moved aggressively into the
direct tax fields during the 1940s, supposedly because of the
very particular needs of wartime, Ottawa and the provinces have
had to meet regularly to divide the tax fields. That first,
supposedly temporary, federal grab of direct tax revenue was to
last for the duration of the war. When the war was over the
money was too good for the federal government to give up. Every
five years since then, the two levels of government have met to
discuss the formula for sharing the tax areas. The federal
government has kept taxing in the direct tax fields, continuing
to compensate the provinces in various ways.
But collecting the money isn’t the only problem plaguing the
federal and provincial governments. They also argue about which
level of government gets to spend money in particular areas.
With more money, Ottawa had the ability to spend in areas that
were actually within provincial jurisdiction. When the federal
government introduced national health insurance in the 1960s,
for example, and covered the costs of Canadians’ doctor and
hospital bills, it was really working in an area that was the
responsibility of the provinces. It could do this by offering to
cover half the cost of health insurance in any province that
passed legislation that met a set of national guidelines.
Provinces that agreed could pay 50 cents for a dollar’s worth of
services — a deal that they all found too good to ignore. But
this allowed the federal government to dictate the terms of what
ought to have been a provincial program.
Since 1956, governments have also recognized that some regions
of Canada are chronically poor while other areas tend to be much
wealthier. Equalization — a system by which the federal
government gives money to poorer areas in order to bring the
region up to a national average — ensures that all Canadians,
regardless of where they live in Canada, have access to the same
level of services. Figuring out which provinces are eligible for
equalization payments is another regular source of friction
between the two levels of government.
In a federal system, the federal and provincial governments are
in a near constant state of conflict over money. Negotiations
over how to divide access to tax revenues occur regularly,
arguments over how to spend the money are ongoing, as are
debates about who needs more money and why. But in Canada, these
sorts of conversations are an accepted, desirable and integral
part of the way our government system functions.
Next Instalment: A Miniature of Britain — Well, Not Quite
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#38 Federal-Provincial Economic Relations
