Equalization payments in Canada

In Canada, the federal government makes equalization payments to less wealthy Canadian provinces to equalize the provinces' "fiscal capacity"—their ability to generate tax revenues. A province that does not receive equalization payments is often referred to as a "have province", while one that does is called a "have not province". In 2013–14, six provinces will receive $16.105 billion in equalization payments from the federal government.

Canada's territories are not included in the equalization program. The federal government addresses territorial fiscal needs through the Territorial Formula Financing (TFF) program.

Equalization payments are based on a formula that calculates the difference between the per capita revenue yield that a particular province would obtain using average tax rates and the national average per capita revenue yield at average tax rates. The current formula considers five major revenue sources (see below). The objective of the program is to ensure that all provinces have access to per capita revenues equal to the potential average of all ten provinces. The formula is based solely on revenues and does not consider the cost of providing services or the expenditure need of the provinces.

Equalization payments happen via the federal treasury. As an example, a wealthy citizen in New Brunswick, a so-called "have not" province, pays more into equalization than a poorer citizen in Alberta, a so-called "have" province. However, because of Alberta's greater wealth, the citizens of Alberta as a whole are net contributors to Equalization, while the citizens of New Brunswick are net receivers of Equalization payments.

Equalization payments are one example of what are often collectively referred to in Canada as "transfer payments", a term used in other jurisdictions to refer to cash payments to individuals (see Canadian transfer payments). The money the provinces receive through equalization can be spent in any way the provincial government desires. The payments help guarantee "reasonably comparable levels" of health care, education, and welfare in all the provinces. The definition of "reasonably comparable levels", however, has been the subject of considerable debate.

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