Equalization Payments Canada: What Are They & How Do They Work

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In Canada, equalization payments are transfers of funds from the federal government to provincial and territorial governments that have relatively lower fiscal capacity.

“Fiscal capacity”, in simple terms, refers to their ability to raise revenues.

The purpose of these payments is to ensure that all Canadians, regardless of where they live, have access to reasonably comparable public services at reasonably comparable levels of taxation.

Equalization payments have been a part of Canada’s system of fiscal federalism since 1957 and have played an important role in promoting economic and social equality across the country.

The program is designed to ensure that all provinces have the resources they need to provide reasonably comparable levels of public services, such as healthcare, education, and social services, to their residents.

The payments are not intended to fund specific programs or projects, but rather to help provinces meet their overall budgetary needs.

How Do Equalization Payments Work?

The formula for calculating equalization payments takes into account the revenue-generating capacity of each province, including its ability to raise revenue through taxes and its natural resource revenues.

Provinces with below-average fiscal capacity receive payments from the federal government, while those with above-average fiscal capacity contribute to the program.

Payments are determined based on a moving average that includes three years of data, with a slight 2-year lag for practicality reasons.

For example, 2023/2024 equalization payments are based on data from 2019/2020 through 2021/2022.

Equalization payments are unconditional, meaning that the receiving governments can use the funds for any purpose they deem necessary.

The payments are not tied to specific programs or projects, but rather are free to use to fit each province’s own priorities.

Who Decides Which Provinces Receive Equalization Payments?

The decision on which provinces in Canada receive equalization payments is made by the federal government.

The calculation of equalization payments is based on a complex formula that takes into account each province’s fiscal capacity, which is the ability of a government to raise revenue from its own sources.

The formula is established by the federal government and is reviewed and updated periodically by an independent panel of experts.

The panel examines the formula and makes recommendations on any adjustments that may be necessary.

However, the final decision on the formula and the allocation of equalization payments ultimately rests with the federal government.

How Much Money is Distributed Through Equalization Payments in Canada?

Below are the total amounts (in millions) of equalization payments distributed in the past 5 years:

Period 2023/24 2022/23 2021/22 2020/21 2019/20
Total (in millions) $23,963 $21,920 $20,911 $20,573 $19,619

Source: Canada.ca

In other words, over $24 billion was distributed through equalization payments for the 2023/24 period.

To see how these payments were split between provinces in the last 5 years, check out the table below:

2023/24

Total (in millions)

2022/23

Total (in millions)

2021/22

Total (in millions)

2020/21

Total (in millions)

2019/20

Total (in millions)

Quebec $14,037 $13,666 $13,119 $13,253 $13,124
Manitoba $3,510 $2,933 $2,719 $2,510 $2,255
Nova Scotia $2,803 $2,458 $2,315 $2,146 $2,015
New Brunswick $2,631 $2,360 $2,274 $2,210 $2,023
Prince Edward Island $561 $503 $484 $454 $419
Ontario $421 $0 $0 $0 $0
Alberta $0 $0 $0 $0 $0
British Columbia $0 $0 $0 $0 $0
Newfoundland and Labrador $0 $0 $0 $0 $0
Saskatchewan $0 $0 $0 $0 $0

Source: Canada.ca

Frequently Asked Questions

  • Are provinces happy about equalization payments?
  • Are equalization payments good for the economy?
  • Why do equalization payments exist and are they fair?
Tara Al-Khudairi

Tara Al-Khudairihas worked in the financial services industry since 2017. She graduated from McMaster University with a degree in Finance and is pursuing her CFA.

She has worked at a major Canadian financial institution in various client-facing advisory roles, starting as a bank teller and working up to a Client Services Associate within the Asset Management division. She specializes in simplifying concepts of personal finance for people of various financial backgrounds.

When she’s not examining the markets looking for the next SHOP.TO, she’s either practicing yoga, planning her next vacation, or has her nose buried deep in a book.