Equalization Payments Favoured Some Higher-GDP Provinces in 15 of the Past 25 Years: Study

A Canadian flag flies in front of the offices of the Prime Minister in West Block on Parliament Hill in Ottawa, on Jan. 22, 2025. The Canadian Press/Justin Tang

Canada’s equalization program may not be operating as intended, according to a newly released study that found at least one province with a higher GDP per capita received equalization payments in 15 of the past 25 years, while less affluent provinces did not.

“More often than not, over the past few decades, there have been provinces that have received equalization even though they had a higher living standard than provinces that received none,” Fraser Institute director of Alberta Policy Tegan Hill said in a press release.

“If equalization worked as intended, there should be a fairly consistent relationship between GDP per person levels—a general measure of living standards—and equalization payments per person, yet there are discrepancies in all but three years of analysis from 1981 and 2024.”

Canada’s federal equalization program transfers funds to provinces with lower-than-average revenue-generating capacity. The government has described the program as a way to ensure all provinces can provide reasonably comparable public services at similar tax levels.

It is funded by federal tax revenues and enables recipient provinces to deliver services such as health care and education without imposing prohibitive tax rates.

The study, titled, “Is Equalization Broken?” points to Ontario as an example of a province that received equalization payments while another province with a lower GDP per capita did not.

Ontario received annual equalization transfers from 2009 to 2018, while British Columbia did not, even though B.C.’s GDP per person was consistently lower than Ontario’s for those years, the report said. The total equalization payments received by Ontario amounted to $19 billion during this period and its GDP per person was 3.2 percent higher than B.C.’s on average.

The report also points to Saskatchewan as another example of what it describes as inconsistencies in the equalization formula.

Saskatchewan received equalization payments in 2000 and 2007, while British Columbia received none despite having a lower GDP per capita. From 2005 to 2007, Saskatchewan also received equalization payments even though its GDP per capita exceeded Ontario’s, which received no payments during those years. Saskatchewan received a total of $536 million in equalization payments over the period.

Another example is Newfoundland and Labrador, which received higher equalization payments per person from 2000 to 2007, even though it had a higher GDP per person than at least one province, the study said. In 2005, Newfoundland had a higher GDP per person than Nova Scotia, Quebec, Manitoba, and B.C., yet received higher equalization payments per person.

The reason for this is that Canada’s equalization program relies exclusively on a province’s fiscal capacity—its capability to generate revenue from designated tax bases—rather than its actual GDP, according to the study. In the case of Newfoundland, its 2005 resource revenues, especially those derived from offshore oil, were partially included or excluded altogether in the equalization formula, which led to an inflated eligibility for payments.

The study authors compared provinces of different sizes such as Prince Edward Island and Ontario by standardizing living standards on a per capita basis. This method involves dividing the inflation-adjusted total monetary value of all goods and services produced in a province by its total population.

The study authors argue that if the program worked “as intended,” then there should be a fairly uniform relationship between levels of GDP per capita and per capita equalization payments.

“These discrepancies between equalization payments and GDP per person have persisted for decades,” Hill said. “Rather than being one-off quirks, they point to ongoing structural problems with the formula.”

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