Equalization is one of four major federal transfer programs. The others are the Canada Health Transfer, the Canada Social Transfer, and the Territorial Formula Financing (the main source of revenue for territorial governments). Equalization is the federal government's main device for reducing fiscal inequalities between the 'have and have-not' provinces (Mapleleafweb).
The grant to receive equalization funding is calculated by a formula assessing each province's revenue raising ability against a five-province standard. Presently eight Canadian provinces receive equalization: Quebec, Nova Scotia, Newfoundland, British Columbia, Prince Edward Island, Manitoba, New Brunswick, and Saskatchewan. This program is the Canadian government's most important initiative for reducing fiscal discrepancies between provinces (Equalization Program). Equalization payments allow less prosperous provincial governments to offer their residents public services such as hospital fees, electricity, water and other basics that are comparable to those in other provinces and at similar taxation levels. Each province receives unconditional equalization payments. ...
For 2005-06 eight provinces are expected to qualify for $10.9 billion in equalization entitlements.
The provincial governments may spend the equalization money they receive in any way they desire, unlike conditional transfer payments such as the Canada Health and Social Transfer. The equalization payments guarantee equal levels of health care, education, and welfare in all the provinces.
Equalization payments do not involve payment transfers from wealthy provinces to poorer provinces. Instead the federal treasury provides the funds for these payments. In other words, for example, a wealthy citizen from a poorer province like New Brunswick, pays more into equalization than a poorer citizen in wealthy province like Ontario. Since Ontario has a bigger population and wealth, the citizens of Ontario as a whole pay more federal taxes and therefore their total contribution in equalization payments is greater than that of New Brunswick.
Equalization payments also aid by encouraging national unity. Quebec, the most populous of the poorer provinces, is the largest single beneficiary of the payments. 70% of the 10 million Canadians of the poorer provinces reside in Quebec when British Columbia and Saskatchewan are removed.
The history of Equalization dates back to Confederation and the Constitution Act of 1867. Two basic principles that Canada's founding fathers based the separation of legislative powers: 1) The central government must retain much of its revenue generating power for the purpose of building railroads 2) 'Coordinate federalism' in which provincial governments act independently and autonomously within predefined powers and must be the basis for the division of powers between provinces and the central government.