Fiscal Redistribution in Canada: Better Principled Than the Debate Suggests

To: Concerned Canadians 
From: Brian Lewis and Yiming Sun 
Date: September 14, 2025 
Re: Fiscal Redistribution in Canada: Better Principled Than the Debate Suggests 

The fiscal redistribution that results from the federal government’s system of revenues and expenditures has long been a source of interest – and, at times, considerable grievance – within the Canadian federation. 

Rarely have the stakes been higher. A perception of unfairness sits at the heart of Alberta’s separatist movement, culminating in the upcoming October 19 referendum on whether the province should begin the legal process toward a future vote on independence. The same grievance echoes, in a different key, in Quebec’s long-running sovereignty debate. In both cases, the claim that Canada's fiscal system creates winners and losers among provinces features prominently. 

Much of the public debate rests on incomplete or selectively framed numbers, rarely set against the underlying differences in provincial prosperity that give rise to fiscal redistribution in the first place. This despite a substantial body of thoughtful, empirically sound work on fiscal redistribution among Canadian provinces. Most recently, research by Robert Mansell, Mukesh Khanal and Trevor Tombe of the University of Calgary provides a careful accounting of fiscal redistribution and its underlying determinants, broadly consistent with earlier work by the Mowat Centre. And, thanks to the excellent Finances of the Nation site, interested Canadians can readily examine the latest federal fiscal balances by province. 

Despite this work, a gap remains. Existing research is strong on calculating the net financial flows into and out of each province under Canada’s system of federal revenues and expenditures. It is thinner on a more fundamental question: To what degree are those flows driven by underlying differences in provincial capacity and need, rather than something more arbitrary and potentially unfair? 

The core principles of sound fiscal policy indicate that revenues should track relative capacity to pay. For spending, a natural, if more contested, benchmark is whether outlays track relative program need. This should apply to provinces as it does to individual citizens. Drawing on work underway by the authors for a forthcoming C.D. Howe Institute report, we evaluate the most financially material federal revenue and expenditure components against those principles. 

Our aggregate federal fiscal balances by province, using updated data and some methodological refinements, align broadly with the University of Calgary results. 

Looking beneath those balances produces an important finding: Federal revenues track provincial capacity to pay quite closely, while federal spending tracks provincial need much less consistently. 

Start with equalization, since that expenditure program dominates the public conversation. Its constitutional purpose is straightforward: Use federal revenue to increase the fiscal capacity of lower-capacity provinces toward a national standard. On that count, the evidence shows it largely does what it is supposed to do. 

But there are limits. The formula counts only part of provincial resource revenues, and the overall pool is capped rather than sized to close fiscal-capacity gaps fully. The key point is that equalization works in the direction the capacity principle suggests, significantly narrowing differences in provincial fiscal capacity, but it does not completely eliminate them. 

Redistribution does not stop with equalization. Indeed, past research and our forthcoming analysis show that the major federal revenue sources – personal income, corporate income and sales taxes – account for a substantial share of interprovincial redistribution. Importantly, they do so without any explicit regional redistributive intent. The redistribution arises from applying national tax policies to provinces with very different economic circumstances. 

Personal income tax plays a particularly large role. Federal income taxes are higher per capita in higher-income provinces and represent a higher share of personal income there. This is the direct consequence of higher incomes combined with progressivity: higher-income individuals, and therefore higher-income provinces, pay proportionately more tax. 

For example, in 2024, federal income tax averaged $11,701 per taxpayer in Alberta, the highest-income province, compared with $6,738 in Prince Edward Island, the lowest-income province. The difference reflects significantly higher average incomes in Alberta ($83,949 versus $61,865 in PEI) interacting with a consistently applied national system of tax brackets, rates and credits. The resulting redistribution reflects differences in capacity to pay, not differences in how taxpayers are treated.  

Other federal taxes tell a similar story, although with less redistributive impact. Higher per-capita corporate income taxes generally align with differences in corporate profitability, while sales tax revenues align with household spending. Overall, federal taxation performs quite well against the capacity principle: Provinces with greater capacity to pay contribute more, largely as the natural consequence of applying a common federal tax system across provinces with different economic circumstances. 

On the expenditure side, however, the relationship with relative program need is considerably less consistent. 

Major transfers such as the Canada Health Transfer (CHT) and Canada Social Transfer (CST) are allocated on an equal per-capita basis. But equal per-capita treatment does not necessarily correspond to equal need. 

One important driver of relative health care costs is the age structure of the population. Under the current per-capita allocations, a relatively younger population province such as Alberta receives the same CHT per person as provinces with much older populations, such as Nova Scotia or Newfoundland and Labrador, despite the substantially higher healthcare costs associated with older populations. 

As researchers at the Universities of Regina and Saskatchewan have demonstrated, allocating health transfers more closely according to underlying need would produce a significantly different distribution, with British Columbia and provinces east of Ontario receiving more and Alberta receiving less. 

The same issue arises with the Canada Social Transfer. The CST supports post-secondary education, social assistance and other social programs but is also allocated on an equal per-capita basis, with no adjustment for differences in provincial program needs. A needs-based approach would likely produce a different provincial distribution, including greater support for provinces facing relatively greater social-assistance and related program needs.  

Not all federal spending ignores differences in provincial need. Old Age Security, for example, results in provinces with relatively more seniors receive relatively more OAS spending. 

The bottom line is that equal per capita is equal treatment of provinces; it is not necessarily equal treatment of provincial needs. 

Taken together, the picture is one of a federal system that redistributes substantially across provinces, but largely as the natural result of a principled system of taxes and transfers rather than arbitrary favouritism toward particular regions. Federal revenues track capacity to pay quite closely, while equalization deliberately and substantially narrows remaining differences in provincial fiscal capacity, albeit incompletely. On the expenditure side, however, several large federal programs track differences in provincial need much less closely. 

The perhaps counterintuitive implication is that a more consistent application of the principles of capacity and need could result in more interprovincial redistribution, not less – a conclusion worth keeping in mind given how much of the current grievance runs in precisely the opposite direction. 

Brian Lewis is a senior fellow at the C.D. Howe Institute and the Munk School of Global Affairs and Public Policy and former Chief Economist for Ontario and Yiming (Helen) Sun is a graduate of the Master of Public Policy program at the Munk School with an emphasis in Economics for Public Policy.

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The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.