CANADA

Canada is a parliamentary democracy and a constitutional monarchy with a federal system of government composed of 10 provinces and three territories. Canada’s Constitution, comprised of the Constitution Act, 1867 and the Constitution Act, 1982,

defines the country’s federal system of shared powers in which the federal government and the autonomous provinces have equal status. The choice to establish a federation in 1867 was made to promote unity within the Canadian territory between the Province of Canada, New Brunswick and Nova Scotia for economic and military purposes, while preserving its diversity, and in particular the culture, institutions, laws, and religions of Lower Canada (which later became Quebec) and the Maritime provinces. Canada is an exception among federal countries, as the provinces do not have their own constitutions. The enactment of the Constitution Act in 1982 abolished Canada’s dependence on the British Parliament and introduced the Canadian Charter of Rights and Freedom, making it applicable to all federal and provincial laws.

At the federal level, legislative power is vested in the bicameral parliament, which consists of the Senate (upper house) and the House of Commons (lower house). Members of the House of Commons, elected for four-year terms, are responsible for passing most federal legislation, which is then reviewed by the upper house. The Senate has an equal representation of the four geographic regions of Canada, with the purpose of representing the regional and social diversity of Canada. Its members are appointed by the governor-general on the advice of the Prime Minister. Executive authority at the federal level is formally vested in the Queen through the Constitution, and the executive function belongs to the Governor General, appointed by the Queen on the advice of the Prime Minister, usually for five years. In practice, the executive branch is directed by the Cabinet, a committee of ministers of the Crown responsible to the elected House of Commons and chosen and headed by the Prime Minister of Canada. The Prime Minister of Canada is the most important minister of the Crown and Canada’s head of government.

At the provincial level, there is a clear distinction between provinces and territories as provinces receive their power and authority from the 1867 Constitution Act, whereas territorial governments have powers delegated to them by the Parliament of Canada. Legislative powers were originally conferred to the provinces in 1867, including civil and criminal courts, and regulation of the civil procedure, and as of today each province and territory has its own legislative assembly, functioning similar to that of the House of Commons of Canada. The Premier is the head of government, and is usually the head of the party with the most seats in the legislative assembly. Each province also has its own representative of the Crown, the Lieutenant Governor. In the territories, the Commissioner, a representative from the federal government, substitutes the Crown representative.

At local level, municipalities are not formally recognised in the federal constitution as a separate order of government, but they are mentioned as “coming under the exclusive jurisdiction of the provinces” (section 92 (8) of the Constitution). Without constitutional status, municipalities remain “creatures of the provinces”. They are governed by provincial legislation, and therefore their organisation, responsibilities, and fiscal framework differ from one province/territory to another. The degree of local decentralisation and autonomy also varies from one province/territory to another. There is no uniformity in terms of local–provincial relations. The provincial/territorial legislatures can set up local government structures in their area and grant them powers. Some provinces and territories have elections based on wards, others on a general vote. Councillors in single-tier and lower-tier governments are generally elected directly by the first-past-the-post system. Mayors may be directly or indirectly elected; those in single-tier councils or lower-tier councils are usually directly elected.

There are numerous instruments and mechanisms involved in intergovernmental relations that focus on federal-provincial/territorial relations. However, they are not anchored in the Constitution and do not have any basis in law or statute, unlike several other federations. These forums for the exchange of information and negotiation are the Federal/Provincial/Territorial First Ministers Conferences or Meetings (FMMs), the Ministerial meetings in specific policy sectors, the Canadian Intergovernmental Conference Secretariat (CICS) and Federal/Provincial/Territorial (FPT) Agreements. They constitute an important element of Canadian federal governance to strengthen the economic and social union.

Horizontal coordination takes place through the Council of the Federation, established in 2003, which comprises Canada’s 13 provincial and territorial Premiers to provide a forum to discuss and work together on issues of mutual interest or concern. Through its Annual Premiers Conferences (APC), it develops and presents common positions, providing a "united front" when interacting with the federal government, fostering a "constructive relationship" with the federal government. At local level, the Federation of Canadian Municipalities, established in 1937, acts as a coordination forum among the local governments and as an advocacy group. Provincial organisations representing the municipalities of that province also exist, including the Union of BC Municipalities and the Association of Municipalities of Ontario.

TERRITORIAL ORGANISATION
MUNICIPAL LEVEL	INTERMEDIATE LEVEL	PROVINCIAL LEVEL	TOTAL NUMBER OF SNGs (2021)
3 905 municipalities*		10 provinces and 3 territories
Average municipal size: 9 741 inhabitants
3 905		13	3 918

*Indian reserves, Indian settlements and unorganised territories as well as special purpose entities are excluded from the count reported in the table.

OVERALL DESCRIPTION: Canada is a federal state with two levels of subnational government: the provincial/territorial level with 10 provinces and 3 territorial governments, and the municipal level with 3 905 local authorities (general purpose governments according to the census subdivisions). In addition, Canada has Indian reserves, Indian settlements, and unorganised territories (around 1 151 such entities) as well as around 2 570 special purpose authorities such as school boards, police service boards, public health units, transit authorities, library boards, public housing authorities, etc. Only the school boards, however, have directly elected boards, the other special purpose boards are made up of appointed representatives (often elected municipal councillors).

PROVINCIAL LEVEL: The provincial level is composed of 10 provinces and 3 territories. The three territories – Northwest Territories, Nunavut and the Yukon – account for 40% of Canada’s surface area, but approximately 0.3% of its population. Population ranges from 36 858 inhabitants in Nunavut to 14.2 million inhabitants in the province of Ontario. The three provinces of British Columbia, Ontario and Quebec, which are also the three largest provinces in terms of population, have a multi-tiered local government system, with a regional tier with some authority over local authorities. The local government system in British Columbia is particularly unique because it is comprised of 27 regional districts, divided into smaller areas called electoral areas. This is because a large part of the province is made up of unincorporated areas, with sparse populations, which do not have local governments. The 10 other provinces and territories have a single-tier municipal government.

Canada has relatively low regional disparities compared to other OECD countries and the regional gap in GDP per capita has decreased slightly in Canada over the last 16 years. In 2020, the highest regional GDP per capita (Northwest Territories) was 2.4 times higher than the lowest regional GDP per capita (Prince Edward Island). Regional disparities are mainly found in the areas of safety, health, and jobs, which are largely due to the particular challenges faced by the sparsely populated territories.

MUNICIPAL LEVEL: In total, Canada counts 3 905 municipalities at the lower level. Subnational legislation is unique for each province and territory, and local governments in Canada are very diverse in size and legislation. There is a variety of municipal structures and names, which differ from one province to another, including towns, municipalities, townships, cities, rural municipalities, municipal districts, villages, etc.

Over the last 20 years, several provinces have carried out municipal merger policies such as Nova Scotia (1995-96), Ontario (1996-2002), and Quebec (2000-06). More recently, the 2013 Municipal Amalgamations Act in the province of Manitoba requires that municipalities with a population less than 1 000 inhabitants merge with one or more neighbouring municipalities by 2015. In December 2021, New Brunswick launched a local government reform to reduce the number of local entities from 340 to 90 (78 local governments and 12 rural districts, establish a new form of local government, the “rural district”, and to establish elected advisory committees for each rural district.

HORIZONTAL COOPERATION: Inter-municipal cooperation in Canada has tended to be institutionalised rather than decentralised, due to the almost absolute authority that provincial governments have over municipalities. In this sense, formal institutions have been set up to link regions and municipalities rather than more decentralised agreements between these areas. Agreement-based inter-municipal cooperation tends to be in large urban metropolitan areas, such as Toronto, Calgary, Edmonton, and Winnipeg, and most often concerns emergency services provision, public transportation, administrative services and water and sewage treatment. In the province of New Brunswick, mandated inter-municipal cooperation bodies called Regional Service Commissions were established in 2013 to facilitate improved service delivery and planning amongst groupings of municipalities in the same area. The Commissions are governed by communities through appointed representatives. The 2021 local reform, granted the Regional Service Commissions more responsibilities in the areas of economic development, regional transportation, and community development.

Division of powers across levels of government in Canada adheres to the principle of subsidiarity, and it has been shifting throughout Canadian’s history. Allocation of powers is specified in the Constitution Acts of 1867 and 1982 (ss. 92, 92A and 93), and all residual powers are conferred to the federal government. The provinces have exclusive legislative jurisdiction over a large array of matters of a local nature, social programmes such as health (including hospitals), education and welfare, as well as highways, prisons, natural resources, and municipal affairs. They regulate both labour and capital markets and administer much of the justice system. Provinces and territories also have some concurrent powers with the federal government, including pensions, energy, water, agriculture and immigration.

While the Canadian constitution is based on a unified approach of federalism, it does enable asymmetric arrangements for Canadian provinces. More specifically, asymmetric decentralisation in Canada is mostly based on “menu federalism”, where the “opt in” or “opt out” choices are made available to all provinces. The province of Quebec has been using this option more frequently than other provinces. Quebec has had and used specific powers for example in healthcare provision, the pension system, with the position of the French language in government, and immigration screening.

The provinces have the power to assign municipal responsibilities and can also delegate some of their own provincial responsibilities to the municipalities. As a result, municipal responsibilities vary considerably across jurisdictions. Municipal functions typically include transport, civil protection, utilities, recreation and culture, land use planning, social housing. Municipalities are generally not in charge of education, social or health services, except when they share some of the province’s responsibilities (e.g. social assistance in Ontario). There have been significant changes in local government legislation over the last decade, including giving councils greater autonomy and powers of general competence to respond to structural changes in society. Most provinces and territories have enacted new or substantially amended legislation accordingly. Several Canadian cities, including Calgary, Edmonton, Montreal, Saint John, Winnipeg, and Vancouver, among others, are recognised as Charter Cities. This classification means they are not governed by the municipal act of their respective provinces but rather by their own “stand-alone” legislation or Charter. Each Charter codifies the laws applicable to the particular city and contains powers and responsibilities not given to other municipalities in the province.

Primary and secondary education lies with independently elected local authorities (schools boards) who are directly answerable to provinces and territories. School boards in most provinces and territories can appoint committees and delegate responsibilities to them.

Canada also has a dense network of federally owned corporations (Crown corporation) as well as provincially and municipally owned corporations called government business enterprises (GBEs), which are engaged in selling goods and services to the public in a variety of sectors. An example of a Crown corporation is Canada Post.

Main responsibility sectors and sub-sectors
SECTORS AND SUB-SECTORS	Provincial level	Municipal level
1. General public services (administration)	Civil status register; Criminal justice	Internal administration
2. Public order and safety	State police; Regional Firefighting services	Police; Fire protection
3. Economic affairs / transports	Road; Transport; Agriculture (shared); Tourism; Gas services; Electricity	Roads; Transit; Cemeteries and crematoria
4. Environment protection	Natural resources preservation; Soil and groundwater protection; Climate protection; Sewerage.	Waste management ; Parks and open space
5. Housing and community amenities	Housing; Regional planning	Land use and town planning; Water and sewerage; Social housing
6. Health	Primary care; Hospitals
7. Culture & Recreation	Museums; Religious facilities	Sports; Recreation and leisure
8. Education	Pre-school; Primary education; Secondary education; Higher education; Adult education
9. Social Welfare	Family welfare; Welfare homes; Social security

Scope of fiscal data: At state level: provincial and territorial governments; colleges and universities; health and social services institutions; Non-autonomous superannuation and retirement funds for public service employees; provincial and territorial agencies, boards, and commissions. At local level: municipal governments; agency boards, commissions, and local school boards.

SNA 2008

Availability of fiscal data: High

Quality/reliability of fiscal data: High

GENERAL INTRODUCTION: Canada is one of the most decentralised countries in the world; however, while Canadian provinces and territories enjoy a significant degree of expenditure and revenue autonomy, municipalities, on the contrary, are highly controlled and tightly constrained regarding their spending and revenue. Provinces, in particular, are responsible for most major social expenditures and essentially face no constitutional restraints on tax rates, bases, or collection systems, in addition to perceiving large unconditional transfers from the federal government. Unlike provinces and territories, municipal fiscal autonomy is limited and Canadian municipalities operate within restrictive legislative frameworks and under strict provincial control, often as agents of provincial governments.

Fiscal provisions are not specified in the Constitution, on – for instance – intergovernmental transfers or tax sharing, which leaves local government financing at the discretion of the provinces and territories. However, section 36 (2) of the Constitution Act, 1982, sets out in principle the requirement of federal equalisation payments, resulting in the development of a system of transfers between the federal government and the provinces and territories.

The advanced decentralisation system also creates strong horizontal imbalances, and not all subnational governments enjoy equal levels of fiscal autonomy. For some provinces, transfers are more important sources of revenue than their own taxes. A fiscal equalisation scheme, last reformed in 2007, is enshrined in the Constitution to compensate the more disadvantaged provinces and territories.

Subnational, state and local government expenditure by economic classification
2020	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total expenditure	16630	12157	4473	34.6%	25.3%	9.3%	64.1%	46.9%	17.2%	100.0%	100.0%	100.0%
Inc. current expenditure	14584	10870	3714	30.3%	22.6%	7.7%	61.5%	45.8%	15.7%	87.7%	89.4%	83.0%
Compensation of employees	5366	3239	2127	11.2%	6.7%	4.4%	83.6%	50.5%	33.1%	32.3%	26.6%	47.6%
Intermediate consumption	3208	2058	1150	6.7%	4.3%	2.4%	82.5%	52.9%	29.6%	19.3%	16.9%	25.7%
Social expenditure	2395	2231	164	5.0%	4.6%	0.4%	27.2%	25.4%	1.9%	14.4%	18.4%	3.7%
Subsidies and current transfers	2623	2432	191	5.5%	5.1%	0.4%	84.8%	78.7%	6.2%	15.8%	20.0%	4.3%
Financial charges	925	857	68	1.9%	1.8%	0.1%	65.1%	60.4%	4.8%	5.6%	7.1%	1.5%
Others	67	52	15	0.1%	0.1%	0.0%	65.8%	51.5%	14.4%	0.4%	0.4%	0.3%
Incl. capital expenditure	2046	1287	759	4.3%	2.7%	1.6%	92.6%	58.3%	34.4%	12.3%	10.6%	17.0%
Capital transfers	357	348	9	0.7%	0.7%	0.0%	169.4%	165.1%	4.4%	2.2%	2.9%	0.2%
Direct investment (or GFCF)	1689	939	750	3.5%	1.9%	1.6%	84.5%	47.0%	37.5%	10.2%	7.7%	16.8%

EXPENDITURE: Since 2016, the share of subnational government expenditure in GDP in Canada has risen from 31.6% to 34.6% while the share of subnational government expenditure in total public spending has declined 12.1 percentage points from 76.2% to 64.1%. This is still well above the OECD average (17.1% of GDP and 36.6% of public spending) and the average for OECD federal countries (20.6% of GDP and 43.5% of public spending). The vast majority of subnational spending (73%) is carried out by the provinces and territories. subnational governments account for 27.2% of social expenditure (a 9.2 percentage point decrease from 2016), which still remains high by international standards (14.9% on average in the OECD). Accounting for 83.6% of total public staff spending, subnational governments are also key employers: subnational governments’ share in public staff spending is 22.4 percentage points higher than the OECD average (61.2 %), and 7.8 percentage points above the average for federal OECD countries (75.8%). Most subnational government jobs are located at provincial and territorial levels, representing 50.5% of total public staff spending vs 33.1% for the local level.

As part of their annual budgeting process, several Canadian municipalities have implemented participatory budgeting. The budget allocated to participatory budgeting processes is generally small, ranging from several thousand dollars to CAD 300,000, and tends to be focused on arts and culture or municipal infrastructure projects. The City of Victoria is a unique example, as the priority of the city’s annual participatory budgeting process changes yearly and has focused in the past on youth homelessness and newcomer integration.

DIRECT INVESTMENT: Canada´s subnational governments are key investors, responsible for 84.5% of public investment, a share that tops the ranking of OECD countries together with Belgium (30 percentage points higher than the OECD average of 54.6% and 23 percentage points higher than the average of the OECD federations of 61.5%). Canada also ranks first in the OECD regarding subnational government investment-to-GDP ratio (3.5% vs. 1.9% on average in the OECD and 2.0% in OECD federations). Within the subnational government sector, local governments are major investors, accounting for 44% of total subnational government investment and 37.5% of total public investment while the provincial/territorial levels accounted for 56% of subnational government investment and 47.0% of public investment. In 2020, investment amounted to 16.8% of total local government expenditure, the third highest value among OECD federal countries behind Australia (35.5%) and Mexico (24.1%).

Despite their broad powers of taxation, provinces still rely on the federal government for some infrastructure finance, even for projects of primary benefit to provincial (and municipal) residents. Canada’s seven regional development agencies (RDAs), which implement federal priorities, cover the entire country and, since 2015, are part of the country’s Innovation, Science and Economic Development portfolio. They collaborate with provincial, territorial, municipal and indigenous governments on an ongoing basis. The RDAs are developing regional growth strategies for their respective regions following broad consultations with regional stakeholders, including other levels of government. The regional growth strategies aim to develop a common vision and identify areas for co-operative actions that leverage regional advantages to deliver long-term prosperity. The “Canada Community-Building Fund”, part of “Infrastructure Canada”, provides all municipalities across the country with a permanent, stable and indexed source of infrastructure funding. It was made permanent in 2011 at CAD 2 billion per year, and is indexed at 2 per cent per year. The Canada Infrastructure Bank, a federal crown corporation, contributes towards diversifying financing sources for public investment, notably by attracting private sector and institutional investment in new revenue-generating infrastructure projects via public-private partnership (PPP) agreements. The Bank funding may be accessed by all levels of government and by the private sector.

At the national level there is no PPP legislation in place, however, some provinces and territories have implemented their own legislation and PPPs are widely used at both national and subnational level. The province of Manitoba, for example, passed the Public-Private Partnerships Transparency and Accountability Act in 2012, outlining rules for public sector organisations, including municipalities, to take part in PPP agreements. Six provinces have also created PPP agencies, for example Infrastructure BC or the Société québécoise des infrastructures, to act as the face of PPP development within the province and to assist municipalities in developing their own PPPs.

ⓘ No detailed data available for this country

In health, education, general public services, economic affairs, and environmental protection Canadian subnational governments, and provinces in particular, are responsible for the very large majority of total public spending.

The primary areas of provincial spending are hospital and medical care, education, income support and other social services. On the other hand, primary areas of municipal spending are transport, environment and the protection of persons and property.

subnational governments dedicate on average one third of their expenditure on health, which is by far the highest spending category of subnational budgets. It is followed by education (in the hands of elected school boards), social protection, and general public services.

Subnational, state and local government revenue by category
2020	Dollars PPP / inhabitant			% GDP			% general government			% subnational, state and local government
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total revenue	16109	11506	4603	33.5%	23.9%	9.6%	78.8%	56.3%	22.5%	100.0%	100.0%	100.0%
Tax revenue	8098	6383	1715	16.8%	13.3%	3.6%	55.9%	44.1%	11.8%	50.3%	55.5%	37.3%
Grants and subsidies	4915	2737	2178	10.2%	5.7%	4.5%	-	-	-	30.5%	23.8%	47.3%
Tariffs and fees	2057	1435	621	4.3%	3.0%	1.3%	-	-	-	12.8%	12.5%	13.5%
Income from assets	771	682	89	1.6%	1.4%	0.2%	-	-	-	4.8%	5.9%	1.9%
Other revenues	270	270	0.00	0.6%	0.6%	0.0%	-	-	-	1.7%	2.3%	0.0%

OVERALL DESCRIPTION: Tax revenues are the primary source of revenue for Canadian subnational governments, accounting for 50% of their total revenue in 2020, 8 percentage points above the OECD average (42.4%) and above the average of OECD federations as well (45.8%). Consequently, the share of grants and subsidies in subnational government revenues is more limited, well below the OECD average (41.2%). The share of tariffs and fees in total subnational government revenue is in line with OECD average.

Provincial taxing powers are enshrined in the Constitution and limited to direct taxation within the province. A constitutional amendment in 1982 (92A) gave the provinces an unrestricted taxing power over natural resources within their jurisdiction. The territories have direct taxation powers, similar to the provinces, conferred to them through federal statute. Provincial taxation powers are protected by the Constitution while territorial taxation powers are not. The provinces and territories do differ in terms of their revenue structures. The three territories receive the majority of their revenues via the Territorial Formula Financing, an annual unconditional transfer from the federal government that enables them to provide their residents a range of public services comparable to those offered by provincial governments, at comparable levels of taxation. Annual transfers are calculated based on the difference between the territory’s expenditure needs and its capacity to generate revenues. Provinces, by contrast, receive more of their revenue from taxes. Yet data varies between provinces, and for some provinces and territories with few natural resources, federal government transfers are the main source of revenues.

There are great differences between provincial/territorial and local funding sources. While provinces and territories are funded mainly through taxation (56% of their revenues), municipalities depend more on grants and subsidies which accounted for 47% of their revenues, representing the primary source of municipal revenue. As municipalities are “creatures of the provinces”, municipal taxing power is at the discretion of the provincial governments and there is considerable variation across Canada. In British Columbia, for example, municipalities are recognised as “natural persons of full capacity” through the Community Charter giving them broad powers in setting tax rates for property value taxes as well as outlining additional sources of tax revenue including parcel taxes, local service taxes, and utility taxes.

TAX REVENUE: The share of subnational government tax revenue in public tax revenue in Canada (78.7%) is the highest within OECD countries (45.3%) as well as within OECD federations (57.5%). Regarding the subnational government tax-to-GDP ratio, Canada also stands out in the OECD: 33.5% vs 17% in the OECD and 20.3% in the OECD federations.

subnational government tax revenue comes from shared taxation (between provinces and the federal government) and own-source taxation (in particular at the municipal level). Provinces represent almost 80% of all subnational government tax revenue, and have a wide-ranging tax autonomy. Their tax revenue includes the personal income tax (PIT), the corporate income tax (CIT), provincial sales tax and payroll tax (all shared taxes).

Personal income tax (PIT) and value-added tax (VAT) are the two main sources of tax revenue for provincial and territorial governments, accounting for 38% and 21% of total provincial/territorial tax revenues, respectively, in 2020. Corporate income tax ranks third (12%) in terms of share of total tax revenue. The provinces and territories have the power to set their own PIT and CIT rates provided they use the federal definition of “taxable income” and as such a tax payer’s total marginal tax rate varies depending on where they live in Canada. With the exception of Quebec, who administers their own PIT system and has their own definition of taxable income, the Canadian Revenue Agency (CRA) administers both the provincial/territorial and federal tax systems.

Similarly, the provinces and territories have the power to establish their own VAT and set the rates, in addition to the federal goods and sales tax which is applicable across the country. There are two types of provincial VAT. The provincial sales tax (PST) which is administered by the province itself, or the haromonised sales tax, which combines federal and provincial sales tax and is administered by the federal government, which returns the province its share. Ontario, for example, has a provincial sales tax of 8% while the three territories and the province of Alberta have no additional VAT in place. As provinces and territories have direct taxation powers within their jurisdictions there is considerable variation in the “basket” of taxes paid by Canadians. For example, British Columbia has had a provincial carbon tax in place since 2008, and Ontario, in 2017, implemented a Non-resident Speculation Tax for foreign property buyers that only applies in a specific urban region of the province. There are disparities amongst the provinces in terms of tax revenue raising capabilities.

The fiscal equalisation system, established in 1957 and enshrined in the 1982 Constitution, seeks to mitigate these revenue raising gaps by providing unconditional transfers from the federal government to the provinces based on their fiscal capacity Currently five provinces receive payments via the equalisation programme: Quebec, Manitoba, Nova Scotia, Prince Edward Island, and New Brunswick. For each of these provinces, equalization in 2021/22 will be the largest source of federal transfer payments and will represent over 10% of provincial revenues.

For local governments, recurrent property taxes (on land and buildings) account for 85% of all local government tax revenues and one-third of total local government revenue, accounting for 3% of GDP (vs 1.0% on average in OECD). This tax is composed of the personal property tax paid by residents and business owners, as well as special assessments and charges on local property. Municipalities have discretion over the tax rates. Each municipality (and province) has its own tax formula but municipal property tax bases are harmonised within all provinces. Assessment of the property value is typically conducted by a provincial authority and the frequency of assessments can differ by province. Property value assessments take several factors into account such as neighbourhood, the age of the home, the size of the lot, etc. In some provinces, municipalities are required to share this tax revenue with the provincial government. The remaining share of local government tax revenues comes from a mix of other taxes, including business taxes, area improvement taxes, and local fuel taxes; however, as local government taxation power is determined by the province/territory there is considerable variation across Canada.

GRANTS AND SUBSIDIES: Canada´s subnational fiscal system is composed of large and unconditional federal-provincial fiscal transfers and a revenue equalisation system enshrined in the Constitution and revised in 2007, in order to ensure that all provinces and territories of various sizes, resources, and wealth can provide relatively comparable level of public services at relatively comparable tax rates. Grants and subsidies accounted for 24% of total provincial/territorial revenue in 2020. The vast majority (98%) of these grants were current grants.

The high degree of revenue decentralisation in Canada results in significant horizontal imbalance. High-income provinces and those heavily endowed with natural resources have relatively high fiscal capacity, and transfers represent a very low share of their revenue, whereas in some provinces transfers from the federal government represent a more important source of revenue than their own taxes. On the other hand, this imbalance generates fiscal pressures for the federal government, obliged to finance equalisation from its own revenues.

Federal transfers to provinces and territories aim at ensuring funding for providing social programmes, mostly in the area of health, welfare and post-secondary education services. They include a vertical equalisation function through unconditional equalisation transfers (determined by assessing each province’s revenue-raising capacity from tax revenues and natural resource revenues), and social transfers, transferring revenues from high-income to low-income provinces. The latter are based on equal per capita transfers and include the Canada Health Transfer (CHT), with broad conditions in order to support the public health care programme, and the Canada Social Transfer (CST), conditional on provincial programmes. In addition, there exist many other small transfers to provinces for specific purposes. Territories also receive specific unconditional transfers that also take expenditure needs into account, in recognition of the higher cost of providing programmes and services in the north of the country.

Municipalities receive both federal and provincial transfers. In 2020, grants and subsidies accounted for 47% of local government total revenue, which is low in comparison with other OECD federal countries such as Mexico or Austria (85.4% and 64.7% of total local government revenue, respectively). Federal transfers take the form of earmarked grants, such as the Canada Community-Building Fund (formerly known as the Gas Tax Fund), dedicated to support municipal infrastructure that contributes to cleaner air and water and reduced greenhouse gas emissions. Most grants from provincial to local level are conditional grants aimed at financing specific services at levels and standards that are set by the province. Most provinces provide some form of equalisation grants to municipalities, and each province can define its own municipal equalisation scheme, but these do not generally constitute the major component of grants. In 2021, as part of a local government reform, New Brunswick established the Community Funding and Equalisation Grant to prevent underfunded mandates for newly expanded local entities, created as part of the reform.

OTHER REVENUE: User charges and fees are the third largest source of revenue for subnational governments in Canada, accounting for 13% of total subnational government revenue in 2020, in line with the OECD average. User charges for services (e.g. water, waste water and sewer fees) and development permits are a significant source of revenue for municipalities.

Revenue from assets (dividends, rents, assets sales) also represented a significant source of revenues for subnational governments in 2020 (4.9% of subnational government revenues vs 2.0% in the OECD), especially for the provincial/territorial level (5.9%). In fact, property income includes proceeds from natural resources exploited on provincial territory (royalties), which can be significant for some provinces. Provinces receive direct payment from mining companies, in the same way as in Australia or Argentina. Revenue from oil and gas royalties have tended to decline sharply in recent years.

Subnational, state and local government fiscal rules and debt
2020	Dollars PPP / inh.			% GDP			% general government debt			% SNG debt			% SNG financial debt
-	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local	SNG	State	Local
Total outstanding debt	36 467	30 933	5 534	75.8%	64.3%	11.5%	53.6%	45.4%	8.1%	100%	100%	100%	-	-	-
Financial debt	26 812	24 169	2 643	55.8%	50.3%	5.5%	52.8%	47.6%	5.2%	73.5%	78.1%	47.8%	100%	100%	100%
Currency and deposits	0	0	0	-	-	-	-	-	-	0.0%	0.0%	0.0%	0.0%	0.0%	0.0%
Bonds / debt securities	24 612	22 807	1 805	-	-	-	-	-	-	67.5%	73.7%	32.6%	91.8%	94.4%	68.3%
Loans	2 200	1 361	839	-	-	-	-	-	-	6.0%	4.4%	15.2%	8.2%	5.6%	31.7%
Insurance pensions	3 717	3 658	59	-	-	-	-	-	-	10.2%	11.8%	1.1%	-	-	-
Other accounts payable	5 938	3 107	2 831	-	-	-	-	-	-	16.3%	10.0%	51.2%	-	-	-

FISCAL RULES: Almost all provincial and territorial governments in Canada have adopted fiscal rules in the form of balanced-budget requirements since the mid-1990s, prior to which most provinces ran deficits and failed to balance their budgets. Only recently, did the Canadian Federal Government follow the example of provinces and introduced its first balanced-budget legislation in 2014. There have been three waves of fiscal rules in Canada, the first focusing on spending limits (early 1990s), the second one on more wide-reaching rules for deficit reduction (mid-1990s) and the third one for the completion of provincial fiscal consolidation (late 1990s). Fiscal rules vary significantly among provincial governments, in both the types and stringency of rules. Manitoba and Alberta are the provinces with the strongest rules, including an annual general prohibition of deficits (“zero-deficit targets”), limited tax rate increases without a referendum, debt repayment requirements, and sanctions in case of non-compliance, such as a decrease in politicians’ salaries. Quebec takes a different approach; the province’s self-imposed rule is that overruns of less than CAN 1 billion must be offset by an equivalent surplus the following fiscal year, while overruns greater than CAN 1 billion must be offset over a maximum period of five years.

The use of fiscal rules in Canadian provinces has changed frequently, and their efficiency was particularly questioned during the great recession, to which provinces responded in different ways. During the 2007-08 economic crisis, some provinces ignored their rules, making them become functionally non-operative (Ontario, Nova Scotia and New Brunswick), whereas other actively confronted the constraints set by their rules and made changes accordingly (British Columbia, Quebec and Manitoba). Eventually, Nova Scotia and New Brunswick abandoned their budget-balance legislation post-2008 (in 2009 and 2014 respectively), and more than 40% of the stability laws that were enacted were repealed or significantly amended. The Parliamentary Budget Officer (PBO), established by the 2006 Federal Accountability Act (FedAA), provides independent analysis on public finance and since 2011, has provided an assessment of the long-term sustainability of government finances for three government sub-sectors (federal, provincial/territorial, and local).

DEBT: Canadian provinces can borrow and lend at their discretion, while in contrast, territorial borrowing capacity is restricted to limits set by the federal government. Both the provinces and territories set fiscal rules, impose balanced budgets and restrict borrowing for their municipalities. A common rule is to restrict borrowing to the financing of capital expenditure (golden rule). The debt-GDP ratio varies widely across provinces, some of them reaching levels comparable to the federal government debt. Yet all provinces can borrow at similar terms to the federal government. In 2020, the subnational government sector accounted for 54% of total general government debt and had a debt-to-GDP ratio of 76%, a much higher level of subnational debt than the OECD average (20.2% of total public debt and 45.5% of GDP).

In 2020, financial debt accounted for 73.5% of total outstanding subnational government sector debt, a five percentage point increase from 2016, while insurance pension and other accounts payable accounted for 10.2% and 16.3% of debt stock, respectively. The financial debt is made up mainly of bonds (92%) while the share of loans is more limited (8%).

Provinces account for 85% of subnational government outstanding debt (i.e. 64.3% of GDP), compared to municipalities whose debt is much smaller (15% of subnational government debt i.e. 11.5% of GDP). Some provinces have run up significant debt-GDP ratios, with Manitoba having the largest debt-to-GDP ratio in 2020 at 39.2%. Financial debt is higher for the provinces/territories (78% of debt stock) than for the local government sector (48%) whose debt is largely composed of other accounts payable (51% of debt stock). Bond financing is predominant at both provincial/territorial and local government levels.

TERRITORIAL MANAGEMENT OF THE CRISIS: Coordination between the federal and provincial/territorial governments in managing the COVID-19 crisis mainly relied on existing “soft” sectoral mechanisms, as compared to other countries, Canada’s intergovernmental relations arrangements are largely ad hoc and not institutionalised. At the executive level, in the early stages of the pandemic the Prime Minister of Canada had regular teleconferences with the Premiers to coordinate efforts and share knowledge across jurisdictions, with similar meetings also taking place between federal and provincial/territorial Ministers. Given that health care is a shared responsibility, with the federal government responsible for aspects of national relevance including vaccine procurement and providing the provinces/territories with health funding and the provinces and territories are responsible for health-care delivery, several mechanisms exist to facilitate intergovernmental coordination. Examples include the Pan-Canadian Public Health Network, which is governed by a council composed of federal, provincial, and territorial government officials; the Federal/Territorial/Provincial Response Plan for Biological Events, which sets out a governance structure and outlines possible responsibilities for each level of government in the event of a “biological event”; and the Multilateral Information Sharing Agreement, which sets out the terms for sharing information relevant for routine surveillance, case management, and responses to infectious diseases. Overall, coordination between the provinces/territories and the federal government remained executive-led and was generally seen as effective albeit opaque.

Horizontal coordination among the provinces and territories was limited and took place on an ad hoc basis, with the most prominent example being the establishment of an “Atlantic travel bubble” from July-November 2020 by the Maritime Provinces of Prince Edward Island, New Brunswick, Newfoundland and Labrador, and Nova Scotia to coordinate travel restrictions and facilitate unrestricted travel among the four provinces for residents of those provinces.

EMERGENCY MEASURES TO COPE WITH THE CRISIS AT THE DIFFERENT LEVELS OF GOVERNMENT: Given the federal nature of Canada, there was no coordinated response to cope with the COVID-19 crisis among the provincial and territorial governments, however, they did adopt similar economic and social support measures. Common economic measures included tax and loan payment deferrals for businesses, wage top-up programmes, and direct subsidies for low-income and vulnerable households. In terms of social support measures, most of the thirteen provinces and territories implemented temporary bans on rent increases and froze evictions to provide relief to those experiencing sudden job losses.

To assist subnational governments in weathering the crisis, the national government provided financial support through additional transfers or early payments of existing funding allocations as well as non-financial support including streamlining of regulatory procedures and data sharing. For example, the federal government provided direct financial support to municipalities through an advance payment of CAD 2.2 billion in funding from the Canada Community-Building Fund, an existing infrastructure project funding resource. Similarly, the federal government introduced legislation to permit municipalities to fully conduct Council, local board and committee meetings electronically in local and province-wide emergency situations, empowering the municipalities to respond quickly when in-person meetings could not be held. Provincial and territorial governments also stepped in to support to local governments. In Ontario, in the early stages of the pandemic, the provincial government provided CAD 4 billion in one-time assistance to the 444 municipalities in the province.

IMPACTS OF THE CRISIS ON SUBNATIONAL GOVERNMENT FINANCE: General government expenditure increased by 23% in 2020 compared to 2019, with the largest increases seen in subsidies and current transfers (164%) and current social expenditure (41%). These increases reflect the federal government’s emergency response strategy which was primarily consisted of current transfers to provincial and territorial governments to cover increased health care and testing costs, as well as broad reaching wage subsidy and benefit programs (for example, the Canadian Emergency Response Benefit).

Provincial/territorial government total expenditure increased by 5% in real terms in 2020, with the largest increases in subsidies and transfers (10%) and direct investment (9%). The increase in subsidies and current transfers by provincial and territorial governments was directed towards municipalities to offset declines in municipal tax revenues and to boost municipal investment as part of subnational recovery plans. Local government expenditure increased by 3% in real terms, with the largest increases seen in capital transfers (12%), social expenditure (11%), and subsidies and current transfers (10%). The steep increase in capital transfers reflects the key investment role local governments play in provincial and territorial recovery plans.

Subnational government revenues increased in 2020 compared to 2019, due to the large increases in transfers from higher levels of government. At the provincial and territorial level, total revenue increased marginally (1%), with grants and subsidies increasing the most (23%). Federal government current transfers to provincial/territorial governments reached record highs in 2020, peaking at CAD 125.4 billion. Conversely, capital grants and revenue from assets decreased sharply by 29% and 15%, respectively. Declining asset revenues can in part be explained by the crash in oil prices in April 2020, which affected the oil producing provinces of Alberta, British Columbia, and Newfoundland and Labrador in particular. Provincial and territorial tax revenues declined by 3% in real terms in 2020, with the largest decreases seen in excise tax and VAT revenues (10% and 7%, respectively). Taxes levied on income support measures from the federal government to businesses and households (ex. CERB, CEWS, and CESB) helped to limit overall decreases in personal and corporate income tax revenue for the provinces/territories. The provinces of Alberta, Manitoba, Nova Scotia, and Saskatchewan experienced the largest declines in tax revenues in 2020 (greater than 5%) while some provinces – Newfoundland and Labrador, Prince Edward Island, and Quebec – experienced slight increases in tax revenues in the same period.

At the local government level, total revenues increased by 3%, with grants and subsidies increasing the most (8%), and in particular capital grants, as the provincial and federal governments focused on shovel ready investment projects as part of their recovery strategies. Municipal tax revenue, which are mainly composed of revenue from the property tax, have remained stable. However, excise tax revenues plunged sharply by 33% due to lockdown measures.

Provincial/territorial debt increased by 13% in 2020 compared to 2019. In April 2020, the Bank of Canada stepped in to ensure the provinces and territories had access to short-term borrowing to fund their respective pandemic responses by establishing a Provincial Bond Purchase Program and a Provincial Money Market Purchase Program, both of which lasted for less than a year. Some provincial governments also implemented fiscal measures to assist local governments. In British Columbia, the provincial government temporarily relaxed municipal balanced budget requirements under the condition that they rebalanced their books in 2021. BC municipalities were also given permission to borrow from their internal capital reserves against anticipated future revenues at 0% interest until 2025. In Nova Scotia, the government established a municipal operating loan program to help municipalities cover short-term expenditure increases; municipalities had six months to begin repayment and are required to repay the loan in full by 2023.

ECONOMIC AND SOCIAL STIMULUS PLANS: Canada’s economic and social stimulus in response to the COVID-19 pandemic has taken place in stages, beginning with the COVID-19 Economic Response Plan released in March 2020 and culminating in the national economic recovery plan outlined in the 2021-2022 federal budget tabled in April 2021. The COVID-19 Economic Response Plan totalled CAD 27.4 billion, primarily targeted at households and businesses. The plan also included the creation of the Indigenous Community Support Fund with targeted funding (over CAD 1 billion as of April 2021) to address immediate needs in First Nations, Inuit, and Métis communities. In August 2020, the federal government adjusted an existing infrastructure investment program, the Investing in Canada Infrastructure Program (ICIP), to include a COVID-19 Resilience steam worth up to CAD 3.3 billion targeted at subnational governments and NGOs to fund quick-start pandemic-resilient infrastructure projects. The funding was distributed through bilateral agreements with the provinces and territories, who then disbursed it to municipalities within their respective jurisdictions through a separate application procedure. The maximum size of projects under the COVID stream was set at CAD 10 million in total eligible costs.

Canada’s national economic recovery plan, A Recovery Plan for Jobs, Growth, and Resilience, was presented as part of the 2021 federal budget. The plan is comprised of four pillars: COVID-19 response, job creation and growth, resilient and inclusive recovery, and fair and responsible government. Throughout the plan, consultation and coordination with the provincial and territorial governments is highlighted numerous times as essential for achieving the policy aims of the federal government in areas of provincial/territorial jurisdiction (health, environment, housing, regional and economic development). The role of local governments in the plan is less pronounced and mainly limited to receiving investment funds to finance community infrastructure projects (public transport, roads, bridges, community centres, etc.).

In addition to the national stimulus packages, the provinces, territories, as well as some municipalities, have also released their own economic recovery plans. The province of Alberta launched its “Alberta’s Recovery Plan” in the summer of 2020 to respond to a simultaneous trifecta of challenges: a global economic recession, an unprecedented drop in oil prices, and the COVID-19 pandemic. Municipalities feature prominently in the plan, particularly in relation to infrastructure investment and development where CAD 5.9 billion in direct support was allocated to municipalities up until 2024 for infrastructure projects in addition to top ups of existing infrastructure funding sources. Further funding was allocated to municipalities to support public safety and emergency service provision and social housing development. The recovery plan also included a reduction in provincial corporate tax rates from 11% (2019) to 8% by 2022. In March 2021, the City of Montreal released a municipal economic recovery plan totalling of CAD 60 million in investment. The plan, which focuses on 10 measures, has a one-year span and aims to support sectors that have been made more fragile by the crisis; to set the stage for a green, resilient and inclusive recovery; and to mobilize all partners around the city’s recovery.