Canada, Federal-Provincial Grants and the Spending Power of Parliament (1969)

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Date: 1969-06-11
By: Canada
Citation: Canada, Federal-Provincial Grants and the Spending Power of Parliament (Ottawa: Queen’s Printer, 1969).
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Federal-Provincial Grants
and the
Spending Power of Parliament

Government of Canada
Working Paper on the Constitution

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One of the central aspects of Canada’s Constitution is the distribution of legislative powers between the Parliament of Canada and the legislatures of the provinces. These are the sections which determine which of the federal or the provincial governments will have the jurisdiction or the responsibility to deal with the several problems of Canadian life.

The Constitutional Conference agreed in February 1969 to begin a study of this aspect of the Constitution. The Government of Canada has decided that the way in which it could contribute most effectively to this study would be to prepare a series of Working Papers on the major elements of the distribution of powers. These Papers will explore the problems which are associated with the allocation of legislative powers to the federal and to the provincial governments in the several fields of government—fiscal, economic, social and cultural—and will present the preliminary views of the Government of Canada as to how the legislative powers ought to be divided.

These views, it must be emphasized, will be preliminary views only: just as the governments of the provinces have said concerning the papers they have submitted to the Constitutional Conference the Government of Canada wishes also to make clear that it will not feel bound by the views it has submitted. Indeed all governments will find it necessary to review their positions as the shape of the whole constitution, as seen by themselves, by other governments and by the public generally, unfolds.

This Working Paper is the second of these proposed Papers. It was first submitted to the provinces on April 13, 1969, and subsequently revised to take into account certain of their views. It was submitted to the Constitutional Conference in its present form on June 11, 1969.

OTTAWA, 1969

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Federal-Provincial Grants and
the Spending Power of Parliament

The Constitutional Conference decided, at its February 1969 meeting, to accord priority to “the study of the distribution of powers, in particular the taxing and spending powers”, and directed the Continuing Committee of Officials “to give its immediate attention to this aspect of the Constitution”. This Working Paper has been prepared pursuant to this decision: its purpose is to examine the use of the “spending power” by the Parliament of Canada; to consider the criticisms which have been made of its use; and to present a possible proposal for establishing under a revised Constitution a new procedure for the use of the spending power in respect of federal grants to the provinces.

The Spending Power: What it is and How it has been Used

Ordinarily one thinks of the “spending power” of governments simply in terms of the spending they do on particular programmes, under the authority of legislation passed by their legislative bodies. Constitutionally, however, the term “spending power” has come to have a specialized meaning in Canada: it means the power of Parliament to make payments to people or institutions or governments for purposes on which it (Parliament) does not necessarily have the power to legislate. The best example, perhaps, is the grants to provincial governments to assist in the provision of free hospitalization across Canada: Parliament does not have the power under the Constitution to establish general hospitals or to regulate them or their use; but under its “spending power” it is generally conceded that Parliament can make grants to the provinces to assist them in financing provincially operated hospitalization programmes.1

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The importance of the spending power in Canada can be illustrated by looking at some of the programmes which are founded primarily upon it (as opposed to being based upon Parliament’s regulatory powers). The equalization of opportunity for individual Canadians, in the form of income redistribution between persons, has been based in no small measure upon this power. In particular, family allowances are paid to all mothers in Canada ($560 million in 1968-69), and the federal government pays to the provinces one half of the cost of social assistance payments to individuals in need (under the Canada Assistance Plan—costing over $400 million). In addition to these measures, Canada Pension Plan payments, Old Age Security payments, and Guaranteed Income Supplements are paid by Parliament under a specific section of the Constitution. Obviously too, the Income Tax Act of Canada, through its higher rates on the rich than on the poor, contributes substantially to income redistribution across the country.

The equalization of provincial public services—including health, welfare, education, and roads—is also accomplished largely because of the existence of the spending power. The Government of Canada makes revenue equalization grants to the governments of low income provinces for this purpose (over $560 million in 1968-69), and it contributes as well to specific provincial or federal-provincial programmes. Health care for individual Canadians is supported through federal grants to the provinces for hospital insurance (nearly $800 million), through a $500 million Health Resources Fund, and now through payments to provincial medical care plans. Higher education is supported, indirectly, through unconditional grants to provinces—grants based upon the total operating expenditures of universities and technical institutes (over $220 million in cash grants, and another $275 million in tax transfers and equalization payments). The Trans-Canada Highway, which finds its constitutional foundation both in the spending power and, because of its interprovincial character, in other provisions of the Constitution, was financed under a joint programme involving both the federal and provincial governments (over $700 million). And there have been other smaller programmes.

Equalization of opportunity for individual Canadians through regional economic development is also achieved in part through federal-provincial programmes involving Parliament’s spending power. One example is the $300 million Fund for Rural Economic Development, which is financing a broad range of regional development measures, some of which are based upon the spending power alone. Another is the $125 million ARDA programme (Agricultural Rehabilitation and Development Act) which might

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have been managed directly by the Government of Canada, but which took the form of a federal-provincial programme. And the new Department of Regional Economic Expansion will have to rely, for its new measures, both upon Parliament’s power to legislate and upon its spending power—as did its predecessors, notably the Atlantic Development Board.

Finally, specific projects of national importance have been possible, constitutionally, because of Parliament’s spending power. Expo is the outstanding example. But many other projects or. programmes could be listed (some of which relied in whole or in part upon this power)—Roads to Resources, the South Saskatchewan River Development project, and various other measures within individual provinces.

The scale of the payments made under the spending power of Parliament is another index of its importance. In 1968-69 the Government of Canada spent some $3.4 billion—32 per cent of its budget—on programmes which are based largely upon it, involving payments to persons, payments to institutions, and payments to governments.2

($ millions)
% of Federal
Payments to Persons $ 855.2 8 .0
Payments to Institutions 77.3 0.7
Payments to Governments
Conditional Grants 1,616.9 15.0
Unconditional Grants 865.0 8.1
TOTAL $3,414.4 31.8

The Spending Power and the Constitution

A “spending power” of the kind which is to be found in Canada is not unusual in federal states. The constitution of the United States of America, for example, provides the central government with very broad power: “The Congress shall have the power to levy and collect taxes . . . and provide for

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the . . . general welfare of the United States . . . “.3 Similarly The Commonwealth of Australia Constitution Act provides specifically that the central Parliament “may grant financial assistance to any State on such terms and conditions as the Parliament thinks fit”.4

In Switzerland and West Germany, on the other hand, the terms of the spending power are more explicit and more limited. The Swiss Constitution gives the Confederation broad powers to act “for the welfare of the people and the economic security of the citizens”, but provides that these powers “may be introduced only in the form of federal laws or federal decrees subject to referendum”, and that the “cantons, must be consulted before the enactment of [such] laws”. The Swiss Constitution also provides that “the Confederation shall encourage financial equalization among the cantons”.5 The Constitution of West Germany has three specific heads relating to the spending power as we know it in Canada. On matters involving mixed jurisdiction (concurrent legislative powers) the Federation has the power to legislate where individual states (Laender) cannot act effectively by themselves, or where action by one state “might prejudice the interest of other Laender”, or where the “maintenance of legal or economic unity, especially the maintenance of uniformity of living conditions beyond the territory of a [state]” requires federal action.6 Secondly, if a federal law imposes additional financial obligations upon the states, the central government is required to compensate them. And finally, as provided in the Constitution a federal law has been enacted to establish the formula and criteria under which financially weak Laender qualify for equalization contributions from financially strong Laender. The Constitution also permits supplementary grants out of federal funds.

The spending power provisions of the Constitution of Canada are less precise than those of other federations. They flow from, and are a part of the general distribution of powers, and can best be understood in this context. The British North America Act divides the power to legislate between the Parliament of Canada and the legislatures of the provinces, principally in Sections 91, 92, and 93 to 95, and gives to the Parliament of Canada the residual legislative power. It follows that there are certain specific heads upon which Parliament may not legislate, namely those in Sections 92 and 93, and others upon which provincial legislatures may not legislate, principally those in Section 91.

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In addition to the powers of the Parliament of Canada to legislate, the Constitution as it has been interpreted by the Courts gives to it the power to spend from the Consolidated Revenue Fund on any object, providing the legislation authorizing the expenditures does not amount to a regulatory scheme falling within provincial powers. The constitutional basis for this spending power is to be found in Section 91 (3) of the B.N.A. Act, which gives the Parliament of Canada the power to raise money by any mode of taxation, and Section 91 (1A) which gives Parliament the right to make laws respecting public debt and property, the latter having been construed to include every kind of dominion asset, including the Consolidated Revenue Fund.

A judgment in the Supreme Court of Canada said of these provisions:

“. . . Parliament, by properly framed legislation may raise money by taxation and dispose of its public property in any manner that it sees fit. As to the latter point, it is -evident that the Dominion may grant sums of money to individuals or organizations and that the gift may be accompanied by such restrictions and conditions as Parliament may see fit to enact. It would then be open to the proposed recipient to decline the gift or to accept it subject to such conditions. As to the first point, it is also undoubted, I conceive, that Parliament, by properly framed legislation may raise money by taxation, and this may be done either generally or for the specific purpose of providing the funds wherewith to make grants either before or after the conferring of the benefit.”7

On appeal, the Privy Council stated the general principle in this way:

“That the Dominion may impose taxation for the purpose of creating. a fund for special purposes, and may apply that fund for making contributions in the public interest to individuals, corporations or public authorities, could not as a general proposition be denied.”

The qualification of this general proposition was stated as follows:

“But assuming that the Dominion has collected by means of taxation a fund, it by no means follows that any legislation which disposes of it is necessarily within Dominion competence.

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It may still be legislation affecting the classes of subjects enumerated in s. 92, and, if so, would be ultra vires. In other words, Dominion legislation, even though it deals with Dominion property, may yet be so framed as to invade civil rights within the Province, or encroach upon the classes of subjects which are reserved to Provincial competence.”8

It cannot be said that there is universal agreement among constitutional lawyers in Canada as to the precise meaning of these and related decisions. Some argue that they mean Parliament may make conditional or unconditional grants for any purpose, even if the purpose falls within exclusive provincial legislative jurisdiction, providing only that the programme involved does not amount to legislation or regulation (see for example Bora Laskin and Gerard V. La Forest).9 Others, such as Quebec’s Tremblay Commission, argue that the qualifications the Privy Council attached to the spending power mean that Parliament has no power to make grants of any kind in areas of exclusive provincial jurisdiction—even unconditional grants.10 Others seem to suggest, when discussing federal grants to provincial governments, that Parliament might properly make unconditional grants to the provinces, but not conditional grants.11

In fact, there seems to have been little disposition on the part either of the federal or the provincial governments to seek further judicial clarification of the matter. Federal governments consistently have taken the position that Parliament’s power to spend is clear,12 while provincial governments generally have limited themselves to criticism of the use of the spending power by Parliament—in particular to its use to start new federal-provincial shared-cost programmes, or to terminate old ones, without the consent of the provinces.13 Only governments of Quebec have advanced the more general proposition that it was constitutionally improper for Parliament to use its spending power to make grants to persons or institutions or governments for purposes which fall within exclusive provincial jurisdiction.

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The Spending Power and Federal-Provincial Programmes:
Provincial Government Criticisms

The governments of the provinces have advanced three criticisms of Parliament for its use of the spending power to establish new federal-provincial programmes:

(1) That the Government and the Parliament of Canada are deciding, without the formal participation of the provinces in such decisions, as to when federal-provincial programmes ought to be started.

(2) That shared-cost programmes force upon provincial governments changes in their priorities.

(3) That “taxation without benefit” occurs when the citizens of a province whose provincial government has refused to participate in a shared-cost programme are required to pay the federal taxes which finance the federal share of the programme.

Each of these criticisms is examined in the paragraphs which follow.

Provincial participation in the decision to establish shared-cost programmes. It is argued by many provincial governments that the Government of Canada ought not to, or perhaps ought not even have the right to, initiate, change or terminate shared-cost programmes without first obtaining some kind of consensus among provincial governments in favour of doing so. The rationale for this argument is essentially this: where exclusive provincial jurisdiction is involved, federal-provincial shared-cost programmes can only be established and operated by the provinces; therefore, the Government of Canada ought not to proceed with any plan to contribute to such programmes without first obtaining some kind of agreement from among the provinces. (The counter-argument has been that no provincial government is constitutionally obliged to enter into shared-cost agreements with the Government of Canada; and that what really is being criticized, therefore, is the political pressure which is imposed upon provincial ministers to participate in Canada-wide programmes.)

Provincial priorities. Secondly, the provincial governments point out that, because they feel obliged to enter into new federal-provincial shared-cost programmes, they are forced to alter their spending and taxing priorities. Moreover, because shared-cost programmes cost the provinces only 50 cents for each dollar they spend (the usual ratio), there is a greater incentive to allocate provincial funds toward these as opposed to purely provincial programmes, and a smaller incentive to economize in administering them. (The response to this argument has been that the very purpose of shared-cost

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measures is to achieve a country-wide priority for certain programmes, and that in the absence of some such vehicle common priorities across Canada would be highly unlikely.)

Taxation Without Benefit“. Thirdly, some provincial governments are arguing that their citizens ought not to be forced to contribute toward the federal share of shared-cost programmes which do not operate in their province, by reason of the decision of their provincial government. Alternatively, it is argued, the federal government ought to pay over to the provincial government the equivalent of what the taxpayers in the province are contributing toward the federal share of the programme, or the equivalent of what they would have received in benefits had the province embarked upon the programme. (The counter-argument has been that the taxpayers of each province are represented in Parliament as well as in provincial legislatures, and that they have participated, through their M.P.’s and their Senators, in Parliament’s decision to offer to spend from the Consolidated Revenue Fund for the purpose of contributing toward new shared-cost programmes.)

The Spending Power and Payments to Persons and Institutions

In addition to the arguments which are made concerning federal-provincial shared-cost programmes, the Government of Quebec, as has been noted, has generally argued against the use by the Parliament of Canada of its spending power for the purpose of making payments to persons and institutions. The rationale for this position is different, generally speaking, than that concerning shared-cost programmes. New provincial programmes are not required as a consequence of federal payments to persons or institutions; at most adaptations might be called for in the related federal and provincial programmes to achieve the best results for the citizen. Provincial government priorities remain unaffected; again the most which might be called for would be programme adaptation (usually involving reduced obligations on the provincial treasury). Finally “taxation without benefit” does not occur.

The argument against federal grants to persons and institutions is based more upon a particular approach to the Constitution, and upon what might be called “the case for programme integration”. The constitutional argument is straightforward: Parliament ought not to have the power to spend except

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where it has a specific power to regulate. The programme argument is that a single authority is better able to integrate different programmes in the same or related fields—for example income redistribution and social security—than are two authorities. Further, the single authority, if it is the provincial government, would be able to adapt every programme to the specific demographic, income and regional structure of the province, without taking into account the situation in the rest of the country. This approach is based on the assumption, of course, that a province would be put in the financial position, by Parliament, of being able to finance the federal programmes it took over, including, if it were a lower income province, higher equalization payments.

It is not possible to enter into a discussion of this particular proposition without considering the whole of the structure of Canadian federalism, including the totality of the distribution of powers. There are two reasons for this. First, programmes which involve payments to persons and institutions and which are excluded from Parliament’s jurisdiction under the propositions submitted by the Government of Quebec, include income redistribution measures, possibly certain economic development programmes, contributions to Canada’s cultural development, and research and technological development measures—all of which the Government of Canada considers to be important powers of Parliament. This view was advanced by the federal government at the first meeting of the Constitutional Conference, when it was argued that Parliament ought to retain explicit powers in these fields. Secondly, to achieve the programme and fiscal transfers called for in the Quebec propositions relating to these matters would be to weaken very substantially the powers of Parliament across the country, or to call for special status for the National Assembly of Quebec. In either case the structure of Canadian federalism would be fundamentally altered. For these reasons the Government of Canada does not believe it would be appropriate to discuss the Quebec propositions concerning federal payments to persons and institutions until all propositions concerning the distribution of powers have been received by the Secretariat of the Constitutional Conference, and until their effect upon the structure of Canadian federalism has been fully evaluated by all governments.

Federal Contributions to Provincial Programmes:
The Rationale for the Spending Power

The case for a federal spending power for the purpose of enabling Parliament to contribute toward provincial programmes in fields of provincial jurisdiction is to be found in the very nature of the modern federal state—in its economic and technological interdependence, in the interdependence of the policies of its several governments, and in the sense of

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community which moves its residents to contribute to the well-being of residents in other parts of the federation. To understand these characteristics of an industrialized, Twentieth Century federal state is to understand the rationale for the spending power of the Parliament of Canada.

The Interdependence of the Modern State—The modern industrial state is so interdependent, particularly in technological and economic terms, and its population is so mobile, that it has become quite impossible to think of government policies and programmes as affecting only the people within the jurisdiction of the particular government responsible for those policies. There are benefits which flow to the people of the whole of Canada from certain of the services of provincial governments, when such services take into account national as well as provincial interests, and there are costs which are borne by the people of the whole or of parts of Canada when the programmes of a particular province fail to take into account the extraprovincial effects. The effectiveness of pollution control, for example, affects the people of neighbouring provinces; provincial educational systems contribute to or fail to advance the economic growth of Canada as a whole; and the equality of opportunity across the country, or the lack of it, affects the. well-being of Canadians generally. Moreover the mobility of Canadians—increasing year by year—itself creates a kind of interdependence: a person in almost any part of Canada, accustomed to the expectation that he or his children will sooner or later move to other parts of the country, develops an interest in the public services in other provinces as well asthe services of his own province—the obvious examples being hospital and medical care.

The extra-provincial or national effects of certain provincial public services would pose no problem if the interests of each individual province always coincided with the interests of other provinces and of the country as a whole. In such a simplified state, a provincial government would automatically be serving the national interest when it was doing its job of serving the provincial interest. But this is not always the case. And when it is not—where provincial interests would be better served by one kind of programme and the national interest by another—the provincial legislature which does its job of meeting the needs of its constituents will not be meeting the potential needs of other Canadians. There is nothing new or unusual about this: the problem of differences between the interests of the “provincial constituency” and those of the “national constituency” has been very real in the history of Canadian federalism, as indeed it has been in the history of other federations. Only a few examples need be given to illustrate this problem—some of which have involved the use of Parliament’s spending power and some of which have not.

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First, the terms of reference by which a provincial government is guided differ necessarily from those which the Government of Canada must take into account. The criteria which are used by the provinces and their municipalities in determining the amount they will borrow each year, for example, are necessarily different than those employed by the Government of Canada. The provinces and municipalities are guided by their views as to the proportion of capital expenditures they think ought to be borne by present as opposed to future generations, their judgment as to the amount which can be borrowed in different capital markets, and the needs of their respective economies. The Government of Canada is guided, on the other hand, by its judgment as to the total demands which are likely to be placed upon the supply of resources and capital in the economy as a whole, including those by the provinces and municipalities, the desirable balance between fiscal and monetary policy, and other related considerations. The harmonization of fiscal and financial policies of governments, therefore, in the interest of the national as well as of regional economies, requires some vehicle for bringing the national perspective to the attention of the provinces, and vice versa. (It is for this purpose, among others, that the Ministers of Finance and Provincial Treasurers meet each year before their annual budgets are completed.)

Secondly, the priorities imposed upon provincial governments by their constituencies are almost certain to be different, in some measure, to the priorities which might be suggested by the needs of the “national constituency”. For example, the transportation requirements of the people of most if not all provinces suggest naturally that intra-provincial roads and streets should take precedence over inter-provincial highways. It is scarcely surprising, therefore, that the Trans-Canada Highway was built as a result of a federal-provincial programme, under which provincial governments were able to meet a national need without foregoing unduly their local priorities.

Thirdly, the objectives of provincial policies and programmes are naturally directed more to the needs and the interests of the provincial constituency than to those of the national constituency. French is not required as a second language in many provinces of Canada, for example, and it is not surprising therefore that it has not been taught as a living language in the schools of these provinces. Yet it is in the interest of the country as a whole that English-speaking Canadians receive an adequate “base” in the nation’s other language, and in particular it is in the interest of the young people who leave English-speaking areas to go to areas and jobs where both languages are required or are desirable, that they have such a “base”.

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Fourthly, the consequences of provincial policies must be judged by politicians largely. in terms of their provincial constituency. Provincial industrial development programmes, for example, are designed primarily to increase the rate of growth of the economy of the individual provinces. Their extra-provincial consequences—in terms either of their effect upon the efficient allocation of labour and capital in the economy as a whole, or in terms of their impact on development programmes in other provinces—are understandably a second rather than a first consideration in the decision-making process. Another example could be given in the municipal field: each urban municipality tends to establish its own building codes, under the authority delegated to it by the province, in terms of its own local interests or objectives. But taken together, a multiplicity of municipal building codes increases considerably the cost of housing in Canada.

This point is perhaps best illustrated by considering the national consequences of inaction on the part of some or all provinces. To take an extreme, if one or more provinces were to provide, for whatever reason, quite inadequate education, health and housing services, the rest of the country could be expected sooner or later to bear some of the “cost” of this inaction. A larger proportion of the labour force in those provinces would tend to be unemployed, the capacity of people to seek employment opportunities in areas where, jobs were available would be more limited, and income would tend to be lower. In consequence the nationas a whole would be called upon to redistribute income to the people of those provinces, to provide equalization payments to their provincial governments, and to contribute to the economic development of the regions or areas involved.

The essential difference between the influences which enter into provincial decision-making and those which are a proper part of national decision-making is clearest when considering the costs and benefits of providing services. Provincial governments cannot be expected to assume unduly heavy burdens, or to impose upon their taxpayers considerably higher costs, for the purpose of providing benefits to other provinces or their residents. Pollution control and technical education are the most obvious examples. The governments of upstream provinces are not likely to be disposed to impose very heavy burdens upon their municipalities and industries where the benefits of pollution control will be felt largely in a neighbouring province. Nor will a largely agricultural province be likely to initiate expensive technical and professional training courses, the graduates of which can only be employed in manufacturing enterprises. It might have been expected, therefore, that federal-provincial programmes such as the Technical and Vocational Training Agreements, under which the Whole of Canada

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bore a part of the cost of the training facilities, would be the vehicle for initiating technical and vocational training institutes across the country.

The Interdependence of Government Policies—A further reason for shared-cost programmes, in addition to the “national interest” coming to attach to certain provincial programmes, is the need for some vehicle for harmonizing programmes where “mixed” federal and provincial jurisdiction is involved. However clear and however tidy the division of legislative powers, the complexity of today’s society and the scale of government activity will inevitably result in both orders of government having an impact upon certain public policy problems. Again, this phenomenon is not unique to Canada: it is common to all federations. Urban development provides a good example. The provinces are responsible for establishing and regulating municipal government; but the Parliament of Canada has jurisdiction over rail and air transport and over harbour facilities, and the Government of Canada, including its Crown agencies, is a leading “resident” of most of Canada’s urban centres. Moreover, the exercise by the Government of Canada of its responsibilities for certain economic policies, including credit policies, has an important influence upon housing and municipal development. In these circumstances there must be some vehicle by which the provinces can influence the federal government in the exercise of its jurisdiction and vice versa. Federal-provincial shared-cost programmes are one such vehicle.

Technological change over the years to come can be expected to increase rather than decrease the interdependence of federal and provincial policies and programmes. Health care, to take one example, is less and less a matter which can be identified with small defined local areas. Certain highly specialized and expensive facilities serve whole regions, if not the whole of Canada. And medical records—even diagnostic techniques—are increasingly coming to involve computer technology and communications facilities which are national rather than local in scope. The Constitution must be flexible enough to enable Canada’s governments to adapt to changes such as this: to eliminate the possibility of federal-provincial shared-cost programmes would be to move in the opposite direction.

The Sense of Community in a United Country—The sense of community that exists in Canada provides the third essential reason for a federal spending power. Canadians everywhere now feel a sufficient sense of responsibility for their compatriots in other parts of the country that

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they are prepared to contribute to their well-being. They do so in a great many ways, the principal of which will always be income redistribution payments directly to the people of other parts of Canada.” But one of the most important ways of giving expression to this concern isby the provision to every citizen, wherever he lives, of adequate levels of public services— in particular of health, welfare and education services. Again, some vehicle is required by which Canadians can achieve this goal—by which the “national interest” in the level of general provincial public services or of a particular public service can be expressed.

The Spending Power and Other Aspects of the Constitution—It can be argued that the Constitution should be contrived so as to avoid any need for a spending power—that each government ought to have the revenue sources it needs to finance its spending requirements without federal assistance, and further that where the national interest comes to attach to a certain matter within provincial jurisdiction the Constitution ought to be amended to transfer that matter to federal jurisdiction.The difficulty with this “tidy” approach to federalism is that it does not accord with the realities of a Twentieth Century state.

It is quite true that in the ideal state provincial governments ought to have access to enough tax fields that they themselves can discharge their responsibilities. But in fact the tax-raising potential of Canada’s provinces differs very markedly across Canada, because of the differing levels of income and economic activity in the country. One percentage point of personal income tax, for example, yields about $3.14 per capita in Ontario, $2.98 in British Columbia, $2.21 in Quebec, $1.89 in Saskatchewan, $1.27 in New Brunswick and 91 cents in Prince Edward Island (1968-69 figures). Similarly one point of corporation income, tax yields $3.40 per capita in Ontario, $3.29 in British Columbia, $2.39 in Quebec, $1.82 in Saskatchewan, $1.38 in New Brunswick and $1.00 in Prince Edward Island. It is evident from these figures that federal grants to the lower income provinces are essential if these provinces are to provide adequate levels of public services at levels of taxation which are not too far out of line with those in the higher income provinces.

It is also true, to deal with the second argument, that when technological, economic and social changes have the effect of transforming a purely local or provincial matter into a national or quasi-national one, it can be argued that the Constitution should be amended to give Parliament jurisdiction. This is obviously valid where the change is so marked as to warrant giving one order of government full legislative jurisdiction where it had none before. But this “either-or” approach—either it is federal jurisdiction or it is not—does not meet the situations so prevalent in today’s society, where there is a valid national interest in certain provincial problems or

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policies, but not such a “total” national interest as to call for the transfer of jurisdiction to the Parliament of Canada. It is for these “in-between situations”14 that some such vehicle as federal-provincial programmes, involving on occasion the spending power, is required.

The Role of the Parliament of Canada—If the interdependence of Canadian society which has been described in earlier paragraphs is acknowledged, and if it is accepted that there may be a national or extra-provincial interest in certain provincial problems or programmes, it remains to determine what vehicle would be most appropriate for communicating that national interest to the provincial governments concerned, and for achieving the desirable adaptations in the provincial programmes involved. What is involved here, it should be emphasized, is sometimes only a matter of identifying the extra-provincial or national interest which is seen to exist, and communicating it to the provinces concerned, and sometimes also a matter of compensating these provinces for the cost—measured in dollars or in disruption of priorities—of adapting the programmes involved to serve the national as well as the provincial interest.

It might be argued that because provincial jurisdiction is involved, provincial governments themselves ought to assume this responsibility—that the Provincial Premiers’ Conference rather than Parliament ought to be the body through which this “national interest” in provincial public services might be expressed. Where intergovernmental grants were involved, this argument would go, the provincial governments rather than the federal government ought to be responsible for making the grants. Thus the Premiers’ Conference would decide what equalization payments would be contributed by the higher income provinces to the lower income provinces, for the purpose of ensuring adequate levels of provincial public services across Canada. Similarly, it would be the Premiers’ Conference which would decide when and whether Canadians in certain provinces could or ought, because they were benefiting from or were being affected by the programmes of other provinces, to contribute to the governments of those other provinces for the purpose of bringing about an adaptation, in their interests, of the programmes involved. Federal-provincial programmes would become interprovincial programmes, in other words, and federal-provincial grants would become interprovincial grants.

Neither the governments of Canada nor students of govermnent in Canada—except those advocating the replacement of federalism by “confederalism”—have suggested this approach. There are very practical reasons for this. First, there exists in a federal state a Parliament which has been chosen by all citizens, and which because it has been directly elected is uniquely able

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to represent the “national interest” of the citizens—as distinguished from their “provincial interests”. Only in a “confederal state”, where the directly elected Parliament is replaced by intergovernmental conferences of state ministers or other delegates, is it necessary to define the national interest by political negotiation rather than by public election. It is in the nature of federalism, in other words, for the citizen to look to Parliament for an expression of his national or extra-provincial interests.

This is not to suggest that interprovincial meetings cannot play a useful role in harmonizing provincial programmes, or in providing a forum for the communication of extra-provincial interests in respect of many provincial problems. But it is to suggest that the nationally elected Parliament has a unique and a legitimate role to play in determining the national interest, even where provincial jurisdiction is involved. And it is to suggest, further, that Parliament is the appropriate body to make grants to the provinces for the purpose of equalizing provincial public services and for the purpose of compensating the provinces for adapting their programmes to meet national as well as provincial needs.

Having said this, it must be emphasized that this reasoning does not lead to the conclusion that because Parliament is elected by all Canadians it has or ought to have the power to invade provincial jurisdiction any time it perceives some national interest in a provincial programme. Nor does it mean that Parliament ought to have the power to enlarge its constitutional powers at the expense of the provinces by unilateral, de facto action. This would make a mockery of a federal constitution, which has as one of its purposes the definition andprotection of provincial jurisdiction, making it subject to change only by constitutional amendment. Rather, the correct conclusion is that because the people of Canada will properly look to a popularly elected Parliament to represent their national interests, it should play a role, with the provinces, in achieving the best results for Canada from provincial policies and programmes whose efiects extend beyond the boundaries of a province.

Federal Contributions to Provincial Programmes:
a Possible Approach in a Revised Constitution

If the rationale for federal government contributions toward provincial government programmes is accepted, and if at the same time some validity is recognized in the provincial criticisms of the use of the federal spending

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power for this purpose, the problem is to find a method of meeting these criticisms, while at the same time retaining a sufficiently strong spending power. To this end the Government of Canada has attempted to develop certain principles which it could tentatively advance to the Constitutional Conference as a basis for reviewing this aspect of the Constitution. They are these:

(1) The constitutional power of the Parliament of Canada to contribute toward the public services and programmes of provincial governments should be provided for explicitly in the constitution;

(2) The power of Parliament to make unconditional grants to provincial governments for the purpose of supporting their programmes and public services should be unrestricted;

(3) The power of Parliament to make general conditional grants in respect of federal-provincial programmes which are acknowledged to be within exclusive provincial jurisdiction should be based upon two requirements: first, a broad national consensus in favour of any proposed programme should be demonstrated to exist before Parliament exercises its power; and secondly the decision of a provincial legislature to exercise its constitutional right not to participate in any programme, even given a national consensus, should not result in a fiscal penalty being imposed upon the people of that province.

It will be evident that a firm proposal for defining the federal spending power in this way is impossible until the revised distribution of legislative powers is known. If Parliament’s powers to legislate in the national interest are reasonably broad, its freedom to spend to this end, where provincial jurisdiction is involved, could be limited. If on the other hand, its powers to legislate were narrow in relation to present and potential national needs, the freedom to spend would have to be relatively untrammelled. It follows that the principles here suggested for defining the federal spending power, and the specific proposal which will subsequently be advanced for realizing them, are subject to the adoption of a distribution of legislative powers which will ensure a strong federal government as well as strong provincial governments. During the course of the discussions on the Constitution, and before the coming into force of a revised distribution of powers, including any suggested limitation on the federal spending power, the Government of Canada would propose to exercise the spending power under the present Constitution with the kind of restraint which the Prime Minister indicated during the course of the Second Meeting of the Constitutional Conference.

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Unconditional Grants

These proposed principles would give to Parliament the unlimited power to make unconditional grants to the governments of the provinces, in support of programmes falling within exclusive provincial jurisdiction. This would provide the constitutional basis for federal equalization payments to the provinces, much as the present Constitution does. The case for such payments has not been questioned by any province (though the Government of British Columbia has suggested that if the minimum annual income of individual Canadians were high enough equalization payments to provincial governments would become unnecessary). Without federal equalization payments, disparities in provincial public services would be wider and would widen, and any existing feelings of disatfection with Canada in the lower income regions, would be aggravated. Moreover, greatly inferior public services in certain areas of the country would undermine the efficiency of the Canadian common market, by making more difficult the mobility of labour and capital within it. It follows, in the view of the Government of Canada, that Parliament must retain its unqualified spending power for the purpose of making unconditional grants to provincial governments.

Conditional Grants for General Federal-Provincial Programmes

The proposed principles would establish two limitations on the use by Parliament of its power to make conditional grants for general federal-provincial programmes—first the existence of a “broad national consensus” in favour of any programme, and secondly the assurance that a “fiscal penalty” would not be imposed upon the people of non-participating provinces. The Government of Canada would suggest the following method for giving effect to these two requirements:

(1) The determination as to when the national interest or extra-provincial interests warranted a new shared-cost programme between the Government of Canada and the governments of the provinces would be arrived at jointly by Parliament and the provincial legislatures, in the manner described below15, instead of by Parliament alone.

(2) Where a consensus had been reached that a new shared-cost programme was desirable, the provincial governments whose legislatures had voted for the consensus would receive conditional

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grants for the programme, once it was started by them. In the provinces whose legislatures had voted against the consensus, the people of the province would be paid grants equivalent in the aggregate to the average per capita amount paid to the participating provinces (multiplied by the population of the non-participating province). (See pp. 44 and 46.)

The introduction into the Constitution of these tworequirements would meet all of the provincial objections to the present procedures for initiating shared-cost programmes. Parliament would no longer have the power to decide unilaterally when a shared-cost programme ought to be initiated: a provincial consensus would be required. The payment of grants to the people of the provinces whose legislatures had voted against the consensus would meet the “taxation without benefit” argument. The two principles taken together would ensure that the priorities of any provincial government would be changed only if its legislature had supported the consensus. They would also mean that Parliament would not be able to give effect to its judgment that the national interest had come to attach to some problem or programme within provincial jurisdiction unless enough legislatures had voted their agreement, and it would be able to do so only in the provinces where the legislatures had voted for Parliament’s proposal.

Determining the consensus—The first step in determining whether there was a consensus in favour of a new shared-cost programme would be the presentation to the Parliament of Canada by the federal government of a resolution proposing the programme.16 If Parliament approved the resolution, it would be transmitted to the provincial governments for submission to their legislatures. The legislatures, in turn, would approve or reject the resolution. The determination as to whether there was a provincial consensus in favour of the shared-cost programme would be made by reference to the Senate divisions provided for in the Constitution.

For the purposes of this proposal the Senate could be regarded as having four divisions under the present Constitution, namely Ontario, Quebec, the Maritime Provinces and Newfoundland, and the Western Provinces.17 The affirmative vote of the legislatures in at least three of these Senate divisions would be required before Parliament could proceed with the proposed shared-cost programme. The vote of the legislatures in the Atlantic region would be considered to be in the afiirmative if the legislatures of provinces having at least 16 of the 30 Senate seats of that region were to vote for the resolution

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(two of Nova Scotia, New Brunswick or Newfoundland). The vote of the legislatures of the Western region would be considered to be in the affirmative if the legislatures of provinces having 12 of the 24 Senate seats of that region were to vote for the resolution (two of the Western Provinces).

An affirmative vote on the part of three Senate divisions would represent a provincial consensus in favour of Parliament’s proposal. In the event of a negative vote—two or more Senate divisions voting against a proposal— Parliament could re-transmit its resolution to the governments of the provinces whose legislatures had voted against the proposal, within one year, to determine whether the legislatures wished to change their decision given the results of the votes in other legislatures. Subsequently Parliament could not re-submit its resolution to the provinces more often than once every two or three years.

This method of determining a consensus is based upon the present constitutional provisions regarding the Senate. If the Senate were to be reformed in such a way as to increase the representation of provincial interests (that is, by the appointment of a proportion of the Senators by the governments of the provinces), another alternative for determining the provincial consensus could be considered, namely by a special vote of the Senate (using the Senate division voting procedures suggested). Whatever the decision as between these two alternatives—a vote of the legislatures or a vote of a reformed Senate—it would not be appropriate to give the provinces a “double veto”, once by a Senate in which provincial governments were directly reproasented, and once by provincial legislatures. It should be noted that any revision in “the basis of distribution in the Senate as among the various regions and provinces” (which possibility the Government of Canada has suggested should be considered) might call for a review of the formula for determining a provincial consensus.

Provinces whose legislatures had voted for the consensus. In the event of a provincial consensus in favour of the proposed programme the Government of Canada could begin making payments to the provincial governments whose legislatures had voted for the consensus, once the shared-cost programme had been started by them. To ensure the participation in the programme of the required number of provinces, personal grants in lieu of programme grants would not be paid in any province whose legislature had voted in favour of the proposal but whose government either had failed to start the programme or rescinded it once it was started.

Provinces whose legislatures had voted against the consensus. In the event of a favourable provincial consensus, and after a prescribed lapse of time, the Government of Canada would begin making personal grants in lieu of programme grants in the provinces whose legislatures had voted against

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participation. During this interval the legislatures which had voted against the consensus would have an opportunity to reconsider their decision, given the results of the votes in other legislatures, and the governments of the participating provinces would be engaged in establishing the programme. The personal payments might begin, for example, three months after the end of the fiscal year in which the shared-cost programme had been started by the required minimum number of provinces. The payments would continue until the provinces concerned established a qualifying programme: the Government of Canada would not have the right to re-transmit Parliament’s resolution to the non-participating provinces any more often than once every two or three years.

Other aspects of the determination of a consensus. To ensure that all legislatures had an opportunity to express themselves on proposed shared-cost programmes, and did in fact vote upon the proposals, a constitutional obligation would be imposed upon provincial governments to submit Parliament’s resolutions to their legislatures at the current or the next session, and upon provincial legislatures to vote upon the resolutions within one year of their receipt by the provincial government. A constitutional obligation of this kind would not be unique: an obligation upon the provinces to hold annual sessions of their legislatures and to dissolve their legislatures for a general election at least every five years has also been suggested. It would be open to the legislatures, of course, to amend the proposals submitted by Parliament. A major amendment by any legislature, which was unacceptable to the Government of Canada, would be taken to be a negative vote. Minor amendments acceptable to the Government of Canada would be discussed with the provincial governments whose legislatures had voted in the affirmative, to determine the acceptability of the amendments to the provinces.

Grants to Persons in the Non-Participating Provinces—The aggregate amount of the grants to persons in the non-participating provinces would be calculated by multiplying the average per capita payment to participating provinces by the population of the non-participating province. The alternative basis of calculation—the taxes paid in support of the shared-cost programme by the people of the non-participating provinces—would not be feasible, since it is impossible to trace with any accuracy the tax contribution to the federal treasury from each province.18

The allocation of the aggregate amount as between persons in the non-participating provinces, and the method of distributing the refunds would have

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to be determined by Parliament. Clearly it would not be feasible to make this allocation on the basis of the taxes paid by each taxpayer in the province, because of the impossibility of making such a calculation. Nor would it be reasonable to require that the refunds be based upon the amount of the individual income tax contributed by each taxpayer—the one tax where the amount paid by each person is known. To do so would be to act upon the fiction that all federal-provincial programmes were or could in reality be financed solely from this source of revenue. In fact federal expenditures of whatever kind—excepting those paid from insurance funds, such as unemployment insurance—are financed from all of the taxes paid by the people of Canada to their federal government, and no bookkeeping device would obscure this fact.

It is recognized that the arrangement here proposed for calculating the aggregate amount to be paid to the people of the non-participating provinces, and for distributing it among them, would involve some redistribution of income, both as between provinces and as between taxpayers. But this is true of all taxes and expenditures. More particularly, it is necessarily true of federal payments to provincial governments, since federal taxes fall more heavily upon high income areas than upon low ones, and because contributions to provincial services frequently result in greater benefits to low income as opposed to high income provinces. It follows that the redistributive effects of the arrangements proposed might reasonably be accepted as simply one of the side effects of an arrangement under which federal-provincial programmes could be established in the provinces which wanted them. Moreover the redistributive effect of federal-provincial programmes could be said to be undesirable only if it were suggested thatthe particular government measures, and the taxes used to finance them, ought somehow to be based, in the participating provinces, strictly upon the benefits each family was likely to receive from the programme, and, in the non-participating provinces, strictly upon the contribution each person was making to the federal treasury in the taxes he was paying to it, directly or indirectly. Neither proposition would be practical, nor, in the view of the Government of Canada, desirable.

Payments to the governments rather than to the people of the non-participating provinces would seem, at first glance, to be a reasonable alternative to the approach here proposed. Upon reflection, however, it is evident that such a suggestion would be inconsistent with the underlying reason for a payment of any kind to non-participating provinces. The basic principle underlying such payments would be this: no provincial government ought to feel obliged to exercise its constitutional powers in a particular way for the reason that a fiscal penalty would be visited upon its people if it took a contrary view. The objective, therefore, clearly must be to keep

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the people of non-participating provinces from paying a penalty: it follows that any payment must logically be made to them.

There is another way of stating this principle which may make the proposition clearer. Every provincial government ought to be free to accept or reject federal-provincial programmes proposed by the Government of Canada. Once the decision finally has been made by a province to reject a proposed programme—once a provincial government has said it wants nothing to do with the programme—it ought not indeed be expected, or expect, to participate in any way. It remains only for Parliament to return to the people of that province—to its taxpayers—an amount which bears some relationship to the taxes they have contributed toward the programme, or the amount they would have received through the programme had their provincial govern-ment decided to participate.

There is, in short, no reason in principle for Parliament to pay to the government rather than to the people of a non-participating province the amount it would be obliged under the Constitution to pay. Nor is there any compelling administrative reason to do so. In an age when virtually all citizens have contact with the government, in one way or another, and when computers can be used to do things which earlier would have been impossible, it is not too difiicult to develop a system under which the compensatory payments to non-participating provinces would be paid directly to the citizen.

Amendment and Termination of General Shared-Cost Programmes—A brief note should be added about the amendment or termination of general shared-cost programmes. The resolution concerning each programme proposed undoubtedly would contain provisions for the termination, lapsing or amendment of the programme. Major amendments to the programme not provided for in the original resolution (presumably those requiring statutory amendment) would require Parliamentary approval, and the consent of the participating provinces (the minimum consensus required would be the same as that provided for in the Senate division voting procedure described previously).

Conditional Grants in Support of Federal-Provincial
Programmes Involving Fewer than Ten Provinces

The proposal outlined above would not apply to regional programmes, that is to say shared-cost programmes which involved some or all of the provinces of one or two Senate divisions. Such programmes would continue to be negotiated directly between the Government of Canada and the I governments of the provinces concerned. Further, because regional schemes by

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their nature usually require the participation of all provinces affected in order to be viable, and because the taxpayers in the other parts of Canada would be required to contribute toward such schemes without either programme benefits or compensatory personal grants, no personal grants in lieu of programme grants would be paid in provinces which were invited to participate in a regional plan but whose governments decided against doing so. It is difiicult to visualize a shared-cost programme which would be applicable to the provinces of three Senate divisions, but it would have to be decided whether the scheme for general shared-cost programmes or that for regional plans ought to apply in these circumstances, in case that eventuality were to arise in the future.

* * * *

This proposal for a new approach to the federal spending power in a revised Constitution is based upon the belief that federalism in a modern state must provide for joint federal~provincial action, sometimes initiated by Parliament, and upon the further belief that a federal constitution must always provide for the integrity of the regions or provinces which make up the state. It is hoped that the Constitutional Conference will find this proposal helpful in beginning its task of reviewing the distribution of powers in the Constitution of Canada. It remains to be said of this Working Paper, as the provinces have said of the papers they have submitted, that the Government of Canada will not feel bound by the particular proposal which is here presented. More specifically the Government will feel obliged, as was said previously19, continually to review its position as discussions on the distribution of legislative powers proceed.

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1 This latter statement must be qualified both in legal terms and in terms of the generality of the support for this View of the Constitution. See pp. 12 and 14, infra.
2 See the Appendix for an elaboration of these figures.
3 Article 1, section 8 of the American constitution.
4 Section 96.
5 See Articles 31A, 32 and 42B of the Swiss constitution.
6 See Article 72 (2) of the constitution of the Federal Republic of Germany.
7 Reference re Employment and Social Insurance Act, [1936] S.C.R. 427, Duff C.J. at p. 457.
8 [1937] A.C. 355 at 366.
9 Bora Laskin, Canadian Constitutional Law (Toronto: The Carswell Co. Ltd., 1966) p. 666; and Gerard V. La Forest, The Allocation of Taxing Power under the Canadian Constitution (Toronto: The Canadian Tax Foundation, 1967), pp. 36-41.
10 Report of the Royal Commission of Enquiry on Constitutional Problems, 1956. Vol. II, pp. 217-223. 6
11 See, for example, the reference in Jacques Dupont, “Le pouvoir de depenser. du gouvernement federal: A Dead: Issue?” “, in Cahiers de Droit (Laval University), Volume 8, footnote 63.
12 See in particular a speech by Prime Minister Louis St. Laurent in 1957. Hansard, January 29th, p. 754.
13 See the Proceedings of Federal-Provincial and Dominion-Provincial Conferences of the past 10 or 15 years.
14 See pp. 24, 26 and 28, supra.
15 See pp. 40 and 42, infra. Note also the qualification concerning the role of the Senate.
16 This would be a money resolution preceding a Bill which would be considered if and when a consensus was reached. Special procedures likely would be required by Parliament for the consideration of such a resolution.
17 The Newfoundland seats have been added to the Maritime Provinces division referred to in Section 22 of the B.N.A. Act.
18 Shared-cost programmes are financed out of the Consolidated Revenue Fund, which is made up of personal income tax, corporation income tax, sales and excise taxes, customs duties and other revenues. It is not possible to determine, province by province, the true source of many of these revenues.
19 See p. 36, supra.


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