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Chapter 8. Fiscal Federalism inCanada

A. Federalism in Canada: The Constitutionaland Political Context

Canada is a fundamentally federal countrymarked by a vast territory, second only to Russia in area, and by a diversepopulation of over 30 million descended from immigrants drawn from manycultures around the world as well as an aboriginal population. Canada has twoofficial languages, English and French, and the country consists of distincteconomic regions. Canada became a federation in 1867 when the former Britishcolony of Canada was split into two new provinces, Quebec with aFrench-speaking majority and Ontario with an English-speaking majority. Twoother British colonies along the Atlantic coast, Nova Scotia and New Brunswick,were added to establish a four-province federation. In the 133 years since thattime, the federation has grown to encompass most of the northern half of theNorth American continent stretching from the Atlantic Ocean to the PacificOcean to the Arctic Ocean and consisting of ten provinces and threeterritories. Commencing as a relatively centralized federation, Canada inaccommodating the internal diversity of its population and regional economieshas become one of the more decentralized federations in the world, whiledeveloping at the same time a cohesive transportation network and system offederation-wide social programs.

1. Constitutional Status of Various Ordersof Government

The government structure consists of a federalgovernment, 10 provincial governments, 3 territorial governments and numerousmunicipal (or local) governments. All of the federal, provincial andterritorial governments are organised on the basis of the Westminsterparliamentary system. There is also a newly evolving system of self-governmentfor many of the aboriginal communities.

The Federal, Provincial and TerritorialLegislatures

The fusion of the legislative and executivebranches of government within the federal and provincial legislatures withexecutives chosen from within and responsible to the legislatures, combinedwith strong political conventions of party discipline, have effectivelytransferred legislative power in practice to the executive branches.

The Senate of Canada is the Upper House andits members are appointed by the prime minister and hold office untilretirement at 75. Although the Constitution gives the Senate extensivelegislative powers these are rarely fully exercised because the chamber lacksdemocratic legitimacy. As a result there are few checks on the power of theexecutive when it is supported by a majority in the House of Commons.

The House of Commons (the Lower House) ofCanada is elected by a first past the post electoral system and the number anddistribution of seats is based on population (giving provinces with a largerpopulation more seats). The Canadian prime minister must choose the executivefrom the members elected to the House of Commons or from members in theSenate1 and as a matter of convention the executive reflects regional,linguistic and other important interests. In order to stay in government theexecutive must win votes in the Lower House on issues that are consideredcentral to their governing platform. This is usually assured by the electoralsystem which gives the governing party a majority of seats and the use of partydisciple to ensure that members of parliament from the government’s party vote in support of theexecutive’slegislation. This ensures a very stable executive and very stable government(as long as one party holds the majority of seats) that faces few challengesfrom the legislature or the Upper house.

Provincial and territorial legislatures areunicameral. These legislatures are elected by the same method as the federalHouse of Commons and the relationship between the executive and the legislatureis the same as it is in the federal House of Commons.

The Courts

One institution that does have considerablepower to check the power of the federal, provincial, and territorialgovernments is the courts. They conduct judicial review on two bases; 1) thedivision of powers (as it is specified in the Constitution) and 2) since 1982on the basis of an entrenched Charter of Rights. In both of these cases thecourts have the power to rule legislation null and void if it is found toviolate the terms of the Constitution.

Constitutional Status of the Federal andProvincial

The federal government and the 10 provincialgovernments are recognised and their existence is guaranteed in theConstitution (Canada Act 1867, s.1-5). The federal and provincial governmentsare independent of each other; there is not a hierarchical relationship betweenthe two orders of government. The provincial legislatures and the federalparliament are each considered sovereign within their own constitutionallydefined areas of jurisdiction.

The federal government has legislative andregulatory powers in areas that include: regulation of trade and commerce,national defence, foreign affairs, criminal law, unemployment insurance, anddirect and indirect taxation. The provinces have legislative and regulatorypowers in important, and costly, areas that include: education, health, socialassistance, civil law (and the administration of justice), municipal affairs,licensing, and management of public lands and non-renewable natural resourcesand forestry resources, property law, civil law, direct taxation, property andcivil rights within a province and other matters of a localnature.

Local and TerritorialGovernments

Canada’s three territories remain underthe constitutional authority of the federal government and their legalstructures are specified in several federal statutes.2 Theterritorial legislatures derive their legislative powers from the federalgovernment. In the statutes that created the territories, the federalgovernment delegated extensive powers to the territorial legislatures thatroughly corresponds to the list of provincial powers.

Local governments (city governments, towngovernments, village governments, township governments, etc) are the creationof the provincial and territorial governments and are subject to regulation bythe provincial and territorial governments that create them.

2. Constitutional Allocation of Revenue andExpenditure Responsibilities and Provisions related to IntergovernmentalTransfers

Constitutional Allocation ofRevenue

In Canada both the federal and provincialgovernments have broad taxing powers. The result is overlapping taxjurisdictions that make the taxation and revenue system rather complex.

The constitution gives the federal governmentan exclusive power to raise money by any mode or system oftaxation.3 However, the Constitutional also gives the provinces the power toapply direct taxation in their provinces.4 As a result the federal andprovincial governments share several of the most significant taxation powers.For example, both orders of government levy personal income taxes and generalsales taxes. Table A1 indicates the various types of taxes levied by thefederal and provincial governments and indicates the areas ofoverlap.

Personal Income Taxes

The federal and provincial governments levypersonal income taxes. The federal government determines the base for personalincome tax and the provinces use this as the base for determining provincialpersonal income taxes.5

Corporate Income Taxes

Corporate income taxes are levied by both thefederal and provincial governments. The federal government sets the basic rateand allows for an abatement of income earned in a province. This allows theprovinces some tax room to impose their own taxes on corporate income earned intheir province although not all of the provinces do so.6

Sales Taxes

General sales tax is levied by both federaland provincial governments.

Table A.1: Taxes Levied by Federal, Provincial andTerritorial Governments







Newfoundlandand Labrador






Yukon &NWT










Customs andExcise


Goods andServices


Prov. SalesTax

Prov. SalesTax

HarmonisedSales Tax

HarmonisedSales Tax

HarmonisedSales Tax

Prov. SalesTax

Prov. SalesTax

Quebec SalesTax

Prov. SalesTax





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