The Government of Newfoundland and Labrador announced today that it is launching a constitutional challenge regarding the Government of Canada’s federal equalization program.

As outlined in the Constitution Act of 1982, equalization is intended to ensure provincial governments have sufficient revenues to provide comparable levels of public services at comparable levels of taxation. Essentially, fairness for all citizens. Currently, this fairness is not achieved for Newfoundland and Labrador.

The equalization formula does not consider:

1. The cost of delivering services. The Government of Newfoundland and Labrador services more than 500 communities across a large, geographically dispersed, and aging population connected by almost 10,000 kilometres of roads. To meet the objectives of the equalization program, it is only just and fair to consider the cost of providing services.
2. Total resource revenue is included in the calculation used to determine the fiscal capacity cap on equalization payments. The current equalization formula penalizes Newfoundland and Labrador for developing its natural resources, including renewables like wind energy which is used to produce green hydrogen. The province must pay the costs for development, regulation and management of resource sectors and these costs are not considered in the formula. Resources sectors are also subject to commodity price fluctuations, which impacts revenue certainty.
3. Once entitlements have been determined, any excess funding not required to equalize the fiscal capacity of provinces is only distributed to receiving provinces. The Government of Newfoundland and Labrador sides with other provinces (i.e., Alberta) that this excess funding should be distributed to all provinces, rather than only to the provinces receiving equalization.

The constitutional challenge announced today is currently being prepared and will be filed in a Newfoundland and Labrador court in the coming weeks. At that time, details of this court action will be available and appropriate notices will be delivered to relevant parties.

The Government of Newfoundland and Labrador has written to the Government of Canada and discussed its concerns which have not been addressed to date. Correspondence is available here.

Quotes
“This challenge is all about ensuring that equalization achieves what is intended in the Constitution – to ensure fairness among all provinces within Canada relating to the cost of delivering public services. From our perspective, the Government of Canada’s equalization program is insufficient in that it does not consider the cost of delivering services in a province such as ours with a geographically dispersed population; nor does it consider the inequity caused by including 100 per cent of our natural resource revenue in the formula. We want the equalization program to treat provinces equitably.”
Honourable Siobhan Coady
Deputy Premier and Minister of Finance

“The Government of Newfoundland and Labrador is challenging the current equalization formula as being unconstitutional. When the Government of Canada dismissed our concerns and extended the equalization formula until 2029, we were left with no other alternative except to launch a court challenge.”
Honourable John Hogan, KC
Minister of Justice and Public Safety and Attorney General

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BACKGROUNDER

Newfoundland and Labrador’s Position
Federal Equalization Program

• The federal equalization program was established in 1957-58 to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels of taxation.
• The Constitution Act of 1982 states, “Parliament and the Government of Canada are committed to the principle of making equalization payments to ensure that provincial governments have sufficient revenues to provide reasonably comparable levels of public services and reasonably comparable levels of taxation.”
• The total equalization federal support to provinces in 2024-25 was $25.3 billion.
• The program is renewed every five years.
• The last three renewal cycles for equalization have offered no substantive methodological changes and only minor technical amendments. For example, technical amendments made to the formula starting in 2024-25 have provided Newfoundland and Labrador with a small equalization payment of $218 million for 2024-25. This is the first time since 2007-08 that Newfoundland and Labrador has qualified to receive an equalization payment.
• The Federal Government extended the current federal equalization formula for another five years, to March 31, 2029, through Bill C-47, a piece of omnibus legislation that received royal assent on June 22, 2023.
• Newfoundland and Labrador’s primary concerns with the equalization program are not incorporating costs to deliver services to residents, and including 100 per cent of resource revenue in the fiscal capacity cap.
• Based on a pre-2006 federal election commitment, the equalization formula was changed in 2008 to include 50 per cent or 0 per cent of resource revenue, whichever provides the most benefit to the province.
• At the same time of the change to 50 per cent or 0 per cent resource revenue inclusion in 2008, a cap on payments was introduced at a resource revenue inclusion rate of 100 per cent.
• As a result, the effective resource revenue inclusion rate used in the formula varies between provinces.
• The cap systematically disadvantages Newfoundland and Labrador.
• In each of the last five years, Newfoundland and Labrador would have received between $450 million and $1.2 billion in equalization entitlements if the fiscal capacity cap was removed. This would have totaled approximately $3.2 billion over the five years.
• The cap has been referred to as the “resource fiscal capacity cap” since it only hinders provinces that have resource revenues.
• Equalization addresses variations in provincial revenue-raising capacity but does not account for expenditure need differences, or variations in costs of providing services across provinces.
• Provinces differ in their ability “to provide reasonably comparable levels of public services” because they must spend different amounts to offer similar services due to diseconomies of scale; differences in demographics such as age, health and income; and environmental factors such as a geographically dispersed population.
• Considering expenditure need in the equalization formula would allow for a better comparison of provincial capacity to provide services at comparable tax rates and is pivotal in improving the equity of this program.
• The Government of Newfoundland and Labrador also has concerns regarding the redistribution of any excess equalization funds once entitlements have been determined. This extra money should be distributed to all provinces, rather than only to the provinces receiving equalization.