How Canada’s Equalization Payments Are Calculated & Why Alberta Is Still Paying

If you live in Alberta or Quebec these are a particularly important questions.  Quebec continues to receive tens of billions of dollars in transfer payments that are effectively paid for by Alberta, even though Alberta has been dealing with a crushing economic turn down in their primary industry, oil and gas.

In 2019 Alberta’s Provincial deficit was $9 Billion, while Quebec had a $4 Billion surplus.  Yet Quebec received more than $10 Billion in equalization payments.  Contrast that to Alberta which has received less than $1 Billion since equalization was introduced in 1957 and hasn’t received a penny since 1964.

Equalization Payments to Canadian provinces
2011 through 2021
in Millions of Canadian Dollars

We are only showing every 3 years so it fits on your screen

To many Albertan’s this seems wrong and so it begs the question, just how is the equalization calculation made?

How Is Equalization Calculated In Simple Terms?

Canada’s equalization formula is quite complex but it can be simplified to two critical questions:

1. How much COULD each Province collect in taxes if there taxes were at the average of all the other Provinces?
2. How does each Provinces average household income compare to the Canadian average ?

Alberta pays so much more than all the other Provinces because:

1. Alberta has the lowest tax rates in Canada
2. Alberta has the highest incomes in Canada

That explains why Alberta pays, and Quebec collects.

The Canadian Equalization Calculator

Economist Trevor Tombe from the University of Calgary built a simple to use equalization simulator on FinancesOfTheNation.ca which lets you change the taxes and revenues for each Province and instantly see what changes.  We encourage you to go play with it… its kind of fun!

Here are some graphics from that simulator showing what the 2022 payments will be:

It does not take an abstract artists eye to notice that the graph of total equalization payments looks like Quebec is giving the rest of Canada the finger… but is it really?

Why Do BC, Alberta & Ontario Keep Paying Equalization?

In the “How Is Equalization Calculated” section above, we wrongly stated that Alberta pays.  In fact the Province of Alberta pays zero equalization.

So called “have” Provinces like Ontario, Saskatchewan, Alberta and BC do NOT send equalization payments to the Canadian Federal Government.   You and I do.

The Federal Government collects many taxes directly from its citizens, most notable of which is annual income tax.  The Canadian Government then doles out that money, much of which is determined by the equalization formula.

What Benefit Do Provinces Receive From Equalization?

At first glance, this appears to be a silly question.  It seems obvious that if a Province just pays money into equalization, that they receive no benefit, but that is not true.

University of Alberta professor Jared Wesley points out that Provinces like Alberta who just keep paying reap enormous rewards from the program because:

1. The tens of thousands of Canadian citizens that move to Alberta from other Provinces each year are healthy and educated
2. Equalization keeps the country strong and that allows Alberta to thrive
3. In the future, equalization is an insurance plan Alberta may need in the distant future

Here are some other calculations you will find interesting in the 2021 – 2022 time frame: