Newfoundland and Labrador Launches Legal Challenge of Equalization Program

Newfoundland and Labrador Premier Andrew Furey holds a press conference in St. John's on March 20, 2024. The Canadian Press/Paul Daly

Newfoundland and Labrador is launching a constitutional challenge against the federal equalization program, saying it places the province at a disadvantage.

The program’s goal is to “ensure provincial governments have sufficient revenues to provide comparable levels of public services at comparable levels of taxation,” the province’s Liberal government said in a statement on May 30.

“Currently, this fairness is not achieved for Newfoundland and Labrador,” it said.

Equalization was introduced by the federal government in 1957, and since then, every province has received benefits at some point, according to the government of Canada website. The three territorial governments are excluded from the program and instead receive federal support through a separate initiative known as Territorial Formula Financing.

In recent years, Alberta, Saskatchewan, British Columbia, and Newfoundland and Labrador have largely been net contributors to the equalization program, while Quebec, Manitoba, the other Atlantic provinces, and Ontario have been net recipients.

The allocation of equalization payments is determined by a province’s “fiscal capacity,” which is the revenue it could generate if taxed at the national average rate. Provinces with a lower-than-average fiscal capacity receive payments; those with higher capacities do not. The program is renewed every five years.

Newfoundland and Labrador qualified for equalization this year for the first time since 2008, receiving $218 million for the 2024-25 fiscal year. The provincial government criticized the current equalization formula, saying it could have received between $450 million and $1.2 billion annually over the past five years instead of no funding.

The government also said the equalization formula doesn’t consider the cost of delivering services, highlighting its challenge of serving over 500 communities across a large, geographically dispersed and aging population connected by nearly 10,000 kilometres of roads.

Additionally, the province criticized the cap imposed on equalization payments, which is determined by factoring in 100 percent of Newfoundland and Labrador’s natural resource revenue, including its offshore oil sector, without considering the costs incurred by the province for their development.

“This penalizes Newfoundland and Labrador for developing its natural resources, including renewables like wind energy used to produce green hydrogen,” the release said.

The province also voiced dissatisfaction with how excess equalization funds are distributed, noting that currently any additional money is allocated to provinces already receiving equalization payments. Instead, it calls for distributing these funds among all provinces, citing similar concerns from provinces like Alberta.

The Alberta government made a similar proposal for distributing excess equalization funds to all provinces in a 2023 position paper as part of its call for reforming the federal program. The paper also highlighted several challenges with the existing system, including concerns that equalization could diminish the incentive for provinces to implement growth-promoting policies and that top-up payments could over-equalize some provinces as fiscal disparities shrink.

Saskatchewan Premier Scott Moe voiced support for Newfoundland and Labrador, saying the program penalized his province as well.

“I have asked our Attorney General to reach out to her counterpart to discuss our province’s legal intervention to support their case,” Mr. Moe wrote on the platform X on May 30.

Nova Scotia Premier Tim Houston said his government will closely monitor Newfoundland and Labrador’s actions, adding he and Premier Andrew Furey share similar thoughts on the federal government’s obligations and whether they are being met.

“From past discussions, I would say we are pretty closely aligned philosophically with the position Newfoundland [and Labrador] has had,” Mr. Houston told reporters after a cabinet meeting on May 30.

The Canadian Press contributed to this report