Equalization formula up for debate again Property values could affect twicea-decade update
• A decades-old sore spot in the Canadian federation is days away from yet another flare-up as the country’s finance ministers prepare to discuss potential tweaks to the formula behind equalization payments.
British Columbia Finance Minister Carole James said in an interview that the federal government is proposing a change to include non-residential property values as part of the complex calculation.
The adjustment would likely make it more difficult for provinces with property values well above the national average — such as B.C. and Ontario — to qualify as recipients of equalization payments from Ottawa.
Equalization is designed to help poorer provincial governments provide public services that are reasonably comparable to those in other provinces. The program is coming due for its twice-adecade update before the 2019-20 fiscal year — and since it’s a federal program, Ottawa can make unilateral changes.
Under the current formula, the provinces that received shares of this year’s $18-billion equalization envelope — the so-called “havenot” provinces — included Quebec, Manitoba, Nova Scotia, New Brunswick, Prince Edward Island and Ontario. Quebec easily took in the largest share in 201718 at $11 billion. The other provinces — B.C., Alberta, Saskatchewan and Newfoundland and Labrador — did not receive anything.
The B.C. government warns that including nonresidential property values in the formula would make it more difficult for the province to qualify for payments in the event of an economic downturn.
The issue is a top concern for James ahead of meetings Sunday and Monday in Ottawa with her federal, provincial and territorial counterparts.
James said the update would mean the formula would deem B.C. to have untapped capacity to generate additional property tax revenue. She argued it’s based on the assumption B.C. municipalities could raise tax rates on properties, which have seen their values soar in recent years.
B.C. isn’t the only province with concerns about the proposal.
“When it comes to the potential of generating more revenue from the high prices of real estate, which is what British Columbia is arguing, we don’t have the capacity to squeeze out more money from the system,” Ontario Finance Minister Charles Sousa said in an interview.
Sousa said his province has lowered its revenue expectations for the real estate sector after the introduction of measures to cool red-hot markets, such as Toronto.
Ontario has been receiving equalization payments since 2009 as a have-not province. But after improvements to its economy in recent years, it’s expected to return to “have” status some time in the next couple of years.
A senior Ontario government official, who spoke on condition of anonymity, said the proposed change could be the difference between whether it collects equalization funds or not.
“Our concern is that if the last years taught us anything, it’s that property values are volatile in both British Columbia and in Ontario,” said the official, who would prefer a phased-in approach.
The future of the equalization formula will also be a priority for Newfoundland and Labrador at the meetings. The province’s economy, hit hard in recent years by the commodity slump, still failed to qualify for equalization payments this year and Finance Minister Tom Osborne doesn’t expect it to next year, either.
Osborne said in an interview that the current formula only addresses revenue and doesn’t account for the different costs of services between provinces. He says his province, with its small population, faces the highest costs of services in Canada.
B.C.’s Carole James and other finance ministers will gather this week to discuss tweaks to equalization payments.