11. Equalization of Financing Between Urban and Rural Local Governments: Canada
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- 2026
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Abstract
11.1 Introduction
Canada is a federal country with ten provinces, three territories, and approximately 3500 municipalities (see Table 11.1 for the population of each of the provinces and territories).1 It is a highly urbanized nation with over 70% of the population living in municipalities inhabited by more than 100,000 people. Although rural areas account for the majority of Canada’s land mass, they account for less than 18% of the population (Statistics Canada, 2022). Municipalities function in a variety of contexts—some are enjoying rapid growth, mainly in metropolitan areas, while others are facing relative or absolute decline, largely on the periphery.
Table 11.1
Population, provinces and territories, 2023
Population | |
|---|---|
Provinces: | |
Newfoundland and Labrador | 538,605 |
Prince Edward Island | 173,787 |
Nova Scotia | 1,058,694 |
New Brunswick | 834,691 |
Quebec | 8,874,683 |
Ontario | 15,608,369 |
Manitoba | 1,454,902 |
Saskatchewan | 1,209,107 |
Alberta | 4,695,290 |
British Columbia | 5,519,013 |
Territories: | |
Yukon | 44,975 |
Northwest Territories | 44,972 |
Nunavut | 40,673 |
Canada | 40,097,761 |
The Constitution Act sets out the division of powers between the federal and provincial governments. Municipalities are not granted specific powers in the Constitution but are listed as one of the responsibilities of provincial governments. In essence, this means that the provinces can create or dissolve municipalities, determine their geographic boundaries, set out their expenditure responsibilities and sources of revenue, and much more. The federal government, on the other hand, has no constitutional authority over local government. It can, however, influence local governments through federal transfers, which it has done to some extent at various times (Slack & Taylor, 2024).
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Municipalities in Canada make expenditures on a wide range of services, including fire and police protection, water supply and distribution, sewage collection and treatment, solid waste collection and disposal, transportation (including roads and transit), parks, libraries, recreation, and planning and development. In some provinces, they are also responsible for paying part of the costs of housing, social services, and public health. The main sources of local government revenue on average across local governments in Canada, are property taxes (over 46% of total municipal revenues), user fees (21%), federal and provincial transfers (21%), and other revenues (12%) (calculated from Statistics Canada, 2023). Included in other revenues are development charges and other taxes (for example, hotel occupancy taxes, vehicle registration taxes, land transfer taxes, etc.) that municipalities in some provinces are permitted to levy. By far, the largest revenue source for local governments is the property tax, but intergovernmental transfers are also a significant revenue source.2
11.2 Do Municipalities Receive Vertical Financial Transfers?
Municipalities receive vertical transfers from both the federal and provincial/territorial governments. Both the level and the structure of transfers differ across provinces/territories and have changed over time in different ways in different jurisdictions. Transfers are allocated in a variety of ways for different reasons. In most provinces and territories, the transfer system is complex, confusing, and in a word, ‘messy’ (Bird & Slack, 2021). Few transfers seem to be based on careful analysis or have a clear rationale, and their impact is rarely evaluated.
11.2.1 From Whom Do These Come: From The Central Government, from Regional Governments, or from the Second Level of Local Government?
Unfortunately, there are no recent, comparable data by province indicating the exact shares of municipal income attributable to the provincial/territorial and federal governments. However, information from individual jurisdictions suggests that the majority of transfers comes from provincial/territorial governments. In the largest province, Ontario, for example, 84% of transfers were received from the provincial government and 16% from the federal government in 2021. The breakdown between federal and provincial transfers in 2021 in Nova Scotia was similar– 84% of the total were provincial transfers and 16% were federal. In Alberta, provincial transfers accounted for 72% of total transfers in 2022 compared to 28% federal. In British Columbia in 2021, provincial transfers were 71% compared to 29% federal transfers. These results are what one would expect given the nature of Canadian fiscal federalism, where provinces are responsible for local government.
11.2.2 What Proportion of Municipal Income Comes from Transfers?
As noted earlier, and as Table 11.2 shows, federal and provincial transfers combined accounted for over 21% of total municipal revenues in 2021 (the latest year for which data are available). Two other major findings can be derived from Table 11.2—there has been relatively little change in the portion of municipal revenues made up of grants over the last 15 years (with the exception of 2020), and there is considerable variation in the reliance on transfers in different provinces and territories. This variation is partially explained by differences in the responsibilities devolved to municipalities across provinces.
Table 11.2
Federal and provincial transfers as a proportion of municipal revenues, by province and territory, 2008–21 (%)
2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
British Columbia | 7.8 | 6.0 | 10.1 | 8.2 | 5.7 | 3.9 | 4.4 | 4.5 | 8.3 | 6.0 | 7.4 | 8.4 | 13.5 | 7.0 |
Alberta | 24.8 | 23.8 | 22.3 | 21.7 | 18.9 | 23.7 | 18.5 | 14.9 | 21.1 | 26.6 | 19.1 | 17.4 | 25.0 | 22.2 |
Saskatchewan | 29.2 | 27.2 | 27.2 | 28.9 | 23.2 | 19.6 | 20.6 | 17.8 | 18.2 | 19.0 | 18.5 | 18.8 | 25.9 | 23.1 |
Manitoba | 21.8 | 21.5 | 22.7 | 23.1 | 23.2 | 23.7 | 20.0 | 19.7 | 18.3 | 17.9 | 14.9 | 16.0 | 21.1 | 19.0 |
Ontario | 20.9 | 25.5 | 27.5 | 22.5 | 22.8 | 23.3 | 22.3 | 22.6 | 23.2 | 23.1 | 25.0 | 22.3 | 29.5 | 24.0 |
Québec | 13.4 | 16.3 | 14.8 | 14.0 | 13.8 | 12.5 | 11.0 | 12.4 | 11.2 | 17.5 | 15.6 | 14.2 | 24.9 | 22.4 |
New Brunswick | 23.2 | 23.2 | 22.9 | 22.8 | 18.6 | 19.9 | 18.5 | 19.7 | 20.5 | 24.2 | 22.2 | 24.5 | 20.7 | 17.9 |
Nova Scotia | 15.1 | 16.4 | 17.4 | 13.5 | 13.2 | 9.9 | 9.3 | 8.3 | 8.1 | 17.1 | 12.5 | 17.5 | 19.4 | 20.7 |
Prince Edward Island | 21.8 | 17.6 | 41.1 | 41.6 | 37.1 | 36.6 | 34.4 | 32.0 | 35.4 | 43.0 | 42.5 | 46.9 | 51.2 | 54.1 |
Newfoundland and Labrador | 35.9 | 40.6 | 40.7 | 35.8 | 24.3 | 25.6 | 25.0 | 24.6 | 19.2 | 21.4 | 21.8 | 21.1 | 20.2 | 19.9 |
Nunavut | 53.4 | 54.7 | 56.0 | 53.9 | 50.5 | 54.6 | 53.2 | 50.7 | 47.5 | 45.9 | 48.4 | 45.5 | 45.5 | 45.5 |
Northwest Territories | 66.1 | 67.9 | 62.4 | 60.4 | 56.3 | 59.9 | 58.3 | 54.1 | 47.3 | 59.2 | 61.8 | 61.7 | 63.3 | 64.2 |
Yukon | 29.2 | 47.4 | 27.5 | 28.6 | 38.0 | 24.1 | 59.5 | 24.5 | 23.4 | 24.7 | 25.9 | 40.9 | 59.6 | 61.9 |
Canada Total | 18.9 | 21.4 | 22.3 | 19.4 | 18.5 | 18.9 | 17.4 | 17.0 | 18.4 | 20.4 | 19.7 | 18.3 | 25.6 | 21.4 |
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Provincial grants for much of the later twentieth century provided more of total local revenue than currently (Kitchen, 1984, 2002), but the picture shown in Table 11.2 has not changed much over the last decade and a half.3 Over the last 15 years, federal and provincial transfers combined have generally provided around 20% of municipal revenues. The exception is 2020, which saw higher transfers (almost 26% of municipal revenues) during the COVID-19 pandemic. Both the federal and provincial governments provided assistance to municipalities to cover their unexpected operating deficits arising from higher expenditures on health and social services and lower transit fare revenues.4 In 2021, transfers fell back into the 20% range.
In terms of provincial/territorial variation, municipalities in the three territories (Nunavut, Northwest Territories, and Yukon) receive a much larger portion of their revenues in the form of transfers. The territories are considerably smaller, more rural, and more remote than Canadian provinces. Transfers are also relatively high in Prince Edward Island, which is the smallest province. At the other end of the spectrum, transfers to municipalities in British Columbia account for only 7% of municipal revenues. The relatively low transfers partially reflects that public transit, typically a large cost pressure for Canadian municipalities, is delivered by provincial agencies in British Columbia. Transfers to municipalities in Ontario are much higher, accounting for almost one quarter of total municipal revenues, in part because social services are cost-shared with the provincial government. In other provinces, social services are delivered by the provincial government.
Grants have consistently accounted for the lowest percentage of municipal revenues in BC, Quebec, and Nova Scotia. Municipal reliance on transfers has changed in some provinces over the last decade or so. For example, transfers as a percentage of total municipal revenues in Newfoundland and Labrador are now much less than they were in 2008 and their importance has also declined in Saskatchewan. In contrast, in PEI, grants as a percentage of municipal revenues have more than doubled over this period.5
11.2.3 Are Transfers to a Greater Extent Earmarked or Unconditional?
Transfers to municipalities in Canada are largely earmarked (conditional) in the sense that funds have to be spent on specific services designated by the provincial or federal government and they are often subject to many conditions and reporting requirements. There is no comparable data country-wide on the division between unconditional and conditional grants. However, there is some data for individual provinces such as Ontario where conditional transfers (federal and provincial combined) accounted for almost 80% of municipal transfers and unconditional transfers were just over 20% in 2021. In Nova Scotia in 2021, conditional transfers accounted for almost 97% of total transfers and unconditional transfers just over 3%. In Alberta, conditional transfers were 94% of total transfers in 2022, with unconditional transfers at 6%. The remainder of this section describes the various types of federal and provincial transfers.
For the most part, transfer from the federal government are conditional and largely dedicated to capital purposes. These transfers have been earmarked largely for transit, housing, economic development, and climate adaptation.6 In some cases, the transfers go directly to municipalities but, in others, they go through the provincial government or municipal associations (Slack & Taylor, 2024). Some examples of federal transfers are described below.
The “Investing in Canada” plan, for example, is designed to distribute funding over a 10-year period for infrastructure. The federal government also has a 10-year National Housing Strategy which invests in affordable housing. “Local immigration partnerships” bring the federal, provincial, local governments, and local service agencies together to assist in immigrant integration (Slack & Taylor, 2024).
The federal government implements programs for economic and community development. For example, the Department of Innovation, Science and Economic Development (created in 2015) is implementing two policy frameworks directed to different types of city-region growth—globally engaged urban centres and smaller cities and rural communities (Bradford, 2018).
Block transfers to municipalities are provided by the federal government for municipal infrastructure.7 The Canada Community-Building Fund provides permanent funding for local infrastructure (Adams & Maslove, 2014). These funds are distributed to provinces/territories, municipal associations and the City of Toronto on the basis of population. The federal government requires that the transfers be used for municipal infrastructure, that the provinces do not cut their own funding in response to the transfer, and that municipalities show that they are making progress towards federal objectives around sustainability (Slack & Taylor, 2024).
The Housing Accelerator Fund is an application-based program introduced in 2022 with funding from 2023 to 2026–27. Funding is designed to encourage local governments to increase the supply of housing and supports the development of complete, low-carbon and climate-resilient, affordable, equitable, and inclusive communities. There are two streams: large/urban and small/rural/north/Indigenous.8 There has been some controversy over the distribution of these funds because the federal government has been attaching conditions around zoning regulations and municipal charges on development for infrastructure. Some provinces and municipalities have objected to the federal government imposing such conditions on the receipt of funds.
During the pandemic, the federal government introduced the Safe Restart Agreement, which provided funding to help provinces/territories restart their economies and make the country more resilient to possible future waves of COVID-19. Part of the funding from this agreement, matched by provincial and territorial governments, was to support municipalities with their operating costs over a 6-to-9-month period. Moreover, the federal government cost-matched additional funding to support additional provincial/territorial contributions to public transit.
A number of points can be highlighted from this brief summary of federal transfers for infrastructure and housing (Slack & Taylor, 2024). First, federal transfers are generally implemented through bilateral agreements with provinces. Provincial governments then delegate operational decision-making authority to the municipalities that are eligible for the transfers. Second, in addition to provincial and local governments, local non-governmental actors have been included in decision-making about how to use these funds and deliver services. Third, federal transfers increased following the pandemic. Fourth, although there has been an increase in the number of federal transfer programs and the amount of funding attached to them, federal transfers government do not provide as much funding to municipalities as provincial transfers .
Provincial/territorial transfers account for the majority of transfers to local governments in Canada, and they are largely earmarked for specific purposes. However, since this chapter is about equalization, the discussion focuses on unconditional grants by province/territory, of which equalization is one type. Unconditional grants can also take the form of revenue sharing or grants based on population, remoteness, or other municipal characteristics. Table 11.3 summarizes provincial-municipal unconditional grants in Canada.
Table 11.3
Provincial/territorial unconditional transfers by province/territory, 2023
Province | Equalization | Revenue sharing | Other |
|---|---|---|---|
British Columbia | Small community grant partially based on population and property assessment values | Traffic fines are shared based on a municipality’s policing cost relative to total policing costs of all municipalities Provincial gaming revenue is shared with local governments that host casinos and community gambling centres. Local governments receive 10% of net revenues from these establishments in their jurisdiction. | Regional district grants based on population. |
Alberta | Capital grants for the two major cities (Calgary and Edmonton) are based on population (48%), education tax requisitions (48%), and kilometres of roads (4%). For other local governments, the formula is based on population (65%), tangible capital assets (15%), amortization of tangible capital assets (10%), and kilometres of roads (10%). Local governments also receive operating grants. | ||
Saskatchewan | Provincial sales tax sharing, distributed on a per-capita basis Funds are split among the urban pool (cities, towns, villages, and resort villages); the rural pool (rural municipalities and organized hamlets); and the northern pool (northern municipalities) For rural municipalities, the grant has three components: unconditional grant (based on population and roads data), organized hamlet grants (per capita), and conditional rural revenue sharing grants | ||
Manitoba | Strategic Municipal Investment Fund to support operating expenses and infrastructure investments. | ||
Ontario | Ontario Municipal Partnership Fund (OMPF): assessment equalization grant. The grant for each municipality is based on the total assessment differential, which is calculated as the total municipal assessment below the median per household amount. OMPF northern and rural fiscal circumstances grant: The grant takes account of the fiscal circumstances of municipalities, using indicators for weighted assessment, median household income, change in assessment, employment, dependency ratio, and low-income population. | Other OMPF components: • per capita Northern communities grant • per-household amount for small and rural communities based on percentage of population in rural and small communities plus additional grant for communities with large percent of farmland • transitional assistance to guarantee support based on previous year’s allocation. | |
Quebec | Equalization determined by a formula that provides funds to a municipality whose tax base is lower than a standard tax base. Additional funding is also provided for devitalized municipalities; 20 regional county municipalities are guaranteed a minimum amount based on fiscal circumstances. | Natural resources royalty revenue sharing with municipalities that have mining, oil, and gas production sites. Share of the growth on one percentage point on Québec sales tax, starting in 2021, distributed on the basis of population and an index of economic vitality | Québec government reimburses 50% of the provincial sales tax paid by municipalities. |
New Brunswick | Equalization grant is 1 plus the difference in growth rate of the municipal tax base from the provincial tax base multiplied by the equalization grant from the previous year. Other community funding (core funding) to be phased out by 2027. | ||
Nova Scotia | Equalization grant calculated as the difference between municipal operating per capacity cost (expenditure need) and the property assessment base (fiscal capacity). | Towns receive a flat amount under the town foundation grant. | |
Prince Edward Island | Equalization grant based on taxable non-farm property assessment. | ||
Newfoundland and Labrador | Grant based on population and remoteness index (based on proximity to services and daytime population during working hours). | ||
Nunavut | Tax-based municipal corporations are eligible for equalization funds under the Municipal Funding Program to help with operating revenue. Amount is based on the municipality’s ability to raise revenue through property taxes (based on factors such as number of dwelling units and property assessment), modified by the differential costs of providing services. | Municipal Funding Program to non-tax-based communities to assist with delivering programs and services. The grant includes a basic grant based on population plus a community uniqueness factor (which includes road length), a municipal cost index and settlement allowance distinctive to each municipality, plus any approved forced growth funding. | |
Northwest Territories | Under the Operations and Maintenance Funding, community costs are calculated by subtracting standard revenue from the total cost of delivery of community government services (excluding water and waste services). A community’s proportionate share of funding is identified by comparing those costs to the sum of costs for all community governments. | ||
Yukon | Funding under Comprehensive Municipal Grant uses a formula that includes factors such as population, properties, infrastructure, and the tax base of each incorporated municipalities. The grant is increased annually by the rate of inflation. |
Six provinces and one territory provide some form of equalization transfer to municipalities. The rationale for providing equalization transfers is to ensure that all local governments can provide reasonably comparable levels of service at reasonably comparable tax rates. The inability to provide a comparable level of service compared to other municipalities can arise for several reasons — the costs of services are higher, the need for services is greater, the tax base is smaller, or some combination of these factors.
Needs and/or costs may be greater than average because of geographic location, population density, or other factors. For example, wages and rents are usually higher in cities with high population density and the cost per unit to provide services increases with increasing population because of congestion (Fenge & Meier, 2001). Per unit costs may also be higher than average in sparsely-populated areas because of the inability to achieve economies of scale or the higher costs associated with transportation to remote areas (Kitchen & Slack, 2006). Needs may be higher for municipalities with a high proportion of low-income households who require affordable housing and social services. Taxing capacity is also unevenly distributed across municipalities, resulting in disparities in the ability to finance the provision of local public services. In rural communities, for example, the property tax base may be relatively small, compounded by lower tax rates on farm properties that may be required by provincial governments.9
Equalization grants, based on expenditure needs and fiscal capacity, are designed so that those municipalities with a small tax base and greater costs or needs are able to levy tax rates that are comparable to those of other jurisdictions. Explicit provincial-municipal equalization grants in Canada are limited. Many transfers include some element of equalization in their distribution formulas, but with the exception of Nova Scotia, none is based to any significant extent on “expenditure need” (the costs that arise due to circumstances beyond a jurisdiction’s direct control, such as demographic and geographic factors, etc.) although some are based on “fiscal capacity” (the potential to raise revenues given the size of the tax base).10
The provinces of British Columbia, Ontario, Quebec, and Prince Edward Island provide small equalization grants to municipalities based on fiscal capacity. New Brunswick provides a grant based on an earlier equalization grant that is adjusted by the growth rate of the municipal tax base relative to the provincial tax base, and Nova Scotia, as noted above, is the only province that has an equalization grant based on fiscal capacity and expenditure need.11 Nunavut provides equalization to tax-based municipal corporations based on fiscal capacity that is modified by the differential cost of providing services, in effect taking expenditure need into account.
The second type of unconditional transfer is provincial-local revenue sharing whereby provincial governments share their revenues with municipalities. Revenue sharing provides more reliable and predictable funding for municipalities than other unconditional transfers because the overall amount distributed increases annually with the increase in provincial revenues.
Revenue sharing occurs in two Canadian provinces—Saskatchewan and Quebec. In both provinces, the provincial government shares provincial sales tax revenues with municipalities. In Quebec, starting in 2021, the province shares the growth on one percentage point of the Quebec sales tax with municipalities. For 2023–24, the Government of Saskatchewan is sharing the equivalent of 0.75% of the provincial sales tax with municipalities.
Finally, there are unconditional transfers to municipalities that are based on the size of their population or other characteristics. For example, British Columbia provides grants to regional districts based on population. In Ontario, the Rural Communities Grant recognizes the unique challenges of rural municipalities and particularly those of rural farming communities; the Northern Communities Grant is also dedicated to northern communities. In Quebec, the province reimburses municipalities for 50% of the provincial sales tax that they pay. In Nova Scotia, towns receive a flat amount under a foundation grant and in Newfoundland and Labrador, municipalities receive a grant based on population and remoteness. In Alberta, municipalities receive grants based on population, kilometres of roads, and other factors.
11.2.4 Are There Different Vertical Fiscal Transfers for Urban and Rural Municipalities? If So, What Criteria Are Considered for Differentiation?
Some provinces differentiate transfers for urban and rural municipalities. In Nova Scotia, for example, the equalization transfer (known as the municipal financial capacity grant) is determined by a formula that reflects the community’s expenditure need and fiscal capacity.12 The formula is applied separately to two classes of communities—Class I comprises regional municipalities and towns (the larger municipalities in the province) and Class II comprises county and district municipalities (smaller municipalities).13 Municipalities are grouped into two classes to reflect differences in expenditures and revenue-raising capacities of municipalities of different size. Without these groupings, expenditure levels and revenue-raising capacity would exaggerate both fiscal needs and fiscal capacity in the formula because the average would be increased by the significantly higher expenditure levels and tax bases in the largest cities. As such, grouping municipalities controls for structural differences in fiscal need and fiscal capacity between smaller municipalities and large cities. Where capacity and need vary greatly, this approach avoids the imposition of an implicit common standard across all municipalities based on average fiscal capacity or standardized expenditure need.
Under section 10 (1) of the regulations under the Municipal Grants Act, the amount of grant to an individual municipality in Nova Scotia is calculated as the difference between the “derived standardized expenditure for the municipality” and the revenue calculated by a standard residential tax rate for the residential class multiplied by the residential uniform assessment for the municipality added to a standard commercial tax rate multiplied by the commercial uniform assessment for the municipality. Standard expenditures are calculated from estimates of operating expenditures as follows: “(a) 50% of general government services, not including valuation allowances; (b) protective services; (c) transportation services; (d) environmental health services; (c) 50% of recreation and cultural services; (f) environmental development services.”
Standardized tax rates, as indicated above, include one for residential and one for commercial properties. Under 9 (1) of the regulations, the standard residential tax rate is calculated by multiplying “the total derived standardized expenditure for all municipalities in the class for which the standard residential rate is being calculated” by “the average proportion of residential uniform assessment in the class” all divided by “the total residential uniform assessment for all municipalities in the class for which the standard residential rate is being calculated.” A similar calculation is used for the determination of the standard commercial rate. Under section 8 (1) of the regulations, uniform assessment (after adjusting for some exemptions) is equal to “the taxable assessment of the municipality minus 25% of the taxable assessment of commercial properties identified on the assessment roll as being occupied by a seasonal tourist business plus the capitalized value of payments made to the municipality in lieu of taxes and tax payments made to the municipality by a utility.”14 One criticism of this formula is that it does not include other own-source revenues, such as user fees.
As noted in the regulations,15 “under the transitional support program, if the amount obtained for a municipality under subsection 11(2) is less than the amount received by the municipality for its financial capacity grant for the 2014–15 fiscal year, then the difference between those amounts will be provided to that municipality each year for the period specified in subsection (1).” This provision means that municipalities that no longer need equalization according to the formula are receiving funds at the expense of those that do need it (Bird & Slack, 2021).
Revenue sharing in Saskatchewan splits funds between different categories of municipalities—urban (cities, towns, villages and resort villages); rural (rural municipalities and organized hamlets); and Northern municipalities. There are three parts to the rural municipalities and organized hamlets grant: an unconditional grant based on a combination of transportation/road needs and population; an organized hamlet grant, which is a percentage of the grant received by towns, villages and resort villages; and a grant for communities in transition from a village to a rural municipality.
In Newfoundland and Labrador, the unconditional grant is based on population and remoteness, using a remoteness index to measure how accessible (or remote) a community is. The index is calculated as a weighted average of the community’s proximity to a number of general services and the estimated daytime population during normal working hours.
In Alberta, a new capital grant introduced in 2024 under the Local Government Fiscal Framework has a different formula for the two largest cities (Edmonton and Calgary) compared to the rest of the province. For the two largest cities, the formula is based on population (48%), education tax requisitions (48%), and road kilometres (4%). For the rest of the province, the formula is based on population (60%), tangible capital assets (15%), amortization of tangible capital assets (10%), and road kilometres (10%).
Tax-based municipal corporations are differentiated from non-tax-based communities in Nunavut. Tax-based corporations receive equalization based on their ability to raise revenue through property taxes (based on factors such as number of dwelling units and property assessment), modified by the differential costs of providing services. In non-tax-based communities, there is a basic grant based on population plus a uniqueness factor (which includes a variable for road length), a municipal cost index, and settlement allowance in each municipality.
In some provinces, there is no differentiation between urban and rural municipalities. Quebec has a fairly small equalization program for municipalities. The equalization grant is based on fiscal capacity and has two parts. A municipality is eligible for the first part of the grant if its standardized property value per capita is less than 80% of the median value for all municipalities. The second part of the grant, which targets fewer municipalities, provides funds to a municipality if the average value of the dwellings situated in its territory is less than 70% of the median value of all municipalities. There is no measure of need in the formula except to the extent that population reflects the need to make expenditures.
Prince Edward Island makes an annual Municipal Support Grant payment, which includes a Municipal Services Grant and equalization funding. The formula for equalization multiplies the municipality’s population by the difference between the average PEI municipal property assessment per capita and the municipality’s property assessment per capita, multiplied by the municipality’s non-commercial property tax rate. Farm property is excluded from the calculation. Since 2017, the annual increase in the grant reflects the average increase in municipal property assessments.
11.2.5 Are There Specific Funds for Rural Municipalities?
Many provincial governments allocate specific grants for small and/or rural municipalities. These grants are designed to reflect the challenges faced by these communities that may be more sparsely developed, more remote, and experiencing colder weather. These challenges result in higher costs for heating, housing, and transportation, and the inability to achieve economies of scale in the provision of services. These municipalities are also likely to have smaller tax bases (less fiscal capacity).
Unconditional transfers are provided by the provincial government of Ontario under the Ontario Municipal Partnership Fund (OMPF). These transfers only go to small, rural, and remote communities in Ontario, although large and urban municipalities do receive conditional transfers (mainly for social services and transportation). OMPF provides funding to 389 of the 444 municipalities in the province.16 OMPF comprises four grants, two of which are equalization grants, plus a transition grant to guarantee a level of support based on the previous year’s allocation. The four grants are:British Columbia provides a Small Community Protection Grant, which is a formula-based grant that goes to small municipalities with a population up to 19,000. The grant includes a base amount plus an equalization component (calculated by multiplying a dollar amount by a property assessment weighting factor), and an amount based on population.
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The Assessment Equalization Grant provides funding to municipalities with a limited property tax base because overall property values are low or because there is limited non-residential assessment.17 The grant to each eligible municipality is determined by its total property assessment differential (i.e., the total municipal assessment below the median per-household threshold). Increments in a municipality’s assessment differential result in an additional amount of funding. This grant is a fairly straightforward fiscal capacity equalization grant; there is no component to reflect expenditure needs.
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The Northern and Rural Fiscal Circumstances Grant provides additional funding to those northern and rural municipalities that face relatively more challenging fiscal circumstances than others in this category as measured by the Northern and Rural Municipal Fiscal Circumstances Index (MFCI). The MFCI is determined on the basis of two primary indicators, which account for 50% of the index (25% on the basis of weighted assessment per household and 25% on the basis of median household income) and four secondary indicators, each accounting for 12.5% of the index (average annual change in assessment, employment rate, ratio of working age to dependent population, and percent of population above low-income threshold). An indicator value that is above the median will have a positive score, which is reflective of relatively positive fiscal circumstances. An indicator value below the median will have a negative score, suggesting relatively negative fiscal circumstances. The MFCI is determined based on the average indicator score for a municipality and is measured on a scale from 0 to 10.The Northern and Rural Fiscal Circumstances Grant formula is based on a small number of variables over which municipalities have no direct control, so they cannot influence the size of the grant. These variables attempt to capture the ability of municipalities to make expenditures through both “capacity” variables such as weighted assessment, changes in assessment, and median income and also to some extent “need” variables such as the percentage of the population above the low-income threshold, dependency ratios, and the employment rate. Although the formula is based on only six variables, the calculation of the overall index is very complex and hard to follow.
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The Rural Communities Grant provides a grant to rural communities and especially rural farm communities, based on the proportion of the population that resides in rural areas and/or small communities, as measured by the Rural and Small Community Measure (RSCM). Municipalities with an RSCM of 75% or more receive a per household amount; municipalities with an RSCM between 25% and 75% receive a portion of this funding on a sliding scale.
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The Northern Communities Grant is a per-household grant to all northern municipalities in recognition of the unique challenges they face.
Table 11.3 summarizes the provincial-municipal unconditional grant programs by province and territory.
11.3 Is There Any Form of Direct Horizontal Transfers Between Municipalities?
Fiscal disparities exist among jurisdictions within regional or metropolitan areas, especially those that are characterized by a large number of small local government units. The reason is that some local government jurisdictions in a metropolitan area will have high-income communities and some will have low-income communities. High-income communities will be able to provide better services at lower tax rate because they have a larger tax base and may face lower demands for services. Low-income communities may face the opposite situation where they have a smaller tax base and greater demand for services (Slack, 2017).
Direct horizontal transfers between municipalities in Canada are not common, but there are examples of implicit equalization or redistribution in metropolitan and regional districts through the creation of a regional or metropolitan government. To address inequities within metropolitan areas, one option has been to consolidate rich and poor municipalities and, in effect, tax the richer municipalities to help subsidize poorer municipalities. Metropolitan governments could be large enough in scale to raise and redistribute revenue within their own region (Slack, 2017). To the extent that a regional or metropolitan government levies taxes that are collected across the area and makes expenditures in different parts of the area, there will be implicit redistribution in the sense that there is not necessarily a direct correspondence between where the taxes are paid and where benefits are received from local services.
Canada has experience with three different governance models to address the fiscal disparities among local jurisdictions in a metropolitan region—a one-tier consolidated government model (through annexation, consolidation, or amalgamation), a two-tier government model, and a shared service delivery model.18 In a one-tier consolidated government there is one local government with a geographic boundary that covers the entire metropolitan area and provides all of the local services.
The advantage of a consolidated model is the larger metropolitan tax base for sharing the costs of services. The result is that the availability of services does not depend on the wealth of each of the jurisdictions that make up the consolidated local government (Slack, 2019). Amalgamation means that all the municipalities in the region, rich or poor, can enjoy an adequate level of services at a reasonable tax rate. In other words, consolidation leads to a redistribution of resources across the region.
The amalgamation of Toronto, the largest city in Canada, in 1998 provides one example. The history of municipal amalgamation in Toronto goes back to 1954 with the creation of a two-tier metropolitan government (a metropolitan tier and 13 lower-tier municipalities). In 1967, the 13 municipalities were merged into six and, in 1998, the metropolitan tier and six lower tiers were amalgamated to create a single-tier City of Toronto. Although there have been many criticisms of the amalgamation, it did result in some redistribution within the metropolitan area, increasing equity among residents in terms of service levels and tax burden (Slack & Bird, 2013).
Another example of an amalgamation is the Halifax Regional Municipality (HRM) in 1996, which merged urban, suburban, and rural areas. The Halifax case is particularly interesting because the regional municipality levies different residential property tax rates for urban areas, suburban areas, and rural areas, with the highest rate in urban areas where there are more services. Similarly, commercial property tax rates differ according to whether they are in urban or rural parts of the municipality (and also by the size of the property assessment).
Fiscal disparities are also addressed in a metropolitan region by implementing a two-tier government model where there is an upper-tier governing body (usually a region, district, or metropolitan area) that encompasses a fairly large geographic area and two or more lower-tier or area municipalities (such as cities, towns, or villages). Under this model, redistribution happens at the upper-tier level which is responsible for services that provide region-wide benefits, generate externalities, and display economies of scale. Services that provide local benefits are the responsibility of the lower tier.
Redistribution is achieved at the upper-tier level through a combination of tax and spending policies. Taxes are generally levied at uniform rates across the region, with the contribution of each lower-tier municipality to the upper-tier municipality dependent on the size of its tax base. The upper-tier government makes expenditures on services that benefit the entire city-region and those benefits are not necessarily distributed among the lower-tier municipalities in the same way as revenues are collected. A uniform tax at the upper-tier level combined with region-wide expenditures serves to redistribute resources from municipalities with larger tax bases to those with smaller tax bases. Nevertheless, there may still be differentiation in service levels and tax rates with respect to services provided by lower-tier municipalities.
Many of the regions in Ontario outside of Toronto are two-tier, such as York, Halton, Durham, Peel, Waterloo, and Niagara. There are also two-tier regional districts in British Columbia. For example, Metro Vancouver comprises 21 municipalities, one electoral area, and one treaty First Nation. It is governed by a board of directors of elected officials from each of the member jurisdictions. Metro Vancouver plans and delivers regional utility services (water, sewers, wastewater treatment), solid waste management, planning, regional parks, and affordable housing. Unlike the Ontario model, however, participation in regional functions by the lower-tier municipalities is voluntary (Spicer, 2022).
Finally, shared service models are sometimes used to deliver specific services that cross municipal boundaries. For example, Consolidated Municipal Service Managers (CMSMs) in Ontario are an integrated system of services for welfare, childcare, social housing, land ambulance (and sometimes public health). There are 47 CMSMs (including District Social Service Administration Boards in the northern part of the province) in the province that has 444 municipalities. The costs of these services are shared on the basis of population, size of the tax base, or some other factor that they choose. As with the other models, shared service models may result in some redistribution.
11.4 Conclusions
In Canada, the bulk of transfers to municipalities come from provincial/territorial governments and most of these grants are conditional. These transfers may be appropriate where the benefits of services spill over municipal boundaries and municipalities are unable to cover all of the costs from their own revenues, or where the province wants to ensure that its priorities are met. They are not well suited for general support, however. Although provincial/territorial governments generally provide some unconditional support, none really delivers sufficient equalization grants to ensure that all local governments can provide a level of services of at least minimal acceptable quality, provided they exploit their own tax bases sufficiently.
Equalization also exists in Canada through implicit redistribution that occurs with the amalgamation of urban and rural municipalities or the creation of service delivery agents. Although the fiscal capacity of rural municipalities is not generally equal to that of urban municipalities, equalization transfers and municipal consolidations are designed to help smaller and rural municipalities provide a reasonable level of service by levying reasonable tax rates.
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