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You are the mayor of a small northern town with frigid temperatures and no winter road. You have just learned that supplies will run out long before spring. You could choose to issue rations to the young. After all, they are young; they should learn to fend for themselves. Or you could choose to park a few of the elderly in a snowbank and leave them there. After all, they are old; they aren't much use to anyone any more.

This is not some horrible new online game but rather the nature of the discussion in the Canadian theatre world, as companies get word from the Canada Council about cuts to their operating grants. Almost all of the 117 English-language groups that were getting funding are seeing cuts – many as much as 7 per cent to 8 per cent – so that 11 new groups could be added to the list. What began as an exercise in the much-vaunted "generational renewal" is raising some hard questions about how thin the gruel can be spread.

The council, which has not had any increase in the money it gets from Parliament since 2008, is worried that new artists are not receiving their fair share because incumbents can't be dislodged. For a while, the council stressed stability – once you had cleared the many hurdles to get an operating grant, you were safe for a few years; your artistic success or your ticket sales might fluctuate, but you could still count on the grant and plan ahead.

Now, in a bold move, the council set itself the goal of moving 8 per cent of its $22-million budget for theatre operating grants to newcomers, both by creating a new stream open only to them and by instructing juries in other categories to shift money, too. Theatre was first up in this process; dance and opera are in the middle of it (the National Ballet's funding is being cut 5 per cent over two years) and other disciplines will follow.

It sounded daring in theory; in practice, it's less so. On one hand, important civic institutions are going to cut their programming and hire fewer artists. On the other, a small number of newcomers have received a few paltry grants.

In particular, Canadian Stage in Toronto is crying foul, saying the system lacks transparency. Artistic director Matthew Jocelyn complains that the company took a 13-per-cent cut to its $500,000 grant for reasons that nobody can explain to him. Under Jocelyn, who took over in 2009, the company has been working hard to produce more daring theatre, use more independent artists and reach a new audience, so he finds it difficult to understand why it would be targeted for the largest cut. You might guess it is simply because, if you are a beleaguered theatre jury being asked to yield the axe on your colleagues, you can get the fastest results by cutting the bigger budgets.

Meanwhile, the list of newcomers is not particularly impressive if the goal is to let the youngsters in: Most of the 11 companies are actually long established, including Vancouver's Bard on the Beach and Gateway Theatre in Richmond, B.C. (On the francophone side, the exercise added only three new companies.) The grants are not large – newcomers got only $25,000 – yet staff at Canadian Stage, Halifax's Neptune Theatre and The Grand Theatre in London, Ont., are now scrambling to fill big holes in their budgets.

The English list looks like an attempt to let in more Western players; of the 11 new recipients of council grants, seven are from British Columbia and Alberta, including Victoria's Atomic Vaudeville Society and Calgary's Vertigo Theatre. It looks like the council, which last let newcomers into the operating-grants category in 2008, is very belatedly catching up with the explosion of theatre in Vancouver that dates back to the 2000s.

For historical reasons, theatre groups with operating grants are mainly located in Ontario; it's not disparaging any of them, nor to those Westerns now allowed in, to point out that a longer list is by definition a list of lower standards. (Companies are judged on their art, but also their connection with their community, so there is some element of a popularity contest in this.) Should the council be yet more draconian and insist that the number of companies that win grants stay the same, but that those at the bottom, in terms of quality or audience, be left in that snowbank?

"I thought it was strange to cut off the top to fund the bottom," said Ravi Jain, a Toronto theatre producer who has long agitated for generational renewal, but did not get a Canada Council grant for his Why Not Theatre. (He does receive money from Ontario and Toronto.) "If the money is frozen, what you have to do is move it around the system."

The theatre community isn't calling for a more brutal meritocracy; instead, most of what is heard are suggestions about how bigger companies could take smaller companies under their wing to spare them the expense of setting up as charities that can apply for grants, acting as their presenters or perhaps their financial trustees. The trouble with that idea is that the jury of peers is replaced with a jury of one – the artistic director in the sponsoring company.

Some say older artists should simply retire, close their companies and release their grants – even though the arts councils still encourage the incumbents to plan their succession. Others complain that younger theatre artists are too committed to their lone-wolf status, and should be forming more artist-run collectives for survival. Ask Jocelyn at Canadian Stage or George Pothitos, artistic director at the Neptune Theatre and recipient of an 8-per-cent cut, to summarize the situation and they say the same thing: "It's an octopus."