Skip to main content

Sign up for the Tax and Spend newsletter.

Canada’s equalization system, where the federal government pays billions of dollars a year to poorer provinces, is a bit like the weather.

It affects everyone, sometimes in unpredictable ways. And everyone likes to talk about it, even without really knowing how it works.

I dove into the equalization debate twice in recent days, first in a big weekend story that looked at how Alberta’s contracting economy could shake up the assumptions underpinning the system. Part of that story addressed some of the persistent misinformation that swirls around the equalization, most notably the idea that provinces pay into equalization. (They don’t.)

Yes, complaints that Alberta, say, pays for equalization funds that flow to Quebec are misguided. On the other hand, dismissing any complaint from Alberta, or elsewhere, that there aren’t some fundamental flaws in the equalization system is equally misguided. The equalization system is built on decades of compromise and political dealing, leaving lots of scope for legitimate criticism.

I took a look at one of those issues – how Quebec’s artificially low electricity rates boost its equalization entitlement – in this week’s Tax and Spend. In short, Quebec would get billions less in equalization if the potential revenue from its hydroelectric natural resources were used in calculating payments. And, it would lose out on billions more if Ottawa decided to abandon its formula for linking the growth of its overall equalization outlays to economic growth, rather than changes in disparities between the provinces – which, after all, is the philosophical and constitutional basis for the program.

And you can hear more on the equalization debate here, on the CBC West of Centre podcast.

Taxing questions

Daniel Jenkins of Vancouver asks about the carbon-emission trading system that Ottawa is developing – has it been delayed, and will companies in any industry be able to sell credits if they are below reduction targets?

Yes, the pandemic has delayed the launch of the system, in two ways. The core of emissions trading, among heavy emitters covered by the output based pricing system (OBPS), was supposed to have been up and running by June 1, 2020, when companies would report on their progress toward meeting annual emissions reduction targets. Then, they would have had until Dec. 15 to make up for any shortfall by purchasing credits or paying a per-tonne charge, effectively, a carbon tax. The government changed those dates in April, as the extent of the pandemic became clear, with the reporting deadline shifting to Oct. 1 and the compensation deadline changing to April 15.

Then there is the offset system, which allows entities outside of the OBPS system to sell carbon credits that meet protocols still being developed. On Friday, the Environment and Climate Change department outlined timelines for that part of the system. Draft regulations were published Friday and will be finalized by the fall. Public consultation on protocols, which will govern how credits can be earned, will start this spring.

That brings us to the second part of Daniel’s question – who can qualify? First, there are the companies that are part of the OBPS (or a provincial equivalent, like Alberta’s, that Ottawa has deemed to be compliant with its system). Companies that exceed their emissions targets will have the option to sell them.

But the range of industries that could qualify for credits will be much broader once the offset system begins operating. The initial protocols focus on four areas: advanced refrigeration systems; reduced methane from landfills; improved forest management; and improved agricultural practices that will boost the amount of carbon stored in soil. Any organization selling credits under the offset system won’t have a specific target it needs to exceed, but there will be a requirement (among others) that the carbon-reducing activities can demonstrate “additionality” – in other words, that the emissions reduction was not already going to take place.

Line Item

Tax slip slip-up: If you repaid pandemic benefits in 2020, be sure to scrutinize your T4A slip to confirm that the transaction was credited to your account. The Canada Revenue Agency said last week that some of the T4As it has sent out don’t reflect repayments. The agency said it is working to send out corrected slips, but affected taxpayers can call 1-800-959-8281 if they want to get a jump on fixing the problem.

Capital insights: A new commentary on FinancesoftheNation.ca concludes that the federal Liberal government’s move in 1994 to eliminate the $100,000 lifetime capital gains exemption did not have much of an adverse effect on the realization of capital gains in the following five years. The authors, Adam Lavecchia and Alisa Tazhitdinova, conclude that “capital gains income is not very responsive to permanent changes in tax rates, and that raising capital gains taxes is likely to result in large tax revenue gains over time.”

If you liked this newsletter, share it on Twitter or post it to LinkedIn.

Follow me on Twitter, @PatrickBrethour or ask your Taxing Question here.