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Ontario Finance Minister Charles Sousa speaks to media in Chelsea, Que., on Dec. 16, 2013.ADRIAN WYLD/The Canadian Press

The scene would have been unthinkable just a few years ago.

Ontario, once a province firmly entrenched among the "have" provinces of Confederation, found itself reacting in fury to the recent news that its equalization transfers would be cut.

There was no sympathy from Jim Flaherty. The federal finance minister first made his name in politics as a Queen's Park Tory and his wife, Christine Elliott, is now deputy leader of Ontario's Progressive Conservative opposition. Mr. Flaherty has been a consistent critic of the Ontario Liberal government on economic files.

Now, on the eve of an Ontario budget that could trigger a provincial election, the minority Liberals find themselves arguing with Ottawa over a $640-million shortfall in federal transfers.

Ottawa insists that's simply the way the numbers worked out in the complicated equalization formula. It argues that while it has stepped in during each of the past four years with a program called Total Transfer Protection to ensure no province sees a reduction in transfers, the program expired on schedule. Ontario thinks it's more than a coincidence that the program – which Ontario had never used – expired without warning just as it was about to be the only province that qualified.

An internal Finance Canada document marked "secret" and obtained by The Globe and Mail through access to information sheds new light on the mystery surrounding the Total Transfer Protection program that suddenly vanished in December when Mr. Flaherty told the provinces how much money they will be getting from Ottawa for the fiscal year that starts April 1.

"No decision has been taken on any future transfer protection," states a briefing note from Finance Canada deputy minister Michael Horgan to then-Minister of State Ted Menzies. The memo was dated July 9, 2013, meaning that as recently as the summer, it was still an open question as to whether the program would live or die.

"This discovery furthers my concern that Ontario's being singled out," said Ontario Finance Minister Charles Sousa in an interview. The minister said the timing suggests Ottawa only decided to cancel the program after learning that only Ontario would qualify for a transfer protection payment.

With an Ontario budget on the horizon, Mr. Sousa suggested Mr. Flaherty is trying to help the Ontario Tories by hurting the Liberal government's bottom line.

"That is kinda how it looks, doesn't it?" he said. "This should not be about the fortunes of any political party. It's got to be about the fortunes of Ontarians."

The Total Transfer Protection program was quietly launched in 2010-11 as a response to the economic downturn. The premise was that after calculating all three major transfers – equalization, the Canada Health Transfer and the Canada Social Transfer – Ottawa would step in to make up the difference if any province was about to see a total reduction.

Over four years, Ottawa paid out more than $2.2-billion to seven provinces, including the four Atlantic provinces, Quebec, Manitoba and Saskatchewan. The coming year would have been the first in which Ontario qualified.

For critics of Canada's equalization program, the entire debate between Ontario and Ottawa borders on the surreal.

"It's bizarre at all that we're talking about the protection of quasi-equalization payments for Ontario. That shows how weak Ontario has become fiscally and what a mess its own fiscal situation is that it's going to Ottawa begging for a transfer protection," said Mark Milke, senior fellow at the Fraser Institute, a fiscally-conservative think tank.

Mr. Milke released a report this month that argues equalization has become wildly distorted since Ontario moved from "have" to "have-not" status.

In 2008-2009 – the year before Ontario became a have-not province, equalization payments went to just five provinces (Prince Edward Island, Nova Scotia, New Brunswick, Quebec and Manitoba). Collectively, they represented 10.8 million people or 32 per cent of the population of the 10 provinces, the report noted.

Now that Ontario has become a "have not" province, 71 per cent of Canadians now live in a province that receives equalization.

"Equalization used to be about the smallest and poorest of the provinces getting money from a federal program designed to bump up their revenues," said Mr. Milke, who argues the program has now become "something very different."

"It's simply not sustainable, I would argue, fiscally or politically," he said.

On the need for change, Mr. Milke and Ontario agree. However Mr. Sousa rejects criticism that its "have-not" status is a sign of poor decisions, pointing to work by the Mowat Centre that found such terms like "have not" are unhelpful given that Ontario sends more money to Ottawa than it gets in return.

"There's a lot of tinkering with regard to that formula," said Mr. Sousa. "How do we determine a 'have-not' province when the province is a net contributor to the federation? Cut it however you wish, Ontario gives out more than it receives, and that's just a fact."

Equalization payments to Ontario