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Premier Kathleen Wynne in Toronto on April 29, 2013.Kevin Van Paassen/The Globe and Mail

A battle between federal Finance Minister Jim Flaherty and Ontario Premier Kathleen Wynne is exposing a gulf between the two levels of government on one of the most serious problems facing the nation's largest city.

Mr. Flaherty intervened in Ontario's transit expansion plans, shutting down the possibility of a special sales tax in the Toronto area to fund new subways, light-rail lines and commuter trains. Ms. Wynne shot back Friday, needling the federal government for not putting forward a national transit strategy.

The bunfight between the two could easily be dismissed as mere partisan sniping, but this serious division marks yet another hurdle to busting gridlock in the Greater Toronto and Hamilton Area.

While the province favours a continuous-building approach to transit – where a set amount of money is put aside every year to construct a master-planned network – Ottawa prefers to put up an envelope of cash and have cities or provinces request funding on a project-by-project basis, said sources in both governments.

This week, the Ontario transit agency Metrolinx put forward a series of proposals to fund $34-billion in transportation expansion in the GTHA. The central idea is a one-per-cent hike to the harmonized sales tax, with proceeds dedicated to transit.

Ms. Wynne has said that parts of the province outside of the GTHA will not have to pay for transit expansion, leaving two options. Either Queen's Park could hike the HST provincewide and dedicate funds raised outside the Toronto area to projects in other regions – roads and bridges in the North, for instance – or it could try to renegotiate its tax deal with Ottawa to put in place a special sales tax in the GTHA only.

But, in a letter to Ontario Finance Minister Charles Sousa, Mr. Flaherty slammed the door shut on that second possibility.

"As you are well aware, the Comprehensive Integrated Tax Co-ordination Agreement signed by the Government of Ontario does not allow for the provincial component of the HST to vary between regions of the province," he wrote, adding his government "will not accept such a proposed regional sales tax increase."

Government sources played down the importance of Mr. Flaherty's letter, stressing that Queen's Park is still a long way off from making any decisions on Metrolinx's suggestions.

Then Ms. Wynne went on the offensive.

"We haven't asked the federal government for any changes to the tax regime. What we have asked the federal government for – and I have asked the federal government for this since I was minister of transportation starting in 2010 – we've asked for a national transit strategy," she said. "I really hope that since Minister Flaherty is taking an interest in building transit that he'll be open to a discussion about an infrastructure plan that would include a dedicated transit stream."

It seems unlikely such a plan will come to pass. In a statement, federal Transportation Minister Denis Lebel discussed the federal $53-billion infrastructure fund and listed several one-off transit projects to which the federal government has contributed money, but said nothing about a national transit strategy.

Meanwhile, Mr. Flaherty's stand means that, if Ms. Wynne's government ultimately adopts the one-point increase to the HST, it will have to sell the tax hike to the entire province and decide what it will pay for outside of the Toronto area.

With a report from Bill Curry

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