Andrew Petter ..................................

Federalism and the Myth of the Federal Spending Power, by
Andrew Petter

MP Intro. Introduction. 1. 2, 3, 4, 5, Conclusion, Postscript, End

I. The Demise of Co-ordinate Federalism

From Confederation until the Second World War, institutional arrangements in Canada were shaped by a common belief among the courts, constitutional scholars and most political actors that a clear division of political responsibilities between two coordinate orders of government was an essential characteristic of the Canadian state. This coordinate vision of Canadian federalism was shared by centralists and decentralists alike. It influenced the recommendations of the Rowell-Sirois Report2 as much as it animated the constitutional jurisprudence of the Judicial Committee of the Privy Council.3 It so permeated Canadian scholarship during the same period that the leading constitutional treatise of the 1920s referred to "the Generally accepted theory that Canada is a federation in which sovereign power is divided among coordinate governments, none of which are delegations and among which the provincial governments are not new creations, but retain 'their independence and autonomy' ".4

The demise of coordinate federalism can be traced to the social and economic initiatives undertaken by the federal government, and acceded to by most provinces, in the period of reconstruction following the Second World War.5 The seeds of that demise, however, were sown during the war itself. Under wartime tax agreements, the provinces agreed to cease levying taxes on personal and corporate incomes. To compensate the provinces for relinquishing this tax room, Ottawa assumed all provincial debts, agreed to pay the provinces unconditional grants based upon fiscal need, and took over responsibility for the welfare of unemployed employables.

The wartime tax agreements, like the assumption of emergency powers, were intended as temporary measures to enable the central government to deal with crisis conditions. Following the war, however, Ottawa exhibited little desire to relinquish the revenues and the authority that it had acquired. Instead, buoyed by the revitalized sense of national purpose instilled in Canadians by the war effort, and responding to the demands for social and economic reform which followed the war, federal authorities sought to "continue to levy the major taxes in order to finance peacetime reconstruction and to use centralized fiscal policy as a tool of national economic management".6

The major constitutional obstacles confronting the federal government in this enterprise were the division of legislative powers and the principle of coordinate federalism. The division of powers gave to the provinces jurisdiction over most areas of social policy and many aspects of economic regulation, while coordinate federalism posited a constitutional barrier that protected provincial powers from federal encroachment.

Ottawa's strategy to overcome these obstacles was set forth in the "Green Book" proposals that were presented to the Dominion-Provincial Conference on Reconstruction in the summer of 1945. The Green Book strategy was a simple one. Given the difficulties of persuading the provinces to agree to a major reallocation of legislative powers, the Green Book proposed that the federal government seek to achieve its policy objectives by means of fiscal intervention rather than constitutional reform. In particular, it recommended that Ottawa build upon its wartime tax base by obtaining provincial agreement to continue to stay out of the personal and corporate income tax fields, and to refrain from imposing inheritance taxes, in return for a flat per capita subsidy. The federal government would then draw upon this tax base to implement, and to push provincial governments to implement, a postwar agenda of social and economic reform.7

The Green Book proposals represented an attack on the coordinate orthodoxy that had prevailed before the war. Unlike the recommendations of the Rowell-Sirois Report, to which the federal government had committed itself three years earlier, the proposals showed little regard for the need to preserve a clear division of legislative powers or for the desire to promote political accountability within a federal state. While the Rowell-Sirois recommendations sought to reallocate powers within a coordinate framework, each order of government retaining exclusive responsibility to implement policy within its sphere, the Green Book rejected notions of exclusivity in favour of overlapping governmental responsibilities and administrative integration. And while the Rowell-Sirois Report decried the use of federal spending as a means of overcoming problems of limited jurisdiction, spending was at the heart of the Green Book proposals. Spending, was the means by which federal authorities would exert influence over social and economic spheres previously denied them by the division of legislative powers.

Although the Reconstruction Conference broke down in 1946, it laid the political Groundwork for what was to follow. In 1947, all provinces except Ontario and Quebec agreed to stay out of the three tax fields in exchange for tax rental agreements that provided them with somewhat larger subsidies than those proposed in the Green Book.8 The significance of this arrangement was that it gave the federal government exclusive access to major sources of wartime taxation, and limited the provincial share in those sources, at a time of post-war expansion and social reconstruction.

The economic impact of these agreements was to enable the federal government to consolidate and build upon the "temporary" fiscal gains that it had realized during the war. In 1939, the year that Canada entered the war, federal income from personal and corporate income taxes9 was $123 million, about twenty-two per cent of federal budgetary revenue. By 1963, the year after the tax rental agreements expired, federal income from these taxes, plus inheritance taxes, stood at $3.6 billion, over fifty per cent of federal budgetary revenue.10 While provincial income from the three taxes rose from $51 million in 1939 to $887 million in 1963,11 a factor of seventeen, federal income from these taxes increased by almost twice as much, a factor of thirty, over the same period.

Having secured for itself exclusive access to these three major sources of tax revenue, Ottawa proceeded to implement a strategy similar to the one mapped out in its Green Book proposals. One by one, the federal government established conditional grant programs dealing with highways, education, health and other social services - all matters falling within provincial legislative jurisdiction. Some of these programs provided financial assistance directly to individuals, corporations and provincially regulated institutions such as universities. However, the most significant took the form of shared-cost programs under which the federal government agreed to transfer funds to the provinces for social and economic initiatives undertaken by them in accordance with conditions laid down in federal legislation. As Black has observed:12

Joint programs like the Trans-Canada Highway proliferated after the Second World War and became one of Ottawa's major policy instruments. The bulk of the funds went into health and welfare which, together with the highway project, accounted for more than 90 percent of the federal share of all joint programs in 1959, a proportion that remained representative of the nineteen-sixties as well. Frustrated as it was in securing implementation of its comprehensive post-war Reconstruction proposals. . ., the federal government was able to achieve most of its social policy aims in a piecemeal fashion through its conditional grant projects of the late forties and early fifties.

It would be difficult to exaggerate the growth of conditional transfers as an instrument of federal government policy in the past forty years. Since the Second World War, Ottawa has initiated over 100 shared-cost programs, most of them of a continuing nature.13 In 1945, conditional transfers from Ottawa to the provinces stood at $46 million annually,14 less than one per cent of federal budgetary expenditures.15 By 1965, such transfers had grown to $1.2 billion,16 over thirteen per cent of federal expenditures.17 And by 1975, conditional transfers had reached $6.7 billion,18 almost twenty per cent of federal expenditures.19 Thus, by expanding its revenue base and by channeling new revenues into shared-cost programs and direct grants, Ottawa has been able to circumvent limitations on its legislative jurisdiction and to have a major influence on public policy falling within the sphere of provincial legislative responsibility.

Almost as remarkable as the rise in administrative federalism has been the lack of controversy it has generated, at least outside Quebec. The lack of political debate is perhaps understandable. Government spending is less likely to provoke public criticism than is "command and control" regulation. Citizens and provincial governments who benefit from federal spending initiatives are not prone to complain about them, even if they dislike some of the conditions that accompany such programs. It is true that provincial Governments have from time to time objected to the use of federal spending to influence provincial decision-making. However, in all provinces except Quebec, such objections have taken a back seat to the desire of provincial administrations to share in federal revenues and to secure provincial spending powers.

It might be thought that those whose taxes have funded federal spending programs would be inclined to challenge the constitutionality of such programs in court. Yet, for good reasons, this has not been the case. First, the federal government has been careful to separate its spending programs from the revenue measures that have made them possible. This has obscured the relationship between spending and taxing, making it difficult for taxpayers to discern a clear link between particular taxing and spending initiatives. Second, because of this difficulty, taxpayers seeking to challenge a spending program would, until relatively recently, have found it virtually impossible to demonstrate sufficient interest in the program to be granted standing before the courts.20

The lack of academic controversy, particularly among legal academics, is more difficult to fathom. Constitutional scholars from English Canada have viewed the shift from co-ordinate to administrative federalism with uncritical eyes. Rather than questioning its legitimacy, the bulk of their energies has been devoted to devising doctrinal justifications for the federal spending power.21 Scant attention has been paid to the theoretical implications of that power, and to the political nature of the "new federalism" which it has spawned.

What accounts for the uncritical stance adopted by these scholars? There are a number of probable explanations. For some, support for administrative federalism has stemmed from their desire to broaden the authority of the central government. It is no coincidence that one of the earliest and most outspoken proponents of the federal spending power was F.R. Scott,22 as ardent a centralist as this country is likely to see. For others, support of the spending power appears to be related to their support for political initiatives with which it has been associated.23 After all, what "progressive" constitutionalist in the postwar period would want to be seen objecting to federal government support of highways, education and universal health insurance? Still others have been inclined to approve of the "new federalism" because it coincides with their desire to limit judicial intervention in the political process.24 The shift from coordinate to administrative arrangements has diminished the adjudicative powers of the judiciary, leaving jurisdictional issues to be resolved through a process of political bargaining. Finally some younger scholars seem simply to accept the spending power as a fait accompli, a precondition to the functioning of a modern federal state.25 Having been weaned on administrative federalism, such scholars apparently have difficulty conceiving of contemporary government functioning in any other way.

It is nevertheless astounding that such a major restructuring of the Canadian state should have attracted so little critical commentary. This is especially so given that the constitutional foundation of the "new federalism" is, at best, shaky.




Report of the Royal Commission on Dominion-Provincial Relations (1940). As I noted by D.V. Smiley, Conditional Grants and Canadian Federalism (1963), p. 6: "The general solution of the Rowell-Sirois Commission was. . . towards a situation in which the functional responsibilities of the federal and provincial governments were delineated in a relatively clear-cut fashion, with each level being assured adequate revenues to discharge the obligations conferred upon it."


Lord Watson's statement in The Liquidators of the Maritime Bank of Canada v. The Receiver-General of New Brunswick, [1892] A.C. 437, at pp. 441-442, typifies the view of the Privy Council:

The object of the [British North America] Act was neither to weld the provinces into one, nor to subordinate provincial governments to a central authority, but to create a federal government in which they should all be represented, entrusted with the exclusive administration of affairs in which they had a common interest, each province retaining its independence and autonomy.

4. W.P.M. Kennedy, The Constitution of Canada (1922), p. 411.  
5. It is true that federal efforts to overcome the rigidity of coordinate federalism were initiated following the First World War and that such efforts were renewed in response to the political pressures placed upon Ottawa during the Great Depression of the 1930s. However, it was not until the period following the Second World War that federal authorities mounted a sustained attack on the coordinate federalist model.  

P.W. Hogg, Constitutional Law of Canada (2nd ed., 1985), p. 114.

7. Included in that agenda were universal old age pensions, health insurance grants, and employment measures encompassing unemployment insurance, welfare benefits and an anti-cyclical public investment strategy." Taken as a whole, the proposals represented an integrated and ambitious social security and economic welfare program of staggering proportions.": A.M. Moore, J.H. Perry and D.I. Beach, The Financing of Canadian Federation (1966), p. 23.
8 Ontario joined the system when the agreements were renewed in 1952, although the province retained the right to levy inheritance taxes.
9 There was no federal inheritance tax in 1939.
10 F.H. Leacy (ed.), Historical Statistics of Canada (2nd ed., 1983), series H1-18.
11 Ibid., series H92-112.
12 Black, op. cit., footnote 1. p. 73 (note in text deleted).
13 Hogg, op. cit., footnote 6, p. 120.
14 Moore, Perry and Beach, op. cit., footnote 7, p. 33.
15 Leacy, op. cit., footnote 10, series H34.
16 Ibid., series H474-493. This figure includes the value of tax points and cash compensation payments to Quebec for established programs and also includes the value of tax abatements to provinces for the financing of post-secondary education.
17 Ibid., series H34.
18 Ibid., series H474-493.
19 Ibid., series H34. This percentage has decreased only slightly in the past decade. Conditional transfers to the provinces in 1984 (including the established programs and contracting out tax transfers) stood at about 20.9 billion, nearly 18 per cent of federal expenditures: Canadian Tax Foundation, The National Finances, 1986-87 (1987), p. 16:26, and letter from R.A. McLarty, Department of Finance, Canada, August 6, 1987.
20 Prior to the decision of the Supreme Court of Canada in Thorson v. Attorney General of Canada, [1975] 1 S.C.R. 138, (1974), 43 D.L.R. (3d) 1, citizens had to be able to show that they were "specially affected" by a governmental measure in order to obtain standing to challenge the constitutionality of that measure in court.
21 See, infra, footnotes 26-28.
22 F.R. Scott, The Constitutional Background of Taxation Agreements (1955), 2 McGill L.J. 1.
23 See, for example, G.V. La Forest, The Allocation of Taxing Power Under the Canadian Constitution (2nd ed., 1981), pp. 45-51.
24 See Hogg, op. cit., footnote 6, pp. 111-131. See also E.A. Driedger, The Spending Power (1981-82), 7 Queen's L.J. 124.
25 See K. Hanssen, The Constitutionality of Conditional Grant Legislation (1966-67), 2 Man. L.J. 191; J.E. Magnet, The Constitutional Distribution of Taxation Powers in Canada (1978), 10 Ottawa L. Rev. 473.