The transformation of Canada from a predominantly agricultural to a mainly industrialized and urbanized country created many problems and strains within Canadian federalism.
The first source of difficulties was that the financial arrangements of Confederation had been based on the idea that the heavy burdens would fall on the shoulders of the federal government. Consequently, it was given unlimited taxing powers while the provinces would have limited sources of revenues to match their seemingly modest fields of jurisdiction. The heavy burden envisioned for the federal government had been mainly the creation of a national economy through subsidized immigration, the building of railways (the CPR and the Intercolonial), the buying and managing of the Western territories. On the whole, the federal government had discharged these responsibilities successfully by 1920 and could look forward to substantial surpluses in its budget in the future although the war debt would have to be taken care of first.
Correspondingly, the provinces had been given small revenues that turned out to be inadequate to meet their obligations in a modern, industrialized world. A good many of the fields of jurisdiction given to the provinces in 1867 acquired an importance that the Fathers of Confederation could not have foreseen. What came to matter most to Canadians in the 20th century, was not immigration or railways, but rather their quality of life and their standard of living whose maintenance depended on provincial governments through their control of education, health, welfare, social assistance, labour, etc. Canadians demanded more and more services of their governments and these services had to be provided by provincial governments that did not have the financial capacity to fully meet these increased responsibilities.
The second source of difficulty, closely related to the first one, was the realisation by Canadians that they lived in a country with considerable regional disparities. New techniques of communication (railways, planes, radio and mass circulation newspaper) put more Canadians in contact with one another and a sense of common identity developed. It became increasingly difficult for Canadians in the poorer regions of the country to accept the fact that they should receive lesser social services, and perhaps of an inferior quality, than those received in the more affluent provinces. The provincial governments of the have-not provinces could only provide services equal to those of the rest of the country by imposing a heavier than average fiscal burden on their taxpayers. The disparities of services and of taxation were not only more recognized but had become unacceptable to many Canadians by the 1930s.
The advent of the Great Depression of 1929-1939 magnified these two structural problems. The Depression hit very hard all of the provinces of Canada, but was particularly devastating for the poorer ones for it was in these less fortunate areas that unemployment was at its highest. Yet, these provinces were the least capable to shoulder that extra burden. The Depression did not create the problems of the Western and Maritime provinces but it blew them right out of proportion to their capacity to handle them. The original solution of the provinces was to turn to new sources of taxation. In 1930, only Canada, PEI and British Columbia levied taxes on the profits of corporations. By 1940 all the governments in Canada did. Four provinces introduced income taxes (Que., Ont. Sask., Alta.,). Provincial taxes on gasoline were increased by about 50%. Succession duties were raised substantially and by 1940 two provinces were levying sales tax (Sask., and Que.).
While the steps described above were taken, they did not resolve the financial difficulties. Most Canadians looked to the federal government for relief. This was a natural impulse as Canadians, especially in the English-speaking provinces, had increasingly come to regard Ottawa as their focus of loyalty. Furthermore, the federal government was the only government to have the financial capacity to deal with the problems. Initially the reaction of the federal government was cautious: help came in the form of unconditional subsidies to some provinces (the four western provinces received, between 1932 and 1935, the sum of $177 721 445 in aid from the central government; this was 83% more than the all the sums received by Quebec from the same source between 1867 and 1935) and in grants-in-aid (Public Works programmes) paid 40% by the federal government. These programmes taxed the financial capacity of the federal government to its limit. In the course of the Great Depression, the federal government doubled its income tax, raised its sales tax from 1 to 8% and imposed several new excise taxes.
Eventually, in 1935, the federal government introduced a series of comprehensive measures patterned on the New Deal initiated by Roosevelt in the United States. Bennett's New Deal aimed at coping with the social and economic effects of the Depression. But the measures, adopted late in any case, were nearly all struck by the courts as ultra vires, as intruding on provincial spheres of jurisdiction.
It was in this context that the Liberal government of Mackenzie King created [P.C. 1908], in August of 1937, the Royal Commission on Dominion-Provincial Relations, better known as the Rowell-Sirois Commission. The Commission was instructed "to consider and report upon the facts disclosed by their investigations; and to express what in their opinion, subject to the retention of the distribution of legislative powers essential to a proper carrying out of the federal system in harmony with national needs and the promotion of national unity, will best effect a balanced relationship between the financial powers and the obligations and functions of each governing body, and conduce to a more efficient, independent and economical discharge of governmental responsibilities in Canada" [s.4 of P.C. 1908].
The Commission took three years to assemble the evidence and reach its conclusions. It visited every province, talked to provincial administrations (Alta. and Quebec refused to cooperate arguing that the purpose of the Commission was to support an invasion of provincial rights), invited and received briefs, commissioned many specialized studies and generally accumulated such massive evidence that it remains, to this day, the most comprehensive investigation into the financial basis of a federal system.
Its conclusions stunned even the most hardened centralists in Canada. Several methods could be used to solve the problems disclosed by the Depression: 1) a reallocation of powers between the two levels of government could be made so that responsibilities would match fiscal capacity. This would imply massive centralization and probably could not be achieved given the autonomous stand of many of the provinces. 2) A reallocation of fiscal powers in favour of provincial governments could be made but the Commission argued that this could not be achieved because of the great economic disparities between provinces and regions. These problems could have been overcome but this method was probably rejected far more because it was not conducive to promoting "national unity" rather than for economic reasons. 3) There would remain only one solution and that was to centralize taxes and to establish a guaranteed income for the provinces.
The major recommendations of the Commission were:
1) Transfer to the federal government of responsibility for the relief of employable unemployed.
2) The federal government would assume full responsibility for the debt of the provinces. In the case of Quebec where the provincial debt was small, the federal government would also take over part of the municipal debt.
3) The existing subsidies paid by the federal government to the provinces [s. 118-119 of the Constitution Act, 1867] would be done away with.
4) In return, the provinces would vacate certain tax fields that would be entirely taken over by the federal government; these were to be the personal and corporation income taxes and succession duties (in 1938-39 these represented 60% of the provincial revenue of Quebec).
5) The federal government would pay to the provinces a sum equivalent to 10% of the revenue derived from mining and petroleum operations in the province.
6) The old subsidy system and the direct taxes given up by the provinces would be replaced by a National Adjustment Grant. The Dominion would pay annually to certain provinces subsidies based on a national norm. These subsidies could be revised every five years. The "norm" would be derived from the spending necessary for a province to assure its citizens governmental services considered as standard for the whole country and from the revenue raised by the province according to norms of taxation considered average for Canada. If there was a discrepancy between the average spending and the average revenues on the one end and the actual spending and revenues of a province on the other hand, the federal government would pay the difference. A province would only receive help if there was excess spending. This was the beginning of the equalization formula.
7) Exceptional unconditional grants might be given by the federal government to help a province through a difficult period. Such exceptional grants were promised to Saskatchewan.
8) Money borrowed by the provinces could be guaranteed on their own credit or by the federal government if a Finance Commission established by the federal government approved the loan. This system was reminiscent of the provincially guaranteed loans of the municipal governments.
9) Each province would be left free to better its services by increasing considerably its taxes, or to reduce the tax burden of its citizens by reducing services or to expand certain services above the Canadian average at the expense of maintaining other services below the Canadian average. The Commission did not discuss how provinces could increase their taxes considering that they would turn over to the federal government their more productive sources of revenues. Consequently, a lowering of services in certain sectors was more likely to occur if a province wanted to establish a priority in a certain sector. That proposition seemed to defeat the purpose of the main recommendation of the Commission which had been to assure that a high standard of services would be available all across Canada.
The proposals of the Commission were studied at a Federal-Provincial conference held in January of 1941. The Commission had claimed that its propositions aimed at assuring the autonomy of the provinces. This was also the position taken by King at the conference: the provinces could not fulfill their responsibilities if they did not have the financial means to exercise their jurisdiction. The argument was hollow considering that the federal government now proposed that the provinces - by transferring their main fiscal powers to the federal government - depend almost entirely, and forever, on the federal government to be supported financially. Maurice Duplessis, Premier of Quebec in the late 1930s, was to say later about such proposals:
At the conference, the provinces of Ontario, British Columbia and Alberta rejected the report and refused to even consider it as the basis for constitutional changes. Manitoba, Saskatchewan and the Maritime provinces were the most favorable. The province of Quebec, represented by Adélard Godbout who had been elected in 1939 with the help of the federal Liberals, vacillated. He was the first premier of Quebec, since the days of Mercier, not to stand firm on the issue of provincial autonomy. He was never to be reelected again
Seemingly, the conference, for lack of a general agreement, was a complete failure; the Rowell-Sirois Report was officially shelved but many of its propositions were to reappear, in one form or another, in the post World War era. In the short run, the Report led to a constitutional amendment, enacted in 1940, which transferred jurisdiction over unemployment insurance from the provincial to the federal level [s.91(2A)].
© 2001 Claude Bélanger, Marianopolis College