Opting Out

Claude Bélanger,
Department of History,
Marianopolis College

Opting out can take two forms:

1. a province can assume responsibility for financing and administering a program that in the other parts of Canada would be carried out by the federal government; to assure that the contracting-out province or its citizens are not financially penalised, the federal government pays to that province compensating sums of money either directly or through tax abatements; or
2. a province may receive a fiscal compensation instead of the federal contribution to a program through a conditional grant arrangement.

The method was first used in 1959 and led to an agreement between Quebec and the federal government over university financing (see Massey Report). Up until then, it had been assumed that when a province chose not to participate in a shared-cost programme (conditional grant) that it would suffer full financial penalties for this choice (the citizens of a non-participating province would pay the same federal taxes as in the other provinces but would not receive the same benefits).

Quebec had been the province traditionally opposed to this type of programme arguing that they were unwarranted encroachments by the federal government on provincial spheres of jurisdiction. During the Duplessis administration, Quebec had refused conditional grants for the construction of the Trans-Canada Highway, university financing, hospital insurance, vocational training, forestry's’ activities, civil defence, language training for immigrants, etc. In 1959, it was estimated that Quebec received $46 million in conditional grants while it refused a further $82 million. Hence, 64% of the amount available to the province had been refused (that sum of money represented 13.7% of the revenues of the provincial government of Quebec). Pressure mounted in Quebec, in the early sixties, for a commitment by the federal government to work out, in consultation with the provinces, a contracting-out formula. There was in the period of 1962-1965 good will evidently displayed by the federal government and this activated further the discussions. In expectation for such an arrangement, Quebec joined, between 1960 and 1962, most joint programmes that it had so far refused. By 1962, tied 23% of the budget of the government of Quebec was tied into joint programmes as opposed to 5% in 1958. A Federal-Provincial Conference was held in Quebec City in the spring of 1964 to design a contracting-out formula. Federal action came in the spring of 1965 when the Established Programs (Interim Arrangements) Act was enacted by Parliament. The bill divided the arrangements to which contracting- out was to apply into "Standing Programs" and "Special Programs".

Standing programmes included: hospital insurance, old age pensions, blind persons’ allowances, disabled persons’ allowances, the welfare portion of the general public assistance programme, health grants (excluding those for hospital construction), and non -capital expenditures on vocational training. Special programmes were to include: agricultural lime assistance, some forestry programmes, hospital construction, camp grounds and picnic areas’ programmes and the road-to-resources programme. Some programmes were excluded from contracting-out: capital grants for vocational training, certain research grants, the unemployment part of the general public assistance programme, the Centennial projects, municipal winter works, emergency measures and projects under the Agricultural Rehabilitation and Development Act (ARDA). Provinces that opted out of standing programmes would receive abatement on the federal personal income tax. Each programme was assigned a unit value corresponding to the estimated percentage yield of these abatements in Quebec (Quebec was rightfully expected to be the main province opting out). The equivalent for the standing programmes was to be cash payments based on the amount that the federal government thought the province would have received as conditional grants if it had participated in the programmes. A time limit was set to pull out of programmes and the arrangements would have to be renegotiated at the end of each Tax Rental Agreement (every five years).

The principle of the opting-out formula is unique to Canada among the federations of the world and is rather remarkable. It demonstrated on the part of the federal system a flexibility to meet the special demands of Quebec, as it prized its autonomy more than any other province. Originally, the smaller provinces were afraid that all the large provinces would withdraw from shared-costs programmes and bring about their cancellation by the federal government; thus, they would loose programmes viewed as essential, which they could not afford to finance on their own. But, as had been foreseen, only Quebec availed itself of the opportunity to opt out, demonstrating how different it was from other provinces and increasing its special position in Confederation.

In 1965-66, Quebec withdrew from 30 joint programmes (by 1968, only 5.5% of the Quebec budget was tied into joint programmes; Quebec had come back full circle to the situation prevailing in 1958. The value of the compensation to Quebec for abandoning the joint programmes was equal to 20 additional tax points).

Though remarkable in principle, the opting-out formula is far from perfect. Several criticisms have been levelled against the idea or its application: many have felt, outside Quebec, that

1. the opting-put formula weakened the economic stabilising capacity of the federal government; this criticism has some validity but many experts are now of the opinion that the federal government doesn't need to control such a large share of the GNP to be able to control the economic perfor-mance of the country (one might argue, moreover, that it is the existence of the federal system itself which weakens the central government's stabilising capacity and yet nobody suggests seriously that we should abolish the federal system... ;
2. some have argued that the formula is only one more way in which the federal government "caters" to Quebec and that the opting-out formula reinforces the feeling inside Quebec that it is a province different from the others, hence weakening the unity of Canada The validity of this criticism is dubious on two counts:

• contracting out was offered to all provinces but all, except Quebec, for one reason or another, refused them; the federal government did not want to give Quebec a special status, that status merely emerged because the other provinces did not opt out of the joint programmes when they had the right to do so;
• the fact that Quebec is not a province like any other is not the result of the opting out formula but rather the cause for introducing the formula; the formula doesn't threaten the unity of Canada but its inexistence might very well do so.

Within Quebec, five different types of criticisms have been levelled against the application of the formula:

1. there are still limitations on the types of programmes from which a province may opt out;
2. the interim period has been extended ever since 1965; no permanent arrangements have yet been made; Claude MORIN argues in Quebec Versus Ottawa (p. 18) that the federal government is merely waiting for a political juncture where Quebec would "normalise" its relations with the federal government, abandon its claim to a special position in Confederation and rejoin all joint programmes. The theory is very credible in view of the fact that the "Interim arrangements" have now been extended so many times, yet have not been formalised in the Constitution;
3. Quebec must still, even from such programmes from which it had opted out, "maintain its present obligations" in respect to the instituted programmes. In other words, even though a province pulls out of a specified programme, it must still continue the programme in the province, furnish the federal government with audited financial reports on the expenditures and participate in the federal-provincial meetings established for the purpose of co-ordinating the programmes. The purpose of the opting-out formula was presumably to assure a province of its autonomy but the principle is undermined by the regulating restrictions introduced by the federal authorities. The opting-out province lives under what Morin calls, correctly,  "surveyed liberty."
4. Contrary to what is often thought, Quebec has not obtained, by opting out, any new powers which formerly it would not have had under the Constitution Act (1867). Those programmes subjected to the opting-out formula were all originally, at least partly, under the provincial sphere of jurisdiction. The province, it was argued, had merely regained ground lost in the past.
5. Still, the federal government retains the right to unilaterally cancel, reduce or alter its contribution to a joint programme. In such a case the financial compensation to the opting-out province is automatically lost; such cancellations have already occurred since 1967, as priorities of the federal government have shifted.

The solutions to the problems and criticisms that have arisen on the subject of shared-cost programmes and of the opting-out formula seem to rest in a constitutional amendment guaranteeing

1. the right of a province to opt out of a federal sponsored programme;
2. that fiscal compensation equivalent to the cost of operating the programme would be paid to the opting out  province and that it would have the power to use such sums as it would receive from opting out for whatever purpose(s) it would desire, thus protecting the autonomy of the provinces;
3. that the federal government would require the near unanimous support of the provinces to institute a joint programme and similar support to cancel it.

A small step in the direction indicated above was taken in 1982 in the Constitutional Act of that year. Article 40 provided that where an amendment transferring power from the provinces to the federal government on "education or other cultural matters", reasonable compensation would be provided and thus no penalty would apply for any province to which the amendment would not apply. Thus a province had a right to opt-out of such amendments and would not be penalised for it.

In 1987, the Meech Lake Accord proposed to extend the principle of compensation for opting out of all amendments transferring legislative authority from the provinces to the federal government. The clause came under vicious and unrelenting attacks from those who believed that it would render future "national programmes" impossible to create and that it would balkanise Canada. Pierre Trudeau was especially forceful in his denunciation of the clause, arguing among other reasons, that the principle of opting out ought to be rejected altogether. This view was rather surprising in light of the fact that he had accepted the Constitutional amendment of 1982 that included a provision for opting out. In 1992, the Charlottetown Accord proposed a similar clause to the Meech Lake Accord, but to no avail as the Accord failed to obtain a majority in the national referendum that was held on the question.
 

© 1998 Claude Bélanger, Marianopolis College