Module 4: The Federal System

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Modules two and three dealt with the broad strokes of defining Canadian narratives and Canada’s constitutional history, respectively. In module four, we begin to look at the nuts and bolts of what constitutes Canadian democracy through federalism. Federalism connects the general to the specific. As Jean Chretien argued in his memoir, My Years as Prime Minister,

“Federalism is more than a form of government. It’s also a system that allows different people in diverse communities to live and work together in harmony for the good of all.”

– Jean Chretien

This is the ideational side of federalism. It hints at the conscious effort required to bring together divergent interests through workable compromise. It is what takes this:

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That is not to say this compromise would be easy, nor that it would be without recurring tension, or even at times hostility. Hostility may be unavoidable given the nature of federalism, which by definition contains multiple levels of government with multiple interests. To address this tension, the practical side of federalism deals with two key areas of dispute. The first surrounds jurisdictional issues, or who is in charge of what: from national defence and international trade to education and health care. The second surrounds the issue of funding the responsibilities allocated by the jurisdictional framework that has been agreed upon. Therefore, this module will begin by looking at the differences between unitary and federal states. Next, we will look at Canadian federalism. Finally, we will look at the crux of most conflict in a federal system: money.

Before exploring the concept of federalism, we need to deal with some conceptual issues. First, federalism constitutes one type of modern sovereign state formation. A sovereign state is a political construct that wields authority and power within set geographic boundaries recognized by other states. Domestically, the state is to ensure order within its borders through the use of its authority and power and has the sole right to use coercion to achieve this. This exercise of authority and power is deemed legitimate when it is recognized as such by its citizens and other states.

Take Canada, for example. Canada is a sovereign state that exercises authority and power within borders recognized by other states. Canada’s seat at the United Nations and other international organizations like the World Trade Organization and the acceptance of Canadian embassies in other countries are symbols of this recognition. As a recognized sovereign state, it has the sole right to use coercive force, like the police or military, to ensure that the laws are obeyed. For the most part, this exercise of authority and power in Canada is considered legitimate, although challenges exist. The Oka Crisis of 1990 is an excellent example of such’ questioning.’ The Mohawk people of Kanesatake contested the legitimacy of the state’s decision to permit the expansion of a golf course on unceded and ceremonial Mohawk territory and the use of coercion to enforce this decision.

Second, before defining federalism, it is helpful to outline the predominant form of sovereign state: the unitary system. Of the world’s 193 states, 165 are unitary states.

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In the unitary system, the central government alone possesses sovereignty, and sub-national actors’ power and authority are only legitimate when delegated by the central government.

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The United Kingdom of Great Britain and Northern Ireland is an example of a unitary state. One may be confused by this since there is extensive autonomy wielded by Scotland, Wales, and Northern Ireland.

For example, they each have independent legislatures. These legislatures can pass laws on devolved matters, like housing or education and training. But this autonomous power has been delegated by the Parliament of the United Kingdom, which can, in theory, pass laws that amend or abolish such power and authority, albeit this would be difficult in practice. There are advantages to the unitary state. When it works well, the unitary state can maintain a single narrative of the state. It is also arguably more efficient than other forms of government.

In a federal system, and unlike a unitary system, power and authority are divided between at least two levels of government. In most cases, there is some form of national government which exercises its power and authority across the entire state. This is referred to as the federal government. A second layer of government, most often defined regionally, also has a legal basis for exercising authority and power. These are most often called a ‘state’ or ‘provincial’ government. The legal basis for these sub-national actors to exercise authority and power is not derived from the central government but is usually defined independently through a constitution. Federal states can either privilege the federal government or the state/provincial governments. If the system privileges the federal government, it is a cooperative or centralized federalism. In this case, if powers haven’t been expressly assigned to state/provinces, the federal government has jurisdiction. If the system privileges the state/provinces, it is a dual or decentralized federalism. In this case, the federal government can only exercise the power and authority expressly provided, and states/provinces have jurisdiction over all other areas. In both forms of federalism, citizens fall under the jurisdiction of at least two independent levels of government which builds-in tension between those different levels of government.

While there are far more unitary states in the world, those states with a federal system constitute approximately half of the world’s population. This includes the world’s newest, albeit fragile state, South Sudan.

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However, what is undisputed, the American federalist experiment would become the model for many subsequent sovereign states.

In the late 18^th century, the term federalism referred to a league of sovereign states. However, the US did something relatively new, at least in the western world. With the Constitution and the Bill of Rights, the founding fathers combined the logic of the unitary state with the diverse interests of independent states by constituting a robust federal government with protected state rights. This American experiment would redefine federalism as representing this new form of government organization.

Federalism has become a popular form of state governance. As embodied by the US, federalism is seen as means to have the best of both worlds. It allows a strong state that can fight for the rights of its citizens in an increasingly economically globalized world. It also provides for sub-national identities and regional autonomy, bringing governance closer to the citizenry and facilitating a more accountable government. This is highly attractive in states with protracted and historical internal grievances.

Before examining Canada as a federal state, we must deal with the problem of the term’ Confederation.’ We speak of the ‘Fathers’ of Confederation’ and the moment of Confederation in 1867. However, the Canadian state is a federal system, not a confederal system. A confederal system is characterized by a number of smaller states, which delegate a degree of sovereignty to a central authority for specific purposes. While not a perfect fit, the European Union is arguably a confederation since the EU Members States have delegated to the EU Institutions specific powers/authority.

During the negotiations over ‘confederation’ in the Charlottetown and Quebec Conferences, the delegates spoke of forging a new nation and a single state, not a loose confederation of autonomous provinces. Thus, while we use the term ‘ Confederation,’ the idea from the outset was to adopt a federal system with a strong federal government but one that would also protect future provincial rights.

Economic and military concerns dictated the need for a strong central state. Economically, forming a federal state would open markets for trade, facilitating prosperity. These economic motivations were enhanced by the American cancellation of the Canadian-American Reciprocity Treaty, a free trade deal from 1854 to 1865. The cancellation further limited market opportunities for the British colonists. Militarily, British North America had felt vulnerable since the American colonists had fought against Britain for their independence. The US had invaded the colonies of Upper and Lower Canada in 1812.

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The relationship between the US and Britain further deteriorated when it was perceived that British elites favoured the Confederacy in the American Civil War. The doctrine of Manifest Destiny and the purchase of Alaska demonstrated an expansionist policy in the US, exacerbating the uneasiness of the British colonists. This was especially true given the increasing reluctance of Britain to maintain a military presence in its colonies.

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Conversely, political concerns would dictate the need for securing the rights of the future provinces. The Province of Canada, formed through the union of Upper and Lower Canada in 1841, had begun to produce tensions. The population of what had been Upper Canada was increasing relative to what had been Lower Canada, which created pressure to increase the political representation of English-Canada. Conversely, what had been Lower Canada was alarmed by this shift in demographics and sought guarantees of non-interference with values, language, and religion of French-Canada. A union with the other British Colonies was seen as a solution to these increasing political problems.

For the other two founding colonies, New Brunswick and Nova Scotia, the economic advantages of a federal state were most persuasive. Not only would there be a larger market to take advantage of, but the promise of a new transcontinental railway would allow them to take full advantage of such a union.

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Manitoba and the Northwest Territories would join the Dominion in 1870, followed by British Columbia in 1871, Prince Edward Island in 1873, and the Yukon Territory in 1898. In the 20^th century, Saskatchewan and Alberta would join in 1905, followed by Newfoundland in 1949. The establishment of Nunavut in 1999 completed the contemporary shape of Canada.

The second question we need to deal with is how the federal and provincial governments would divide the powers in such a way as to retain the benefits of a strong federal government and yet also protect the rights of the provinces. The BNA Act details the 29 areas of federal jurisdiction in Section 91. These include trade, commerce, banking, currency, taxation, navigation, citizenship, and defence. Section 92 details 16 areas of provincial jurisdiction, including direct taxation, hospitals, prisons, property, and civil rights. It should be noted that the social welfare aspect of provincial jurisdiction would become a future issue in federal/provincial relations due to the exponential rise in cost over time. Finally, Section 95 provides for concurrent powers in the areas of agriculture and immigration. Concurrent power means shared jurisdiction between the federal and provincial governments. In practice, there are far more areas where concurrent powers exist due to the previously mentioned issue of funding. The federal government may not have jurisdiction over health or the environment, but they can spend money there. And provinces can petition for the government to either fund joint federal-provincial initiatives or request more funding for the provinces to do so. We will discuss funding issues further in the next section of this module.

Beyond specific jurisdictional decisions, the BNA Act (1867) provided the federal government with powerful centralizing powers and authority. First, the federal government was given the power of disallowance by the BNA to negate provincial legislation even when it is within provincial jurisdiction. Disallowance was used 112 times after Confederation, with PM John A. Macdonald and PM Wilfred Laurier accounting for 76 of these.

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Most instances of disallowance were exercised to support the National Policy: examples include building the transcontinental railway, immigration policy to fill the west, and protecting Canadian industry. The last use of disallowance occurred in 1943 to strike down Alberta’s Land Sales Prohibition Act, which made it illegal to sell land to a Hutterite or enemy alien.

Disallowance has not been used since 1943, although PM Pierre Elliot Trudeau was put under some pressure to exercise it in 1977 to nullify Quebec’s Charter of the French Language. Second, the federal government had the power of reservation whereby provincial lieutenant-governors could reserve provincial legislation for approval by the federal government.

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In 1961, Lieutenant Governor of Saskatchewan Frank Bastedo reserved Bill 56, The Alteration of Certain Mining Contracts, without consulting the federal government. This would be the first time since 1937 that a provincial bill would be reserved. It was also the first time in Saskatchewan a bill would be reserved. And it was the last time the power of reservation was used in Canada.

Fourth, the federal government was given declaratory power: the right to assume jurisdiction of any work considered to be for the general advantage of Canada as a whole. The state’s declaratory powers have been exercised most often regarding railways but have also been used on issues like uranium mining and nuclear energy in the Atomic Energy Control Act of 1946. The federal government has not exercised its declaratory power since 1961. Finally, via the residual clause in section 91 of the BNA, the federal government was given the right to legislate in any area not specifically designated as a provincial jurisdiction, “…for the peace, order, and good government of Canada”. The residual clause is often referred to as the “Peace, Order, and Good Government” clause, and it as a means to strengthen the hand of the federal government. This was deemed necessary in order to avoid the disorder that had been witnessed in the US due to the residual powers remaining with the individual states.

The balance of power between the provinces and the federal government would wax and wane from 1867s. As argued above, it would seem like the federal government was put in the dominant position over the provinces in 1867. However, in practice, these powers and authority were not as robust as they may seem. In the cases of disallowance, reservation, and declaratory powers, some argue a constitutional convention has emerged against their use. Disallowance was last exercised in 1943 and both reservations and declaratory powers were last exercised in 1961. Further, the balance of power between the provincial and federal governments shifted back towards the provinces after Confederation.

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Remember the Judicial Committee of the Privy Council? The JCPC was the highest court in Canada until the Treaty of Westminster provided for its abolishment. The JCPC tended towards supporting provincial rights over federal rights, setting important restrictions against federal powers and authority. For example, the JCPC restricted the scope of the federal government’s residual powers to three areas. First, jurisdictional gaps that were not foreseen by the drafters of the Constitution are clearly of a federal nature. Federally incorporated companies were not foreseen by the drafters of the Constitution and in 1915 were included under federal jurisdiction via the case of John Deere Plow Co v Wharton.

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Second, the federal government could take jurisdiction in areas via emergency powers. For example, the JCPC gave the federal government jurisdiction over alcohol in 1882 to ensure order in Canada. More recently, the Supreme Court of Canada gave the federal Parliament the right to regulate inflation in 1976. Third, the federal government could legislate in areas of provincial jurisdiction if it is inherently of a national concern. For example, the 1952 Supreme Court decision of Johannesson v West St Paul established the area of aeronautics as being inherently of a national concern. While the federal government retains residual powers, they were greatly constrained.

The power and authority of the federal government would increase with the Great Depression in the 1930s and the consequent rise of the welfare state. The provinces had jurisdiction over social policy, and this would become financially problematic. The provinces were limited to raising funds via direct taxes, notably income tax. This source of revenue is hardly a match for the needs of social demands during an economic depression. These tensions would take the provinces to the brink of bankruptcy, which would be the subject of the Rowell-Sirois Commission in 1937. As an outcome, areas such as unemployment insurance and pensions would transfer to the federal jurisdiction.

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Further, the federal government would provide grants to the provinces to help ease the financial burden but with strings attached: the provinces would have to spend the money as specified by the federal government.

Between the 1960s and the 1980s, the provinces would begin to reassert themselves. First, Québec would begin to chafe under the perceived paternalism of the federal government or executive federalism. The cost-sharing of social policies and conditional grants had influenced provincial priorities, giving the federal government influence in areas of provincial jurisdiction. With the resource boom, Western Canada began to be more assertive as well. In this context, the premiers began to unify in their deliberations with Ottawa. They began meeting ahead of the First Minister’s conferences, an annual event since 1950, to agree on a united front. This tension between the provincial and federal levels of governments would come to a head with the patriation of the Constitution in 1982, the failure of the Meech Lake and Charlottetown Accords, and the question of the role of Québec in Canada. However, despite the rhetoric of values, history, or culture, much of the tension in the Canadian federal structure was, and continues to be, about finances.

Much of the tension between the federal and provincial levels of the Canadian government surround the issue of finance. This is nothing new. Since Confederation there have been four structural financial issues between the provincial and federal governments. First, there has been an exponential growth in the social responsibilities of the provincial governments as the welfare state has developed. While the social jurisdiction of provinces was intended to protect cultural values in the provinces, it was not expected to occupy so much of the provincial coffers. Second, Canadian federalism is strained by the divergence in wealth between the provinces. The Maritimes, for example, stands in stark contrast to Ontario or Alberta in their ability to tax their respective populations. This is highly problematic when the provinces are the primary providers of social welfare. If education or health care were to be significantly different in Newfoundland and Labrador than in Alberta or Ontario, it would mean there were different classes of Canadians. Third, the ability to raise revenue through taxation is unequal between the provinces and the federal government. The federal government was not restricted in its means of revenue-raising. They could use both direct and indirect taxation. The provincial governments on the other hand were restricted to using direct taxation. This was amended during the patriation of the Constitution in 1982 whereby provinces could levy indirect taxes in the resource sector. Once the provincial governments were allowed to levy indirect taxes, they came into competition with the federal government to collect taxes from the same sources. Fourth, the division of taxation and spending policies between the federal and provincial governments poses a threat to fiscal policy. Policy or spending by one side could offset the intentions of policy or spending on the other. For example, if the federal government is pushing a stimulus package to reinvigorate the economy and the provincial governments raise taxes, the two policies could offset each other.

How have these financial tensions been addressed? Well, the short answer is they have not been addressed, but rather there have been attempts to do so. These tensions are still very much alive. The federal government has attempted to address the tension between provincial responsibilities and the means to pay for them with conditional grants. The federal government provided funding on the condition the money was used in specific ways. This funding was often included in a shared-cost program whereby the federal government would pay 50%, and the provinces would pay 50%. However, as previously mentioned, this allowed the federal government to intrude on the jurisdiction of the provinces. It also perverted the policy goals of the provinces as they may cater to federal goals in order to receive funding. In 1964, the federal government allowed provinces to opt-out and receive funding in kind due to criticism of conditional grants. Québec was the only province to take this offer. As the provinces began to unify and demand more from the federal government, conditional grants began to transform into unconditional grants or money that can be spent in any way the provinces wanted. These unconditional grants were folded into the equalization payments enshrined in the repatriated Constitution in 1982, albeit less formally operating since 1957. Equalization payments are unconditional transfers that are calculated according to each province’s ability to raise revenue. Essentially, provinces that fall below a set threshold are considered ‘have not’ provinces and those above this threshold are the ‘have’ provinces. This money tries to ensure that all Canadians have access to the same quality of social welfare, avoiding the creation of second-class citizens. In 2017-18, six provinces will receive equalization payments: Québec, Manitoba, Nova Scotia, New Brunswick, Ontario, and Prince Edward Island. Québec will receive the most at 11.081 billion dollars which is more than the other five recipients combined. Between 1977 and 1995, the federal government provided funding to the provinces via the Established Programs Financing. These funds were limited to the specific fields of post-secondary education and healthcare, but within these broad constraints, the money could be spent unconditionally. Further funding was made available for social services through the Canada Assistance Plan, whereby the federal government would pay 50% of the cost for welfare, daycare, child welfare services, and homemakers’ assistance. However, through the 1980s, the federal deficit grew while some provinces began to run budget surpluses, often due to resource wealth. In 1995, the CAP and EPF were combined into a single block of funding called the Canada Health and Social Transfer. This provided funding for health care, post-secondary education, social assistance and social services. Between 2000 and 2003, the federal, provincial, and territorial governments sought a means to strengthen the health system. In 2004, the CHST was split, 62% went into the Canada Health Transfer, and 38% went into the Canada Social Transfer. From 2011 to 2018, these funds would grow at 6% a year and would subsequently be adjusted according to a three-year moving average of nominal Gross Domestic Product. Other important financial innovations include the Canada Child Tax Benefit and the Universal Child Care Benefit.

Beneath these shifting means of funding are the substantive issues. The provinces have increasingly gained independence on how they spend federally allocated money within broad issue areas. While both sides squabble over how much money is required to meet their respective obligations, there is general goodwill towards addressing these issues. There is a commitment to ensuring that the ‘have not’ provinces are able to offer the same social safety net as the ‘have’ provinces through equalization. There are, of course, disagreements over the amounts and some regional hostility when the ‘have nots’ obstruct the policy of the ‘haves’; the pipeline controversy we introduced in learning activity 2 is a good example. In the end, the story of funding the jurisdictional framework established by the BNA, and later enshrined in the Constitution of 1982, is about how to make federalism work.

While being oddly named a Confederation, Canada has all the characteristics of a federal state, which was the intention from the outset. The BNA Act and later the repatriated Constitution set out the respective areas of jurisdiction between the federal and provincial governments, emphasizing the federal government having the upper hand through its residual powers. However, the balance of power and authority between the two levels of government has shifted over time. This has required new policy and procedures as well as accommodation. This is most evident when it comes to the issue of financing the jurisdictional structure created by the BNA Act. In the ongoing attempt to balance the financial burden both between the provincial/federal governments and between the ‘have’/’have not’ provinces, we see the struggle of a federal state that is trying to maintain a national narrative that is both prosperous and free with provincial narratives of distinct histories and culture. This is most true in Québec, but we will leave that debate for module 11, which deals with the role of Québec in Canada.