CHAPTER VII

The Federal Spending Power

1. Although one level of government cannot legislate in respect of matters over which the other has exclusive legislative authority, the so­called spending power permits one level of government to expend its funds in respect of matters over which the other has exclusive legislative authority. It would seem that each level of government enjoys such a spending power, although neither section 91 nor section 92 of the Constitution Act, 1867 contains any explicit reference to it in the distribution of legislative and executive responsibilities.

The Proposal

2. The 1987 Constitutional Accord proposes to regulate the future exercise of the federal spending power as follows:

"106.A (1) The Government of Canada shall provide reasonable compensation to the government of a province that chooses not to participate in a national shared­cost program that is established by the Government of Canada after the coming into force of this section in an area of exclusive provincial jurisdiction, if the province carries on a program or initiative that is compatible with the national objectives.

(2) Nothing in this section extends the legislative powers of the Parliament of Canada or the legislatures of the provinces."

3. Clearly, the most significant aspect of proposed section 106A is the fact that the government of Canada will be obligated to provide reasonable compensation to the government of a province "that chooses not to participate in a national shared­cost program" if the province carries on a program or initiative that is "compatible with the national objectives".

Policy Considerations

4. The principal issues raised in the submissions to our Joint Committee are:

Present Shared­Cost Programs

5. The federal spending power is at present used in a variety of different ways. Many expenditures are now governed by the Federal­Provincial Fiscal Amendments and Federal Post­Secondary Education and Health Contributions Act, 1977. Part I of that Act is concerned with fiscal equalization payments, a matter also addressed by section 36 of the Constitution Act, 1982. These payments are made to the provinces without conditions being attached to the payments. Part II of the Act deals with fiscal stabilization payments, which, again, are unconditional payments to the provinces. Part IV is concerned with another type of direct payment to the provinces known as provincial personal income tax revenue guarantee payments.

6. Part VI of the Act deals with the major existing national shared­cost programs. These established programs are the post­secondary education financing program and the insured health services program covered by the Canada Health Act. Once again, payments authorized by this Act are paid to the provinces. Some of these payments are subject to the satisfaction of certain criteria and conditions. Others (as in the case of post­secondary education) are made without conditions.

7. The third major national shared­cost is governed by the Canada Assistance Plan or CAP. CAP replaced four conditional grant programs under the Old Age Assistance Act, the Blind Persons Act, the Disabled Persons Act and the Unemployment Assistance Act.

8. While the education, health and assistance programs are by far the largest national shared­cost programs, there are numerous other such programs, including programs concerning highways, national parks, retraining, young offenders, etc.

9. In addition to these national shared­cost programs, there are a plethora of programs that are not shared­cost programs. Perhaps the best known of these programs is the family allowances program under the Family Allowances Act, 1973. Payments under that program are made not to provincial governments but to those individuals entitled to payments under the terms of the statute. The provinces establish the level of payments within the overall limit of the amount of money allocated by the federal government. An example of another program dependent on the federal spending power is the Canada Council grants program, under which payments can be made directly to individuals and organizations who satisfy the requirements established by the Canada Council.

10. Each of the programs described above results in payments being made in areas that are under exclusive provincial legislative jurisdiction. Yet, there would appear to be no question about the validity of the legislation establishing these programs.

Explicit Recognition of the Federal Spending Power

11. Many witnesses sought to highlight the fact that proposed section 106A will, for the first time, constitutionally "recognize" the federal spending power. This was to be seen as a positive feature of the section.

12. For almost the first fifty years of Canada's history, the existence, and the extent, of any spending power as we know it today was not of great concern. The issue came to the fore during the Depression, when Parliament sought to establish an unemployment insurance scheme for the country. The provinces challenged the federal scheme on the ground that an insurance scheme was a matter within the exclusive legislative jurisdiction of the provinces under section 92.13 of the Constitution Act, 1867 ("Property and Civil Rights in the Province"). The federal government argued that the legislation was valid federal legislation on the ground, inter alia, that the proposed scheme constituted an expenditure of federal funds and, therefore, did not trench on the provinces' legislative authority. The Supreme Court of Canada, in Reference Re: Employment and Social Insurance Act, [1936], SCR 426 per Kerwin J., p. 457, took the view that "generosity is not unconstitutional";

Parliament, by properly framed legislation may raise money by taxation and dispose of its public property in any matter that it sees fit. As the latter point, it is evident that the Dominion may grant sums of money to individuals or organizations and that the gift may be accomplished by such restrictions and conditions as Parliament may see fit to enact. It would then be open to the proposed receipt to decline the gift or to accept it subject to such conditions.

13. Although the Judicial Committee of the Privy Council ruled that the scheme was unconstitutional, it recognized, for the first time, the existence of a federal spending power. The federal unemployment insurance scheme was held to be invalid because it constituted a legislative insurance scheme, insurance being a matter of exclusive provincial jurisdiction within section 92.13 of the Constitution Act, 1867. Implicit in the judgment of the Judicial Committee is the notion that a simple expenditure of federal funds in an area over which the provinces have exclusive legislative jurisdiction would be valid. The Judicial Committee of the Privy Council stated the general principle in this way at l 19371 1 DLR at 687:

That the Dominion may impose taxation for the purpose of creating a fund for special purposes and may apply that fund for making contributions in the public interest to individuals, corporations or public authorities could not as a general proposition be denied...But assuming that the Dominion has collected by means of taxation a fund, it by no means follows that any legislation which disposes of it is necessarily within Dominion competence.

It may still be legislation affecting classes of subjects enumerated in s.92, and, if so, would be ultra vires. In other words, Dominion legislation, even though it deals with Dominion property, may yet be so framed as to invade civil rights within the Provinces, or encroach upon the classes of subjects which are reserved to provincial competence...If on the true view of the legislation it is found that in reality in pith and substance the legislation invades civil rights within the Province or in respect of other classes of subjects otherwise encroaches upon the provincial field, the legislation will <>be invalid.

14. Since 1937, there have been only a handful of cases in which there has challenge to the exercise of the federal spending power, and in none of the cases h challenge been brought by a provincial government. (The reason for this may well be that a successful challenge to a federal program would not only deprive the province of a desirable sum of money but judicial limitations imposed on the federal spending power may result in parallel limitations on the provincial spending power as well.) The challenges -- none of which has been successful -- have been to the National Health Act, the Mothers' Allowances Act, the Canada Health Act, and the Canada Assistance Plan. The conclusions of the courts in theses cases may be summarized as follows:

  1. There is a federal spending power.

  2. The federal spending power is most likely based on ss. 91(1A) and 102 of the Constitution Act, 1867. Other suggested bases for this power include the peace, order and good government clause and the royal prerogative (see LaForest, The Allocation of the Taxing Power Under the Canadian Constitution (2d ed. May, 1981, at 46­47)

  3. The federal spending power supports the outright grants of federal funds to individuals, organizations and governments.

  4. However, the federal spending power is not necessarily unlimited. "If on the true view of the legislation it is found that in reality in pith and in substance the legislation invades civil rights within the Province, or in respect of other classes of subjects otherwise encroaches upon the provincial field, the legislation will be invalid": Reference Re: Employment and Social Insurance Act, supra.

  5. There is nothing in the above statement from the Unemployment Insurance Reference to suggest that conditional grants would per se constitute an invasion of a provincial field. Indeed, Rinfret J. in the decision of the Supreme Court of Canada in the Unemployment Insurance Reference suggested that grants to individuals or organizations may be made conditional.

  6. What is not perfectly clear is whether grants to provinces may be made conditional.

    15. Accordingly, it would appear to be inappropriate to justify proposed section 106A solely on the ground that it constitutionally sanctions the federal spending power. Section 36 of the Constitution Act, 1982, and not proposed section 106A, has the "honour" of first expressly recognizing the federal spending power and even it was foreshadowed to some extent by section 118 of the Constitution Act, 1867 in respect of equalization payments. Second, Canadian courts in the last 30 years have shown little or no hesitation in "recognizing" the federal spending power, even in the case of conditional payments in areas of exclusive provincial jurisdiction. Third, it is possible that the limited recognition of the federal spending power in proposed section 106A could be interpreted as restricting the federal spending power to these kinds of program covered by the section although in our view this is not a supportable position. Maître Yves Fortier, Q.C., gave his opinion on this point as follows:

    I arrive at the conclusion that when a federal initiative does not meet any one of the five conditions identified in the Langevin Accord, the federal spending power remains intact. The federal government can therefore spend, as payments or otherwise, for the benefit of individuals, governments or even entire regions of the country in federal or provincial areas. The only limit to its power is inherent in the federalist principle and has existed since 1867: the federal government cannot use the spending power to invade and regulate areas that fall under exclusive jurisdiction.
    (Fortier,12:85)

    The Two Major Criticisms

    16. At the same time, it must be recognized, that the federal spending power has to date, not been unquestionably accepted as a feature of federalism. While lower courts have dismissed challenges to the federal spending power in areas of exclusive provincial legislative jurisdiction, the Supreme Court of Canada has not yet authoritatively ruled on this issue. Thus, there is some question whether the almost unqualified judicial support of the federal spending power has so far received will withstand the scrutiny of the Supreme Court. To the extent that proposed section 106A obviates the need for judicial sanctioning of the federal spending power in respect of national shared­cost programs in areas of exclusive provincial jurisdiction, it will immunize such programs from constitutional challenge, and will eliminate debate between the levels of government about the validity of the federal spending power.

    17. We return, then, to the two major criticisms that were levelled at proposed section 106A -- the uncertainty of its terms and the consequences flowing from such uncertainty and the provision's potential to result in balkanization of major social and other programs.

    (a) Uncertainty of terms

    18. Dean John Whyte of Queen's Law School told us:

    The uncertainty about when the right to compensation will apply and the conditions under which it will apply seems to me to lead to a very strong incentive to the federal level not to engage in certain forms of spending for social programs. It has a disincentive effect because two things cannot be known: first, what the cost by way of compensation is going to be--that is, compensation without political credit or political accountability--and second, the extent to which the aims of the project can be achieved in the first place, since there is no way of knowing how many provinces, once it is announced, will choose to pursue their own initiatives that are consonant with objectives.
    (Whyte,10:62, 63)

    19. On the other hand, Professor Al Johnson, a former Deputy Minister both in Saskatchewan and in Ottawa, pointed out that unpleasant uncertainties can arise at the provincial level when Ottawa is in the driver's seat. He recalled his days as Deputy Minister of Finance in Saskatchewan:

    The way the shared­cost agreements worked at that time was the Parliament of Canada passed legislation saying we think X, Y, Z would be a good national program and under that legislation, the Government of Canada and the provincial governments, entered into agreements. The agreements by and large specified the national standards or the conditions--they were called conditions then. "Conditions" became an opprobrious word, and we moved to "standards".

    This approach manifestly not only gave to Parliament the power to act arbitrarily, but it created specific situations which were offensive. When you read in the newspaper in the morning that ... the old­age pensions were being raised by $5, of which you were going to find $2.50 and your budget had already been brought down, it jarred you.
    (Johnson,11:40)

    20. Professor Gérald Beaudoin of the University of Ottawa Law School told us that terms employed in the section dealing with national shared­cost programs were unlikely to give rise to great difficulty because the concepts such as "compatibility" and "initiative" were already known to the law. He emphasized that, in any event, the section would only come into play in the limited category of future programs that have the following characteristics:

    Only if all four of these conditions are satisfied will the section be triggered.

    21. Accordingly, the proposed section 106A will have no impact on established national shared­cost programs, nor will the section affect non­shared­cost programs, such as the Family Allowances program. If the government of Canada establishes a regional, rather than a national program, proposed section 106A will not come into play. Proposed section 106A will not apply to programs established in areas of shared jurisdiction, such as agriculture, immigration and perhaps education.

    22. Senator Lowell Murray suggested that undue emphasis should not be put on the phrase "the national objectives". In his opinion, the concepts of national objectives and national standards, conditions or criteria were more or less interchangeable. Senator Murray suggested that the phrase "the national objectives" was used so as to ensure that comparisons between the national program and provincial initiatives or programs would focus on the aims of the programs rather than on the manner in which a program is administered.

    23. The possible ambiguities of proposed section 106A, along with the possible ambiguities in other provisions of the Constitution Amendment, 1987, were also rationalized as a feature of constitution making. It was suggested, for example, that the provisions of the Meech Lake Accord were no more ambiguous than the provisions of the Constitution Act, 1867 (e.g. "peace, order and good government") or the Constitution Act, 1982 (e.g. "demonstrably justifiable in a free and democratic society") .

    24. On the other hand, those expressing a concern about proposed section 106A argued that the section was dangerously ambiguous, that too many questions were being left to be answered by the courts. They suggested that there was no obvious meaning to be ascribed to many of the terms employed in proposed section 106A, such as "reasonable compensation", "initiative", "compatible" and "the national objection

    25. There is no doubt that the meaning of many of the terms in the section will have to await judicial interpretation. The phrase "reasonable compensation", for example,<> could be interpreted as meaning compensation commensurate with the proportion of the population of opting­out provinces to the population of Canada as a whole. Or the reasonableness of the compensation may be commensurate with the compatibility of a provincial program or initiative to the national objectives. Yet, a third possible interpretation is that the compensation to be provided can in no case exceed the size of the provincial expenditures on the compatible provincial program or initiative. No doubt some ambiguity exists, but it must be acknowledged that the same expression "reasonable compensation" is already used in section 40 of the Constitution Act, 1982, where it is also undefined.

    26. While the words "compatible" and "initiative" do, on occasion, appear in federal and provincial statutes others witnesses pointed out that, these terms have not, in any real sense, been judicially interpreted. In any event the statutory context would be different from the context of proposed section 106A. The fact that these words might appear in federal or provincial statutes would not itself justify their use in a constitutional document if the ambiguity of these terms is likely to result in federal-provincial conflict.

    27. As stated above, Senator Murray suggested that the terms "objectives", "standards", "conditions" and "criteria" are more or less interchangeable, but we note that section 95B(2), refers to both "standards" and "objectives", which suggests that these concepts are intended to be different. That "objectives", "conditions" and "criteria" are not likely interchangeable is also suggested by the Canada Health Act, which governs an established national shared­cost program. That Act contains a preamble, an objective clause and a purpose clause. The preamble to the Act sets the historical stage for the legislation; the "objective" clause states that the "primary objective of Canadian health care policy...is to protect, promote and restore the physical and mental well­being of residents of Canada and to facilitate reasonable access to health services without financial or other barriers". The "purpose" clause states that the purpose of the Act is "to establish criteria and conditions that must be met before full payment may be made". The Canada Health Act then refers to five "criteria": public administration, comprehensiveness, universality, portability and accessibility. Properly worded these broad criteria would likely qualify as "national objectives" within the meaning of the proposed amendment. On the other hand, the Act also requires the recognition of federal contributions and payments in public documents. This is unlikely to qualify as a "national objective"

    (b) Balkanization of social programs?

    28. Professor Al Johnson objected to the proposed amendment because, in his view, national shared­cost programs that satisfy the conditions of portability and universality are an important element in binding Canada together.

    Ms. Jewett: So your main concern would be that the variations in the programs would be such as to destroy, say, the principle of universality?

    Prof. Johnson: Destroy the principle of universality would be one illustration. Even more important, in my judgement, would be to destroy the sense of Canadians that they were entitled to the same kinds of services wherever they went in Canada.

    I worry about a country in which we do not really have much of a common memory. I have a regional memory from Saskatchewan. I can give my little lecture about hating<> the east, hating banks, hating railway companies, etc., like anybody else in the west can do -- I have a regional memory. We have different cultural memories, we have different linguistic memories, we have different memories of heritage. That is the nature of the country.

    ... the vehicles by which, we develop a common conciousness are very, very precious indeed. They are difficult to find in a country like ours, and they are precious when we find them. And we have found an instrument here, one of the instruments, for saying to Canadians, yes, we all have that. We know that. It is an essential public service we all enjoy, and we can move in this country and still enjoy it.
    (Johnson,11:47)

    29. Ms. Havi Echenberg, Executive Director of the National Anti­Poverty Organization, agreed that some regional diversity in social programs was acceptable but that Parliament should have the authority to impose minimum national stands.

    30. Other witnesses noted that the amendment would leave it open to the federal government to define "national objectives" in such a way as to achieve the desired results, and that, in any event, as a practical matter new programs would either be supported by federal­provincial consensus or they would not proceed at all. For example, Gordon Robertson, a former Clerk of the Privy Council, was skeptical about future recourse to the spending power because of economic realities:

    I am skeptical about whether the spending power is going to have the importance or will have the importance in the future it has had in the past.
    (Robertson,3:77)

    Conclusions

    31. We do not share the doom and gloom prophesies of the opponents of proposed section 106A. The drafting of the section may not be a picture of perfection but this was likely one of the areas where some ambiguity was the price of agreement. We are not prepared to reject the section or call for changes in its language simply on the ground that some of the language is ambiguous. We believe that the courts will be able to work out the interplay of concepts in the concrete fact situations that come before them.

    32. The Committee further believes that proposed section 106A constitutes a reasonable accommodation of federal and provincial concerns. On the one hand, the section clearly recognizes that there are advantages in decentralization. The history of the development by the provinces of many of Canada's social programs underlines the importance of provincial experimentation. The present health care system has its origins in the health care system first established in Saskatchewan over 40 years ago. It must be recognized that Canadian society is not monolithic in nature. What may be needed in Ontario is probably not exactly what is needed in New Brunswick or British Columbia.

    33. At the same time, we realize that proposed section 106A has the potential for creating elements of a checkerboard of social programs across Canada. In our opinion, a checkerboard Canada, insofar as the details of national shared­cost programs are concerned, can be countenanced and, to some extent, should even be encouraged: all provinces and all Canadians may stand to benefit from local experimentation. What should not be countenanced is a checkerboard Canada on fundamental aspects of national shared­cost programs. But we do not believe that proposed section 106A necessitates the acceptance of this type of checker-boarding. Otherwise the very concept of "national objectives" included in that section would be meaningless.

    34. We agree that the phrase "the national objectives" does not equate with national standards. Given the language of proposed section 95B(2), it would be impossible to equate objectives with standards. Nor can it be said that "the national objectives" can be equated with conditions or criteria, as exemplified by the Canada Health Act. But that does not end the matter.

    35. What opponents of proposed section 106A have too often lost sight of is the fact that the section is concerned with national shared­cost programs. There will inevitably be federal­provincial negotiations leading up to the establishment of any such program. Such negotiations are as likely in future to result in a reasonable compromise on such programs as has been the case in the past. Thus, standards, conditions or criteria could well form part of the program approved by all the governments.

    36. Section 106A provides a new bottle for an old problem. Negotiations and compromises by both the federal and provincial governments will be necessary for the establishment of any new national shared­cost programs given the present economic conditions in Canada. The federal government will retain most, if not all, of its bargaining chips in such negotiations. Without a doubt, the provincial governments have gained a constitutional right to opt­out of new programs with reasonable compensation. But this right, we believe, is justified since the programs envisaged by proposed section 106A will be in areas of exclusive provincial jurisdiction. If governments take their obligations seriously, Canadians in various parts of the country will be guaranteed the right to programs which may differ in their particulars, but which all strive to achieve the same goal.


    Last HTML revision: 12 May, 1996

    William F. Maton