Canada: Returning to the Original Vision

Essay, Government, Politics, Role of Government, Randy Boldt

Many Canadians are aware of stories of how immigrants were originally attracted to Canada through the promise of free land.  The then Minister responsible for immigration, Clifford Sifton, had his staff spread out across central and eastern Europe promising free land on the Canadian Prairies through posters of beautiful wheatfields and lush harvests.  This was the basis on which immigrants from Germany and Eastern Europe were attracted to Canada; to take advantage of owning land, which many had only been renting in Europe. Moving to Canada allowed them to finally own a piece of land for themselves.

What is less known is that the original drive for immigrants was not about land, but about taxation. Canada was without an income tax for the first 50 years of its existence, from 1867 until 1918. The initial goal was to attract immigrants from the UK and the USA.  The first temporary income tax imposed in the UK was in 1798, to pay for the Napoleonic wars.  It became permanent in 1841 when it was introduced to cover the costs of the very expensive Crimean war.  The USA began its own income tax in 1861, to pay for the massive costs associated with the American Civil War. Although it was intended to be temporary, US income tax has never been repealed. Canada used its low tax policy to attract people and investment into our new country, and did so very successfully.

When Canada was formed in 1867, our population was only 3.4 million people. The government of the day had plans to grow to the west coast and populate the entire country.  The race was on, to develop Canada as a  country before the USA could make claims to the western regions (particularly BC).  In order to attract people to Canada, the Canadian government promoted Canada as a tax haven, a country with no income tax,  and a promise of no income tax in the future.  It was on this basis that millions of people moved from the British Isles and the USA into Canada.  This allowed for the country to grow to 8 million prior to WW1,only 40 years after Confederation.

Of course, the promise of low taxes had major limitations on the spending capacity of Canadian governments.  The Federal Government relied on tariffs, while the Provinces relied on natural resource revenue, and the cities relied on property taxes.  These limited levels of taxation meant that governments of the day were very small and very efficient.  It also explains the Canadian Constitution Act of 1867 (also called the British North America Act) which was the foundation of Canada.  Anyone reviewing this act can’t help but notice that the power allocated to the Central Government is very limited, and in fact, was “granted” very little spending authority by the founding colonies.  Most of the actual services, such as health, education, the environment, the justice system, housing, and even professional regulations, rest with the provinces.  This left the Central Government with limited responsibilities. As an example of how limited the role of the Federal Government was, it wasn’t until 1931 that we actually opened our first embassy – that being in Washington DC.  Up until then, all foreign embassies and consulates were operated by the British Government, from which Canadian officers were allowed to operate.

Unlike the USA, the Canadian Central government had no entitlement programs allocated to them under the BNA, which would drain its coffers.  There was no CPP, OAS, transfer payments, etc.  The Federal Government was limited to areas such as defence (shared with the UK), industrial regulations of railways, banking and money, diplomatic affairs, and tariffs. Other than defence, none of these other activities actually cost very much.  As such, the Federal Government could operate primarily on tariffs imposed on imported goods.

This was not done by mistake, but because the intent of the construction of Canada was to limit both the taxation authority of the Central Government, and its operational responsibilities. Keep in mind, Canada was started by the three colonies, all of whom wanted to ensure that they kept as much of their power as possible as provinces.  Unlike the USA, there was no centralized rebellion fighting against the British.  The aim was to maximize power for the provinces, not for the central government.   For the first 50 years of its existence, Canada was a tax-free jurisdiction, bent on attracting as many British, American and European immigrants as possible to free land, low taxation, limited government, and freedom of religion. This was a powerful and attractive message which attracted millions of people.  With small governments of the day, the Canadian Government had little interest in the day to day lives of ordinary citizens

All of this began to change in in 1917 when Canada needed to find a way to finance its participation in the Great War.  It was decided to impose a temporary income tax to pay for the war effort.  It was adopted by parliament only on the basis of it lasting long enough to pay for the massive cost of Canada’s participation in the war.

Prior to that, there was no encroachment by the federal government into the areas where the provinces had jurisdiction.  How could they; the central government had no money to interfere?  Their revenues were so limited that all they could do was manage their own responsibilities.  This left the provinces with strong powers, able to do things like impose interprovincial trade restrictions; set up local monopolies on things like brewing beer, selling agricultural products, issuing securities, selling insurance; bidding on government contracts, and perhaps most importantly, limiting the ability of regulated trades and professionals from working across Canada.  The legacy of many, if not most of these provincial powers, remains intact to this day.

The “Repatriation” of the Constitution in 1982, brought in the Charter of Rights and Freedoms, but it did nothing to tackle the thorny issues relating to interprovincial trade, regulations, and licensing of professionals (there is still minimal federal oversight of 400 or so professional bodies in Canada).  There were no change in responsibilities to any level of government.  (Note, prior to 1982, the BNA was amended 19 times, from 1871 to 1975.  Those of us old enough to be around in 1982 remember that one of the main arguments in favour of the for “repatriation” of the Constitution was that Canada and Canadians alone would be responsible for amending any changes to the Constitution.  This would make it easier to amend, as no longer would we need to seek final approval from the British Government.  Since the act was passed by the British Parliament in 1982, there have been no changes made in its 40-ear history, with many political scientists pointing to the unwieldiness of the Amending Formula as the reason why).

After WW1, it seems like the MPs of the day enjoyed their new source of revenues, and decided to reverse their promise of a temporary income tax  and made it permanent.  Then a decade after WW1 ended, along comes the Great Recession, which required substantial flow of funds from the Federal Government to help out those people and provinces who were badly suffering.  This began the process of transfer payments to support entitlement programs run by the provinces.  Then shortly after came WW2, which saw massive spending by Canada, even on a greater level than in the earlier war.  Again, this solidified the relatively recently introduced income tax even more.

But the British North America Act limited what the Federal Government could do.  From 1940 until 1975, the BNA was amended several times to enable the Federal Government to encroach into areas operated by the Provincial Governments.  The first was in 1940 when it was amended to allow for the introduction of a federally run Unemployment Insurance Program, as both insurance and employment were provincial jurisdiction.  The amendment allowed the Federal Government to provide insurance to protect those who became unemployed.   The second was the introduction of the Old Age Pension, and the introduction of Equalization payments both in 1957.  Next was the introduction of a Canadian Medicare program in 1968.  Some provinces were already offering provincial health care programs, but the Federal Government wanted a national program.  Although the BNA was amended to allow for such an act, the Federal Government decided to partially fund Provincial programs, as well as provide a standardization under which all provinces were obligated to operate, rather than offer a national program which we see in most European countries.

With almost every subsequent Liberal government, there are further and further attempts to encroach into provincial Jurisdiction.  This can be in terms of taxation on natural resources, additions to health care coverage, childcare, education, professional regulations, environmental protection, etc.  They are able to do this, as through the massive collection of taxes, they hold the purse strings.  And the appetite for new entitlement programs is never ending.  With each Liberal government, there is less and less personal responsibility, more and more government regulation and restrictions, and less of the low taxation and freedoms that were the basis on which this country was founded.

In comparison, the USA has a very strong founding constitution, which by any standards, is a document, that has led to a robust democracy lasting nearly 300 years.  Regardless of whether you like or dislike current American politics, it is impossible not to marvel at the care, attention, and vision of the constitution framers.  To this day, it is the backbone of the largest economy in the world.  Canada’s efforts at framing a constitution, both in the 1867 BNA act and in the 1982 Constitution Act, pale in comparison.  Rather than being inspirational documents, they are clearly written with committee style compromises.   The BNA act was written to make Canada an attractive jurisdiction with small efficient governments, a strong legislative and legal system, and limited taxation.

Over the last four or five decades, we have become the quintessential “Nanny State,” where personal responsibility has been abandoned in favour of government rules, protection, and enforcement.  Our taxes are markedly higher than in the USA or even in the UK, and the role of government is generally much greater.  The appetite by the Federal Liberals to interfere in the lives of average Canadians is unquenchable.  They show no sign of letting up, and in fact, based on recent budgets, they are accelerating their involvement in the day-to-day lives of Canadians; be it families, regulations, social media, mobility, or incomes.

While most Canadians are proud of our liberal democracy, many believe in personal responsibility and that government’s power needs to be held in check.  Both the UK and the USA have far more checks and balances than we do to prevent governments from getting excessively large as well as ensuring more accountability.  In this regards, two recent things illustrate this point.  One is that from 2015 when the Liberals took over from the Harper  Conservatives, they proudly boast that they have spent $100 billion fighting so-called greenhouse gases (GHG) – yet other than reductions caused by the Covid Pandemic, there has been absolutely no headway made in reducing GHG, which actually rose slightly from 2015 to 2019.  Second was the introduction of Canada Infrastructure Bank in 2017. They have a staff of 46 people, an appropriation of $35 billion, but in five years, they have yet to actually complete a single transaction, yet paid staff an average bonus of $73,000 last year in addition to their wages.  For the most part, the government has not been held to task in any meaningful way on either of these outcomes, which it should be by both the media and the opposition in the House.

On a broader scale the size of the Federal Government is exploding with the size of the federal civil service expanding by 25% since 2015. Program spending is up by 36% between 2015 and 2020.

Is there an alternative to excessive federalization?

In Canada, unlike the USA, we seldom discuss what the founders of the country expected.  It might be time to re-examine the basis on which we were founded, and see if there are any lessons we could learn.

As mentioned, the power dynamics changed when income tax was introduced, and it gave the Federal Government massive revenues.  Once the wars were paid for, the central government benefited from large new/excess revenues, which it decided to spend on entitlement programs, which were constitutionally the responsibility of the provinces.  One obvious alternative is that perhaps we could look at actually changing how income tax is collected and who has responsibility for collecting and spending it.  If we look at a European model, where the individual countries collect the taxes, and then provide a portion to the EU, this may open up some interesting opportunities for Canada.  Rather than ensuring that the Federal Government has all the revenues, and then insisting that the provinces agree to their new entitlement wishes, the founders wanted the provinces to have more power.  They never anticipated the introduction of Income Tax, and the power that the Federal Government wields because of it.

What would this model look like with stronger provinces and a weaker Federal Government, as was the basis of our foundation?  The roles of the provinces, as established in the BNA act, would remain the same.  It would simply be that the fiscal resources to undertake modern government services would be changed.  The Federal Government would effectively be collecting the money on behalf of the provinces.  Once these taxes were collected, then it would be up to an agreed formula how much was transferred to the Federal Government to support policy areas under its jurisdiction in the constitution: foreign affair, military, federal courts, and interprovincial trade, etc.  Federal transfer payments, i.e. the health and social transfer plus equalization would be replaced with transfers of federal taxes – GST and income taxes. John Ibbitson of the Globe and Mail, who is no big fan of the constant incursion of the federal government into provincial affairs favours this idea (see Ottawa should transfer GST to provinces and be done with transfers to the provinces). I am suggesting we go even further, and transfer income tax to the provinces, but like GST, the Federal Government can simply be the collection agency, with the money actually being the property of the provinces.

Canadian Citizens would be guaranteed mobility rights within Canada, and the provinces would be encouraged to allow the portability of CPP, health, and employment benefits.  This is the original design for Canada, and generally, provinces work well together.  In this scenario, the revenue of the individual provinces would be more in keeping with their areas of responsibility as defined in the founding of our country.

This resurrected view of Canada would allow for much greater innovation in services, and likely at substantially reduced costs.  It would also allow each province to develop its recourses as it sees fit, with limited intervention by the central government.  As we see in the EU, this change would foster greater competition between the provinces.  This competition would be for investment, human capital, educational institutions, resource development, arts and entertainment, and more.  This competition alone would add greatly to the Canadian fabric of society, where excellence would be, once again be valued, something that is almost lost under a heavy-handed Federal Government, who is more interested in standardised outcomes than quality of services.

The provinces would ensure that the Government of Canada had enough resources to fund its limited role, as defined in the BNA.  This would be national defence, foreign affairs, borders and international security, trade and tariffs, citizenship, the criminal code, with the federal courts and the Supreme Court remaining the responsibilty of the central government. It would also be responsible for things such as national data banks for criminality, regulating The Bank of Canada (nd the currency, aviation, railways, licensing drugs, and vehicle regulations.

The provinces would be responsible for health, education, social services, insurance, retirement programs, employment standards, policing, criminal courts and the administration of justice, roads and highways, building codes and inspections, immigration, pensions, employment insurance,  environmental protections, etc.   In short, most of the expensive government programs would be provincial.

The value of such a change is that it recognizes that in addition to Quebec, the other provinces or regions are also distinct.  With the enhanced taxations capacity, the provinces would find it much easier to operate without interference from the Nanny State.

A less divisive model can save the country – could this ever come about?

With each passing year, we see more and more divisions within Canadian society.  The current Liberal Government has a clear agenda to exploit and exacerbate these divisions.  The current government believes that by dividing us into smaller and smaller identifiable groups, it can pander to each group more successfully.  The consequences is that the current Liberal government is creating divisions within the country which are leading to growing successionist movements in the west as well as in Quebec.  It is not unthinkable for Quebec and Alberta and Saskatchewan together to seek to leave Canada.  Both groups would want to remain associated with Canada, but both want to remove the shackles of the Federal Government.  Rather than resisting this, perhaps Canadians need to embrace it.  Let Quebec be a distinct society within Canada, and let each province be likewise distinct.  Rather than having Liberal governments attempting to rewrite the BNA  every time they get elected seeking more and more power, perhaps it is time we appreciated what our founding fathers believed in, and adhere to a limited role for the Federal Government without the ever-creeping hand of more and more power.

 

Randy Boldt is a senior fellow at the Frontier Centre for Public Policy