THE SPENDING POWER:
SCOPE AND LIMITATIONS
Law and Government Division
OF THE SPENDING POWER
RE: CANADA ASSISTANCE PLAN (B.C.)
SCOPE AND LIMITATIONS
The concept of
a federal "spending power" is a relatively recent constitutional
development. It arises from federal government initiatives immediately
following the Second World War, and is closely linked with efforts to
centralize the taxing power.(1)
By providing program funds for a variety of health, education and social
development programs, either unilaterally or in co-operation with the
provinces, the federal government substantially altered Canadas
approach to issues that were essentially within provincial jurisdiction.
The spending power thus
became the main lever of federal influence in fields that are legislatively
within provincial jurisdiction, such as health care, education, welfare,
manpower training and regional development. By making financial contributions
to specified provincial programs, the federal government could influence
provincial policies and program standards.
Until the 1960s, most of
the provinces acquiesced in this expanded federal influence, but Quebec
both raised objections and refused to accept certain contributions. With
the election of a new provincial government in 1960, Quebecs objections
crystallized, and during the early 60s other provinces also began
to find the increased federal role objectionable. Accordingly, in 1964
the provinces were given the right to "opt out" of programs
financed through the spending power with income tax abatements as compensation.
Only Quebec took advantage of this provision.(2)
In June 1969, the federal
government presented to a Federal-Provincial First Ministers Conference
the paper "Federal-Provincial Grants and the Spending Power of Parliament,"
which, for the first time, dealt with the evolving nature of the "spending
Ordinarily, one thinks
of the "spending power" of governments simply in terms of
the spending they do on particular programmes, under the authority
of legislation passed by their legislative bodies. Constitutionally,
however, the term "spending power" has come to have a specialized
meaning in Canada: it means the power of Parliament to make payments
to people or institutions or governments for purposes on which it
[Parliament] does not necessarily have the power to legislate.(3)
The federal paper noted
that there was some disagreement among constitutional lawyers as to the
limits of the spending power. Some, such as Bora Laskin and G.V. La Forest,(4)
argued that Parliament could make conditional or unconditional grants
for any purpose, provided that the program did not amount to legislation
or regulation within provincial jurisdiction. Others, including Quebecs
Tremblay Commission, argued that Parliament had no power to make grants
of any kind in areas within exclusive provincial jurisdiction. Yet others
seemed to suggest that unconditional, but not conditional, grants could
properly be made in areas within provincial jurisdiction.
The provincial governments
had argued that the Government and Parliament of Canada ought not to be
able to initiate cost-shared programs without obtaining a provincial consensus,
because the operation of such programs fell to the provinces; that cost-shared
programs forced the provinces to alter their spending and taxing priorities;
and that the citizens of provinces that "opted out" were subjected
to "taxation without benefit."
The federal government,
on the other hand, stressed the importance of the spending power in maintaining
equal opportunity for individual Canadians (e.g., family allowances);
in equalizing provincial public services (e.g., health, welfare, education
and roads); in regional economic development; and in carrying out programs
of national importance, such as Expo 67.
In the result, the federal
government "tentatively advanced" certain principles: (1) the
federal spending power should be entrenched in the Constitution; (2) Parliament
should have an unrestricted power to make unconditional grants to provincial
governments for the purpose of supporting their programs and public services;
and (3) Parliaments power to initiate cost-shared programs involving
conditional grants in areas within provincial jurisdiction should require
both a broad national consensus and per capita reimbursement of
the people (not the government) of a province whose legislature decided
not to participate.
The debate over the spending
power continued on a muted but steady level through various constitutional
negotiations in the 1970s and the 1980s. In 1986, limitations on the federal
spending power became one of Quebecs five conditions for support
of the Constitution Act, 1982. As a result, the Meech Lake Accord
of 1987 would have added a new section, section 106A, to the Constitution,
immediately after the federal power to appropriate funds. Section 106A
would have provided for reasonable compensation to the government of any
province that chose not to participate in a cost-shared program in an
areas of exclusive provincial jurisdiction, provided that the province
carried on a program compatible with the national objectives.
The spending power is not
difficult to understand as a fiscal mechanism, but has always been controversial
as a constitutional concept. E.A. Dreidger has suggested that the "spending
power" first emerged in a constitutional context with the publication
of the federal paper at the June 1969, Federal-Provincial Constitutional
Conference. As recently as 1981, however, Dreidger was "unable to
find the expression spending power in any Canadian judicial
decision or statute."(5)
Arguably, the "spending power" is simply the expansion of the
taxing power to the point that the federal government has sufficient revenues
to underwrite national programs, in addition to fulfilling its more specific
Peter Hogg agrees that the
spending power is nowhere explicit in the Constitution Act, 1867,
but says it must be inferred from the powers to levy taxes (section 91(3));
to legislate in relation to "public property" (section 91(1A));
and to appropriate federal funds (section 196).(6)
The nature of the spending
power is as disputed as its origins. Those who, like Dreidger, question
the independent constitutional existence of the spending power note that
the federal government needs no additional constitutional authority to
disperse its money as it wishes, so long as it does not effectively regulate
areas within provincial jurisdiction. Dreidger notes that "the Salvation
Army has no power to make laws respecting hospitals, but it can and does
establish and operate such hospitals."(7)
Presumably, it can also make grants to hospitals, on conditions, provided
that it does not interfere with their provincial regulation.
The provinces are always
free to refuse to enter into a cost-shared program. Indeed, in 1975 no
province accepted the federal government proposal that provincial governments
extend social services to Indians, with the federal government covering
100% of the cost for services to on-reserve Indians and sharing with the
provinces the costs for services to off-reserve Indians. Additionally,
there seems to be no technical reason why the spending power should be
discussed only in terms of the federal government. Theoretically, the
10 provinces could band together and adopt a uniform position on a field
within federal jurisdiction (for example, fisheries), and then offer to
cost-share a common program if the federal government would administer
it. Similarly, although international trade is exclusively within federal
jurisdiction, many provinces maintain at least one trade office abroad.
From one viewpoint, therefore,
the federal spending power is simply the ability of the federal government
to generate revenue, and therefore spend money, above and beyond the amounts
required to fulfil its specific constitutional responsibilities.
On the other hand, others
consider "the magnitude and nature of intergovernmental cash and
tax transfers [to be] essentially de facto redistributions of power
under the Constitution."(8)
This view of the spending power as an independent constitutional concept
was well summarized in a recent court decision:
Shortly put, the position
of the appellants is that Canada, by the powers of its purse, has
unconstitutionally coerced the provinces to participate in certain
programmes proposed by Canada, with standards and criteria established
by Canada, although such programmes lie exclusively within the jurisdiction
of the provinces...
In sum, the appellants
argument is that Parliament is indirectly legislating in respect of
matters within provincial jurisdictions. It argues that Parliament
cannot directly prohibit extra-billing (over and above health care
payments) by doctors, so it cannot achieve the same end by the conditions
attached to funding.(9)
Regardless of the constitutional
status of the spending power, most commentators agree that its use has
both potential advantages and disadvantages:
ON THE SPENDING POWER
Regardless of how the constitutional
status of the spending power is perceived, there are definitely limitations
on the way in which the money is raised and the way in which it is spent.
Despite the general taxing
powers of the federal government, tax legislation could be questioned
if it were explicitly combined with a spending program outside federal
jurisdiction. For example, environmental issues are largely within provincial
jurisdiction. The federal government can nonetheless spend money on environmental
programs that affect local concerns within the provinces. Federal government
legislation implementing a tax for the express purpose of enforcing or
funding a local environmental objective might well be struck down, however.
Similarly, a federal tax surcharge for the specific purpose of establishing
a scholarship fund would be problematic.
All taxation ultimately
involves regulation: "to some extent [taxation] interposes an
economic impediment to the activity taxed as compared with others
not taxed." Lord Atkins oft repeated statement draws attention
to that fact: it underlines that there must be a dividing line between
regulatory effects created by taxation which are tolerable, and regulatory
effects which are not tolerable.
What is the dividing
line? Ultimately, that question falls to be decided in this way: if
a taxing statute effects, in addition to taxation, clearly discernible
regulatory results, the validity of the statute depends on whether
the subject matter of the regulation falls within, or is necessarily
incidental to, the regulatory powers of the jurisdiction levying the
Even when money is raised
through a proper exercise of the federal taxing power, there are limits
on how it can be used. The federal government can spend or grant its money
as it chooses,(12) but
it may not directly regulate activities within the provincial sphere of
Parliament ... is entitled
to spend the money that it raises through proper exercise of its taxing
power in the manner that it chooses to authorize. It can impose conditions
on such disposition so long as the conditions do not amount in fact
to a regulation or control of a matter outside federal authority.(13)
It is easy to see, however,
why the provinces can be irritated by the use of the spending power. Once
the federal government takes the initiative by offering to share the cost
of a proposed program to be administered by the provinces, provincial
options are seriously circumscribed. If a provincial government does not
provide its inhabitants with the same benefits as are enjoyed by people
in other provinces, there are likely to be political consequences. If
the province does join the program, however, it may not be able to afford
the necessary expenditure or may have to neglect other budget priorities.
There is also the possibility that the federal government may pull out
of the program, leaving the province with increased financial responsibilities.
Political reality also places major constraints on the initiation or alteration
of national cost-shared programs. There would clearly be difficulties
in abandoning a major cost-shared program once it was underway. Thus,
for political reasons, the province itself can seldom close down such
programs, although it may be increasingly unable to afford the increased
expenditure. The Government of Canada, through its spending power, has
at its disposal a powerful political lever.(14)
The constraints upon the
federal government, however, are almost as strong. By imposing stricter
conditions, or even enforcing loose ones, it runs the risk of overstepping
the division of powers; withdrawing, or even limiting, funding has significant
Since 1977, for example,
the federal government contribution to the EPF programs (Established Programs
Financing, or post-secondary education, hospital insurance and medicare)
has been determined by a formula tied to the growth of the gross national
product and the provincial population rather than the actual costs. Theoretically,
this gives the provinces a greater incentive to reduce expenditures and
the federal government less interest in controlling or auditing provincial
expenditure. Recent attempts to put a similar ceiling on the growth of
Canada Assistance Plan transfers, however, provoked criticism and a court
RE CANADA ASSISTANCE PLAN (B.C.)
The provisions of the Canada
Assistance Plan(15) authorize
the Government of Canada to enter into agreements with provincial governments
on federal contributions towards social assistance and welfare costs.
Section 5 of the Plan, broadly speaking, allows for federal contributions
equal to 50% of each provinces eligible expenditures. Agreements
signed under the Plan continue in force as long as the provincial social
assistance and welfare plans remain in effect, unless terminated by mutual
consent or by one years notice from either party.
In 1990, the federal government
decided to reduce expenditures, in part by putting a limit on Plan contributions
to the financially stronger provinces. Accordingly, legislation was introduced
to provide that federal contributions to certain provinces would not increase
by more than 5% for the years ending on 31 March 1990 and 1991.(16)
The provinces affected were those not qualifying for an equalization
payment in any given year, initially British Columbia, Alberta and Ontario.
In February 1990, the Government
of British Columbia referred two questions to the British Columbia Court
Can the Government of
Canada limit its obligation under the Plan and the subsidiary Agreement
with the Government of British Columbia to contribute 50 per cent
of the cost of assistance and welfare services?
Do the provisions of
the Plan, the Agreement between Canada and the British Columbia, and
the subsequent conduct of the Government of Canada raise a legitimate
expectation that the Government of Canada would not introduce a bill
to limit its obligations under the Agreement or the Plan without the
consent of British Columbia?
The British Columbia Court
of Appeal answered "No" to the first question and "Yes"
to the second question. The Supreme Court of Canada, however, gave the
opposite answer to each question.(17)
On appeal, the Supreme Court
of Canada dealt first with the issue of whether the questions were justiciable
at all, or whether, as the Attorney General of Canada submitted, being
political in nature they were not subject to judicial intervention. The
Court found that both questions had a sufficient legal component to justify
a judicial determination:
The first question requires
the interpretation of a statute of Canada and an agreement. The second
raises the question of the applicability of the legal doctrine of
legitimate expectations to the process involved in the enactment of
a money bill. Both these matters are in contention between the so-called
"have provinces" and the federal government. A decision
on these questions will have the practical effect of settling the
legal issues in contention and will assist in resolving the controversy.(18)
The Court noted that the
contribution formula was to be found only in section 5 of the Plan, and
not in the subsidiary Agreement with British Columbia, which simply refers
to the contributions "that Canada is authorized to pay to that province
under the Act [Plan], and the Regulations." Therefore, the contributions
are subject to amendment to the extent that the Plan is subject to amendment.
Section 42(1) of the federal
Interpretation Act states that every Act "shall be construed
so as to reserve to Parliament the power of repealing or amending it,"
which reflects the principle of parliamentary sovereignty. By virtue of
both this principle and the Interpretation Act, Parliament was
entitled to amend the Plan, and therefore the payment formula. Thus, British
Columbias first question was answered in the affirmative.
As for the second question,
the Court first restated its concept of the doctrine of legitimate expectations:
The principle developed
in these cases is simply an extension of the rules of natural justice
and procedural fairness. It affords a party affected by the decision
of a public official an opportunity to make representations in circumstances
in which there otherwise would be no such opportunity. The court supplies
the omission where, based on the conduct of the public official, a
party has been led to believe that his or her rights would not be
affected without consultation.(19)
However, the doctrine of
legitimate expectations is part of the rules of procedural fairness, and
cannot create substantive rights. At most, therefore, British Columbia
could legitimately have expected that the federal government would consult
the province before acting, but not that the federal government would
obtain the provinces consent. Moreover, the rules governing
procedural fairness do not apply to a body exercising purely legislative
functions, and the court will not meddle in the legislative process.
The Attorney General of
British Columbia had argued that the provinces legitimate expectations
should prevent the government from introducing the bill, if not Parliament
from passing it. The Supreme Court dismissed the argument, holding that
"Parliamentary government would be paralysed if the doctrine of legitimate
expectations could be applied to prevent the government from introducing
legislation in Parliament."(20)
Further, such an interpretation of the doctrine would place a fetter on
the fundamental principle that a government is not bound by the undertakings
of its predecessor.
The provinces and the Native
Council of Canada raised various other arguments with which the Court
dealt briefly, even though they were outside the scope of the two questions
referred by the British Columbia government. The question of legislative
jurisdiction, raised by the Attorney General for Manitoba, specifically
referred to the "spending power":
The argument begins
with the observation that the federal spending power is wider than
the field of federal legislative competence. So, as with the Plan,
Parliament can authorize the disbursement of federal funds to the
provinces for use in areas within provincial jurisdiction. Manitoba
said that once Parliament authorized the federal government to enter
into an agreement with British Columbia and such an agreement was
executed, Parliament became disabled from unilaterally changing the
law so as to change the Agreement.(21)
The Court held that the
simple withholding of federal money that had been previously granted to
fund a matter within provincial jurisdiction does not amount to the regulation
of that matter. The fact that Bill C-69 would "impact" upon
an area within provincial jurisdiction is "clearly not enough to
find that a statute encroaches upon the jurisdiction of the other level
Finally, the Attorney General
of Manitoba also argued that the "overriding principle of federalism"
should prevent Parliament from interfering in areas of provincial jurisdiction,
and that the court should supervise the exercise of the spending power
to protect provincial autonomy. The Supreme Court concluded simply that
"supervision of the spending power is not a separate head of judicial
review. If a statute is neither ultra vires nor contrary to the
Canadian Charter of Rights and Freedoms, the courts have no jurisdiction
to supervise the exercise of legislative power."(23)
The spending power involves
the transfer of money or tax points rather than jurisdiction, and the
areas most affected by it (health, education, welfare, employment training,
and regional development) are already within provincial jurisdiction.
Theoretically, at least, the elimination of the spending power could involve
simply the elimination of such federal transfers to the provinces. In
practice, the provinces would almost certainly in return insist upon a
transfer of tax points or actual funds.
By funding national programs,
even those within provincial jurisdiction, the federal government has
some ability to equalize national standards. With EPF programs, even although
there is no federal control over actual expenditures, the amount transferred
is on a per capita basis. If, however, the federal government
removed its funding and turned over tax room or tax points,(24)
the result could easily be inequitable from one province to another. Poorer
provinces would receive less per capita than richer provinces,
though they would be applying the same percentage increase in provincial
taxation. If actual funds were transferred on a per capita basis,
the results would be fairer but national standards might still suffer.
Overall, it seems that little
has changed since La Forest wrote his landmark text; the issue remains
one of standards, funding and co-ordinating mechanisms, rather than of
What the foregoing reflects
is that in Canadian federalism, the real battleground in the constitutional
distribution of fiscal powers is not the taxing power. ... Rather,
it is in connection with the federal spending power that the most
incisive thinking must be directed to determine how the legitimate
claims of the federal government (regarding, for example, the control
of the economy, mobility of Canadians, equalization and the alleviation
of disparities) can be accommodated to the equally legitimate claims
of the provinces in seeing to the maintenance of the character of
provincial society. But whatever changes may be made at the constitutional
level, these will not displace the need for ongoing practical arrangements
to meet the evolving needs of society.(25)
"In addition to its general policy of reconstruction and a more activist
approach, particularly in welfare, the government considered it essential
to centralize taxation power to promote the Keynesian economic policies
which it proposed to embark upon, and which it followed with considerable
success for a long time during the postwar period with a single-mindedness
that was probably unmatched in any other country." G.V. La Forest,
The Allocation of Taxing Power under the Canadian Constitution,
(2nd ed.), Canadian Tax Paper No. 65, Canadian Tax Foundation, 1981,
Ibid., p. 31-33.
Anne Bayefsky, Canadas Constitution Act, 1982 and Amendments:
A Documentary History, Vol. 1, McGraw-Hill Ryerson, Toronto,
1989, p. 146-162.
Later Chief Justice Laskin and Mr. Justice La Forest of the Supreme
Court of Canada.
E.A. Dreidger, "The Spending Power," Queens Law Journal,
Vol. 7, 1981, p. 124.
Peter W. Hogg, Constitutional Law of Canada, 2nd ed., Carswell,
Toronto, 1985, p. 124.
Dreidger (1981), p. 125.
Thomas J. Courchene, "The Fiscal Arrangements: Focus on 1987,"
Ottawa and the Provinces: The Distribution of Money and Power,
Vol. I, Ontario Economic Council Special Research Report, 1985, p. 4.
Winterhaven Stables Ltd. v. Canada (1988), 53 D.L.R. (4th)
413, at 415.
Joseph E. Magnet, Constitutional Law of Canada: Cases, Notes and Materials,
5th ed., Éditions Yvon Blais Inc., 1993, p. 381-2.
Ibid., p. 380-381.
A number of cases confirm that the federal government can spend its
revenue on subject matters outside its legislative competence: Angers
v. M.N.R.,  Ex.C.R. 83 sustains the validity of federal family
allowances; and CMHC v. Coop College Residences (1975),
13 OR (2d) 394 (OCA), sustains the validity of federal loans for student
Winterhaven Stables, at p. 434.
Dreidger (1981), p. 134.
Enacted by S.C. 1966-67, c. 45, now R.S.C. 1985, c. C-1.
Bill C-69, An Act to amend certain statutes to enable restraint of government
expenditures, was introduced on 15 March 1990, received Royal Assent
on 1 February 1991, and is now the Government Expenditures Restraint
Act, S.C. 1991, c. 9.
Reference Re Canada Assistance Plan (B.C.),  2 S.C.R. 525.
Ibid., p. 546.
Ibid., at p. 557; cited from the reasons of the majority in
Old St. Boniface Residents Assoc. Inc. v. Winnipeg (City),
 3 S.C.R. 1170, at p. 1204.
Ibid., at p. 38.
Ibid., at p. 45.
Ibid., at p. 48.
"Tax room" or "tax points" are difficult concepts
with limited practical application. To oversimplify, the total capacity
of Canadians to bear tax is seen as a large pie divided between the two
levels of government. Thus, if the federal government reduces its portion
of the total pie, the provinces have "tax room" available to
them to fund additional programs.
La Forest (1981), p. 38.