A new blueprint for Confederation
“Fiasco!” snorted Bennett of B. C. “A bribe to Quebec!” others charged. What really went on when ten wary and suspicious premiers met last month? Have we finally solved the riddle that has plagued Canada since 1867?
TO A group of wary and mutually suspicious men in Ottawa last month Prime Minister Louis St. Laurent outlined a new blueprint for the Government of Canada.
This month those same men, the ten provincial premiers, are studying the plan, and even before they meet again their reaction will be known.
If it is a favorable reaction Canada will have taken a new step toward solving a problem that has plagued her for almost a century since the days of Joseph Howe and Sir John A. Macdonald. If it is hostile the problem may be solved anyway, but not without a dispiriting squabble on the old sore issues of race, religion and language.
The problem is peculiarly Canadian. Canada has two thirds of her people and three quarters of her money gathered in a central heartland, so that the extremities are always threatened with relative economic starvation. The heartland itself is divided between two cultures, each with a language and a faith of its own.
Every region of Canada has a grievance against one or more other regions, and none of the grievances is groundless. Ontario thinks, rightly, that “have-not” provinces covet Ontario’s wealth and scheme to get a share of it. Western and Maritime provinces think, rightly, that Ontario grew rich selling them high-priced goods from industries protected by Canada’s “National Policy” that Ontario got the
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Mixed emotions and varied stances at first divided the ten bargaining premiers but later brought hope of understanding
economic benefit while they paid the economic price of making Canada a nation. Quebec thinks, rightly, that in national affairs Frenchspeaking Homan Catholics are a weak minority; only at the provincial level can French Canada fully protect its own ways, so Quebec must be ever vigilant against any threat to provincial autonomy. Nine English-speaking provinces think, rightly, that government in Canada would be tidier,
simpler and a good deal cheaper if Quebec were not so stubbornly determined to do things in her own fashion.
From this unique combination of divisions and disparities the problem arises: how to share our national revenue among provinces so unequally endowed, on terms that all are willing to accept.
Mackenzie King and his finance minister, J. L. Ilsley, thought they had a solution ten
years ago, when they faced a similar gathering of provincial premiers at the same rectangular table in the House of Commons. They offered an alluring bargain: let the provinces forego direct taxation of incomes and estates, which was their constitutional right but which gave a great advantage to the big central provinces, especially Ontario, where corporations and large estates cluster. In return, the federal government would pay a handsome
“rental” for these tax fields, more to each province than any had ever collected by itself. Ottawa would also take over such costly burdens as unemployment relief, which in the 1930s had brought several provinces to the verge of bankruptcy.
Ontario and Quebec refused the bargain. The conferences of 1945-46 ended in failure and the full federal-provincial exchange was never completed. Ottawa to this day has not taken on full responsibility for unemployment relief. But seven provinces did make individual tax-rental agreements of much the same kind, and Newfoundland made an eighth after the union in 1949. Thus the one third of all Canadians who live in “have-not” provinces were satisfied.
In 1952 Ontario came in—another third of Canada’s people. Two thirds of all Canadians were thus included in a set of agreements which nobody thought perfect, but which did divide with reasonable fairness the tax revenue all had helped to earn.
Only Quebec remained outside.
Louis St. Laurent attended the conferences of 1945-46. As a member of Mackenzie King’s cabinet he was party to the federal offer. As acknowledged leader of Quebec in federal affairs he must have believed it was as fair an offer to Quebec as it was to other provinces. He must have felt then, as most English Canadians did, that Premier Maurice Duplessis’ refusal of it was mere personal stubbornness, perhaps inspired by political hostility.
At the time this judgment may have been right. But much water has gone over the dam since the first tax-rental agreement went into effect on April 1,1947.
In those years Quebec has lost $152,221,000 by refusing to rent tax rights. That is thirtyfive dollars for every man, woman and child in the province. Yet Quebec has twice voted in favor of accepting that loss rather than surrender any provincial rights. In two elections the issue was “autonomy” as defined by Premier Maurice Duplessis, and his refusal of tax rentals. In both he won handsome majorities. No political party in Quebec, no public organization, no newspaper dares to challenge him on the “autonomy” issue. It is now obvious—and to St. Laurent as a Quebec leader it has been deeply disturbing—that on this question Quebec is virtually unanimous. Quebec will not sign a tax-rental agreement or anything like it at any price—even a Liberal Government in Quebec wouldn’t sign one. Ottawa’s offer is spurned, not by one arrogant man, but by a people.
St. Laurent’s new plan is aimed at ending this isolation of Quebec. Its object is to give back to every province, unconditionally, a slice of the taxes on national income. The slice will be just big enough to give each an equal share per person. No agreement need be signed, no stipulation accepted. Parliament will pass a law and the money will be sent out with no strings attached. Since Quebec will not come into the fold, the fold itself is to be torn down.
That much is already settled. It was decided by the federal cabinet before the provincial premiers arrived for the October meeting. Unless the Duplessis government should refuse even an unconditional share of federal tax money, the equalization payments will be made no matter what the provincial premiers say when they meet again.
Nevertheless, what they say at the next meeting is of the gravest consequence. They will determine two things: first, whether Canada shall continue to have a fairly orderly tax structure, or return to the complex muddle of prewar days; second, and even more important, whether the St. Laurent plan will
actually strengthen the unity of Canada as it aims to do, or whether it will merely open a new breach in trying to close an old one.
This is a plan for equal sharing. Quebec now gets less than any other province; equal sharing must therefore give Quebec a larger increase than any other province. Will this fact of simple arithmetic be made clear to Canadians by their provincial leaders? Or will the new system be denounced as a bribe to Quebec?
Already the phrase has been used. Some angry provincial premiers at “off-the-record” press conferences described the new federal plan as no more than appeasement of Duplessis. For a while in the middle of the October conference it seemed that this might be the general reaction, and that the most important federal - provincial meeting since 1945 - 46 might end as the last one did, in failure.
It was a gathering of alarmed and resentful men, in the main. All ten premiers knew Ottawa wanted something different when the tax-rental agreements expire. Of the nine who accepted the present system, each had his own reasons to wonder if a change would help or hurt his province, his party or himself.
British Columbia’s W. A. C. Bennett had most to lose. John Hart, the wily old Liberal who was premier of B. C. from 1941 to 1947, drove a hard bargain nine years agoBritish Columbians get thirty-six dollars a head as rental for their tax fields while most other provinces get about thirty. To make any political gain for his Social Credit government Bennett had not only to maintain this good deal, he had to better it.
Where Did B.C.’s Goodies Go?
A self-made hardware merchant with a quick smile and plenty of self-assurance, Bennett has a gift for sales talk to which he himself is not immune. He told his electors, and apparently convinced even himself, that he would come back with new concessions for B. C.
Instead he was shocked to discover that all the elaborate tables, worked out to illustrate how the new system would work, gave British Columbia no increase at all but an actual cut of anywhere from four to eight million a year. The dreadful news leaked out at once. Pacific coast newspapers headlined:
$40 MILLION EXTRA TO QUEBEC;
$7 MILLION CUT FOR B. C.
Finance Minister Walter Harris, even before any of the tables had been distributed, had assured everyone that no province would suffer any cut; each would get at least as much as its tax-rental payment in the last year of the agreement. Prime Minister St. Laurent protested indignantly against the headlines in the B. C. papers as being unfair to Quebec, and untrue. But Premier Bennett was far from mollified.
For a man who had vowed to go home with the extra goodies he had led British Columbians to expect, the assurance that he would bring them the same goodies offered cold comfort. Small wonder that he left in a huff, spurning the prime minister’s invitation to dinner and calling the whole conference a “fiasco.”
From the other end of Canada came another dissatisfied man, Joey Smallwood of Newfoundland. A bit heavier, a bit greyer, a bit more sedate than the sharp little bluejay of a man who came to Ottawa eight years ago to negotiate the terms of union, Smallwood was deceptively serene at the October
conference. He could afford a detached view because, as he frankly said, Newfoundland’s situation was due for complete review in two more years. He evidently expected to do better by himself than in a Canada-wide arrangement, but he has twice threatened publicly to lead Newfoundland out of confederation altogether if he is not satisfied.
Nova Scotia has changed a lot since the last time she elected a premier who promised to do the same thing, but Nova Scotians still have a resentful feeling that they were swindled into confederation in the first place. And aside from the normal prejudices of any Nova Scotian, Premier Henry Hicks had personal reasons to l)e on his guard at. the Ottawa meeting.
Hicks is a boy wonder among politicians. A Rhodes Scholar and a war veteran, he was an MLA at the age of thirty, a cabinet minister at thirty-four, premier of Nova Scotia at thirty-nine. In a Canadian Club tour last season he made an excellent impression in central Canada, as a speaker and as spokesman of the Maritime point of view. Yet in spite of all these natural advantages, Hicks is perhaps the most vulnerable of the ten provincial premiers.
He won the leadership after the death of the invincible Angus L. Macdonald by a close decision at a bitterly fought convention in which religious prejudices played some part. No one yet knows what that fight may have done to the Liberal Party in Nova Scotia. Meanwhile the Conservatives had been slowly but steadily gaining ground, even against the great Angus L. Hicks badly needed a good tax deal for Nova Scotia at the Ottawa conference, or a good popular grievance to take home, or—perhaps best of all —both.
Hugh John Flemming of New Brunswick was quiet and agreeable; Alexander Matheson of Prince Edward Island was voluble and agreeable, but both share the Maritime grievance—the grievance of “have-not” provinces. Flemming introduced a plan of his own which would have brought ten million dollars more to New Brunswick this year, twenty-two million dollars more to the other Atlantic provinces, and nothing more to anybody else. He didn’t press it, but it showed how he felt.
The Atlantic provinces are “have-nots” in every sense. The prairie provinces are not, except in the technical sense for tax purposes. They have few corporations, few easy sources of revenue, but their citizens have been doing very nicely of late. Saskatchewan’s per capita income in 1953, a good crop year, was $1,292 —third highest in Canada, less than two hundred dollars below Ontario and well above the “wealthy” province of Quebec. Alberta and Manitoba are not far behind, and Alberta every year becomes more an industrial “have” province and less dependent on a good crop for prosperity.
Nevertheless the prairie premiers had their own reasons, not all of which were shared by all three, for being wary and suspicious at Ottawa in October.
Cautious Ernest Manning of Alberta spoke for a province that is still a “have-not” in the technical sense, in spite of the oil riches that pour into its treasury. Alberta’s equalization payment will run between thirteen and fifteen million a year depending on what scale is adopted at the next conference. But Manning could see the day coming soon when Alberta will be a “have” province helping out the others. He talked like a premier of Ontario, pleading the cause of the expanding industrial region which needs millions for urgent capital development.
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A New Blueprint For Confederation
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Saskatchewan in the past have been the Good Boys of federal-provincial conferences while Quebec has been the Bad Boy. It was a shock even to Saskatchewan’s Tommy Douglas, a CCFer with no great faith in Liberals, to attend a conference where Quebec seemed to have the role of Jack Horner and get more plums than anybody else. As for Douglas Campbell and his loyal Grits of Manitoba, they were the most indignant of all when the October conference opened.
But the key to success or failure lay with none of these minor figures; it lay with the two giants of the centre. Most of all it depended on the big, genial, grey-haired man with the slow quiet voice, Leslie Frost of Ontario.
Ontario pays almost as much income and estate tax as the other nine provinces put together. Ontario sets the pattern of commerce and industry in Canada. Eight or even nine other provinces might agree to encourage industry by keeping taxes uniform, but they’d do little good unless Ontario would go along too.
Ontario’s Leslie Frost was also a suspicious man in October. Five years ago, as he took care to remind the federal delegates, he had urged that instead of tax-rental agreements some plan be worked out which would bring in Quebec as well as Ontario. His advice had not been taken. Now he smelled a plot to buy off Quebec with Ontario’s money.
Suspicion was heightened by Duplessis’ new manner. In closed sessions he was quiet and polite, not snubbing the ; whole affair as he has sometimes done but listening and asking questions. Only once or twice did he take off on one of his old oratorical flights, and then a soft answer from Prime Minister St. Laurent brought him quickly down again.
Those soft answers bothered the other premiers most of all. Time after time, they told each other nervously, the prime minister would look at Duplessis, wait for a benign nod, and only then proceed to answer a question or make a statement. On the way to the governor-general’s reception at Rideau Hall one of the newer premiers asked a question about protocol. When was it proper to leave, and all that sort of thing?
A Liberal premier answered him: "Watch Duplessis, do whatever he does and you can’t go wrong. That’s what St. Laurent’s been doing all week.”
Maybe the premiers would have been less subject to these neurotic doubts and fears had they known more about the origins of the new tax deal. Alj though the need of a new plan obviously was emphasized by political considerations, the mechanics of the new plan were conceived just a year ago this month, not in any smokefilled room but in—of all places—the Bank of Canada. It was an economist’s response to what federal tax officials— and many politicians—still call "the Quebec crisis” of 1954.
For seven years after the tax-rental agreements began in 1947 Ottawa had been able to ignore the fact that Quebec would not come in. Quebec was losing money by it—as much as forty million dollars in the latest year—but that was Maurice Duplessis’ own affair. Not until Duplessis imposed his own provincial income tax in 1954 did Ottawa realize that this airy detachment could not be maintained.
Duplessis chose his ground with his
usual shrewdness. Federal aid had been offered to universities, which were in desperate financial straits. Education is the most jealously guarded of all provincial rights; after reluctantly accepting Ottawa’s money for one year, Duplessis forbade Quebec universities to take it on pain of losing all provincial support.
But the universities needed help. It was to provide this help—to raise money for them in place of the tainted federal gold—that Duplessis proclaimed a provincial income tax. It ran as high as fifteen percent of the federal tax. Duplessis suggested Ottawa might make it fully deductible from the federal tax. Meanwhile he put it on anyway.
Ottawa refused to make it deductible. But as the months went by, federal officials as well as federal politicians realized they were in an indefensible position. Quebec’s new income tax brought in less money than a tax-rental agreement would have done. In other words, if Ottawa did make it deductible the federal treasury would still be better off than if it made the rental payments it was already committed to make.
Quebec taxpayers were paying the same federal rates as everyone else, but the federal Income Tax Act allowed them to deduct only five percent as an offset to a provincial levy. The result was that Quebec suffered a double penalty. The provincial treasury was still getting less each year than the rental it could have collected. But Quebec taxpayers had to pay more income tax than other Canadians paid.
Ottawa had always declared these tax-rental agreements were "purely voluntary.” Why then should it compel the very people who got so much less to pay so much more? These arguments began to look more persuasive not only politically but in
the matter of equity and common sense.
Ottawa’s new stop-gap solution was obviously inadequate, as well as clumsy and humiliating. It allowed a tax abatement of ten percent instead of a deduction of five percent in provinces levying their own tax. Some Quebeckers were still paying a lot more than people in other provinces, even though some other Quebeckers were paying a little less. And meanwhile Quebec was still taking an annual loss of about twenty million by foregoing her tax-rental payment.
It was to break this dilemma that the Bank of Canada came up with its new idea last November:
Why not make an "equalization payment” to every province whether it signs an agreement or not? Let the provinces levy what taxes they like, but still get their fair share of the national tax on the national income.
This suggestion won immediate, unanimous approval from officials whose job it is to plan federal tax policy. Everybody was for it—in principle. But on the question of how it should be applied a sharp difference of opinion developed.
One group of bureaucrats, the majority, wanted to scrap the taxrental system altogether. They wanted not only to permit but actually to force the provinces to impose income and corporation taxes. Provincial responsibilities, they said, would be increasing in the next few years while federal responsibilities such as national defense became lighter. It was bad for the provinces to look always to Ottawa for painless, priceless revenue; far better for spenders to take full responsibility for raising the money they spent.
But a small obdurate minority still favored tax-rental agreements. Equalize by all means, said these dissidents, but don’t force all the provinces into tax fields they’d rather not occupy.
“Most provinces don't want to levy income tax. They'd rather Ottawa take the blame"
Uniform corporation taxes, this group argued, are more than a help to tidy government. They’re invaluable to industry. The tasks of keeping track of what business is done in which province, and of making out tax returns by several different rates and rules, can run into millions.
"I talked to an American businessman the other day,” an Ottawa tax official said. "His company has to calculate and pay twenty-six income taxes, all different.”
The fact that companies haven’t had to do that in Canada has been a big encouragement to those investing here. Ottawa’s tax experts, as distinct from economic theorists, want above all to avoid a return to this multi-tax chaos. And they think it can be done.
They admit there’s no hope of persuading Quebec to sign any kind of agreement, but they say that needn’t matter too much. If all provinces are levying their own income tax, Canada’s tax structure in ten years will look like a dilapidated roller coaster. But if nine are levying a uniform tax and only Quebec is different, that fact alone will exert a kind of gravitational pull to keep Quebec’s rates from being too far out of line.
Are All Provinces Equal?
But what incentive is left to bring provinces into agreements if all get an equal share of federal taxes anyhow?
Tax experts answer that not much incentive is needed. Provincial governments, or most of them, don’t really want to impose their own income taxes. They’d rather let Ottawa take the trouble and the blame. A fairly slight advantage of convenience or security will be enough to bring in all nine, according to the federal taxgatherers, and the advantage they suggest is this:
All provinces are promised a certain guaranteed minimum from Ottawa each year, a sum never to be less than the present tax-rental payments. (Quebec is included in this promise, at the amount Quebec would have got from a tax-rental pact.) The tax experts suggest that, for provinces willing to enter a new rental agreement, Ottawa give a higher guarantee—-perhaps undertake that the rental payments shall never fall below whatever peak they reach in a good year.
To the majority of officials who wanted to abolish rental agreements, this was heresy. It sounded to them like the motto of George Orwell’s Animal Farm: "All provinces are equal, but some are more equal than others.”
Besides, having gone to all this trouble to end the isolation of Quebec, why should they now set up a new scheme to isolate Quebec all over again?
This argument was still unresolved when the October conference began; it continued to rage in the federal camp all through the week. Some confusion resulted. One afternoon a provincial delegate put the same technical ques-
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tion to four federal delegates and got four quite different answers.
But the point seems to have been settled now, and apparently the minority has won. There will be an inducement to enter tax agreements, the inducement of a higher guarantee. How much higher is a question still to be decided— it can’t be very much without introducing a new penalty for noncompliance, a new injustice to Quebec. But it will be enough, if Ottawa’s wishes are fulfilled, to bring Ontario in—and if Ontario comes in the rest don’t matter.
In or out of the new agreements, each province will get the same kind of money. Each will have a certain slice of the federal taxes—ten percent of personal income tax, maybe nine or ten percent of corporation profits, half of succession duties on estates. The exact amounts are to be negotiated, but the principle is the same in all cases.
On top of that, each province will get an annual payment from Ottawa, enough to bring its total revenue from these taxes up to the same level per capita as the average of the two richest provinces, Ontario and British Columbia. For provinces that sign tax agreements, that would be all.
But if, on top of that again, any province wishes to levy additional taxes on personal and corporation incomes or estates, it may do so. Its apnual equalization payment from Ottawa will not be affected. Its taxpayers will have to pay more than other Canadians, but presumably they will get more for their money in schools, roads, health services. In any case, it will be the province’s own business.
As things look now with another federal-provincial conference in prospect, chances are better than fiftyfifty for complete success.
Perhaps because Ottawa did not confront them with a fixed, final, take-itor-leave-it offer, most of the premiers went home with their suspicions rather mollified than aggravated in the end. They were invited, nay encouraged, to produce counter-proposals of their own; none had any that could be applied with equal advantage to all ten provinces.
Also they were surprised—even Quebec was surprised—to find that "rich” Quebec is really a "have-not” province. Yield of the "standard” taxes in Quebec is only twenty-two dollars per person, less than that of Ontario by $9.98 and fifty-seven cents below the national average.
So far Ottawa has no indication whether or not Premier Duplessis will accept the proposed equalization payment, but nobody is greatly worried about that. If he should refuse, it will be his own responsibility. Federal officials are now satisfied, as they were not satisfied before, that the terms are now both fair and honorable.
Ottawa’s worry, what there is of it, is in the other direction. Will Englishspeaking Canadians also see this plan as fair? Or will they see it as favoritism?
If the premiers raise that cry they would probably not prevent the new plan from going into effect, but they could make its path a thorny one.
But if they accept it wholeheartedly —and there is excellent hope that they will—then Confederation might begin a new chapter. After nine decades Canada will have a new chance to get over perhaps the biggest single obstacle to her development as a strong, nrosperous, firmly unified country. ★