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Federal government's ability to spend money in areas of provincial jurisdiction rests on 'shaky legal ground'

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Release Date: October 11, 2007

VANCOUVER, BC- Canada's federal government should stop spending tax dollars in areas of provincial jurisdiction or seek an amendment that would bring current political practices in line with the written Constitution, recommends a new paper from independent research organization The Fraser Institute.

"The federal government is now using its spending power to transfer more than $42 billion in tax dollars each year to provincial governments," said Sylvia LeRoy, co-author of Questioning the Legality of the Federal Spending Power.

The term 'spending power' refers to the perceived power of Parliament to spend money in areas of provincial jurisdiction.

"Not only does this practice rest on shaky legal ground, it also distorts local policy preferences, transfers power to federal politicians, and blurs the accountability of both levels of government," LeRoy added.

LeRoy and co-author Burton H. Kellock, Q.C., evaluate the complex tax-and-transfer system in light of the intentions of Canada's founders, original constitution, and binding legal precedents.

"It is important to emphasize the general consensus among legal academics that there is no such thing as a federal "spending power" in the Canadian Constitution and there has been no explicit mention of this power in any judicial decision either," Kellock said.

The validity of the federal spending power has been the subject of much academic debate and has only been alluded to by the Supreme Court of Canada and never fully debated or examined.

The British North American Act gives the federal government broad powers to raise money "by any mode or system of taxation," but these tax revenues may not be directed to provincial purposes.

"The exclusivity of federal and provincial jurisdiction is a founding principle of Canada's federal system," Kellock said.

The paper looks at the landmark legal decision where Canada's highest court recognized constitutional limits on federal spending power. The 1937 Unemployment Insurance case resulted in Parliament passing an amendment to the Constitution in order for the federal government to move ahead with its plans for a national unemployment insurance program.

"While a constitutional amendment was required before the federal government could establish a national unemployment insurance scheme, Ottawa has since moved ahead with countless other spending programs notwithstanding their relation to matters of provincial jurisdiction," LeRoy said.

Included among these federal spending initiatives are family allowances and hospital insurance and medicare, as well as recent federal child care initiatives.

"Previous research calculates that conditional transfers from Ottawa to the provinces grew from less than one per cent of federal budgetary expenditures in 1945, to more than 13 per cent of federal expenditures in 1965, and almost 20 per cent of federal expenditures a decade later," LeRoy said.

"This has resulted in a profound redistribution of legislative power in Canada."

The authors note that the provinces (with the exception of Quebec) have seldom objected to - and indeed, frequently encouraged - the use of the federal spending power to increase transfers for education, health and other social programs. Federal spending now supports so much of the established political, social and economic structure that governments are hesitant to take any steps to limit it. Both levels of government have avoided legal certainty, preferring to negotiate politically rather than risk a judicial decision that would upset the status quo.

"Unless the federal government amends the Constitution, as it did in 1937, the continued transfer of tax dollars to the provinces contradicts established legal precedents, the written word of the Constitution, and the intentions of Canada's founding fathers," LeRoy said.