The present status of Dominion-provincial arrangements is the consequence of the constitutional and administrative decisions made in 1867 as developed over subsequent decades and the course of economic, social, and political developments and the correlative budgetary changes in both federal and provincial fields. The purpose of this paper is to set out the historical objectives of Dominion-provincial financial policies, to examine the shifts which have occurred in these objectives from time to time, and to attempt a statement of the appropriate objectives in the Canadian system. Much of the subsequent argument has to do with the fiscal consequences of federalism in Canada and with the fact that changing circumstances have imposed on the junior levels of government, and to some extent on the federal Government also, financial responsibilities which it was not originally contemplated they would have to bear.

The allocation of functions between the Dominion and the provinces by the Act of 1867 was clearly intended to place on the Dominion those which financially were the most onerous. The heavy costs of development, including the public debt, national defence, and national government were to be borne by the Dominion, while the supposedly lighter costs of public welfare, education, provincial development, and provincial administration were given to the provinces. On the revenue side, the lucrative taxes—customs and excise—were given exclusively to the Dominion and the direct taxes also were given to the Dominion, though not exclusively, to use if it so desired. The provinces were limited to direct taxes, which, with the exception of real property taxes, it was supposed they would be reluctant to use, and to the relatively unproductive licences, fees, and fines. While the federal Government was to pay annual grants to the provinces, the Act of 1867 stipulated that “such grants shall be in full settlement of all future demands on Canada.” This interpretation of intention at Confederation is accepted generally by the historians of the period and is supported by many statements of participants in the Confederation debates. In the period immediately following Confederation these objectives were realized.