1 The widespread deprivations of the Great Depression prompted Canada’s federal government to examine the financial implications of Confederation and investigate the restructuring of the Canadian federal system during the 1940s. To this end, both the 1940 Report of the Royal Commission on Dominion-Provincial Relations (Rowell-Sirois Commission) and the 1945 Green Book on Reconstruction proposed broadly based social welfare programs and public works initiatives to benefit the provinces. These were to be funded by a complete reworking of federal-provincial fiscal relations whereby the provinces would cede to Ottawa sole authority to levy certain taxes. In essence, these two documents represent the beginnings of the Canadian welfare state and led to the protracted constitutional negotiations that occupied much of federal and provincial politicians’ time during the 1940s.

2 A study of the negotiations surrounding the Rowell-Sirois Report and the Green Book offers a unique opportunity to examine provincial interpretations of Canadian federalism as both initiatives provided a forum for the provinces to express positions on dominion-provincial relations. With the exception of T. Stephen Henderson’s work on Nova Scotia, however, regional scholars have not offered a sustained examination of the evolution of provincial views of federalism during the critical decade of the 1940s as the foundation of the modern expansionist welfare state was laid. 2 This article details New Brunswick’s view of Canadian federalism in the 1940s; it argues that financial exigencies clearly shaped the province’s position. Much like Nova Scotia, New Brunswick consistently argued for recognition of fiscal need as a principle of federal-provincial fiscal relations and maintained that the provinces that had benefited most in Confederation should help those that had benefited least. 3 Although both provinces had similar goals in their federal negotiations with Ottawa, New Brunswick’s tenuous financial position made it more vulnerable than Nova Scotia. Consequently, New Brunswick strongly advocated for the centralization of tax power in Ottawa in return for a secure source of revenue. 4 Indeed, New Brunswick’s willingness in the 1940s to cede provincial tax fields to the federal government in return for a guaranteed payment seemed a radical departure from the province’s stance on constitutional issues during the previous decade, when the province was seen as a stalwart defender of provincial rights.

3 Historical studies of both the Rowell-Sirois Commission and the Green Book Proposals have tended to overlook their implications on federalism, and have instead concentrated on the conflicts in personalities that arose during the negotiations or the impact of professional organizations and labour on the proceedings. 5 For their part, political scientists who have studied federal-provincial relations have ignored much of the twentieth century to focus on either the late-nineteenth century, when a series of Privy Council decisions gradually decentralized the powers of the state, or the post-1980 period, when questions relating to Quebec’s place in the federation and the possibilities of secession gained prominence. 6 Only with the relatively recent renaissance of political history have studies of federalism come back into vogue (such that they have), with historians such as Barry Ferguson and Robert Wardaugh offering a perceptive analysis of the Rowell-Sirois Commission’s attempt to alter Canadian federalism by recommending the reconfiguration of the federal and provincial governments’ responsibilities. 7

4 The 1940s discussions on federalism were firmly rooted in the unfortunate circumstances of the previous two decades. During the 1920s, Maritimers of all stripes came together in the Maritime Rights Movement to lobby the federal government for policies that would allow the region to more fully participate in the nation’s economic growth. Although the resulting 1926 Royal Commission on Maritime Claims, commonly called the Duncan Commission after its chair Andrew Duncan, called for fiscal need subsidies to better allow the Maritime governments to provide essential services, this recommendation was never acted upon. 8 Meanwhile, the 1930s saw nine years of drought on the Prairies, coupled with the occasional grasshopper plague, ruin harvests and turn wheat fields to dust. 9 Many farmers were driven onto relief rolls, which further strained the already cash-strapped Prairie governments. By November 1937, 407,600 of Saskatchewan’s 928,000 people were on relief, and the Prairies were soon almost totally dependent upon federal aid in the form of loans to meet their relief costs. 10

5 Things were little better in 1930s New Brunswick, where the lean years of the 1920s that prompted the Maritime Rights agitation precluded the loans that buoyed the west. As a result, economic conditions in the province were bleak, especially along the impoverished North Shore, where health and educational services were inadequate and problems in the lumber and fishing industries swelled the relief rolls until the municipalities could no longer handle the burden. So dire was the situation across Canada that the federal government initiated a series of one-third matching grants, whereby the federal, provincial, and municipal governments were each to bear one-third of the cost of administering relief. This system was only as strong as its weakest link, and more affluent municipalities in central Canada could more fully participate in the scheme than those in the cash-strapped peripheral provinces. This meant that, paradoxically, people in those areas most immune to the Depression could receive the most relief, while those in areas most in need of help were entitled to lesser payments. 11

6 New Brunswick was particularly limited by the matching grants system, and on occasion Fredericton and Ottawa assisted the municipalities to a greater extent than the system mandated. For example, the provincial and federal governments eventually assumed 80 percent of the financial burden for relief in Northumberland County. 12 Still, such collaboration between Fredericton and Ottawa proved the exception as New Brunswick was notoriously reluctant to match, much less increase, the relief contributions of its municipalities. Between 1929 and 1933, New Brunswick’s debt charges in relation to provincial revenues almost doubled from 28 percent of provincial revenues to 55 percent. 13 With debt payments consuming such a large part of the province’s finances, New Brunswick was unwilling to participate in other federal-provincial shared-cost initiatives. When public outcry finally prompted the New Brunswick government to enter into joint-relief programmes with Ottawa, it did so at a level far below the national average. To compound matters, the federal government slashed relief payments to the provinces by 25 percent between April and June 1936, with the end result being that by October 1936 the average monthly relief payment in New Brunswick was $1.67, the lowest in Canada. 14

7 The matching grant system proved no more than a stop-gap measure, and by mid-decade the Prairies could no longer cope; in 1936 Alberta defaulted on one of its loans, and both Manitoba and Saskatchewan were in danger of doing the same. It was becoming clear that the provinces had fiscal responsibilities, such as unemployment relief, education, and social services, which they could no longer afford given their weakened economies and inadequate tax bases. Therefore, “either new revenue sources must be allotted to them or their constitutional responsibilities and government burdens must be replaced.” 15 With this as its goal the Rowell-Sirois Commission was struck to uncover, in Prime Minister Mackenzie King’s words, “what should be done to secure a more equitable and practical division of the burden [of relief] to enable all governments to function more effectively. . .[and] more independently. . .within the spheres of their respective jurisdictions.” 16 Commissioners were drawn from of each of Canada’s five regions: Ontario’s Newton Rowell, Quebec’s Joseph Sirois, the Prairies’ J.W. Dafoe, British Columbia’s Henry Angus, and the Maritimes’ R.A. Mackay. 17

8 Despite the inclusion of Nova Scotian Mackay, New Brunswick Liberal Premier A.A. Dysart was upset that no New Brunswicker was named to the Commission. Commission Chairman Rowell tried to soothe Dysart on this score by pointing out that S.A. Saunders, who had been appointed to write an Economic History of the Maritime Provinces for the Commission, had been born in Saint John. 18 Dysart may have been using New Brunswick’s lack of a commissioner as a bargaining chip, for he seemed more concerned that New Brunswick present its submission to the Commission after those of Ontario and Quebec so that the central provinces could not refute his claims. Although Rowell tried to assuage Dysart’s fears, stating that all provinces would have the chance to respond to the individual submissions, he eventually agreed that New Brunswick’s would be the last submission heard by the Commission. 19

9 After meeting with all other provinces, the Commission arrived in Fredericton on 18 May 1938. Over five days of meetings, New Brunswick made a rather curious argument. The province’s brief called for assistance to the poorer provinces based on fiscal need, but at the same time it invoked the compact theory of Confederation as justification for a subsidy. The compact theory as championed by Ontario Premier Oliver Mowat in the nineteenth century maintained that Confederation was the result of a treaty, or compact, among the provinces and therefore could not be altered without provincial consent. Given legal validity by favourable Privy Council decisions, Mowat utilized the compact theory to effect a more decentralized federal union whereby the provinces were granted greater powers than was originally intended. 20 New Brunswick’s brief agreed in principle that Confederation was a compact among four autonomous provinces. As A.P. Paterson, New Brunswick’s Minister of Federal and Municipal Relations and the main proponent of the compact theory, argued, although New Brunswick had surrendered certain powers through the BNA Act, it retained the right to retrieve these powers if it felt the federal government had not honoured the terms of Confederation. 21

10 Moreover, despite the transiency of the BNA Act implicit in the compact theory, New Brunswick framed much of its argument before the commissioners around a clause in the BNA Act’s preamble that declared that the intent of Confederation was “to conduce to the welfare of the provinces and promote the interests of the empire.” 22 For New Brunswick’s compact theory proponents, the supposed intent of Confederation to improve the position of the provinces superseded any claims of provincial rights or, more precisely, was itself an aspect of provincial rights. Since New Brunswick’s financial position had not improved markedly in the years following union, the federal government was guilty of not living up to the terms of Confederation. Thus, New Brunswick argued, Ottawa was constitutionally obliged to provide fiscal need subsidies to assist the poorer provinces—subsidies that would be paid for, in part, from tax revenue collected from the richer provinces. 23 As they told the Commission, if a province “is not able to provide for its people the same privileges which are enjoyed by those in other provinces,” then Dominion assistance is required to ensure “that living conditions be on par with those obtaining elsewhere.” Although New Brunswick did not advocate “a redistribution of all the wealth in Canada,” the province did believe that “the burden [of providing the money for fiscal need grants] should fall upon those provinces which have profited most” in Confederation. 24 Unanswered in New Brunswick’s version of the compact theory and the province’s presentation was, if Confederation was a contract among four separate states, why should one state be required to subsidize the level of social services in another? As E.R. Forbes has suggested, New Brunswick’s rationalization of provincial rights before the Commission while simultaneously lobbying for subsidies based upon fiscal need rendered the province an “awkward anomaly.” 25

11 In any event, the importance of the compact theory to the New Brunswick position with the Rowell-Sirois Commission may be overstated. During the 1938 session of the New Brunswick Legislature a schism developed within the New Brunswick Liberal Party over the provincial government’s policy of supporting the compact theory. The catalyst for this split was the 1935 Dominion-Provincial Conference, called at the height of the Depression to discuss unemployment relief. At that meeting, the Liberal government of A.A. Dysart, represented by his trusted lieutenants and cabinet ministers A.P. Paterson and J.B. McNair, vetoed the constitutional amendment necessary to allow Ottawa to assume sole responsibility for the unemployed—an amendment to which the other eight provinces had agreed—claiming that it impinged on the province’s constitutional responsibilities. 26 Led by provincial MLAs W.W.V. Foster and Frank Bridges, the Liberal dissidents believed that the provincial government’s position at this conference, where they used the compact theory to justify not transferring the responsibility of unemployment relief to Ottawa, was unthinkable during such dire economic times. Bridges adroitly summed up their position in the 1939 legislative session when he stated that “[n]othing in the wide world is going to hinder and retard the growth and progress of Canada. . .more than this doctrine [of the compact theory].” 27 Although McNair made a spirited defence of the government’s constitutional position in the Legislature, his words apparently fell on deaf ears, for during the provincial election of 1939 the electorate seemed to reject the compact theory, retaining a Liberal government but casting staunch compact theory supporter A.P. Paterson from office. 28 When Paterson offered his services to the provincial government in an advisory role free of charge, he was rebuffed. While McNair made another half-hearted defence of the compact theory in 1941, suggesting that the Rowell-Sirois Commission had confused claims for financial assistance to governments with claims for the relief of a province adversely affected by federal policies, it seems likely that had New Brunswick presented its submission to the Commission even one year later there would have been much less mention of the compact theory, for with the rejection of Paterson’s offer of assistance, New Brunswick’s short-lived adherence to the compact theory had essentially come to an end; however, the province’s demand for the recognition of fiscal need would persist. 29

12 New Brunswick’s waning adherence to the compact theory and the doctrine of provincial rights was illustrated when Walter Jones, a distinguished lawyer and Liberal MLA, presented the province’s brief to the Commission. In strong terms he reiterated New Brunswick’s commitment to the principle of fiscal need, while taking Ontario to task for arguing against the concept of equalization:

13 Jones also stated, in an obvious reference to New Brunswick’s impoverished Acadian North Shore, that “[t]here are certain parts of this province where it is impossible to provide schools,. . .nursing or doctors” and that “there ought to be a reasonable standard of life for every citizen and his family in Canada.” 31 However, Jones was not clear about where the revenue to provide a reasonable standard of life was to come from. New Brunswick’s written submission to the Rowell-Sirois Commission was grounded in the doctrine of provincial rights and called for the Dominion to vacate the personal income tax field. 32 Thus New Brunswick was essentially calling for the federal government to assume greater fiscal responsibilities while shedding its ability to collect revenue. At first Jones defended the province’s written position, although he stated that if the Dominion did collect income tax then it should give some of the revenue back to the provinces. 33 Finally, after being pressed on the subject by Commissioner J.W. Dafoe, Jones said that “I think that we would prefer that they [the federal government] should tax the rich and give us a fair proportion of it,” thereby revealing his province’s willingness to endorse the centralization of fiscal power in Ottawa’s hands in return for a fixed payment. 34

14 Following New Brunswick’s presentation, the Commission spent a year and a half writing its Report. During this time major changes took place throughout the world, the greatest of which was the outbreak of the Second World War. Overshadowed by the events in Europe were changes in New Brunswick, where A.A. Dysart retired from public life in March 1940. Dysart was replaced by his former Attorney-General and “chief lieutenant” J.B. McNair. 35 McNair had been a star pupil at the University of New Brunswick, receiving a BA with double honours in 1911, winning the Governor-General’s Medal and the Lieutenant-Governor’s Prize, and being Valedictorian of his class. These achievements earned him a Rhodes Scholarship to Oxford University, where he received a BA in jurisprudence in 1913 and a Bachelor of Civil Law degree in 1914. Following his service in World War One, McNair returned to New Brunswick to practise law in Fredericton until entering politics as a Liberal in 1935. By the time Dysart left office McNair was seen as the former premier’s “logical successor” as he had a background in constitutional law, he had “distinguished himself both as a scholar and in public life,” and he had performed admirably as the defender of the government’s constitutional position in the previous year’s legislative session. 36

15 Within a few months of McNair’s inauguration, The Report of the Royal Commission on Dominion Provincial Relations was tabled in Parliament. 37 The Report was an extraordinary document calling for a complete revamping of federal-provincial fiscal relations and heralding the beginning of the modern welfare state with its broader and more interventionist government role. Significantly for New Brunswick, the commissioners recognized that regional disparities existed by acknowledging that some provincial governments had budgetary surpluses while others struggled to provide “those community services which Canadians have come to look on as the minimum which their governments should supply.” 38 Key among the Commission’s financial recommendations was the centralization of tax authority. In return for their granting Ottawa sole authority to levy income, corporation, and succession taxes, thereby simplifying the tax structure and doing away with double taxation, the provinces would be relieved of having to provide for the unemployed. Moreover, the commissioners recommended the provinces forego all federal subsidies that they were receiving in return for Ottawa’s assumption of all provincial debts. Meanwhile, a system of National Adjustment Grants, designed to ensure a minimum standard of social services for all Canadians, would be instituted. To arrive at the amount that each province was to receive, the Commission calculated the cost of ensuring a desired minimum standard of services and compared that sum with the province’s revenues. If there was a deficit—that is, if a province’s revenue was less than the required expenditure—then the province would receive a National Adjustment Grant, which made it tantamount to a fiscal need subsidy. 39 Six provinces, New Brunswick among them, were to receive National Adjustment Grants, with Ontario, Alberta, and British Columbia being excluded.

16 The commissioners were careful to emphasize that although their financial recommendations may appear at odds with the BNA Act, there were also some remarkable similarities. In 1867 Ottawa was given the most lucrative taxing power of the day: the customs and excise tax. Likewise, the commissioners recommended that Ottawa be granted what in 1939 was the chief taxing power: personal income, corporation, and succession taxes. In 1867 the Dominion paid the provinces subsidies to assist them in performing their responsibilities. In 1939 the proposed National Adjustment Grants would fill this role. 40 And although Ottawa would pay the provinces these grants to ensure a national minimum standard of social services, the actual responsibility for administering these services would remain with the provinces. Social services had been delegated to the provinces under the British North America Act, and there was to be no redistribution of jurisdiction. 41 In essence, the commissioners did not believe that they were rewriting the constitution; they were merely updating it while remaining committed to the classical liberal ideology that underscored it.

17 The publication of the Rowell-Sirois Report necessitated a January 1941 meeting between the federal and provincial governments to discuss its recommendations. On this conference’s second day the premiers of Ontario, Alberta, and British Columbia, perhaps motivated in part by their provinces’ exclusion from the National Adjustment Grant system, refused to sit on any committees discussing the document. Thus no committees were appointed and the conference had for all purposes come to an end. But prior to the conference’s formal dissolution King allowed his Minister of Finance, J.L. Ilsley, to suggest that Ottawa would probably have to “invade provincial tax fields such as succession duties” in order to fund the war effort, while also opting out of assisting the provincial governments in paying the cost of unemployment relief, for which the Dominion paid 40 percent. Moreover, gasoline would likely be rationed, thereby diminishing provincial revenues from both gasoline taxes and automobile licences. 42

18 Prior to the conference’s dissolution, McNair presented New Brunswick’s position. The New Brunswick premier viewed the financial plan recommended by the Commission as “the crux of the report,” yet he refused at that early date “to express a definite opinion thereon.” 43 McNair’s reluctance to formally state a position on the Report at the conference stems from a number of factors. A draft version of a speech for the conference in his papers makes clear that McNair was caught off guard by the conference as he did not expect it to be held until war’s end. As a result of this “lack of adequate prior consideration,” he maintained that the conference was solely of an “exploratory” nature and, as a result, did not require the provinces to explicitly endorse or condemn the Report. 44 Moreover, McNair seemed to be having a minor personal crisis over the proposal. Although he did not say so at the conference, his personal correspondence makes clear that the New Brunswick premier was personally “very favourably disposed towards the Report and. . .considered it of great value.” At the same time, he was opposed to any over-centralization of authority in Ottawa. 45 Thus McNair was in an uncomfortable position with regard to the Rowell-Sirois Report, as provincial rights were seemingly in conflict with provincial self-interest. McNair believed the Report’s recommendations would benefit his province, but he recognized that implementing those recommendations would require him to cede certain tax rights granted New Brunswick under the BNA Act, thereby contributing to the very centralization he had so publicly opposed at the 1935 Dominion-Provincial Conference.

19 To complicate matters, McNair received mixed messages from his advisors about the impact of the Report’s recommendations on his province. In a 29 November 1940 memo, Walter Jones stated bluntly that “[t]he recommendations of the Commission seem. . .quite favourable to this province.” In this memo Jones stressed the importance of the Commission’s recognition of fiscal need, which seemed to him a fair trade-off to the ceding of the right to levy corporation taxes to Ottawa “because of our relatively small corporation taxes.” 46 All told, Jones calculated that New Brunswick would end up with a budgetary surplus of $2,250,000, or $5.51 per capita, the highest per capita surplus in Canada. The second memo, included without signature in the McNair papers, was not nearly so optimistic. Basing its calculations on the assumption that Ontario would be unwilling to enter an agreement, thereby depriving Ottawa of that province’s lucrative tax revenues, this memo concluded that the net gain to New Brunswick would be a mere $360,000, leading the author to conclude that under the Rowell-Sirois plan New Brunswick “would do no better even from a financial standpoint. . .than it is doing at present.” 47

20 This second memo also took a much more critical stance with regard to the impact of the Rowell-Sirois Report on the structure of Canadian federalism, a subject the first memo had ignored. The unknown author recommended to McNair that he keep in mind the power that the constitution grants the province to levy personal income, corporation, and inheritance taxes, and insisted that these taxation rights “should not be lightly thrown away.” This urgent defence of the structure of federalism was prompted by two factors. First, the memo makes the important point that “it is impossible to foretell how valuable such powers may be in the future” and that to cede their “potential value” would be fiscally irresponsible. Second, the memo cautioned McNair that relinquishing these tax fields, even for a generous financial subsidy, would result in a loss of provincial prestige. Maintenance of provincial prestige was imperative, as the memo’s author anticipated that the coming years would see the further renegotiation of federal and provincial responsibilities. As the author makes clear, “It seems to me that the more authority to be placed in the hands of the Dominion parliament means more prestige to that parliament. If questions arise in the future as to the abolition of appeals to the Privy Council or other suggested changes in the constitution, it would be as well for New Brunswick to maintain its prestige.” 48 The breakdown of the conference meant that McNair did not have to choose between this memo and the more optimistic one penned by Jones.

21 On 31 March, Ilsley made good on his threat to end Dominion assistance for direct unemployment relief, and in his 29 April budget address he announced the federal government’s intent to commandeer certain tax fields to prosecute the war effort. As part of the federal government’s proposed Wartime Tax Agreement, the provinces were asked to surrender income and corporation taxes in return for a fixed annual grant and a fiscal need subsidy if needed. 49 Furthermore, the Dominion agreed not to interfere with the special taxes that the provinces levied on timber limits, oil wells, mining, or other natural resources, and guaranteed that should provincial revenues from gasoline taxes fall below the 1940 level, they would make up the difference. 50

22 It is important to recognize that the Wartime Tax Agreement was distinct from the recommendations put forth by the Rowell-Sirois Commission. Although both the Rowell-Sirois recommendations and the Wartime Tax Agreement called for the federal government to assume the sole authority to levy certain tax fields, there the similarities ended. The Rowell-Sirois recommendations were designed to be a permanent re-configuration of Canada’s federal structure, complete with the recognition of regional disparities and the need for grants to ensure a minimum standard of social services for all Canadians. The Wartime Tax Agreement, on the other hand, was simply a wartime convenience designed to allocate to the federal government the funds necessary to successfully prosecute the war effort without any commitment to the provision of social services, while leaving the provinces in a secure enough financial position to weather the conflict. As Stephen Henderson has suggested, the Rowell-Sirois Commission viewed the centralization of tax authority as a necessary precursor to a more equitable redistribution of wealth to the peripheral provinces through the National Adjustment Grant system. In this manner, centralization and provincialism were not at odds, and were, in important ways, opposite sides of the same coin. 51 The Wartime Tax Agreement, on the other hand, called for the centralization of tax authority without any corresponding long-term recognition of regional disparities or the vagaries of provincial need. As a result, under the Wartime Tax Agreement centralization occurred at the expense of provincialism.

23 The proposed Wartime Tax Agreement necessitated a December round of meetings between the Dominion and the provinces. 52 At this conference the federal government made an important concession to the Maritime Provinces regarding non-statutory subsidies that had been paid to the eastern provinces. The Maritime delegates held that in reality these payments amounted to de facto statutory subsidies. Faced with this petition, the federal government adopted a curiously incongruous position. Although they would not pay the subsidies while the Wartime Tax Agreement was in effect, they apparently agreed with the Maritime position:

24 The Dominion also promised to incorporate this in a new statute “so as to avoid any possibility of misunderstanding at a later date.” 54 To this end Ottawa passed The Maritime Provinces Additional Subsidies Act (1942), which implemented the recommendations of the White Commission by guaranteeing New Brunswick $900,000, Nova Scotia $1,300,000, and Prince Edward Island $275,000 per annum. While this seems to have benefited the Maritime Provinces, it may have simply been a way for Ottawa to try to pull the region on side. Not only were these subsidies not payable while the Wartime Tax Agreement was in effect, they were simply the codification of amounts that the region was already receiving. 55

25 In his closing remarks to the conference McNair made clear New Brunswick’s position. Although he felt that the atmosphere at the conference “compared more favourably” with that of the Rowell-Sirois Conference, he regretted that the broader Rowell-Sirois recommendations were off the table, lamenting that “we did not get to the point where we could have discussed what had been presented by a competent as something in the nature of a constructive plan.” 56 Moreover, McNair was displeased with Ottawa’s use of 1940 as the base year for calculating the rental payments, for the federal government was entering the provincial tax fields when their yields were on the increase and then would return them when the yields were declining. 57 McNair was also dissatisfied with New Brunswick’s $300,000 fiscal need subsidy under the Wartime Tax Agreement, for under the Rowell-Sirois recommendations the province would have received “in round figures, ten times the amount indicated.” However, since the threat of the war was of paramount concern he would accept the proposal as it was, and he would “recommend to the legislature, as soon as possible, the adoption of the agreement.” 58 McNair made good on his promise and, on 27 March 1942, the Legislative Assembly of New Brunswick assented to An Act To Suspend Temporarily the Imposition of Income Taxes, Corporations Taxes, and Taxes on Securities.

26 New Brunswick benefited financially under the Wartime Tax Agreement. This arrangement guaranteed Fredericton an annual payment of $3,278,574.15, although the province was to give up revenues of $3,350,067.45 and suffer a net loss of $71,493.30 under the agreement. Ottawa agreed to make up this net loss as well as pay a yearly fiscal need subsidy of $300,000. In essence, although New Brunswick’s fiscal need subsidy was stated as $371,493.30, the province’s net gain over its 1940 revenue was $300,000. 59 This agreement effectively stabilized the revenues of New Brunswick for the duration of the war, and the full employment of the wartime boom—and the subsequent decline in relief expenditures—meant that the province’s financial position was improved for the duration of the conflict. Moreover, the temporary nature of the Wartime Tax Agreement made further negotiations between Ottawa and the provinces inevitable.

27 New Brunswick’s financial position was not the only thing altered during the war; the province also saw an increase in industrialization. 60 While few war orders were placed within the province, “[t]he general economic prosperity of the nation ... overflowed into [the] region.” 61 An indication of this wartime “economic prosperity” was the rise in manufacturing output in the province by 112 percent during the war. Yet despite this wartime boom, New Brunswick’s competitive position had deteriorated. The Maritime Provinces were not central to Ottawa’s wartime industrialization program and, as a result, emerged from the conflict in a weaker economic position vis à vis the central provinces than they had been in before the outbreak of the conflict. This lack of investment was particularly detrimental to New Brunswick, where the prospect of numerous returning veterans, combined with the end of wartime demand, would, it was feared, lead to “the re-emergence of the old economic weaknesses.” 62 Moreover, McNair knew that New Brunswickers would not tolerate a return to pre-war conditions. As his secretary R.A. Tweedie later recalled, McNair “used to say that people just won’t believe, after the war effort, that we can’t stop people from being unemployed and can’t provide three square meals for everyone.” 63

28 With the end of war in Europe, Ottawa, keen to avert a post-war economic collapse, invited the provinces in 1945 to a conference to discuss how the federal government could assist the provinces in meeting their post-war obligations, a motive that would require a discussion regarding the renegotiation of certain responsibilities of the provinces and Ottawa. The federal government offered specific proposals to achieve these goals. Commonly called the Green Book Proposals, these included a three-tiered plan in the areas of public investment, social services, and such fiscal matters as an extension of the Wartime Tax Agreements. 64 Yet despite the Green Book’s broad proposals regarding the establishment of the welfare state, the bulk of discussion at the conference revolved around financial matters. Rather than use the format proposed by the Rowell-Sirois Commission, whereby a National Adjustment Grant would be allocated to aid the poorer provinces, Ilsley proposed a three-year extension of the Wartime Tax Agreement of 1942, with a $12 per capita grant, to be adjusted in proportion to changes in population and Gross National Production. Since Ottawa’s bureaucratic intelligentsia had accepted Keynesian economic theory and favoured increased state intervention in the economy, the justification for the federal government’s continued exclusive occupation of the personal income, corporation, and succession tax fields followed Keynes’s recommendation of counter-cyclical budgeting to avert a post-war depression similar to that which followed the First World War.

29 Ilsley’s proposals suited McNair just fine. While still committed to the principle of fiscal need, he was not averse to an extension of the Tax Rental Agreement. Earlier that year, in the Legislative Assembly of New Brunswick, McNair had stated that “[t]he plan of operation which brought about the existing financial arrangements between the Dominion and the Provinces may well prove the pattern of action in the post-war period. It makes possible the negotiation of proper financial terms between the Dominion and the Provinces.” 65 This was not an attitude that McNair came to blindly. In The Regional Economy of New Brunswick, a study commissioned by the New Brunswick Committee on Reconstruction, J.R. Petrie, a professor of economics at the University of New Brunswick and the committee’s secretary, argued that “income and corporation taxes, and succession duties be transferred to the federal authority. . .[and a] system of federal grants in lieu of these taxes should be worked out,” which echoed the recommendations put forth by the Rowell-Sirois Commission for federal control of these tax fields in return for payments to the provinces. 66 Furthermore, New Brunswick’s experience with the Wartime Tax Agreement had already shown McNair the merits of a guaranteed source of provincial revenue and had weakened his commitment to maintaining sole provincial authority to these taxes as a matter of provincial right. But although McNair now agreed in principle with the idea of transferring these tax fields to the federal government, he was not enamoured with the terms and was particularly wary of a subsidy based upon the GNP which could, in the event of an economic downturn feared to be likely at war’s end, cut the revenues and rental fees paid to the provinces when they needed these funds the most. Moreover, McNair believed that a common per capita grant was unacceptable as it ignored the concept of fiscal need and existing standards of provincial services. Yet despite these concerns, McNair certainly had reason to be optimistic when he returned to Ottawa that November.

30 His hopes would be dashed, however, when the Government of Ontario made its counter-proposals. Ontario Premier George Drew opposed vacating the personal income or corporation tax fields, or of giving up his province’s right to levy succession duties. 67 While he veiled his objections in the structure of federalism set out by the British North America Act, 68 his primary concern was that because of

31 Drew acknowledged that some of the provinces would not be able to provide adequate services funded solely by the monies collected through their income and corporation taxes. In place of a per capita subsidy, Drew proposed the establishment of what he termed “The National Adjustment Fund,” which would be comprised of 10 percent of each province’s income garnered from personal income taxation, corporation taxation, and succession duties. This pooled revenue would then be apportioned by a Dominion-Provincial Coordinating Committee to those provinces that were unable to provide a set minimum standard of social services. 70

32 Ontario’s counter-proposals were not well received by New Brunswick. 71 R.S. Fitzrandolph, New Brunswick’s chief financial advisor at the conference, cautioned McNair that the “Ontario proposals. . .[do not] offer a satisfactory substitute or alternative to those of the Dominion” for they did not guarantee a minimum level of assistance to the poorer provinces. 72 W.B. Trites, New Brunswick’s Deputy Provincial Secretary-Treasurer, agreed, advising McNair that Ontario’s proposals “would cause a great many difficulties and. . .would not be advantageous to the provinces.” 73 McNair took Trites’ advice to heart, and when he presented New Brunswick’s submission to the conference, he made no mention of Ontario’s counter-proposals, instead stressing the inadequacy of a per capita subsidy to meet the province’s needs. New Brunswick, McNair argued, required a fiscal need subsidy “to permit local and provincial services to be raised to the average standard prevailing throughout Canada without raising internal taxation beyond the general level in all provinces.” 74 Still, the premier was “prepared to accept the Dominion proposals in broad principle” while still calling for the inclusion of a “plan to provide for the more needy provinces supplementary grants based on their financial circumstances.” 75

33 Over the next week the conference deteriorated as neither Ontario nor Ottawa would budge from their positions. The deadlock angered McNair; while Ontario could afford to refuse an extension of the Wartime Tax Agreement—its large population and disproportionate share of industry meant Ontario could raise enough money to support its needs through its own personal income and corporation taxes—New Brunswick could not. On 2 May McNair addressed the conference in strongly nationalist terms:

34 McNair’s linking of centralization and nationalism had little effect, and the conference adjourned sine die.

35 With the conference’s failure, the Dominion followed its familiar template and set aside the social welfare aspects of the Green Book and began to negotiate tax agreements with the provinces on an ad hoc basis. This was something Ottawa was well prepared for, having discussed the possibility of negotiating with individual provinces solely regarding the tax agreements as early as 20 June 1945. 77 Although McNair perceived the necessity of these Tax Rental Agreements, he reminded the federal government that they were “only one aspect or part of that programme” advanced by Dominion at the conference:

36 While this agreement would stabilize the province’s finances, without the allocations for public investment, social security, and health grants, the level of services in New Brunswick would still fall short of the Canadian average.

37 However, McNair was under pressure to reach an agreement by 1 November, the date that New Brunswick’s Wartime Tax Agreement expired and the beginning of the province’s fiscal year. This was the earliest beginning to a provincial fiscal year in Canada, which placed the New Brunswick premier under added pressure to finalize negotiations with Ottawa and ensure his province a guaranteed source of revenue. Although fiscal need was not recognized in the agreement, the Dominion’s proposals were attractive to McNair because they guaranteed greater provincial income than if the province retained control of its personal income, corporation, and succession tax fields. Thus, on 31 October 1946, New Brunswick was the first province to enter a Tax Rental Agreement with Ottawa. 79

38 It should be noted that the Tax Rental Agreements proposed by the federal government did not necessarily conflict with McNair’s commitment to provincial rights. Both the federal and provincial governments had the constitutional right to impose these taxes. All that the provinces were agreeing to was to refrain from collecting these taxes for a fixed period of time—thereby granting Ottawa exclusive access to these tax fields—in return for a fixed payment. As Nova Scotia Premier Angus L. Macdonald would later remark, the 1947 Tax Rental Agreement was “solely a financial agreement and is temporary in nature.” 80 Such a temporary agreement did not necessitate a constitutional amendment; it only required the passage of an act agreeing to the terms in each province’s legislature. Thus, while taxing capacity was centralized for a brief period of time under the Wartime Tax Agreement and the 1947 Tax Rental Agreement, the constitutional right to these tax fields would revert to the provinces (and Ottawa) when the agreements expired. McNair made clear that New Brunswick’s quick acceptance of the 1947 proposals stemmed, “in no small measure. . .[from] the fact that acceptance of such plans involves no constitutional change.” 81 What is more, McNair hoped that by signing on to the 1947 tax plan, the broader proposals encompassed by the Green Book would once again be on the table. As the New Brunswick premier told The Maritime Advocate and Busy East, he supported Ottawa’s plan with the “expectation that the Dominion would consider all the [social welfare] matters that had been under discussion.” 82

39 New Brunswick’s early entry into an arrangement with Ottawa would cause McNair some political difficulty in mid-December, when it was revealed that British Columbia had received a substantially better financial deal. In its deal with Ottawa, New Brunswick had been offered a choice: $15 per capita based on either the 1941 or 1942 census, to increase proportionately with population and GNP, or 150 percent of what it would have collected under the Wartime Tax Agreement. McNair opted for the per capita option. British Columbia’s arrangement appeared essentially the same, save for one minor clause that would have major repercussions. For New Brunswick, only the per capita payment would rise relative to population and GNP increases; the 150 percent option was a static payment. For British Columbia, both choices would be influenced by population and GNP growth. Therefore, by choosing the 150 percent option, British Columbia had a guaranteed minimum payment of $21 per capita that would increase proportionate to the GNP. Accordingly, were the GNP to increase by 10 percent, New Brunswick would receive $15 per capita plus 10 percent ($1.50), for a total payment of $16.50 per capita. British Columbia, on the other hand, would receive $21 per capita plus 10 percent ($2.10), for a total payment of $23.10. Thus, under this arrangement, British Columbia “must permanently and progressively receive a higher price for its taxes than any other province.” 83 Since the New Brunswick legislature had not yet ratified the Tax Rental Agreement, McNair put the legislation on hold and suspended relations with Ottawa until “counterbalancing adjustments” to New Brunswick’s deal were put in place. This tactic proved successful, and by January 1947 McNair announced that New Brunswick had finalized a new agreement with the federal government that saw the province’s financial take jump from an estimated $7.5 million to over $9.5 million, with a guaranteed minimum payment of $8,773,420. 84 However, the fact that New Brunswick had to suspend relations with Ottawa in order to effect a better deal reveals the lack of inter-provincial cooperation in the negotiation of the 1947 Tax Rental Agreements.

40 Following the signing of the 1947 Tax Rental Agreement, J.B. McNair did not give up hope of the recognition of fiscal need or the implementation of a broader social welfare and public works plan. When Mackenzie King stepped down after almost 30 years in office, McNair used the 1948 convention that chose Louis St. Laurent to be King’s successor as a national forum for his views. “[T]he maintenance of our national income at a high level,” McNair told the assembled delegates, was “dependent on the production of goods and services,. . .construction and other works projects, and. . .social security measures.” Characteristic of a premier whose province was undertaking a massive road building and infrastructure development scheme, McNair believed that Canada’s future prosperity was contingent upon increased state intervention and argued that “a full scale public works program. . .is essential to the nation’s well being.” He also used the convention as a platform to once again champion the principle of fiscal need by complaining that “economic injustices still exist” between the provinces, necessitating future federal initiatives that would ensure that “those sections less fortunately endowed by nature or geography should not become the poorer because of those policies.” 85

41 McNair would get the chance to make his case to Prime Minister St. Laurent at the December 1950 Dominion-Provincial Conference. 86 Owing to fears that the ongoing conflict in Korea might escalate into a third world war, the 1950 conference was a relatively brief, straightforward, and orderly affair with two main objectives. First, it was to negotiate an extension of the 1947 Tax Rental Agreements. Second, it was to discuss the possibility of implementing universal old age pensions. However, Ottawa had learned from its mistakes at past conferences and ensured in 1950 that the social security proposals and the tax rental proposals were not interconnected. Outright refusal of one would not negate the adoption of the other. Furthermore, the adoption of the universal old age pension was almost a forgone conclusion as all provinces favoured it to some extent, and the conference quickly reached agreement on the issue. 87

42 Almost as congenial were the discussions surrounding the proposed extension of the 1947 Tax Rental Agreement. By now those provinces that had accepted Tax Rental Agreements were, with the exception of Nova Scotia, quite willing to enter into another. 88 For them this conference was nothing more than a formality and a chance to perhaps effect a more profitable financial agreement with Ottawa. As McNair informed St. Laurent in August 1950, “a major concern for us is our responsibility to the people of New Brunswick and our ability to provide them with the services within provincial jurisdiction which are their due.” 89 These services could readily be provided, McNair suggested, through an extension of the existing Tax Rental Agreements, although the New Brunswick premier suggested that “the formulae in which the existing agreements are based might be revised to provide more fully for the needs of all the provinces.” 90 Again McNair brought up the principle of fiscal need subsidies for the poorer provinces, but by this point it seems as though the New Brunswick premier was tilting against windmills. Ottawa had come to the meeting with a specific agenda, and the provision of fiscal need subsidies was not on the itinerary. Indeed, the exclusion of fiscal need in the 1951 tax proposals had no bearing on McNair’s decision; New Brunswick, along with Prince Edward Island, was the first to accept the Dominion’s offer. 91 Eventually, all provinces except Quebec signed on to the 1951 Tax Rental Agreement. 92

43 Political scientist Reginald Whitaker observed that in New Brunswick “there has never been any important friction between the federal and provincial wings of the Liberal party.” 93 A review of New Brunswick’s position on the renegotiation of federalism in the 1940s supports this conclusion; despite McNair’s last-second suspension of federal-provincial relations over British Columbia’s 1947 Tax Rental Agreement, he consistently played the role of the “good Liberal” throughout his tenure, and he generally supported Ottawa’s initiatives. Although McNair carried the torch for the principle of fiscal need during the constitutional discussions of the 1940s, as the decade went on he seemed increasingly eager to cede his province’s tax rights to Ottawa in exchange for a secure source of provincial revenue. Indeed, it would not be until McNair had been replaced as premier by Conservative Hugh John Flemming that New Brunswick would become more of a thorn in the federal government’s side. This tactic seemed more profitable, for Flemming helped lead the successful campaign for equalization payments, and their explicit recognition of regional disparities, during the 1950s. 94

44 During the constitutional negotiations of the 1940s New Brunswick Premier John McNair’s belief that the BNA Act encouraged the redistribution of wealth from richer to poorer provinces led him to invoke the compact theory of Confederation to lobby, somewhat inconsistently, for federal recognition of fiscal need and increased federal assistance to disadvantaged provinces. The inherent incongruity of this position, the outbreak of a war that placed provincial rights in conflict with national self-interest, and New Brunswick’s consistently unenviable financial position weakened McNair’s commitment to the compact theory, and as the years went on it seemed to have increasingly become a ploy to try to effect a more equitable fiscal arrangement for his province. Yet McNair’s position can only be appreciated when one considers the financial pressures his province was under during the 1940s; his fight for recognition of fiscal need is emblematic of the severe monetary constraints facing his province, and his quick entry into and endorsement of the Tax Rental Agreements stemmed from New Brunswick’s unenviable financial position. The province, which in 1935 had been Canada’s strongest defender of provincial rights, had been wracked by the economic and social strains of the Great Depression and only marginally integrated into Ottawa’s wartime industrialization program. As a result, during the 1940s the province found itself unable to fund an adequate level of social services and programs—programs the wartime boom had led New Brunswickers to expect—through its personal income taxes, corporation taxes, and succession duties.

45 Moreover, McNair’s personal view of the purpose of Confederation contributed to his decision to cede tax powers to Ottawa during the 1940s. While the New Brunswick premier had been a disciple of provincial rights ideology during the 1930s, he also tenaciously clung to the idea that Canada’s federal system was intended to improve the welfare of the provinces and, as a result, he firmly believed that federalism mandated that the stronger provinces should help the weaker provinces. The 1940s Tax Rental Agreements seemed a perfect solution to New Brunswick’s troubles. In signing on, the province received a secure source of revenue in exchange for its income and succession taxes, yet it retained the right to these tax fields upon the agreement’s expiry. Thus, when Ottawa offered New Brunswick substantially more for these tax fields than the province collected from them, McNair was quick to agree, and he soon came to appreciate this guaranteed source of provincial income. In so doing, one of the champions of provincial rights during the 1930s became a willing participant in the centralization of tax power in Ottawa’s hands a decade later.