Federalism and Money: An Examination of the Taxation Powers in the Federal Systems of Nigeria and Canada

Date01 November 2020
Published date01 November 2020

States are constantly concerned with how they can effectively and efficiently administer themselves and manage their resources in order to maximise their potentials. In dealing with this sort of concern, and bearing in mind their unique features, different states choose to adopt a particular system of government, with its attendant corollaries in order to ensure that a good economic and political balance is maintained. Some states choose to adopt the federal model as a system of government based on a variety of factors, such as economic and military reasons. For instance, the Canadian federal system was partly influenced by the need for a strong military defence. The federal system of government usually involves at least two levels of government operating within a single geographical area, in a constitutionally harmonised manner, which allows each level of government, free from the other, to make rules necessary for the fulfilment of its duties.1

In a federal arrangement, it is of paramount importance that the various levels of government operating within the geographical sphere possess resources sufficient to enable them carry out their functions efficiently. Also intrinsic in a federal system is the assignment of constitutional powers between the central government and the sub-units. The constitutional division of powers between these levels of government directly affects the allocation of taxing powers in the federation because the more functions a level of government is assigned, the more funds it will require in order to fulfil them.

Taxation is a major source of revenue for governments. Allocation of taxing powers may be easier in unitary states, since there is just one level of government without much competition as to what taxes should be reserved for any particular level of government. Federal systems usually have to deal with the issues of assignment of taxing powers to the different levels of government. The questions which then come to mind are what taxes should be reserved for a particular level of government and what level of government is better suited to levy a particular type of tax?

The purpose of this article is to demonstrate that the federal system of Nigeria falls short of the independence attribute of federalism with regard to tax efficiency, subnational independence and sovereignty interests when compared to the federal system of Canada. The reason for this shortcoming is both historical and practical, and the article will analyse how all the important taxes have been concentrated on the federal government, thereby impoverishing the state and local governments and making them completely dependable on federal allocation. On the other hand, the Canadian system, through historical evolution and its constitution, ensures that the sub-units have sufficient tax authority to secure their independence and reduce and/or eliminate control by the federal government.

Commenting on the overcentralised tax system in the Nigerian federation, Professor Ignatius Ayua, a Senior Advocate of Nigeria (SAN), noted that the 1999 Constitution of Nigeria has not done much to improve on the lot of the states in terms of allocation of financial sovereignty, and its consequence remains that the federal government maintains its strong position.2 It has also been stated that Nigeria ‘runs, by her 1999 Constitution, a somewhat uniform taxing system in which, it would appear that only the federal government may impose tax while all others have competence only to collect and administer this tax.’3 Another author has highlighted that: ‘One consequence of the concentration of revenue-taxing powers in the federal government … is the imbalance between the functions constitutionally assigned to state and local governments and the tax powers available to them.’4

Canada currently represents a more balanced federal system. Though the federal Parliament retains greater taxing powers, the taxing powers of the provinces are more guaranteed and protected under the Constitution Act,5 thereby giving the provinces some measure of independence and sovereignty. Commenting on the allocation of taxing powers under the Constitution Act, Magnet noted that, ‘Although Parliament has wide latitude to raise monies by taxation, and an equally wide latitude to spend monies thereby collected, it does not follow that the powers thus combined can be used to invade provincial heads [sic] of jurisdiction.’6

In order to achieve my objectives, this work is divided into six further parts. Part II will deal with the historical development of federal systems. Part III will analyse the theoretical and fiscal relationship in the federations. Part IV will contextualise the distribution of powers and taxing authorities in the federations. Part V will scrutinise the approach to taxation in both federal systems and also discuss some tax disputes between the central and subnational governments in the two countries. Part VI will contain the conclusions and future research questions.


Historical events and circumstances shape states and the political institutions that they adopt in order to advance their affairs. Thus historical institutionalism emphasises that early events causally influence later developments.7 Therefore a historical institutionalist framework prompts an examination of the institutional alignments that happen early in a sequence to determine how varieties of federalism emerge from contingent historical origins.8 Accordingly, the institutional building blocks of federal systems such as the allocation of competences or the system of intergovernmental relations display a high degree of variation, reflecting different federal trajectories across time and space.9

Once a specific configuration of federal institution has been established early in a historical sequence, it becomes increasingly ossified and resistant to efforts to reverse it or make substantial alterations.10 It has been noted that varieties of federalism manifest themselves not only in diverging institutional trajectories, but also in the way federal systems generate varying modes of adjustment. Also, the way institutions are constructed historically is crucial to our understanding of how federal systems variously respond to pressures for change.11

Thus the federal systems under consideration manifest the institutional design framework given how the federal systems have evolved differently. Nigeria's centripetal federal system can be attributable to her colonial heritage and the long period of military rule that centralised most institutions and managed the affairs of the country from the centre. The effects of the civil war also did not help matters as fears of balkanization prevented the then government from reverting to the centrifugal federation that was previously in place. Although Nigeria has reverted to a democratic regime for 19 years, the vestiges of the centripetal federalism institutionalised by the military remain.

On the other hand, the federal-provincial balanced relationship that characterises Canadian federalism can be traced to colonial history and the historical evolution of the relationship between the centre and the provincial government. The American civil war and the need to form a strong union in the wake of the war had pushed the various North American colonies to form a confederation. As noted, ‘the event, however, brought about a situation of heightened historical openness that weakened the position of those forces that had been traditionally opposed to the idea of confederation.’12 Historical events have continued to shape the relationship between the federal and provincial governments of the federation over time. Such have either caused the federation to tilt either towards centripetal allocation of overarching power to the federal government or the centrifugal allocation of more powers to the provinces.

The importance of the historical institutional framework is that it helps to cast the various systems into new lights for a more profound understanding of how the unique histories and events have helped to shape different models of federalism around the world. Elaigwu pointed out that one of the challenges facing Nigerian federalism derives from her history of military rule.13 This observation reaffirms the impact of military rule as the turning point of over-centralisation, which set in motion the type of federal system operating in Nigeria today.

This historical impact is not lost on other parts of the world as in Mexican federalism, for instance, it has been noted that ‘the tradition of central control imposed on Mexico during the colonial period is of critical importance because it provided the basic framework for the future organization and functioning of the political system as a federation.’14 The design of these federations and the attendant distribution of powers were heavily influenced by historical events that have shaped current reality. The balance of power directly affects the direction of money and the fiscal relationship in these federations.


The tax system in a federal arrangement plays a vital role in determining how balanced such a federation would be. In distributing legislative powers, the central government usually has a lot of roles to play in the management of the federation as a whole. This places more duties on the central government that are absent on the state or provincial governments. In order to ensure that there is a balance between revenue generation and expenditure expectations, the central government usually retains more taxing powers or the most important taxes that yield a lot of revenue. Federations also usually confer on the central governments the taxes that may be difficult to administer on a regional basis.15

Perhaps this may have been the underlying reason behind the assignment of customs...

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