The Growth Project

This is a part of RBC Thought Leadership and Eurasia Group’s joint report

Canada’s economic prospects are threatened not just by external shocks and demanding neighbours; they’re up against a deepening asymmetry of federalism that makes a unified economic strategy harder to design, sell, and implement.

Different views among Ottawa, the provinces, and Indigenous governments over how to use natural resources, fund and deliver education, and stabilize a strained health-care system are pulling Canada further toward a patchwork of policy regimes just as it confronts tough trade talks with a more transactional United States and intensifying global competition. Constitutional tools that were once seen as last resorts—the notwithstanding clause, aggressive jurisdictional challenges, demands for exemptions from national regulations and standards, even provincial votes on autonomy—are becoming more commonplace, raising the odds that provinces and Indigenous groups will weaponize hard and soft vetoes on national priorities. One Canada, maybe, but many nations within.

The consequences for national unity are more serious than at any point since the 1990s because fragmentation now comes with cheerleaders and sponsors abroad. A divided global order gives foreign governments, activist networks, and corporate actors more opportunities to exploit jurisdictional tensions, whether by privileging particular provinces in supply-chain decisions, funding litigation and media campaigns around resource projects, or amplifying separatist narratives. For geopolitical rivals, anything that weakens Canada’s coherence as a U.S. ally and G7 partner could even become a feature, not a bug, as sub-national players and Indigenous rights-holders seek to express their voices more assertively over energy, climate, industrial policy, internal trade and, most critically, bilateral trade with the U.S.

Canada’s federation was designed to balance provincial autonomy with federal authority over certain shared concerns, including trade. But over time, the Charter of Rights and Freedoms has pulled the courts into the heart of that balance. The Charter gives individuals and groups—including Indigenous communities and provinces themselves—powerful tools to challenge federal or provincial legislation on rights grounds, forcing policy choices in areas like language, education, and social programs to survive constitutional scrutiny. In practice, this has extended the Supreme Court’s role as an arbiter of federal-provincial and Crown–Indigenous relations, as governments on all sides use the Charter not only to protect rights but also to constrain fiscal and regulatory initiatives they oppose.

Among those weapons, the most contentious is the notwithstanding clause. Once rarely invoked, the clause has been used or seriously threatened in recent years by Quebec, Ontario, Saskatchewan, and Alberta in disputes over language, religious symbols, election finance, labour rights, and education, signalling to voters that governments can bypass courts when rights protections collide with political objectives. 

The regional nature—and divergences—of Canada’s economy only serves to sharpen the competing interests of the provinces, each under a different threat from the Trump trade war and global divisions. Ontario’s economy remains anchored in autos and steel; British Columbia relies heavily on lumber and Asia-facing trade; Saskatchewan depends on canola and other agricultural exports; and Alberta’s prosperity hinges on oil and gas. Canada’s negotiating position struggled through much of 2025 as premiers tried to argue for their patch in Washington. They may reemerge as soon as CUSMA negotiations begin in earnest.

Bill C-5, the One Canadian Economy Act, and political backlash, has become a focal point for federal-provincial tensions over resource governance and Indigenous rights. The legislation allows the federal cabinet to declare projects—ports, pipelines, mines, dams—to be in the national interest and fast-track approvals. Provinces that resent federal intrusion into natural-resource jurisdiction view C5 as Ottawa reaching over their heads, while many Indigenous groups see the act as a direct attack on their constitutionally protected right to be consulted and accommodated on decisions affecting their lands. The result is a wave of legal challenges and protests that further politicize big-ticket projects the Carney government counts on to diversify away from the United States.

In the wake of C-5, the Canada–Alberta Memorandum of Understanding on energy and climate is both a template for cooperation and a sign of how transactional federalism has become. The MOU commits Ottawa and Edmonton to work together on net-zero by 2050, build major transmission interties, streamline regulatory timelines to roughly two years, and negotiate equivalency agreements on carbon pricing and methane reductions by April 2026. It also sketches pathways for a new export pipeline and carbon capture infrastructure, with explicit references to Indigenous participation and economic benefit-sharing. But the fact that these national priorities are being handled on a project-by-project basis, with one province at a time, underlines how much of the Carney agenda now runs through bilateral deals rather than pan-Canadian frameworks, inviting other resource-rich provinces to demand similar side arrangements or carve-outs—and the growing urban parts of the country, where the ruling Liberals have their political base, to question if their own aspirations are being met, too.

The sleeping giant of Canada’s asymmetrical agitations is Crown–Indigenous relations that sit at the intersection of rights, resources, and legitimacy. Indigenous nations and communities have become sophisticated in their use of both the courts and direct action to halt or reshape major projects, winning injunctions, forcing governments back to the negotiating table, and mobilizing public opinion when they’ve deemed consultation to have been inadequate. B.C. First Nations pose a particular challenge, as they are central to both resource development and expanded exports to the Pacific—and they have different legal standing, given the province came into Confederation without treaties.

Under these pressures, several provinces and Ottawa have started to experiment with exemptions from environmental rules, electricity regulations, and interprovincial trade norms, and some are pushing to further decentralize immigration and demanding more respect for their jurisdiction over housing policies, which remains the country’s political hot potato. As a result, international investors are beginning to price Canadian federalism—once a quirky part of the Great White North—as an operational risk. “Can you get it done?” is still the global response to many Canadian proposals, whether it’s pipelines, mines or large export infrastructure. At the same time, some view this web of rights protections and multi-level consent requirements as a signal of rule-of-law robustness and social licence, especially compared with more arbitrary regimes. The balance between speed and certainty will be measured, in part, by how the Carney government navigates high-profile disputes over C-5 projects and the project commitments under the Canada-Alberta MOU.

The PMO’s highly centralized style is both an asset and a vulnerability. A strong prime ministerial centre can coordinate economic, climate, and foreign policy to respond quickly to U.S. shocks and mobilize federal spending behind a coherent industrial strategy. But governing through a tight PMO and bilateral deals with premiers risks sidelining intergovernmental forums and parliamentary scrutiny, feeding the narrative that Ottawa is imposing its will and prompting provinces to retaliate through the courts, the notwithstanding clause, or their own referendums on autonomy. That’s not to mention the risk of cabinet and caucus, especially in a fragile parliament. Any over-reliance on executive bargains could leave national policy dependent on a handful of political relationships rather than anchored in durable institutions.

The 2026 political calendar heightens the risk that constitutional and jurisdictional disputes move from background noise to full-blown flashpoints. A possible federal election, a scheduled Quebec election, and ongoing battles in Alberta and B.C. over resource policy, climate targets, and revenue-sharing all create incentives for leaders to campaign against Ottawa or against other provinces. This politics of permanent grievance erodes the goodwill necessary for joint economic projects. Without more signals of progress, the summertime meme of “elbows up” is at risk of melting into a wintertime mood of confidence down. 

Bridging these gaps will require a deliberate strategy of political choreography as much as policy design. Federal-provincial-territorial summits on health, housing, and climate can still set common baselines—but are always at risk of becoming provincial shakedowns of the federation. Advertising, public campaigns and town halls, led not only by the prime minister but also premiers, Indigenous leaders and CEOs, can further strengthen a shared narrative around a united and confident Canada. 

Regulatory reform will be a key test of whether the Carney government can use federal powers to unite the country. Efforts to reduce interprovincial trade barriers, harmonize or mutually recognize skills accreditation, and streamline immigration pathways for in-demand occupations all promise gains in productivity and labour mobility, but each step touches sensitive provincial prerogatives. The new cooperation mechanisms embedded in the Canada-Alberta MOU—single-window assessments, clear timelines, and equivalency agreements—offer a model that could, in theory, be extended to other provinces and sectors if trust can be built. Without such reforms, Canada risks leaving significant internal market efficiencies on the table just as it tries to compensate for a less reliable U.S. partner.

Businesses and investors should treat jurisdictional tensions as an enduring feature—and potential strength—of the Canadian landscape. The need to secure multi-level consent and navigate overlapping legal regimes raises transaction costs and lengthens project lead times, but it can also produce more resilient outcomes with stronger social licence and lessen the risk of abrupt reversals. For firms willing to invest in local relationships with provinces, Indigenous governments, and municipalities, Canada’s complex federalism can be a source of differentiated advantage, insulating long-term bets from the whims of any single political actor, including the U.S. The risk in 2026 is that escalating constitutional brinkmanship turns this complexity from a managed challenge into a systemic vulnerability—just when Canada needs a coherent, collective strategy to build a stronger economy, and country.