Background
The CHST was an amalgamation of two federal programs prior to 1996: Established Programs Financing (which paid for health care and post-secondary education and was established in 1977) and the Canada Assistance Plan (which supported social assistance and was established in 1966).
Under the Constitution of Canada, health, education and social assistance are all areas of provincial responsibility and authority. The federal government does not directly participate in the administration of government services in these areas, though federal money through the CHST and its successors is used to fund them. But unlike equalization payments, which provinces can spend on anything, money distributed through the CHST is conditional and must be spent on health, post-secondary education or welfare. Legislation such as the Canada Health Act specify standards that the provinces must maintain in order to receive funding.
The CHST and its successors consist of both cash transfers and tax transfers. Cash transfers are direct transfers of money from the federal government to the provinces. Tax transfers work because both federal and provincial governments collect personal and corporate income tax. A tax transfer involves the federal government reducing its income tax rates, leaving the provinces room ("tax points") by which they can increase their own taxes (and thus their revenues) without increasing the total tax burden on their citizens.
Read more about this topic: Canada Health And Social Transfer
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