Two points.
First, the battle with the provinces demonstrates why the federal government should get out of providing any funding other than equalization payments.  The provinces have all the same taxing powers of the federal government except for import duties but they also collect all the money from lotteries.  Of course, to stop funding the provinces the federal government needs to drop their taxes by exactly the amount of the cut in transfers or it will be nothing but a huge tax grab.  By having the federal government inserting itself into provincial funding simply increases the bureaucracy of both to monitor and report on the spending.
Second, provinces are mature forms of government that are responsible to the voting public.  If the residents of the province doesn't like what the provincial government is doing, it can vote them out.  Hence it makes perfect sense to provide equalization payments with no strings attached.