Canada's great experiment in aboriginal self-government is about to collapse – or, at least, it certainly looks that way for a Yukon first nation that has successfully managed its own affairs since 2006.

It may surprise many Canadians, but there are now 17 self-governing first nations. They pass their own legislation. They control their social spending. They design school curricula. They create justice systems and punish some crimes differently. They can levy their own taxes. They have a say in the pace and extent of extraction of their natural resources. The Canadian constitution effectively recognizes them as a new and legitimate level of government, and hundreds more first nations are currently negotiating for similar arrangements.

This is what the future between Canada and aboriginal peoples looks like, a devolution of power following a long-troubled relationship, and there are many indications that self-government works to improve outcomes for communities that are sick of being governed from Ottawa. If the Harper government is as serious about unlocking the human and economic potential of first nations as it claims, it cannot allow bureaucrats to strangle self-government in its infancy.

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Indeed, one of us is charged with this particular community's economic development, a task made far easier by local governance.

So it is distressing to watch Yukon's Carcross-Tagish First Nation and the Department of Northern and Aboriginal Affairs fail to reach an agreement to renew financing for the fledgling self-government. If a deal is not signed by Oct. 1, the 800-odd people of the CTFN may see their funding slashed by 50 per cent. The self-government would collapse. The federal government has even threatened to send in third-party contractors to deliver essential services.

CTFN sprawls over 1,500 square kilometres south of Whitehorse. Its government is the result of a legal and political battle with Ottawa that spanned over three decades. Since 2006 CTFN has reformed the way welfare is distributed to reduce dependency and bolstered cultural programming in their schools, not to mention reduced the use of salt on their roads to protect oblivious caribou who have been known to lick themselves to death.

These are local solutions to local problems. This is part of the way forward to a better future. Ottawa seems to agree, and has recognized an inherent aboriginal right to self-government.

And yet this ascendant arc of history now faces a barrier. The CTFN may largely govern itself, but it still relies on federal financing, just like the Yukon Territory or a have-not province like Ontario. This means the federal government has rather a lot of leverage in periodic negotiations to renew funding.

An impasse has been reached. CTFN says it is being shortchanged relative to other self-governments. The Feds say the CTFN is getting more than they got in the agreement for 2006-2012. Both statements seem true. But CTFN is refusing to accept a deal that offers demonstrably less than what other self-governments are receiving elsewhere in the Yukon, including far less for areas like health and education. Federal bureaucrats refuse to improve their offer. This is pettiness protected by power.

The self-government agreement signed in 2006 calls for "public services at levels reasonably comparable to those generally prevailing in Yukon." CTFN is now being offered no choice but to accept worse services. It is not clear why. The issue is not only equitable funding, but also respect for self-governing institutions negotiated in good faith.

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As it happened, Stephen Harper was scheduled for an unrelated visit to CTFN territory in August to tout his vision for Canada's North. While federal bureaucrats threatened to undermine self-government, Mr. Harper arrived for a barbecue. During the requisite photo-op with CTFN's leaders, the Prime Minister quietly assured them he had been informed of the funding issue and had instructed his minister to look into it.

On the road leading to the barbecue, a group of locals had assembled a peaceful protest. A member of the Prime Minister's security detail marched over to ask what they were up to. "Exerting our aboriginal rights and title," he was told. "Oh," he said, "I thought you were going to dance for us."

The Oct. 1 deadline looms, and a precedent is about to be set. There is still time to decide whether it will stand for bullying or for fairness.

Justin Ferbey is the CEO of the Carcross-Tagish Management Corporation. Heserved as a federal self-government fiscal policy advisor from 2003–2005 and senior official of the Carcross-Tagish First Nation from 2006-2009. Andrew Stobo Sniderman is a JD candidate at the University of Toronto.