Open this photo in gallery On Dock Street in Shelburne, N.S., visitors can see one of the many signs of the town's 18th-century Loyalist roots. Shelburne was once home to 10,000 people, but has only 1,700 today. Darren Calabrese/The Globe and Mail

There was a time when the town of Shelburne thought of itself as the new New York City. Now its ambition is much, much smaller: just survival.

The historic seaside municipality of about 1,700 people, founded on Nova Scotia’s South Shore by American pioneers loyal to Britain, is facing the prospect of dissolution over a financial crisis it has been struggling with for years. The town can’t afford to fix or replace its aging infrastructure and, with a limited tax base, says it either has to amalgamate with surrounding communities or cease to be a municipality. With a population that has declined steadily since the 1960s, despite a slight uptick in the most recent census, Shelburne is facing an uncertain, worrisome future.

“It’s sad, because something is being lost,” said Mayor Karen Mattatall. “But this is happening in small towns across the province.”

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Throughout the Maritimes’ rural regions, small towns are struggling under similar financial pressures.

And while Nova Scotia, New Brunswick and Prince Edward Island actually have growing populations, it’s been a largely urban phenomenon.

Driven mostly by immigration, the Maritimes’ largest cities are enjoying population growth not seen since the early 1970s, according to Statistics Canada.

More than 16,000 people moved to those three Maritime provinces last year, more than double the number who came to the region in 2010.

Cities such as Moncton and Halifax are getting bigger, younger and richer, with record levels of new residents. Charlottetown has one of the hottest housing markets in Canada. Saint John managed to reverse a decades-long decline in its population by welcoming a wave of new Canadians.

In the rural regions on the East Coast, it’s a much different story.

“We can’t all live in Halifax,” said Paul Richardson, a chartered accountant and partner at Belliveau Veinotte Chartered Professional Accountants in Shelburne. “We have to support our rural communities. Governments pay lip service to this problem, but I don’t think they fully appreciate it.”

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Open this photo in gallery Water Street in Shelburne. The town's population has declined steadily since the 1960s, and the dwindling tax base makes it harder to maintain aging infrastructure.

Open this photo in gallery A for-sale sign hangs in one of Shelburne's historic homes. Town staff say a hike in property taxes won't be enough to make up its growing budget shortfall, and without a solution, it may have to merge with other municipalities.

Shelburne, with its deep, natural harbour and quaint downtown of 18th-century homes that looks like a movie set, once had more than 10,000 residents. Thousands of British-American colonists came here with the promise of free land, followed by waves of Black Loyalists, former slaves who had escaped from the U.S. Its founders imagined a handsome, sophisticated town filled with taverns, hat shops and hair salons that would rival the places they had left behind in New York and other middle colonies of America.

In the 1780s, it was one of the largest settlements in North America, bigger than Halifax and Montreal. But as the land proved difficult to farm, and as many persecuted former slaves ultimately left to take their chances in Sierra Leone, the community began shrinking. More recently, the loss of the town’s naval base and the closure of a boarding school for boys eliminated two major employers in the area.

Today, Shelburne is an aging town with a sleepy main street marked by businesses closed for the winter months. Its work force largely subsists on jobs connected to the fishing industry, including lobster, aquaculture and ship repair. People such as Mr. Richardson argue the provincial government could do more to encourage economic diversity, including disbursing more public sector jobs away from the provincial capital.

Across the Maritimes, meanwhile, cities continue to draw the most talented newcomers, attract young people to universities, offer more opportunities and present fewer obstacles to those who want to start a business. That’s as hard as ever for rural areas to compete with.

“The rural Maritimes really have to pull against gravity,” said Donald Savoie, an expert in public administration and regional economic development at l’Université de Moncton.

“You’re better off starting a business in Moncton or Halifax, and history proves it … human resources skills tend to be higher-knowledge and they tend to locate in urban areas. That’s true whether you live in Ontario or Europe.”

Open this photo in gallery A single flyer and mitten are posted to a community message board on Water Street.

In terms of urbanization, the Maritimes are where Ontario was around the time of the First World War, when more than half the population still lived in rural areas, Prof. Savoie said.

That’s slowly changing, but the transition has been a painful one for many smaller communities. More and more young Maritimers are leaving for cities to go to university – and many aren’t coming back.

“Once you settle into an urban area, you say, ‘Jeez, I’m not sure I want to go home again.’ What you have left is an aging population,” Prof. Savoie said. “And they tend to resist change a lot more than the younger population.”

There’s a role for provinces to play to ease the challenges facing their rural regions, he said, including tax incentives to draw people out of cities. Harrison McCain, co-founder of New Brunswick’s McCain frozen food empire, once suggested that people who live in rural areas shouldn’t pay income taxes.

Prof. Savoie says a policy like that would be a tough sell. But he argues that regulations could be eased and streamlined in rural areas to make it easier to open a business there. There should also be more efforts to attract international students who want to become entrepreneurs in small towns after they graduate, he said.

“There’s no question there’s a role for government, but the answer is not to throw money at it. That is not a solution,” he said. “But governments should look at regulation in rural areas and how that compares to urban areas.”

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Open this photo in gallery Downtown Charlottetown. The PEI capital is facing a housing shortage and rapidly rising rents.

The rural-urban contrast is dramatic around the Maritimes. In Charlottetown, there’s a housing shortage, an influx of immigrants and classrooms bursting at the seams, while in the province’s rural communities people are worried about their future. Family farms are closing, schools are being shuttered and towns are aging and shrinking.

“When people talk about preserving the 'island way of life,’ they’re talking about rural Prince Edward Island, not downtown Charlottetown,” said University of Prince Edward Island political science professor Don Desserud. “It’s not a rosy picture for the rural Maritimes. It’s becoming less and less sustainable.”

But while Maritimers may be nostalgic for their rural roots, the flight to the cities is inevitable, he said. But that doesn’t mean governments shouldn’t do anything to make life easier for rural communities, Prof. Desserud added.

Mayor Mattatall argues that Nova Scotia’s Municipal Government Act should be amended to ease the burden of services that smaller towns must provide, from policing, sidewalk and road maintenance to hockey rinks, parks and sewage treatment systems. Residents in Shelburne’s surrounding areas enjoy many of those services, she said, but pay a fraction of the taxes people in town pay.

The Town of Shelburne is facing an annual deficit projected to be $400,000 within 10 years, which represents more than 10 per cent of its annual operating budget. Shelburne says it simply can’t cut and slash its way to balancing the books.

“Unless the legislation changes, towns are set up to fail,” Ms. Mattatall said. “The province knows this is happening, but they need political will to change it.”

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Open this photo in gallery Karen Mattatall, Shelburne's mayor, wants changes to Nova Scotia’s Municipal Government Act to help towns like hers maintain services.

Raising property taxes also has its limits and can’t make up the gap between what Shelburne collects and what it needs to spend each year, according to town staff. Taxes account for more than 70 per cent of the town’s revenues, but they’re static because Shelburne is landlocked and has little room for new construction.

“Unless we’re growing, we’re not able to keep up. I don’t see any way of overcoming that,” said Darren Shupe, the town’s chief administrative officer. “If we keep going down this road, we’re cutting staff and services down to a level that would be unrecognizable.”

To survive, the town is proposing an amalgamation with two other communities, the larger Municipality of the District of Shelburne and the Town of Lockeport. While Lockeport appears open to a merger, residents in the surrounding rural municipality are worried their taxes would increase under amalgamation.

If a merger can’t be negotiated, Shelburne may have to dissolve and leave its fate to the province. Its town council is expected to make a decision by the end of March. Many residents seem to prefer amalgamation, a path taken by other municipalities around the province.

“People are afraid of change, but I don’t think it will be the end of the world. It’s not like the town will disappear,” said Henry Pedro, a founding partner of Shelburne’s Boxing Rock Brewing. “I think a merger makes a lot of sense. Having a larger tax base will solve a lot of problems. This town will go bankrupt if they don’t do something.”

Mr. Pedro, who moved his family from Toronto in 2012, said there is a lot to like about life in Shelburne. It’s peaceful and affordable, and people look out for each other. Residents may have to accept that its municipal governance structure will change, but that doesn’t mean the community itself will be dramatically altered.

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Open this photo in gallery Henry Pedro assesses a new beer at Boxing Rock Brewing, where he is a founding partner. He moved his family here from Toronto eight years ago.

Open this photo in gallery George Van der Meer, originally from Alliston, Ont., rests briefly at the Shelburne Barrel Factory, where he makes barrels and trawl tubs for fishermen and more tourist-oriented creations.

Some see opportunity in the town’s decline. You can buy waterfront property for a fraction of the price of homes closer to Halifax. It’s a sailing mecca and has a historic core that could draw more tourists – if they only knew about it.

“This is a beautiful place to live. It’s just that there’s no industry here, so there’s no work for young people and they move away,” said George Van der Meer, an Alliston, Ont., transplant who bought the Shelburne Barrel Factory on the waterfront less than two years ago.

“If you want a community to grow, you have to promote it. I can see all kinds of opportunity here, but sometimes people here don’t even see it themselves.”

Mr. Van der Meer, like a lot of residents here, feels the province overlooks this corner of the South Shore and promotes tourism to places such as Peggy’s Cove and Lunenburg instead. An important ferry link between Yarmouth and New England has also been closed for more than a year due to ongoing terminal renovations, keeping more traffic away from Shelburne.

Ms. Mattatall has spent most of her life here and wants to make the best decision for her town’s future. As she drives around streets she could navigate with her eyes closed, she proudly points out new public art in the children’s park, the renovated sailing academy and a farmer’s market built for the filming of The Scarlet Letter in 1995.

There are encouraging signs of life despite the challenges, she says. The elementary school grew slightly this year, and some younger business owners have brought new energy and new ideas, slowly changing the town’s retirement community reputation.

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The fiscal problems facing Shelburne are nothing people should be ashamed of, Ms. Mattatall said. Many rural communities like hers are struggling with historical population trends that defy simple solutions.

“Some people have said, ‘Maybe we could do a fundraiser,’” she said. “I don’t think they truly understand how our revenue is generated and how serious this problem is … That’s why we want to make sure we get this right.”

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