In a nutshell: we don't elect a prime minister directly, we elect a member of parliament in each electoral district (riding.) The party with the most members elected is asked to form a government by the Queen's representative (who is appointed by the previous prime minister) and the leader of that party becomes the PM.

This means that in order to get a seat in Parliament, a new party has to get more votes than any other party in one riding. If there's only two parties, that means 50% of the vote, but it's quite common for three or four parties each to get a sizeable chunk of the vote in any given riding. Most of the time, though, it's a three-way race. There have been several elections lately where the Liberals got a majority of the seats in Parliament while taking home about 35% of the popular vote, because the vote was split so finely in many ridings that the count had to be very precise. The guy who won in my riding last time won by less than seven hundred votes, out of some forty thousand cast.

We need parliamentary reform, but the parties that are in power have no interest in seeing it happen - they're benefitting from this system quite nicely.
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