The fiscal climate of restraint in the Canadian province of Ontario has led to increased calls for a more diversified higher education system. Significant diversity in the university sector in Ontario has not been achieved that underscores the importance of understanding government policy and its related influences on institutional diversity. This study used policy and descriptive analysis and drew on mutually related theoretical perspectives from organisational theory as its conceptual framework to examine the factors that promoted or hindered processes of diversity in the sector. The study suggests that the lack of diversity objectives in provincial funding policies combined with the existing egalitarian operating funding model contributed to the continued lack of diversity in the university sector in Ontario while federal funding programmes distributed on the basis of a peer review, competitive process increased the potential for diversification. Structural policy directions to enhance diversity in the university sector are also considered.