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Taxation & Spending Powers
The taxing powers
assigned to Canada’s
legislatures by the Constitution Act,
1867 provoke more division of powers litigation than any other
provisions in the Constitution Act,
1867. What are the critical questions that must be answered in these
cases?
Is taxation
involved?
The question that must first be asked is: does the
legislation at issue impose a tax, or does it impose something else?
Governments can charge money for many different reasons – when a law
student pays $10.00 for a copy of a piece of legislation from Access Ontario, she is
paying a charge, which raises revenue. But it would be difficult to
characterize this as a tax – or even as a “regulatory charge”. To be a tax,
a charge must have some constitutionally-defined limits, form, and scope.
Is the
taxation ‘direct or indirect’?
Central to the design of the federal distribution
of taxation powers is a distinction between direct and indirect taxes. This
distinction comes from John Stuart Mill’s 19th century classic, Principles of Political Economy
(Book V, ch.3). Mill thought that distinguishing between direct and indirect
taxes would enhance democracy because the electorate better perceives
direct taxes. With greater scrutiny by the citizenry comes more resistance
to public expenditure, more accountability from public authorities, and
more control by the demos.
Canada’s framers
subscribed to this doctrine by restricting the provincial legislatures and
their municipal subdivisions to “direct taxation”.
Is the
taxation ‘within the province’?
Constitutional law prohibits the “imposition by a
Province of any tax upon citizens beyond its borders.” (CIGOL v. Saskatchewan, [1978] 2
S.C.R. 545). This is now a
central explanation why provinces are limited to direct taxation.
In Manitoba v. Air Canada, [1980] 2 S.C.R. 303 at
316-319, Laskin C.J.C. voided a provincial taking statute which taxed
individuals in aircrafts that temporarily landed in Manitoba on route to
another destination. The Chief Justice ruled:
Merely going through the air
space over Manitoba
does not give the aircraft a situs there to support a tax which
constitutionally must be “within the Province.” In the case of aircraft
operations, there must be a substantial, at least more than a nominal,
presence in the Province to provide a basis for imposing a tax in respect
of the entry of aircraft into the Province. […] Moreover, there is, at
best, merely a notional drawing into the taxation net of interprovincial
and extraprovincial operations, and constitutional authority, which is
limited to direct taxation within the Province, cannot be extended by
self-servicing definitions.
In Air Canada
v. Minister of Revenue et al. (1996), 28 O.R. (3d) 97 [leave to appal
to SCC dismissed Sept. 26/96], the Ontario Court of Appeal considered
whether the province could tax gasoline purchased and primarily consumed
outside the province by Air Canada and Canadian Airlines. Morden A.C.J.O.
held:
The subject-matter of the tax in
the present case is a transaction or event – not the use of an aircraft –
but rather the transfer of aviation fuel into the fuel tank of an aircraft.
Clearly, both the transaction and the aviation fuel, as well as the
taxpayer, are “within the province” and I do not think that the fact that
the aviation fuel was, initially purchased outside the province, weakens
the connection between the province and the transaction. […]
Notwithstanding that the aviation fuel in question has been purchased
outside Ontario and is, substantially,
consumed outside the province, there is no extraprovincial aspect to the
subject-matter of the tax in this case in the way there was in the Manitoba
case.
The notion of a physical presence within the
province upon which these cases determine the constitutional meaning of
“within the Province” is unsatisfactory. This difficulty mirrors similar problems in
determining “within the Province” in the property and civil rights cases.
In Churchill
Falls (Lab) Corp. v.
A.G. Nfld., [1984] 1 S.C.R. 297 searching for a physical situs in answer to the question
‘where is taxation imposed or felt’ leads to unprincipled and sometimes
unjust results. Intellectual concepts like taxation have no physical situs.
“Within the Province” is a constitutional (or
intellectual notion), not a physical one. Accordingly, the appropriate
analysis must be by constitutional method, not geography. The guiding value
ought to be whether the province advances a sufficient “sphere of interest”
to undergird the assertion of provincial legislative jurisdiction. To pour
this concept into more familiar language of constitutional analysis: is the
challenged taxing statute in object and purpose, pith and substance and
effect in relation to direct taxation within the province?
Licenses,
Levies and Regulatory Charges
If the imposition is neither direct nor indirect
taxation, it becomes relevant to ask: what kind of charge is it? Section
92(9) supports a power to impose licensing charges. There are other
permissible charges as well. A probate fee, for example, is neither a tax
nor a licensing charge. It is supportable as being a charge “ancillary or
adhesive to a regulatory scheme.” It is no objection to such charges that
they possess a measure of indirectness.
The line between a “regulatory charge ancillary to
a regulatory scheme” and an “indirect tax” is difficult to draw.
In Ontario
Home Builders and Allard
Contractors, the Supreme Court of Canada ruled that a charged can be
levied to defray the costs of regulatory scheme, notwithstanding that it is
indirect in the sense of the constitutional cases. The term “regulatory
scheme” is a term of art in constitutional law that is discussed in Westbank First Nation v. B.C. Hydro and
Kirkbi v. Ritvik Holdings.
Taxation of
Natural Resources
This issue became a focal point of provincial
concern following the decision of the Supreme Court of Canada in CIGOL v. Saskatchewan, [1978] 2
S.C.R. 545. This case considered a complex of Saskatchewan
legislation and regulations by which Saskatchewan levied a “mineral income tax” at the
wellhead on the price received by an oil producer, and a royalty surcharge
imposed upon oil produced from existing crown lands or from newly
expropriated lands. The mineral income tax and royalty surcharge were 100%
of the difference between the new rising world price and the “basic
wellhead price”, a price received by oil producers prior to the first
spectacular rise in oil prices in 1973. The majority of the Supreme Court
of Canada held that the tax and royalty surcharge to be beyond the powers
of the province, since, as the Court found, they were indirect taxes
designed to regulate the price of Saskatchewan oil in the export market.
Following the CIGOL
decision, Saskatchewan and other provinces
became determined to remove the “direct taxation” restriction on provincial
taxing powers from Canada’s
Constitution. The provincial case received some support from the Federal
New Democratic Party in the Constitutional discussions of the late 1970s
and arly 1980s. As a result, new provincial taxation powers were included
as section 92A(4) of the Constitution
Act, 1982.
Section 92A(4) provides:
92 A. (4) In each
province, the legislature may make laws in relation to the raising of money
by any mode or system of taxation in respect of
(a) non-renewable natural resources and forestry resources in the province
and the primary production therefrom, and
(b) sites and facilities in the province for the generation of electrical
energy and the production therefrom,
whether or not
such production is exported in whole or in part from the province, but such
laws may not authorize or provide for taxation that differentiates between
production exported to another part of Canada and production not
exported from the province.
In Moull, “Section
92A of the Constitution Act, 1867”
(1983), 61 Can. Bar. Rev. 715 at p.718 contends
that “Subsection 92A(4) is a relatively straightforward attempt to give the
provinces the power to levy indirect taxation in the resources field. …
Under clause 92A(4)(a), the provinces will now be able to tax both the
resource in place and its ‘primary production’, or in other words both the
resource itself in situ and the
product that results from its severance, by any system of taxation
including indirect taxation.”
For more information download the
taxation and spending powers sample chapter from Constitutional Law of Canada, Vol. II, 9th
ed. here.
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