Canada: Prince V ACE: Extra-Territorial Effect Of U.S. Tax Laws?

Should a Canadian court exercise its jurisdiction to hear a class action lawsuit against Air Canada for improperly collecting U.S. travel taxes on ticket purchases in Canada and on air travel in Canada?

That was the question in Prince v. ACE Aviation Holdings Inc. (2014 ONCA 285), in which the Ontario Court of Appeal declined to exercise its jurisdiction and stayed the class action on the basis that the U.S. was clearly a more appropriate forum until the plaintiffs exhaust their rights in the U.S. by first applying to the IRS for a refund and, if refused, appealing to the U.S. courts.

In Prince, a class action was commenced in Ontario against Air Canada for improperly collecting U.S. travel taxes on ticket purchases in Canada and on air travel in Canada. Effectively, the plaintiffs alleged that Air Canada was giving extra-territorial effect to U.S. tax laws. The plaintiffs claim raised issues about the taxes imposed by the U.S. government, the methods used to collect those taxes, the immunity conferred on intermediaries who collect the taxes, the procedures established for the recovery of those taxes and the interpretation of the taxing statute.

Analysis

Before a Canadian Court will engage in the interpretation of a foreign revenue law, the party alleging the infringement must raise the issue in the appropriate forum in the foreign jurisdiction.  Doing so achieves the goals of order, fairness, efficiency and comity, all of which underlie the forum non conveniens analysis.

Jurisdiction

Ontario had presence-based jurisdiction over Air Canada.  However, Air Canada argued that the "revenue rule", which provides that a Canadian court will not entertain a suit by a foreign state to recover a tax, bars the Ontario court from having subject-matter jurisdiction over the plaintiffs' action.  The Court of Appeal reasoned that an Ontario court has jurisdiction to determine whether a foreign law is being enforced extra-territorially and to grant appropriate relief.  Such an approach is consistent with the "revenue rule" as the court would only determine those rights and obligations of the plaintiffs and Air Canada which are not derivative of the sovereign authority of the U.S.

Forum Non Conveniens

The forum non conveniens analysis engaged in by the Court of Appeal included a consideration of juridical advantages and disadvantages.

In the U.S., Air Canada, as an intermediary tax collector for the U.S. government, is entitled to statutory immunity (comparable immunity provisions exist in Canadian tax law).  Air Canada would not have the benefit of that immunity in Canada.

The administrative procedure to recover an overpayment of tax from the IRS is a complete system for the effective administration of taxes in the U.S and was not considered to be a procedural disadvantage to the plaintiffs.  Comity requires respect for the right of a foreign state to make and apply laws within its territorial limits.

Conclusion

As a matter of comity, the interpretation of the U.S. statute, including its scope, should be undertaken by agencies and courts in the U.S.  This would require the IRS to determine whether Air Canada acted beyond the scope of the taxation statute. If the plaintiffs are unsuccessful, the IRS decision can be challenged in the U.S. courts.   If the U.S. court affirms the decision of the IRS, then the Ontario Court will have the benefit of those reasons if the Court is called upon to decide whether the collection of taxes by Air Canada is a violation of the principles governing the conduct of sovereign states and an extraterritorial application of U.S. law in Canada.

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