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.
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.
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.
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.
Dentons is a global firm driven to provide you with the competitive edge in an increasingly complex and interconnected marketplace. We were formed by the March 2013 combination of international law firm Salans LLP, Canadian law firm Fraser Milner Casgrain LLP (FMC) and international law firm SNR Denton.
Dentons is built on the solid foundations of three highly regarded law firms. Each built its outstanding reputation and valued clientele by responding to the local, regional and national needs of a broad spectrum of clients of all sizes – individuals; entrepreneurs; small businesses and start-ups; local, regional and national governments and government agencies; and mid-sized and larger private and public corporations, including international and global entities.
Now clients benefit from more than 2,500 lawyers and professionals in 79 locations in 52 countries across Africa, Asia Pacific, Canada, Central Asia, Europe, the Middle East, Russia and the CIS, the UK and the US who are committed to challenging the status quo to offer creative, actionable business and legal solutions.
For more information, visit our Canadian Tax Litigation blog at www.canadiantaxlitigation.com
Learn more at www.dentons.com
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Specific Questions relating to this article should be addressed directly to the author.