Canada: The Importance Of Borders In A Borderless World: Ontario Court Stays Action For U.S. Transportation Taxes

In Prince v. ACE Aviation Holdings Inc., the Ontario Court of Appeal stayed a class action based on allegations that Air Canada had improperly collected transportation taxes levied under the U.S. Internal Revenue Code (the "Code"). The Court's decision highlights the difficulty in predicting the outcome of jurisdictional disputes involving e-commerce transactions. In addition, it illustrates the reluctance of our courts to permit class actions based on claims that engage the territorial sovereignty of other nations.


Like other air carriers, Air Canada acts as a withholding agent on behalf of the U.S. in collecting taxes for U.S. flights under the Code. In Prince, the representative plaintiffs sued Air Canada, alleging that the U.S. "Transportation Tax" and "Domestic Flight Segment Tax" under ss. 4261(a) and (b) of the Code were improperly levied by Air Canada on flights within Canada but within 225 miles of the continental U.S. By withholding the taxes, Air Canada was said to have been involved in the extra-territorial application of U.S. tax law.

The Court of Appeal reversed the motion judge's decision in part and stayed all of the claims advanced by the representative plaintiffs. While accepting that the Ontario courts have jurisdiction, Ontario was not an appropriate forum. The Court's decision is noteworthy for two reasons.

Where is a Ticket Purchased?

Under the Code, a passenger who pays for her ticket outside of the U.S. is required to pay the Transportation Tax and Domestic Flight Segment Tax only if the flight begins and ends in the U.S. A passenger who pays for her ticket inside the U.S. must pay the taxes on U.S. flights and flights within 225 miles of the continental U.S. The proposed subclasses depended on the passenger's residency, flight and where the ticket was purchased. Without deciding the issue, the Court noted the difficulty in determining where a flight was "purchased" under the legislation:

On the record before us, there is no clear answer to the question of where, in any given case, a class member's ticket was "paid for" as a matter of fact and law. I am not sure that the answer is as simple as the appellants would have it – saying the ticket is "paid for" in the place where the purchaser is physically present when she clicks a button on her computer screen, authorizing the ticket to be charged to her credit card, which may have been issued in the U.S. by a U.S. bank. Is the ticket "paid for" in Canada when she is sitting in the Windsor law office, but "paid for" in the U.S. when she buys it using her computer to access the internet from her hotel in Detroit?

The types of questions posed by the Court are not new and highlight the thorny issues for litigants in predicting the outcome of jurisdictional disputes, particularly where e-commerce is involved. As discussed in an article that can be found here, the Supreme Court of Canada has struggled with providing guidance for litigants on these types of issues for well over two decades.

Territorial Sovereignty

The decision in Prince provides a clear warning to class counsel to proceed with caution in advancing claims that trench on the jurisdictional sovereignty of other nations.

In concluding that Ontario was not a convenient forum, the Court relied on the ancient "Revenue Rule" laid down in United States of America v. Harden. In Harden, the Supreme Court of Canada refused to allow the U.S. to enforce a judgment in Canada for taxes obtained in the U.S. District Court.

While accepting that the Ontario courts had jurisdiction, the Court of Appeal held that the claims should be stayed on the basis that Ontario was not a convenient forum. In coming to this conclusion, the Court relied on the underlying policy rule in Harden that it would be unwise for a Court to adjudicate provisions of "public order" of another sovereign nation.

Under U.S. law, a person who claims that transportation taxes have been improperly collected has no right of action against the withholding agent and must follow a statutory procedure to recover the tax alleged to have been unlawfully collected. A claim for a refund must be filed with the IRS. If the claim is denied, the taxpayer may file suit in the U.S. Federal Courts. The only proper defendant in such a suit is the U.S.; a withholding agent such as Air Canada has statutory immunity. Similar laws and procedures exist for domestic tax legislation in Canada.

The Court held that comity – defined by the Supreme Court of Canada as an "attitude of respect for and deference to other states" – required the statutory procedure in the U.S. to be followed. As the Court stated:

The appellants' claims raise issues about the taxes imposed by a foreign state, the methods used to collect those taxes, the immunity conferred on those who collect the taxes, and the procedures established for the recovery of taxes and for the interpretation of the taxing statute. As Harden tells us... these are matters that affect the foreign state in a manner "vital to its existence." Insofar as the analysis touches on the "relations between the foreign State and its own citizens or even those who may be temporarily within its borders" it becomes a "troublesome [and] delicate inquiry."

Accordingly, the plaintiffs' complaints should be lodged first with the IRS, with appeals to the Federal Court if necessary.

While Prince serves as a warning to class counsel advancing claims that engage issues of territorial sovereignty, it should provide some comfort to Canadian defendants that collect withholding taxes that their statutory immunity from suit – even a statutory immunity in another jurisdiction – will be respected. It remains to be seen whether the decision will be appealed.

Case Information

Prince v. ACE Aviation Holdings Inc., 2014 ONCA 285

Docket: C57423

Date of Decision: April 15, 2014

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