Abstract
Municipal governments in Canada have come to rely increasingly on user fees to fund local services, as they struggle to deal with the combined pressures of federal and provincial devolution of responsibility for such services and the political costs of raising property taxes. While there is a substantial body of literature regarding the rationale for user fees, little information exists about how to design and implement a user fee so as to ensure that it satisfies the legal requirements for imposing this type of levy. The authors provide a detailed review of the existing Canadian case law to highlight key legal, technical, and administrative issues facing municipalities in designing and implementing user fees. The discussion focuses in particular on the principal legal tests for user fees and the application of those tests in specific cases. Through their analysis, the authors draw attention to several unresolved issues and inconsistencies in the application and interpretation of the tests, which need to be navigated and addressed by the courts.
Introduction
A growing concern for Canadian municipalities is their ability to generate sufficient revenue to fund activities, using the most appropriate policy instrument, while balancing complex policy challenges. As "creatures of the provinces," Canadian municipalities may raise revenue only through means authorized by the provinces.1 As a result, fewer revenue-generating instruments are available to municipalities as compared with those available to the provincial and federal governments. These concerns have led Canadian municipalities to turn increasingly to user fees as an alternative to property taxes.2
While the rationale for user fees is well established in the literature,3 little information exists on how to satisfy the Canadian legal requirements for the imposition of user fees, despite the presence of significant relevant case law.4 In fact, the legal requirements for user fees do not appear to be well understood, if they are even considered, in the existing literature. There is evidence suggesting that municipalities have experienced legal difficulties in implementing user fees. Not only have municipal user fees in a number of forms faced legal challenges across Canada (examples include campground fees,5 volumetric gravel removal fees,6 and waste disposal fees7), but they have also been the subject of negative internal audit reviews.8
The primary purpose of this article is to assess the current state of the law on user fees in Canada and to highlight key issues that present challenges to Canadian municipalities in ensuring that user fees are legally permissible and appropriate.9 By carrying out a detailed review and critique of the existing case law, we aim to provide clarity with respect to the principles developed in the jurisprudence on the topic of user fees, particularly from a municipal implementation perspective. Our main focus is on the legal tests and criteria that are relevant for municipal public administrators. While these tests may address some questions regarding the legitimacy of user fees, the law in this area is complex and not definitive. As a result, many legal questions remain unresolved, creating uncertainty with respect to the specific requirements that must be met in designing municipal user fees. Our intention in highlighting these grey areas of the law is to illuminate the inconsistencies between the existing legal tests, not only to ensure that municipalities are aware of potential vulnerabilities but also to guide courts toward resolving these inconsistencies. An important caveat of our work is that, because municipalities derive their authority to charge user fees from their enabling legislation, the analysis presented here cannot and should not supplant careful review of such legislation by any municipality contemplating the introduction of user fees.
The discussion that follows is divided into six sections. In section one, we outline the constitutional authority for municipalities to charge user fees. Then, in section two, we explain the legal tests for user fees and review the leading cases establishing these tests and their respective criteria. Our discussion focuses on those cases in which the legal criteria have been elaborated or clarified; by no means do we attempt to cover all municipal user fee cases. However, we do include user fee cases outside municipal law where the judgment would apply in the municipal context. Drawing on this case-law review, in section three we identify and explain a number of unresolved issues related to the existing legal tests, and make recommendations for clarification of the test. Then, in section four, we address an important complication that arises in the jurisprudence—the difference between a user fee and a regulatory charge. Again, our review of the case law highlights several unresolved questions related to the distinction between a user fee and a regulatory charge, and these are discussed in section five. Section six presents a few brief concluding comments.
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Originally published by Canadian Tax Journal.
Footnotes
1 The expression "creatures of the provinces" is often used in reference to, and is derived from, the constitutional status of municipal governments in Canada, discussed in the next section of the article. Throughout the article, the term "provinces" is used in a broad or general sense and may include one or more of Canada's three territories.
2 On average, revenues from municipal user fees have grown at an annual rate of 2 percent since 1988, surpassing the growth rate in property taxes: Federation of Canadian Municipalities, The State of Canada's Cities and Communities 2012 (Ottawa: Federation of Canadian Municipalities, 2012), at 4. (www.fcm.ca/Documents/reports/The_State_of_Canadas_Cities_and_Communities_2012_EN.pdf).
3 See, for example, Richard M. Bird, Charging for Public Services: A New Look at an Old Idea, Canadian Tax Paper no. 59 (Toronto: Canadian Tax Foundation, 1976); Harry M. Kitchen, Local Government Finance in Canada (Toronto: Canadian Tax Foundation, 1984); Harry M. Kitchen, Municipal Revenue and Expenditure Issues in Canada, Canadian Tax Paper no. 107 (Toronto: Canadian Tax Foundation, 2002); Harry Kitchen, "Pricing of Local Government Services," in Paul A.R. Hobson and France St-Hilaire, eds., Urban Governance and Finance: A Question of Who Does What (Montreal: Institute for Research on Public Policy, 1997); Richard M. Bird and Thomas Tsiopoulos, "User Charges for Public Services: Potentials and Problems" (1997) 45:1 Canadian Tax Journal 25-86; Donald N. Dewees, "Pricing Municipal Services: The Economics of User Fees" (2002) 50:2 Canadian Tax Journal 586-605; and David G. Duff, "Benefit Taxes and User Fees in Theory and Practice" (2004) 54:4 University of Toronto Law Journal 391-447.
4 We note, in particular, one Canadian study and three US studies on the legal criteria applicable to user fees: Catherine Althaus, Lindsay M. Tedds, and Allen McAvoy, "The Feasibility of Implementing a Congestion Charge on the Halifax Peninsula: Filling the 'Missing Link' of Implementation" (2011) 37:4 Canadian Public Policy 541-61, briefly summarize the key Canadian case law on the legal criteria for a user fee in Canada, to evaluate whether a congestion charge could be designed to satisfy the legal requirements for a user fee; Wisconsin, Legislative Audit Bureau, Joint Legislative Audit Committee, Best Practices Report: Local Government User Fees (Madison, WI: Legislative Audit Bureau, April 2004) (http://legis.wisconsin.gov/lab/reports/04-0UserFeesFull.pdf), provides a brief overview of the statutory and case law that governs the distinction between a tax and a user fee in Wisconsin; Leslie A. Powell, "User Fee or Tax: Does Diplomatic Immunity from Taxation Extend to New York City's Proposed Congestion Charge?" (2009) 23:1 Emory International Law Review 231-71, uses statutes and case law to determine whether the city of New York's proposed congestion charge meets the legal criteria to be considered a user fee and therefore not subject to the Vienna Convention on Diplomatic Relations; and Hugh D. Spitzer, "Taxes vs Fees: A Curious Confusion" (2003) 38:2 Gonzaga Law Review 335-65, considers the case law for distinguishing a tax and a user fee in the state of Washington.
5 Carson's Camp Ltd. v. Amabel, 1998 CanLII 14917 (ONSC).
6 Allard Contractors Ltd. v. Coquitlam (District), [1993] 4 SCR 371.
7 Antigonish (Town) Waste Disposal Charges Bylaw, Re (1999), 7 MPLR (3d) 165 (NSSC).
8 For example, City of Ottawa, Office of the Auditor General, 2010 Audit Report (Ottawa: Office of the Auditor General, 2011) (www.ottawa.ca/city_hall/mayor_council/auditor_general/audit_reports/2011/annual_report_2010_en.pdf), where the auditor general wrote, first, that there was no comparison of planned amounts and actual costs and volumes to validate the user fees charged by the city of Ottawa; second, that city council was not provided with the details of the costing used to justify the user fees; and finally, that some user fee calculations included costs that were in no way attributable to the service being provided.
9 While our work focuses on issues related to municipal user fee design, many of the lessons that we expound can also be applied to user fees designed by other levels of government. Municipalities, however, operate within a constrained fiscal environment that serves as a backdrop for the application of these legal principles. Other levels of government are not so constrained, and some of the considerations that we outline would not apply beyond municipal governments. This is not to suggest that there are no restrictions on the fiscal powers accorded to the federal and provincial governments. Governments at both levels are constrained not only constitutionally but also procedurally. In particular, the Constitution Act, 1867 stipulates that before a tax can be enacted, it must be approved by Parliament or a provincial legislature, as the case may be. See sections 91 and 92 of the Constitution Act, 1867 (UK), 30 & 31 Vict., c. 3. Failure to meet this procedural requirement would result in "taxation without representation."
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