Canada: Distinguishing Between A Tax And A Regulatory Charge And The Return Of Improperly Collected Money

Section 53 of the Constitution Act, 1867 provides that "Bills for appropriating any Part of the Public Revenue, or for imposing any Tax or Impost, shall originate in the House of Commons."

This provision gives effect to a central principle of parliamentary democracies that taxation cannot occur without representation and, thus, that any measure imposing a tax must originate in the legislature. Taxation powers, therefore, cannot arise incidentally in regulations or other delegated legislation.

As a result, where legislation provides that a minister or an agency is permitted to collect "fees" by way of regulation (which will prescribe the amount to be paid and the terms of payment), that minister or agency cannot misuse the power to levy fees to levy what is in fact and in law a tax.

Over the past two decades, the Supreme Court of Canada (SCC) has incrementally developed jurisprudence that seeks to answer two questions that flow from Section 53 and the potential misuse of the power to levy fees.

The first question is: when is a levy a tax as opposed to some other regulatory charge?

That question has been answered by the SCC's decision in 620 Connaught Ltd v. Canada (Attorney General) 2008 SCC 7 (620), which sets out an analytical framework to distinguish a tax from a regulatory charge.

The second question is: what happens to the amounts collected, if the levy is a tax that did not originate in the legislature? That question has been answered in Kingstreet Investment Ltd. v. New Brunswick [2007] 1 S.C.R. 3 (Kingstreet), which provides that, subject to limitation periods and remedial legislation, the Crown is required to return the money to the person from whom it was improperly collected.

620 — When is a Levy a Tax?

In 620, the SCC articulated a clear analytical framework to determine whether a levy is a tax as opposed to a regulatory charge. The purpose of the analysis is to distil the levy to its dominant or most important characteristics (as opposed to its incidental features), and to identify its primary purpose. The analysis follows a two-stage process whereby a court first considers whether the levy has the attributes of a tax and then considers whether the levy is connected to a regulatory scheme.

Stage I — Does the levy have the characteristics of a tax?

The first step in the analysis is to determine whether the levy has the characteristics of a tax by considering whether it is:

  1. enforceable by law — this element will be met when there is a legal requirement to pay or practical compulsion in the sense that failing to pay would result in the withholding of some license or authorization issued by the government to engage in some activity or business or some other penalty;

  2. imposed under the authority of the legislature — this element will be met when the charge purports to be imposed pursuant to the authority of some legislation;

  3. levied by a public body — the levy cannot originate from a private entity; and

  4. intended for a public purpose — this requirement will be met when the purpose of the levy is to collect funds for some public purpose.

As noted by the SCC in 620, these characteristics will likely apply to most government levies. It is therefore necessary to ask whether each of these elements are the dominant characteristics of the levy or whether they are only incidental. If they are only incidental, then the levy will not be considered a tax. Also, it is important to keep in mind that these factors were first articulated by the SCC in 1931 in Lawson v. Interior Tree Fruit and Vegetable Committee of Direction [1931] S.C.R.357 at a time when government regulation and the accompanying fees were not as pervasive as they are now.

Assuming that these requirements are met, a court will then turn its mind to the second part of the analysis and consider whether the levy is connected to a regulatory scheme.

Stage II — Is the levy connected to a regulatory scheme?

The second element of the analysis was developed more recently by the SCC in Eurig Estates (Re) [1998] 2 S.C.R. 565 and Westbank First Nation v. British Columbia Hydro and Power Authority [1999] 3 S.C.R. 134. This element requires the court to consider whether the levy is "unconnected to any form of a regulatory scheme" or is "necessarily incidental to a broader regulatory scheme." When the levy is not connected to any regulatory scheme, it will be a tax. When the levy is connected to some regulatory scheme in some necessary manner, it will be a regulatory charge.

To determine whether the levy is connected to a regulatory scheme, a court should look for the presence of some or all of the following indicia:

  1. a complete, complex and detailed code of regulation;

  2. a regulatory purpose that seeks to effect certain behaviour;

  3. the presence of actual or properly estimated costs of the regulation; and

  4. a relationship between the person being regulated and the regulation, where the person being regulated either benefits from, or causes the need for, the regulation.

As noted by the SCC in 620, the first three considerations establish the existence of the regulatory scheme while the fourth consideration establishes that the regulatory scheme is relevant or connected to the person being regulated. A relationship between the scheme and the person being regulated will exist when the revenues collected via the levy are tied to the costs of the regulatory scheme (i.e., there is some reasonable nexus between the funds collected by the levy and the costs of funding the regulatory scheme), or where the levy itself has a regulatory purpose (i.e., encouraging or discouraging certain behaviour).

The fourth consideration has the most room for the application of judicial discretion as it requires a court to consider the sufficiency of the relationship between the regulatory scheme and the person paying the levy, and whether that relationship is direct or indirect. The resulting concern for those seeking to challenge the imposition of a levy on the basis that it is an unconstitutional tax for want of authorization from the legislature is that a court will broadly define the regulatory scheme and will not strictly apply the requirement for a direct connection between the person being regulated and the regulatory scheme.

However, in 620, the SCC has made it clear that the relationship between the scheme and the person paying the levy must be sufficient and direct. In its decision in 620, the SCC adopted the reasons of the Federal Court of Appeal, which held that the regulatory scheme was sufficiently and directly related to the person paying the levy as the amounts collected were applied in a manner that brought a direct benefit to the person's business. In 620, restaurant and bar owners were required to pay a levy on the alcoholic beverages they sold in Jasper National Park. The amounts collected were used to fund the operation of Jasper National Park where the alcoholic beverages were sold. Therefore, the amounts were applied in a manner that would increase the person's potential customer base (i.e., there was a direct benefit). What is particularly important is that the Federal Court of Appeal stated, and the SCC agreed, that the person would only receive an indirect benefit if the amounts collected went to funding the national park system generally or to funding the central administration of national parks, thereby reinforcing the need for a direct connection.

Taxes and regulatory charges distinguished from user fees and proprietary charges

In 620, the SCC distinguished between a tax, as defined above (and which must originate in the legislature) and a regulatory charge, a user fee and a proprietary charge.

The SCC defined a "regulatory charge" as a levy imposed in relation to rights or privileges awarded or granted by the Crown. The funds collected under the regulatory scheme to which the levy relates are used to finance the scheme or to alter individual behaviour.

In contrast, the SCC defined a "user fee" as a fee charged by the Crown for use of government services or facilities. In order for a levy to be a "user fee" a clear connection must exist between the quantum charged and the cost to government in providing the services or facilities such that the user fee charged does not exceed the cost to government of providing the service or facilities.

Also in 620, the SCC identified "proprietary charges" as a fourth category of levies. A "proprietary charge" is a levy charged for goods or services supplied by the Crown in a commercial context. Citing commentators, the SCC identified charges such as royalties or rents for the exploitation of provincially owned natural resources as examples of proprietary charges.

Kingstreet — What Happens to the Amounts Collected?

If a court concludes that the levy is a tax as opposed to a regulatory charge and also concludes that the tax was not enacted by the legislature in accordance with the Section 53 of the Constitution Act, 1867, the issue then becomes what to do about the amounts improperly collected.

In Kingstreet, the SCC simply held that the amounts collected are to be returned to the person from whom they were collected.

In a unanimous decision, the SCC forcefully held that illegally collected taxes must be returned to the person who paid them, subject to limitation periods and remedial legislation. The SCC held that to permit the Crown to retain an ultra vires tax would be to condone a breach of the rule of law. By adopting a rule that grants a constitutional right to recover illegally collected taxes, the SCC expressly rejected earlier jurisprudence that appeared to immunize public authorities from restitutionary claims with respect to monies collected under invalid legislation. This is an important finding as the result of a challenge to an illegally imposed tax is not simply relief against future payments but can result in the return of amounts paid.

McCarthy Tétrault Notes:

Individual businesses operating in Canada, and industry associations, should closely scrutinize any levies that they, or their members, are paying to public authorities — and should consider whether those levies can be properly characterized as a tax. If a levy can be characterized as a tax, businesses or industry associations should determine whether that levy has been properly authorized by the legislature.

Examples of instances where "fees" have been later determined to be taxes include "fees" related to the purchase of fuel in British Columbia, having a will probated in Ontario and the sale of alcohol in New Brunswick.

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.

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