The Supreme Court of Canada's approach to the recovery of ultra vires taxes: at the border of private and public law.

• Author: Pal, Michael

I INTRODUCTION II THE RESTITUTION OF ULTRA VIRES TAXES: THE CANADIAN LAW PRIOR TO KINGSTREET Amax Potash Air Canada v. British Columbia Air Canada v. Ontario (LCBO) Re Eurig Estate Summary III KINGSTREET V. NEW BRUNSWICK (DEPARTMENT OF FINANCE) Facts At Trial--The New Brunswick Court of Queen's Bench On Appeal--The New Brunswick Court of Appeal At the Supreme Court of Canada The Death of the Immunity Rule from Air Canada The Relationship between Constitutional and Restitutionary Principles The 'Passing On' Defence Limitation Periods and Ultra Vires Taxation IV NARROWING THE REACH OF KINGSTREET: CANADA (ATTORNEY GENERAL) V. HISLOP V CONCLUSION: THE RESTITUTION OF ULTRA VIRES TAXES GOING FORWARD Abstract

This article explores the Supreme Court of Canada's approach to the recovery of ultra vites taxes in two recent cases, Kingstreet Investments Ltd. v. New Brunswick (Department of Finance) and Canada (Attorney General) v. Hislop. Ultra vires taxation refers to the collection of taxes by a government when those moneys are levied pursuant to an unconstitutional statute, regulation or order-in-council, or by a statutory authority acting outside of the bounds of its enabling legislation.

The article argues that in Kingstreet, the Supreme Court correctly adopted an essentially constitutional law rather than a restitutionary or private law framework in deciding cases of ultra vires taxation. This framework was appropriate given the fundamental constitutional principles at stake--no taxation without representation and the rule of law. It is further argued, however, that because these fundamental constitutional principles are at issue, the recovery of ultra vires taxation should not have been categorized as a separate, third branch of the law of restitution by the Court; nor should the recovery of ultra vires taxes have been made subject to ordinary statutory limitation periods. Furthermore, although the Court was correct in holding that the 'passing on' defence was inapplicable in cases of ultra vires taxation, the article notes that the decision in Kingstreet may undermine the use of the defence in other areas of the law.

The article also argues that Hislop unduly restricts the scope of the reasoning in Kingstreet that ultra vires taxes should be recoverable by the taxpayer. By holding that Kingstreet does not apply in cases where unjust enrichment of the state has occurred through compulsory benefit schemes, Hislop severely limits the circumstances in which payments made to the state pursuant to an unconstitutional statute may be recovered.

Resume

Cet article explore l'approche de la Cour Supreme du Canada pour recuperer les taxes ultra rires dans deux cas recents, Kingstreet Investments Ltee c. le Nouveau-Brunswick (Ministere des Finances) et Canada (Procureur general) c. Hislop. L'imposition ultra vires porte sur le recouvrement de l'impot par un gouvernement lorsque l'imposition est effectuee selon un reglement, un decret, ou une loi anticonstitutionnelle, ou une autorite legislative qui agit en dehors des limites de son mandat.

L'article avance que, dans Kingstreet, la Cour Supreme a adopte une loi essentiellement correcte d'un point de vue constitutionnel, au lieu d'un cadre base sur la restitution ou sur le droit prive, pour rendre jugement dans les cas d'imposition ultra vites. Cette approche est appropriee, etant donne les principes constitutionnels fondamentaux impliques--pas de taxation sans representation, et la primaute d'un Etat de Droit. Cependant, l'argumentation continue puisque, etant donne les principes constitutionnels fondamentaux qui sont en question, la Cour n'aurait pas du classifier la recuperation d'imposition ultra vires separement en tant que troisieme ramification de la loi sur la restitution; la recuperation de taxes ultra vires ne devrait pas non plus etre assujettie aux periodes limites statutaires conventionnelles. De plus, bien que la Cour ait pris la bonne decision en jugeant que la defense de "passing on" etait inapplicable dans les cas de taxes ultra vires, l'article indique que la decision dans Kingstreet pourrait limiter l'emploi de la defense dans d'autres aspects de la loi.

L'article avance aussi que Hislop limite excessivement la portee du raisonnement dans Kingstreet qui etablit que les contribuables devraient pouvoir recuperer les taxes ultra vires. En confirmant que Kingstreet ne s'applique pas aux cas ou l'enrichissement injustifie de l'etat decoule de programme d'avantages sociaux obligatoires, Hislop limite severement les circonstances ou les paiements faits a l'etat suite a une loi anticonstitutionnelle peuvent etre recuperes.

I INTRODUCTION

This article will evaluate the current Canadian law of restitution as it relates to ultra vires taxation. Ultra vires taxation refers to the collection of fees or taxes by the government when those moneys are levied pursuant to an unconstitutional statute, regulation, or order-in-council, or by a statutory authority acting outside of the bounds of its enabling legislation. The law on ultra vires taxes is on the border between public and private law. On the one hand, it implicates the following foundational concepts and principles of the Canadian constitutional order: (1) the separation of powers between the judiciary, legislatures, and the executive; (2) the division of powers between the federal and provincial governments; and (3) the rule of law. On the other hand, levying ultra vires taxes leads taxpayers to seek recovery for moneys unconstitutionally collected by the state. Cases of ultra vires taxation are therefore also about justice between the opposing parties in a private law action for the restoration of those moneys paid to the government. Allowing governments to retain ultra vires taxes is essentially to condone arbitrary state action or, in other words, to permit governments to do what is legally impermissible. The underlying importance of the Canadian law on ultra vires taxation is the fact that it establishes whether arbitrary state action will be countenanced.

Two recent decisions of the Supreme Court of Canada have dramatically altered the law in this area. In Kingstreet Investments Ltd. v. New Brunswick (Department of Finance) the Court clarified to a great extent the enormous confusion surrounding the state of the law on the restitution of ultra vires taxes. Kingstreet was unequivocal that ultra vires taxes must be recoverable. Otherwise, serious harm is done to constitutional principles and the rule of law. Canada (Attorney General) v. Hislop involved the right of saine-sex survivors to their deceased partners' Canada Pension Plan payments. (2) In Hislop, the Court distinguished Kingstreet, and did so on the basis that cases regarding ultra vires taxes are fundamentally different from cases such as Hislop, which concern government benefits and programs.

This article will argue that Kingstreet was rightly decided in opting to assess cases of ultra vires taxes through constitutional rather than private law principles and in holding in favour of recovery by the taxpayers. That the recovery of ultra vires taxes legitimately constitutes a third branch of restitution law as Bastarache J. decides is less defensible. Justice Bastarache also appropriately rejected the use of the 'passing on' defence. He attempted to narrow the impact of the judgment by stating that his critique of the passing on defence should apply only to the realm of ultra vires taxes. The reasons offered by the Court in rejecting the defence, however, are persuasive and suggest that passing on is unlikely to persist as a valid defence in the law of restitution more generally. It is problematic, however, that the Court limited recovery in Kingstreet to the six-year period prescribed by the New Brunswick Limitation of Actions Act. (3) The Act should instead have been read down so that an ordinary statute does not allow the province to do indirectly what it is constitutionally barred from doing directly.

Hislop, it will be argued, unjustifiably narrowed the scope of Kingstreet. Hislop was decided on s. 15 equality rights under the Canadian Charter of Rights and Freedoms. (4) It was not decided on principles of unjust enrichment. Kingstreet created the strong presumption for the recovery of any unjust enrichment by the state. The reasoning in Kingstreet could potentially have been extended beyond cases involving ultra vires taxes to those of unjust enrichment by the state through contributory benefit programs. By distinguishing cases of ultra vires taxation from those concerning government benefits, Hislop limited this strong presumption of recovery to a much narrower subset of cases than was necessary or desirable.

This article will provide an in-depth study of the Canadian law on ultra vires taxation. It will first assess the state of the law on the restitution of ultra vires taxes prior to the Court's decision in Kingstreet. Kingstreet is in many ways a reaction to the incoherence and inconsistency of the previous case law. All of the issues dealt with in the case were anticipated in the earlier case law. It is therefore necessary to deal with the major cases prior to Kingstreet in detail. Second, it will consider Kingstreet and the implications stemming from the decision. Third, it will assess the impact of Hislop on the law of unjust enrichment by the state.

II THE RESTITUTION OF ULTRA VIRES TAXES: THE CANADIAN LAW PRIOR TO KINGSTREET

This section will highlight the major cases on ultra vires taxation prior to Kingstreet as they set the stage for the Supreme Court's decision. The state of the law on the restitution of ultra vires taxes before Kingstreet was soundly criticized as incoherent. (5) At best, its application by Che courts could be described as inconsistent. There were strands within the law prior to Kingstreet that strongly articulated the arguments in favour of restitution. There were others which were hostile to...