Back in the 80s there was this show on TV called Ripley’s Believe it or Not that dealt “in bizarre events and items so strange and unusual that readers might question the claims.” This blog post is in the spirit of that show.
Anyone who works in the field of tax policy or expenditures must have a good understanding of constitutional authorities. This is because the powers to tax and spend are outlined in the constitution. While most people think they understand this division of powers, they actually don’t. In this blog post I am going to fundamentally shake your understanding of the Constitution Act. I am going to tell you that, despite the message from Constitutional scholars, provinces do in fact have the power of indirect taxation. Yup, I said it. Provinces can charge indirect taxes. Don’t believe me? Then read this post.
The Constitution Act, 1867 sets out the division of powers between the federal and provincial governments in sections 91 and 92, respectfully. The federal and provincial governments are only able to pass laws on the matters for which they are given authority. If a law is outside of the jurisdiction of a government, that is, the government is not given constitutional authorization to govern in that area, it is ultra vires; if it is within the jurisdiction of a government it is intra vires.
The broadest revenue raising powers are provided to the federal government. The relevant provision in the Constitution Act that explains the federal government’s revenue generation authority is s 91(3), which reads,
s 91. […] it is hereby declared that (notwithstanding anything in this Act) the exclusive Legislative Authority of the Parliament of Canada extends to all Matters coming within the Classes of Subjects next hereinafter enumerated; that is to say,
(3) The raising of Money by any Mode or System of Taxation.
Section 91(3) has been interpreted to mean that the federal government can pass both direct and indirect taxes.
The revenue raising powers of provinces are more limited than those of the federal government. Section 92(2) governs the raising of revenue in a province. This section reads,
(2) Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes.
Section 92(2) has been interpreted to include the legislative power to impose a “fee or charge”, meaning that s 92(2) provides the provincial authority for the charging of both direct taxes and user fees.
And that is where most people stop and conclude that the provinces can only charge direct taxes. This conclusion though ignores section 92(9) which authorizes licences and has been found to also provide for the levying of fees in relation to those licences. This begs the question that if license fees are direct taxes, why would they need to be listed separately from section 92(2)?
This point is taken up in Lawson. The court in Lawson held that the jurisdiction of the provincial government, which is limited in the Constitution Act, s. 92(2) to impose direct taxes, does not carry over to s. 92(9) with respect to licence fees. That is, while many think that according to the Constitution Act, s. 91(3), only the federal government can charge indirect taxes, the Court in Lawson implied that licence fees may be charged as indirect taxes. Specifically, the Court said
“The question has never yet been decided whether or not the revenue contemplated by this head can in any circumstances be raised by a fee which operates in such a manner as to take it out of the scope of ‘direct taxation’ Prima facie, it would appear, from inspection of the language of the two several heads, that the taxes contemplated by no. 9 are not confined to taxes of the same character as those authorized by no. 2, and that accordingly imposts which would properly be classed under the general description ‘indirect taxation’ are not for that reason alone excluded from those which may be exacted under head 9. On the other hand, the last mentioned head authorizes licences for the purpose of raising a revenue, and does not, I think, contemplate licences which, in their primary function, are instrumentalities for the control of trade—even local or provincial trade. Here, such is the primary purpose of the legislation. The imposition of these levies is merely ancillary, having for its object the creation of a fund to defray the expenses of working the machinery of the substantive scheme for the regulation.
This point is expounded on in the subsequent decision in Allard Contractors Ltd v. Coquitlam (District) [Allard Contractors]. The SCC succinctly stated in Allard Contractors that there are limitations on the amount that may be recovered by licence fees, “[w]hile Lawson […] gave a reading to s. 92(9) which opened up the possibility for indirect taxation within that section, it did so in the context of language suggesting that the possibility would be limited to the recoupment of regulatory expenses.” In essence, Lawson has been interpreted to mean that licence fees may be charged for both direct and indirect taxes, but the amount of the fee is limited to the costs of regulation. However, because provinces have authority to charge any form of direct tax, the licence fee exemption is only relevant where a levy has been found to be an indirect tax and must be saved. The levy can be found valid if it is a licence fee.
In summary, the federal government has unrestricted powers to charge any form of levy it chooses, including direct and indirect taxes as well as user fees. Provincial governments are limited to direct taxes and licence fees, as provided for in the Constitution Act. License fees can be either direct and indirect taxes. Hence, provinces can charge indirect taxes if they are found to be licence fees. Believe it or not!