Are the Federal Income Tax Act (Canada) and GST Unconstitutional?

DISCLAIMER: The following information is not legal advice. It should not be used or relied upon as such. Paul McKeever disclaims any and all liability respecting the use or abuse of the following information and any losses or penalties resulting therefrom. If you wish to have legal advice, retain a lawyer. Paul McKeever is not, by the presentation or distribution of this information, retained by those who read or obtain it.

Are the Federal Income Tax Act and GST Unconstitutional?

by
Paul McKeever, B.Sc.(Hons), M.A., LL.B.

Are the federal Income Tax Act ("ITA") and Goods and Services Tax ("GST") unconstitutional?

For well over a year, contributors to can.taxes have been debating this question.

Many different people have proposed that the Constitution of Canada gives *only* the provincial legislatures the power to make laws respecting what is called "direct taxation". Suffice it to say that nobody disagrees with the statement that the federal ITA and GST are direct taxes.

Chief among those who have asserted on can.taxes that the federal ITA and GST are constitutional is a lawyer named David Sherman who, apparently, limits his practice to tax issues. I have read no claim by him that he practices constitutional law.

There is a real problem with this debate, however. I have not seen a single *lawyer* (other than myself) challenge Mr. Sherman's position that the federal ITA and GST are unconstitutional. Rather, several non-lawyers have admirably done their best to interpret or paraphrase sections of the constitution and/or the decisions of our highest courts. I would submit that, on the whole, the arguments of those non-lawyers have, for the most part, suffered from reliance upon incorrect interpretations of cases and law. Chief among the misinterpretations is an interpretation of a case which can be cited as:

Nova Scotia (Attorney General) v. Canada (Attorney General), [1950] 4 Dominion Law Reports 369

(I'll refer to that case as the "Lord Nelson" case). From what I can tell, the misinterpretations stem from reports in such publications as the Michael Journal about the tax fighting efforts of Gerry Hart (who, according to legend, never paid income taxes for 40 years because he succeeded, 22 times in the Manitoba Court of Appeal, in his challenge to the constitutionality of the federal ITA). Tax fighters repeatedly state that, in the Lord Nelson case, the Supreme Court of Canada said that the federal ITA is unconstitutional. However, THE CASE SAYS NO SUCH THING. As a result, the arguments of those who have used the Lord Nelson case in support of their position have been discredited by people such as David Sherman.

Like David Sherman, I am a lawyer. Apparently, unlike David Sherman, I practice constitutional law and civil litigation, rather than tax law. I would like further stimulate discussion on the topic of the constitutionality of the federal ITA and GST by providing an argument which opposes that forwarded by David Sherman and the federal government. In the process, I will, hopefully, explain why the typically misinterpreted Lord Nelson case is truly relevant to the issue of the constitutionality of the federal ITA/GST.

An Argument

The constitution of Canada is the supreme law of Canada. Part of our constitution is the Constitution Act, 1867. Subsections 91(3) and 92(2) of the Constitution Act, 1867 give to the federal Parliament and the provincial Legislatures, respectively, the power to pass certain types of tax laws. If the federal Parliament or a provincial Legislature make a law that the constitution does not give it the power to make, the law is of no force or effect. In such a case, the law is said to be one which lies outside of the scope of the legislative authority of the law-making body that attempted to pass it: the law is said to be "ultra vires" ("vee-rez") the legislative body that made it, or to be "unconstitutional".

With respect to taxation, section 91 of the Constitution Act, 1867 states:

"It shall be lawful for the Queen, by and with the Advice and Consent of the Senate and House of Commons, to make Laws for the Peace, Order, and good Government of Canada, in relation to all Matters not coming within the Classes of Subjects by this Act assigned [in section 92] exclusively to the Legislatures of the Provinces; and for greater Certainty, but not so as to restrict the Generality of the foregoing Terms of this Section, 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. [...]" (my emphasis)

The words "any Mode or System of Taxation" clearly refer to all taxes: there is no type of tax that isn't referred to by those words. Thus, if one were to read only subsection 91(3), one would be lead to believe that only the federal government can make a law that imposes a tax: according to subsection 91(3), the federal Parliament has the "exclusive Legislative authority" to make laws in relation to "The raising of Money by any Mode or System of Taxation".

However, section 91, before listing some federal classes of exclusive legislative power, limit the scope of the federal law-making power: it takes away from the federal power the law-making powers which are, in other parts of the Constitution Act, 1867, granted exclusively to the provincial Legislatures. One law making power which the constitution grants exclusively to the provincial Legislatures is set-out in subsection 92(2):

"In each Province the Legislatures may exclusively make Laws in relation to Matters coming within the Classes of Subject next hereinafter enumerated; that is to say, -

[...]

2. Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes..." (my emphasis).

Now, it was noticed quite early in Canada's history that sections 91(3) and 92(2) appear to be in conflict (see Bank of Toronto v. Lambe (1887), 12 Appeal Cases 575 and Citizens' Insurance Co. v. Parsons (1881-82), 7 Appeal Cases 96). Specifically, subsection 91(3) states that only the federal Parliament can impose taxes, and subsection 92(2) states that only the provincial Legislatures can impose "direct" taxes: the problem is that the power described in subsection 91(3) obviously refers to all taxes of any sort, direct or indirect. However, rules of interpretation insist that the courts make some sense out of the apparent conflict: the court has to find a way to interpret the constitution such that there is no conflict.

The federal government's position (usually) has been that the conflict between sections 91(3) and 92(2) of Constitution Act, 1867 should be resolved as follows: the federal Parliament can make laws that impose either type of tax (i.e., direct and indirect), but the provincial Legislatures are limited to making laws which impose only direct taxes. In short: the position of the federal government, which is also defended by David Sherman, is that THE LAW- MAKING POWERS OF THE FEDERAL PARLIAMENT AND THE PROVINCIAL LEGISLATURES OVERLAP WITH RESPECT TO THE MAKING OF LAWS WHICH IMPOSE A DIRECT TAX (such as the ITA and GST). On this argument, both the federal Parliament and a provincial Legislature can impose an ITA (and, for that matter, a GST) if it wants to. There is a real problem with that position, however: there is little or no judicial authority for it and, in fact, it arguably flies in the face of the decision in the Lord Nelson case. What did the Lord Nelson case say?

The Lord Nelson case was not a case in the normal sense: it was a "reference" brought by the Lieutenant Governor in Council of Nova Scotia respecting proposed legislation that would (a) allow the Lieutenant Governor in Council to transfer its exclusive legislative power respecting "any matter relating to employment in any industry, work or undertaking", and would (b) give the Lieutenant Governor in Council certain regulatory powers if and when the federal government transferred to the province certain of its exclusive legislative powers (including its exclusive power respecting indirect taxation). The case said NOTHING, at least explicitly, about the constitutionality of the federal ITA. HOWEVER, the case is very relevant to the issue of whether or not the federal ITA is constitutional. Specifically, the Chief Justice of the Supreme Court of Canada, in that case, stated that:

"Neither legislative bodies, federal or provincial, possess any portion of the powers respectively vested in the other and they cannot receive it by delegation. In that connection the word "exclusively" used both in s. 91 and in s. 92 indicates a settled line of demarcation..." (p. 372).

In other words, the legislative powers set out in sections 91 and 92 DO NOT OVERLAP! You see, were the federal and provincial powers overlapping, NEITHER THE FEDERAL PARLIAMENT NOR THE PROVINCIAL LEGISLATURES WOULD HAVE THOUGHT IT NECESSARY TO DELEGATE THEM TO ONE ANOTHER! With respect to taxation, this means that, if the provincial Legislatures have the authority under section 92 to make a certain type of tax law, then section 91 does not give the federal Parliament the authority to make that type of tax law. It follows that, because the federal Parliament's legislative authority to make tax laws is set out only in section 91, if the provincial Legislatures have the authority under section 92 to make a certain type of tax law, the federal Parliament lacks the authority to make such a law: the provincial Legislatures' power lies on one side of the "line of demarcation", and the federal power lies on the other side. If Gerry Hart did win his constitutional argument with the help of this case, it is because the case is one of the most definitive authorities (being a case decided in the Supreme Court of Canada) that federal and provincial taxing powers do not overlap as David Sherman and the federal government would assert (see also Bank of Toronto v. Lambe, Parson's Case, and Caron v. The King [1924] Appeal Cases 999).

David Sherman is fond of saying that the courts have consistently concluded that the federal ITA is not unconstitutional. He is correct. However, it is important to consider (a) the facts of the cases, and (b) the reasons of the judges. YOU CAN'T JUST LOOK AT THE CONCLUSIONS IF YOU WANT TO DETERMINE THE SCOPE OF THE FEDERAL TAXING POWER. Luckily, despite the fact that the constitutionality of the federal ITA has been addressed in some 15 or so cases, an action brought specifically to challenge the constitutionality of the federal ITA has made it to trial ONLY TWICE (most of the other challenges were tossed-out by the court before they could get to trial and most challenges were simply one of many issues brought up in tax assessment appeals).

The constitutionality of the federal ITA was first challenged at trial in Caron v. The King [1924] Appeal Cases 999 in which Lord Phillimore of the Privy Council (then, Canada's highest court) stated:

"Money raised by an income tax Act is unquestionably money raised by a mode or system of taxation.

It is true that by the provision of s. 92 the Legislature in each Province may exclusively make laws in relation to certain matters coming within the classes of subjects which are there enumerated, and that one of these classes of subjects is "direct taxation within the Province in order to the raising of a revenue for provincial purposes."

As such particular direct taxation is reserved to the province, to that extent there is some deduction to be made from the totality of power apparently given exclusively to the Dominion Parliament to raise money for any purpose by any mode or system of taxation." (p. 1003, my emphasis)

In short, the Privy Council concluded that the federal Parliament's allegedly exclusive power to make laws respecting "the raising of money by any mode or system of taxation" does not include the power to make laws in relating to Matters falling into the Class of Subjects described in subsection 92(2) of the Constitution Act, 1867: "Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes". To borrow a phrase from the Lord Nelson case, there is a "line of demarcation" which divides the power to make laws which impose a tax: some of the power - described by subsection 92(2) - lays on one side of the line, and the rest of the power lays on the other side of the line. Thus, if the provincial Legislatures have the authority to make a given tax law, the federal government does not have the authority to do so, and vice versa. Given these reasons, you might ask: "WHY WAS THE CONSTITUTIONALITY OF THE FEDERAL ITA UPHELD IN THE CARON CASE?" The answer is simple: the court said that the federal ITA raised a revenue not for provincial purposes but for federal purposes. Thus, the federal ITA was not a law of the type described in subsection 92(2) of the Constitution Act, 1867.

Winterhaven Stables Ltd. v. Canada (Attorney-General) (1988), 53 Dominion Law Reports 413 is the only other case in which an action was brought to challenge the constitutionality of the federal ITA and actually made it trial. In that case, a taxpayer argued that, because revenues from the federal ITA were now (but had not been at the time of the Caron case: 1924) being spent, by the federal government, on matters respecting which only the provincial Legislatures could make laws (such as education and health care), the federal ITA was now a tax that raised revenues "for Provincial Purposes" (and, it will be recalled, the constitutionality of the federal ITA had been saved in the 1924 Caron v. R. case only because, at the time, the federal ITA was not raising revenues "for Provincial Purposes": the court in Caron had made it clear that only a provincial legislature can impose a direct tax "for Provincial Purposes"). And, the taxpayer in Winterhaven argued, because the federal ITA was now a tax imposed to raise revenue "for Provincial Purposes", the federal ITA was ultra vires the federal Parliament (i.e., it was "unconstitutional"): the federal Parliament lacked the authority to make the federal ITA. The Alberta Court of Appeal disagreed with the taxpayer's argument. Speaking for the Court, Irving, J.A. stated:

"I agree with the conclusion of the learned trial judge on this point where he states p. 418]:

There is also some question as to whether it can be said that some of the money raised under the Income Tax Act is being raised for provincial purposes...It is...not possible to trace the payments made by the federal government to the provinces for provincial purposes to any specific source.

In my view the [taxpayer's argument] cannot be sustained. The power given under s. 91(3) to "the raising of Money by any Mode or System of Taxation" is a general and wide power. It would appear to be subject only to the exception continued in s. 125 which contains an exemption from taxation of lands or property belonging to the federal or provincial authority.
[...]
The moneys received under the Income Tax Act are...undoubtedly...used for provincial purposes. It is, however, clear that the main object of the Income Tax Act is not to raise money by direct taxation for provincial purposes. It is concerned with raising money by taxation." (referred to on p. 431 of the Court of Appeal decision)

In addition to concurring with the trial judge on these three points, Irving, J.A. added a final, fourth reason why the taxpayer's argument was insupportable:

"The [taxpayer] argues that Parliament cannot raise moneys which may be used for purposes which fall within the legislative jurisdiction of the provinces...This argument equates Parliament's spending power with its legislative power. I would not read the Constitution Act, 1867 so restrictively....Canadian governments (of all levels) have never restricted spending to matters within their respective legislative competence..." (pp. 431-432).

In other words, whether or not the revenue from a federal or provincial tax is ultimately spent on a federal or provincial purpose does not affect the power of the federal Parliament or a provincial Legislature to impose the tax. Because the taxpayer's argument was not accepted (for the four reasons endorsed or given by the judge in that case), the federal ITA was not declared to be ultra vires the federal Parliament (i.e., it was not declared to be unconstitutional).

Professor Peter W. Hogg, in his highly regarded text "Constitutional Law of Canada" (3rd ed.) has concluded that the Winterhaven decision "...confirmed that there are no limits on the purposes for which the federal Parliament may raise taxes" (my emphasis). This has also been echoed by Tax Court of Canada judge Hamlyn in Guillemette v. Canada [1997] T.C.J. No. 589 (Court File #95-3245[IT]G) (Tax Ct. Can.) [also reported at 97 Dominion Tax Cases 1347], which involved a challenge to the constitutional validity of the federal ITA (based, in part, on the division of legislative powers respecting taxation). In deciding that the taxpayer's argument failed, Hamlyn, T.C.J., stated:

"The federal taxation power is wide and general. While earlier jurisprudence found this federal taxing power could not be used to levy taxation for provincial purposes [footnote: the Lambe and Caron cases], later and current jurisprudence and constitutional writings have not accepted this implied restriction on the federal taxing power [footnote: the Winterhaven case and a paper written for the Canadian Tax Foundation by Mr. Justice La Forest, who has retired from the Supreme Court of Canada]".

Hamlyn, T.C.J. then went on to endorse Professor Hogg's interpretation of the Winterhaven decision (quoted above).

I would submit that, because the federal Parliament's power to impose a tax is not limited by whether or not the revenues are "for Provincial Purposes", the phrase "for Provincial Purposes" cannot limit the scope of the provincial Legislatures' power to impose a tax. Specifically, if the scope of the provincial Legislatures' power were (contrary to what was decided in Winterhaven) so limited then, because the legislative power in subsection 92(2) is exclusive to the provincial Legislatures, the federal Parliament would not have the authority to impose a direct tax "for Provincial Purposes": yet the Alberta Court of Appeal in Winterhaven said that the federal Parliament does have such authority, so it must logically follow that the scope of the provincial Legislatures authority with respect to the making of tax laws is not limited by the phrase "for Provincial Purposes".

If as the decision in Winterhaven indicates, the phrase "for Provincial Purposes" limits the scope neither of the federal Parliament's legislative power respecting taxation, nor of the provincial Legislatures' power respecting taxation, it cannot be said that the phrase "for Provincial Purposes" plays a role in distinguishing federal and provincial law making powers (as it had done in the Caron case). In other words, I would submit that (contrary to the decision in Caron) the phrase can play no role in determining the position of the "line of demarcation".

Arguably, then, "Direct Taxation" is the only the phrase in subsection 92(2) which both limits the scope of the provincial Legislatures' legislative power respecting taxation, and distinguishes the power from that of the federal Parliament. What, then, is the scope of the federal power? I would submit that, when determining that scope, one must keep in mind the decision of Chief Justice Rinfret in the Lord Nelson case:

"Neither legislative bodies, federal or provincial, possess any portion of the powers respectively vested in the other and they cannot receive it by delegation. In that connection the word "exclusively" used both in s. 91 and in s. 92 indicates a settled line of demarcation..." (p. 372).

Considered along with the Parsons, Lambe and Caron decisions, the decision in the Lord Nelson case makes it clear that THERE IS SOME TYPE OF TAX LAW THAT ONLY THE PROVINCIAL LEGISLATURES CAN MAKE.

The legislative powers listed under section 92 of the Constitution Act, 1867 are exclusive to the provincial Legislatures, and one of those exclusive powers is the power to make laws respecting matters which fall into the class of subjects described in subsection 92(2):

"Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes".

If the only phrase in subsection 92(2) that distinguishes the federal and provincial powers is the phrase "Direct Taxation", and there is a "settled line of demarcation" between the federal and provincial legislative powers, I would submit that ONLY THE PROVINCIAL LEGISLATURES MAY MAKE A LAW WHICH IMPOSES A DIRECT TAX. Because the federal ITA and GST impose direct taxes, I would submit that THE FEDERAL PARLIAMENT LACKS THE AUTHORITY TO MAKE A LAW THAT IMPOSES THE TAXES WHICH ARE IMPOSED BY THE FEDERAL ITA AND GST. In conclusion, I would submit that both the federal ITA and GST are ultra vires the federal Parliament and are, therefore, of no force or effect: that they are UNCONSTITUTIONAL.

Back Down to Earth

Does any of this matter? Probably not. Keep in mind, the above is one possible argument: it is not a statement of fact. A judge/court can decide what it likes, and I'd bet dollars to doughnuts that the courts would be loath to find the federal ITA or GST unconstitutional. Give a court a half-baked excuse for saying that the above argument is wrong, and it might be considered. For example, I can come up with 2 or three arguments to defeat the one I provided above (no, I will not provide a single one of them: the Crown can do the legwork...they've certainly got the money and the staff). All of them would require a re-writing of history, or an ignorance of it, not to mention a heavy dose of self-deception: I fully expect that the Crown would use one of these cheesy, intellectually dishonest arguments...and I fully expect that it would win - maintenance of the status quo has often required the turning of one's head or the purposeful use of illogical arguments. But, even if a court agreed with the preceding argument, you can bet that the court would give the feds plenty of time to make things right while preserving, in the interim, their revenue stream. And, you can bet that there would be a constitutional amendment to give the federal and provincial law-making bodies overlapping powers respecting direct taxation.

Keep in mind, also, that the Supreme Court of Canada's position on the recoverability of unconstitutionally paid taxes is unclear. Mr. Justice La Forest, in the case of Air Canada v. British Columbia (1989) 59 Dominion Law Reports 161 (S.C.C.), stated that for policy reasons the court ought not to allow people to recover the taxes which, pursuant to an unconstitutional tax law, they paid (a policy which, if applied, would punish those who paid there taxes and would award those who did not). However, only one half of the Supreme Court of Canada concurred with Mr. Justice La Forest on this point and, in fact, Madam Justice Wilson vehemently opposed such a policy. In short, even if one were to convince a court that income taxes were paid unconstitutionally, it is quite possible that the court would say "Alright, but you don't get your money back".

This is not to mention that tax fighters can expect no sympathy from interested parties...and THERE ARE SO MANY OF THEM, POTENTIALLY. All of those who believe in state intervention in the economy: socialists, communists, centrists, even "right wingers" (each of whom have their own reasons for stealing and spending your money). All of the people and banks who lend money to our governments and depend upon the tax-extortion powers of government as 'collateral' and to ensure that they will be paid. All of the accountants and tax lawyers who make money trying to save you money (or take it from you more thoroughly). Many of the doctors whose salaries are largely publicly funded. Many of the seniors, poor, culturalists, social engineers, etc. who believe that your money would be best spent by them or on them. And, not to be forgotten, those who believe that the best way to keep Quebec 'in its place' is to hold Quebec's purse strings (notably, it is Quebec that has, over the years, most openly brought into question the legislative powers of the federal Parliament respecting taxation). To say it would be an uphill battle to have income taxation declared an exclusively provincial legislative power could be seen as an understatement.

In any event, work harder and longer: you won't get to keep any more money, but but you'll have the satisfaction of knowing that Papa Kretien's Komrades in the Banking and Aerospace industries made good use of your overtime wages...in the Bahamas.

Sincerely Yours,

Paul McKeever

==========================================
Paul McKeever, B.Sc.(Hons), M.A., LL.B.
Barrister & Solicitor
106 Stevenson Road South
Oshawa, Ontario L1J 5M1

Telephone: (905) 721-9772

e-mail: pmckeever@ownlife.com
www: www.ownlife.com/mckeever
==========================================

DAVID SHERMAN's REPLY

Paul McKeever writes a very lucid article, up to about 10 paragraphs from the end, and carefully reviews the case law that confirms that, indeed, the income tax is constitutionally valid, and that the Courts have confirmed it to be so. To put it simply, the Courts in Caron, Winterhaven Stables and Guillemette confirmed that the "Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes" did not exclude the federal government from using direct taxation for raising revenue for its own purposes.

Mr. McKeever further quotes Peter Hogg's authoritative text on constitutional law as stating that Winterhaven Stables confirmed that "there are no limits on the purposes for which the federal Parliament may raise taxes". (Professor Hogg, incidentally, teaches both constititional law and tax law!)

I should note that Professor Hogg continues immediately thereafter (section 30.1(b)): "The decision also confirmed the corollary proposition that the spending power of the Dominion (like that of the provinces) is comprable to that of a natural person, extending to purposes that are outside the legislative authority of the federal Parliament".

Having clearly established that the law is what I have consistently said it is, Mr. McKeever continues:

"I would submit that, because the federal Parliament's power to impose a tax is not limited by whether or not the revenues are "for Provincial Purposes", the phrase "for Provincial Purposes" cannot limit the scope of the provincial Legislatures' power to impose a tax. Specifically, if the scope of the provincial Legislatures' power were (contrary to what was decided in Winterhaven) so limited then, because the legislative power in subsection 92(2) is exclusive to the provincial Legislatures, the federal Parliament would not have the authority to impose a direct tax "for Provincial Purposes": yet the Alberta Court of Appeal in Winterhaven said that the federal Parliament does have such authority, so it must logically follow that the scope of the provincial Legislatures authority with respect to the making of tax laws is not limited by the phrase "for Provincial Purposes".

I disagree with this interpretation of what Winterhaven says. Although some of the purposes to which federal income tax revenues are put are, as the Court in Winterhaven noted, undoubtedly provincial, that is not the primary purpose of federal income taxation. And, as Professor Hogg notes, there is a difference between legislative power and spending power, and there are no restrictions on federal spending power.

"Considered along with the Parsons, Lambe and Caron decisions, the decision in the Lord Nelson case makes it clear that THERE *IS* SOME TYPE OF TAX LAW THAT *ONLY* THE PROVINCIAL LEGISLATURES CAN MAKE."

I can posit a federal direct tax that could be unconstitutional. A tax that was separately enacted solely to raise revenue earmarked towards education or health, and the revenues from which did not go into the Consolidated Revenue Fund but went directly to educational institutions or hospitals, might be held to be over the line, since it might be considered a direct tax enacted to raise revenue for provincial purposes.

Note that, as I understand, the federal government turns money over to the provinces for education and health purposes, but doesn't spend a parge percentage of federal revenues directly on matters within provincial jurisdiction.

Mr. McKeever's argument is that there must be a dividing line with no overlapping, and since there isn't a dividing line restricting federal taxation for provincial purposes, the dividing line must be one that prohibits direct taxation by the federal government at all. I have shown above one example of why the dividing line is indeed "direct taxation for provincial purposes".

But then again, I'm just a dumb tax lawyer and I don't purport to understand constitutional law, so I'll likely stay out of the argument from here on.

"Does any of this matter? Probably not. Keep in mind, the above is one possible argument: it is not a statement of fact."

Indeed. Furthermore, the federal income tax and GST have been found valid by the higher Courts, and this is now settled law. Mr. McKeever, as he notes, is raising an argument that could be used to challenge this settled law. While it is of course possible for such a challenge to be brought, it should be clear that this is an argument for OVERTURNING existing law, not simply for deciding the issue from scratch. Thus, it is in my view incorrect to phrase the question as "is the federal income tax unconstitutional?". Rather, the question is "given that the law is, at present, that the federal income tax is constitutionally valid, do I have a new argument that the Courts would accept to overturn the law as has been found by the Courts to date?".

The distinction is important, and it's the reason why I've consistently states that the federal income tax and GST are constitutionally valid -- not because my arguments make them valid, but because THE COURTS HAVE FOUND THEM TO BE VALID. Mr. McKeever has an argument for challenging the existing law as determined by the Courts, rather than a claim of truth that the income tax "is" unconstitutional. He admits this.

"A judge/court can decide what it likes, and I'd bet dollars to doughnuts that the courts would be loath to find the federal ITA or GST unconstitutional."

That's obviously true.

David Sherman Tax Lawyer & Author

PAUL MCKEEVER's REBUTTAL

Mr. Sherman provides an interesting and well thought-out response to my initial post "v.1.1: GST and Federal Income Tax Act: Unconstitutional?" which was made to can.taxes, can.politics, and can.legal (for those who wish to access the article by using www.dejanews.com). In the spirit of academic debate, I would now like to address Mr. Sherman's counter-argument point by point.

Let me begin by addressing the following of his comments:

"But then again, I'm just a dumb tax lawyer and I don't purport to understand constitutional law, so I'll likely stay out of the argument from here on."

I did not intend to imply that Mr. Sherman is in any way "dumb", and I certainly hope that he will not stay out of this academic debate. In my initial post, I stated that Mr. Sherman does not purport to practice constitutional law, but that was not meant as an insult. Rather, my comment was made because previous posts by Mr. Sherman have not addressed, to any great detail, the reasons used by courts in making the conclusions they have made regarding the constitutionality of the federal Income Tax Act and GST. My point was that the reason Mr. Sherman has not gone into the reasons may be that, as a tax lawyer, he is not to concerned about why the courts have never found the federal Income Tax Act to be unconstitutional. In any event, I apologize for making a statement that apparently was interpretable as a comment on Mr. Sherman's intelligence. I have no question that he is a talented man.

That said, let's get on to the debate.

"Mr. McKeever further quotes Peter Hogg's authoritative text on constitutional law as stating that Winterhaven Stables confirmed that "there are no limits on the purposes for which the federal Parliament may raise taxes". (Professor Hogg, incidentally, teaches both constitutional law and tax law!)

I should note that Professor Hogg continues immediately thereafter (section 30.1(b)): "The decision also confirmed the corollary proposition that the spending power of the Dominion (like that of the provinces) is comparable to that of a natural person, extending to purposes that are outside the legislative authority of the federal Parliament."

Agreed. But the issue is not whether a government has the authority to spend money. The issue is about whether it has authority to make a law that imposes a tax. (The unlimited spending power which the courts have stated is held by the federal government, by the way, appears nowhere in our constitution: it is a power made explicit only in the statements of the courts).

"Having clearly established that the law is what I have consistently said it is..."

Clearly, I have not done anything of the sort. I have confirmed that Mr. Sherman is not misinforming people about the conclusions of the courts in cases involving the constitutionality of the Income Tax Act. I (and probably every other lawyer in Canada) agree with Mr. Sherman that the courts have never concluded that the federal Income Tax Act is unconstitutional: I have never said otherwise. But, as I have said many times, and as Mr. Sherman knows, conclusions alone do not make "the law": the reasons for the conclusion must be understood, as must the implications of those reasons. Therefore, I do not agree that I have "clearly established that the law is what [Mr. Sherman has] consistently said it is". Rather, I have suggested that there is an argument that "the law", based upon the reasons and implications of the cases that considered the constitutionality of the federal Income Tax Act, is not what Mr. Sherman and the government of Canada say it is.

"Mr. McKeever continues:

"...if the scope of the provincial Legislatures' power were (contrary to what was decided in Winterhaven) so limited then, because the legislative power in subsection 92(2) is exclusive to the provincial Legislatures, the federal Parliament would not have the authority to impose a direct tax "for Provincial Purposes": yet the Alberta Court of Appeal in Winterhaven said that the federal Parliament does have such authority, so it must logically follow that the scope of the provincial Legislatures authority with respect to the making of tax laws is not limited by the phrase "for Provincial Purposes".

I disagree with this interpretation of what Winterhaven says. Although some of the purposes to which federal income tax revenues are put are, as the Court in Winterhaven noted, undoubtedly provincial, that is not the primary purpose of federal income taxation. And, as Professor Hogg notes, there is a difference between legislative power and spending power, and there are no restrictions on federal spending power. I can posit a federal direct tax that could be unconstitutional. A tax that was separately enacted solely to raise revenue earmarked towards education or health, and the revenues from which did not go into the Consolidated Revenue Fund but went directly to educational institutions or hospitals, might be held to be over the line, since it might be considered a direct tax enacted to raise revenue for provincial purposes."

This sort of reasoning was implied in Winterhaven and in the Reference re: GST. I'll refer to the argument as the "Earmarking Argument". In a nutshell, the Earmarking Argument is that because the revenues generated by federally imposed direct taxes (e.g., income tax and GST) are not earmarked to be spent only on provincial purposes, the taxes cannot be said to be a laws that are in relation to "Direct Taxation... for Provincial Purposes".

Leaving aside the issue of whether or not some of the revenue from federal direct taxes is earmarked for provincial purposes, I submit that the Earmarking Argument is not supportable. If the meaning of "for Provincial Purposes" is "for purposes falling into the exclusively provincial heads of legislative power listed in subsection 92(2)" then, if the Earmarking Argument were correct, the necessary implication would be that the provincial Legislatures may impose a direct tax only if its taxes are earmarked for provincial purposes: an exclusion from the federal power (other than that set out in section 125 of the Constitution Act, 1867) necessarily implies a limitation on the provincial power. Yet, as the decision in Winterhaven makes clear (c.f., La Forest's "The Allocation of the Taxing Power..." paper, p. 75 and Hogg p. 154), even the provincial governments have not limited spending to matters over which they have exclusive legislative power: therefore, it cannot be said that the provinces have earmarked all tax proceeds for provincial purposes. Consequently, for reasons similar to those raised by the taxpayer in Winterhaven, the Earmarking Argument would necessarily imply that provincial ITA's are ultra vires the provincial Legislatures (i.e., unconstitutional).

Moreover, it would be hard to believe that, when the BNA Act was being drafted, the position of the provinces (which, prior to confederation, held the power to impose both direct and indirect taxes) was that (a) they didn't mind the federal Parliament imposing a direct tax to raise a revenue which could be spent on provincial purposes, but that (b) they didn't want the federal Parliament to have the authority to impose a direct tax the revenues from which were earmarked for provincial purposes. Even if "for Provincial Purposes" means "for spending by the provincial government" (an absurd interpretation but, nonetheless, one which the Crown would like to adopt), it would be absurd for the provinces to (a) prevent the federal government from imposing a direct tax the proceeds from which were intended to be given to the provincial government for spending, but to (b) allow the federal government to impose a direct tax the proceeds from which could be given to the provincial government for spending. For this reason, if for no other, I do not think that the Earmarking Argument is supportable: it requires, as I said in my initial post, a denial of history or, at least, a belief that the fathers of confederation had very strange concerns about federalism and how legislative powers should be allocated.

"Note that, as I understand, the federal government turns money over to the provinces for education and health purposes, but doesn't spend a large percentage of federal revenues directly on matters within provincial jurisdiction."

But that's just it. Winterhaven stands for the proposition that federal spending powers are unlimited: that there would be absolutely nothing wrong with the federal government spending federal revenues on matters within provincial jurisdiction. If the constitution grants the federal and provincial governments such unlimited spending power, it cannot rationally be concluded that the same constitution limits the purposes (a) to which a revenue is put, or (b) for which a revenue is raised.

La Forest, for example, notes that the provinces have not limited their spending to "provincial Purposes": this, even though s. 92(2) would disallow provincial revenue-raising by direct taxation for other than "provincial Purposes" if the phrase "for provincial purposes" were interpreted to impose a limit on the taxing power of the provinces. Thus, it is logical to interpret Winterhaven as stating that the phrase "for Provincial Purposes" does not limit the provincial taxing power and does not distinguish it from the federal one. And, I would remind the reader, this interpretation is the one supported by Hogg and the court in Guillemette (see original post for references).

So, if the phrase "for provincial Purposes" neither limits the provincial power nor distinguishes it from the federal one, there must be some other way in which the provincial power is different from the federal one: the decisions in Parsons case, Lambe, Caron, and the Lord Nelson Hotel case demand that some deduction (in the form of exclusively provincial legislative power) must be made from the federal legislative power respecting taxation. The constitution reserved to the provinces some portion of their formerly unlimited legislative power respecting taxation. Given that the only thing in subsection 92(2) of the Constitution Act, 1867 that could reasonably distinguish the federal and provincial taxing powers is the phrase "Direct Taxation", it is reasonable to conclude that the federal Parliament lacks the legislative power to impose a direct tax. The federal income tax and GST both being direct taxes, it logically follows that the legislation that imposes those taxes is unconstitutional.

It appears, also, therefore, that Winterhaven may have had the correct reasons (at least, they were correct if one wants to manufacture an unlimited spending power), but that the implications of those reasons indicate that the wrong conclusion was made. In other words, I would submit that, on the basis of the reasons in Winterhaven, the court should have concluded that the federal Income Tax Act is unconstitutional. By implication, the federal GST would similarly be unconstitutional.

"

"Does any of this matter? Probably not. Keep in mind, the above is one possible argument: it is not a statement of fact."

Indeed. Furthermore, the federal income tax and GST have been found valid by the higher Courts, and this is now settled law."

I don't think that is correct. In division of powers cases, there is a "presumption of constitutionality" (see Hogg, 3d ed., p. 390): constitutionality is presumed, until the law is shown to be unconstitutional. What the courts did was to state that the ITA and GST were not unconstitutional. In arriving at such conclusions, the court's decisions were based upon the submissions of those who sought a declaration of unconstitutionality. Thus, it is now settled law only that such submissions failed and would fail in the future.

"Mr. McKeever, as he notes, is raising an argument that could be used to challenge this settled law. While it is of course possible for such a challenge to be brought, it should be clear that this is an argument for OVERTURNING existing law, not simply for deciding the issue from scratch. Thus, it is in my view incorrect to phrase the question as "is the federal income tax unconstitutional". Rather, the question is "given that the law is, at present, that the federal income tax is constitutionally valid, do I have a new argument that the Courts would accept to overturn the law as has been found by the Courts to date?".

I disagree. A law is either constitutional or it is unconstitutional. If the Supreme Court of Canada were to declare, today, that the federal ITA and GST are unconstitutional, it would be declaring that the Acts were not constitutional even before the action was brought. If this is not true, then nobody who manages to have a law declared unconstitutional should ever be entitled to a finding that they have been wronged by the law because, on Mr. Sherman's view, at the time the law wronged the person in question, it was constitutional. Consider also the following. Subsection 52(1) of the Constitution Act, 1982 states:

"Primacy of the Constitution of Canada. -- The Constitution of Canada is the supreme law of Canada, and any law that is inconsistent with the provisions of the Constitution is, to the extent of the inconsistency, of no force or effect." (my emphasis).

Note that this subsection does not say "is....of no force or effect only after a court declares it to be so." Thus, whether or not the court has declared a given law to be unconstitutional does not determine whether or not a law is unconstitutional. Rather, after a court declares that a law is unconstitutional, the state can no longer use force or the threat of force to enforce the unconstitutional law. (And, to be more precise, a law that is "of no force or effect" is not a law, period). In short, courts do not truly "overturn" laws. Rather, they decide that alleged laws were never laws to begin with.

"The distinction is important, and it's the reason why I've consistently states that the federal income tax and GST are constitutionally valid -- not because my arguments make them valid, but because THE COURTS HAVE FOUND THEM TO BE VALID. "

Again, the courts have found them not to be invalid (as it were). But they have not decided that the laws were valid: constitutionality is presumed. It is to be disproved, not proved.

"Mr. McKeever has an argument for challenging the existing law as determined by the Courts, rather than a claim of truth that the income tax "is" unconstitutional. He admits this."

To be more precise, I did not "admit" it (as if it were a concession or weakness in my argument): I stated it as a point of fact. And the compliment is also true. Specifically, Mr. Sherman's argument ought not to be a "claim of truth": it too is but an argument to the contrary.

"

"A judge/court can decide what it likes, and I'd bet dollars to doughnuts that the courts would be loath to find the federal ITA or GST unconstitutional."

That's obviously true."

If my analysis of the federal Parliament's legislative powers respecting direct taxation it accurate, it's not only "obviously true", it's "sadly true" and embarrassing considering our self-stated respect for the rule of law.

Regards,

Paul McKeever

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Paul McKeever, B.Sc.(Hons), M.A., LL.B.
Barrister & Solicitor
106 Stevenson Road South
Oshawa, Ontario L1J 5M1

Telephone: (905) 721-9772

e-mail: pmckeever@ownlife.com
web: www.ownlife.com/mckeever
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