Forbes, Silver Brothers and the Purported Overlap of Canadian Federal and Provincial Legislative Powers Respecting Taxation
Paul McKeever, B.Sc.(Hons), M.A., LL.B.
Barrister & Solicitor
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.
The constitutionality of the federal Income Tax Act or GST has been challenged several times in recent years. Quite often, such challenges have involved an argument that the federal Parliament lacks the constitutionally-conferred legislative power to make the tax law in question. In most cases, a plaintiff's claim has been struck, or an appellant's appeal dismissed, on the ground that such arguments are contrary to prior jurisprudence or academic writings. However, I submit that some such conclusions have been ill founded and have been grounded on arguments that confuse the issue of a law's validity with the issue of the inconsistency of federal and provincial laws. I also submit that, largely, this confusion has been fostered by the writings of academics who have either:
(a) assumed, incorrectly, that the doctrine of paramountcy is inapplicable with respect to issues of federal and provincial legislative powers respecting taxation; or
(b) having adopted assumption (a), confused the question of consistency with the question of validity.
In what follows, I will first explain, in general terms, the allocation of most exclusive legislative powers, validity and inconsistency, the tests for each, and the related doctrines of double aspect and federal paramountcy. Thereafter, I will describe two cases which have lead to much of the confusion. Finally, I will discuss how those cases have been misinterpreted or misapplied by academics and the courts.
The Division of Exclusive Legislative Powers
The scope of the Canadian federal Parliament's power to make laws is largely set out in section 91 of the Constitution Act, 1867:
"91.Legislative Authority of Parliament of Canada. -- 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 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,-- ..." [a list of those Classes of Subjects which are assigned exclusively to the federal Parliament follows].
In section 92 are listed most of those Classes of Subjects which are assigned exclusively to the Legislature of the Provinces. Thus, sections 91 and 92 divide, between the federal Parliament and the provincial Legislatures, most of the power to make laws: if the provincial Legislatures have the exclusive authority to make a certain type of law, the federal Parliament lacks the authority to do so.
Validity, Inconsistency, and the Doctrine of Federal Paramountcy
When a rule is made by a legislative body (i.e., the federal Parliament, or a provincial Legislature) that has the constitutionally-conferred power to make it, the rule will be said to be intra vires (i.e., within the jurisdiction of) the legislative body, and the rule will be a law. Rules that are not intra vires a legislative body are ultra vires (i.e., beyond the jurisdiction of) the legislative body, and are, as a result, not laws. Some legal experts have referred to the former type of rule as a "valid" law, and to the latter type as an "invalid law" (though, clearly, an "invalid law" is not a law at all, but merely an unenforceable rule).
To determine whether a law is valid, a court will first characterize the law in question. This process will typically being by identifying the "Matter" (see sections 91 and 92 of the Constitution Act, 1867) to which the law relates. The Matter will be determined by identifying the law's so-called "pith and substance": typically, its most dominant or important characteristic. Thereafter, the court will decide into what "Class" or "Classes" of "Subjects" (again, see sections 91 and 92) the Matter comes. Where the Matter of the law comes within only a Class or Classes of Subjects respecting which the law's maker has the constitutionally-conferred power to make laws, the law will be found to be valid. Where the Matter of the law comes within only a Class or Classes of Subjects respecting which the law's maker lacks the constitutionally-conferred power to make laws, the law will be found to be invalid. Sometimes, however, a law will be found to have two Matters (i.e. a so-called "double aspect"), one coming within a federal Class or Classes of Subjects, and one coming within a provincial Class or Classes of Subjects. In such circumstances, where the two Matters or "aspects" of the law are of roughly equal importance, the courts will apply the double aspect doctrine. According to this doctrine, a law is upheld on the ground that it could have been made by either by the federal Parliament or by one or more provincial Legislatures.
However, where there is no question of a law's validity, there still may be questions of so-called consistency. Specifically, there sometimes arises a situation in which the federal Parliament and a provincial Legislature have each made a valid law, but the federal and provincial laws are "inconsistent" with one another. Where the courts have found two such laws to be inconsistent, they have applied the doctrine of federal paramountcy to end the conflict. According to this doctrine, the court will render the inconsistent part(s) of the provincial law (but not of the federal one) inoperative until such time as the inconsistency is eliminated (e.g., by repeal or amendment of the federal law).
The courts have used different tests to determine whether a federal law and a provincial law are inconsistent. One such test is the "covered field", "occupied field" or "negative implication" test. Professor Peter W. Hogg, in his highly regarded book, Constitutional Law of Canada (3rd ed.), explains this test:
"Under this test, a federal law may be interpreted as covering the field and precluding any provincial laws in that field, even if they are not contradictory of the federal law. In other words, a federal law may be read as including not only its express provisions, but also a "negative implication" that those express provisions should not be supplemented or duplicated by any provincial law on the same subject. Under this test, the question is whether the provincial law is in the same "field", or is upon the same subject, as the federal law: if so, the provincial law is deemed to be inconsistent with the federal law."
The negative implication test for inconsistency is no longer regarded as correct by our Courts. Instead, before the doctrine of paramountcy will be called into play, the two laws must be found to expressly contradict one another. Express contradiction, in this context, refers to a situation in which, for example, one person cannot logically obey one of the laws without violating the other. The flipside of the express contradiction requirement is that if the federal Parliament and a provincial Legislature each pass a law, but they do not expressly contradict one another, neither law will be rendered inoperative. In the extreme, for example, even if the federal and the provincial law were worded identically, there would be no conflict, and the doctrine of paramountcy would not be applied.
Professor Hogg points out that the question of inconsistency is separate and distinct from the question of validity:
"Occasionally, the search for differences - any differences - has led judges to point out that the competing laws had different "purposes" or "aspects", and that they were inconsistent for that reason, even though they were substantially the same in operation. This kind of reasoning confuses validity with consistency. The existence of different purposes or aspects is relevant only to the question whether each law is valid in the first place. The double aspect doctrine "opens two gates to the same field", but it does not help to resolve the subsequent question of whether the two laws are inconsistent. Whether the laws are inconsistent or not depends not on their dominant purpose or aspect but upon whether they are compatible in operation." (p. 432).
Thus, when it is decided that a provincial law is not inconsistent with a federal law, it does not necessarily follow that one, both, or neither law is valid.
The Forbes Case
In the case of Forbes v. Attorney-General of Manitoba,  1 Dominion Law Reports 289, a federally-employed meat inspector named Forbes had received his pay without a deduction of 2% having been made with respect to a provincial income tax. The Attorney General of the province sued Forbes for the amount of $20.80 which had not been deducted. The County (trial-level) Court of Winnipeg decided in favour of the A-G. of Manitoba, and its decision was upheld on appeal to both the Court of Appeal of Manitoba, and the Supreme Court of Canada. Forbes appealed to the Judicial Committee of the Privy Council (which, at the time, was our court of final appeal). The primarily issue on the appeal was whether the provincial Legislature had the legislative authority to pass a law which imposed an income tax on a federal employee such as Forbes.
Counsel for Forbes argued, in part, that, because the federal Parliament had previously enacted income tax legislation in 1917, the field was covered, such that the relatively new provincial income tax act was invalid: counsel used what is now an inapplicable test for inconsistency. But, as Professor Hogg's comments make clear, the argument made by counsel for Forbes was one not about validity, but about inconsistency between the federal and provincial tax laws. In effect, Forbes' lawyer was attempting to have the court decide that, even if the law were valid, it was inconsistent with a pre-existing federal law such that the doctrine of paramountcy was to be applied to render it inoperative.
The court rejected Forbes' inconsistency argument. In answering the question of inconsistency, the court first referred to the apparent conflict between the exclusively federal power to make tax laws (subsection 91 of the Constitution Act, 1867) and the exclusively provincial power to make tax laws (subsection 92 of the Constitution Act, 1867): a conflict which had first been discussed in the case of Citizens Insurance Company of Canada v. Parsons. You will recall that section 91 of the Constitution Act, 1867, "for greater certainty", lists certain Classes of Subjects in connection with which only the federal Parliament may pass laws. One of those classes, is "3. The raising of money by any mode or system of taxation". It was noted in the Parsons case that, read in isolation, subsection 91(3) appears to say that only the federal Parliament has the legislative authority to make a law which imposes a tax. However, you will recall that, earlier in section 91, it is said that the federal Parliament's legislative power extends only to those Matters which do not fall into a Class of Subjects respecting which only the provinces can make laws. One of the classes of subjects reserved exclusively to the provincial legislatures is "2. direct taxation within the province in order to the raising of a revenue for provincial purposes". With respect to the apparent conflict between subsections 91(3) and 92(2), the Court, in Forbes, stated:
"It was pointed out in Citizens Insurance Company of Canada v. Parsons [Footnote: 7 Appeal Cases 96], that though the description "the raising of money by any mode or system of taxation" [in subsection 91(3) of the Constitution Act, 1867] is "sufficiently large and general to include 'direct taxation within the province in order to the raising of a revenue for provincial purposes' [subsection 92(2) of the Constitution Act, 1867], assigned to the provincial legislatures by s. 92, it obviously could not have been intended that....the general power should override the particular one." [Footnote: 7 Appeal Cases 108]. This statement is quoted and approved in Bank of Toronto v. Lambe. [Footnote: 12 Appeal Cases 575, 585].
Essentially, they confirmed that the federal power respecting the making of tax laws does not override the exclusivity of [i.e., does not include] the provincial power to make tax laws (which is more limited in scope). Undoubtedly, they made this endorsement with full knowledge of the decision the Privy Council had made in the case of J.E. Caron v. The King (1924), 1 Dominion Tax Cases 49, in which the scope of the federal taxation power in subsection 91(3) was first determined. In that case, their Lordships stated that:
"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.
Upon any view there is nothing in s. 92 to take away the power to impose any taxation for Dominion purposes which is prima facie given by head 3 of s. 91. It is not therefore ultra vires on the part of the Parliament of Canada to impose a Dominion income tax for Dominion purposes..."
In short, the Privy Council in Caron had decided that whereas only the provincial Legislatures may impose a direct tax to raise a revenue for provincial purposes, the federal Parliament may nonetheless impose a direct tax to raise a revenue for federal purposes.
Having concluded, essentially, that the law-making powers of the federal Parliament and those of the provincial Legislatures do not overlap, the Court in Forbes went on to say:
"The doctrine of the "occupied field" applies only where there is a clash between Dominion legislation and provincial legislation within an area common to both. Here there is no conflict. Both income taxes may co-exist and be enforced without clashing. The Dominion reaps part of the field of the Manitoba citizen's income. The Province reaps another part of it. This argument therefore also fails."
Thus, the court decided that there was no inconsistency (i.e., no "clash" or "conflict") between the federal income tax act and the provincial one. Because there was no inconsistency, the doctrine of paramountcy (in this case, referred to as the "doctrine of the occupied field") was not applicable. Consequently, the provincial law could not be said to be inoperative pursuant to the doctrine of paramountcy.
Why, exactly, there was no clash between the federal income tax act and the provincial one was not elaborated upon by the Court in Forbes. However, I would submit that the Court clearly was applying not the "express contradiction" test of inconsistency, but the "negative implication" test. The court, in deciding that there was no inconsistency (i.e., "clash"), first endorsed previous decisions in which it had been said that the federal and provincial taxation powers did not overlap. Arguably, the Court made that endorsement to show that the federal and provincial income tax laws in question were both valid, but that they were made pursuant to separate, non-overlapping (i.e., distinguishable) Classes of Subjects (one federal, one provincial): in other words, pursuant to separate, non-overlapping "fields" of legislative authority. Because they were made pursuant only to separate, non-overlapping powers, they did not, by definition, occupy the same field. Consequently, the doctrine of paramountcy (referred to by their Lordships as the "doctrine of the occupied field") was inapplicable, and the provincial income tax law could not be said to be inoperative pursuant to that doctrine. Had the court been applying the express contradiction test of inconsistency, any discussion about the non-overlap of the federal and provincial law-making powers would have been both irrelevant and unnecessary: clearly, neither the federal nor the provincial tax law, in that case, required the taxpayer to violate the other law.
To summarize, in Forbes, the Court confirmed that the federal power to make tax laws did not include the exclusive tax-law making power conferred on the provincial Legislatures by subsection 92(2) of the Constitution Act, 1867. The Court decided that, because the provincial and federal income tax Acts in question were made pursuant to the respective separate, non-overlapping legislative powers of the provincial Legislatures and federal Parliament, they could not occupy the same field. Consequently, Forbes' argument - that, by function of the doctrine of federal paramountcy, the provincial law was inoperative - failed. It is important to note, however, that the Court, in finding no inconsistency between the federal and provincial tax laws (apart from the priority provision), did not thereby conclude that the federal and provincial powers to make laws in respect of taxation overlap.
The Silver Brothers Case
In In re Silver Bothers, Limited,  Appeal Cases 514, section 17 of the Dominion Special War Revenue Act (a federal statute) which imposed an indirect, excise tax, essentially stated that a debt owed by the taxpayer in respect of the excise tax was to rank in priority to all other debts owed by the taxpayer. At the same time, section 1357 of a Quebec statute, which imposed a direct tax, essentially stated that a debt owned by the taxpayer in respect of the direct tax was to rank in priority to all other debts owed by the taxpayer. Silver Brothers Limited, as it turns out, was a bankrupt, and had insufficient money to honour both the federal and provincial debts owed. The Attorney General for Canada argued that the federal government was to be paid first, even if to the exclusion of Quebec. The Attorney General for Quebec, who here was appealing to the Privy Council from a decision in favour of the A.G. for Canada, argued that:
"The Provincial power with regard to direct taxation is on an equal footing with the Dominion power of taxation. The principle whereby Dominion legislation overrides Provincial legislation applies only where the Dominion power is of a more particular nature than that invoked by the Province, and where the two enactments cannot exist side by side." (p. 516).
The Attorney General for Quebec, ultimately, wanted the court to decide that the federal and provincial claims to the bankrupt's money rank equally.
The court decided that, if section 17 of the federal Act was a natural concomitant of taxation (s. 91 of the Constitution Act, 1867) rather than of bankruptcy (subsection 91 of the Constitution Act, 1867):
"...then the case falls clearly under the fourth proposition laid down in the judgment delivered by Lord Tomlin; it runs thus: "There can be a domain in which Provincial and Dominion legislation may overlap, in which case neither legislation will be ultra vires if the field is clear, but if the field is not clear and the two legislations meet the Dominion legislation must prevail...". Now here, so far as taxation itself is concerned, the field is clear. The two taxations, Dominion and Provincial, can stand side by side without interfering with each other, but as soon as you come to the concomitant privileges of absolute priority they cannot stand side by side and must clash; consequently the Dominion must prevail." (p 521).
Ultimately, it was decided that, despite the clash between section 17 of the federal law and section 1357 of the provincial law, the debts owing to the federal and provincial governments ranked equally. However, this conclusion was based not on an exception to the application of the doctrine of federal paramountcy, but to a finding that, pursuant to the federal Interpretation Act, s. 17 did not apply with respect to the crown in right of the province. The Attorney General of Quebec not having submitted that, therefore, section 1357 of the provincial law gave priority to Quebec's claim, the court did not make such a finding. Instead, the normal situation prevailed: the creditor's respective claims ranked equally.
The court did not explain, precisely, its conclusion that "...so far as taxation itself it concerned, the field is clear..." and can "...stand side by side without interfering with each other...". However, whereas the validity of section 17 of the federal Act had been challenged, the validity of the rest of the federal taxing statute - including the authority of the federal Parliament to make a law which imposes an indirect tax - was not called into question. Nor was the validity of the provincial tax brought into question. And, there appears to have been little argument that each tax was imposed pursuant to a separate, distinct legislative power (i.e., that the federal, indirect tax was imposed pursuant to subsection 91, and the provincial, direct tax was imposed pursuant to subsection 92). Each law having related to Matters which fell into separate, non-overlapping Classes of Subjects (one federal, one provincial), the two laws did not occupy the same field. Consequently, the field being clear, the doctrine of federal paramountcy was not applicable. But, it is again important to note that the court, in finding no inconsistency between the federal and provincial tax laws (apart from the priority provision), did not thereby conclude that the federal and provincial powers to make laws in respect of taxation overlap.
Subsequent Academic Writings & Court Decisions
In his often cited paper, The Allocation of Taxing Power Under the Canadian Constitution" (1981, 2nd edition, Canadian Tax Foundation, Canada Tax Paper No. 65), Professor G.V. La Forest (who was later made a judge of the Supreme Court of Canada, now retired), having reviewed and discussed the Caron case, stated:
"Since both levels of government may impose direct taxation...their legislation may well overlap. Here the courts have not applied the usual principle of federal paramountcy, but have taken the attitude that the two taxations can stand side by side and that there is no clash or conflict. Thus, the same person may be taxed on his income both by the provinces and the federal Parliament." (p. 52).
Professor La Forest then cites the Forbes and Silver Brothers cases as one authority for this position. I respectfully submit that Professor La Forest's conclusion - that the courts did not apply the usual principle of federal paramountcy in the Forbes case - is misleading. Specifically, one may easily and wrongly infer from his conclusion that the non-application of the doctrine of paramountcy in the Forbes and Silver Brothers cases was, somehow, a special exception or a violation of the norm: that the doctrine should have applied to render the provincial law inoperative, but that the court made a special exception with regard to taxation. Clearly, the courts made no such exception. And, there is evidence that such an unjustified inference has been made both by academics and by judges. For example, in discussing the exclusiveness of the powers set out in sections 91 and 92 of the Constitution Act, 1867 Professor Hogg states that:
"...the exclusiveness of the two lists does not mean that similar or even identical laws may not be enacted by both levels of government. Some laws are available to both levels, but that is because such laws have a double aspect (or two matters), not because the classes of subjects duplicate or overlap each other; they do not" (p. 404, my emphasis).
Directly after the phrase "they do not", Professor Hogg provides a footnote which states "There is one arguable violation of this proposition, namely, the taxation powers of ss. 91(3) and 92(2): see ch. 30, Taxation, at note 17, below" (my emphasis). As it turns out, footnote 17 in chapter 30 begins with a reference to page 52 of Professor La Forest's paper: the very page at which Professor La Forest makes the conclusion which I submit is misleading. The rationale for Professor Hogg's "arguable violation" appears to be that the legislative powers respecting taxation implicitly overlap because, as a special exception, the doctrine of federal paramountcy will not be applied where federal and provincial tax laws are inconsistent. Yet, as pointed out in my discussions of the Forbes and Silver Brothers cases above, the courts in those cases did not make a special exception to the application of the doctrine of federal paramountcy. Rather, the doctrine of federal paramountcy, in each case, was inapplicable because, in fact, no inconsistency had been found between the federal and provincial laws in question.
In the case of Hoffman v. Canada (1996), 112 Federal Trial Reports 185, Hargrave, Prothonotary, in deciding that the plaintiff's statement of claim should be struck for want of a legal argument that could succeed at trial, stated:
Counsel for the Plaintiff has suggested that provincial and federal powers under the BNA Act are two separate spheres, that they may not overlap and from this argues that income tax, that is direct tax, by the Federal Government is ultra vires notwithstanding the reference in section 91(3) to raising money by any mode of taxation.
La Forest touches on this issue:
"Since both levels of government may impose direct taxation and levy revenue by way of licences, their legislation may well overlap. Here the courts have not applied the usual principle of federal paramountcy, but have taken the attitude that the two taxations can stand side by side and that there is no clash or conflict. Thus, the same person may be taxed on his income both by the provinces and the federal Parliament."
Thus, Hargrave, Prothonotary purported to disprove the plaintiff's assertion - that the federal and provincial taxation powers do not overlap - by referring to La Forest's conclusion. Yet, La Forest's conclusion was based on the Forbes and Silver Brothers decisions in which the non-overlap of federal and provincial taxing powers was actually endorsed or taken for granted by the court, and was essential to its finding, in each case, that a federal tax law and a provincial one did not occupy the same field (such that the doctrine of paramountcy was inapplicable). In short, the court in Hoffman wrongly inferred, from Professor La Forest's conclusion, that the Forbes decision stands for the proposition that the federal and provincial powers to impose tax laws overlap. The court, apparently not having been referred specifically to the decisions in Forbes and Silver Brothers, made an unjustified inference from Professor La Forest's conclusion regarding those cases and, largely for that reason, concluded that Hoffman's argument had no chance of succeeding.
In P. H. L. F. Family Holdings Ltd. v. Canada (Tax Court of Canada, not reported), Professor La Forest's conclusion was again misapplied, this time pursuant to reliance on Professor Hogg's inference, to the detriment of a taxpayer:
"The heads of power set out in sections 91 and 92 of the Constitution Act, 1867, are vaguely worded; this has caused much confusion over the years. The general rule is that the powers are assigned "exclusively" to one of the two levels. Professor Hogg's comments on this point are helpful as found at page 15-34 in his book Constitutional Law of Canada, vol. I (3rd edition, 1992):
"Each list of classes of subjects in s. 91 or s. 92 of the Constitution Act, 1867 is exclusive to the Parliament or Legislature to which it is assigned. This means that a particular 'matter' will come within a class of subjects in only one list. ... However, the exclusiveness of the two lists does not mean that similar or even identical laws may not be enacted by both levels of government. Some laws are available to both levels, but that is because such laws have a double aspect (or two matters), not because the classes of subjects duplicate or overlap each other; they do not."
Hogg inserted an important footnote to this principle: "There is one arguable violation of this proposition, namely, the taxation powers of subsections 91(3) and 92(2)."
Thus, again, a court had concluded wrongly - on the basis of Professor Hogg's inference, drawn from Professor La Forest's conclusion, founded upon the Forbes and Silver Brothers decisions - that just because a federal and a provincial income tax law are not inconsistent, the legislative powers of the federal Parliament and the provincial Legislature overlap. Yet, in both the Forbes and Silver Brothers decisions, the conclusions of the court were founded partly upon the fact that the powers do not overlap.
Clearly, the Forbes and Silver Brothers decisions have been misinterpreted or misapplied (albeit, sometimes indirectly by reliance on secondary sources). They have been used to support the position that the federal and provincial powers to make tax laws overlap, despite the fact that the decisions in those cases were dependent on a finding to the contrary. The most unfortunate thing about this, however, is that the decisions in both Hoffman and PHLF may yet be misused as precedents should (read "when") courts, in the future, choose to strike the claims of other taxpayers on the ground that, given prior jurisprudence and academic opinion, the taxpayer's argument has no chance of succeeding.
Back to Forbes v. Attorney-General of Manitoba
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