Federal Carbon Law Constitutional, Not a Tax

Ontario's constitutional challenge to the Greenhouse Gas Pollution Pricing Act ("GHG Act") has failed by a 4-1 margin (2019 ONCA 544), reinforcing the 3-2 loss from Saskatchewan's similar challenge (2019 SKCA 40). Although Ontario's principal argument—that the content of the legislation fell outside federal jurisdiction—was turned aside by the court's finding that the legislation fell under the national concern branch of the "peace, order and good government" power, the decision also provided interesting insights into the distinction between a tax and a regulatory charge.

The GHG Act puts a price on carbon pollution in order to reduce greenhouse gas emissions; it applies only to those provinces and territories that have not adopted sufficiently stringent carbon-pricing mechanisms. Currently the act applies to Manitoba, New Brunswick, Nunavut, Ontario, Saskatchewan, and partially to Prince Edward Island, although it is expected to be extended to Alberta as well.

The GHG Act levies two distinct charges. Under part 1, it places a "fuel charge" on carbon-based fuels, which is imposed on certain producers, distributors, and importers. Under part 2, it establishes a regulatory trading system applicable to large industrial emitters of greenhouse gases; the system includes limits on emissions, a credit to those who operate within their limit, and an "excess emission charge" on those who exceed it.

Under section 91(3) of the Constitution, Parliament has jurisdiction to enact laws for raising money by any mode or system of taxation. Given the breadth of this power, one might wonder how a tax imposed by the federal government could possibly be challenged. However, under section 53 of the Constitution, any bill for imposing a tax must originate in the House of Commons. As established in Eurig Estate (Re) ([1998] 2 SCR 565) and 620 Connaught Ltd. v. Canada (Attorney General) (2008 SCC 7), section 53 codifies the principle that there should be no taxation without representation, by ensuring that the executive branch must call the legislative branch into session to raise taxes.

The GHG Act delegates to the governor in council (that is, the federal Cabinet) the authority to determine to which provinces or territories the GHG Act will apply, giving no say to Parliament in this matter. Thus, Ontario argued that the GHG Act, as a tax, is unconstitutional.

The federal government argued, and the court agreed, that this basis for challenge could not succeed because the GHG Act is not a tax; instead, it is a regulatory charge. The court drew on Westbank First Nation v. British Columbia Hydro and Power Authority ([1999] 3 SCR 134), where the Supreme Court established that in assessing whether a charge is a regulatory fee or a tax, the primary purpose of the charge is decisive. Where a charge is imposed primarily for a regulatory purpose, or as necessarily incidental to a broader regulatory scheme—as opposed to being primarily for the raising of revenue for general fiscal purposes—it is a regulatory fee. An additional condition for a charge to be regulatory is that the charge must be connected to the regulatory scheme itself. This will apply where the revenues raised are tied to the costs of the regulatory scheme or where the charges themselves have a regulatory purpose, such as the regulation of certain behaviour.

The ONCA found that the GHG Act imposed a valid regulatory charge because its purpose is primarily regulatory, and the purpose of the charges is behaviour modification. Ontario argued that the charges could not be regulatory because (1) the revenues generated by the charges are not linked to the cost of administration of the regulatory scheme, and (2) those revenues will not be spent in connection with the purposes of the GHG Act (instead, the part 1 funds are to be returned to taxpayers); however, the court rejected those arguments.

It will be interesting to see whether the Ontario judgment is appealed. On a similar topic, Hunt v. The Queen (2018 TCC 193), which also considers the difference between a regulatory fee and a tax, is currently before the FCA.

Kathryn Walker
Fasken Martineau DuMoulin LLP, Toronto

Canadian Tax Focus
Volume 9, Number 3, August 2019
©2019, Canadian Tax Foundation