This article appeared in Consent #24 (December 1995)
Is The Federal Income Tax Act Unconstitutional?
- Paul McKeever, B.Sc.(Hons), M.A., LL.B.
Paul McKeever is a resident of Southwestern Ontario who holds an Honours Bachelor of Science degree from Trent University, a Master of Arts degree in Psychology from the University of Western Ontario, and a Bachelor of Laws degree from the University of Western Ontario.
Disclaimer: Nothing in this article should be construed as legal advice. It is not intended as such. Anyone wishing to challenge, in court, the constitutionality of the federal Income Tax Act or any other legislation, should obtain advice from a lawyer who practices constitutional law. On the day that this analysis was written, the author was not a lawyer. (copyright 1995 by Paul McKeever).
A year or so ago, everyone in my neighbourhood received a copy of a small newspaper published by a religious organization that wants the federal government to stop taxing Canadians and, instead, implement the Social Credit monetary system developed by English Major C.H. Douglas early in this century. In that newspaper, I found an interesting article claiming that the federal Income Tax Act is unconstitutional, and that a fellow in Winnipeg, named Gerry Hart, won the argument in court some 22 times; apparently he had never paid income tax in 40 years.
I looked, but it turns out that none of Hart's constitutional arguments were ever reported. (Only some decisions are published; the rest are filed away in court houses, and are not brought to the attention of most lawyers). So, not having found a good description of Hart's constitutional argument, I asked one of my income tax professors about the constitutionality of the Income Tax Act.
His response was something to the effect of: "I thought that the constitutionality of the Income Tax Act was a dead issue. The federal government can tax whatever the heck it wants to tax."
For a while I left the issue and got back to my studies. Then, in the midst of some legal research, I came across a book in the law library that had been written exclusively about Gerry Hart and his argument that the Income Tax Act was unconstitutional (see references below). Reading it left several questions unanswered, so to satisfy myself about this issue, I decided to research it myself.
I began by reading sections 91 and 92 of the Constitution Act, 1867 (formerly called the British North America Act). These two sections, as interpreted by English and Canadian courts, tell the federal Parliament and the provincial Legislatures whether or not they have the jurisdiction to pass certain laws. If the federal Parliament, or a provincial Legislature, purport to pass a law that the Constitution of Canada gives them no jurisdiction to pass, the court may state that the law is of no force or effect, and the people of Canada, or of that province (as the case may be) may then ignore it.
Under the title "Powers of the Parliament", Section 91 lays out the matters over which the federal government can pass laws, it 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."
So, according to the wording of section 91, if a bill which Parliament wishes to make law is "in relation to" any matter "coming within the Classes of Subjects...assigned exclusively to the Legislatures of the Provinces" in section 92, then the bill cannot become law because Parliament does not have the jurisdiction to legislate with respect to that matter. And, a class of subjects listed in section 91 cannot be interpreted as "restricting the generality of" an exclusive provincial power listed in section 92.
Thus, the wording of subsection 91(3) suggests that "any Mode or System" really means "any Mode or System left over when you take out those Modes or Systems that fall within the exclusive jurisdiction of the provinces". So, according to section 92, which modes or systems of taxation fall within the exclusive jurisdiction of the provinces?
Under the title, "Exclusive Powers of Provincial Legislatures", section 92 lays out the classes of matters over which only the provincial Legislatures can pass laws. With respect to the power to pass tax laws, it states:
"In each Province the Legislatures may exclusively make Laws in relation to Matters coming within the Classes of Subjects next hereinafter enumerated; that is to say,
[...]
2. Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes."
So, the wording of the Constitution Act, 1867 suggests that the federal Parliament cannot pass a law which imposes "Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes". However, as pointed out earlier, the wordings of all laws (including the Constitution) are subject to the interpretation which is given to them by the courts. Thus, the next step in my research was to find out how the courts have interpreted section 92(2) in the context of subsection 91(3).
I began by reading what Professor Peter W. Hogg, of Osgoode Hall Law School, had to say on the subject. His book, Constitutional Law of Canada is probably the most influential and authoritative text on Canadian constitutional law, and is regularly referred to by our courts when they make decisions involving the Canadian constitution. In the context of subsection 91(3), he states that subsection 92(2) "...limits the provinces to "direct taxation", to taxation "within the province" and to taxation "for Provincial Purposes" "(p. 736).
Having found that Professor Hogg interprets s. 92(2) by first breaking it into those three components, I began reading what Professor G.V. La Forest (as he then was) had to say in his book, The Allocation of Taxing Power Under the Canadian Constitution. Professor La Forest is now Mr. Justice La Forest of the Supreme Court of Canada. His influential book has been referred to many times since it was first published. It is referred to not only by academics, but by the courts when they have addressed issues involving the constitutional division of taxation powers between the federal and provincial governments in Canada.
According to Professor La Forest, the constitutional division of taxation powers in subsections 91(3) and 92(2) has been interpreted by our courts to what I will herein call the "purposes test".
"As early as 1882 the Privy Council (then Canada's highest court) in Parson's case stated that sections 91 and 92 of the British North America Act had to be read together and the general words of the federal power could not be intended to override the specific grant to the provinces. This was followed by Lord Hobhouse's statement in Bank of Toronto v. Lambe that the raising of revenue for provincial purposes was wholly within provincial competence {i.e. jurisdiction}. Finally, in Caron v. R., Lord Phillimore expressly stated that Parliament could not levy direct taxation to raise revenue for provincial purposes."
Thus, between 1881 and 1924, our highest courts wrote the decisions which first drew the line between federal and provincial tax law-making powers: the provinces could tax income for provincial purposes, and the Dominion could tax income for Dominion purposes. The purpose for the tax indicated whether or not a given law was constitutional.
When Professor La Forest's book was published in 1981, the courts still had not disagreed with the decisions in Bank of Toronto v. Lambe and Caron v. R.; the courts continued to recognize those two cases as the ones which distinguished federal from provincial tax law-making powers. Nonetheless, Professor La Forest stated that:
"...in the Caron case it was held that Parliament could levy income tax notwithstanding that it was direct taxation, and as already seen there are numerous federal payments to the provinces that are used for provincial purposes. The British North America Act itself sanctions such actions, for section 118 provides for the payment of subsidies to the provinces which at one time amounted to almost half the provincial revenues.
"For these reasons, the dicta of the Privy Council should probably be ignored. They were made when the device of transfer payments might still have been considered doubtful, and in that context might have had some practical effect." (p.52)
These statements can be interpreted in two ways.
On one hand, Professor La Forest could have been implying that the federal Parliament can now tax income for any purpose. On the other hand, Professor La Forest could have been implying that the purposes test is no longer an appropriate way to distinguish between the federal and provincial tax law-making powers.
It is important to remember that, when Professor La Forest made these statements, the decisions in Parsons, Lambe, and Caron remained good law; they had not been overturned by the courts. Thus, Professor La Forest was not providing case authority for his position; he was simply suggesting that Canada has changed, and that judges and lawyers should probably consider this fact when arguing in court about the constitutional division of taxation powers. In short, his words were academic opinion, not law.
Nonetheless, for reasons different than those of Professor La Forest, Professor Hogg has said that the purposes test is no longer appropriate. He states that, in section 92(2), the words "for Provincial Purposes" have "turned out to be unimportant" (p.737) for the purposes of determining the constitutionality of federal tax legislation:
"Nor does the phrase 'for Provincial Purposes' in s. 92(2) constitute an implied restriction on the federal taxing power of s. 91(3). In Winterhaven Stables v. Canada (1988), it was argued that the federal Income Tax Act was valid on the ground that the income tax was used for the raising of a revenue for provincial purposes. In support of the argument, it was pointed out that the revenues raised by the income tax contributed to the grants that were made to the province out of the Consolidated Revenue fund to subsidize provincial programmes of post-secondary education, health care and welfare. The Alberta Court of Appeal rejected the argument, holding that it was not an objection to a federal taxing statute that some part of the revenue would ultimately be used for provincial purposes. This decision confirmed that there are no limits on the purposes for which the federal Parliament may raise taxes..." (pp. 737-738; my emphasis).
Now, it is important to take the following point into consideration: what Winterhaven does not say is that the federal government can tax income, within the provinces, for any purpose. All it really says is that the phrase "for Provincial Purposes" in subsection 92(2) is no longer useful when distinguishing between the federal and provincial tax law-making powers.
So if the purposes test is no longer an appropriate way to draw a line between the provincial taxing power granted by subsection 92(2), and the federal taxing power granted in subsection 91(3), the question must be asked: should no line be drawn at all, or must a line be drawn but drawn by applying a different test?
The answer to this question was first provided in 1881 by the Privy Council in Parson's case. In that case, the Privy Council stated that though the description "the raising of money by any mode or system of taxation" in section 91(3) is sufficiently large and general to include "direct taxation within the province in order to the raising of a revenue for provincial purposes" assigned to the provincial legislatures by s. 92, it obviously could not have been intended that "...the general power should override the particular one" (p.108).
The answer was again provided by the Supreme Court of Canada in 1950 in the case of Attorney General of Nova Scotia v. Attorney General of Canada. In that case, all judges agreed that the legislative powers given to the provinces in subsection 92(2) could not be exercised by the federal government. The Chief Justice in that case stated:
"The constitution of Canada does not belong either to Parliament, or to the Legislatures; it belongs to the country and it is there that the citizens of the country will find the protection of the rights to which they are entitled. It is part of that protection that Parliament can legislate only on the subject matters referred to it by section 91 and that each Province can legislate exclusively on the subject matters referred to it by section 92. "The country is entitled to insist that legislation adopted under section 91 should be passed exclusively by the Parliament of Canada in the same way as the people of each Province are entitled to insist that legislation concerning the matters enumerated in section 92 should come exclusively from their respective Legislatures. In each case the Members elected to Parliament or to the Legislatures are the only ones entrusted with the power and the duty to legislate concerning the subjects exclusively distributed by the constitutional Act to each of them." (my emphasis)
In other words, the decisions in both Parson's case and Attorney General of Nova Scotia v. Attorney General of Canada, support the proposition that there is a type of tax legislation which would be unconstitutional if introduced by the federal Parliament.
These decisions remain good law to this day; they have not been overruled. Thus, in order to determine whether or not the federal Income Tax Act is unconstitutional, we must determine how the federal tax law-making power differs from the provincial one: according to both the Privy Council and the Supreme Court of Canada, there must be a difference.
What, then, is the difference? Recall that Professor Hogg breaks subsection 92(2) into three components:
-
Direct Taxation,
-
within the province, and
-
for Provincial Purposes.
Recall also that professor Hogg effectively states that the Winterhaven decision rendered (3), the phrase "for Provincial Purposes", useless for distinguishing between federal and provincial powers to pass legislation.
This leaves only two possible ways in which the federal and provincial tax law-making powers can be distinguished: either (1) by the phrase "Direct Taxation", or (2) by the phrase "within the Province".
The phrase "within the Province", although useful for determining the constitutionality of provincial tax legislation, is not useful for the purpose of distinguishing between federal and provincial tax law-making powers. Any tax levied by the federal government on a person, property, transaction or benefit in all provinces would, in each province, be considered a tax "within the province".
How, then, is the federal power to pass tax legislation different from the provincial power to pass tax legislation? When we remove from subsection 92(2) the two phrases which, according to the above arguments, are irrelevant for the purposes of making this distinction ("in the Provinces" and "for Provincial Purposes"), we are left with the following:
"Exclusive Powers of Provincial Legislatures: s. 92. In each Province the legislature may exclusively make Laws in relation to Matters coming within the Classes of Subject next hereinafter enumerated; that is to say,
[...]
2. Direct Taxation in order to the raising of a Revenue."
Because all taxation is "in order to the raising of a Revenue", we must conclude that the provincial Legislatures may exclusively make Laws in relation to direct taxation.
Income tax is a direct tax. Consequently, only the provincial Legislatures may exclusively make Laws in relation to income tax (and the Supreme Court of Canada has said that it is unconstitutional for a provincial Legislature to transfer its constitutional tax jurisdiction to the federal Parliament or vice versa; see Attorney General of Nova Scotia et al. v. Attorney General of Canada [1950]).
Thus, it is reasonable to conclude that the Income Tax Act, being an act passed not by a provincial Legislature, but by the federal Parliament, is unconstitutional.
Also, it is important to notice that, by my analysis, the Income Tax Act is unconstitutional whether Winterhaven was decided correctly or incorrectly. If Winterhaven was decided correctly, the federal Income Tax Act is unconstitutional for the reasons I've explained. If Winterhaven was decided incorrectly, then the federal Income Tax Act is unconstitutional for the reasons argued in that case.
If a court were to agree with the analysis I've just put forth, it could state that the federal Income Tax Act is of no force or effect.
Provided there were no successful appeals of the decision, Canadian residents would not be required to pay federal income tax. Moreover, those Canadians who live in provinces where provincial income tax payable is based upon a percentage of one's federal income tax payable would also have a provincial income tax payable of zero dollars (because their federal tax payable would be zero dollars).
Of course, for a large number of reasons, no judge is very likely at all to agree with my analysis.
By agreeing with my analysis, a judge would be triggering a massive shortfall in revenues, and this would speed-up the collapse of the Canadian economy (say goodbye to those who lend money to the federal and provincial governments).
Moreover, even if the analysis I've put forth were accepted whole hog, the courts would probably give the federal and provincial governments a grace period during which they could set up a constitutional method of taxing the income of Canadian residents. This is not to mention ideological ramifications: Canada would be (at least temporarily) forced into a tax system reminiscent of that which existed in Canada's laissez-faire heyday (which, instructively, occurred around the time the Constitution Act, 1867, was drafted).
Although this state of affairs might please freedom-loving individualists, it would not be at all acceptable to Canadian socialists who believe that a higher average standard of living results from, and justifies, enslaving others to some extent. Without making other legislative changes, rendering the federal Income Tax Act of no force or effect would make it much more difficult for the federal government to play Robin Hood.
Whatever the courts would decide, it seems reasonable that there really is something to the rumour (more frequently heard, of late) that the federal Income Tax Act is unconstitutional. And, if there is, perhaps it is also true that Gerry Hart avoided paying income tax for 40 years by repeatedly convincing the Manitoba Court of Appeal of the truth of that rumour. Perhaps a request from the Manitoba Court of Appeal's records office is in order.
REFERENCES
Books:
Armstrong, G.H. (1990). The Hart System of Effective Tax Avoidance Volume 1: Call It Extortion! Winnipeg, Manitoba, AaA Publishing.
Armstrong, G.H. (1990) The Hart System of Effective Tax Avoidance Volume 2: Taxfighter's Sourcebook. Winnipeg, Manitoba, AaA Publishing.
Hogg, P.W. (1992) Constitutional Law of Canada (Third Edition) Scarborough, Ontario, Carswell.
La Forest, G.V. (1981) The Allocation of Taxing Power Under the Canadian Constitution (Second Edition), Canadian Tax Paper No.65, Toronto, Ontario, Canadian Tax Foundation.
Cases:
Attorney-General of Nova Scotia et al. v. Attorney-General of Canada (1950), 50 Dominion Tax Cases 838.
Bank of Toronto v. Lambe (1887), 12 Appeal Cases 96.
Caron v. R. (1924) Appeal Cases 999.
Citizens' Insurance Co. v. Parsons (1881-82), 7 Appeal Cases 96.
Winterhaven Stables v. Canada (1988) 53 Dominion Law Reports (4th) 413.
Statutes:
Constitution Act, 1867, UK., 30 & 31 Victoria, c.3.
Income Tax Act, R.S.C.
1952, c. 148 as amended by 1970-71-72, c. 63.
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