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Tax - Ultra Vires

. Fareau v. Bell Canada

In Fareau v. Bell Canada (Ont CA, 2023) the Court of Appeal considers a court claim advanced by the class action plaintiffs that a monopolistic and exploitive telephone contract for provincial prisoners constituted an ultra vires tax:
[8] The appellants brought a certification motion, and Bell and Ontario brought cross-motions seeking a stay or dismissal of the action on the basis that the claims were within the jurisdiction of the Canadian Radio-television and Telecommunications Commission (“CRTC”).


The First Issue: Did the motion judge err by dismissing the appellants’ claim that the commissions paid to Ontario were an ultra vires tax?

[58] The appellants allege that the commissions Bell paid to Ontario amounted to an indirect tax on class members, which is impermissible under the Constitution Act, 1867. Specifically, they plead that the “Commissions constituted an unlawful indirect tax ultra vires the Province of Ontario”.

[59] The Supreme Court has most recently summarized the characteristics of a tax in 620 Connaught Ltd. v. Canada (Attorney General), 2008 SCC 7, [2008] 1 S.C.R. 131, at para. 22:
In Lawson v. Interior Tree Fruit and Vegetable Committee of Direction, 1930 CanLII 91 (SCC), [1931] S.C.R. 357, Duff J. (as he then was) identified the characteristics of a tax (pp. 362-63). In [Eurig Estate (Re), 1998 CanLII 801 (SCC), [1998] 2 S.C.R. 565], Major J. summarized the Lawson characteristics of a tax at para. 15:
Whether a levy is a tax or a fee was considered in Lawson, supra. Duff J. for the majority concluded that the levy in question was a tax because it was: (1) enforceable by law; (2) imposed under the authority of the legislature; (3) levied by a public body; and (4) intended for a public purpose.
[60] The appellants submit that they have pleaded the necessary elements under this four-part test. In particular, they have pleaded:
The Commissions were enforceable by law under statutory authority granted to the Minister. Unless the Class Members agreed to the Collect Call rates unilaterally imposed by the Defendants, inclusive of the Commissions, the Prisoner Class members could not make a call and the Payor Class members could not receive a call from a Prisoner in an Ontario Facility.

Bell imposed the telephone fees on the Plaintiffs and the Class on authority given to it by the Minister through the Contract. The Minister administered the OTMS, including the Contract, under the general authority given to it by the legislature through the [Ministry of Correctional Services Act, R.S.O. 1990, c M.22] to operate Ontario Facilities.

Therefore, the Crown, as represented by the Minister, was a public body levying the Commissions in a public authority, and intended the Commissions to be collected for a public purpose. The revenue obtained from the Commissions was used for the public purpose of defraying the costs of government administration in general, and not simply to offset the costs of the OTMS.
[61] The motion judge concluded that it was plain and obvious that the appellants did not have a cause of action against Ontario for the recovery of ultra vires taxes.

[62] He recognized that “[t]o determine the characterization of the government charge, it is necessary to determine its fundamental nature, its ‘pith and substance’”, in other words “its dominant, primary and most important characteristic as distinguished from its incidental features.”

[63] He found that it was plain and obvious that the commissions were not a tax at all, but rather a proprietary charge. It was therefore unnecessary to analyze whether the commissions were an indirect or direct tax, or whether they were intra vires licence fees, user fees or regulatory charges.

[64] In concluding that the commissions were not a tax, the motion judge found that they were analogous to the charge imposed in Toronto Distillery Company Ltd. v. Ontario (Alcohol and Gaming Commission): 2016 ONCA 960, 135 O.R. (3d) 637, aff’g 2016 ONSC 2202, 130 O.R. (3d) 612. In Toronto Distillery, a percentage-based payment from a vendor to the government in respect of sales made to consumers was found to be either a proprietary charge or a contractual payment.

[65] The motion judge quoted from para. 8 of this court’s decision in Toronto Distillery:
Furthermore, we agree .. that the markup is not a tax because the appellant agreed to it in its contract. It is well-established that obligations under a contract arise from the voluntary agreement of the parties, while the obligation to pay a tax does not. Under the contract, the LCBO owns the spirits in the appellant's store. As owner of the goods, the LCBO must have the right to determine the prices for which they are sold, including the markup. It follows that the markup is not an exercise of the government's public authority but of its private law rights. [Emphasis added.]
[66] Drawing on this passage, he noted that “contractual payments made to a government authority are a private law matter and not a public law matter of taxation because taxes are imposed by a government without a taxpayer’s consent while contracts are a matter of voluntary agreement between the parties to the contract.” Contractual payments do not “satisfy the indicia of tax being an imposed obligation.”

[67] The appellants submit that the motion judge made three errors in his analysis. First, rather than applying the “plain and obvious test”, he decided the merits of the appellants’ claim. Second, he erred in finding that the levy was a proprietary charge, a point that was not even argued. Third, he erred in deciding that a contract between Bell and Ontario was dispositive of the claim on behalf of the class against Ontario.

[68] I would reject these arguments.

[69] The motion judge was alive to the threshold for striking a claim. He recognized that the “plain and obvious” test calls on courts to read the claim as generously as possible because cases should, if possible, be disposed of on their merits at trial: see Atlantic Lottery Corp. Inc. v. Babstock, 2020 SCC 19, [2020] 2 S.C.R. 420, at paras. 87-88. However, he also recognized that “the power to strike hopeless claims is ‘a valuable housekeeping measure essential to effective and fair litigation’”: Babcock, at para. 18, citing R. v. Imperial Tobacco Canada Ltd., 2011 SCC 42, [2011] 3 S.C.R. 45, at para. 19.

[70] As for the appellants’ second submission, I see no error in the motion judge’s conclusion that the commissions were a proprietary charge. In the context of the constitutional limitations on taxation, nothing turns on whether a given payment is best characterized as a “proprietary charge” or a “contractual payment”, since neither is a tax. Neither involves the element of compulsion, which is a threshold requirement for characterizing a payment as a tax: 620 Connaught, at para. 22.

[71] Nor do I accept that there is a procedural fairness concern because the proprietary charge issue was not specifically argued. The core argument advanced by Ontario before the motion judge was that Bell paid the commission to Ontario subject to voluntary private law obligations and not under legislative compulsion.

[72] Finally, the motion judge did not err in taking into account the contract between Bell and Ontario in determining that it is plain and obvious the commissions were not a tax. It is clear, as a matter of law, that a payment made pursuant to a contract is not in the nature of a tax, which involves a payment compelled by or under a statute: see, for e.g., Unfiltered Brewing Inc. v. Nova Scotia Liquor Corporation, 2019 NSCA 10, 431 D.L.R. (4th) 416; Steam Whistle Brewing Inc. v. Alberta Gaming and Liquor Commission, 2018 ABQB 476, 428 D.L.R. (4th) 697; Toronto Distillery, 2016 ONCA 960, aff’g 2016 ONSC 2202; and QCTV Ltd. v. Edmonton (City) (1983), 1983 CanLII 1088 (AB KB), 48 A.R. 255 (Q.B.), aff’d 1984 ABCA 311, 58 A.R. 182.

[73] While I accept that the appellants were not party to the agreement between Bell and Ontario, and had no choice but to pay if they wanted to make a phone call, this does not change the fact that payment of commissions was a matter of contract law and not a public law matter: the payments were payable by Bell to Ontario pursuant to a contract and, as the respondent Ontario stresses, Bell’s contractual obligation to pay the commissions existed regardless of whether Bell successfully collected any revenue from payors. If Bell failed to pay, Ontario’s only recourse would have been a contract claim.

[74] Accordingly, I would affirm the dismissal of the ultra vires tax claim.


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Last modified: 04-05-23
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