Found Money: New Rules for Recovering Taxes paid under ultra vires Legislation

(As originally published in GST & Commodity Tax Journal, September 2005)

Some readers may recall the shock and horror of reading the Air Canada v. British Columbia ([1989] 1 S.C.R. 1161) decision, where the Supreme Court held that notwithstanding that the taxpayer had paid tax under ultra vires legislation, it was not entitled to recover those taxes from the BC provincial government.

The New Brunswick Court of Appeal has recently put a new spin on the Air Canada case with the result – you guessed it – being the recovery of such taxes by a local New Brunswick business.

The balance of this article reviews the case, and comments on the new rules, which appear to give some hope to taxpayers in similar situations.

The Kingstreet Case

The Facts

In Kingstreet Investments Ltd. et al. v. Department of Finance (New Brunswick ) et al., [2005] N.B.J. No. 205, 2005 NBCA 56 (N.B. C.A. ), the Appellants (Kingstreet and 501638) operated licensed night clubs in New Brunswick .

To make a long story short, they had been paying provincial “user-charges” from 1988 based on a percentage of the retail price of liquor (the “Surcharges”).  The Surcharges had been levied on licensed vendors to defray the regulatory cost of the licensing scheme, but with the annual revenues from the surcharges ($5 million) far exceeding the annual costs ($1 million), and the surplus going into the Province’s consolidated revenue fund.

The Appellants (and others) sought restitution (for “unjust enrichment”) from the Provincial Government, on the basis that the Surcharges were an “indirect tax”, and therefore ultra vires the province under s. 92(2) of the Constitution Act, 1867.

The Trial Decision

At trial, the Court found that the Surcharges were in fact “taxes” and not mere “fees” (partly due to the lack of existence of a nexus between the amount of each Surcharge and the regulatory cost of the scheme).  Given their status as a “taxes”, the trial judge held that they were an “indirect tax” and ultra vires, finding that the tax had been intended to be (and actually was) passed on to the Appellants’ ultimate customers.  Unfortunately, the trial judge also concluded that he was without the power to order the amounts repaid to the Appellants, and therefore denied the restitutionary claim.  (The trial judge felt compelled to follow the reasoning of Justice La Forest in the Supreme Court of Canada’s decision in Air Canada v. British Columbia, supra, which held that – where (1) the burden of the tax had been passed on to the customers, and (2) given the possibility of ‘fiscal chaos’ if all monies paid under invalid legislation were required to be repaid – restitution was not in order).

The Court of Appeal Decision

The issues before the Court of Appeal were complex, but essentially reduced to whether or not to give the money back to the Appellants.  Two judges found for the Appellants, and overturned the Trial Judge’s decision, with one judge dissenting.

In his majority decision, Justice Robertson took a rather scholarly stroll through the law of restitution, finding ultimately, that the case could be resolved in the Appellants’ favour, while still applying the reasoning of the Supreme Court in Air Canada .

In Mr. Justice Robertson’s view, La Forest had accepted the principle that payments made under a mistake of law should be recoverable, but ruled that the “general rule” could not apply to payments to a public authority under ultra vires legislation unless the failure to grant relief could be characterized as unjust or oppressive – which he called the “immunization rule”.  According to La Forest, the “immunization rule” was needed to prevent fiscal chaos resulting from the invalidation of longstanding tax legislation, and for other reasons.

La Forest ’s position stood, of course, in contra-distinction to the views of Justice Wilson, in dissent in Air Canada.   Justice Wilson took the view that immunizing governments from restitutionary claims would breach the constitutional imperative against governments doing indirectly what they cannot do directly by demanding payment of unconstitutional taxes.  She also rejected the passing-on defense on the basis that the law of restitution imposed no requirement to establish that the enrichment of the defendant came at the plaintiff’s expense.

Taking those opposing views into account Justice Robertson then proceeded to craft his own approach based on the principles of the law of restitution.  He first noted that the Supreme Court had not since been presented with a case on point, and that the comments of both Justices La Forest and Wilson were in fact obiter dictum (i.e., not binding) in the Air Canada decision, with neither judge attracting a plurality of votes on the restitution issue.  He then rejected the Trial Judge’s invocation of the “immunization rule”, on the basis that it was unclear to Justice Robertson how the Trial Judge could have determined whether the denial of the restitution would be ‘unjust’ or ‘oppressive’.

Instead, Justice Robertson chose to accept Justice Wilson’s rationale that a public authority should not – through blind application of the immunization rule – be allowed to do indirectly what it could not do directly.  Emphasizing that the New Brunswick legislature maintained the right to adopt retrospective and ameliorating legislation in order to nullify restitutionary claims (the Eurig Estate (Re), [1998] 2 S.C.R. 565 case being an example of that approach), Justice Robertson thus concluded that if the legislature chose to do so, it could enact appropriate measures to avoiding repayment of the restitutionary claims, and apply them retroactively.  The adoption of a valid and equivalent retrospective tax was not to be equated with legislation amounting to a bar to recovery for amounts paid under an invalid tax, even though the result is the same.

Justice Robertson viewed this result as an important incentive for governments to comply with their constitutional obligations, which would be removed if there was no recovery allowed to the plaintiff in such instances.

Finally, Justice Robertson went on to formulate a conception of the defence of passing-on which would be compatible with allowing recovery to the Appellants, as he was not prepared to abandon the defence outright. In summary, the Defendant (government) has the initial burden to show that the cost of the tax was passed on to consumers, with a rebuttable presumption to that effect if it is found to be an indirect tax. The Plaintiff will then have the burden to show that it is still out of pocket due to reduction in sales or costs associated with tax collection and remittance. The role of the court will then be to determine on a balance of probabilities whether the Plaintiff would be unjustly enriched if restitutionary recovery were allowed.   .

In the result, the Appellants’ were afforded the right to restitution, however with a further twist. Although Justice Robertson stated that this case is not to stand for the rule that unless taxes are paid under protest, restitution would not be allowed, restitution was only granted from the date that the Appellants commenced legal proceedings forward. Proposing that if the Plaintiff wishes to avoid the application of the defence of passing-on, payments made under an allegedly invalid tax should be made under protest, and thereby integrating the role of payment under compulsion and protest into the theory of the defence of passing-on.

Commentary

Kingstreet is an important case because it opens up another avenue of relief for taxpayers that find that they have paid tax under unconstitutional legislation.  It also, by corollary, provides a further incentive for taxpayers to challenge federal and provincial legislation that may be over-stepping jurisdictional bounds.  That, in itself, is a good thing, since it is important that the Courts provide a “check and balance” function to the legislatures, and police the latter’s attempts to improperly tax Canadians.  But the Courts can only effectively fulfill that function if they have the raw materials to do so.  The raw materials are the cases, and the fact that there is now some additional hope for taxpayers to actually recover the monies paid under unconstitutional taxing legislation, may serve to increase the flow of these cases into the courts.

Author:

Robert G. Kreklewetz

Millar Kreklewetz LLP

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