Dunne v. Quebec (Deputy Minister of Revenue), 2007 DTC 5248, 2007 SCC 19, [2007] 1 SCR 853

                                                 SUPREME COURT OF CANADA

Between:

Ronald G. Dunne

Appellant

and

Deputy Minister of Revenue of Quebec and

Attorney General of Quebec

Respondents

‑ and ‑

Attorney General of Ontario, Attorney General of New Brunswick

and Attorney General of British Columbia

Interveners

Coram: McLachlin C.J. and Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein JJ.

______________________________

Dunne v. Quebec (Deputy Minister of Revenue), [2007] 1 S.C.R. 853, 2007 SCC 19

Ronald G. Dunne                                                                                              Appellant

v.

Deputy Minister of Revenue of Quebec and Attorney General

of Quebec                                                                                                     Respondents

and

Attorney General of Ontario, Attorney General of

New Brunswick and Attorney General of British Columbia                       Interveners

Indexed as:  Dunne v. Quebec (Deputy Minister of Revenue)

Neutral citation:  2007 SCC 19.

File No.:  31180.

2007:  February 21; 2007:  May 10.

Present:  McLachlin C.J. and Bastarache, Binnie, LeBel, Deschamps, Fish, Abella, Charron and Rothstein JJ.

on appeal from the court of appeal for quebec

Constitutional law — Taxation — Provincial taxation power — Partner retiring from partnership — Retired partner not residing in Quebec or carrying on any business there from which he drew income — Quebec taxing percentage of retired partner’s retirement allowance equivalent to percentage of partnership’s total income earned in province — Whether impugned provisions of Taxation Act amounting to extraterritorial extension of province’s taxing power — Constitution Act, 1867, s. 92(2)  — Taxation Act, R.S.Q., c. I‑3, ss. 608, 609, 612.1.

Taxation — Income tax — Partner retiring from partnership — Nature of retirement allowance — Quebec taxing percentage of retired partner’s retirement allowance equivalent to percentage of partnership’s total income earned in province — Retired partner not residing in Quebec or carrying on any business there from which he drew income — Whether province exceeded its taxing power — Whether Revenu Québec’s assessment should be vacated — Constitution Act, 1867, s. 92(2)  — Taxation Act, R.S.Q., c. I‑3, ss. 608, 609, 612.1.

After retiring as an active member of his accounting partnership in 1994, D, who lives in Ontario, received retirement benefits from the partnership.  In 1997, Revenu Québec determined that part of D’s retirement allowance constituted income earned in Quebec and was therefore taxable by that province by virtue of certain provisions of Quebec’s Taxation Act.  Since almost 20 percent of the accounting partnership’s total income had been earned in Quebec in 1997, that percentage of D’s retirement allowance was taxed by Revenu Québec.  D, who did not reside in Quebec, did no business there and did not receive any taxable income from  a business carried on there, appealed the assessment and challenged the constitutionality of the provisions.  The Court of Québec vacated the assessment, but the Court of Appeal set aside that decision, upheld the constitutionality of the impugned provisions and restored Revenu Québec’s assessment. 

Held:  The appeal should be dismissed.

D was properly assessed under the Taxation Act, which does not exceed the taxing power of the province under s. 92(2)  of the Constitution Act, 1867 .  The s. 92(2)  power includes the power to tax not only residents of the province, but also property, businesses and transactions within the province, and can, in this respect, reach non‑residents.  Here, it is clear from the relevant provisions of the partnership agreement that the allowance paid to a retired partner is a share in the profits of the partnership.  Since ss. 608, 609 and 612.1 of the Taxation Act operated to determine the portion of D’s income that could be allocated to the partnership’s Quebec activities, and the portion of the retirement allowance that could be taxed by the province, these provisions did not improperly expand the scope of the provincial taxing power. [1] [12] [16] [20]

Cases Cited

Referred to:  Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298; Alworth v. Minister of Finance, [1978] 1 S.C.R. 447; Ontario Home Builders’ Association v. York Region Board of Education, [1996] 2 S.C.R. 929; Minister of National Revenue v. Wahn, [1969] S.C.R. 404.

Statutes and Regulations Cited

Constitution Act, 1867, s. 92(2) .

Regulation respecting the Taxation Act, R.R.Q. 1981, c. I‑3, r. 1, s. 1088R4.

Taxation Act, R.S.Q., c. I‑3, ss. 25, 87, 600, 608, 609, 612.1, 1088.

Authors Cited

Hogg, Peter W. Constitutional Law of Canada, vol. 1. Scarborough, Ont.:  Carswell, 1992 (loose‑leaf updated 2006, release 1).

La Forest, Gérard V. The Allocation of Taxing Power Under the Canadian Constitution, 2nd ed. Toronto: Canadian Tax Foundation, 1981.

APPEAL from a judgment of the Quebec Court of Appeal (Morin, Doyon and Bich JJ.A.), [2005] R.J.Q. 2184, [2005] R.D.F.Q. 28, [2005] Q.J. No. 11812 (QL), 2005 CarswellQue 6703, 2005 QCCA 739, reversing a judgment of Charette J.C.Q., [2003] R.D.F.Q. 264, 2003 CarswellQue 2707.  Appeal dismissed.

Guy Du Pont, Nicolas X. Cloutier and Brandon Wiener, for the appellant.

Jocelyne Mailloux‑Martin, for the respondent the Deputy Minister of Revenue.

Alain Gingras, for the respondent the Attorney General of Quebec.

Sean W. Hanley and Robin K. Basu, for the intervener the Attorney General  of Ontario.

Gaétan Migneault, for the intervener the Attorney General of New Brunswick.

George H. Copley, Q.C., for the intervener the Attorney General of British Columbia.

The judgment of the Court was delivered by

LeBel J. _

I.       Introduction

1                                   After retiring, the appellant, Mr. Dunne, a chartered accountant, received retirement benefits from the partnership of which he had been an active member.  The respondent Deputy Minister of Revenue of Quebec (“Revenu Québec”) assessed tax with respect to a portion of the benefits on the basis that it was business income from a source in the province of Quebec.  The appellant challenged the assessment on the basis that he did not reside in Quebec, did no business there and had received no taxable income from a business carried on there.  The Court of Québec allowed his appeal and vacated the assessment.  The Quebec Court of Appeal reversed that judgment and confirmed the assessment.  For the reasons that follow, I propose to dismiss the appeal.  The appellant was properly assessed under the Taxation Act, R.S.Q., c. I-3 (T.A.), which does not exceed the taxing power of the province of Quebec under s. 92(2)  of the Constitution Act, 1867 .

II.      Background

2                                   Mr. Dunne was a partner with Ernst & Young for many years.  He resides in Ontario and has never been a resident of Quebec or owned assets there.  He has never personally worked in Quebec, carried on business there or established an office or other presence there, nor has he ever been employed there.  He did work for the partnership in other provinces.

3                                   Mr. Dunne retired in 1991, but kept working for the partnership as a consultant until he turned 60 in February 1994.  He then became eligible to receive what he characterizes as a retirement allowance (which the Quebec Court of Appeal found to be a pension) in accordance with his partnership agreement.  Since 1994, he has received the annual amount of $31, 244.

4                                   In 1997, Mr. Dunne received his annual amount of $31,244 and an additional $9,991, the source of which is not in dispute.  Revenu Québec took the position that part of Mr. Dunne’s retirement allowance constituted income earned in Quebec and was therefore taxable by that province by virtue of certain fictions or statutory presumptions found in ss. 25, 87, 600, 608, 609, 612.1 and 1088 T.A. (see Appendix).  As 19.87 percent of Ernst & Young total income had been earned in Quebec in 1997, that percentage of Mr. Dunne’s retirement allowance was taxed by Revenu Québec.  Mr. Dunne appealed his 1997 assessment and challenged the constitutionality of the legislative provisions.

III.    Judicial History

5                                   Mr. Dunne appealed the assessment to the Court of Québec.  Charette J.C.Q., allowed his appeal and vacated the assessment: [2003] R.D.F.Q. 264.  In Judge Charette’s opinion, Revenu Québec had to establish that the taxpayer, a non-resident, had earned business income in Quebec.  He found that Mr. Dunne had not carried on a business in Quebec from which he had drawn income.  Mr. Dunne was no longer a member of the accounting partnership and had not received any business income from it.

6                                   In reasons written by Bich J.A., the Quebec Court of Appeal took a different view.  It allowed the appeal and restored the assessment: [2005] R.J.Q. 2184.  After carefully reviewing the Taxation Act and the regulations made thereunder, Bich J.A. found that a portion of the payments the taxpayer had started to receive upon his retirement was deemed to be income from the business of a partnership in the province.  Those payments were taxable by the province, which had validly exercised the taxing powers allocated to the provinces under the Constitution Act, 1867 .  Bich J.A. also held that the provisions of the Taxation Act were constitutionally valid and were applicable.  Mr. Dunne was granted leave to appeal to this Court.

IV.    Analysis

A.     The Issues

7                                   The core issue in the appeal is the legal nature of the payments received from the partnership.  The appellant ties this issue to an argument on the application of the Taxation Act that involves issues of statutory interpretation, and a constitutional question about the validity of certain provisions of the Taxation Act dealing with the allocation of income from the business of a partnership in Quebec.  Mr. Dunne challenges the validity of those provisions on the basis that they amount to an extraterritorial extension of the taxing powers of the province of Quebec, contrary to s. 92(2)  of the Constitution Act, 1867 .  The Chief Justice stated the constitutional issue raised by the appeal as follows July 17, 2006:

Are ss. 608, 609 and 612.1 of the Taxation Act, R.S.Q., c. I‑3, invalid or constitutionally inapplicable to the appellant on the ground that they contravene subsection 92(2)  of the Constitution Act, 1867  by exceeding the territorial limit on provincial legislative competence?

8                                   In order to decide whether or how the constitutional question ought to be answered, I will have to determine which interpretation of the relationship between the partnership and Mr. Dunne after his retirement as an active member is correct.  Before turning to these issues, I will review the provisions of the Taxation Act that have an impact on the tax status of the payments and will summarize the constitutional principles that govern the scope of the taxing powers of the province of Quebec.

B.      Retirement From a Partnership Under the Taxation Act

9                                   According to s. 25 T.A., individuals who reside in Canada but not in Quebec on the last day of a taxation year must pay tax if they carried on a business in Quebec at any time during the year.  Part II of the Act then determines how the income earned by such individuals in Quebec will be taxed.  Section 1088 T.A. provides that income is earned in Quebec if it comes from a business carried on there and is attributed in a prescribed manner to an establishment there.

10                               The parties agree on the basic principle of the taxation of partnerships:  a partnership’s income is allocated to its partners.  A partnership is not treated as a distinct entity from the partners (Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298, at para. 22).  Although the partnership’s income is first computed as if it belonged to a distinct person (s. 600(c)(ii) T.A.), it is then allocated to the partners under the rules set out in the Taxation Act (s. 600(f) T.A.).

11                               In general, when a partner withdraws from a partnership, he is no longer entitled to a share of its income.  But the Taxation Act provides for cases where this is not so.  Section 608 applies to retirement allowances agreed upon with the members of the partnership.  It requires that they be dealt with as a share of the partnership’s income:

608.  For the purposes of sections 7 to 7.0.6, 217.2 to 217.16, 600, 607, 634 and 635, where the principal activity of a partnership is carrying on a business in Canada and its members have entered into an agreement to allocate a share of the income or loss of the partnership from any source in Canada or from sources in another place to any person described in section 609, that person is deemed to be a member of the partnership and the amount so allocated for a particular fiscal period of the partnership shall be included in computing the person’s income for the taxation year in which that fiscal period of the partnership ends.

Section 609 confirms that the person to whom s. 608 applies is a taxpayer who has ceased to be a member of a partnership.  Under s. 612.1, a retired partner to whom s. 608 applies is deemed to have carried on a business in Quebec even if he or she does not reside there.  This retired partner must pay tax as determined in accordance with s. 1088 T.A. and s. 1088R4 of the Regulation respecting the Taxation Act, R.R.Q. 1981, c. I-3, r. 1.  The amount of tax payable will be proportionate to the share of the partnership’s total income earned in Canada that was earned in Quebec.

C.     The Provincial Taxing Power

12                               Section 92(2)  of the Constitution Act, 1867  limits a province’s taxing authority to the imposition of direct taxes within the province.  The courts have construed this power broadly and flexibly.  It certainly includes the power to tax residents of the province, but the provincial legislature may also tax property, businesses and transactions within the province.  Its taxing power can thus reach non-residents in this respect (P. W. Hogg, Constitutional Law of Canada (loose-leaf ed.), vol. 1, at pp. 30-22 to 30-24; G. V. La Forest, The Allocation of Taxing Power Under the Canadian Constitution (2nd ed. 1981), at p. 146; Alworth v. Minister of Finance, [1978] 1 S.C.R. 447; Ontario Home Builders’ Association v. York Region Board of Education, [1996] 2 S.C.R. 929, at para. 39, per Iacobucci J.).  In order to apply these principles, I must now consider the partnership agreement and determine the legal nature, for tax purposes, of the retirement allowance at issue.

D.     The Partnership Agreement and the Nature of the Retirement Allowance

13                               Mr. Dunne argues that he has no real connection with Quebec, that he has not received income from a business there, and that he has not carried on a business there.  As a consequence, he asserts that he is beyond the reach of the province’s taxing power.  In my view, the terms of the partnership agreement put this argument to rest. (See Minister of National Revenue v. Wahn, [1969] S.C.R. 404, at p. 410, per Cartwright C.J., and at pp. 423-25, per Pigeon J.)

14                               As mentioned above, before retiring, Mr. Dunne was for a long time a partner in what became the Ernst & Young partnership.  A revised partnership agreement in effect since 1989 determined his rights and status upon retirement. (See A.R., vol. IV, at p. 570.)  It provided for various payments to retired partners, as defined therein.  The only one in issue in this appeal is the retirement allowance.

15                               Paragraph 4.4(1) of the agreement provides for the payment of a retirement allowance to former partners.  It is based on a formula under which length of service with the partnership is factored in together with the average of the retired partner’s combined salary and share of profits during his or her best three-year period:

Retirement Allowance of Retired Partners

4.4  (1)  A Partner having completed 15 Equivalent Years’ Service who retires from the firm after attaining the age of 60 under the provisions of Paragraph 2.7(1) of this Agreement will be entitled to receive during his lifetime a monthly retirement allowance to commence at the end of the month following the month in which he retires computed by reference to his highest average annual combined salary and share of profits (but excluding bonuses, interest and Registered Retirement Savings Plan contributions) for any period of three consecutive years (hereinafter referred to as his “Highest Average Remuneration”), plus such amounts, if any, as may be deemed by the Executive Committee in its discretion to be appropriate to add to his Highest Average Remuneration (hereinafter referred to as the “Additional Amounts”), the amount of such monthly allowance to be calculated as follows:

1/12 x ($15,000 + 10% (Highest Average Remuneration + Additional Amounts))

16                               It is clear from certain other provisions of the partnership agreement that this allowance is a share of the profits of the partnership.  Although the allowance may have been intended as consideration for past services and for agreeing to a no-competition clause, it nevertheless constitutes income from the partnership’s business.

17                               First, the agreement defines the partnership’s net profit as the gross profit less certain payments, which include those made in respect of the retirement allowance:

Net Profit

3.6  The Net Profit of the Partnership in respect of any fiscal year shall mean the Gross Profit of the Partnership for such year determined in accordance with Paragraph 3.5 hereof less:

(a)  the portion thereof payable to Retired Partners for the year by way of retirement allowance under the provisions of Paragraph 4.4 hereof and similar provisions of agreements antecedent to this Agreement.

18                               Second, if the gross profit is insufficient, payments to former partners may be reduced proportionately (para. 3.9).  Moreover, para. 4.4(3)(b) treats the retirement allowance as a share of the gross profit.  It caps such payments in any year at 15 percent of the gross profit and provides for a proportionate reduction to keep them within the cap if necessary:

(b)    in the event that the total amounts receivable by all Retired Partners of the Partnership and of Woods Gordon in any year computed in the foregoing manner and in the manner provided in similar provisions of the Woods Gordon Partnership Agreement and, after giving effect to the provisions of Paragraph 3.9 of this Agreement and Paragraph 3.9 of said Woods Gordon Partnership Agreement, where applicable, would exceed 15% of the combined gross profits of the Partnership and Woods Gordon the amount receivable by each Retired Partner of the Partnership and Woods Gordon shall be reduced pro rata until the total amount receivable by all such Retired Partners is reduced in the aggregate to 15% of the combined gross profits of the Partnership and Woods Gordon.

19                               Finally, the partners agreed that amounts payable in respect of the retirement allowance should be considered a share of the partnership’s income for tax purposes:

Amounts Agreed to Represent Allocated Share of Income for Tax Purposes

5.5  Where in any fiscal year of the Partnership, an amount becomes payable to a Former Partner or his estate or credited to his drawing account in respect of:

(a)    salary, bonus (if any) and Registered Retirement Savings Plan payments for the fiscal year of the Partnership during which he ceased to be a Partner;

(b)    amounts to which he or his estate is entitled pursuant to subparagraphs (a) and (f) of Paragraph 4.0 and Paragraphs 4.2, 4.3 and 4.4 hereof; or

(c)    instalments on account of the balance of his WIP deferred income account pursuant to subparagraph (d) of Paragraph 4.0 hereof;

the Partnership shall allocate to such person or estate as his or its share of the business income of the Partnership for such fiscal year, as such income is determined for purposes of the Income Tax Act  of Canada, the total of all such amounts which become payable to such person or estate or credited to his drawing account during such fiscal year.

20                               The partnership agreement itself establishes that Mr. Dunne received a share from the profits of a partnership that carried on a business in the province of Quebec.  Under the Taxation Act, the respondent could therefore require the appellant to pay income tax.  Under s. 92(2) of the Constitution Act, 1867 , this was taxation within the province.  The assessment was not based on a legal fiction.  The Taxation Act’s deeming provisions, namely ss. 608, 609 and 612.1, operated to determine the portion of the appellant’s income that could be allocated to the partnership’s Quebec activities and the portion of the retirement allowance that could be taxed by the province of Quebec, and did not improperly expand the scope of the provincial taxing power.

V.     Conclusion

21                               For those reasons, I would answer the constitutional question in the negative and dismiss the appeal with costs.

APPENDIX

Relevant Constitutional and Statutory Provisions

Constitution Act, 1867 

92.    In each Province the Legislature may exclusively make Laws in relation to Matters coming within the Classes of Subjects next herein-after enumerated; that  is to say,—

. . .

2.      Direct Taxation within the Province in order to the raising of a Revenue for Provincial Purposes.

Taxation Act, R.S.Q., c. I-3

25.    Every individual resident in Canada but outside Québec on the last day of a taxation year shall, if the individual carried on a business in Québec at any time in the year, pay a tax on the individual’s income earned in Québec for the year as determined under Part II.

The tax payable under sections 750 and 751 by an individual referred to in the first paragraph is equal to the portion of the tax that the individual would pay, but for this paragraph, under those sections on the individual’s taxable income determined under section 24 if the individual were resident in Québec, that is the proportion, which shall not exceed 1, that that income earned in Québec is of the amount by which the amount that would have been the individual’s income, computed without reference to section 1029.8.50, had the individual been resident in Québec on the last day of the taxation year, exceeds any amount deducted by the individual under any of sections 726.20.2, 737.16, 737.16.1, 737.21, 737.22.0.3, 737.25 and 737.28 in computing that taxable income.

. . .

600.  Each member of a partnership shall compute, for a taxation year, his income, non-capital loss, net capital loss, restricted farm loss, farm loss or taxable income earned in Canada, as the case may be, as if each of the following hypotheses governing the interpretation of the provisions of this Title applied:

. . .

(f) subject to section 600.0.1, the income of the partnership, for a taxation year, from any source in Canada or from sources in another place is, to the extent of the taxpayer’s share thereof, his income for his taxation year during which the taxation year of the partnership ends, from such source in Canada or sources situated in such other place, as the case may be;

. . .

608.  For the purposes of sections 7 to 7.0.6, 217.2 to 217.16, 600, 607, 634 and 635, where the principal activity of a partnership is carrying on a business in Canada and its members have entered into an agreement to allocate a share of the income or loss of the partnership from any source in Canada or from sources in another place to any person described in section 609, that person is deemed to be a member of the partnership and the amount so allocated for a particular fiscal period of the partnership shall be included in computing the person’s income for the taxation year in which that fiscal period of the partnership ends.

609.  The person to whom section 608 applies is:

(a)     a taxpayer who at any time ceased to be a member of the partnership described therein or of any other partnership that has been dissolved at any time, or would, but for section 618, have been dissolved, where the members thereof or the members of a third partnership in which a member of such other partnership became a member immediately after the other partnership was dissolved, have entered into an agreement described in section 608 in favour of the taxpayer or of any person described in paragraph b; and

(b)     the spouse, estate or heir of the taxpayer referred to in paragraph a or a person referred to in section 611.

612.1.    Where a partnership carries on a business in Québec at any time during a taxation year, each taxpayer who is deemed to be a member of the partnership under section 608 is deemed, for the purposes of section 25, to carry on that business in Québec at any time during the year.

1088.     The income earned in Québec, for a taxation year, by an individual contemplated in section 25 is equal to the part of the income from businesses which he carries on that is attributed in prescribed manner to an establishment in Québec, less the part of the losses of the said businesses that is attributed to such establishment.

Appeal dismissed with costs. 

Solicitors for the appellant:  Davies Ward Phillips & Vineberg, Montréal.  

Solicitors for the respondents:  Veillette, Larivière, Montréal. 

Solicitor for the intervener the Attorney General of Ontario:  Attorney General of Ontario, Toronto.

Solicitor for the intervener the Attorney General of New Brunswick:  Office of the Attorney General, Fredericton.

Solicitor for the intervener the Attorney General of British Columbia:  Ministry of Attorney General, Victoria.