10 September 1998 External T.I. 9817715 - CONSTITUTIONALITY OF INCOME TAX ACT

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Validity of the Income Tax Act and Revenue Canada’s right to collect federal and provincial income taxes as it pertains to 1950 case involving the Attorney General of Nova Scotia v. the Attorney General of Canada and Lord Nelson Hotel Limited (1950) S.C.R. 31.

Position: Income Tax Act is constitutional

Reasons: The above-mentioned Supreme Court case did not indicate that the federal government did not have the power to impose direct taxes.

XXXXXXXXXX 981771
G. Moore
September 10, 1998

Dear XXXXXXXXXX:

Re: Constitutionality of the Income Tax Act

This is in reply to your letter of June 7, 1998, regarding the right of the federal government to collect federal and provincial income taxes.

In your letter, you refer to correspondence dated May 27, 1998, from the St. John’s Taxation Centre, regarding your balance owing. You have indicated that Revenue Canada has overstepped the authority it was given in the British North America Act with respect to the right to collect federal and provincial income taxes. You have also referred to the Supreme Court of Canada ruling in the case of The Attorney General of Nova Scotia v. The Attorney General of Canada and Lord Nelson Hotel Company Limited ( 50 DTC 838) as the authority for your position that the Income Tax Act is ultra vires the Parliament of Canada and that the federal government does not have the legal authority to impose income tax on you.

Our Comments

The court case mentioned above dealt with the specific issue of the competence of the Parliament of Canada and the legislature of a province to delegate authority to the other legislature on certain matters, namely labour and taxation. The court case did not address the issue of the constitutionality of the Income Tax Act and the decision did not indicate that the federal government could not impose direct taxes.

The constitutional authority for Canadian taxation is established under the Constitution Act 1867. Section 91(3) of the Constitution Act 1867, gives the Parliament of Canada the power to make laws in relation to “the raising of money by any mode or system of taxation”. This power extends to both direct and indirect taxation. Under section 92(2) of the Constitution Act 1867, provincial legislatures are given the power to make laws in relation to direct taxation within the province in order to raise revenue for provincial purposes.

In 1988, a challenge was brought on the basis that the Income Tax Act was invalid because it constitutes direct taxation within a province for provincial purposes. The Alberta Court of Appeal upheld the constitutionality of the Income Tax Act in the court case of Winterhaven Stables Ltd. v. Attorney General of Canada (53 D.L.R. (4th) 413). The Supreme Court of Canada refused leave to appeal on April 13, 1989. The constitutionality of the Income Tax Act was also raised at the Tax Court of Canada in 1994 in the case of Sarraf et al. v. Minister of National Revenue (94 DTC 1506) and later at the Federal Court -Trial Division (Sarraf v. the Queen, 94 DTC 6553, 94 DTC 6554). As one of several arguments challenging the validity of a particular assessment of tax on each of the taxpayers, they argued before the Tax Court that, by reason of section 92(2) of the Constitution Act 1867, the federal government did not have the power of direct taxation within a province. The Tax Court dismissed the case on the basis that the Parliament of Canada is limited in its taxing powers only by the Canadian Charter of Rights and Freedoms.

In those provinces where provincial income tax is collected by Revenue Canada, the legislative authority covering the collection agreement between the federal and provincial government is found in the provincial income tax legislation.

Accordingly, we confirm that the Department is constitutionality empowered to administer the provisions of the Income Tax Act.

We trust our comments will be of assistance to you.

Yours truly,

J. Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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