H. Hoffman v. Her Majesty the Queen and Minister of National Revenue, [1996] 3 CTC 164, 98 DTC 6614

Hargrave P.: — These reasons arise out of the Defendants’ motion to strike out the Statement of Claim under Rule 419(l)(a), (c) and (f), that it discloses no reasonable cause of action, that it is scandalous, frivolous or vexatious, and that it is an abuse of the process of the Court.

The Plaintiff*s position

The Statement of Claim seeks a declaration that the Income Tax Act, R.S.C. 1952, c. 148 and the Goods and Services Tax provisions set out in Part IX of the Excise Tax Act, R.S.C. 1985, c. E-15, are ultra vires and unconstitutional. Mr. Hoffman also seeks general damages arising by reason of this alleged constitutional breach which the Plaintiff says has breached his Canadian Charter rights.

Key to the Plaintiffs position is the argument that direct taxation, as exemplified by Federal Income Tax and the Goods and Services Tax (the “GST”) is not within the federal jurisdiction as not only is it absent from the jurisdiction given to the Federal Government under section 91 of the British North America Act, 1867 (the “BNA Act”), but also direct taxation is an area of taxation given to the provinces under section 92(2), “Direct Taxation within the Province in order to the raising of a Revenue for Provincial purposes.”.

Counsel for the Plaintiff referred, both in his oral and his written argument, to a good deal of interesting historical background in order to try to show that the original provinces did not intend to assign a direct taxation power to the Dominion. However, from my reading of Constitutional cases, I am quite certain that the judges who contributed to our body of Constitutional Law, particularly those who were of the Privy Council and of the Supreme Court of Canada during the half century following the enactment of the BNA Act, were quite familiar with the historical context of the Act [1]

To expand the Plaintiff’s argument, it is that the Federal Government has only those powers given it by the provinces, Nova Scotia and New Brunswick, in 1867. These powers are set out in section 91 of the BNA Act. Direct taxation, as such, is not one of those powers. Indeed, under section 92(2) of the BNA Act, direct taxation is specifically reserved to the provinces:

92. In each Province the Legislature may exclusively make Laws in relations 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.

Counsel for the Plaintiff defines direct taxation in terms used by John Stewart Mill [2] , however, rather than become entangled in definitions, I accept that both the Income Tax and the G.S.T. are forms of direct taxation. Indeed, the Privy Council in Worthington v. Manitoba (Attorney General), [1937] A.C. 260 (sub nom. Forbes v. Manitoba (Attorney General) [1937] 1 All E.R. 249, at page 268 (All E.R. 253) agreed “...that an income tax is the most typical form of direct taxation.”. The G.S.T., while a value-added tax at each stage of production and distribution, contains a reimbursement aspect for the tax at each stage, except as to the final retail sale. Thus, each payer of the tax will not pass the cost of the tax along: it will be only the ultimate purchaser who bears the cost of the G.S.T. and thus it is also a direct tax.

From this definition of indirect taxation counsel moves to a Privy Council decision in Parsons v. Citizens Insurance Co. (sub nom. Citizens Insurance Co. v. Parsons) (1881-82), 7 A.C. 96. In the Parsons action two insurance companies, defendants in the initial claim, appealed to the Privy Council challenging the validity of the Ontario Fire Insurance Policy Act and its applicability to policies issued by a Dominion company and by a British company. The respondent Parsons contended that the matter fell within the Provincial Property and Civil Rights jurisdiction. The issue was thus the scope, on the one hand, of the Federal Trade and Commerce Power and, on the other hand, of the Provincial Property and Civil Rights power. The Parsons case is an example of modification of these two sometimes conflicting powers so that there is no overlap.

While the Parsons case did not deal directly with taxation, the Privy Council touch upon it by way of dicta and analogy. The passage relied upon in the Parsons case is not nearly so broad as counsel would have it in his written argument and indeed some of the quoted passages in the brief are not from the case itself, but perhaps from someone’s extension and comment upon a passing analogy made by the Privy Council:

So “the raising of money by any mode or system of taxation” is enumerated among the classes of subjects in section 91; but, though the description 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 section 92, it obviously could not have been intended that, in this instance also, the general power should override the particular one. (page 108)

It is perhaps unfortunate that the Privy Council, in taking this example, paid only lip service to the idea of judicial economy, which they discussed at page 109, including the concept of deciding each case which arises “... without entering more largely on the interpretation of the statute that is necessary for the decision of the particular question in hand.” However, as I say, this passage, while worthy of some weight, is still dicta and is not by any means a complete consideration of the topic.

Next, counsel for the Plaintiff refers to Reed v. Quebec (Attorney General) (1883), 8 S.C.R. 408, a case raising the question as to whether a duty, payable in stamps, was a direct or indirect tax. Counsel quotes a passage in his brief, from the reasons of Chief Justice Ritchie, at page 416, who wrote one of the majority judgments. To be fair, the whole of the passage should be quoted:

To the Dominion Parliament is given the right to raise money by any mode or system of taxation (section 91, subsection 3). This right is exclusive when not coming within the classes of subjects assigned to the provincial legislatures, and as the legislatures of the Provinces are only authorized to raise a revenue by direct taxation and the other sources of revenue already mentioned, it follows that the Parliament of Canada has the exclusive right to raise a revenue by means of indirect taxes, and the legislatures of the provinces have no such right.

This again is dicta. Further, it does not put a limit on the scope of Parliament’s right of taxation, merely pointing out that Parliament has the

Counsel also referred to Nova Scotia (Attorney General) v. Canada (Attorney General), [1951] S.C.R. 31, [1950] 4 D.L.R. 369 (the “Lord Nelson Hotel case”), a constitutional reference about contemplated Nova Scotia legislation as to delegation of jurisdiction between Parliament and the legislature of Nova Scotia. That case is usually taken to represent the proposition that federal legislative power may not be delegated to the provinces and vice versa. In passing Chief Justice Rinfret, who wrote a short concurring judgment, noted the by then quite evident proposition that:

The Parliament of Canada and the Legislatures of the several Provinces are sovereign within their sphere defined by The British North America Act, but none of them has the unlimited capacity of an individual. They can exercise only the legislative powers respectively given to them by sections 91 and 92 of the Act, and these powers must be found in either of these sections. (pages 33-34 (D.L.R. 371))

Counsel then goes on to refer to a subsequent passage from the Lord Nelson Hotel case which, in part, read as follows:

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. .. .

No power of delegation is expressed either in section 91 or in section 92, nor, indeed, is there to be found the power of accepting delegation from one body to the other; and I have not doubt that if it had been the intention to give such powers it would have been expressed in clear and unequivocal language. Under the scheme of the British North America Act there were to be, in the words of Lord Atkin in The Labour Conventions Reference (1), “water-tight compartments which are an essential part of the original structure.” Neither legislative bodies, federal or provincial, possess any portion of the powers respectively vested in the other and they cannot receive it by delegation. In that connection the word “exclusively” used both in section 91 and in section 92 indicates a settled line of demarcation and it does not belong to either Parliament, or the Legislatures, to confer powers upon the other. (page 34 (D.L.R. 371-72))

Counsel for the Plaintiff seeks to distinguish two of the main cases against this line of reasoning, Winterhaven Stables Ltd. v. Canada (Attorney General) (1989), [1989] 1 C.T.C. 16, 53 D.L.R. (4th) 413, a decision of the Alberta Court of Appeal and Caron v. R., (sub nom. Caron v. The King) [1924] A.C. 999, [1924] 4 D.L.R. 105, a decision of the Privy Council, by saying that the Alberta Court of Appeal relied on the Caron case and that in the Caron case the Privy Council had suggested that words could be added to the Constitution which are not there. However, a closer reading of the Caron case shows that the reference to amendment involves the 1919 Amendments to the Income War Tax Act of 1917, that peripheral issue being whether members of the Senate, Parliament and other federal and provincial legislative officers and appointees were subject to income tax. The Caron case has broader application than that and I will return to it in due course.

The Alberta Court of Appeal in the Winterhaven case dealt with a taxpayer who sought a declaration that the Income Tax Act was ultra vires the Parliament of Canada. The Court touched on the Caron case, but only in the context of whether Parliament could raise money which might be used for purposes falling within the legislative jurisdiction of the provinces: the Court of Appeal suggested that Parliament’s spending power ought not to be equated with its legislative power: see pages 30-31 (D.L.R. 432) of the Winterhaven case [supra].

Counsel for the Plaintiff also seeks to distinguish the Caron and Winterhaven cases by saying that they involved a mode or method of collection of tax, rather than the type of tax being collected, direct or indirect. The subject of direct taxation came up in Abbott v. Saint John (City), [1908] 40 S.C.R. 597. Abbott’s case was referred to andfollowed by the Supreme Court of Canada, wrongly, in R. v. Caron, [1922] 64 S.C.R. 255, [1923] 1 D.L.R. 1173. While the Privy Council in Caron merely refers to income tax, it is apparent from the summary of argument that the issue was whether it was competent for the Dominion Legislature, under section 91(3) of the BNA Act to impose direct taxation in a province: Caron at page 1000 (D.L.R. 105). Neither the Supreme Court of Canada nor the Privy Council in Caron ought to be considered so simplistic that they did not realize the issue was clearly that of whether section 91(3), giving Parliament the ability to raise money by any mode or system of taxation, included direct taxation. In the Winterhaven case, while there are a number of issues, direct taxation within a province was also clearly at issue: see for example pages 17-18 and 28-9 (D.L.R. 416 and 430).

Counsel for the Plaintiff suggests that the Alberta Court of Appeal, in the Winterhaven case, decided in 1988, might have come to a different decision had the Lord Nelson Hotel case been cited and relied upon. The Lord Nelson Hotel case is not a taxation case, but rather a delegation case. The Court of Appeal in Winterhaven seemed to take it as a given that Parliament might levy a direct tax, that is federal income tax, in the provinces: the issue was whether Parliament could spend that money in support of programs within the areas of jurisdiction reserved to the provinces, including cost sharing programs. I do not see any real connection between the Lord Nelson Hotel case, which was a matter of delegation of powers, the Winterhaven case, which involved spending, but not delegation, and the present case, which involves the question of direct taxation by Federal Income Tax and GST within a province. Rather the propriety of direct taxation by Parliament in the provinces has other roots in our Constitutional Law.

ANALYSIS

Constitutionality of Federal Direct Taxation

The whole topic of the constitutionality of the Income Tax Act and the Goods and Services Tax Act might be dealt with in two sentences, as was done by Mr. Justice Hugessen of the Federal Court of Appeal in Kasvand v. R., (sub nom. Kasvand v. Canada) [1996] 1 C.T.C. 204, 95 D.T.C. 5618:

The only point taken by the applicant which was not taken in her previous unsuccessful tax litigation is that the Income Tax Act is ultra vires the Parliament of Canada as being direct taxation. It suffices to read paragraph 91(3) of the Constitution Act to see that the point is wholly without substance.

However, I have gone into the background that I expect Mr. Justice Hugessen knew and may have considered in reaching that conclusion because the Plaintiff, Mr. Hoffman, seems sincere about his action and indeed was present when the motion to strike out was heard.

In seeking a declaration that the federal income tax is ultra vires, by reason of it being direct taxation within a province, the Plaintiff breaks no new ground. Parliament’s general power of taxation, as set out in section 91(3), “the raising of Money by any Mode or System of Taxation.”, has its roots in the Quebec resolutions which came out of the meeting of the Fathers of Confederation at Quebec in October of 1864 [3] . La Forest, in The Allocation of Taxing Power of the Canadian Constitution (see footnote 1) refers to the Privy Council, in Caron v. The King [supra] as taking . the view that it was permissible for Parliament to enter the direct taxation field for its own purposes and that Parliament and the provinces had concurrent jurisdiction over direct taxation.” [4] . La Forest goes on to say that any other construction would not only have violated the intentions of the Fathers of Confederation, but more important, would have hamstrung Parliament both in meeting national emergencies and carrying out those economic functions which are now considered normal in developed nations [5] . This is both a fair reading of the Caron case and apt comment.

La Forest, writing before the Winterhaven decision, suggests that “The only federal tax that could ever be called into question, therefore, is one earmarked to provide revenues for provincial purposes.”, and then goes on to suggest that the dicta of the Privy Council in the Caron case ought to be ignored [6] . Indeed, that is what the Alberta Court of Appeal did in the Winterhaven case [supra] by making the distinction between taxation powers and spending powers.

Counsel for the Plaintiff has suggested that provincial and federal powers under the BNA Act are two separate spheres, that they may not overlap and from this argues that income tax, that is direct tax, by the Federal Government is ultra vires notwithstanding the reference in section 91(3) to raising money by any mode of taxation.

La Forest touches on this issue:

Since both levels of government may impose direct taxation and levy revenue by way of licences, their legislation may well overlap. Here the courts have not applied the usual principle of federal paramountcy, but have taken the attitude that the two taxations can stand side by side and that there is no clash or conflict. Thus the same person may be taxed on his income both by the provinces and the federal Parliament [7] .

For this proposition La Forest refers, among other cases, to the Parsons case, which was a case relied upon in this instance by the Plaintiff and also to Silver Brothers Ltd., Re, [1932] A.C. 514, 13 C.B.R. 223 (P.C.).

The Silver Bros. case, a decision of the Privy Council, involved the competency of Parliament to legislate, among other heads, under section 91(3), Taxation, to the prejudice of the rights of the Province of Quebec. At issue was the priority to the assets of a bankrupt. The Government of Canada claimed for sales tax, a direct tax, due under the Special War Revenue Act of 1915. The Province of Quebec claimed tax payable by commercial corporations. The available fund was insufficient to satisfy both claims. The Attorney General for Quebec took the position that the Special War Revenue Act was ultra vires Parliament. By a 1922 Amendment to the War Revenue Act the claims of the Federal Crown were to rank in priority to all other claims, with minor exceptions, which were not applicable. Similarly, the Quebec Legislation gave the province a privileged rank. When the claim reached the appeal side of the Court of King’s Bench a majority of the Court decided that the claims should be ranked concurrently. When the case was heard by the Supreme Court of Canada, reported [1929] S.C.R. 557, the majority of the Court held that the Dominion took priority by reason of the jurisdiction conferred on it by sections 91(3) and/or 91(21) of the BN A Act.

On the appeal of the Silver Bros. case [supra] the Privy Council agreed with the majority of the judges in the Supreme Court of Canada, that Parliament had the power to enact the War Revenue Act, a form of direct taxation. The Privy Council then considered the matter of preference. It assumed that the issue of preference was a natural concomitant of taxation (page 521 (C.B.R. )) and thus the case fell under the fourth proposition laid down by Lord Tomlin, speaking for the Privy Council, in Canada (Attorney General) v. British Columbia (Attorney General), [1930] A.C. Ill, [1929] 3 W.W.R. 449 at page 118), that “There can be a domain in which Provincial and Dominion legislation may overlap, in which case neither legislation will be ultra vires if the field is clear, but if the field is not clear and the two legislations meet, the Dominion legislation must prevail.”. The Privy Council, in Silver Bros., then pointed out that so far as taxation was concerned, the field was clear and that the two taxations, Dominion and Provincial, might stand side by side without interference [loc. cit]. Now the Privy Council did go on to consider whether the matter of priorities produced a clash, but that is not germane in the present instance. To summarize the impact of the Silver Bros. case on Mr. Hoffman’s claim, the Privy Council has made it clear that there can be overlapping legislation, federal and provincial, standing side by side. This takes away the Plaintiff’s argument that there is a conflict between the provincial direct taxation power and the federal power to tax by any means, a conflict that ought to be decided, according to the Plaintiff, in favour of the provinces.

There have been more recent cases on point. While these cases add little to the older cases, they ought to be touched upon.

In TransGas Ltd. v. Mid-Plains Contractors Ltd., [1993] 4 W.W.R. 337, a Saskatchewan Court of Appeal pointed out that the Income Tax Act was obviously, pith and substance, tax legislation falling within section 91(3) of the BN A Act (page 346). The Court then went on to deal with the issue at stake, the right to collect taxes by garnishment, which was also a long-established right under section 91(3). The Supreme Court of Canada decision in TransGas, reported [1995] 1 W.W.R. 1, posed the question whether obtaining money by a requirement to pay under the Income Tax Act infringed any power of the Province of Saskatchewan, gave a one-word answer, “No”, and dismissed the appeal “substantially for the reasons given by . . . the Saskatchewan Court of Appeal”.

I have already referred to the September 1995 decision of the Federal Court of Appeal in Kasvand v. R., (sub nom. Kasvand v. Canada) [1996] 1 C.T.C. 204, 95 D.T.C. 5618, in which Mr. Justice Hugessen gave short shrift to the argument that the Income Tax Act was ultra vires the Parliament of Canada.

In early October of 1995 Mr. Justice Joyal gave judgment in Giagnocavo v. Canada, (sub nom. Giagnocavo v. R.) [1996] 1 C.T.C. 130, 95 D.T.C. 5650, in which case the taxpayer alleged that the Income Tax Act was unconstitutional. Mr. Justice Joyal noted that “From a philosophical point of view, a case can no doubt be made that the impugned statute is cruel and inhuman, that it is a travesty of recognized moral values, that it constitutes an intrusion of the state not only in the bedrooms of the nation, as was said in another case, but in its piggy-banks as well. One could also say that a good number of citizens share the applicant’s view in these matters, and would ring bells and dance in the streets if ever there [sic] were liberated from the unconscionable burden of taxation.” (page 5651). He went on to touch on policy, but pointed out that in light of Mueller v. R., (sub nom. Mueller v. Canada) [1993] 1 C.T.C. 143 (F.C.T.D.), the Reference re Excise Tax Act (Canada), (sub nom. Reference re Goods and Services Tax) [1992] 2 S.C.R. 445 and the Winterhaven's case [supra], the Senior Associate Prothonotary’s action, of striking out the statement of claim, was proper and that the appeal was dismissed.

Subsequently in October of 1995, in Charbonneau, Re, (sub nom. Minister of National Revenue v. Charbonneau 95 D.T.C. 5634, Mr. Justice Pinard dealt with the argument that the Income Tax Act was unconstitutional, but dismissed the application as untenable in light of Caron [supra] and Kasvand [supra].

The Plaintiff’s Statement of Claim also challenges the constitutionality of the G.S.T. legislation. While the G.S.T. is direct taxation and thus the cases dealing with the vires of the Income Tax Act apply, there is also a case on point, the reference Re G.S.T., [supra]. The issue was whether the GST Act was ultra vires Parliament in whole or in part having regard to the BN A Act and the Constitution Act of 1982. The Court looked upon this as an umbrella question and therefore did not deal with it directly, but considered the other constitutional questions, including whether the GST Act infringed on the right of the Province of Alberta and did decide that it affected matters falling within the provincial jurisdiction under section 92(13) of the BN A Act to pass legislation in relation to property and civil rights in the province. Chief Justice Lamer, in reasons concurred in by the rest of the Court (Mr. Justice La Forest also writing concurring reasons) referred to the GST Act and its purpose to raise revenue for the Federal Government and then remarked “. . . it would be hard to dispute that the Act is properly characterized as being in relation to a mode or system of taxation in the meaning of section 91(3) of the Constitution Act, 1867." (page 468). After further consideration, including of section 91(3) of the BNA Act, he concluded . that the GST Act is enacted pursuant to a federal head of power under section 91 of the Constitution Act, 1867, and that while the scheme it establishes does intrude upon matters traditionally falling under the provincial power over property and civil rights, the scheme is sufficiently well integrated into the GST Act as a whole that the intrusion upon provincial jurisdiction is justified.” (page 471). The Supreme Court of Canada in the GST Reference did not look at the Goods and Services Tax vis-a-vis section 92(2) of the BNA Act, the direct taxation power given to the provinces, I think because it was considered a dead issue, given the analysis that the Courts, particularly the Privy Council, had made in the past when considering the federal and provincial ability to levy direct taxes. In the conclusion, the Supreme Court found that the GST Act was not ultra vires the Parliament of Canada in whole or in part.

The reasons of La Forest and L’Heureux-Dubé JJ. in the GST Reference, delivered by Mr. Justice La Forest, are somewhat more direct. When considering the vires of the Goods and Services Tax Act he pointed out that:

There can be no question that the GST is intended to raise money and that a value-added tax, which is what the GST is, is a mode or system of taxation. The GST thus falls squarely within section 91(3). It is in pith and substance a mode or system of taxation, so one need not enquire any further about whether it might be justified as necessarily incidental to the legislative scheme. The fact that it may affect activities within provincial regulatory competence is of no moment, (page 490).

I now turn to the test for striking out.

Striking Out

The Defendants, in their motion, seek to strike out the Statement of Claim pursuant to Rules 419(a), that there is no reasonable cause of action, (c), that the Statement of Claim is scandalous, frivolous or vexatious and (f), that it is an abuse of the process of the Court. The first ground, that the Statement of Claim discloses no reasonable cause of action, is self- explanatory. That the Statement of Claim is scandalous, frivolous or vexatious, or is an abuse of the process of the Court, I take it to refer to the fact that this issue has been litigated on many occasions over the past seventy years, beginning with Caron [supra] in 1924.

The general principle is that a litigant ought not to be deprived of his or her day in Court. As a result, a Court will only strike out pleadings in plain and obvious cases where the result is beyond doubt: see for example Inuit Tapirisat of Canada v. Canada (Attorney General), [1980] 2 S.C.R. 735, 115 D.L.R. (3d) 1 and Operation Dismantle Inc. v. R., (sub nom. Operation Dismantle Inc. v. The Queen) [1985] 1 S.C.R. 441, 18 D.L.R.

(4th) 481.

The test for striking out an action, on the basis that a pleading is frivolous or vexatious, under Rule 419(l)(c) or (f) is at least as stringent, if not more so, than when dismissal is sought under Rule 419(l)(a): see The “Laurentian Forest”, Waterside Ocean Navigation Co. v. International Navigation Ltd., [1977] 2 F.C. 257 (T.D.) at page 259.

A vexatious or frivolous or abusive action is one in which the claimant can present no rational argument based upon the evidence or law, in support of the claim, an action without reasonable cause, which will not lead to a practical result. The test that I should apply was set out by Mr. Justice Pratte, as he then was, in Creaghan v. R., 72 D.T.C. 6215, [1972] F.C. 732 at page 6218 (F.C. 736):

(3) Finally, in my view, a statement of claim should not be ordered to be strick out on the ground that it is vexatious, frivolous or an abuse of the process of the Court, for the sole reason that in the opinion of the presiding judge, plaintiffs action should be dismissed. In my opinion, a presiding judge should not make such an order unless it be obvious that the plaintiffs action is so clearly futile that it has not the slightest chance of succeeding, whoever the judge may be before whom the case could be tried. It is only in such a situation that the plaintiff should be deprived of the opportunity of having “his day in Court”.

In the present instance, given the numerous cases that have been decided which are either directly on point or from which basic principles may be taken, I can see no argument that the Plaintiff might make, on the facts set out in the Statement of Claim, which has any chance of succeeding. Overall the Plaintiffs claim is forlorn and doomed. Nothing can come of this litigation. To allow it to proceed, with a cause of action that is completely defective, would be an abuse of the process of the Court and an imposition on all taxpayers whose taxes go, in part, to support the judicial system. The Statement of Claim is therefore struck out. The Defendants have not asked for costs in their motion and thus there will be none.

Motion was granted.