2011 QCCA 1942, 2011 QCCA 1942

Quebec (Attorney General) c. Algonquin Développements Côte-Ste- Catherine inc. (Développements Hydroméga inc.) 2011 QCCA 1942 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-019625-094 (500-05-027481-967) DATE: OCTOBER 21, 2011 CORAM: THE HONOURABLE YVES-MARIE MORISSETTE, J.A. LORNE GIROUX, J.A. NICHOLAS KASIRER, J.A. ATTORNEY GENERAL OF QUEBEC APPELLANT – plaintiff v.

ALGONQUIN DÉVELOPPEMENTS CÔTE STE-CATHERINE INC. (DÉVELOPPEMENTS HYDROMÉGA INC.) and ALGONQUIN POWER FUND (CANADA) INC. and SOCIÉTÉ EN COMMANDITE ÉLECTRICITÉ ALGONQUIN (MONT-LAURIER) RESPONDENTS – defendants and plaintiffs in warranty and ATTORNEY GENERAL OF CANADA and THE ST.

LAWRENCE SEAWAY MANAGEMENT CORPORATION IMPLEADED PARTIES – defendants in warranty JUDGMENT [ 1 ] THE COURT : On appeal from a judgment of the Superior Court, District of Montreal (the Honourable Danielle Richer), rendered on March 27, 2009, that dismissed the Attorney General of Quebec’s claim; [ 2 ] For the reasons of Kasirer, J.A., with which Morissette and Giroux, JJ.A. agree: [ 3 ] ALLOWS the appeal, with costs; [ 4 ] SETS ASIDE the judgment of the Superior Court; [ 5 ] MAINTAINS the appellant's action in the Superior Court, with costs, and condemns the respondents to pay, solidarily, an amount of $5,358,752.57, with interest at the rate established by

section 18 of the Act respecting the ministère du Revenu , R.S.Q., c. M- 31, from January 1, 2009; [ 6 ] ORDERS that the action in warranty, which was suspended by an interlocutory judgment of the Superior Court rendered on October 6, 2008, be resumed pursuant to the terms of that judgment. YVES-MARIE MORISSETTE, J.A.,

LORNE GIROUX, J.A. NICHOLAS KASIRER, J.A. Mtre Patrice Claude BERNARD, ROY (Justice-Québec) For the appellant Mtre Stéphane Roy LAPOINTE ROSENSTEIN For the respondents Mtre Linda Mercier JOYAL, LEBLANC For the impleaded party Attorney General of Canada Mtre Patrick Girard (absent) STIKEMAN ELLIOTT For the impleaded party The St. Lawrence Seaway Management Corporation Date of hearing: January 31, 2011 REASONS OF KASIRER, J.A. [ 7 ] A company leases land and deep water lots from the federal crown, with a right to divert water on the St.

Lawrence River, and builds a hydroelectric station on one of the dykes of the seaway. The Quebec government seeks to collect what it calls a charge from the company, as holder of waterpower under the lease, based on the number of kilowatt-hours of electricity produced at the station. It says the statutory charge is a tax.

The company refuses to pay, arguing that the levy is not a tax but a proprietary charge, like a rent, and cannot be exacted by the province against property owned by the federal crown. [ 8 ] The outcome of this appeal thus turns, in part, on whether the provincial levy is a tax that applies to holders of all waterpower in the province or, instead, a charge that the province can only collect in respect of waterpower it owns. [ 9 ] Even if the provincial levy is characterized as a tax, the question arises as to its applicability, as a matter of constitutional law, to the lessee in light of different interjurisdictional immunities enjoyed by its lessor, the federal government.

Does a provincial tax apply to a company that produces electricity on the St. Lawrence seaway with waterpower that belongs to the federal crown? I Facts and proceedings [ 10 ] The Saint Lawrence Seaway Authority was incorporated pursuant to statute in 1951 for the purposes of acquiring lands and constructing works necessary for the proposed seaway on the St. Lawrence River. [1] Exercising powers of expropriation under that statute as an agent of the federal crown, the Seaway Authority acquired certain parcels of land near Montreal between the towns of St. Lambert and Côte St.

Catherine in 1954, including river banks and land situated in deep water. As part of the seaway system, locks were built at Côte St. Catherine on some of this expropriated property to allow ships access to Lake St. Louis while avoiding the hazards of the Lachine Rapids. [ 11 ] In 1985, Hydromega Developments Inc. began discussions with the Seaway Authority to lease part of the dyke near the Côte St. Catherine locks, as well as a sufficient flow of water from the canal, in order to produce hydroelectric power.

After negotiations during which the Seaway Authority considered the possible effects of the project on navigation in the seaway, the federal government approved a proposal by Order-in-Council to lease land and to divert water to Hydromega. [2] The 21-year lease commenced March 1, 1988. [ 12 ] The

preamble and clause 1 make plain that the purpose of the lease is to allow the lessee to install, maintain and operate a hydroelectric power station using the land and the deep water lot in the South Shore Canal of the seaway. To that end, the lease allows the lessee to divert water from the seaway to a maximum number of cubic meters of water per second for the purpose of generating electricity. The amount of water diverted is described as "surplus to navigation" and the lessee undertook to maintain the flow of water downstream for the proper operation of the locks and canals of the seaway.

Built in stages near the Town of Côte St. Catherine, the power station began operating in 1989. [ 13 ] The electricity generated at the power station was not used on the seaway nor was it sold to seaway authorities. Instead, the lessee sold the electricity exclusively to Hydro-Québec. Hydromega and the respondents paid rent to the Seaway Authority and later to the Minister of Transport for the federal crown. In the first year, before the completion of the station, and in the two years following, the rent was fixed. In later years it was calculated in part on the value of the electricity sold.

The lease was amended on several occasions to adjust the rent and even to change the amount of water used by the station. It was always made clear by the seaway authorities, however,

that the increased flow would only be with water surplus to navigation and could not adversely affect the operation of the locks or the canals. Indeed clause 15 of the lease provided that the lessor could require the reduction or even the stoppage of water flow into the station. The lease required that remote controls to regulate the flow of water be installed at the station, at the expense of the lessee, to allow seaway authorities themselves to control the flow of water to the locks when necessary.

The lessee undertook to remove its installations at the end of the lease and ensure the property be restored to its original state.

Clause 14.10.2.5 of the lease was added in 1994 to provide that if a competent court ordered the lessee to pay the government of Quebec amounts relating to water power used or electricity produced, the lessor would agree, subject to certain conditions, to reduce the amount of rent due under the lease accordingly. [ 14 ] In 1995, the Quebec Minister of Natural Resources sent a first demand letter to Hydromega for $196,639.05 as a charge levied on the electricity generated at the Côte St. Catherine station pursuant to

section 68 of the Watercourses Act . [3] The amount initially claimed was based on the number of kilowatt-hours of electricity generated at the station between 1989 and 1995. A second demand letter followed later that year. [ 15 ] Hydromega refused to pay, saying that it had already paid substantial rental payments and that this further sum amounted to a second levy on the same resource. In 1996, the Attorney General of Quebec filed an action in the Superior Court against Hydromega for the unpaid charges.

In 1999, Hydromega was purchased by the Algonquin Group of companies – now respondents herein – who took over the lessee’s rights under the lease. In 2000, the St.

Lawrence Seaway Management Corporation, the crown corporation that succeeded to the Seaway Authority, was called in warranty along with the Attorney General of Canada by the respondents pursuant to the hold-harmless clause in the lease. [ 16 ] The Attorney General of Quebec amended his declaration several times in the long period leading up to trial to take into account unpaid charges, with interest and interest on interest, for a total claim of $5,358,752.57 to January 1, 2009.

From the beginning of the lease in 1988, the respondents and their predecessors in title have paid the federal crown a total of $4,553,417.63 in rent. [ 17 ] The trial judge granted the Attorney General of Canada's interlocutory motion to suspend the action in warranty pending the outcome of the principal action. The trial judge decided that if the government of Quebec obtained judgment against the respondents in the principal action, the parties to the action in warranty would be afforded one month to negotiate a settlement.

Failing a settlement, a hearing would be fixed on the action in warranty, with payment of the amount owing to the Quebec government suspended until final judgment. That decision was not disturbed as the principal action proceeded to appeal. [ 18 ] At trial and on appeal, the Attorney General of Quebec argued that

section 68 of the Watercourses Act imposes a tax on holders of all waterpower in Quebec, whether the waterpower is owned privately or is part of the public domain. On this view, the respondents enjoy no immunity from the tax in constitutional law, and there is no basis for saying that

section 68 is inapplicable to the respondents by reason of federal powers over shipping and navigation or public property. [ 19 ] For the respondents and the Attorney General of Canada,

section 68 creates a proprietary charge that the province levies as the owner of waterpower. They contend that the waterpower at this site on the St. Lawrence River belongs to the federal crown by reason of an expropriation that was necessary to the exercise of the federal constitutional power over navigation. As a proprietary charge, the levy is inapplicable to waterpower not in the provincial crown’s domain. Moreover even if the levy is characterized as a tax, the respondents should benefit from the federal crown’s immunity from provincial tax under

section 125 of the Constitution Act , 1867 . And even if the respondents do not benefit from fiscal immunity,

section 68 is inapplicable on the basis of constitutional principles of interjurisdictional immunity as the levy would impair federal powers over public property and navigation. II Judgment of the Superior Court [ 20 ] The trial judge dismissed the province’s claim. She held that

section 68 of the Watercourses Act is not a tax but a proprietary charge that does not apply to waterpower owned by the federal crown. [ 21 ] The judge agreed with the Attorney General of Canada that the waterbed belongs to the federal crown by reason of the expropriation by the Seaway Authority in 1954.

She was of the view that the expropriation was necessary to the exercise of the exclusive constitutional power over navigation enjoyed by Parliament pursuant to section 91(10) of the Constitution Act, 1867 . [ 22 ] The evidence confirmed that the use of the waterpower by the respondents had a potential impact on both the St. Catherine and the St. Lambert locks.

After noting that ownership of the bed carried with it ownership of the waterpower, the judge found that the Seaway Authority was right to expropriate the waterbed, and by extension the waterpower, in order to ensure that federal authority over navigation on the seaway would not be impaired (para. [61]).

The Seaway Authority was also permitted to lease the surplus power not used for the purposes of navigation given what the judge described as the "défi réel et constant que l'utilisation des forces hydrauliques représente pour la navigation" (para. [71]). [ 23 ] The judge then proceeded to consider whether the charge imposed by

section 68 of the Watercourses Act could be levied against the respondents in respect of the waterpower owned by the federal crown. She disagreed with the Attorney General of Quebec that the charge was a tax within the meaning of

section 92A(4) (

b) of the Constitution Act, 1867 . She cited the reasons of Rothstein J. in Connaught [4] as a basis for her conclusion that, in pith and substance,

section 68 was neither a tax nor a regulatory charge. Instead, she held that this provision established a proprietary charge that could not be exacted by the province in respect of federally-owned waterpower. She wrote that the charge was inapplicable to Algonquin because the charge was not claimed in exchange for the use of the waterpower owned by the province: [86] En effet, le Tribunal est d’avis que le caractère véritable (« the pith and substance ») de la redevance exigée en application de

l’article 68 L.R.E. [ i.e. the Watercourses Act ] est en fait le paiement d’une contrepartie reliée à l'utilisation des forces hydrauliques que la province considère être sa propriété en dépit de l'expropriation de 1954 par la Couronne fédérale. Il ne s’agit donc ni d’une taxe, ni d’une redevance de nature réglementaire. [ 24 ] Since the federal crown owned the waterpower, the charge was not due. As a result, the trial judge dismissed the claim against the respondents under the Watercourses Act and declared the action in warranty to be without further object.

III Questions on appeal [ 25 ] The action in warranty did not form part of the dispute before the Court. Six connected questions arise on appeal in the principal action: (

A) Does the waterpower belong to the federal crown? (

B) Is the levy established under

section 68 of the Watercourses Act a proprietary charge, a regulatory charge or a tax? (

C) If the levy is a tax, does

section 125 of the Constitution Act, 1867 afford fiscal immunity to the respondents because the waterpower is owned by the federal crown? (

D) If it is a tax, does the provincial levy impair federal constitutional authority over public property under

section 91(1A) of the Constitution Act, 1867 ? (

E) If it is a tax, does the provincial levy impair federal constitutional authority over shipping and navigation under section 91(10) of the Constitution Act, 1867 ? (

F) In the event that the respondents are liable for unpaid taxes, can they be excused for interest due on the unpaid amount given the delays in the prosecution of the action? IV Analysis (

A) Does the waterpower belong to the federal crown? [ 26 ] The Attorney General of Quebec argues that the amount the province claims from Algonquin remains due under

section 68 whomsoever owns the waterpower. He nevertheless submits that the trial judge erred in holding that the resource belongs to the federal crown. The waterpower belongs to the crown in right of the province pursuant to

Part VIII of the Constitution Act, 1867 , he says, and the expropriation of the waterbed in 1954 did not deprive the province of ownership of the waterpower. [ 27 ] In my view, the trial judge was correct in deciding that the expropriation undertaken by the Seaway Authority in 1954 had the effect of vesting ownership of the waterpower with the federal crown. [ 28 ] Firstly, it may be observed that Parliament can authorize the expropriation of property held by the provincial crown where that expropriation is necessary to the exercise of its constitutional power over navigation and shipping. [5] This is what occurred here.

The notice in 1954 filed pursuant to the expropriation by the Seaway Authority mentions plainly the deep water lot, including the relevant part of the bed of the St.

Lawrence River. [ 29 ] Secondly, the expropriation of the waterbed extended to the waterpower to which it is attached following the principle that the transfer of lands to the federal crown includes water rights incidental to those lands. [6] This principle is confirmed, as it happens, in a declaratory provision of the Watercourses Act enacted in 2006. [7] [ 30 ] Thirdly, the judge found on the evidence that control of the waterpower at the site on the seaway was necessary for the exercise of federal power over navigation.

She cited documents from the Seaway Authority prepared prior to the signature of the lease that confirm that the Côte St. Catherine lock operators needed to have the proper equipment to reduce or stop the flow of water running through Hydromega's installations to protect water levels in the canal for shipping purposes (para. [62]). The evidence indeed showed that the administrators of the seaway were concerned that the turbines in the power station not draw water away from the flow necessary for the vessels in the canal.

While it is true that the power station relies on surplus water from the seaway to operate, it is the ability to determine and control the availability of that surplus that is essential to the federal power over navigation on the seaway. The appellant did not point us to a reviewable error made by the judge in this regard. [ 31 ] Fourthly, based on these undisturbed findings of fact, it may properly be said that the expropriation of the bed, extending as it did to ownership of the waterpower, was necessary so as not to impair the exercise of constitutional power over navigation and shipping.

Separating title to the waterbed and title to the waterpower here would result in what has been decried as a "fragmentation of ownership" that would limit the federal power to expropriate like matters inappropriately. [8] [ 32 ] Citing the Reference re: Waters and Water-Powers , [9] the appellant argued that the 1954 expropriation could not have had the effect of transferring waterpower to the federal crown because that power is a source of revenue to the province. Here again I agree

with the analysis of the trial judge who was of the view that the Water-Powers Reference was of no assistance in the present case. On the facts here, control of the waterpower was plainly necessary to the seaway and thus to the exercise of power over navigation and shipping.

In the Water-Powers Reference , the Supreme Court cast doubt over whether the federal crown could, by expropriation, "assume the administration or control of water-powers so acquired for purposes not connected with the canal". [10] On the facts of the present case, the expropriation of the waterpower is connected to the seaway and the safety of vessels proceeding through the locks. Given that control of waterpower is necessary for the safe passage of ships in the seaway in the St. Lawrence River, and in particular at the St. Catherine's locks, the better view is that the expropriation in 1954 was well-founded.

To invoke the expression of the Supreme Court in the Natural Gas Reference , in which the Water-Powers Reference was more fully explained on this point, an expropriation is valid where it is "tied inherently and of necessity to the exercise of the authority in question by the federal level of government". [11] That was the case here, as the evidence at trial demonstrated: because it was tied inherently and of necessity to the federal power over shipping and navigation, the expropriation was valid.

The federal crown owns the waterbed and the waterpower. [ 33 ] As a last note on this point, it bears mentioning that the province has not questioned the right of the federal crown to lease the waterpower to Hydromega. Indeed there is something perplexing in the Attorney General of Quebec's position before the Court. One might well have expected the province to have asked for cancellation of the lease or to have contested its validity had it been convinced, as it states in its factum, that Quebec never lost ownership of the bed or waterpower as a result of the expropriation.

But the province did not argue that the federal crown had no right to lease the property. Instead, Quebec only asks Algonquin, as holder of the waterpower, to pay the charge imposed by

section 68 for electricity generated under the lease. At the end of the day, however, this contradiction matters little given my view that the levy under the Watercourses Act is a tax. (

B) The characterization of the charge under s. 68 of the Watercourses Act [ 34 ] The levy established by

section 68 of the Watercourses Act is imposed on all "holders/ détenteurs " of hydraulic powers in Quebec: 68. Tout détenteur de forces hydrauliques au Québec doit verser dans le Fonds des générations visé dans la

Loi sur la réduction de la dette et instituant le Fonds des générations (chapitre R- 2.2.0.1 ), par 1 000 kilowatts-heure d'électricité générée au cours de l'année et provenant de ces forces hydrauliques, une redevance fixée à : 1° 2,31 $ pour la période du 10 mai 1995 au 31 décembre 1995; 2° 2,01 $ pour la période du 1 er janvier 1996 au 31 décembre 1996; 3° 2,16 $ pour la période du 1 er janvier 1997 au 31 décembre 1997; 4° 2,31 $ pour la période du 1 er janvier 1998 au 31 décembre 2000.

À compter du 1 er janvier 2001, le taux de la redevance est indexé le 1 er janvier de chaque année selon l'augmentation en pourcentage, par rapport à l'année précédente, de l'indice général des prix à la consommation pour le Canada, publié par Statistique Canada en vertu de la Loi 68.

Every holder of hydraulic powers in Québec shall pay into the Generations Fund referred to in the Act to reduce the debt and establish the Generations Fund (chapter R-2.2.0.1 ), per 1,000 kilowatt-hours of electricity generated during the year and derived from such hydraulic powers, a charge of (1) $2.31 for the period extending from 10 May 1995 to 31 December 1995; (2) $2.01 for the period extending from 1 January 1996 to 31 December 1996; (3) $2.16 for the period extending from 1 January 1997 to 31 December 1997; (4) $2.31 for the period extending from 1 January 1998 to 31 December 2000.

From 1 January 2001, the rate of the charge shall be adjusted on 1 January each year according to the percentage of increase, in relation to the preceding year, in the Consumer Price Index for Canada, as published by Statistics Canada under the Statistics Act (Revised Statutes of Canada, 1985,

chapter S-19 ). For such purpose, the Consumer Price Index for a year is the average monthly index for the 12 months ending on 30 September of the preceding year.

sur la statistique (Lois révisées du Canada (1985),

chapitre S-19 ). À cette fin, l'indice des prix à la consommation pour une année est la moyenne annuelle calculée à partir des indices mensuels pour les 12 mois se terminant le 30 septembre de l'année précédente. Si une moyenne annuelle ou le pourcentage calculé en vertu du deuxième alinéa ou si le taux de redevance ainsi indexé comporte plus de deux décimales, les deux premières seulement sont retenues et la deuxième est augmentée d'une unité si la troisième est égale ou supérieure à 5. Le ministre des Ressources naturelles et de la Faune publie à la Gazette officielle du Québec le taux de redevance ainsi indexé. La redevance prévue par le présent

article s'ajoute à toute autre redevance conventionnelle que le détenteur pourrait être tenu de payer . [Emphasis added.] Where an annual average or the percentage computed under the second paragraph or where the rate of the charge thus adjusted has more than two decimals, only the first two decimals are kept and the second decimal is increased by a unit if the third decimal is 5 or over. The Minister of Natural Resources and Wildlife shall publish, in the Gazette officielle du Québec , the rate of the charge thus adjusted. The charge provided for in this

section is in addition to any other contractual charge that the holder may be obligated to pay . [ 35 ] The task before the Court is to determine whether the levy that the province seeks to exact from the respondents is, in pith and substance, a tax, a proprietary charge or a regulatory charge. As Rothstein J. explained in Connaught , "[t]he pith and substance of a levy is its dominant or most important characteristic.

The dominant or most important characteristics are to be distinguished from its incidental features". [12] As is often the case, the levy here shares characteristics of several categories at once but, for the reasons that follow, I am of the view that its true nature is that of a tax. [ 36 ] In point of fact, the respondents and the Attorney General for Canada agree with the appellant that the levy evinces many of the qualities identified in Connaught as characteristic of a tax: (1) the levy is enforceable by law; (2) it is imposed under the authority of the legislature; (3) it is levied by a public body (in this case the Minister of Natural Resources of Quebec); and (4) it is intended for a public purpose. [ 37 ] It is also not seriously contested that the charge is unconnected to any single regulatory scheme thereby setting it apart from "regulatory charges".

To invoke the test identified by Rothstein J. in Connaught , there is no evidence in the present case of a "reasonable attempt [by government] to match the revenues from the fees with the cost of the regulatory scheme". [13] It is true that the charge is found in a statute that has the overarching mission of regulating watercourses and waterpower in the province, and that the funds are collected by the Minister of Natural Resources and not the Minister of Finance or the Minister of Revenue. However the amounts collected under

section 68 are not devoted to financing the regulation of water resources but, instead, to paying down the provincial debt in a manner that is highly suggestive that the levy is a tax. [ 38 ]

Section 68, paragraph 1 provides that the levy is to be paid into the "Generations Fund" referred to in the Act to reduce the debt and establish the Generations Fund . [14] According to

section 2, paragraph 2 of this statute, the monies collected are transferred to this Generations Fund established by the Minister of Finance, which Fund is "dedicated exclusively to repaying the gross debt". [15] It is true that the Fund is made up of sums collected not just under

section 68 but from those derived from the lease and development of waterpower under the Watercourses Act as well as earnings of Hydro-Québec from the sale of electricity outside of the province. [16] But the Generations Fund has no direct bearing on the preservation or exploitation of water resources and has no

part in financing a regulatory scheme for water resources in Quebec. That the charge is collected by the Minister of Natural Resources, rather than the Minister of Finance, or that it is used to pay down the debt rather than meet current expenses of the government, are matters of no import. It is not a regulatory charge. Not surprisingly, none of the parties emphasized in argument on appeal that the levy qualifies under the test in Connaught as a regulatory charge. [ 39 ] If the levy is not a regulatory charge, is it best construed as a proprietary charge?

In Connaught , [17] Rothstein J. explained this category of charge as follows: [49] [...] I agree that proprietary charges for goods and services supplied in a commercial context are distinct from either regulatory charges or taxes and may be determined by market forces. As explained by Professor Hogg in Constitutional Law of Canada , at pp. 870- 71: [...] [proprietary] charges are those levied by a province in the exercise of proprietary rights over its public property.

Thus, a province may levy charges in the form of licence fees, rents or royalties as the price for the private exploitation of provincially - owned natural resources; and a province may charge for the sale of books, liquor, electricity, rail travel or other goods or services which it supplies in a commercial way.

[ 40 ] With respect, I do not share the trial judge’s view that the levy under

section 68 is properly construed as proprietary charge exacted as a "paiement d'une contrepartie reliée à l'utilisation des forces hydrauliques que la province considère être sa propriété" (para. [86].). A reading of the Watercourses Act as a whole, as well as a consideration of its legislative history, suggest that the "charge" in

section 68 is not a licence fee, rent or royalty that represents the equivalent of the price for the private exploitation of the waterpower that the province claims to own. The application of the charge does not depend on provincial ownership and it is not designed as a "counterprestation" paid in exchange for the use of the waterpower. [ 41 ] The charge under

section 68 is levied against "every holder of hydraulic powers in Québec" without specifying the nature of the title under which the property is held. This distinguishes it from the rent alluded to in

section 3 of the Act relating to the "lease of hydraulic power vested in the domain of the State": 3. Le cession de force hydraulique du domaine de l'État est prohibée, sous réserve de l'

article 32 de la

Loi sur Hydro-Québec (chapitre H-5 ).

La location de force hydraulique du domaine de l'État n'est permise que dans les conditions suivantes: 1° lorsque la force hydraulique est nécessaire à l'exploitation, en un endroit donné d'un cours d'eau, d'une centrale hydro-électrique dont la puissance attribuable à la force hydraulique du domaine de l'État est supérieure à 50 mégawatts, chaque location doit être autorisée par loi; 2° lorsque la force hydraulique est nécessaire à l'exploitation, en un endroit donné d'un cours d'eau, d'une centrale hydro-électrique dont la puis​sance attribuable à la force hydrau​lique du domaine de l'État est égale ou inférieure à 50 mégawatts ou lorsque le locataire est une munici​- palité, la location doit être autorisée par le gouvernement et effectuée dans les conditions qu'il détermine.

Avant de recommander au gouverne​ment de louer des forces hydrauliques en vertu du paragraphe 2° du deuxième alinéa, le ministre peut consulter une municipalité régionale de comté sur les implications d'un projet de développement hydro-électrique dans son territoire. Le preneur verse dans le Fonds des générations les loyers et autres droits ou redevances qui lui sont exigibles en vertu du paragraphe 2° du deuxième alinéa . La propriété des forces hydrauliques du domaine de l'État est et a toujours été rattachée à la propriété du lit des cours d'eau faisant

partie du domaine de l'État. Le présent alinéa est décla​- ratoire. 3. The transfer of hydraulic power vested in the domain of the State is prohibited subject to

section 32 of the Hydro-Québec Act (chapter H- 5 ).

The lease of hydraulic power vested in the domain of the State is permitted only (1) where the hydraulic power is necessary for the operation, at a specific place along a watercourse, of a hydro-electric power plant gener​ating more than 50 megawatts attributable to the domain of the State , such lease being, in every case, authorized by law; (2) where hydraulic power is necessary for the operation, at a specific place along a watercourse, of a hydro-electric power plant gener​ating 50 megawatts attributable to the domain of the State or less or where the lessee is a municipality, such lease being authorized by the Government and made subject to the conditions it determines.

Before recommending to the Govern​ment the lease of hydraulic power under subparagraph 2 of the second paragraph, the Minister may consult with the regional county municipality concerning the implications of a hydro-electric project in its territory. The lessee shall pay into the Gener​ations Fund any rent and other fees or charges payable under subparagraph 2 of the second paragraph. Ownership of hydraulic power in the domain of the State is and always has been attached to ownership of the bed of the watercourses in the domain of the State. This paragraph is declara​- tory. [Emphasis added.]

[ 42 ]

Section 3 serves to restrict the alienation of waterpower in the public domain. It ensures that if the province allows for its waterpower to be exploited, it will do so by lease without alienating the property. The province will retain title but for exceptional circumstances. The policy objective is plain: waterpower owned by the province is imagined not only as a precious resource, but as one upon which the present and future economic health of the province rests.

By retaining ownership of this renewable resource in the public domain, the province endeavours to retain waterpower in the public domain as a source of the prosperity for future generations of Quebeckers.

When definitively alienated, the waterpower is notionally lost as a capital source of wealth, thereby justifying, along this view, the restriction on alienation. [18] Where it is merely leased, the crown retains ownership for future use. [19] Thus, the lease is an alternative to outright alienation whereby the crown retains title and assures for itself a present income from the lessee who pays for the right to use the waterpower. That income is rent collected by the crown as owner. [ 43 ] Accordingly, where leases are permissible under

section 3, the "rent and other fees or charges" [20] payable by a "lessee/ preneur " are plain examples of proprietary charges levied in exchange for the right to use the property owned by the crown. Strictly speaking, the proprietary charge under

section 3 is not established by statute but merely authorized thereunder. The amount of rent is fixed by the lease. Under

section 3, the rent under the lease is a sort of royalty comparable to a fee for the private exploitation of a provincially-owned resource in other settings. The rent may well be due whether or not electricity is produced, and, according to

section 3, paragraphs 2(1) and (2), the hydroelectric potential of the waterpower is merely a means of determining the basis on which the leases are authorized. This appears to be a proprietary charge on waterpower owned by the province and not a tax on all of like resources in the province. [ 44 ] By imposing a charge on electricity produced by waterpower,

section 68 of the Act shares some of the same policy aspirations as

section 3. Here again, we have an assertion of the idea that all Quebeckers have a stake in the use of waterpower central to the present and future economic health of the province. [21] However

section 68 is far more sweeping in scope and turns on a different stake in the waterpower. The rent authorized under

section 3 is based on the province having a proprietary stake in the resource, whereas

section 68 is predicated on a non-proprietary public interest that the province has in the electricity produced by all waterpower in the province. The first justifies a charge in the nature of a rent. The second justifies a charge in the nature of a tax. [ 45 ] It is worth noting that sections 3 and 68 interact differently depending on who owns the resource subject to the two rules. Where the province owns the waterpower in question, the holder of the waterpower pays a rent under

section 3 and an additional charge – a tax – under

section 68. [22] Where the province is not the owner, the holder is not a lessee and pays no rent under

section 3 but, because he or she holds waterpower in the province, a "charge" – again, a tax – is due under

section 68. [ 46 ] The government does not levy the charge under

section 68 qua owner-lessor but qua public authority: it is not exacted as an incident of crown ownership but rather of the crown's authority to regulate property in the province and to raise taxes on "sites and facilities in the province for the generation of electrical energy and the production therefrom" pursuant to

section 92A(4) (

b) of the Constitution Act, 1867 . [23] Not surprisingly,

section 69.2 provides that the charge does not apply to Hydro-Québec or to a municipality, an electricity cooperative or to a mandatary of the crown. [24]

Section 68 is a tax, not a proprietary charge. [ 47 ] In explaining her view that the levy was a proprietary charge and not a tax, the judge pointed to certain terminological choices that suggested to her that this reflected legislative intent. She noted that

section 68 employs the word " redevance " rather than " taxe " as a sign that

section 68 established a proprietary charge. It is true that " redevance " in French is often used as an equivalent for terms such as "royalty" in English which are not typically used to designate a tax. [25] While the English word "charge" used in

section 68 is not incompatible with the idea of a fiscal charge, the use of the term "charge/ redevance " elsewhere in the Act is equivocal, and could be read as suggestive of a proprietary charge. [26] Even the French word " détenteur ", used to describe the debtor of the charge in

section 68, [27] is also unhelpful in deciding the matter, just as the English term "holder" has different meanings in different circumstances. [28] The better view – noted by the trial judge – is that these semantic matters on their own cannot decide pith and substance. As far as the wording of the text goes, the fact that

section 68 does not refer to property in the "domain of the State" is most indicative, to my ear, that the levy is a tax and not a proprietary charge. [ 48 ] The legislative history of

section 68 of the Watercourses Act offers confirmation that the charge is not limited to waterpower owned by the State. It is important to note that Quebec had a long history of granting concessions of waterpower in ownership. [29] Even if waterpower held by those persons was no longer in the public domain, it was nevertheless subject to a levy under the former version of

section 68 of the Watercourses Act. As it appeared in the revised statute book in 1964,

section 68 levied separately, but in identical amounts, "(

a) Every holder of hydraulic powers of the public domain/ tout détenteur de forces hydrauliques du domaine public de la province " and "(

b) Every owner of hydraulic powers situated within the province/ tout propriétaire de forces hydrauliques situées dans la province ." [30]

Section 68(

a) designated the levy an "additional charge/ redevance additionnelle " on the non-owner for whom the charge would have been additional to rent owed to its lessor, the crown in right of the province.

Section 68(

b) levied a "contribution/ contribution " on the owner, who would owe no other charge to the province. [ 49 ] In other words, the precursor to

section 68 , like today’s provision, imposed a charge on both holders of waterpower that belongs to the crown and to persons owning the waterpower outright. These "contributions and charges" were combined in a single statutory

section and regulated together in Division VIII of the previous version of the Act. Taken together, they could not have been a proprietary charge because they were not limited to lessees of the provincial crown. In both cases, the levy was fixed at "fifteen cents per thousand kilowatt-hours of electricity generated and derived from such hydraulic powers" and remitted by the Minister of Natural Resources to the Minister of Finance for the consolidated revenue fund. [31] The whole is suggestive that former

section 68 was a tax. [ 50 ] The imposition of a same levy for holders of waterpower that were part of crown domain and owners who did not hold waterpower of the crown was carried forward, in different language, by amendments to the Act in 1978. [32] This again suggests that in the period prior to constitutional amendments that liberalized provincial authority to impose taxes on natural resources in the 1980s,

section 68 of the Act was understood by the province as a tax that applied to electricity produced on waterpower held by both lessees of the provincial crown and outright owners. [ 51 ] The characterization of the current

section 68 as a tax was made very plain in amendments brought to the Watercourses Act in 1984, when the distinction between holders of waterpower in the public domain and outright owners of waterpower for the purposes of

the levy was abolished.[33] From that time, the expression "of the public domain" was struck from

section 68 and all holders ofwaterpower in Quebec, whether they owned the waterpower or whether they held it of the crown, were subject to a same levy pursuant tothe same provision of the Act. It was thus mostly the formal expression of the rule that was changed. This change came on the heels ofthe amendments to the Constitution Act, 1867, which allowed the province to tax sites and facilities in the province that produceelectricity. While not fulsome on this point, debates in the National Assembly suggest the amendment to

section 68 may well have beeninspired by the invitation that the constitutional amendment adding

section 92A(4)(

b) to the Constitution Act, 1867 extended toprovincial legislatures.[34] This is not to say that

section 68 was an unconstitutional tax prior to the amendments – that issue does notarise here given that the respondents are facing charges that arose after 1989 and need not be decided here – but merely that since 1984,section 68 was reformulated to apply unequivocally to all waterpower in the province without regard to ownership. As such, it is a taxon the production of the resource, pursuant to

section 92A(4)(

b) of the Constitution Act, 1867. [52] The charge is levied on the electricity produced, and is not "une contrepartie reliée à l’utilisation des forces hydrauliques" thatbelong to the province as the trial judge suggested. A charge in the nature of a rent would presumably be due whether or not thewaterpower was used to produce electricity. As a charge on the volume of electricity produced, the levy appears more plainly to be a taxthan a rent.

Statutory levies in the nature of rents or royalties may be exacted on natural resources based on the volume of production, asis sometimes the case for oil and gas production. Care should be taken, however, before examples dealing with charges on non-renewable resources are applied to hydroelectric power. One might well argue that the most effective way for the owner of an oilreserve to levy a proprietary charge on the resource is by volume produced (for example the number of barrels drawn from the propertyin a given period), given that volume is a dominant measure of the non-renewable resource.

Unlike oil and gas which must be measuredby volume, electricity produced by waterpower comes from a renewable resource that is not exhausted through use. If the levy wasimposed on waterpower as a proprietary charge, one would ordinarily expect it to be measured by horsepower, not on the basis of thekilowatt-hours of electricity produced. In

section 68 of the Watercourses Act, the legislature has not levied waterpower through ameasure of horsepower – a direct measure of renewable resources – but instead on the electricity produced by the property.[35] Hereagain we have a sign that the province is not collecting a rent in

section 68 on property it owns, but instead it is taxing electricity by allwaterpower produced "in Québec". [53] In sum, waterpower is treated not as property owned, but as a resource in which all Quebeckers have a non-proprietary stakethereby justifying a levy by the province whether or not it is the owner of the waterpower.

Section 68 establishes a tax. (

C) Can the crown's lessee benefit from fiscal immunity from provincial tax? [54] The respondents argue that if the charge under

section 68 of the Watercourses Act is characterized as a tax, they should beexempt from payment based on the federal crown’s immunity from provincial tax under

section 125 of the Constitution Act, 1867 whichprovides that "no Lands or Property belonging to Canada or any Province shall be liable to Taxation". [55] The federal crown owns the waterpower that produces the electricity upon which

section 68 imposes a tax. Does the principleof intergovernmental fiscal immunity set forth in the Constitution exempt the respondents from paying a tax on "property belonging toCanada"? [56] In my view, the respondents – private entities that are not emanations or agents of the crown – have no claim to the fiscalimmunity in this case. [57] First, it bears recalling that the tax established by

section 68 is imposed on the "holder of hydraulic powers in Québec" – inthis case a private corporation under a lease with the crown – and not the federal crown as owner of the waterpower. The respondents arelegally responsible for paying the tax, not the crown, even though the costs may well be passed on according to the terms of the lease.

Section 125 is not understood to preclude the province from taxing the lessee or occupant of federal property.[36] Much in the way thatmunicipal taxes can be imposed on businesses that are tenants in a building owned by the federal crown, the respondents are assessedhere in respect of the waterpower they lease. [58] It is not the waterpower itself that is taxed or rendered liable for execution, nor is it the federal crown designated as the payorof the charge.

As we have seen, the respondents, as holders of the waterpower, are taxed based on the number of kilowatt hours ofelectricity produced; if they were to produce no electricity – as was presumably the case in the early portion of the lease while theoriginal lessee Hydromega was building the power station – there would be no charge due by the holder under

section 68. The tax isplainly imposed on the respondents personally, based on the business they operate; it is, to quote one case, "taxation on the interest of thetenant or occupant, and not on the property of the Crown".[37] There is not basis for applying fiscal immunity to the respondents'interest here. [59] While it is of course true to say that the electricity is necessarily connected to the waterpower – the text of

section 68 makesplain that it does not apply to electricity produced otherwise – it cannot be said that the charge is levied against the resource itself.

Section 68 is a tax on the electricity produced and not the waterpower as such. Not only is this not an instance of one level ofgovernment seeking to tax the property of another but, further, it cannot be said that this is an instance of one government appropriatingto itself the income of another to which it has no right. The applicability of the tax to the respondents is not affected by the fact that itmay obliquely serve to reduce the revenues that the crown can draw from the rental of the waterpower.

In Reference re G.S.T.,[38]Lamer C.J. explained that a tax will be applicable even if government income from the property is adversely affected: Nor can it plausibly be said that the imposition of the GST on sales of provincial property amounts to a tax on the fruits of provincialproperty in that, due to their liability to pay the GST, purchasers will purchase less of such property, resulting in lost sales and diminishedrevenues to the province.

The fact that a federal tax renders provincial property less commercially attractive than it would be if the taxdid not apply does not render that tax a tax upon provincial property. In Phillips v. City of Sault Ste. Marie, (SCC),[1954] S.C.R. 404, this Court considered the case of a municipal tax levied on tenants of land owned by the Crown in right of Canada.

The tax was assessed on the basis of the value of the premises occupied as assessed by the city. This Court found that the tax was not levied upon the land, but upon the occupants; the value of the land was simply the measure by which the liability of the occupants to pay the tax was to be assessed.

Consequently, the tax did not violate s. 125 of the Constitution Act, 1867 , notwithstanding that, de facto , its collection might lower the returns that the Crown in right of Canada could realize from rental of the land. […] The possibility that the GST may have the effect of reducing provincial revenues from the sale of provincial property does not render the GST a "taxation" of provincial property.

Nor does the calculation of the GST as a fraction of a price a portion of which is provincial tax amount to the federal taxation of provincial tax. [ 60 ] The Attorney General of Canada contends that the ultimate effect of the levy in

section 68 is to expropriate, for all intents and purposes, the fruits of the waterpower owned by the federal crown. It calculates that 62% of the fair market value of the waterpower would be owed in tax, and grosses that up to over 100% if interest on the unpaid tax is included in what is owed by the respondents. The Attorney General of Canada argues that

section 68 operates something of a sleight of hand – the Watercourses Act taxes the electricity, rather than the resource, in order to achieve indirectly what the Constitution precludes it from doing directly, i.e . for the province to appropriate the waterpower of the federal crown to itself. [ 61 ] I disagree. The tax is imposed on a private business, and not the crown, and it is levied based on the volume of electricity produced by a renewable resource, not on the resource itself.

As to whether "62%" or "117%" of the value of the waterpower is effectively appropriated, the least that can be said is that these numbers have not been established as fair market value as matter of evidence, and reflect only a hypothetical bottom line for the federal crown under its lease with the respondents. The crown may well have made a bad business deal – it is not for the Court to speculate on that matter – in undervaluing the property leased and, especially, in offering the lessee a hold-harmless clause without measuring the eventual impact of taxation on the profitability of the arrangement.

But whatever one might think of the terms of the lease, it is a business arrangement whereby a private corporation leased federal property for its personal profit. The respondents, as holders of the waterpower pursuant to the lease, owe a tax on the electricity produced under the Act. The federal crown may well have undertaken to pay that charge under the lease – that is a matter to be left for the action in warranty – but

section 125 cannot be set up as a basis to exempt their lessee from its own liability to provincial authorities for the tax. [ 62 ] As a last point, it strikes me as important to note that the Attorney General of Canada’s reading of

section 125 would have the potential to subvert the principle of fiscal immunity for the federal crown from its primary justification. In Westbank , [39] Gonthier J. carefully explained that fiscal immunity is designed to ensure the proper functioning of Canadian federalism.

Section 125 , he wrote, "grants to each level of government sufficient operational space to govern without interference. It is founded upon the concept that imposing a tax on a level of government may significantly harm the ability of that government to exercise its constitutionally mandated governmental functions". [40] Taxing the respondents on the electricity here cannot be seen as depriving the federal government of "operational space to govern without interference" in connection with the flexible form of federalism described by Gonthier J. One might well make the reverse case: granting the respondents immunity from the tax in

section 68 on an overreaching

interpretation of interjurisdictional immunity from tax would likely do a disservice to the very brand of federalism identified by the Supreme Court in Westbank and later cases. [41] (

D) Is the charge constitutionally applicable given the crown's exclusive jurisdiction over public property (section 91 (1A) Constitution Act , 1867)? [ 63 ] The Attorney General of Canada argues that the imposition of a charge under

section 68 of the Watercourses Act cannot apply to waterpower owned by the federal crown given the principles of exclusivity upon which the division of powers between the federal and provincial governments rests under the Constitution. This argument is not premised on the invalidity of

section 68 – the parties agree that the enactment of this provision of the Act is a valid exercise of provincial jurisdiction. It is said, however, that

section 68 does not apply to federally-owned waterpower based on the principle of interjurisdictional immunity that protects the federal power over public property under

section 91(1A) of the Constitution Act, 1867 against an improper incursion. [ 64 ] The Attorney General of Canada confounds Parliament's exclusive jurisdiction to enact laws over federal public property with the crown's right to enjoy and dispose of the property it owns without interference. Writing about

section 91(1A), Professor François Chevrette has astutely observed that "la Constitution a mis dans le dominium une part de l' imperium " but, he observes, this does not have the effect of insulating all federal property from provincial law. [42] Federal property is not a perfect enclave within which provincial law does not apply. [43] Only when provincial law strikes at the vital part of an entity such as the seaway in respect of that which makes it essentially of federal jurisdiction should the principle of interjurisdictional immunity direct provincial law to be inapplicable. [44] [ 65 ] Can it be said that the impact of

section 68 on the seaway impairs it in a manner vital to its existence and operation such that the tax should not apply? Does the provincial levy impair the "basic, minimum or unassailable" [45] content of the federal power over public property, or does it impair what is often described, in connection with interjurisdictional immunity, as its "core"? [46] [ 66 ] I think not. A tax on the holder of crown waterpower under a commercial lease cannot be said to impair the core of the federal power over public property in

section 91(1A) of the Constitution Act, 1867 . It is a longstanding principle that "[t]he occupant of Dominion lands under a legal right may be taxed in respect of his occupancy". [47] Not only is the tax imposed upon the respondents, and not on the federal crown property, but there is no plausible basis for saying that the crown's authority to legislate in respect of public property would be jeopardized if the tax was applied to the respondents.

Finally, the fact that the crown, under the lease, has undertaken to indemnify the respondents should they be made liable for the tax does not show impairment of the core of federal jurisdiction, but merely represents an unfortunate consequence, if it proves true, of the lessor's business arrangement with the lessee.

(

E) Is the charge constitutionally applicable given the crown's exclusive jurisdiction over shipping and navigation (section 91 (10) Constitution Act, 1867 )? [ 67 ] Just as in the case of the federal jurisdiction over public property, the tax under

section 68 of the Watercourses Act cannot be said to impair the core of the federal power over shipping and navigation. It is true that the ability to control water levels in the seaway, including the determination of the amount of surplus water available to the power station, is critical to the safety of ships and the proper operation of the locks and canals in the St. Lawrence River. But, it is of course the waterpower, not the power station, that is essential to navigation in the seaway. The seaway operated properly without the station from the 1950s until 1989.

The federal power may well extend to seaway infrastructure necessary to navigation, but it is hard to make the case that the power station is necessary when the seaway operated for thirty some years without it. [48] The power station does not directly serve in the operation of the locks and the power generated at the site is not used in the seaway installations.

Moreover it may be noted that under the terms of the lease, the respondents have a contractual obligation to remove the installations at the end of the lease, suggesting again that the power station is not necessary to navigation. [ 68 ] If it is the waterpower, not the station, that is critical to navigation, it cannot be said that a tax on electricity produced at that station with surplus waterpower impairs federal authority over navigation. We know that the electricity produced at the station in a manner that did not adversely affect the required flow of water to the seaway.

The tax may make the lease less profitable for the lessee, and maybe even for the crown, but the core of the federal power over navigation cannot be impaired by the provincial tax on electricity levied upon the respondents. (

F) Do the respondents owe interest on the unpaid amounts of the charge? [ 69 ] In their conclusions, the appellants asks the Court to condemn the respondents solidarily to pay $5,358,752.57, representing, as of January 1, 2009, the amount of the charge due under

section 68 of the Watercourses Act for the years 1989 to 2007, with interest at the rate established by

section 28 of an Act respecting the ministère du Revenu [49] from January 1, 2009. [ 70 ] The respondents argue that they should not be responsible for the interest, or the interest on interest, which represents more than half of the total amount due. They say that the appellant is responsible for the long delay between the date of the original action and that of the hearing before the Superior Court and that should absolve them for liability for the interest. [ 71 ] There is no reason to relieve the respondents from their legal responsibility for the interest on unpaid taxes. Sections 69.4 and 69.5 of the Act provide that all amounts due under

section 68 bear interest at the rate established by

section 28 of an Act respecting the ministère du Revenu . The respondents chose not to deposit an amount with the clerk of the Superior Court pending the outcome of the action and, as a result, have had the benefit of the capital over the life of the debt. The interest on the debt, as well as the interest on the interest, are due. V Conclusion [ 72 ] I propose that the appeal be allowed, with costs. I would set aside the judgment of the Superior Court. The appellant's action should be maintained, and the respondents condemned to pay, solidarily, an amount of $5,358,752.57, with interest at the rate established by

section 28 of the Act respecting the ministère du Revenu from January 1, 2009. [ 73 ] I hasten to say that in arriving at the conclusion that the respondents must pay the charge due under the Watercourses Act , I make no finding as to the liability of the impleaded parties pursuant to the action in warranty. I refer the plaintiffs and defendants in warranty to the order made by the trial judge on October 6, 2008: following final judgment in this case, the judge set aside one month for the parties to negotiate a settlement.

Should they fail in that endeavour, the Superior Court would be seized of the action in warranty in which, among other matters, the meaning of the hold harmless clause in the lease will be in issue. NICHOLAS KASIRER, J.A. 3. […] 3. […]