2015 MBPC 58, 2015 MBPC 58

Citation: 2015 MBPC 58 THE PROVINCIAL COURT OF MANITOBA IN THE MATTER OF: The Income Tax Act AND IN THE MATTER OF: The Constitutional Questions Act BETWEEN Her Majesty the Queen ) ) Mr. J. Akerstream and Ms. K. Elgert Respondent ) for the Respondent - and – ) ) ) Brian (Woody) Langford ) ) ) Mr. B. (W.) Langford on his own behalf (Accused) Applicant ) - and – The Attorney General of Manitoba Respondent ) ) ) ) ) ) ) ) Ms. H. Leonoff for the Respondent The Attorney General of Manitoba ) ) ) Judgment on the Constitutional Application delivered: December 2, 2015 CARLSON, P.J.

Introduction [ 1 ] The Applicant is charged with the following offences: • Nine counts of making or participating in, assenting to or acquiescing in the making of false or deceptive statements in his T1 Individual Tax Returns, by understating his taxable income, contrary to section 239(1) (

a) of the Income Tax Act . There is one charge for each of the nine taxation years 2002 through 2010; • Two counts of unlawfully and willfully evading the payment of taxes, imposed by the Income Tax Act by understating his taxable income and evading payment of income tax thereon, contrary to section 239(1) (

d) of the Income Tax Act. There is one charge for the taxation years 2002 through 2008, and one charge for the taxation years 2009 and 2010; • Four counts of making false or deceptive statements in Goods and Services Tax (“GST”) Returns, by understating the GST, contrary to section 327(1)(

a) of the Excise Tax Act. There is one charge for each of four filing periods that collectively span from July 1, 2003 to December 31, 2007; and

• One count of willfully evading or attempting to evade remittance of taxes imposed by the Excise Tax Act , contrary to section 327(1)(

c) of the Excise Tax Act . That count spans June 30, 2003 to October 1, 2008. [ 2 ] The Applicant filed and served a Notice of Constitutional Question seeking a declaration that the Income Tax Act , R.S.C. 1985, c.1 (5 th supp.) is unconstitutional as ultra vires the authority of Parliament under

section 91 of the Constitution Act, 1867 . The Applicant seeks a constitutional exemption pursuant to

section 52 of the Constitution Act, 1982 , with respect to the charges under the Income Tax Act . [ 3 ] The Attorney General of Manitoba intervened in the constitutional application. The Respondent and the Attorney General of Manitoba oppose the application, and request the application be dismissed. [ 4 ] This is the court’s decision on the constitutional application.

Factual background [ 5 ] An Agreed Statement of Facts was filed. [ 6 ] The Applicant is a practicing lawyer in Manitoba, and has been since 1980. [ 7 ] The Applicant signed and filed an income tax return for each year 2002 - 2010 with the Canada Revenue Agency (“CRA”). On each return the Applicant reported no income. [ 8 ] An investigation by CRA determined that during each of the years 2002 - 2010, the Applicant had received payment for legal services.

It is agreed by the Applicant that the total amount of unreported income for the taxation years 2002 - 2010 is $622,820 and that the total amount of alleged unpaid federal income tax based on the CRA assessment for those years is $99,053. [ 9 ] As a result of not reporting income for the years 2002 - 2010, and not paying income tax on the income he had received as payment for his legal services during those years, the Applicant was charged with the offences under the Income Tax Act . The Applicant was also charged under subsections 327(1)(

a) and (

c) of the Excise Tax Act for failing to remit GST in the amount of $39,647 based on income he received for his legal services during those years. The Applicant reached a civil settlement with CRA and is no longer in arrears for GST. Issue [ 10 ] The issue to be decided by the court is whether the Income Tax Act is unconstitutional on the basis it is ultra vires the authority of Parliament under

section 91 of the Constitution Act, 1867 . Positions of the Parties [ 11 ] The parties agree that the Income Tax Act imposes a direct tax on Canadians, including those in the province of Manitoba.

It is also agreed that some of the revenue raised pursuant to the Income Tax Act is ultimately disbursed by the Government of Canada to the provinces, including to the province of Manitoba, and that such monies are used for provincial purposes. [ 12 ] Where the parties’ positions differ is their respective characterization of the monies raised by income tax that are returned by the Government of Canada to the provinces and used for provincial purposes. [ 13 ] The Applicant’s position is that the Income Tax Act is ultra vires Parliament because it imposes a direct tax within the province in order to raise revenue for provincial purposes, which is a matter that is exclusively within the jurisdiction of the provincial legislature under section 92(2) Constitution Act, 1867 .

The Applicant argues that all monies raised by direct taxation of Manitobans and used in Manitoba for provincial purposes can, constitutionally, only be raised pursuant to provincial legislation.

The Applicant points to specific sums of money that are disbursed by the Government of Canada and are used for provincial purposes in Manitoba, and says that since those monies, or at least some of them, are raised by direct taxation of Manitobans pursuant to the Income Tax Act , such legislation is unconstitutional as it encroaches on exclusive provincial jurisdiction. [ 14 ] The Respondent and the Attorney General of Manitoba agree that the Income Tax Act imposes a direct tax, but say that the Income Tax Act is intra vires Parliament, on the basis that section 91(3) Constitution Act, 1867 gives Parliament the authority to raise money “by any mode or system of taxation”, which includes direct taxation.

The Respondent and the Attorney General of Manitoba agree that the Government of Canada returns some of the monies it raises by income tax back to the provinces and that such monies are used for provincial purposes.

But, they say, the fact monies are returned to the provinces by the Government of Canada, by means of subsidies, grants, shared cost programs and equalization payments, which are then used for provincial purposes, is constitutionally within Parliament’s spending jurisdiction, and does not equate to Parliament exceeding its constitutional jurisdiction to raise monies by direct taxation from all Canadians. [ 15 ] The Respondent and the Attorney General of Manitoba submit that the very argument the Applicant makes before this court has made before other courts, and has been rejected. The Applicant’s Argument

[16] The Applicant filed documentation to demonstrate that certain amounts of money provided by the Government of Canada to theProvince of Manitoba were used for provincial purposes, relative to each of the taxation years for which he is charged with an offenceunder the Income Tax Act. [17] That documentation, specifically entries from the records of the Government of Canada, Department of Finance, headed“Federal Support to Provinces and Territories”, confirms that in each such year, the Province of Manitoba received specified amounts ofrevenue, in the millions of dollars, from the Government of Canada designated as Equalization Payments, Canada Health Transfer(CHT), and Canada Social Transfer (CST).

The documentation confirms that in each of those years, there were also monies provided bythe Government of Canada to Manitoba for other purposes.

In some of those years, those purposes included the Medical EquipmentFund, Primary Health Care Transition Fund, Diagnostic Medical Equipment Fund, Health Reform Fund, Child Care, EcoTrust Fund,Infrastructure Renewal, Manitoba Floodway Expansion, Police Officers Recruitment Fund, Public Transit Capital Trust Fund,Transitional Payment – Corporation Capital Tax Phase-Out, and “Other”, which included items such as Aboriginal and Northern Affairs,Education, Justice, Labour and Immigration, Emergency Expenditures and French Language Services.

These revenues received by theProvince of Manitoba from the Government of Canada, were estimated, in the documentation filed by the Applicant, to range in totalfrom $2,362,274 in 2002/2003 to $3,750,895 in 2010/2011. [18] The Applicant says that sections 91 and 92 Constitution Act, 1867 require that the federal government must only spend revenueraised by income tax on federal purposes, and that each province must fund its own responsibilities with monies raised by provinciallyimposed direct taxation, with no assistance from the federal government. [19] The real crux of the issue raised by the Applicant is whether the fact the federal government spends some of the monies it raisesby the imposition of income tax by returning it to the provincial governments, and that such monies are ultimately used for provincialpurposes, makes the Income Tax Act unconstitutional.

Analysis The distinction between legislative power to raise revenue and spending power [20] The answer to the challenge raised by the Applicant is found in the distinction between constitutionally conferred legislativeauthority to make taxation laws to raise revenue, and constitutionally conferred authority, constraints and requirements relative to thespending of revenue raised by taxation legislation. [21]

Section 91 Constitution Act, 1867 sets out the legislative authority of Parliament to exclusively make laws in relation to specificmatters, including at section 91(3), “the raising of money by any mode or system of taxation”. [22]

Section 92 Constitution Act, 1867 sets out the legislative authority of the provincial legislatures to exclusively make laws inrelation to specific enumerated items, including at section 91(2), “direct taxation within the province in order to the raising of a revenuefor provincial purposes”. [23] While

section 92 expressly requires that the revenue raised by provincial taxation legislation is for provincial purposes, section91 does not specify any mandated purpose for which revenue raised by federal taxation legislation must be used, nor provide anyconstraints on the spending of monies raised by federal taxation legislation. [24] The Constitution Act, 1867 must be considered in its entirety to determine whether there are any constitutional limitationsimposed on the purposes for which federally raised income may be used. [25] In that regard,

section 106 of the Constitution Act, 1867 provides: Subject to the several payments by this Act charged on the consolidated revenue fund of Canada the same shall be appropriated by theParliament of Canada for the public service. [26]

Section 106, when read together with sections 91(1) and 91(3), provides Parliament with authority to spend federally raisedmonies by sending it to the provinces by way of grants and contributions to cost shared endeavors. The Supreme Court of Canada, inQuebec (Attorney General) v. Canada, 2011 SCC 11 , [2011] 1 S.C.R. 368, endorsed that the Government of Canada wasentitled to pass spending legislation, which transferred tax monies collected by the federal government to the provinces. [27] The Constitution Act, 1867 in fact, contains provisions that require certain federal spending by payments to the provinces. [28] One such example is found in

section 118 of the Constitution Act, 1867. That

section requires the federal government to makespecified yearly payments to certain provinces “for the support of their governments and Legislatures”. [29] A further example of required federal spending by payments to the provinces is found in

section 36 of the Constitution Act,1982, which endorses the federal government making equalization payments to the provinces. Section 36(2) reads: Parliament and the government of Canada are committed to the principle of making equalization payments to ensure that provincialgovernments have sufficient revenues to provide reasonably comparable levels of public services at reasonably comparable levels oftaxation.

[30] Accordingly, Parliament is actually constitutionally required to make certain payments of federal monies to the provinces, to beused for provincial purposes, and there are no constitutionally imposed limitations on the purposes for which monies raised by federalincome tax, or other federally raised income, may be spent, except that such monies be spent “for the public service” as required bysection 106 Constitution Act, 1867. Parliament may spend the revenue it raises from income tax and other revenue in any way that itdeems fit.

There is no reason that cannot include sending monies to the provinces for the provinces to use for provincial purposes. [31] The fact that section 92(2) Constitution Act, 1867 gives provincial legislatures the authority to exclusively make laws in relationto direct taxation within the province to raise revenue for provincial purposes does not prohibit the federal government from spendingsome of the monies it raises by sending it to the provinces to be used for provincial purposes. [32] Indeed,

section 92 constrains the provinces in terms of both raising revenue and spending revenue. Provinces can only raisemoney by direct taxation within the province, and that money must be spent on provincial purposes. But

section 91 only deals with thefederal government’s raising of revenue by direct taxation. It does not contain any limits as to how the federal government must spendthe monies raised by such taxation. The jurisprudence and legislation provide that the federal government may spend money as it seesfit. There are no constitutional limits on Parliament’s spending powers except that they must be for “the public purpose” as required bysection 106. [33] In the case of Winterhaven Stables Limited v.

Canada (Attorney General), 1988 ABCA 334 (leave to appeal denied [1989] 1SCR xvi at 215), the Alberta Court of Appeal addressed this exact issue. Mr. Justice Irving of the Alberta Court of Appeal agreed withthe trial judge’s conclusion, which explained the system of the expenditure by Parliament of federally collected monies to the provinces: There is also some question as to whether it can be said that some of the money raised under the Income Tax Act is being raised forprovincial purposes.

The actual revenues collected under the Income Tax Act are paid into the Consolidated Revenue Fund pursuant tothe Financial Administration Act. This Consolidated Revenue Fund is a non-segregated fund comprised of revenues received under theIncome Tax Act and revenues from other sources. Monies are then paid by authority of Parliament from this fund to the provinces forthe purpose of assisting in the financing the provincial programs of post-secondary education; health and welfare. The monies are thenfirst collected and paid into the Consolidated Revenue Fund.

The accounts are structured so that the source of all revenues cannot bedistinguished. It is the source of all revenues cannot be distinguished. It is therefore not possible to trace the payments made by thefederal government to the provinces for provincial purposes to any specific source. In my view the challenge to the Income Tax Act on the basis that it is direct taxation within a province in order to raise money forprovincial purposes and therefore invalid cannot be sustained. The power given under s. 91(3) to “the raising of money by any mode orsystem of taxation” is a general and wide power.

It would appear to be subject only to the exception contained in s. 125 which containsan exemption from taxation ...of lands or property belonging to the federal or provincial authority. I do not believe that it can be said that the Income Tax Act has as its intended object the raising of money for provincial purposes. Itsimply raises money to be used as authorized by Parliament. The monies received under the Income Tax Act are intrinsically missed withother monies and some of these funds are transferred to the provinces. They are undoubtedly then used for provincial purposes.

It ishowever clear that the main object of the Income Tax Act is not to raise money by direct taxation for provincial purposes. It is concernedwith raising money by taxation. (para 14). [34] Also in Winterhaven, the Alberta Court of Appeal specifically stated that Parliament’s spending power is separate and distinctfrom its legislative power. Parliament is not restricted from spending its monies, including monies raised pursuant to the Income Tax Act,on provincial purposes.

The Applicant’s position is inconsistent with federalism [35] The Applicant describes the Constitution as being similar to a cohabitation agreement, on the basis that the provinces and theFederal Government each have designated areas of exclusive jurisdiction and powers and some shared responsibilities. The Applicantsays that the taxing and spending powers of the provinces and of the federal government are limited to their respective legislativeobjectives.

In other words, the Applicant argues, the federal government can only raise monies and spend monies for purposes set out insection 91, and the provincial legislatures can only raise monies and spend monies for purposes set out in

section 92. [36] This idea of “watertight compartments” endorsed by Lord Atkin in A.G. Canada v. A.G. Ontario, (UKJCPC), [1937] A.C. 326, is no longer the judicially accepted view of constitutional law. [37] Indeed, if the Applicant’s position were correct, there would be significant disparity amongst the provinces in terms of servicesthat they could provide to their citizens, as such services would be based on the province’s own financial resources.

In such case, for thecitizens of a poorer province to have comparable services to those in a richer province, they would have to be subject to significantlyhigher taxes, which would create significant inequality amongst Canadians. [38] The Applicant says that policy alone, in terms of there being good reasons for redistribution of wealth by the federalgovernment to the provinces, is not determinative of the constitutionality of legislation. That may be.

But the courts have specificallyendorsed the model of cooperative federalism, in which the powers of each level of government set out in sections 91 and 92 of theConstitution Act, 1867, and how they relate to each other, must evolve and accommodate the changing political and cultural realities ofCanada. As Justices Binnie and Lebel stated, in Canadian Western Bank v. Alberta, 2007 SCC 22 , [2007] 2SCR 3: It is also important to note that the fundamental principles of our constitutional order, which include federalism, continue to guide the

definition and application of the powers as well as their interplay. Thus, the very functioning of Canada’s federal system mustcontinually be reassessed in light of the fundamental values it was designed to serve. [39] Further, there have long been provisions embedded in the Constitution that have specifically provided for, and required, thefederal government to send monies to the provinces to be used for provincial purposes. As previously mentioned,

section 118 of theBritish North America Act 1867, mandated that certain subsidies be made by the federal government to the then four provincialgovernments to be used for provincial purposes, in order to ensure some equality of services amongst Canadians.

Section 25 of theManitoba Act (1870), required Canada to pay a subsidy to the Province of Manitoba, being a fixed annual amount “...for the support ofits Government and Legislature...”, and an annual grant “in aid of the said Province” based on a specified amount per person in theProvince. In the British North America Act, 1907,

section 1 mandated annual grants to be made by the federal government to everyprovince “...for its local purposes and the support of its government and Legislature.” That longstanding constitutional requirement forfederal assistance to the provinces for provincial purposes has been included in the Constitution Act, 1982 in the form of

section 36,which requires the federal government to provide equalization payments to the provinces to ensure provinces have sufficient revenues toprovide comparable services to their citizens at reasonably comparable taxation rates. [40] The federal government is required by provisions of the Constitution to make equalization payments to the provinces, whichfunds are used for provincial purposes. It funds these equalization payments partly through the imposition of income tax and thecollection of income tax revenue.

Federal legislation that deals with the raising of such income tax revenue cannot be unconstitutionalsimply because some monies raised pursuant to it are sent to the provinces for provincial purposes, when such payments are specificallymandated by the Constitution. It must be assumed that the Constitution is intended to be internally consistent. [41] The Applicant equates what the federal government is doing by sending income tax revenue to the provinces for provincialpurposes to money laundering.

That can hardly be the case when such spending is not precluded by the Constitution, and, in fact, isspecifically mandated in certain ways, by the Constitution. [42] The Applicant’s position focuses solely on the fact the some of the monies raised by the Income Tax Act end up in the provincesand are used for provincial purposes. That does not mean that the federal government is infringing on the provinces’ jurisdiction to raiseby direct tax monies for provincial purposes.

It simply means that the federal government is spending some of its monies by sendingmonies to the provinces that are used for provincial purposes. There is nothing in the Constitution that precludes or limits such spending. The Applicant’s argument has already been decided by superior courts [43] The very issue put forward by the Applicant has been considered and decided by other courts. [44] It is settled law that the Income Tax Act is validly enacted federal legislation pursuant to section 91(3) of the Constitution Act,and that

section 92 (giving provinces exclusive power to enact direct taxation in the provinces) does not take away Parliament’s powergiven by section 91(3) to directly tax Canadians (Caron v. The King (UK JCPC), [1924] A.C. 999; and more recently(Frank) Bruno v.

Canada Customs and Revenue Agency (24 January, 2002), Vancouver CA027674 (B.C.C.A.). [45] In Re Anti-Inflation Act (SCC), [1976] 2 S.C.R. 373, the Supreme Court of Canada confirmed that directtaxation is within Parliament’s legislative jurisdiction. [46] Courts have already considered, and held, that the power of the federal government to impose a direct tax is not contrary to thepower of the provincial government to impose direct taxes for provincial purposes. In R. v Bruno, 2001 BCSC 1828, Mr. Justice Tyscoestated at paragraphs 4 to 6: In connection with the first ground,

Section 91 of the British North America Act provides the powers given to Parliament. Item 3 readsas follows: The raising of money by any mode or system of taxation. In my view, that wording includes direct as well as any other type of taxation. While it is true that

Section 92 of the British North America Act talks about direct taxation with respect to the powers given to provinces,it is used there in contradistinction to the inability of provinces to impose indirect taxation. I am satisfied that the Income Tax Act is intra vires Parliament, pursuant to

Section 91 of the British North America Act. [47] As previously indicated, the exact issue raised by the Applicant was specifically addressed by the Alberta Court of Appeal inWinterhaven Stables Limited v. Canada (Attorney General), 1988 ABCA 334.

An application for leave to appeal to the Supreme Courtof Canada was denied ([1989] 1 SCR xvi at 215), so at this time, the Winterhaven decision is the most authoritative decision on thisissue. [48] The Winterhaven decision provided an explanation as to how monies raised pursuant to the Income Tax Act are paid into theConsolidated Revenue Fund, pursuant to the Financial Administration Act, and are then paid out of that fund pursuant to Parliamentary

authority.

That Court determined that Parliament is not limited as to the purposes for which it may raise taxes, that there are no constitutional limits as to how Parliament spends money raised by taxation, and that the Income Tax Act is intra vires because its purpose is to raise monies by taxation pursuant to section 91(3) Constitution Act, 1867 . [ 49 ] In the Winterhaven decision, the Alberta Court of Appeal agreed with the trial judge’s statement: In my view the challenge to the Income Tax Act on the basis that it is direct taxation within a province in order to raise money for provincial purposes and therefore invalid cannot be sustained.

The power given under s. 91(3) to “the raising of money by any mode or system of taxation” is a general and wide power. It would appear to be subject only to the exception contained in s. 125 which contains an exemption of lands or property belonging to the federal or provincial authority. [ 50 ] Mr. Justice Sinclair of the Manitoba Court of Queen’s Bench, relied on the Winterhaven decision in deciding Hoffman v. The Queen (Minister of National Revenue) , 2004 MBQB 164 . [ 51 ] In Hoffman , the issue was exactly the same as the issue put forward by the Applicant. Mr.

Justice Sinclair stated the issue as follows at paragraph 2: Essentially the plaintiff wishes to argue that the Income Tax Act is direct taxation and that the federal government is using it for provincial purposes contrary to s. 92 of the Constitution Act, 1867 . While the plaintiff concedes that s. 91(3) of the Constitution Act, 1867 grants to the federal government the right to raise money by any mode or system of taxation, she argues that s. 91(29) specifically excludes federal intrusion into any area specifically assigned to the provinces.

The right to impose a direct tax for provincial purposes is vested in the provinces by virtue of s. 92(2) of the Constitution Act, 1867 . [ 52 ] Mr. Justice Sinclair, in Hoffman , relied on the Winterhaven decision to find that that issue had already been decided and therefore was moot before him. Specifically at paragraph 8, Mr.

Justice Sinclair said: …the question raised by the plaintiff in her statement of claim has already been determined in a legal proceeding and the matter considered, at least for purposes of a leave application, by the Supreme Court of Canada. [ 53 ] This court is bound by the decision in Hoffman . [ 54 ] The same issue was most recently decided by the British Columbia Supreme Court in the 2010 case of Vander Zalm v. British Columbia (Minister of Finance) 2010 BCSC 1320 . At issue were amendments to the Excise Tax Act that combined the federal GST with provincial sales tax into a harmonized value-added tax (“HST”).

That court upheld the amendments as constitutional, finding that HST was not taxation for provincial purposes and did not intrude on the province’s constitutional taxing power under

section 92 Constitution Act, despite the fact that a part of the HST is returned to the province by the federal government. Conclusion and Decision [ 55 ] The court’s analysis set out above results in the conclusion that the Income Tax Act is intra vires Parliament, falling within Parliament’s authority to raise money “by any mode or system of taxation” as provided for in section 91(3) Constitution Act, 1867 . [ 56 ] Further, the argument made by the Applicant has been made before, in superior courts, including in the Winterhaven and Hoffman cases.

Those courts have found the Income Tax Act to be intra vires , that Parliament is legally competent to impose direct tax by income tax, that imposing and collecting such tax does not fall outside of

section 91 of the Constitution Act, 1867 , and nor does it infringe on the taxation powers granted to the provinces under

section 92 Constitution Act, 1867 . [ 57 ] This court specifically inquired of the Applicant, during submissions, whether there were any arguments he was able to advance that had not been considered by the superior courts in the cases referred to.

The Applicant did not make any argument not advanced and considered in those cases. [ 58 ] Given the principle of stare decisis , and that the very issue argued by the Applicant has already been decided by the Manitoba Court of Queen’s Bench in Hoffman , this court must come to the same conclusion as was reached in Hoffman . [ 59 ] The Income Tax Act is intra vires Parliament and is constitutional. [ 60 ] The Applicant is not entitled to a constitutional exemption. [ 61 ] The Applicant’s constitutional application is dismissed. “ORIGINAL SIGNED BY:” CARLSON, P.J.