Big Week for Tax and the Constitution
Canadian tax law has few day-to-day interactions with the Constitution. Most tax matters do not engage prescribed rights, and while taxpayers will occasionally attempt to overturn rules they see as discriminatory, the courts only very rarely intervene. However, the Federal Court and Supreme Court released two very different decisions this week at the intersection of tax and constitutional law.
In Canada (Attorney General) v. British Columbia Investment Management Corp., the Supreme Court ruled on the applicability of GST/HST to investment trusts managed by governments. Canadian governments are presumptively exempt from tax from one another. Since providers of goods and services generally charge GST/HST on all of their sales, which is then sent to the government, government entities may end up paying some GST/HST during the year. They can recoup some of this by filing a rebate request with the federal government.
Between 1999 and 2003, the British Columbia Investment Corp. (BCIC) was specifically listed as a provincial agency that allowed it to file this rebate. It was then removed from this list. When BC used the HST, instead of the GST and a provincial sales tax, both governments agreed that they would both pay HST on services acquired, as the money flowed back into both of their pockets. BC withdrew from the HST, after which BCIC took issue with paying GST and requested a declaration from the BC courts that it was immune under the constitution from paying GST.
BCIC managed funds in provincial pension plans. It held these funds in trust for the beneficiaries of the pensions. It did not charge these funds fees, but paid its costs from the growth of these funds. Canada argued that, while BCIC itself was immune from tax, at the end of the day the money that it managed was not BC’s, but rather owned by the pensioners, who could be charged tax.
The majority of the Supreme Court largely agreed with BC. While trusts are treated like “persons” for tax purposes, they are not legally separate persons and the assets are in fact owned by the trustee (here, BCIC). At the end of the day, the trustee was a government body and it legally owned the pensioners’ assets, so the federal government could not tax it.
Minister of National Revenue v. Friedman, C. et al., a decision in the Federal Court, involved a much less successful attempt to use the constitution in tax matters. There, the CRA sent “requests for information” asking taxpayers to provide information that would allow the CRA to audit offshore assets. They argued first that these requests were not clear enough to allow them to respond, and that they engaged procedural protections in the constitution.
In brief, the court told them that the audit was only a civil matter for the purposes of determining taxes owed, rather than a criminal investigation. Evidence in criminal and civil tax is gathered in very different ways, and until the “predominant purpose” of an audit becomes to seek criminal prosecution, taxpayers are expected and can be compelled to produce documents and information requested (with some important exceptions—particularly, a limited power to compel interviews and protections for privilege). If the audits were to develop into criminal matters, the taxpayers could deal with constitutional protections at that time.
– James Alvarez, Tax Counsel
© Kalfa Law 2019