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PROVINCIAL AND TERRITORIAL TAXATION - Constitutional validity of provincial or territorial tax - Ontario - Tobacco tax

Friday, September 22, 2017 @ 8:44 AM  


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Appeal by Grand River Enterprises Six Nations Ltd. from the dismissal of its application for judicial review of the decision of the respondent Minister demanding that the appellant provide security pursuant to s. 12(2)(f.1) of the Tobacco Tax Act (Act). The appellant manufactured and sold tobacco intended for export or for sale on First Nations reserves. It did not sell tobacco to retailers outside reserves and did not sell to consumers who were required to pay taxes under the Act. The appellant held permits authorizing the possession, storage and sale of unmarked fine cut tobacco for export and authorizing the sale of unmarked fine cut tobacco to First Nations retailers. Section 12(2)(f.1) of the Act required the Minister to demand security from everyone holding a permit to purchase or sell unmarked fine cut tobacco. The appellant argued that the Minister’s demand for security was unreasonable and arbitrary because the Minister simply assumed that all the tobacco listed as “Other Tobacco” in the appellant’s monthly returns was unmarked fine cut tobacco. The appellant also argued s. 12(2)(f.1) was unconstitutional if it applied to tobacco sold for export because the province could only impose direct taxes within Ontario and had no jurisdiction to tax goods destined for export. The appellant argued the provision must be read down to apply only to sales to consumers in Ontario.

HELD: Appeal dismissed. It was reasonable for the Minister to calculate the amount of security with reference to the exported tobacco that was included in the “Other Tobacco” category. The appellant’s tobacco was “fine cut tobacco” and was not “marked fine cut tobacco”. It clearly fell within the definition of unmarked fine cut tobacco. The appellant was required to have a permit in respect of its unmarked fine cut tobacco. The appellant’s submission that its product was partially manufactured tobacco and not fine cut tobacco was contradicted by the evidence of its own witness. The pith and substance analysis supported the constitutionality of s. 12(2)(f.1). The direct tax imposed by the Act was constitutionally valid. The pith and substance of the Act was plainly the imposition of a tax on the consumption of tobacco. This was direct taxation within the province and fell within provincial jurisdiction under s. 92(2) of the Constitution Act, 1867. The elaborate marking regime, the registration and permitting system and the collection machinery were all designed to serve that end. The security was plainly intended to provide a source of funds for any assessment made by the Minister for taxes, interest or penalties in the event of a contravention of the Act which ensured compliance with the statute. Having regard to the scheme and purpose of the Act as a whole and the context of the impugned provision, it was in pith and substance a provision in furtherance of the legislative scheme to ensure the integrity of the machinery for collection of the tax. The administrative penalties, fines and other assessments in the Act were integral to the scheme of the Act. The provision of security was not itself a tax but a means of ensuring collection of amounts payable under the statute, including taxes, interest and penalties. Section 12(2)(f.1) fell within Ontario’s legislative jurisdiction because it was in furtherance of a valid scheme of direct taxation within the province.

Grand River Enterprises Six Nations Ltd. v. Ontario (Minister of Finance), [2017] O.J. No. 4567, Ontario Court of Appeal, G.R. Strathy C.J.O., E.A. Cronk and S.E. Pepall JJ.A., September 5, 2017. Digest No. TLD-Sept182017011