Canada, The Taxing Powers and the Constitution of Canada (1969)
Citation: Canada, The Taxing Powers and the Constitution of Canada (Ottawa: Queen’s Printer, 1969).
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The Taxing Powers
Constitution of Canada
Government of Canada
Working Paper on the Constitution
One of the central aspects of Canada’s Constitution is the distribution of legislative powers between the Parliament of Canada and the legislatures of the provinces. These are the sections which determine which of the federal or the provincial governments will have the jurisdiction or the responsibility to deal with the several problems of Canadian life.
The Constitutional Conference agreed in February 1969 to begin a study of this aspect of the Constitution. The Government of Canada has decided that the way in which it could contribute most effectively to this study would be to prepare a series of Working Papers on the major elements of the distribution of powers. These Papers will explore the problems which are associated with the allocation of legislative powers to the federal and to the provincial governments in the several fields of government—fiscal, economic, social and cultural—and will present the preliminary views of the Government of Canada as to how the legislative powers ought to be divided.
These views, it must be emphasized, will be preliminary views only: just as the governments of the provinces have said concerning the papers they have submitted to the Constitutional Conference the Government of Canada wishes also to make clear that it will not feel bound by the views it has submitted. Indeed all governments will find it necessary to review their positions as the shape of the whole constitution, as seen by themselves, by other governments and by the public generally, unfolds.
This Working Paper is the first of these proposed Papers. It was first submitted to the provinces on March 27, 1969 and subsequently revised to take into account certain of their views. It was submitted to the Constitutional Conference in its present form on June 11, 1969.
***Odd-numbered pages from pages 3-81 represent the French translation of the same document. To view the French version, please click here.***
The Taxing Powers and the Constitution of Canada
The Constitutional Conference decided, at its February 1969 meeting, to give priority to “the study of the distribution of powers, in particular the taxing and spending powers”, and directed the Continuing Committee of Officials “to give its immediate attention to this aspect of the Constitution”. This Working Paper has been prepared for the purpose of examining the present taxing powers of Parliament and the provincial legislatures, considering the several proposals which have been or might be made for changing them, and presenting the general approach of the Government of Canada on the distribution of taxing powers between the two orders of government.
Taxing Powers under the Constitution of Canada
The general scheme of taxation in the British North America Act might be summarized in this way:
(1) the federal government is given an unlimited power to tax;
(2) the provinces are also given what amounts to an unlimited power to tax “within the province”, that is to say an unlimited power to tax persons within their jurisdiction and to impose taxes in respect of property located and income earned within the province. But their taxing powers are framed in such a way as to preclude them from imposing taxes which would have the effect of creating barriers to interprovincial trade, and generally from taxing persons and property outside the province.
This scheme was achieved by the simple device of giving the federal government the right to “raise money by any mode or system of taxation”, and limiting the provinces to “direct taxation within the province”. In addition, the B.N.A. Act explicitly prohibited interprovincial customs duties, and gave Parliament exclusive jurisdiction over the regulation of trade and commerce (interpreted by the Courts to include interprovincial and inter- national trade and commerce).(1)
The Courts in looking exclusively to the form of the legislation and to the legal rather than the economic consequences of provincial taxes have interpreted provincial taxing powers generously. This was brought about
as a result of adopting John Stuart Mill’s famous definition of a direct tax as “one which was demanded from the very person who it is intended or desired should pay it” and indirect taxes as being “those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another”. The combined effect of Sections 91 and 92 and these judicial interpretations has been, essentially, to enable a province to impose taxes in respect of property situated within it, or in respect of income earned within it, or in respect of the income or wealth of persons within its jurisdiction. The provinces are not thereby enabled, however, to interfere with interprovincial and international trade or to tax persons outside of their jurisdiction. These are important limitations: “the limitation to direct taxation has been employed to prevent the erection of tariff walls to a greater extent than Section 121 of the B.N.A. Act which purports to do this . . . [and] to strike down some taxes where payment is really levied on a non-resident taxpayer who has little connection with the province”.(2)
The breadth of the provincial taxing powers, and the extent to which the provinces have occupied Canada’s several tax fields, can be seen in the fact that provincial-municipal revenues now are nearly equal to those of the Government of Canada. (See Table at page 8.)
Alternative Approaches to the Division of Taxing
Powers under the Constitution
Two approaches are possible in the division of taxing powers between the federal and provincial governments under the Constitution. One is to attempt to predict the fiscal requirements of the two orders of government and then to allocate the several sources of taxation in accordance with these needs. The other is to give both levels of government broad and overlapping powers of taxation, with the objective of enabling each to cultivate these fields, as required, to meet changing fiscal responsibilities.
|Share of Total 1967-68
Revenues Collected by
|Consumption (sales) taxes||5,193||57||43|
|Personal income tax||5,115||71||29|
|Corporation income tax||2,426||75||25|
|Natural resource revenues||513||0.4||99.6|
|Estate tax/succession duties||217||24||76|
|Miscellaneous tax and other revenues from own sources||2,779||46||54|
The Government of Canada has declared itself in favour of the second approach. In Federalism for the Future it was stated: “. . . we suspect that in assigning to governments the power of taxation . . . the principle of access to tax powers will supersede the principle of an exact division of tax fields. We would do well to remember that it is as difficult to predict what technological or social or international changes will have increased the role of the provincial or federal governments in 30 years as it would have been to predict the changes between 1938 and 1968”.(4) It should be added that the problems associated with determining an appropriate division of taxes or tax fields are formidable ones.(5)
The Government of Canada has recognized, too, that if the principle of access to tax fields is to be meaningful to the lower income provinces, the division of taxing powers must be accompanied by provision for the equalization of provincial revenues. It was stated in Federalism for the Future that the Government of Canada must have the right to make payments
to provinces for the purpose of equalizing the level of provincial government services.
Finally, the Government of Canada has also recognized that this approach to the division of taxing powers calls for the harmonization of spending and taxing policies, if the interests of the taxpayer are to be best protected. Federalism for the Future observed that “Obviously the total volume of spending by each order of government affects the priorities of the other”,(6) and recognized the need for intergovernmental consultation on fiscal and budgetary matters.
Provincial governments’ views. Most of the provincial governments which have pronounced themselves on the question of how to allocate tax fields seem similarly to favour the second approach—the “principle of access”. Three examples might be mentioned. The Government of Quebec has said that both federal and provincial governments “should have access to all sources of tax revenue” (with certain limited exceptions discussed below). The Government of Nova Scotia has said that all governments “must . . . have sources of revenue within their control which are sufficient to enable them to meet their constitutional responsibilities”. And the Government of Ontario has said that “tax sharing arrangements must . . . enable each government to discharge effectively its constitutional obligations”.(7)
The Government of British Columbia, on the other hand, while enunciating the same general principles (“the capacity of each government to tax must be sufficient . . .”) , has advanced the view that “The Federal Government should leave exclusively to the provinces the direct tax fields of personal and corporate income taxes and succession or estate taxes”. The British Columbia proposal goes on to suggest that “Having done that, the Constitution should restrict the spending power of the Federal Government to those matters under its jurisdiction”. This proposition was elaborated upon at the February 1969 meeting of the Constitutional Conference, where it was suggested that all federal grants to provincial governments should be terminated in favour of a guaranteed annual income plan for persons, and that the Government of Canada should retain its right to impose income and estate taxes only to the extent that this was required to finance a guaranteed income plan.
The essence of the British Columbia proposal, then, is this: first, the power of Parliament to impose personal and corporate income taxes and
estate taxes would be limited, constitutionally, to levies which would yield an amount sufficient to finance any guaranteed annual income plan established by Parliament; and secondly, the constitutional power of Parliament to make grants to governments would be eliminated, while its power to make grants to persons would be confirmed.
This proposal would have an important effect upon the governments of the provinces, upon the fiscal position of the Government of Canada, and upon the ability of the Government of Canada to operate an effective fiscal and economic policy for Canada.
As to the first of these effects, the Government of Canada has explained in Federal-Provincial Grants and the Spending Power of Parliament Why and in what form it believes Parliament should retain its power to make grants to provincial governments. The arguments need not be repeated here, except to say that the federal government remains committed to the view that equal opportunity for individual Canadians requires the equalization of provincial public services, and to the View that the national interest sometimes calls for the harmonization of particular provincial programmes through the use of federal grants. There seems little question that the elimination of federal grants would seriously disadvantage the governments of the lower income provinces. The transfer of income and estate taxes, while more than adequate to make up for the loss of conditional grants to the higher income provinces, would be insufficient to make up for the loss of both these grants and equalization payments in the lower income provinces. The yield from the taxes transferred is very much lower in these than in the higher income provinces(8), and the equalization received by the lower income provinces is very large indeed (over $1/2 billion under the revenue equalization formula alone). Nor is it likely that the increases in , payments to persons under a guaranteed income plan would increase provincial revenues sufficiently to make up the difference. Since provincial and municipal tax revenues represent less than 20 per cent of personal income in Canada as a whole, the provincial and municipal governments would receive in increased revenues well under 20 per cent—perhaps as little as 10 per cent—of the increased payments to persons under a guaranteed income plan.
The fiscal effect on the Government of Canada would similarly be adverse. It is estimated, on the basis of 1968-69 figures that the net loss to the federal treasury would be in the neighbourhood of $1.6 billion (see Appendix C). To make up this loss it would be necessary to increase the manufacturers’ sales tax—the only other major source of federal revenue, outside of income taxes—from 12 per cent to about 21 per cent. Unless the provinces were to reduce their sales taxes, or require municipalities to reduce their property taxes, this increase in federal sales tax would reduce the proportion of government expenditures financed by income taxes, and hence would increase the burden of the tax system on lower income people.
More important than the fiscal effects of the British Columbia proposal, however, would be the effect upon economic policy. The Government of Canada would be unable, constitutionally, to vary the personal income tax or the corporation income tax for economic policy purposes, since it would be limited to an earmarked levy which would yield the amount of income tax required to finance the guaranteed annual income plan. Thus the Government of Canada would lose the principal fiscal weapons it employs for combatting inflation—taxes upon personal and corporate incomes—and would be left to rely largely on monetary policy. This, however, would not be enough, since monetary policy cannot be effective unless it is complemented by an adequate and an appropriate fiscal policy. In effect, therefore, the limitation of the power of Parliament to tax incomes would have the result of gravely undermining the ability of the Government of Canada to contribute to a strong and stable economy.
For these reasons the Government of Canada must oppose the particular proposal made by the Government of British Columbia in respect of income and estate taxes. But the general principle, which has been enunciated in one way or another by almost all of the provincial governments—the principle that each legislative body ought to have taxing powers which are consistent with its spending power—is one to which the Government of Canada consistently has subscribed. It is a principle which accords both with federalism and with the functioning of democratic processes: each government ought to have access to tax fields or tax capacity which are adequate to enable it to discharge the responsibilities it assumes under its constitutional powers. How much of these powers the legislature wishes to exercise —how many spending obligations it wishes to assume and which taxes it wants to impose to finance them—is a matter to be decided by the political process, not by the Constitution.
The Application of the “Principle of Access” in the Constitution
The application in the Constitution of the “principle of access to revenue sources” should result in virtually unlimited powers of taxation being granted to both the federal and provincial governments, each within its jurisdiction. Parliament should have the power to tax all persons, incomes, property and transactions (sales or purchases) in Canada, and each province should have the same powers within the province. The “within the province” limitation of provincial taxing powers should have the result of allocating fairly among the provinces, the Canadian income, property and transactions which each of them may tax, and of protecting the taxpayer against the taxation of his income, property or purchases by more than one province. No government, it is generally agreed, should have the power to erect through its tax system barriers to interprovincial trade, whether intentionally or otherwise, and only Parliament should have the power to impose customs duties.
How these principles have been applied under the present Constitution has already been described.(9) The question to be considered here is whether the present constitutional provisions could be improved. This can best be done by examining each tax field, in turn: the taxation of incomes, of property, and of transactions (sales or purchases).(10)
The Taxation of Personal Income
The present Constitution provides Parliament with an unlimited power to tax personal income. In practice, Parliament has levied income taxes on the total incomes of individuals resident in Canada, and on the Canadian source income of foreigners. The provincial legislatures have unlimited power to tax the incomes of persons “within the province”. As a result, an individual can be certain that his income will not be taxed by two or more provinces providing that
(1) he resides in one province throughout the whole of a year, and
(2) he does not receive any income from sources in another province.
It will be evident that two problems have had to be overcome in applying this constitutional system: the determination of the proportion of a person’s income which will be taxed by each of the provinces in which a person has lived during the course of a taxation year; and the prevention of the taxation
by two provinces of income which has been earned in one province by a person resident in another. The first of these two problems has been over- come, in nine provinces, by a system of federal-provincial tax collection agreements, under which all the provincial governments involved agree that each will tax only those persons who were resident within its borders at year-end. The Government of the Province of Quebec, the only province which collects its own personal income tax (has not entered into a tax collection agreement), has enacted the same provision in its tax act.
The second problem—the prevention of “double taxation” of income earned in one province by a person resident in another—has also been resolved as it applies to salaries, wages, and investment income. (The situation with respect to business income is considered below.) The provincial governments have agreed that the province in which the individual resides on December 31 will tax all of his income for that year, except business income, and that no other province will tax any of his income for the year, except business income. Again, the provinces other than Quebec have bound themselves to this arrangement by virtue of their tax collection agreements with the federal government, and Quebec has adopted the same basis in its provincial income tax act.
The “principle of access” has been applied successfully, therefore, under the present Constitution, in respect of personal non-business income—the only qualification being the absence of a constitutional guarantee of uniform arrangements for the taxation of the income of persons who have lived in, or who have earned income in more than one province during a year. Consequently, the Government of Canada is not proposing any amendment to the Constitution as it affects the taxation of personal incomes, nor has any been suggested by any of the provinces, except British Columbia.(11)
The Taxation of Corporate Income and the
Business Income of Persons
The Constitution provides Parliament and the provincial legislatures with the same unlimited power to tax corporate and business incomes, each within their jurisdiction, as it does personal incomes. However, the taxation
of corporate income and of the business income of persons is a much more complicated and difficult aspect of the Constitution.(12) It is in the nature of the common market of Canada that many business enterprises do business in more than one province—selling, merchandising, or manufacturing. It follows that their income, or profits, are earned in more than one province, and that some rule must be adopted for deciding what proportion of the income will be considered to have been earned in each. In other words, a way must be found for allocating the income fairly among the provinces, for purposes of taxation, and for preventing the taxation of the same income by more than one province.
The Constitution as interpreted by the Courts has not been fully satisfactory in resolving these questions. Under it the provinces can tax persons and corporations within their jurisdiction on all of their income, and they can also tax income earned within the province by businesses which are resident in other provinces but which are operating in the province where the income is deemed to have been earned. It follows that, subject to these broad constitutional limits, each provincial government has the power to determine when a company will be considered to be doing business in the province, and the power to decide how much of the income of the company will be deemed to have been “earned” in the province.
There was until 1960 some considerable difference of opinion on both of these questions, but it was the second question, the allocation of income, which gave rise to the greatest debate. Certain governments, notably that of Quebec, argued that business income should be allocated to (be deemed to have been earned in) the provinces where a business sold its products, whereas others, notably the Governments of Canada and Ontario, argued that substantial weight should be given to the province in which the products were produced, or where business activity occurred. Obviously the second approach was more favourable to the provinces where there was a concentration of manufacturing enterprises, and the first approach the reverse. The consequence for business was that an enterprise could be taxed on a part of its income by more than one province.
In fact, during most of the postwar period eight of the ten provinces were precluded from choosing between the competing formulae for allocating business income, by reason of the fact that they had signed tax rental agreements under which only the federal income tax was levied within their
borders. But the Government of Quebec continued to apply one formula and the Government of Ontario another (the one used by the Government of Canada). And some of the other provinces supported the argument of the Government of Quebec that its formula for allocating business income should be adopted by the Government of Canada, not the reverse—notably at federal-provincial meetings during the mid-1950’s. In 1957, however, this situation changed, with the introduction of a new federal formula for the allocation of business income and a new formula for the equalization by the Government of Canada of provincial corporation income tax revenues. The new formula for allocating business income between the provinces was based one half on the place where a business made its sales and one half on the place where it paid its wages (different formulae are used for specialized businesses, such as banks, insurance companies, and grain companies). This formula seems to have composed the differences between the Governments of Canada, Ontario and Quebec. The new formula for equalizing provincial corporation tax revenues brought to an end the pressures from other provinces, notably the West, in favour of allocating business profits to the provinces where the goods were sold, since it equalized corporation tax revenues to the per capita level of collections in Ontario and British Columbia.
Two facts stand out in this brief history of the taxation of business income in Canada. First, the determination of where business income has been earned is necessarily arbitrary. Consequently the provinces can be expected to come to different conclusions as to how income ought to be allocated, depending upon their different interests. Secondly, the Constitution itself, as it stands, cannot be relied upon to prevent provincial governments from extending to their advantage their definition of when business income has been “earned within the province”, nor does it prevent the taxation by more than one province of the same business income. It has only been the willingness of the provinces to accept the definitions in the Income Tax Act of Canada—sometimes influenced by the nature of the equalization arrangements, and sometimes by their desire to have the Government of Canada collect their income taxes for them—that has produced an accord on the allocation of business income. The only surer way of accomplishing this objective would be for the provinces to forgo their power to tax business income, by agreement or constitutionally, and leave it to Parliament to levy these taxes.
The Government of Canada believes it is essential that there be agreed rules for the allocation of business income among the provinces, for the purpose of preventing the taxation of the same business income by more than one province, and for the purpose of allocating the total tax base fairly between the provinces. Whether or not this could or should be
accomplished by constitutional means is a matter which the Government of Canada is prepared to discuss with the provinces, though it has no proposals to make to this end at this time.
Other Taxes upon Business—The above paragraphs have not dealt with other taxes which are imposed upon business, notably “special business taxes” (such as the Ontario-Quebec taxes which vary with the amount of paid-up capital or the number of places of business) and “special local property taxes” (business taxes, higher mill rates upon non-residential properties, and non-uniform assessments which result in higher taxes on business than on residential properties). These taxes have generally been judged by the courts to be constitutional on the grounds that they fall directly on the person who it is intended should pay them.
Because it is so manifest that all of the special taxes on business are expected to be borne by businesses and business properties “within the province”, and because of the decline in the relative importance of the special corporation taxes, little attention has been paid to these taxes since the war. There has been no special problem in the allocation of the tax base among the provinces and no substantial “double taxation” of business through special provincial corporation taxes. For this reason the Government of Canada is not proposing any amendment to the Constitution as it affects special business taxes.
Any analysis of Canada’s tax system must recognize, however, that there is in these taxes another potential danger—the possibility of one province seeking to pass on to the residents of other provinces, in some measure at least, the burden of its business taxes. This could come about because of the fact that special corporation taxes and special municipal taxes on business property enter into the cost of doing business, and presumably can be passed on to others in two ways:
(1) through reducing the corporation tax which would otherwise be payable (the special business taxes are deductible as an expense, thus reducing profits and taxes on profits) which in turn makes necessary higher taxes on other Canadians;
(2) through increasing the price of goods to consumers across Canada, to the extent this is possible given the state of competition from imports and other domestically produced goods.
These possibilities have on occasion been explicitly recognized by provincial ministers. The Minister of Education of Manitoba said in 1967, for example, that the reason residential property was being exempted from a standard mill rate for school purposes was “the inability of the home- owner or tenant of residential accommodation to pass on any of his tax
costs through the income or corporation tax provisions or through the machinery of commercial or industrial operations”.
Whether this possibility of one province seeking to pass on its taxes to others, through higher business taxes, should be taken into account in reviewing the taxing powers of the Constitution, depends upon the answer to several practical questions. First, are the taxes substantial enough, or likely to become substantial enough to constitute a burden of any significance? Secondly, what is the potential for businesses passing on the special taxes imposed on them? And thirdly, how far is it practical to base constitutional provisions concerning the taxing powers upon estimates as to the capacity of business enterprises to pass on taxes which enter into the cost of doing business, and upon the estimated regional incidence of the “costs” which result from their doing so.
The magnitude of special corporation taxes (based on paid-up capital and places of business) has not until recently been significant. In 1967-68 they probably amounted to about $50 million, approximately 9 per cent of provincial corporation income taxes. It should be noted, however, that in 1968 the Government of Quebec doubled its tax based on paid-up capital and the Government of Ontario followed suit in 1969, while at the same time removing its tax related to places of business. The scale of special municipal taxes on business is more significant—they undoubtedly amount, now, to some hundreds of millions of dollars. (Data are not available as to the revenues collected by local governments through higher mill rates and higher assessments on business properties, as opposed to those applying to residential properties.) This compares with the $600 million odd collected by the provinces from taxes on corporation incomes (1967-68 figures). It would seem, therefore, that the amount of tax is significant enough to warrant some consideration of these measures.
As to the ability of business to pass on the taxes which enter into the cost of doing business, it is generally true that about 50 per cent of such taxes is recovered by companies through the payment of lower corporation income taxes. (The corporation pays about 50 per cent of its profits in taxes, so every dollar of expense allowed under the Income Tax Act reduces the income tax payable by about 50 cents.) The “cost” to the people of other provinces of allowing as an expense under the federal income tax act the special business taxes of certain provinces will depend upon the regional incidence of the other taxes which are imposed by the Government of Canada to make up its resulting revenue losses. The “cost” to other provincial governments of allowing the special business taxes as an expense under provincial income tax acts will depend upon the formula for allocating
business profits amongst the provinces for taxation purposes (the higher the profits allocated the greater the revenue loss, and vice versa). It will be seen that the regional incidence of passing on business taxes in this way would be extremely difficult to determine.
As to the ability of business to pass on in the form of higher prices the taxes which enter into the cost of doing business, it is extremely difficult to determine what proportion of such taxes is borne by the workers (in the form of lower wages) , what proportion by the shareholders (in the form of lower dividends), and what proportion by the consumers (in the form of higher prices). The answer really turns on the structure of individual industries, and upon the degree of competition which exists in different sectors of the economy; and the state of knowledge about these matters cannot be said to be very advanced in Canada.(13)
The fundamental question, therefore, is whether it is feasible to base constitutional provisions concerning the taxing powers upon some estimate of the capacity of business enterprise to pass on taxes which enter into the cost of doing business, and of the regional incidence of the “costs” which would result from their doing so. The Government of Canada has concluded that it is not: that some more rough and ready rule must be found for preventing, constitutionally, the potential for “predatory” provincial tax systems—that is, tax systems designed to shift the tax burdens of one province onto the people of Canada generally. The method adopted in the Constitution of 1867 was to limit the provincial governments to direct taxation: this enabled the courts to rule unconstitutional any provincial tax which “normally” could be expected to be passed on (see the words used by the courts: “the normal tendency” or the “expectation or intention” in respect of a tax). It seems to the Government of Canada that the present Constitution has served Canadians reasonably well in preventing the imposition by one province of special provincial/municipal business taxes with the intention of shifting the tax burden onto the residents of other provinces, and is not therefore proposing any amendment to the Constitution in this regard. It recognizes however that this device for keeping provincial taxes “within the province”—limiting the provinces to direct taxes—could be too severe a limitation in certain tax fields. For this reason it is proposed later in this Paper that consideration be given to certain important relaxations of this limitation in respect of the death duties and sales tax fields.
The Taxation of Real Property (Municipal Property Taxes)
Turning to the general taxation of real property, it has already been noted that land and property taxes have been held by the courts to be direct taxes, and therefore within the jurisdiction of the provincial legislatures. This applies both to taxes imposed upon property and to taxes imposed on a person in respect of his ownership of property. Because of the nature of general municipal property taxes no problems have arisen in respect of the taxation by one province of property situated in another, nor of taxation of the same property by more than one province.(14) Consequently there seems to be no constitutional reason for reviewing this tax field.
As to the taxation of property by Parliament, the Government of Quebec has proposed in its working paper on the Constitution that the “property tax” should reside within the exclusive jurisdiction of the provinces. It is assumed that the objective of this proposal is to ensure that the Parliament of Canada will not in the future compete with the municipalities in imposing taxes on real property (some municipalities also tax certain types of personal property). The Government of Canada has no intention of entering this field of taxation, but if Parliament were not to have the power to tax property it might well be precluded from the taxation of real and personal property in any form.(15) For this reason and because it would be inconsistent with the “principle of access” to single out for special treatment one particular form of property taxation, the Government of Canada does not agree with this proposal.
Death Duties: The Taxation of Property at the Time of Death
The Constitution as interpreted by the courts gives both Parliament and the provincial legislatures virtually an unlimited power to impose death duties, each within its jurisdiction. However the provinces are limited to direct taxes, that is succession duties on the beneficiaries, while Parliament may impose either succession duties or estate taxes, that is indirect taxes upon the estate, or the executor.
The constitutional limitation of the provinces to direct taxation has not proved to be a satisfactory method of allocating between provinces, for purposes of death duties, the property which may be taxed upon the death
of the owners. Nor has it protected beneficiaries from being taxed by more than one province in respect of the property which has been transmitted to them. The reason is that the provinces may tax either the beneficiary in respect of the property he has received, or the property which has been transmitted. (For example, Province A could tax property sited in Province A which passed from a deceased domiciled in Province B to a beneficiary domiciled in Province B, and Province B could tax the beneficiary in respect of the same property.) It is true that the system of tax credits used by the three provinces which now impose succession duties prevents this, but with 10 provinces in the field (or with some in and some out) the potential for double taxation is substantial, as Canada discovered in the 1930’s.
The Government of Canada believes that the Constitution could be amended to prevent the taxation of the same property by more than one province, while providing at the same time a reasonable method for allocating among the provinces the property which may be taxed, upon death. This could be accomplished by giving to provincial legislatures the power to levy estate taxes instead of succession duties.
If the provinces were to levy estate taxes instead of succession duties, the tax would be imposed upon the estate, or the executor, by the province in which the decedent was domiciled, in respect of all of the property in the estate, wherever sited. The provinces would no longer have the power to impose death duties, upon property merely because it was sited within their boundaries, nor to tax beneficiaries upon property transmitted to them merely because they were domiciled in the province.(16) In this way the danger of two provinces taxing the same property would be removed, and there would be a single rule for allocating between provinces the property which could be taxed upon death (based on the domicile of the deceased). In addition, it would be possible to establish tax collection agreements between the Government of Canada and the provinces, if this were desired, to eliminate the expense of maintaining two systems of taxation.
To achieve these advantages, the Government of Canada would be prepared to participate in a study of the possibility of empowering the provinces to impose estate taxes instead of succession duties. Such a study might usefully be conducted by a special federal—provincial working party. In such a study the representatives of the Government of Canada would be bound by the two criteria mentioned above:
(1) any proposal should have the effect of eliminating substantially the possibility of more than one province taxing the same property upon the death of its owner; and
(2) it should also have the result of establishing a clear and satisfactory allocation as between provinces of the property which may be taxed upon death.
The possibility of providing provincial legislatures with the power to impose estate taxes in lieu of succession duties would be consistent, in part, with the suggestion made by the Government of Quebec that the provinces be given the general power to impose indirect taxes. The Government of Quebec has made a further proposal, however, with which the Government of Canada is not in accord, namely the suggestion that death duties should become an exclusive power of the provinces.
There are a number of compelling reasons, in the view of the Government of Canada, for Parliament retaining its constitutional right to impose estate taxes or succession duties. First, Parliament’s power under the Constitution to impose taxes ought not to be reduced unless powerful reasons are advanced for doing so. This view is consistent with the “principle of access” which has been advanced as the basis for allocating taxing powers both to Parliament and to provincial legislatures. Moreover, the taxation of wealth, whether in the form of taxes on transmissions of property (death duties and gift taxes) or otherwise, is a reasonable and an equitable way in which to raise public revenues, and both Parliament and the provincial legislatures should have access to this field.
Secondly, the taxation of estates must be related to gift taxes, and indeed ought to be integrated with them, if the taxation of property is to be equitable and if tax evasion is to be avoided. In an increasingly mobile society this can only be achieved by the federal government, for it is the only government able to tax transmissions of property regardless of changes in the residence or domicile in Canada, over time, of the donor or the beneficiary, and regardless of the situs of the property. To remove the Parliament of Canada from the estate tax field, therefore, would be to weaken the capacity of governments generally in Canada to use this source of taxation.
Thirdly, there is an important relationship between the use of the estate tax and the use of the personal income tax. The taxation of estates enables the Government of Canada to identify serious evasions of income tax over the lifetime of a taxpayer: it would weaken the capacity of the Government to operate an efficient and an equitable income tax if it were to lose this method of enforcement.
Fourthly, the presence of the Government of Canada in the estate tax field has the potential of limiting the erosion of the tax base of those provinces which wish to occupy part of the field. If there were no federal estate tax, it would be possible for sophisticated taxpayers—making use either of a
province or of a foreign jurisdiction in which there were no death taxes— to avoid death duties on virtually all of their estate. Moreover, the federal government has by virtue of its international sovereignty a greater armoury of weapons which can be employed to curb or restrict the use of foreign tax havens for the purpose of minimizing death taxes.
Fifthly, the presence of the federal government in the estate tax field has made it possible for Canada to offer to collect death duties on behalf of those provinces which, for reasons of economy and for the purpose of facilitating taxpayer compliance, do not want to establish separate statutes and administrations.
Moreover, there is some property which the provinces do not, in practice, tax. They do not tax property situated outside Canada unless both the decedent and the beneficiary are within the province. Further, the provinces are more restricted than the Government of Canada in their ability to tax the Canadian assets of foreign decedents.
Finally, only Canada can enter into tax treaties with other countries, for the purpose of avoiding the double taxation of its residents who own foreign property, and for the purpose of aiding in the enforcement of Canada’s estate tax laws.
For these several reasons the Government of Canada does not think it would be in the interest either of Canada or of the provinces for Parliament to forgo its power to impose estate taxes.
The Taxation of Transactions—Sales and Purchases
Because income and property taxes are direct taxes, the provincial legislatures and the Parliament of Canada enjoy the same unlimited powers of taxation in these fields, within their respective jurisdictions. Taxes upon sales or purchases, however, may be direct or indirect, depending on the person upon whom they are levied. If a sales tax is levied upon the final purchaser of goods or services, the consumer, it has been judged by the courts to be a direct tax. If, however, it is levied upon manufacturers, wholesalers or even retailers, it has been judged to be an indirect tax, since it can be expected that the tax will be passed on to the ultimate consumer. Because Parliament may impose direct or indirect taxes, it may levy a sales tax at any level of the productive-distributive process. In fact it levies a sales tax on manufacturers (computed by reference to their sales). The legislatures,
on the other hand, may impose only direct taxes: consequently they may levy sales taxes only upon the final user or consumer.
Given the interpretation of the Constitution by the courts, this limitation on provincial taxing powers cannot be said to be for the purpose of reducing the ability of the provinces to raise revenues (relative to that of Parliament). Nor indeed has this been the effect. The provincial legislatures now impose a variety of sales taxes—general sales taxes, taxes on gasoline and diesel fuel, taxes on cigarettes, and increasingly taxes on services— and their return from these taxes has come almost to equal the return from the federal tax on manufacturers. Rather the purpose, and the effect, has been to keep provincial sales taxes “within the province”, and to prevent provincial taxing systems from coming to act as impediments to interprovincial trade (whether intentionally or otherwise).
A sales tax levied by a province on persons who buy at retail within the province, or who bring goods into the province for use or consumption, cannot generally be passed on to others. Consequently the possibility of one province being able to tax indirectly persons in other provinces is limited. The tax base—retail sales in Canada—is in the result distributed equitably as between provinces, for taxation purposes: each province taxes only final sales within the province.
The limitation of the power of the provinces to impose sales taxes has also served to prevent provincial tax systems from coming to act as impediments to interprovincial trade. It is argued by some constitutional experts that the limitation of the provinces to direct taxation has been at least as effective, if not more effective, than the constitutional guarantee of free movement of goods within Canada in preventing the erection of fiscal barriers” to interprovincial trade. Dean Gerard V. La Forest has said of this question “It may well be that the courts would use the equivalent of Section 121 in the proposal [that the provinces have the power of indirect taxation] to accomplish the same purpose, but there is no assurance of this”.(17)
An Indirect Provincial Sales Tax—Taxes upon income—personal and corporate—and taxes upon property are considered under the Constitution
as being direct. Consequently the provincial legislatures have the same power to impose taxes in these fields as does Parliament. It follows that the only way in which provincial taxing powers could be broadened would be in the other tax fields, where taxes may be direct or indirect and where the provinces may impose only direct taxes. Specifically, and in terms of the major revenue sources, this amounts to asking whether the legislatures should have the power to impose indirect death duties—estate taxes—and whether they should have the power to impose indirect sales taxes. The Government of Canada has indicated its willingness to consider the former question, and it is prepared similarly to consider a constitutional change which would permit the provinces to impose indirect sales taxes. Any such an extension in powers, however, would have to meet two requirements:
(1) the power of the provinces to impose indirect sales taxes would have to be such as to prevent provincial taxing systems from acting as impediments to interprovincial or international trade; and
(2) the power to impose indirect provincial sales taxes would have to be framed so as substantially to confine each province’s taxes “within the province”, that is to say to prevent one province from taxing indirectly persons resident in other provinces, and thus to ensure that the total tax base is allocated equitably as between provinces.
Tax systems as impediments to interprovincial trade. The Government of Canada has concluded that a general provincial power to impose indirect taxes almost certainly would result in provincial tax systems coming to act as impediments to trade, whether intentionally or otherwise. First, the provinces would be able, through taxing manufacturers, to tax goods which were produced primarily for export (to other provinces or abroad). The legislatures of Alberta and Saskatchewan, for example, could impose taxes upon oil and natural gas which is consumed in Ontario and Quebec and in the United States. Other provinces could single out other products. Secondly, the provinces could impose their sales taxes at different levels of the productive-distributive process, with the involuntary result of creating barriers to interprovincial trade. How this could come about can be illustrated, in its simplest form, in this way. Goods moving from a province imposing a manufacturers’ tax to provinces imposing a retail tax would come to bear two provincial sales taxes (having the same economic effect as an import tax imposed by the provinces to which the goods were shipped); and goods shipped by manufacturers in a province imposing a
retail tax to provinces imposing a manufacturers’ tax would bear no provincial tax (having the same economic effect as an export subsidy by the province from which the goods were shipped).
This is not just a theoretical speculation. It is estimated that Ontario would be able to tax in the neighbourhood of 58 per cent of all manufacturers’ sales in Canada, compared with about 38 per cent of all retail sales. The Quebec figures are around 28 per cent and 25 per cent respectively. These two provinces would have a fiscal incentive, therefore, to impose taxes on manufacturers’ sales. But the other eight provinces would be able to tax only 14 per cent of manufacturers’ sales compared with over 36 per cent of retail sales. Consequently they could be expected to tax retail sales. The result would be the economic equivalent of import taxes on goods moving into the Atlantic Provinces and the West, and export subsidies on goods moving into Ontario and Quebec from the other provinces.(18)
The only sure way to avoid this possibility, it seems to the Government of Canada, would be to confine indirect provincial sales taxes to the retail level. It could be argued that Section 121 of the British North America Act, which prohibits interprovincial trade barriers, might be rephrased so as to ensure that the provinces could not single out for taxation at the manufacturing level goods which are produced primarily for export. This may be so. But it would be difficult to visualize such a section limiting the legitimate exercise by the provinces of their taxing powers in such a way as to prevent the development of two tax systems, as described above. It is equally difficult to visualize the courts being able to point to the mere existence of two different tax systems as evidence of the existence of barriers to trade, or, in the alternative to visualize the courts being able to determine which of two tax systems was responsible for such a result. For this reason it would seem that only a limitation on the taxing powers would prevent the possibility of different provincial tax systems, which would have the results described above, from developing.
Limitation of indirect sales taxes “within the province”. The same conclusion—that any provincial power to levy indirect sales taxes probably would have to be limited to the retail level—emerges from a consideration of how such taxes would be kept “within the province”. There seems to be little doubt that an indirect sales tax at the manufacturing, jobbing or wholesaling level would result in the consumers of one province bearing at least some of the burden of the sales tax of another. It is, indeed, expected that sales taxes will be “passed on” to the consumer.(19) This would not be too serious, perhaps, if interprovincial sales were nicely balanced as between the provinces, and if all provinces imposed their sales taxes at the same stage of the productive-distributive process—and providing things could be expected to remain that way. But manufacturing tends to be concentrated in the two central provinces in Canada, as has been shown above. It follows that if an indirect tax were to be levied at any level other than the retail level these two provinces would have a greater opportunity than others to secure a disproportionate amount of their sales tax revenues from residents of other provinces. (20)
The allocation of the base for sales tax as between provinces would, in other words, be altered radically if the provinces were to impose their sales taxes at the manufacturing instead of the retail level. To repeat the figures, Ontario’s share of the tax base theoretically could rise from about 38 to 58 per cent and Quebec’s from about 25 to 28 per cent, while the share of the other provinces could decline from some 36 per cent to 14 per cent. In terms of revenues, the Atlantic and the Western Provinces theoretically could lose some $310 million (1967-68 figures, see Appendix E). The Government of Ontario could gain about $270 million and the Government of Quebec just under $40 million.
It will be seen that only the Governments of Ontario and Quebec would be tempted to impose indirect sales taxes at the manufacturing level, and that their tax base, and yield, from such taxes would be higher only by reason of the taxation of sales to other provinces. For this reason, as well as by reason of the potential impediments to interprovincial trade which
could result from an unlimited provincial power to impose indirect sales taxes, the Government of Canada believes that any provincial power to impose such taxes would have to be limited to the retail level.
An Indirect Provincial Retail Sales Tax—The possibility of indirect provincial sales taxes has been discussed in the past in Parliament and at Federal-Provincial Conferences—in 1936, 1945, 1951 and 1960(21)
—but for a variety of reasons a constitutional amendment has never been agreed to. It is evident from these discussions and from an examination of the issues involved that a number of policy and technical problems would have to be considered. The principal of these are: the taxation of sales which originate in one province for delivery in another, and the taxation of services.
Both of these problems are quite technical, and can better be discussed in an appendix (see Appendix G). In essence, however, they may be stated in this way. In respect of interprovincial retail sales it would have to be decided whether the “province of origin” (the province from which the goods were shipped) ought to tax the goods involved, or whether they should be taxed by the “province of delivery” (the province to which the goods were shipped). The answer to this question probably would depend upon whether the extra-provincial retail purchases in a sizable number of provinces exceed considerably the extra-provincial sales. As to the taxation of services, there is so little experience in this field of taxation in Canada, and so little is known about the interprovincial aspects of services, that it may well be difficult to make an intelligent decision at this time as to whether or not they ought to be taxed at the indirect level.
Further study of an indirect provincial retail sales tax.—The Government of Canada would be quite prepared to participate in a study of the possibility of an indirect provincial retail sales tax. Again, such a study might usefully be conducted by a special federal-provincial working party. In such a study the representatives of the Government of Canada would be bound by the two criteria already outlined, namely that any proposal would have to meet two requirements:
(1) the power of the provinces to impose indirect sales taxes would have to be such as to prevent provincial taxing systems from acting as impediments to interprovincial or international trade; and
(2) the power to impose indirect provincial sales taxes would have to be framed so as substantially to confine each province’s taxes “within the province”, that is to say to prevent one province from taxing indirectly persons resident in other provinces, and thus to ensure that the total tax base is allocated equitably as between provinces.
Federal-Provincial Consultation on Taxing and Spending
The application of the “principle of access” to all of the tax fields used in Canada would result in both Parliament and the provincial legislatures having the power to tax all persons, income, property and transactions in Canada, each within its respective jurisdiction. (The only limitations on provincial taxing powers would be for the purposes previously noted.(22)
) As each legislative body decided to assume new responsibilities or expenditure obligations within its legislative and spending powers, it would be in a position to raise. the necessary taxes. It would be for the voters to decide, in their two roles as the electors of Parliament and the electors of a provincial legislature, whether the two orders of government were increasing (or decreasing) their spending, and hence their taxing, at an appropriate rate.
Obviously it is difficult for the citizen to sort out which of two governments is responsible for increases in taxes which he considers to be too rapid, when both governments are imposing taxes in the same fields. It follows that the governments themselves have an obligation to consider the aggregate tax burden on the citizen, not just the burden each of them is imposing. To do this in a meaningful way requires consideration first of spending levels and than of levels of taxation. (This is aside altogether from the obligation of governments to consult on fiscal policy, with a view to achieving the best economic policies for Canada and its regions, and through such policies high levels of employment and stable prices.)
These were the underlying reasons for the suggestion by the Government of Canada in 1964 that Canada’s Ministers of Finance and Provincial Treasurers should meet annually before their annual budgets were completed. These meetings have been held each year since, and with increasing benefit to the citizens of Canada. The question, constitutionally, is whether these consultations, or the consultative body, ought to be provided for in the Constitution.
The Government of Quebec has suggested that there ought to be such a provision—that consideration should be given to establishing an Intergovernmental Tax Commission “which would be made up of representatives from all governments and whose role would be to prepare taxation arrangements for set periods, taking into account available and forecast tax resources, programmes planned and priorities involved”. (23)
The Government of Canada, too, believes that consideration must be given to the adequacy of federal-provincial fiscal consultations, though it believes the emphasis of these consultations might better be upon spending and taxing and the harmonization of tax laws (as well as on fiscal policy generally). Whether reference should be made in the Constitution to such consultations, however, is an issue which might best be considered by the Constitutional Conference when it is discussing the general question of federal—provincial consultative machinery.
What must be guarded against, however, in any discussions of possible constitutional provisions along these lines, is any diminution of the responsibility of each government to its legislature and of each legislature to its electors. This caution is advanced because of suggestions which are made from time to time that there ought to be some sort of permanent commission which would “decide on” or “propose” the “tax share” each government ought to have. Such suggestions need to be examined carefully.
One suggestion is that an intergovernmental Commission ought to have the power to decide upon the “share” each government should have of those tax fields which are jointly occupied, or, putting this another way, the power to decide upon the extent to which each government, federal and provincial, ought to cultivate the tax fields available to it. To give an example, such a Commission might decide that over a fixed period Parliament ought to reduce its taxes in a particular field, and that particular provinces ought to increase their tax rates in other designated fields. What this would mean, constitutionally, would be that the taxing powers which were assigned to the Parliament of Canada and to the legislatures of the provinces could be exercised by them only within the limits which were established by the intergovernmental Commission.
It would be difficult to reconcile these powers for such a Commission with the principles of democratic responsible government—the responsibility of governments to their legislative bodies and the responsibility of legislatures to their electorates. It would be even more difficult to visualize the legislators of Canada being willing to agree to have their use of their legislative powers limited or prescribed by a non-elected, non-responsible intergovernmental Commission. The final restraint upon the excessive use by elected bodies of
their spending and taxing powers is the electorate (and to a lesser extent the ability of governments to borrow in the capital markets), and while this system of restraint operates with greater complexity in a federal state where two (or more) orders of government are involved in fiscal decisions, it would scarcely seem appropriate to attempt to resolve this problem by substituting a non-elected body for the elected ones.
The second possibility which is sometimes suggested is that an intergovernmental Commission be given the power to recommend to governments, and thence to legislators, the extent to which they ought to cultivate the tax fields available to them. But this alternative too would present problems. Legislators might not welcome public pressure from a non-responsible intergovernmental Commission in reaching their spending and taxing decisions. Further, it would be necessary to decide, if the Commission were to be endowed with the power and responsibility of reaching conclusions—whatever force those conclusions might have in respect of the elected legislative bodies —how the Commission would go about reaching such decisions. Would each government have a veto over those recommendations which had to do with its jurisdiction? Or would the Commission make its decisions by vote, with the vote of each government represented being weighted by the population represented by that government? Or would the votes be weighted so as to have the result that the combined votes of the provinces always would out- weigh the vote of the Government of Canada? And how many votes would be required to decide upon recommendations with respect to the jurisdiction of specific provinces—for example the Provinces of Ontario or British Columbia or Quebec or Nova Scotia?
It is difficult to visualize a voting system which would be acceptable to all governments, even if the intergovernmental Commission were to have the power to make recommendations only. The root of this difficulty is to be found, again, in the responsibility of each legislative body to its electors: if the electors have voted for a government which has undertaken to embark upon new programmes which will require higher taxes, to take the obvious example, a contrary recommendation by-» a non-elected body representing other jurisdictions would be unlikely to be acceptable.
The only possibility which would seem to be consistent with the principles “of responsible government would be an intergovernmental body which would have as its purpose the exercise of intergovernmental influence upon the fiscal decisions of each government. Each government would, in making its spending and taxing decisions, know and be expected to take into account
the fiscal outlook for other governments, and the effect upon the economy as a whole of alternative fiscal policies. Presumably this approach would not be expected to involve the development of a composite budget for all governments combined, but each government might well, as a result of the information exchanged, be in a position to judge what kind of composite budget would result from the adoption by it of alternative fiscal policies.
The shortcoming of this approach is that it does not guarantee the harmonization of spending and taxing decisions. But this, in the view of the Government of Canada, is probably one of the inevitable consequences of having two orders of democratically elected, responsible governments in Canada—of federalism, in short. It was for this reason that the Government of Canada said a year ago: “The federal government must remain responsible to Parliament, and the provincial governments to their legislatures: federal- provincial conferences must, it seems to us, occupy themselves with the art of influence rather than the power of decision-making”.(24)
Within this context—the protection of democratic and responsible government in Canada—the Government of Canada would welcome a discussion as to how best to provide for federal-provincial consultations on spending and taxing questions. This might best be considered by the Constitutional Conference when it considers the general question of federal-provincial consultative machinery.
The Equalization of Provincial Services (Revenues)
The final question which is related to taxing powers is that of the equalization of provincial public services, or provincial revenues. It has already been noted that if the principle of access is to be employed in allocating taxing powers between Parliament and the provincial legislatures, and if this approach is to be really meaningful to the lower income provinces, the Government of Canada must have the power to augment the revenues of low income provinces with equalization payments.
It has been suggested by the Government of Nova Scotia that the Constitution provide explicitly for the “full equalization of all provincial revenues, including municipal revenues”.(25)
The objective of this proposal is understandable: however, the Government of Canada would question the wisdom of providing in the Constitution for any specific equalization formula, or of attempting to bind Parliament to a particular level of equalization. Earlier attempts at reaching final decisions, constitutionally, as to the appropriate level of federal grants to the provinces, have not been reassuring. In fact, the redistribution of income between the fortunate and the less fortunate,
whether in the form of payments to persons or in the form of some measure of equalization of public services, is a matter of social or moral judgment. As such, it is to be expected that these judgments will change over time; and society would do well not to bind itself to the judgments of the past.
Having said this, the Government of Canada would propose two specific constitutional provisions which would be directed toward the same general end as the Nova Scotia proposition. First, the Preamble to the Constitution —the statement of objectives—should state as a goal for all governments the provision of equal opportunity for all Canadians, including the availability to them of essential public services. The Government has proposed the following wording:
“To promote . . . the general welfare and equality of opportunity for all Canadians in whatever region they may live, including the opportunity for gainful work, for just conditions of employment, for an adequate standard of living, for security, for education, and for rest and leisure”.(26)
Secondly, the Constitution should provide the Parliament of Canada with explicit power to contribute toward the equalization of necessary provincial public services across Canada, whether in the form of revenue equalization or otherwise.(27)
And it should provide Parliament with the power to adjust these grants as concepts as to what public services are necessary, and as to how and to what extent they ought to be equalized, change over time.
* * * *
This Working Paper has been prepared for the purpose of outlining the general approach of the Government of Canada on the allocation of taxing powers, and of proposing a course of action for the discussion of this and allied questions. As the governments of the provinces have said concerning the working papers they have submitted, the Government of Canada will not feel bound by any alternatives which are here explored, nor by any particular approach to taxation problems which has been used in this Paper for the purposes of exposition. However, the Government does attach a high order of importance to the general principles which it believes should be followed in allocating taxing powers, in particular those outlined above at pp. 8 and 16, and it similarly would emphasize that the discussions of taxing powers must take place in the context of, and be contingent upon, the distribution of powers generally.
(1) The taxing provisions of the British North America Act are reproduced in Appendix A.
(2) La Forest, Gerard V., The Allocation of Taxing Power under the Canadian Constitution (Toronto, Canadian Tax Foundation, 1967), p. 165.
(3) Government of Canada revenue and expenditure data are from the Department of Finance White Paper published at the time of the October 22, 1968 Budget. Provincial government revenue and expenditure figures are from D.B.S. estimates, except for natural resource revenues which data were provided by the Department of Finance of Canada.
(4) Federalism for the Future, pp. 40 and 42.
(5) See pp. 50, 52 and 54, infra.
(6) Federalism for the Future, p. 42.
(7) The Propositions submitted by the Governments of the Provinces appear in Appendix B.
(8) One percentage point of personal income tax, for example, yields about $3.14 per capita in Ontario, $2.98 in British Columbia, $2.21 in Quebec, $1.89 in Saskatchewan, $1.27 in New Brunswick and 91 cents in Prince Edward Island (1968-69 figures). Similarly one point of corporation income tax yields $3.40 per capita in Ontario, $3.29 in British Columbia, $2.39 in Quebec, $1.82 in Saskatchewan, $1.38 in New Brunswick and $1.00 in Prince Edward Island.
(9) See pp. 4 and 6, supra.
(10) These are the best known forms of taxation. There are, of course, variations, but they need not be considered explicitly in this Paper.
(11) The British Columbia proposal is examined at pp. 10, 12 and 14,supra.
(12) Unincorporated businesses, including partnerships and professional offices, file individual income tax returns. The tax paid on this “business income” represents about ten per cent of total individual income tax.
(13) An analysis of the problem of analysing the incidence of corporation taxes is available in Study No. 18 of the Royal Commission on Taxation, The Shifting of the Corporate Income Tax in the Short Run.
(14) “General municipal property taxes” as used in this sentence refers to property taxes as they apply uniformly to both business and non-business property. Special municipal taxes on business were discussed at pp. 24, 26 and 28, supra.
(15) See, for example, the reference to Parliament’s power to impose estate taxes at pp. 34 and 36, infra.
(16) Probably the simplest way to accomplish this would be to preclude the provinces from levying any tax on any property passing on the death of persons who were not domiciled therein.
(17) La Forest, Gerard V., The Allocation of Taxing Power Under the Canadian Constitution (Toronto, Canadian Tax Foundation, 1967), p. 165.
(18) See Appendix D. It should be noted with respect of these figures that they assume the manufacturers in Ontario and Quebec would not be required to absorb a part of the provincial manufacturers’ taxes in order to meet competition, and/ or would not lose some of their sales, especially in other provinces, to domestic and foreign competitors. In fact both of these likely would occur to some (unpredictable) degree.
(19) As has been noted, it does not follow that the whole of a provincial indirect tax at the manufacturing level would be passed on to consumers. Presumably the price of Canadian products must be competitive both with other domestic products and with the price of imports; consequently Canadian manufacturers must price their goods in such a way that the retail price, inclusive of taxes and transportation costs, will not exceed the retail price of competing goods.
(20) It must be acknowledged that the same result flows from the taxation under existing provincial statutes of property such as production machinery, where business is the “final consumer”.
(21) Appendix F gives a summary of the history of these discussions.
(22) See p. 16, supra.
(23) See footnote 7.
(24) Federalism for the Future, p. 42.
(25) See footnote 7.
(26) The Constitution and the People of Canada, p. 10. (Published by the Government of Canada on the occasion of the Second Meeting of the Constitutional Conference, Ottawa, February 10, 11, 12, 1969.)
(27) For an elaboration of this view see the Government of Canada Working Paper on the Constitution entitled Federal-Provincial Grants and the Spending Power of Parliament.
The Taxing Powers and the Constitution of Canada
The constitutional basis for federal and provincial taxing powers is to be found in Sections 91, 92, 121 and 125 of the B.N.A. Act (aside from certain transitional provisions). These Sections provide that:
(1) The Parliament of Canada is given the power of “The raising of Money by any Mode or System of Taxation” (Section 91(3));
(2) Provincial legislatures are given the powers of:
92 (2)—Direct taxation within the Province in order to the raising of a Revenue for Provincial Purposes”;
92 (9)—”Shop, Saloon, Tavern, Auctioneer, and other Licences in order to the raising of a Revenue for Provincial, Local, or Municipal Purposes”;
(3) Section 121 provides that “All Articles of the Growth, Produce, or Manufacture of any one of the Provinces shall, from and after the Union, be admitted free into each of the other Provinces”. In addition, by Section 91 (2) the Parliament of Canada has exclusive jurisdiction over the regulation of interprovincial and international trade and commerce;
(4) Section 125 provides that “No Lands or Property belonging to Canada or any Province shall be liable to Taxation”.
Taxing Powers of Federal and Provincial Governments
Propositions Submitted by Provincial Governments
as of May 1969
The federal and provincial governments in Canada must each have sources of revenue within their control which are sufficient to enable them to meet their constitutional responsibilities. In order to assure to the provinces the attainment of this objective, the Constitution must include provision for full equalization of all provincial revenues, including municipal revenues.
The Government of each province must have sufficient powers under the Constitution to discharge its responsibilities in respect of all matters which concern its people as opposed to the interests of all the people of Canada including fiscal resources sufficient to discharge its Constitutional responsibilities.
To fulfill their constitutional responsibilities, member-states as well as the Government of the Union should have access to all sources of tax revenue. Only few fields should be reserved for exclusive use—property tax and succession duties by the States, customs revenue by the Central Government.
The constitution should provide for the establishment of a standing intergovernmental commission on taxation which would be made up of representatives from all governments and whose role would be to prepare taxation arrangements for set periods, taking into account available and forecast tax resources, programmes planned and priorities involved.
In theory, no government should be empowered to tax another government or any of its agents. However, intergovernmental taxation should be permitted by mutual consent.
Federal-provincial tax sharing arrangements must be adequate to enable each government to discharge effectively its constitutional obligations.
The most critical aspect of constitutional review is the distribution of legislative powers in a manner which will ensure a balance between revenue and responsibility as well as the maintenance of national unity. The present distribution as interpreted by the courts must not be ignored, but a formula should be sought which will permit a more flexible exercise of powers which are both national and local in effect, involve matters of truly common concern or, being too broadly expressed, require reconsideration in light of changing circumstances.
Distribution of taxing powers should be effected between the Federal and Provincial Governments so as to ensure that public revenues are raised according to fiscal capacity by the most effective, economical and equitable method and that fiscal arrangements reflect the constitutional commitments of the different levels of government.
The central government must have adequate economic and fiscal powers to ensure stable economic growth, cope with unemployment, combat inflation and deflation and to promote equalization of opportunity in the various provinces and areas of the nation.
To minimize regional dissatisfaction in the economic sphere, there is need to develop a more equitable distribution of the financial means to meet clearly-defined federal and provincial responsibilities and a formula that will ensure the basic social requirements of all Canadians without widespread disparity in the standards of service or cost to the individual citizen.
At the same time, care must be taken to avoid retarding further growth by unjustly penalizing those regions of Canada whose economic development contributes most to national revenues and to the gross national product on which the prosperity of the nation depends.
The capacity of each government to tax must be sufficient for each government to effectively discharge its constitutional obligations. Accordingly, the Federal government should leave exclusively to the provinces the direct tax fields of personal and corporate income taxes and succession or estate taxes. Having done that, the Constitution should restrict the spending power of the Federal government to those matters under its jurisdiction.
Estimate of the Fiscal Consequences of the Proposal of the Government of British Columbia for
a Reallocation of Revenues and Responsibilities between the Federal and Provincial Governments
(See pp. 10, 12 and 14, supra)
|Reduction in Government
of Canada Expenditures
|$ Billions||Reduction in Government
of Canada Revenues
|1. Elimination of Family and Youth Allowances, Old Age Security and Guaranteed Income Supplement Payments, and Canada Assistance Plan||2.5||Transfer of Income and Estate Taxes to the Provinces. (Present yield of $6.5 billion less the taxes imposed to finance the Guaranteed Annual Income Plan. These would amount to $2.5 billion, the cost of the present payments to persons, plus whatever additional amount was required by the new Plan.)|
|2. Cost of Guaranteed Annual Income Plan||(2.5+)||4.0-|
|3. Elimination of Unconditional Grants to Provincial Governments (including equalization and post-secondary education payments)||.9|
|4. Elimination of conditional Grants to provincial Governments (including medicare payments of $500 million and excluding Canada Assistance Plan payments of $400 million)||1.5|
|Reduction in Government of Canada Expenditures||2.4-||Reduction in Government of Canada Revenues||4.0-|
NOTE: The net loss to the federal treasury, $1.6 billion, would remain the same whatever the cost of the Guaranteed Annual Income Plan. For every dollar such a plan were to cost over and above present payments to persons, the tax loss to the Government of Canada (tax transfer to the Provinces) would be reduced by a dollar.
Estimated Proportion of a Uniform Provincial Manufacturers’ Sales Tax and a Uniform
Provincial Retail Sales Tax which would be Collected by Each Province
|Manufacturers’ Sales Tax(1)
||Retail Sales Tax(2)
||Imposed on Domestic Products Only (Gross Tax Collections)
||Imposed on Domestic Producers and Imports (Net Tax Collections)
|Province||Millions $ at a 12% Rate||% of Total Tax Collections||Millions $ at a 12% Rate||% of Total Tax Collections|
1 These Figures are derived from the collections in each province of the Government of Canada’s 12% manufacturers’ sales tax, in the fiscal year 1967-68. Gross collections have been used for domestic products as data are not available as to the amount of tax refunds applicable to domestic products. The total collections for domestic products and imports however have been reduced by the amounts of the refunds. The sales tax collected in the Atlantic Provinces is recorded in the Halifax Office of the Department of National Revenue; consequently the figures for the individual Atlantic Provinces are estimated (based upon a sample of manufacturers’ returns).
2 These figures are derived from an estimate of the yield of a uniform provincial retail sales tax, at the imputed national average provincial sales tax rate, in the fiscal year 1967-68. These estimates are employed by the Department of Finance of Canada in calculating the federal equalization payments to provincial governments, under the Federal-Provincial Fiscal Arrangements Act, 1967.
Estimated Yield from a Uniform Provincial Retail Sales Tax and from a Uniform Provincial
Manufacturers’ Sales Tax with Equivalent Aggregate Yields(1) 1967-68
|Province||Yield from Uniform Prov. Retail Sales Tax (Nat.
|Yield from Uniform Prov. Manuf. Tax (At Nat. Av.
Rate) Yielding Same as Col. (1)
|Reduction in Yield from Retail Tax
Manufacturers’ Tax (1)-(2)
|Per Capita of (1)||Per Capita of (2)|
1 The figures on the yield from a provincial manufacturers’ sales tax are derived from the actual yield from the federal manufacturers’ tax, adjusted downward to equal the aggregate estimated yield from a uniform provincial retail sales tax.
A Summary of Past Discussions Concerning the Possibility
of Indirect Provincial Retail Sales Taxes
There has been a long history of federal-provincial discussions regarding indirect provincial sales taxes. The essence of this history is this:
(1)A constitutional amendment providing indirect taxing powers to the provinces was proposed to Parliament in 1936. It was rejected by the Senate on the grounds that provincial governments would be able thereby to erect tariff barriers, and that duplication in federal and provincial sales taxes would result;
(2)The Rowell Sirois Commission did not particularly favour sales taxes, though it said the federal government “should leave the provinces free to collect these revenues [those left to them by the federal government] In whatever way appears to them the most efficient even if the method of indirect taxation should be involved”;
(3)In 1845 the Government of Canada said at a Federal-Provincial Conference that it was “prepared to delegate [to the provinces] the power to levy a properly qualified retail sales tax”, if the B.N.A Act were amended to permit the delegation of powers;
(4)In 1951 the Government of Canada agreed, at the request of several provinces, to a constitutional amendment which would enable the provinces to impose indirect sales taxes at the retail level. Certain limits on this power were proposed by the federal government, including a three per cent ceiling. These limitations were criticized by certain provinces, and the proposed amendment was dropped.
(5)In 1960 the Government of Ontario suggested a constitutional amendment which would empower the provinces to levy indirect retail sales taxes. The government of Canada agreed providing the provinces were prepared to support such an amendment unanimously. The Governments of Alberta and Quebec rejected
the proposal (Quebec on the ground that the whole field of indirect taxation should be opened up to the provinces);
(6)The Royal Commission of Taxation (Carter Commission) recommended that “the federal government should seek to establish with the provinces a joint indirect retail sales tax that would replace the manufacturers sales tax and the present provincial direct retail sales taxes” and “that the constitution should be amended so as to allow the provinces to levy an indirect retail sales tax on a common base agreed upon by all governments”.
Technical Appendix on the Problems of an Indirect Provincial Retail Sales Tax
The taxation of sales which originate in one province for delivery in another is probably the most serious problem which would have to be overcome if the province were to have the power to impose indirect sales taxes at the retail level. This can best be illustrated by examining briefly what seem to be the two alternative constitutional schemes which could be adopted to give the provinces this power.
Scheme A. The first alternative would be to give the provinces the power to tax all retailers within the province in respect of all their sales, whether for delivery within the province or elsewhere. If the retail sales as between provinces could be assumed to balance out, this would seem to be a simple and acceptable system of taxation. But if some provinces were to suggest that a significant proportion of the retail purchases made by their residents were from extra-provincial purchases from their vendors, it might be argued that the constitutional change would benefit some provinces more than others. (This might be called the “problem of disproportionality”.) In fact, the real difference between this projected situation and the present one might not be as great as might first appear. The provinces now impose, as part of their general sales tax law, taxes upon purchasers within the province in respect of the use and consumption of personal property which has been brought into the province it is extremely difficult to enforce the tax in respect of those goods (excepting automobiles, where the provincial licensing system is used as a method of enforcement).
If, notwithstanding this point, some provinces were to remain concerned about “disproportionality”, they could employ their direct taxing powers to tax persons within their jurisdiction on the use and consumption of goods which the person had brought into the province. Such a tax would be a supplement to their indirect retail sales tax. The result would be an impediment to trade, albeit a limited one. (Province A would tax its vendors on all retail sales, including those made to the residents of Province B, and Province B would tax its residents on the use and consumption of goods
chased in Province A—and in other provinces. This would result in the double-taxation of goods moving from Province A to Province B.) It might well be that the Courts would hold unconstitutional a direct tax which singled out goods imported from other provinces in this fashion. But this cannot be predicted with certainty.
It will be evident that this problem could be overcome by interprovincial agreements. Each province could undertake to remit to other provinces the tax it collected, at its own rate, on such goods. Such agreements would be extra- constitutional; no constitution guarantees would be afforded to the provinces concerned about the “problem of disproportionality”. (It may be that some constitutional amendment would be required to sanction the interprovincial agreements, in view of the fact that province is empowered to levy taxes only for its own provincial purposes.) Moreover, it would have to be accepted that the provinces with the higher sales tax rates would receive tax only at the rate of the province where the sale was made.
It will be evident that, in a system based up-on interprovincial agreements alone, there would be no constitutional guarantee that “fiscal impediments” to trade would not develop, in the manner described above. The only way this could be prevented with certainty would be through a constitutional provision prohibiting the use by the provinces of their taxing powers in such a way to single out for taxation goods which were imported into the province. This would be necessary part of Scheme A to meet the requirements outlined at [.16 of the Working Paper.
Scheme B would be designed to overcome these problems, though it would create other difficulties. Under this scheme the provinces would be given the power to impose an indirect tax on retail sales which were made by vendors within the province for delivery within the province. The indirect tax could not be lived in respect of sales made for delivery in another province. Goods which were sold at retail in one province for delivery in another thus would be taxable only by the “province of delivery”, through a direct tax on the user or consumer in that province (a special tax which applied only to imports).
The two problems which become apparent immediately are first, the problem of enforcement which would be faced by the “province of delivery”; and, secondly, the problem of defining delivery. As to the first problem the provinces would find it just as difficult to enforce their direct tax on imports as they do their present general direct taxes in this regard. This problem might be overcome by interprovincial agreements, sanctioned by constitutional amendment, under which each province acted as an agent
for other provinces in the collection from vendors of the tax of the “province of delivery” in respect of goods sold at retail for delivery to another province. This, however, could involve formidable administrative difficulties for vendors, particularly if the method they employed for fixing the tax-included price of goods did not permit the ready deduction of the tax of the province of sale and the addition of the tax of the province of delivery.
The second problem would be that of defining “delivery”. The concept of delivery as used in the law of the sale of goods might be unsatisfactory, since in certain circumstances delivery might have occurred at the time the goods leave the vendor’s premises. Thus it would be necessary to define the constitutional concept of delivery so that it would include only those transactions where the purchaser received the goods within the province where the sale was made. Whether this approach would be workable would have to be explored.
The taxation of services. An indirect retail sales tax is usually thought of in terms of goods or commodities (tangible personal property): this, indeed has been the basis of the discussion in the Paper, and of this Appendix. When applied to services, however, a different range of problems emerge, and these would have to be solved before any constitutional amendment empowering the provinces to impose an indirect retail sales tax could properly be extended to services.
The first of these problems is the definition of “services”. Governments in Canada have only recently begun to tax services, with the result that there is neither a body of taxation practice nor a body of tax law to serve as a guide in defining services (for this purpose). The Dominion Bureau of Statistics has classified services for statistical purposes, but this classification has not been studied systematically with a view to determining the effect of indirect provincial sales taxes, whether imposed upon the providers of the services or upon the transactions themselves.
Secondly, the problem of interprovincial transactions may be more difficult in respect of the taxation of services than it is with respect to the taxation of goods. This would not likely be the case where personal services are involved—haircuts, automobile repair services, amusements, etc.—but advertising services, management consulting, engineering services, brokers services and accounting services, to mention but a few examples, would present a different and more complicated picture. There would first be the problem of “disproportionality” referred to earlier: it might be found that the providers of certain services in Canada tend to be concentrated in a
few provinces, with the result that the power to tax the provider of the service by reference to the value of the services he renders might be more valuable to some provinces than to others (as a result of the taxation of sales to the residents of other provinces). There is secondly the problem of determining where the service is rendered: in the taxation of telecommunications, for example, would the Courts hold that the services were “rendered” in the province where the contract was made, or that they were “rendered” in all the provinces through which the message was transmitted, or that they were “rendered” in the province in which the message was received?
These problems suggest that the feasibility of indirect provincial retail sales taxes should be examined first in respect of goods, or tangible personal property, and then after the problems related to this first area of taxation have been resolved, secondly in respect of services. It may be found, indeed, that provincial taxes on services ought to remain direct taxes.
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