by Mel Smith, QC

It is not surprising that at a time when the beleaguered Canadian taxpayer is bending low from the ever increasing tax burden imposed upon him by three levels of government some will clutch at any straw in the hope it will lighten the load.

One such straw is the mistaken belief held by some zealot tax reformers that the federal government does not have the power under the Canadian constitution to impose an income tax on Canadians. Their claim is that the government's efforts to do so, which first began as a wartime scheme in 1917, is a well-concealed fraud. These people invariably quote in support of their position a 1950 decision of the Supreme Court of Canada in a case entitled Attorney General of Nova Scotia versus Attorney General of Canada and Lord Nelson Hotel Company Ltd.

Unfortunately, I am sorry to say that neither a fair reading of the Constitution nor of the Lord Nelson case gives any support for the proposition that federal income tax is illegal or unconstitutional. Let me explain. 

The breakdown of power

Sections 91 and 92 of the Constitution Act, 1862 list subject matters over which the federal and provincial governments can exercise legislative jurisdiction. Section 91 sets out the federal powers; section 92 the provincial powers. Each level of government is stated to have exclusive jurisdiction over its own particular subject matters, which means the other level is excluded from legislating on those subjects. Since each level of government imposes taxes, it is not surprising that under the Constitution each is given a specific taxing power. The federal taxing power is contained in clause 3 of Section 91 which reads, "The raising of money by any mode or system of taxation." One would find it difficult to devise a comparable set of words which could convey any clearer the intention to make the taxing power of the federal government all embracing in scope.

The provincial taxing power, on the other hand, is contained in clause 2 of Section 92 which reads, "Direct taxation within the Province in order to the raising of a revenue for provincial purposes."

The argument saying the federal income tax is illegal goes something like this. Since each level of government is afforded under the Constitution exclusive jurisdiction on the subject matter listed to the exclusion of the other (true) and since income tax is direct taxation (true), then only the provinces can impose income tax (false).

The fallacy lies in not reading fully what the provincial taxing powers says. It does not say the provinces have the exclusive right to impose direct taxation. What it does say is that the provinces have exclusive right to impose direct taxation to raise "revenue for provincial purposes." By contrast, when the federal government imposes an income tax it does so for federal purposes (obviously) and therefore it cannot be said to be infringing upon the provincial taxing power. The provincial taxing power, i.e. direct taxation for provincial purposes, must be looked upon as carving out a small chunk of the ample federal taxing power described above. It means the federal government cannot impose direct taxation (including income tax) for "provincial purposes", but why would it want to?

Don't forget the Caron case

The above interpretation is supported by the highest judicial authority. In the 1924 case of Caron v. The King, the Judicial Committee of the Privy Council, Canada's highest court at the time affirmed unequivocally that the federal parliament had the constitutional power under section 91(3) to impose an income tax.

The Privy Council decision in the Caron case, which affirmed the judgement of the Supreme Court of Canada, is the first, last and determinative word on the question of the constitutional validity of federal income tax. Those who champion the 1950 decision in the Lord Nelson Case, which we will see has nothing to do with the federal income tax question, are either unaware of, or totally ignore the Caron case. Is it a case of "my mind's made up, don't confuse me with the law?"

In the Caron case, Lord Phillmore speaking for the Privy Council stated:

It is true that by the provisions of s. 92 the Legislature in each Province may exclusively make laws in relation to certain matters coming within the classes of subjects which are there enumerated, and that one of the classes of subjects is "direct" taxation with the Province in order to the raising of a revenue for provincial purposes.

As such particular direct taxation is reserve to the Province, to that extent there is some deduction to be made from the totality of power apparently giving exclusively to the Dominion Parliament to raise money from any purpose by any mode or system of taxation.

The Lord Nelson Myth

This leads us to a consideration of the Lord Nelson Hotel case. What did it really decide and how is it that over the years it has become the Holy Grail of those who claim that federal income tax is unconstitutional?

The case concerns an attempt by the government of Nova Scotia to provide by enabling legislation the delegation of certain of its exclusive legislative powers to Parliament in Ottawa and also to provide Ottawa the power to delegate certain of its powers to the legislature of Nova Scotia. The Bill was passed in the Nova Scotia legislature in 1947 and because doubts immediately arose as to its constitutionality it was referred to the courts for an opinion. Both the Supreme Court of Nova Scotia en banc and the Supreme Court of Canada found the legislation to be unconstitutional on the grounds that one level of government could not delegate its power to legislate on matters within its jurisdiction to the other level of government and vice versa. The subject matters over which Nova Scotia sought inter-government delegation dealt with employment in industries, works and undertakings. The legislation also attempted to delegate certain indirect taxation power to Nova Scotia.

Those claiming federal income taxes are illegal state that this case decided that one level of government cannot delegate its law-making power to the other (true). They then take a giant leap by declaring that since only the provincial government can impose direct taxes (false because of reasons previously cited) it is unconstitutional for the federal government to impose the ultimate direct tax -- income tax (false).

The Lord Nelson Case is one of the leading authorities on the question of interdelegation of legislative powers between the two levels of government, but it has absolutely no application to the question of whether the federal government can impose income tax.

The power of the federal government to impose income tax for federal purposes is firmly grounded in Clause 3 of Section 91 of the Constitution referred to above. It does not depend on any interdelegation of legislative power from the provinces. It matters not a wit legally that the federal government chose not to exercise the power until 1917, nor does it matter that what was to be merely a First World War revenue source continues to be with us today.

The hoary mythology of misinterpretation that attaches itself to the Lord Nelson Hotel case has produced more barnacles than Nova Soctia's famous bluenose, a scant few miles away. Let's once and for all sink the myth and give it the burial it deserves.

By Mel Smith, QC

The late Mel Smith, QC was a lawyer and senior constitional advisor to four successive British Columbia governments. He is a former CTF board director and recipient of the CTF's TaxFighter Award.