The History of Taxation: A Canadian Perspective

Marco Iampieri, B.A., JD, M.B.A.

The history of taxation in Canada is as old as Canada itself and it matters in a modern context, because recently a Tax Court of Canada case was tasked with examining when a tax is a penalty, specifically regarding a Tax-Free Savings Account (TFSA).     

The Background: First some context:  outlined in Canada’s founding document, the Constitution Act, 1867 (UK), 30 & 31 Vict, c3, at sections 91 and 92, the Canadian Constitution delineates taxation powers between the provincial legislature and the parliament of Canada or the federal government.

In brief, the federal government of Canada may raise money by any mode or system of taxation.  That’s not so for the provinces:  they are circumscribed or restricted regarding taxation to direct taxation within the province in order to raise revenue for provincial purposes.

Importantly, all laws regarding taxation, whether legislated provincially or federally, must legislate within the scope as permitted by the Canadian Constitution.

Throughout the history of the Tax Court of Canada, there have been many decisions regarding whether a particular tax is within the scope delegated by the Constitution of Canada, or intra vires the taxation provisions under the Constitution of Canada. 

Financial professionals and accounting professionals ought to know that taxation legislation may be challenged, should the legislation be beyond the scope delegated by the Constitution of Canada, and that legal professionals practicing in the field of taxation may advise them accordingly.

The Case: Now to the Tax Court of Canada case, Hunt v. The Queen, 2022 TCC 67, which litigated an issue about, among other issues, whether a provision under a federal action of parliament, the Income Tax Act, is a tax or a penalty. The particular provisions at issue were sections 207.05 of the Income Tax Act and 207.06 of the Income Tax Act dealing with Tax Free Savings Accounts.

Essentially, the said provisions allow the taxpayer to be charged a 100% tax. The taxpayer in Hunt argued that these provisions operated as a penalty, and unlike a tax. Unfortunately for the taxpayer, the Tax Court of Canada held that the objective of a tax is no longer constrained to raising public revenue, and that Parliament is entitled to legislate a tax of this kind.

Key Takeaway: Accounting professionals, financial professionals and legal professionals, all working together can deliberate about potential tax challenges arising because of the provisions under provincial or parliamentary legislation. And, if appropriate, these professionals can work with the client to determine whether a particular provision of a taxation statute is in-line with powers delineated by the Canadian Constitution, and if not, whether to go to the time and expense of challenging it, at the Tax Court level.