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Constitution (Non-Charter) - Taxation

. National Steel Car Limited v. Independent Electricity System Operator

In National Steel Car Limited v. Independent Electricity System Operator (Ont CA, 2024) the Ontario Court of Appeal dismissed a 'taxation' constitutional challenge to the 'FIT Program', a renewable electricity program under the Green Energy and Green Economy Act, 2009.

Here the court considers the appellant's argument that "the FIT Program was designed to provide for a general economic purpose, not a regulatory purpose", and was thus "a colourable attempt to tax through regulation contrary to the Constitution Act, 1867":

Appellant’s Applications

[29] The appellant challenged the constitutionality of the FIT Program. It submitted that the FIT Program was a colourable attempt to tax through regulation contrary to the Constitution Act, 1867. More precisely, it submitted that the FIT Program was designed to provide for a general economic purpose, not a regulatory purpose. The FIT Program, it argued, was intended to create: (a) general economic stimulus; and (b) specific economic assistance to rural municipalities, co-operatives, and Indigenous communities that had been adversely affected by the 2008 economic monetary crisis. The appellant labels this generation of allegedly unlawful tax revenue the “Stimulus Goals” of the FIT Program.

[30] Regulatory charges must be ancillary to the costs of regulation. The appellant submits that, given the FIT Program’s Stimulus Goals, the FIT Program’s cost was not ancillary to the regulatory scheme. Rather, it was a tax. Being a tax, it was unconstitutional because it was enacted through regulation rather than legislation, contrary to ss. 53 and 54 of the Constitution Act, 1867.

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Application Judge’s Decision

[34] The application judge identified the key issues before him, his conclusions, and how he arrived at those conclusions. In very lengthy reasons, the application judge addressed the appellant’s primary argument that the FIT Program component of the Global Adjustment was a colourable tax because its purpose was to achieve economic stimulus, a purpose unrelated to the regulation of electricity. At para. 43, he addressed the pith and substance of a government levy. He wrote:

The pith and substance of a government levy is its dominant, primary and most important characteristic as distinguished from its incidental features. When determining the pith and substance of a levy, it is important to keep in mind, the context within which the charge is made and the purpose of the charge. If the pith and substance of the levy is the raising of revenue for general government purposes then the levy is a tax, but if the levy is a user charge or a charge for regulatory purposes or necessarily incidental to a regulatory scheme, then the levy is not in pith and substance taxation. [Footnotes omitted.]

[35] Then at para. 49, he stated:

There is a two-step process to determine if a levy is connected to a regulatory charge. The first step is to identify the existence of a regulatory scheme and if there is a regulatory scheme, the second step is to determine whether there is a relationship between the scheme and the charge.

[36] The appellant does not take issue with the application judge’s description of the law in this regard.

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[42] The application judge noted that the generators provided renewable energy and were paid for their contribution to the energy grid. The costs of the FIT Program related to the procurement of renewable energy. Even if it could be established that the Stimulus Goals were extraneous to the electricity system (which he found not to be the case), the application judge found that the pith and substance of the FIT Program would still be an intra vires regulatory charge. The application judge also found that some of the extraneousness argued by the appellant was trivial in nature. For example, the “adders” represented only 0.4 percent of the Global Adjustment.

[43] The application judge reasoned that Ontario “did not incur expenses that were recouped as a part of the Global Adjustment that were unrelated to the costs of the regulation of energy” and that “any economic stimulus of the FIT Programs [was] reasonably related to the regulatory scheme of the Electricity Act, 1998.” Thus, the appellant’s colourability argument failed.

[44] The appellant conceded that economic stimulus could be pursued as an objective within a regulatory scheme, provided that it was reasonably related to the regulatory scheme. At para. 171, the application judge wrote:

The evidence in the immediate case showed that the economic stimulus of the FIT Programs was objectively reasonably related to electricity regulation. There is no surplus in the Global Adjustment, which is expressly limited to the costs of the regulatory scheme. Raising revenue for general purposes is not the dominant characteristic of the FIT Programs part of the Global Adjustment and that part of the Global Adjustment is not a different type of charge from the other costs included in the Global Adjustment that have not been impugned as the raising of revenue of general purposes.

[45] In comparing this case with the revenue raising measure described in Re: Exported Natural Gas Tax, the application judge wrote at para. 173:

In contrast, in the immediate case, the FIT Programs did have a regulatory purpose associated with Ontario’s electricity scheme. The FIT Programs had the regulatory purposes of: (a) eliminating coal-fired generation of electricity; (b) improving air quality and reducing healthcare costs; (c) planning for an impending supply shortage; (d) increasing renewable energy sources; and (e) encouraging Indigenous communities to participate in Ontario’s electrical system.

[46] The application judge reasoned that this was sufficient to dismiss the appellant’s applications, but he went on to find that the FIT Program levy, as part of the Global Adjustment, was not a tax but a valid regulatory charge. It was: (a) in relation to the rights and privileges associated with a regulatory scheme; (b) used to finance the regulatory scheme; and (c) used to alter individual behaviour in relation to the regulatory scheme. He determined that the FIT Program part of the Global Adjustment was a regulatory charge to advance the purposes of the Electricity Act, 1998 and defray the expenses of the Provincial Government’s regulatory scheme to supply electricity to its citizens.

[47] There was little dispute that there was a regulatory scheme. The Global Adjustment was tied to and limited to the costs of that regulatory scheme. Applying Allard Contractors Ltd. v. Coquitlam (District), 1993 CanLII 45 (SCC), [1993] 4 S.C.R. 371, the application judge recognized that a levy connected to a regulatory scheme is not a form of taxation. As such, the applications also failed on the appellant’s argument that the FIT Program was a tax that should have been enacted by statute and not by regulation.

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[93] Lastly, a charge that is limited by the regulatory scheme to the recoupment of actual costs, as it is here, amounts to a regulatory charge and not a tax: Ontario Home Builders' Association v. York Region Board of Education, 1996 CanLII 164 (SCC), [1996] 2 S.C.R. 929, at para. 85; 620 Connaught Ltd. v. Canada (Attorney General), 2008 SCC 7, [2008] 1 S.C.R. 131, at paras. 38-40, and 45. In all the circumstances, the application judge was not required to embark on any further inquiry.

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(3) The Stimulus Goals

[101] The appellant’s third argument raises two related issues, parts of which have already been touched upon. First, the appellant submits that the application judge erred in finding that the pith and substance of the FIT Program was other than the pursuit of the Stimulus Goals. Second, the appellant argues that the application judge erred in finding that goals of economic stimulus were valid regulatory objectives for the FIT Program on the basis that energy procurement is a “vital component of any economy and any business.” The appellant submits that the application judge erred in finding that goals of “general or specific economic development” were not extraneous to Ontario’s electricity system. The appellant argues that if these goals are not “extraneous to Ontario’s electricity system to achieve general or specific economic development”, then governments are free to pursue general economic policies through any conceivable regulatory regime. The appellant states that it is not arguing that economic considerations are impermissible when making regulatory policy; rather, a charge that is imposed within a regulatory regime for the paramount or principal purpose of achieving an economic stimulus is contrary to the constitutional protections of s. 53 of the Constitution Act, 1867.

(i) General Principles

[102] In addressing these issues, a good starting point is Gonthier J.’s statement in Westbank, at para. 30:

Although in today's regulatory environment, many charges will have elements of taxation and elements of regulation, the central task for the court is to determine whether the levy's primary purpose is, in pith and substance: (1) to tax, i.e., to raise revenue for general purposes; (2) to finance or constitute a regulatory scheme, i.e., to be a regulatory charge or to be ancillary or adhesive to a regulatory scheme; or (3) to charge for services directly rendered, i.e., to be a user fee.

[103] Rothstein J. provided further guidance on this issue in 620 Connacht, at para. 24:

[A] government levy would be in pith and substance a tax if it was ‘unconnected to any form of a regulatory scheme’. This fifth consideration provides that even if the levy has all the other indicia of a tax, it will be a regulatory charge if it is connected to a regulatory scheme. [Citations omitted.]

[104] To determine the characterization of the government charge, it is necessary to determine its “pith and substance.” The pith and substance of the government levy is its primary and most important characteristic as distinguished from its incidental features: 620 Connaught Ltd, at paras. 16-17; Westbank at para. 30. A determination of the pith and substance of a levy must include the context within which the charge is made and the purpose of the charge: Ontario Home Builders’, at para. 43.

[105] Rothstein J. went on to describe the two-step test to determine whether a governmental levy is connected to a regulatory scheme at paras. 25-27 of 620 Connaught. The first step is to identify the existence of a relevant regulatory scheme. The second step is to determine whether there is a relationship between the levy or charge and the scheme in the sense that the revenues are tied to the costs of the regulatory scheme or the levies or charges themselves have a regulatory purpose, such as the regulation of behaviour or the conferral of benefits: 620 Connaught, at paras. 25-28; Westbank, at para. 44.

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(iii) The FIT Program component of the Global Adjustment is a valid regulatory charge

[118] Here, there is a clear regulatory scheme in place; this is not controversial. The more pertinent question concerns the second step in the analysis: was there a relationship between the levy or charge and the scheme. Here, “it is the primary purpose of the law that is determinative”: 620 Connaught, at para. 17.

[119] The record revealed a Provincial Government working towards the regulatory purpose of increasing and incentivizing renewable electricity generation in Ontario. The application judge clearly found that the costs of the FIT Program related to the procurement of renewable energy. The electricity suppliers who were recruited to incur the expense of building renewable energy generations were paid for their investment in, and contribution to, Ontario’s electricity grid. Unlike the situation of the Federal Government’s tax in Re: Exported Natural Gas Tax, the FIT Program was not in pith and substance a revenue-raising mechanism.

[120] The application judge found that any economic stimulus from the FIT Program was objectively reasonably related to electricity regulation. There was no surplus in the Global Adjustment and raising revenue for general purposes was not the dominant characteristic of the FIT Program part of the Global Adjustment. The Global Adjustment was a price adjustment that adjusts the amounts to be paid by consumers in light of the amounts to be paid to generators. The adjustment could be favourable or unfavourable for consumers. Significantly, the Global Adjustment limits recovery to actual costs. It provides for payment of the actual costs that IESO has incurred to generate electricity. The funds do not go into general revenues but are used to meet the contractual procurement obligations agreed to with the generators. The levy was used to finance the regulatory scheme.

[121] The appellant submits that it was an error of law to hold that the Stimulus Goals or goals of specific or general economic development constituted a proper regulatory purpose for the regulation of electricity. However, it should be noted that economic, social, and environmental factors are legitimate considerations when making electricity generation investment decisions. The incentivization of participation in the ownership of renewable projects by Indigenous communities, and the promotion of job creation are related to an electricity regime and are among the purposes authorized by the Electricity Act, 1998. Choices regarding generation technologies will necessarily have economic, environmental, and social impacts. The central and significant role electricity has in the economic and social fabric of Ontario belies the appellant’s notion that the pith and substance of intra vires legislation regulating electricity must be about procuring cheap or the cheapest source of energy. Indeed, as mentioned, Professor McKitrick, who was called by the appellant, acknowledged that a government would be expected to take economic, environmental, and social considerations into account when making electricity generation investment decisions.

[122] In conclusion, I would reject the appellant’s third ground of appeal.