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Federal Tax - Tax versus Penalty. Hunt v. Canada
In Hunt v. Canada (Fed CA, 2026) the Federal Court of Appeal dismissed an appeal, here brought against the Tax Court's dismissal of an appeal that challenged the constitutionality of the liability imposed by section 207.01 ['Taxes in Respect of Registered Plans' - Definitions'], 207.05 ['Taxes in Respect of Registered Plans - Tax payable in respect of advantage'] and 207.06 ['Taxes in Respect of Registered Plans - Waiver of tax payable'].
The court considers a challenge to ITA s.207.01, 207.05 and 207.06 regarding TFSAs, and the 'advantage' exception - here based on a tax v penalty distinction:[7] First, the appellant says that, separately or in combination, sections 207.05 and 207.06 of the Act do not impose a tax. In substance they impose a penalty for which a defence of due diligence is available.
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C. Do sections 207.05 and 207.06 of the Act impose a penalty?
[9] This question depends on what these sections mean. We discover that by interpreting the sections using accepted principles.
[10] What are those principles? For a long time it has been accepted that courts must look at text, context and purpose. Specifically, the words of a statute must be read "“in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”": Rizzo & Rizzo Shoes Ltd. (Re), 1998 CanLII 837 (SCC), [1998] 1 S.C.R. 27 at para. 21, quoting E. A. Driedger, Construction of Statutes (2nd ed. 1983) at p. 87; Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42, [2002] 2 S.C.R. 559 at para. 26. However, the precise manner in which those three elements should be assessed and analyzed has varied somewhat, causing uncertainty—something especially bad in such a fundamental, frequently recurring and important area.
[11] Today, however, we have a great deal of stability. A recent series of consistent Supreme Court cases deserves the credit. In the process of analyzing text, context and purpose, the text is "“the anchor of the interpretive exercise”": Québec (Commission des droits de la personne et des droits de la jeunesse) v. Directrice de la protection de la jeunesse du CISSS A, 2024 SCC 43 at para. 24, citing M. Mancini, "“The Purpose Error in the Modern Approach to Statutory Interpretation”" (2022), 59 Alta. L. Rev. 919, at p. 927; see also the excellent analysis in M. Mancini, "“’Text as Anchor’ in Statutory Interpretation”", to be published in the Canadian Bar Review (online: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=6300919). Many Supreme Court cases just before and just after CISSS A have faithfully followed this methodology and are admirably consistent: see, e.g., TELUS Communications Inc. v. Wellman, 2019 SCC 19, [2019] 2 S.C.R. 144; R. v. Rafilovich, 2019 SCC 51, [2019] 3 S.C.R. 838; MediaQMI Inc. v. Kamel, 2021 SCC 23, [2021] 1 S.C.R. 899; Piekut v. Canada (National Revenue), 2025 SCC 13; R. v. Carignan, 2025 SCC 43; Kosicki v. Toronto (City), 2025 SCC 28; and many others.
[12] The majority reasons in a recent Supreme Court case, R. v. Wilson, 2025 SCC 32, seem at odds with this line of cases. The majority did not refer to the principle that the text is the anchor, seemed to de-emphasize the role of the text in the interpretation exercise, arguably found unexpressed legislative intention under the guise of purpose interpretation, and did not attempt to reconcile its reasoning with the earlier cases. This is regrettable: R. v. Sullivan, 2022 SCC 19, [2022] 1 S.C.R. 460 (horizontal stare decisis); Canada v. Boloh 1(A), 2023 FCA 120, [2023] 2 F.C.R. 915 at para. 24 (the need for doctrinal stability, especially on fundamental points of law like this). Wilson must be taken as an outlier and, thus, cannot be taken to have modified or repealed the long string of recent legislative interpretation cases that came just before it, cited above: and, on this, see also M. Mancini, Sunday Evening Administrative Review, Issue No. 198 (November 2025) (online: https://sear.substack.com/p/issue-198-november-2025) and M. Mancini, Sunday Evening Administrative Review, "“Administrative Law Wrapped, 2025”" (December 14, 2025) (online: https://sear.substack.com/p/administrative-law-wrapped-2025). Perhaps confirming that the long string of case law on this point continues is Carignan, a case postdating Wilson.
[13] While the text is the anchor of the exercise, the context of the words in the legislation can shed light on the meaning of the text and sometimes can resolve ambiguities in the text. And the same is true for the legislative purpose. A court must consider the context and purpose of the provision "“no matter how plain the disposition may seem upon initial reading”": Canada Trustco Mortgage Co. v. Canada, 2005 SCC 54, [2005] 2 S.C.R. 601 at para. 47; ATCO Gas & Pipelines Ltd. v. Alberta (Energy & Utilities Board), 2006 SCC 4, [2006] 1 S.C.R. 140, at para. 48; Williams v. Canada (Public Safety and Emergency Preparedness), 2017 FCA 252, [2018] 4 F.C.R. 174 at para. 43. But where the language is clear and unambiguous and unaffected by considerations of context and purpose, it must be given its effect and the element of purpose "“cannot be used to create an unexpressed exception to clear language”" which was arguably the case in Wilson: see, e.g., Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 SCC 20, [2006] 1 S.C.R. 715 at para. 23. And policy considerations "“cannot be permitted to distort the actual words of the statute, read harmoniously with the scheme of the statute, its object, and the intention of the legislature, so as to make the provision say something it does not”": TELUS Communications, above at para. 79.
[14] Courts must also consider both official language versions of legislation: Piekut, above; Schreiber v. Canada (Attorney General), 2002 SCC 62, [2002] 3 S.C.R. 269. In this case, there is no substantive difference between the English and French versions of sections 207.01, 207.05 and 207.06 of the Act.
[15] The Tax Court followed this methodology and found that sections 207.05 and 207.06 of the Act do not impose a penalty (at paras. 30-65). The Tax Court was correct.
[16] The provisions state clearly and unambiguously that they impose or are dealing with a "“tax”". The words used in subsection 207.05(1) are "“a tax is payable”" / "“""un impôt est à payer”". See also subsection 207.05(2) ("“amount of tax payable” "/ "“""l’impôt à payer”") both in the text and the margin note, subsections 207.06(1)-207.06(2) ("“liable to pay a tax”" / "“""l’impôt dont un particulier serait redevable”" in the text and "“tax payable”" / "“""l’impôt à payer”" in the margin notes).
[17] The word "“penalty”" is not present. When a penalty is intended, the Act consistently uses the expression "“is liable to a penalty” "/ "“""est passible d’une pénalité”" or "“penalty is paid”" / "“""la pénalté…est payée”".
[18] As for context, the words "“a tax is payable”", "“liable to pay a tax”" and other similar variants using the word "“tax”" are used consistently in the Act whenever a tax liability, as opposed to a penalty, is being imposed. And the use of a 100% tax is not unique to section 207.05. The Act uses a 100% rate where the Act provides special tax treatment or there is concern with avoidance and abuse.
[19] One indication that section 207.05 imposes a tax is seen by the fact that paragraph 207.06(2)(b) permits the Minister to waive or cancel all or part of the liability for tax imposed under section 207.05 in the event of double taxation. If section 207.05 levied a penalty, there would be no concern with relieving against double taxation, as penalties generally apply in addition to tax otherwise imposed.
[20] Section 207.05 is not unlike other provisions that are aimed at anti-avoidance and, thus, does not smack of a penalty: see subsection 56(2) which provides for an income inclusion of amounts diverted to a third party; see also section 103 which provides for an inclusion of partnership income allocated to a different partner. These provisions are not aimed at punishing fault but rather are aimed at preventing abuse.
[21] The charge in section 207.05 also meets the definition of a tax: Lawson v. Interior Tree Fruit and Vegetable Committee of Direction, 1930 CanLII 91 (SCC), [1931] S.C.R. 357 at 363. It is enforceable by law, imposed under the authority of Parliament, levied by a public body and intended for a public purpose.
[22] As mentioned above, if these provisions are characterized as imposing a penalty, the taxpayer will be able to raise a due diligence defence. But when Parliament intends a due diligence defence under the Act it says so: subsection 227.1(3) of the Act (director’s liability). It has not said so here.
[23] And on purpose, there is nothing in these sections that suggests a liability is being imposed in order to redress some sort of moral opprobrium normally associated with a penalty. Rather, in these sections, Parliament aims to take away the advantage gained through misuse of the tax-free savings account regime. It does not aim to do more, such as levying an amount over and above the advantage gained in order to create the sort of deterrence normally associated with penalties. Here, Parliament is not levying a disproportionate liability upon the taxpayer to punish socially unacceptable conduct.
[24] Parliament has enacted very strict requirements and limits concerning tax-free savings accounts and has needed to protect the integrity of the regime. It has done so by enacting a highly intricate and detailed scheme. Re-characterizing the regime as imposing a penalty would bring into operation a defence of due diligence that would undermine that intricate and detailed scheme.
[25] The Tax Court correctly characterized this regime as follows (at para. 59):The [tax-free savings account] regime is a benefit-conferring structure introduced to encourage personal savings by taxpayers by exempting tax from the income otherwise earned on savings. As such, there is a risk of taxpayers abusing the regime to avoid taxes on investments outside the [tax-free savings account] rules set by Parliament. The [tax-free savings account] Charge addresses those abuses. It taxes benefits from transactions that artificially shift taxable income from other unqualified transactions into the [tax-free savings account] regime. The Tax Court also correctly noted that the 100% tax rate is proportional to the generous treatment offered under the tax-free savings account regime and, for that reason, cannot be characterized as a penalty.
[26] Rather than interpreting the relevant provisions in accordance with their text, context and purpose, the appellant urged upon us a "“pith and substance”" or "“dominant characteristic”" approach. This may well be part of the proper approach for determining the constitutional validity of statutory provisions in some contexts, but it is not the proper approach for determining the meaning of a legislative provision.
[27] In this regard, the appellant’s reliance on 620 Connaught Ltd. v. Canada (Attorney General), 2008 SCC 7, [2008] 1 S.C.R. 131, is misplaced. That case used the language of "“dominant characteristics”" because it dealt with the constitutional division of powers between Parliament and the executive, not because the dominant characteristic approach applies to determine whether a charge is a tax or a penalty.
[28] The appellant also submits that the relevant provisions are aimed at deterring certain conduct and further larger public purposes and thus, smack of a penalty. However, it has been well-established for decades that taxation provisions can go beyond the purpose of raising public revenue and can extend to further economic and social policies or protect the integrity of a taxing regime: Stubart Investments Ltd. v. The Queen, 1984 CanLII 20 (SCC), [1984] 1 S.C.R. 536 at pages 573-575. I agree with the Tax Court’s finding (at para. 58) that "“[a] charge labelled as a tax may have characteristics so clearly coercive and disproportionate that one concludes it is a penalty; however, this case does not meet that standard”".
[29] The appellant also cites foreign law in support of his position. The foreign law is not relevant in this case. The statutory context and the interpretative principles in other jurisdictions often are different. Foreign law might assist only when the laws are the same or very similar, a point usually proven by expert evidence, something we do not have here. The Tax Court was correct (at paras. 47-48) in rejecting foreign law.
[30] Therefore, sections 207.05 and 207.06 of the Act do not impose a penalty, either separately or in combination.
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