“Canadian provincial governments have broad authority to impose direct taxes by passing enabling legislation in their respective legislatures,” explains the C.D. Howe Institute in Ontario’s Green Energy ‘Fee’: The Trouble with Taxation through Regulation.
“Governments may also use regulation to set fees, for example, to recover the cost of services they provide, but cannot use regulation to impose taxes that raise general revenue,” it continues. “Doing so would be unconstitutional.”
“Governments nonetheless sometimes attempt to raise revenue by imposing levies that are deliberately mislabeled as ‘fees’ and past efforts to do so have exposed provincial governments to successful constitutional challenges,” argues lead author Benjamin Alarie, a Professor of Law at the University of Toronto.
Fee on renewable energy to fund department activities
The Ontario government recently directed the Ontario Energy Board (OEB) to collect a fee that will be used to fund activities of its energy department. It used an Order-in-Council to order the OEB to assess a special levy on local distribution utilities in proportion to the amount of electricity they distribute.
The levy is designed to deliver C$58 million in additional revenue to the province.
In matters of taxation, Canada’s constitution allows provinces to enact laws which impose taxes, but there are limits to what they may do without gaining prior approval of their elected legislature, the paper argues.
Provinces may use regulation that is not approved by the legislature to set fees to recover the costs of goods or services provided to people who are charged the fee, but they may not use regulation to impose taxes that fund general activities of government.
Tax on renewable energy requires legislative approval
Taxes require legislative approval, and raising revenue “quietly through regulation” is done “to avoid political embarrassment in the legislature” but the action exposes governments to successful constitutional challenges, it explains.
In Ontario, the Taxpayer Protection Act requires a referendum approving any new tax before legislation proposing the tax is introduced.
“Governments’ temptation to quietly impose taxes is clear enough; so too is the need to resist such attempts as they arise,” the paper concludes. It details numerous legal arguments which can be used to interpret the levy as a tax.
The OEB is a provincial agency with a mandate that includes the promotion of “use and generation of electricity from renewable energy sources in a manner consistent with the policies of the Government of Ontario, including the timely expansion or reinforcement of transmission systems and distribution systems to accommodate the connection of renewable energy generation facilities.”
'The levy is a tax'
“On its face, the levy is a tax,” the authors argue. “Provided the political will is available, the government has the constitutional capacity to get its revenue one way or the other.”
“Political pressure can shape government action and, in some circumstances, restrain governments from taking arbitrary actions,” they add.
“Taxation through regulation is taxation without representation” and, should the provincial government wish to avoid the possibility of a constitutional challenge, it should endorse the green energy regulation through explicit tax legislation.
The C.D. Howe Institute was created in 1958 to research issues on public economic and social policy.