THE HARMONIZATION OF TAX LEGISLATION DISSOCIATION: A Mechanism of Exception Part III

Martin Lamoureux,
Legislative Counsel, M. Fisc., M.B.A.
Department of Justice Canada

INTRODUCTION[1]

This Column deals with the concept of dissociation and is intended to at clarify the intellectual approach that underlies the use of this concept in a tax law context. This will involve defining dissociation, explaining in what it consists and showing its usefulness for deciding whether a private law concept used in a federal statute or regulation is dissociated from provincial law. It will also include a discussion of the effects of the enactment of section 8.1 of the Interpretation Act[2] as they relate to the legal reasoning that must be followed in order to verify whether a private law concept used in the Income Tax Act[3]is dissociated from the private law of the provinces. Finally, several decisions will be presented in which it was decided that federal legislation was dissociated from the private law of the provinces.

I. DISSODIATION: A DEFINITION

Although subsection 92(13) of the Constitution Act, 1867[4] clearly establishes the exclusive jurisdiction of the provinces over property and civil rights, it has been recognized on many occasions that Parliament also has the right to "enact rules of private law for its own purposes when legislating in ereas within its jurisdiction." [5] Thus, whenever there is a point of contact with the private law of the provinces in a federal statute, there is a legal relationship that must be analysed. When the private law of the provinces applies for the purposes of applying federal legislation,"[...] then there is a relationship of complementarity between the two, or the federal statute may, on the contrary, derogate from the private law - in which case there is a dissociation between them." [6]

Section 8.1 of the Interpretation Act codifies the principle of complementarity but in so doing does not preclude the use of the principle of dissociation by Parliament:

Both the common law and the civil law are equally authoritative and recognized sources of the law of property and civil rights in Canada and, unless otherwise provided by law, if in interpreting an enactment it is necessary to refer to a province's rules, principles or concepts forming part of the law of property and civil rights, reference must be made to the rules, principles and concepts in force in the province at the time the enactment is being applied.  (emphasis added)

Although complementarity is the general rule, Parliament has the power to dissociate itself from the private law of the provinces. Moreover, this principle is explicit in the judgment of Décary J. in St-Hilaire v. Canada, [7] a judgment preceding the enactment of section 8.1 of the Interpretation Act:

The federal private law in Quebec is composed of the private law defined in a statute of the Parliament of Canada and the civil law if it is necessary to resort to an external source in order to apply a federal statute. The Parliament of Canada may enact private law legislation that will form a complete code in which case there is no need to resort to an external source, the civil law, or it may enact private law legislation which, because it is incomplete, will refer either expressly or by implication to the civil law for its implementation.[8] (emphasis added)

The concept of dissociation can be defined, therefore, as a derogation by Parliament from the private law of the provinces when it legislates on a matter that falls within its jurisdiction. [9]

II. THE OBJECTIVES OF DISSOCIATION

In the first instance, Parliament will prefer dissociation in order to ensure the uniform application of tax legislation. In this respect, it should be remembered that, in taxation, the principle of horizontal equity is important in Canada. [10] Dissociation is to be preferred where the application of the general rule of complementarity leads to unacceptable differences, from the standpoint of fiscal policy, in the tax consequences among provinces. [11] The decision of the Federal Court in Marcoux v. Canada[12] is a case in point:

In the interests of the uniform application of this federal statute and the equality of taxpayers before the taxation authorities, I am of the opinion that Parliament, under subsection 224(1) of the Income Tax Act, has created a unique mechanism that gives its provision a genuine self-sufficiency in relation to private law. [13]

Secondly, Parliament will use this method to improve the certainty of the law. These are objectives that are obviously essential, to say the least, in an area such as taxation where the taxpayer generally seeks to minimize the tax payable and uses the tax legislation for that purpose. A good example of a case where dissociation is used to make the law more intelligible is Parliament's definition of the phrase "common-law partner". [14] In this perspective and in a harmonization context, the concept of dissociation could thus be seen as an exceptional mechanism while the general rule would be complementarity.

III. DISSOCIATION: THE APPROACH TO FOLLOW

Absent specific rules that override the private law of the provinces in order to create uniform federal law, provincial law will apply in a complementary manner to federal legislation. [15] Section 8.1 of the Interpretation Act has codified a rule long followed by the tax courts. [16] It is time to look at the reasoning that must be used in determining whether a concept is dissociated from the provincial private law or if its legal application is intended instead to be based on the general rule of complementarity...

3.1- An area of law independent of the private law of the provinces

The first step is to ascertain whether the legislation in question uses the private law of the provinces. There are some areas, consisting solely of public law, that are independent of the private law of the provinces, such as maritime law. Section 2 of the Federal Court Act[17]refers to "Canadian maritime law", an area of law that, by its nature, is dissociated from the private law of the provinces. [18] The Supreme Court of Canada interpreted section 2 of the Federal Court Act in ITO-International Terminal Operators Ltd. v. Miida Electronics Inc. [19]and held that maritime law in Canada was solely federal law and excluded the application of provincial law as the suppletive law. [20] Because of the origin of the rules and their interpretation by the courts, the implementation and interpretation of maritime law is independent of the private law of the provinces. In other words, "[a]s maritime law has been defined by the Supreme Court of Canada as autonomous law, the concept of dissociation thus applies in that the application of this provision bars the supplementary application of the law of the provinces." [21]

However, tax law is not a law independent of the private law of the provinces:

In my opinion fiscal law is an accessory system, which applies only to the effects produced by contracts.  Once the nature of the contracts is determined by the civil law, the Income Tax Act comes into effect, but only then, to place fiscal consequences on those contracts.  Without a contract, without a law and an obligation, there can be no fiscal levy. Application of the Income Tax Act is subject to a civil determination, whether such a determination be according to civil or common law. [22]

3.2- Exceptions to the rule of complementarity

As noted above, it is necessary to first verify that Parliament has not created an independent area of law before applying the general rule of complementarity with respect to a particular statute. After that, to the extent that this is not the case, the analysis must be pursued in order to determine whether the concept at issue is a public law concept (as opposed to a private law concept) or whether the rule, principle or concept at issue does not fall within the area of property and civil rights (the common or usual meaning of the concept). Lastly, it must be determined whether a particular rule is not opposed in the specific case to the application of the provincial private law (explicit or implied dissociation on the part of Parliament).

3.2.1- Public law concept versus a private law concept

Where a statute uses a public law concept that is, then the public law rule, whose origins are generally found in the common law, will apply in all provinces, including the province of Quebec. [23]

Here, the fact that a concept is a public law concept does not, strictly speaking, constitute "dissociation"; that concept should instead be seen as an exception to the principle of complementarity since a public law concept is not intended to regulate the exercise of civil rights but rather to govern the relationships between the state and its citizens. In this respect, one might mention the concept of a charity, which is not defined in the I.T.A. but which could plausibly be seen as a public law concept. [24]

3.2.2- The rule, principle or concept does not relate to property and civil rights

The "residence" test would appear to be a good example of a concept that can have a legal connotation but has been interpreted as having an everyday meaning. This concept is fundamental in taxation since it is used to determine whether a person is subject to Canadian tax on his or her worldwide income. However, "residence" is not defined in the I.T.A. as such. [25] It is the courts that have set the parameters for the application of this concept through, inter alia, the case of Thomson v. M.N.R. [26] What is important in this case for the purposes of this Column is that the five majority judges gave the concepts of "resident" and "ordinarily resident" the meaning ascribed to these terms in ordinary use rather than interpreting them on the basis of a specific technical meaning derived from a legal system.

Section 8.1 of the Interpretation Act explicitly states: "if in interpreting an enactment it is necessary to refer to a province's rules, principles or concepts forming part of the law of property and civil rights [...]". Now that section 8.1 has been added to the Interpretation Act, the appropriate legal approach is to apply the common law or the civil law, depending on the province of application, unless it is concluded that Parliament has decided to dissociate itself from the provincial private law. The judge or practitioner will therefore have to pose the question of whether the concept is dissociated, by the context in which it is used, from both legal systems, particularly when the context requires a plain meaning interpretation. Professor David Duff has recently written on the concept of residence:

...[t]he specific interpretations of the words "residence" and "ordinarily resident" in Thomson are less important than the sources to which the majority judgments refer to support their interpretations. In contrast to the concepts of charity, gift, and employment that Canadian courts have adopted for tax purposes, these interpretations of the words "residence" and ordinarily resident» originate not in common law concepts or principles, such as those governing an individual's domicile, but in the ordinary meaning of the words found in dictionary definitions and "common parlance". [27] (emphasis added)

It is interesting to note that Quebec's Taxation Act[28] explicitly derogates from the Civil Code of Québec[29] in respect of the concept of "resident". It should also be stressed that Professor David Duff[30] and Me François Auger express the view that, for greater certainty, [31] “ [...] that one way Parliament could intervene would be to adopt an explicit derogatory clause in the I.T.A., similar to section 7.14 of the T.A., which excludes the application of article 77 C.C.Q.” [32] However, this solution derogates only from the applicable civil law; but would the common law apply to determine an individual's residence in a context where section 8.1 of the Interpretation Act was applied? In answer to this question, it is believed that, if such a solution were adopted, it would also be necessary to derogate from the private law of all of the provinces.

3.2.3.- Explicit dissociation by Parliament

To make a dissociation explicit, Parliament can decide, inter alia, to include a definition in the enactment that gives its own meaning to the concept that is used. , so as to create a “complete code”. The reader would not be required to refer to either of Canada's two legal systems. As well, it could use a neutral term that does not evoke any legal concept of the civil law or the common law. [33] The common feature of both techniques is obviously to develop a neutral legal norm establishing a private law specific to federal legislation (applicable uniformly throughout the territory of Canada), using terminology that does not cause confusion either in common law or in civil law. To achieve these ends, Parliament may explicitly derogate from the application of the private law of the provinces and favour an approach to interpretation that is based on contextualizing the terms used so that they may be given their common or ordinary meaning.

Subsection 227(4.1) I.T.A. offers an obvious example of a case where Parliament derogates from the private law of the provinces by enacting a contrary "rule":

Notwithstanding any other provision of this Act, the Bankruptcy and Insolvency Act (except sections 81.1 and 81.2 of that Act), any other enactment of Canada, any enactment of a province or any other law, [...] property of the person [...] is deemed

a. to be held, from the time the amount was deducted or withheld by the person, separate and apart from the property of the person, in trust for Her Majesty whether or not the property is subject to such a security interest, and

b. to form no part of the estate or property of the person from the time the amount was so deducted or withheld, whether or not the property has in fact been kept separate and apart from the estate or property of the person and whether or not the property is subject to such a security interest [...]

In this regard, the Supreme Court of Canada in First Vancouver Finance v. Canada[34]explicitly confirms that a deemed trust is dissociated, in some respects, from the private law of the provinces:

Moreover, since the trust is a deemed statutory trust, it is not governed by common law requirements, and, in this regard, the ongoing acquisition of trust property does not present a conceptual difficulty.  I emphasize that it is open to Parliament to characterize the trust in whatever way it chooses; it is not bound by restraints imposed by ordinary principles of trust law. [35] (Emphasis added)

Accordingly, this decision confirms the existence of dissociation, at least in part, for the concept of a deemed trust. In the above decision, Iacobucci J. stressed that Parliament had clearly dissociated the deemed trust from certain characteristics of the common law trust (fiducie), i.e., the rules pertaining to tracing (droit de suite).

Four recent judgments[36] from the Trial Division of the Federal Court of Canada, rendered by Martineau J., have applied civil law to the beneficiary's right under the deemed trust mechanism. In other words, according to these judgments, where a Quebec taxpayer is faced with a deemed trust, he or she must refer to the civilian concept of Her Majesty «droit de bénéficiaire». Moreover, it is expressly stated in the four judgments:

WHEREAS if Her Majesty decided not to institute a personal action herself against the tax debtor or not to exercise the remedies conferred on her by the ITA for realizing her priority claim, she cannot assert her beneficial right unless she herself observes the provincial provisions applicable in the case at bar. [37]

In addition, the four judgments applied the civil law rules for the ranking of secured debts in order to complete the rule under section 227(4.1) I.T.A. These decisions have been appealed and it will be interesting to see whether the Court of Appeal will find that the consequence of the language used in subsection 227(4.1) I.T.A. is to create a relationship of complementarity or of dissociation between federal law and civil law.

3.2.4 - Implicit dissociation by Parliament

It is certainly more difficult to recognize implied dissociation on the part of Parliament than express dissociation. The enactment must in fact be interpreted on the basis not only of its structure but also of the tax context and the underlying tax policies of the statute as a whole. For example, Markevich v. Canada[38]raised the issue of whether the I.T.A. was a complete code with respect to the limitation period for tax debts. The decision of the Trial Division of the Federal Court of Canada [39] went in this direction: it dismissed a taxpayer's application for judicial review on the grounds that the I.T.A. was sufficient in itself with respect to limitations and that, despite Parliament's silence in that regard, it did not have to rule on the limitation period. The Court recognized, therefore, that there had been an explicit dissociation on the part of Parliament.

By contrast, the Federal Court of Appeal reversed the decision of the Trial Division, first noting that, "[t]here are no words excluding limitation periods in the collection provisions of the Income Tax Act." [40] Second, unlike the trial judge, it could not draw the inference that the I.T.A. was a complete code with respect to limitations. The Court, therefore, ruled that the concept of limitation, which falls within the private law, was to be interpreted on the basis of the general rule of complementarity since Parliament was silent on this issue.

It is interesting to note that the Supreme Court of Canada heard that case on December 4, 2002, and will shortly issue its decision, resolving the issue and, it may be hoped, setting guidelines for the method of statutory interpretation that must be followed in cases of implicit dissociation, where necessary.

CONCLUSION

A federal statute may be completely dissociated from the private law of the provinces where the Parliament of Canada creates an area of law independent of the private law of the provinces. In cases where the law is not independent, the introduction of section 8.1 of the Interpretation Act creates a presumption that federal legislation must be completed by referring to the private law of the provinces where a private law concept is used.

A particular concept may, however, be dissociated from the private law of the provinces where it is a public law concept, where its application does not fall within property and civil rights (e.g., where it is used according to its ordinary meaning) or where Parliament has, explicitly or implicitly, excluded the application of the private law of the provinces with respect to the concept.

In this last case, it is preferable, where Parliament intends to dissociate itself from the applicable private law of the provinces, that it do so explicitly. As far as possible, it should clearly draft the dissociation and thereby make the task of litigants and courts easier. In that respect, it may be pointed out that Markevich v. Canada[41] offers an excellent illustration of the need for Parliament to express itself without ambiguity when it wishes to distance itself from provincial legislation in order to make the law clearer so as to avoid disputes and facilitate the task for the litigants and the courts.

Footnotes

  • [1] The writer wishes to thank all the members of the Tax Law Team, Bijuralism and Drafting Support Services, Legislative Services Branch, Department of Justice of Canada, for their valuable comments and collaboration in the revision of this Column. The opinions expressed in this paper are the sole responsibility of the author and are not necessarily those of the Department of Justice of Canada.

  • [2] R.S.C. 1985, c. I-21 (the “Interpretation Act”).

  • [3] R.S.C. 1985 (5th Supp.), c.1 (the "I.T.A.").

  • [4] 30 & 31Vict., U.K., c.3.

  • [5] Jean-Maurice Brisson and André Morel, "Federal Law and Civil Law: Complementarity, Dissociation" in The Harmonization of Federal Legislation with the Civil Law of the Province of Quebec and Canadian Bijuralism, Collection of Studies (Ottawa: Department of Justice of Canada, 1990) 215, p. 222.

  • [6] Ibid., p. 215. (the bold lettering was used by the authors of the quoted text)

  • [7] St-Hilaire v. Canada (Attorney General), [2001] 4 F.C. 289 (C.A.) (« St-Hilaire »).

  • [8] Ibid., p. 313.

  • [9] Ibid.

  • [10] To this effect, the juge Evans of the Federal Court in Markevich c. The Queen 99 DTC 5136 wrote on this issue, referring to Symes v. Canada, [1993] 4 S.C.R. 695, at pages 751 and 752, as follows: [Translation] "Furthermore, as enshrined in the Income Tax Act, the principle of "horizontal equity" among taxpayers is one of the fundamental objectives of this Act, which, because of this, must be interpreted to the extent possible so as to guarantee that taxpayers who find themselves in the same situation pay the same amount of tax.". (emphasis added)

  • [11] See, inter alia, to this effect: David DUFF, “The Federal Income Tax Act and Private Law in Canada: Complementarity, Dissociation and Canadian Bijuralism”, at pp. 40-41. This paper will be published by the Canadian Tax Foundation in 2003, at pp 40-41. The paper was written under a research contract awarded to Professor Duff by the Department of Justice of Canada.

  • [12] [2001] 4 C.T.C. 174, 2001 D.T.C. 5233 (F.C.A.).

  • [13] Ibid., paragraph 16.

  • [14] 248(1) "common-law partner" I.T.A.

  • [15] For an analysis of the effects of the inclusion of section 8.1 in the Interpretation Act, see, inter alia, Henry L. Molot, "Clause 8 of Bill S-4: Amending the Interpretation Act" in "The Harmonization of Federal Legislation with the Civil Law of the Province of Quebec and Canadian Bijuralism", Second Publication, (Ottawa: Department of Justice, 2001), Booklet 6.

  • [16] See to that effect, inter alia, St-Hilaire, supra, note 7; and Perron v. MNR, 60 D.T.C. 554 (TAB.).

  • [17] R.S.C. 1985, c. F-7 (the "Federal Court Act").

  • [18] Section 2 of the Federal Court Act reads: "Canadian maritime law" means the law that was administered by the Exchequer Court of Canada on its Admiralty side by virtue of the Admiralty Act, chapter A-1 of the Revised Statutes of Canada, 1970, or any other statute, or that would have been so administered if that Court had had, on its Admiralty side, unlimited jurisdiction in relation to maritime and admiralty matters, as that law has been altered by this Act or any other Act of Parliament. (emphasis added)

  • [19] [1986] 1 S.C.R. 752. ("ITO")

  • [20] Moreover, the ITO decision was confirmed by the Supreme Court of Canada in Ordon Estate v. Grail, [1998] 3 S.C.R. 437 where, at paragraph 68 of the decision, it was explicitly stated that "[T]his Court's recent maritime law jurisprudence makes clear that Canadian maritime law is a body of federal law, uniform across the country, within which there is no room for the application of provincial statutes."

  • [21] Marie-Claude Gervais and Marie-France Séguin, "Some Thoughts on Bijuralism in Canada and the World, in The Harmonization of Federal Legislation with the Civil Law of the Province of Quebec and Canadian Bijuralism", Booklet 2, Ottawa, Department of Justice of Canada, 2001, p. 11.

  • [22] R. v. Lagueux & Frères Inc., [1974] 2 F.C. 97 (T.D.), paragraph 26.

  • [23] St-Hilaire, supra, note 7, p. 313; 2747-4274 Québec Inc. v. Québec (Régie des permis d'alcool), [1996] 3 S.C.R. 919, paragraph 81; Laurentide Motels Ltd. v. Beauport (City), [1989] 1 S.C.R. 705, paragraph 4; Attorney General of Quebec v.Labrecque, [1980] 2 S.C.R. 1057, p. 1081 ; Canadian Broadcasting Corp. v. Québec (Police Commission), [1979] 2 S.C.R. 618, p. 644.

  • [24] « Benoit MANDEVILLE, Harmonisation des lois fiscales : Asymétrie vs uniformisation » (2002), Vol. 23, No. 2 Revue de planification fiscale et successorale 393-405, p. 403. However, for a contrary opinion, see the research report of Professor David Duff, supra, note 11, pp. 40-41.

  • [25] Section 250 I.T.A. contains a set of presumptions whose function is to deem a person or corporation to be resident or not resident in Canada.

  • [26] [1946] S.C.R. 209 ("Thomson").

  • [27] Supra, note 11, pp. 40-41.

  • [28] R.S.Q. 1991, c. I.3 (the "Q.T.A.")

  • [29] S.Q. 1991, c. 64 (the "Civil Code").

  • [30] Supra, note 11, p. 70.

  • [31] Especially in light of Will-Kare Paving & Contracting Limited v. Canada, [2000] 1 S.C.R. 915, in which the Supreme Court of Canada, in a 4-3 split decision, held that the term "sale" should be interpreted on the basis of its technical (legal) meaning and not its plain meaning.

  • [32] 32 François AUGER, " Study of the dissociaton between federal tax legislation and Quebec civil law, Residence", The Harmonization of Federal Legislation with Quebec civil law and Canadian bijuralism,, Collection of Studies in Taxation, Association de planification fiscale et financière and Department of Justice, 2002, 5 :1-35, p. 34.

  • [33] For a more in-depth discussion and examples where these techniques have been used, see Marc CUERRIER, Louis L'HEUREUX and Sandra HASSAN, "Harmonisation des lois fiscales fédérales avec le droit civil québécois et le bijuridisme canadien", in Congrès 2000, Montreal, Association de planification fiscale et financière, 2001, pp. 16 : 1-58, at pp.38 to 40.

  • [34] [2002] C.S.C. 49.

  • [35] 35 Ibid., paragraph 34.

  • [36] 36 Canada (Minister of National Revenue - M.N.R.) v. National Bank of Canada, [2002] F.C.J. No. 1416 ("1416"); Canada (Minister of National Revenue - M.N.R.) v. National Bank of Canada, [2002] F.C.J. No. 1417 ("1417"); Canada (Minister of National Revenue - M.N.R.) v. Caisse populaire d'Amos [2002] F.C.J. No. 1418 ("1418"); Canada (Minister of National Revenue - M.N.R..) v. Caisse populaire Desjardins de Lebel-sur-Quevillon,[2002] F.C.J. No. 1419 ("1419").

  • [37] 371416, supra, note 36, p. 24; 1417, supra, note 36, p.21; 1418, supra, note 36, p. 24;1419, supra, note 36, p.20.

  • [38] [2001] 3 F.C. 449.

  • [39] Markevich v. Canada, [1999] 3 F.C. 28 (T.D.).

  • [40] Markevich v. Canada [2001] FCA 144, paragraph 15.

  • [41] Supra, note 34 and 35.

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