The expression “it is all a matter of fact” finds its full meaning in the world of legal litigation, and most notably in the case studies of Fitter and Medelco. While it is certain that the judge’s final decision will always depend on the application of the law to the facts, it is difficult to believe that two taxpayers facing the same situation will not get through the same judgment. In our two cases, the facts are practically similar but remain subtly different as they involve two Provincial Courts – first Alberta in 2019 and then Ontario in 2020. Yet the common denominator in both cases – the British Columbia Crown – regardless of the case, a year apart, has retained the same line of defense :
- Impose its provincial legislation on non-resident vendors to make them subject to sales tax registration in British Columbia;
- Revoke its immunity by relying on case law and provincial legislation to assert its exclusive jurisdiction.
Whatever the case, it is always a challenge for a legislator to enforce a law and make it effective throughout a territory. In Canada, this is even more significant since provincial legislatures must comply with federal legislation and are not immune from constitutional review in other provinces. British Columbia is a typical example of this.
British Columbia imposes an obligation on non-residents of the province
This obligation is imposed by section 172 of the Provincial Sales Act (PSA). This section provides, among other things, that “every person located in Canada but outside British Columbia must be registered”. The province has strict territorial conditions, primarily that the solicitation and final sale must take place in the province. Therefore, the non-resident vendor is subject to this administrative obligation if he wants to avoid tax penalties.
These dispositions are the subject of strong criticism because they are not clear and, above all, they ignore the very principles of sales tax. In principle, the applicable tax is that of the province in which the seller delivers the property or makes it available to the purchaser. But beyond the law, the article completely ignores the liberty of the parties themselves to decide where the delivery will take place. Through these provisions, the Province simply extends its jurisdictional power and gives itself the possibility of reaching taxpayers outside the province.
First case located in Alberta
In our first case, the vendor was located in Alberta and was selling sports equipment; a taxable activity, in terms of sales tax. This business made sales for clients located in British Columbia. At that time, the British Columbia Ministry of Finance conducted an audit and pointed out the requirement for non-resident businesses to register in the province and collect sales tax from customers located in the province. As a result, the vendor was penalized by the Ministry.
The vendor then filed a motion before a judge of the Provincial Court of Alberta to claim the unconstitutionality of the extraterritorial effect of section 172 of the PSA.
While the Ministry’s defense was to claim Crown immunity, which consists of the fact that the British Columbia Court has exclusive jurisdiction to litigate and decide any dispute concerning the application of its laws. Of course, if the dispute were brought before the British Columbia Court, it would never challenge the constitutionality of its laws. The argument would therefore be rejected on the merits.
The Alberta Superior Court rejected the immunity argument. It reiterated the principle that the provincial superior court has jurisdiction to decide questions relating to the constitutionality of any provincial legislation. Here, the judge only recalled the principle from the Hunt case law. This decision underlines the crucial role of the Superior Court, and in particular, its inherent competence that allows it to rule cases in any unrestricted scope and, in this case, the constitutionality of provincial legislation. Provincial judges are appointed by the federal government and they must protect the Constitution. The Fitter decision, therefore, enhances this power of the provincial judge to decide whether legislation from other provinces is constitutional or unconstitutional.
Yet this acknowledgement is only short-term. The Medelco decision comes less than a year after Fitter. This time, the vendor is located in the province of Ontario. The company is therefore registered in the province of Ontario. The vendor does not transport product to British Columbia and has no close business ties with the province. The procedure is the same; after a review in British Columbia, the Minister finds that the company has not complied with section 172 of the PSA, and therefore owes penalties and interest.
A declaratory action before the Ontario Supreme Court
As a result, the vendor issued a declaratory action before the Ontario Supreme Court. His request was simple: the execution of the substantive judgment in the Fitter case and thus deemed the province’s legislative provisions unconstitutional. The plaintiff pointed out that the laws of another province have no effect in the province of Ontario where the company is registered and carries on business exclusively.
There is no need to repeat the defenses as they are identical to the first case. The Minister continues to claim immunity from the Crown and hence its legitimate competence to hear the dispute.
The Ontario Supreme Court was unwilling to resolve the principle of constitutionality. In fact, the Court simply recognized interprovincial immunity, which implies that it does not, in principle, have jurisdiction to decide the dispute. This decision therefore contradicts the Fitter decision and ignores the competence of the provincial judge himself and his important role in reviewing standards, and in particular, the constitutionality of provincial legislation.
First of all, the decision of the Ontario provincial judge is understandable. In recent years, and particularly with digital law, the provinces have been protecting themselves from tax evasion and fraud by putting in place significant means of pressure against the giants that emerged from the GAFAM but also against other American companies that trade closely with Canada. It should also be noted that at this stage of the proceedings, the Fitter decision is under appeal. The decision could very well join the Medelco decision and make it a precedent.
However, by protecting themselves, the provinces are being selfish and forgetting that they are part of a larger whole: a federation. A federal state necessarily means cooperation and harmonization. If all provinces require registration, businesses will therefore face different requirements and therefore different laws and therefore different jurisdictions. We consequently lose sight of the real importance of what the Canadian government has tried to implement: sales tax harmonization (HST).
Good to know
As a reminder, as of April 1, 2021, British Columbia’s 2020 budget for the year 2021 will come into force, including the registration requirement for non-Canadian residents who sell taxable property outside that province and/or Canadian or foreign residents who sell software and telecommunications services.
This new legislation extends the provisions of the British Columbia Provincial Sales Tax Act, and more specifically, section 172.1, the precursor to the registration requirements for non-resident vendors. This section was already a foretaste of British Columbia’s desire to extend its jurisdiction to non-resident vendors in that province by imposing a registration obligation on them where there was an advertising solicitation.
The legislator goes even further by taxing sales made to customers located in the province. If we are talking about a new registration rule, in reality, the Province has only introduced a simple threshold of $10,000 of annual revenue from the province. As a reminder, the principle with respect to sales tax in Canada (whether federal or provincial for Quebec), is that a vendor ceases to be considered small, and therefore subject to the sales tax registration requirement, as soon as its total revenues from taxable supplies exceed $30,000 ($50,000 for public service bodies).
From this point on, the Province will be able to extend its jurisdiction far beyond its borders. It is making sure that it extends its power not only on the basis of the PSTA but also by introducing this new provision by the effect of a threshold, thus affecting not only large companies but also small businesses. It remains to be seen in practice whether this disposition will survive, particularly in view of its constitutionality. It dissuades small businesses that would not want to comply with these administrative obligations from doing business with the province and that will not have the capacity to face costly litigation before the Supreme Court. They will be in line with these decisions, in which taxpayers will want to defend the unconstitutionality of these dispositions, pushing them in particular not to trade with the province as much as possible in order to avoid tax disputes.
Meltem Özdamar – Sales Tax consultant
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