First, I was wrong in the comment before that the Residual Value Charge (RVC) was struck down on federalist grounds, as it sounded from that article. It was struck down because it was categorized as a tax, as opposed to a royalty, and the enabling statue, the Crown Forest Sustainability Act, did not authorize the Minister of Natural Resources to levy a tax through forestry leases.
The reasoning requires 2 steps:
1) The classification of the RVC as a tax or a royalty.
2) An analysis of s. 31 of the Crown Forest Sustainability Act to determine if the provision authorizes a tax.
The relationshp between the Province and Boniferro Mill Works is a private lessor-lessee relationship, with the Province as proprietary owner of lumber resources in Ontario, and Boniferro Mill Works leasing that property from the Crown. The relevant term of the lease was s. 2.4, requiring the company to pay prices as determined by the Minister under s. 31 of the Crown Forest Sustainability Act. Section 31 states that the Minister may determine the "price at which forest resources may be harvested or used for a designated purpose under a Forest Resource License."
The RVC was to be determined in relation to the market value of the post-processed lumber resources. The test for determination of whether the charge is a tax is as follows:
1) Is the levy enforceable by law?
2) Is the levy imposed under the authority of the legislature?
3) Is the levy imposed by a public body?
4) Is the levy for a public purpose?
The answer to (2) and (3) is an obvious yes. The answer to (1) was also found to be yes by virtue of the fact that the Crown Forest Sustainability Act creates a statutory enforcement regime that exists above and beyond the private contractual relationship between the Crown and the company. Fair enough.
My concern in this decision is with (4). The court found, with little analysis, that the fact that revenue raised through the RVC was directed into the general revenue stream of the Province to be determinative of whether the charge was for a public purpose. It seems to me that an analysis of the purpose of the levy requires more than looking at whether the revenue is directed to some dedicated fund or the Province's general revenue stream. Such an analysis should look at the purpose of applying the charge rather than the purpose to which the revenue will be directed. The charge here is, at least arguably, for the purpose of capturing the full proprietary value of the lumber to the Province - which is not a public purpose, but a purpose driven by the Province's private ownership of the resources. However, the Crown did not argue this and in fact conceded this point to the complainants... so maybe there is jurisprudence to suggest that this part of the analysis is suppose to look only at the purpose to which the revenue is to be applied, rather than the purpose of imposing the charge in the first place.
The second step of the analysis looks at whether s. 31 authorizes taxation. An argument could be made that s. 31 provides an implied authorization to apply taxation - but unfortunately for the government, legislation requires an express authorization for an administrative agency to levy taxation. Which it clearly does not do.
So, on the merits of the case... I have that one concern. Though its possible it would become less of a concern if I read more on what is meant by "public purpose". But I don't really want to devote the time to find out, so I'll leave it at that.
Looking at the decision more broadly, I have 2 general comments. First, expect the Province to appeal as far as possible. It is at least debatable whether the charge is a tax or royalty as it has characteristics of both. The Court of Appeal may come to a different conclusion (although the standard of review for an appellate court on questions of mixed fact and law is reasonableness - so the characterization of the charge as a tax by the trial court does not have to be correct, it just has to be reasonable). And the Province is not about to give up on $100 million of revenue.
Second, this is a bad decision from the point of view of otherwise uninterested citizens in Ontario. It just means that the Province will have a $100 million revenue shortfall due to the sloppy drafting of the enabling statue. $100 million of proprietary value in lumber resources will have been lost to the private sector. The effect really would have been the same had the Province determined the value of lumber, and then summarily discounted private lumber companies $100 million.
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2 comments:
Interesting analysis. I'm going to have a go at the points where I could see a valid opposing argument, but needless to say, I'm not a lawyer (haven't even taken as much as a single law course) and this is all way out of my league.
First of all, I see your point with "#4" of the criteria for the RVC to be considered a tax. I agree that the account to which the government sends RVC payments should hardly be indicative of the RVC's purpose. But I don't see how it can be considered simply a "charge" for the lumber based on the government's ownership of the resources. BMW and other lumber companies already pay a separate "minimum charge" to the government, as well as a forest renewal charge and a forest futures charge. It seems to me that these charges would constitute the fee paid to the government for use of their privately owned land & resources. The RVC is an additional "fee" on top of this, and it is based on the profits of the lumber companies as opposed to a fixed cost for the harvesting of crown resources. In my admittedly-ignorant line of reasoning, this sounds to me like it's designed as a tax.
Furthermore, I don't completely buy into the general argument that this decision is against the interests of Ontario citizens. It's true that if the government set up the RVC payments as an additional "charge" for their private resources instead of as what's been judged as a tax, the government would have millions more in revenue and therefore Ontario would be better off. But couldn't the same argument be made in raising any tax or fee for any corporation or individual? If the PST went up to 10%, then all "otherwise uninterested citizens" would be better off, insofar as there would be more provincial revenue available for spending. Same goes for MTO fees or toll roads or whatever. But, of course, this argument doesn't hold up. I think it's much the same in this particular case...the money saved by the softwood lumber industry helps it become more profitable, employ more Ontario citizens, and improve rural economies in Northern Ontario. Classic right-wing talking point? Perhaps. But I think it's a fair argument to make when we're talking about a struggling industry and not big-oil or something.
So those are my points. Granted, there's a bit of a family bias, but it's balanced out by my objective views on the relationships in general between business and government. This was more just to try my hand at arguing with lawyers. How'd I do?
Keep in mind that the only reason the tax is unlawful is because it is not authorized under s. 31 of the CFSA. It is, in general, perfectly valid to apply a tax to the use of the Government's property. If s. 31 of the CFSA had said that the Province may determine the "price at which forest resources may be harvested or used for a designated purpose under a Forest Resource License" and that price may include a Residual Value Charge tax determined in relation to the value of post-processed lumber, then the charge would have been lawfully authorized. They could have applied the RVC had they properly written the provision. Or, if the provision had been properly interpreted (or at least interpreted in the same way this trial judge interpreted it) then the Province could have just increased the minimum charge under the lease. The point is, as long as they are following the statue, they can charge as much as they want. And from a policy perspective... you want to the Province to be able to have the freedom to determine the price they are going to charge forestry companies.
Again... I tend to think that the case came out properly on its merits, and that my one concern is likely answered in the jurisprudence and that is why the Province didn't argue it.
But in terms of policy, its still a bad outcome.
Now, an argument can certainly be made that this outcome will help development of the forestry industry in northern and rural Ontario through the old trickle-down theory. My point is just that losing this revenue in this manner is what is unhelpful. If the government had a $100 million revenue surplus and wanted to use it to spur economic development in rural Ontario, there are a million better and more efficient way to do it than by discounting stumpage fees. For instance... they could offer conditional subsidies in exchange for local investment and job creation. Or, they could increase the capital cost allowance of forestry-related assets in the tax code.
but that also assumes that the forestry industry is the best mechanism to promote economic growth in rural areas. I would argue that an energy intensive industry that is a large contributor to greenhouse gas emissions is not something that is deserving of economic incentives.
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