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Comments to Ontario Minister of Finance on the retroactive amendment of Retail Sales Tax Act.

On June 20, 2008, Tax Executives Institute submitted the following comments to Dwight Duncan, Minister of Finance for the Province of Ontario, concerning the retroactive amendment of the Retail Sales Tax Act to overturn a taxpayer-favorable decision of the Ontario Court of Appeals. The comments were prepared under the aegis of TEI's Canadian Commodity Tax Committee, whose chair is Phil W. Riley of ArcelorMittal Dofasco Inc.

On behalf of Tax Executives Institute (TEI or Institute), I write to register TEI's objection to the decision to retroactively amend sections 1(1) and 7(1)41 of the Retail Sales Tax Act. Although the new legislation has been characterized as necessary to ensure the result originally intended by the legislature, in reality the new provisions represent nothing more than the government's effort to overturn, without the benefit of any consultation, an unfavourable court decision. Even if the substance of the new provisions could be justified as sound tax policy, the retroactive enactment of the legislation violates core principles underlying Ontario's tax regime--namely, fairness and predictability. Accordingly, we urge that the legislation be re-considered.


TEI is the preeminent association of business tax executives. The Institute's more than 7,300 professionals manage the tax affairs of the leading 3,200 companies in Canada, the United States, Europe, and Asia and must contend daily with the planning and compliance aspects of business tax laws in Canada and these other areas. TEI's first Canadian chapter was founded in Toronto over a half century ago, and Canadians constitute 10 percent of the Institute's worldwide membership, with our Canadian members belonging to chapters in Toronto, Montreal, Calgary, and Vancouver. In addition, many of our non-Canadian members are employed by companies with substantial activities in Canada.

As a broad-based association of tax professionals, TEI is concerned with issues of tax policy and administration and is dedicated to working with government agencies in Canada, including the provinces, as well as in the United States and elsewhere, to reduce the costs and burdens of tax compliance and administration to our common benefit. We are convinced that the administration of the tax laws in accordance with the highest standards of professional competence and integrity, as well as an atmosphere of mutual trust and confidence between business and government, will promote the efficient and equitable operation of the tax system. In furtherance of this principle, TEI supports efforts to improve the tax laws and their administration at all levels of government.


A. Proctor & Gamble Inc. v. Ontario (Minister of Finance)

The legislation at issue was enacted in the wake of the government's loss in Proctor & Gamble, Inc. v. Ontario (Minister of Finance). That case considered whether rented wooden pallets used to ship products to customers were exempt from the Retail Sales Tax Act as "tangible personal property purchased for the purpose of being processed, fabricated or manufactured into, attached to, or incorporated into tangible personal property for the purpose of sale" that are not "returnable containers" as defined in paragraph 7(1)41 of the Act. The Ontario Court of Appeal held that the wooden pallets fall within this definition and therefore that no retail sales tax was due.

Bill 44 effectively nullifies the Proctor & Gamble decision, not only for the taxpayer in the case, but for all affected businesses and does so on a retroactive basis back to May 7, 1997.

B. Analyzing Retroactive Legislation

For a tax system to be fair and perceived as being fair, taxpayers must be able to rely on the legislation and regulations in effect when business transactions take place, expenditures are incurred, and other taxable events occur. Therefore, except in extreme circumstances, tax legislation should be prospective in scope. We suggest that while the government may possess the authority, in certain instances, to change the tax laws retroactively, it is a power that should be exercised sparingly. In this instance, the government moved not to vindicate any core principles of law or public finance but rather to overturn a court's reasonable interpretation of a statute that did not favour it. Thus, not liking the result, the government moved after the fact to strip the judicial system of its authority to adjudicate disputes, effectively changing the rules of the game after the game clock had run.

The principles governing the retroactivity issue were fully explored in a September 1995 report by the federal Department of Finance. In its Comprehensive Response of the Government of Canada to the Seventh Report of the Standing Committee on Public Accounts, the Department of Finance held open the possibility of retroactive legislation in response to adverse decisions by the Tax Court of Canada. Nevertheless, the Finance Response acknowledged that "[t]ax policy considerations ... dictate that retroactive tax changes remain exceptional [because] [t]ax certainty ... requires that taxpayers be able to determine precisely their tax liability." (1) This "is a fundamental principle of taxation." (2) In addition, the Finance Response stated that "[T]axpayers should be able to expect stability and continuity in the tax rules [and] they should be able to expect certain tax results when they plan their investments on the basis of the rules as they know and understand them." (3) Moving beyond these broad policy considerations, the Finance Response identified several situations where retroactivity might be justified:

* Where the amendments reflect a longstanding well-known interpretation of the law by the Department of National Revenue;

* Where the amendments reflect a policy that is clear from the relevant provisions that is well-known and understood by taxpayers;

* Where the amendments are intended to prevent a windfall benefit to certain taxpayers;

* Where the amendments are necessary to preserve the stability of the Government's revenue base; and

Where the amendments are corrections of ambiguous or deficient provisions that were not in accordance with the object of the Act. (4)

Thus, the "fundamental legal principle" favours clarifying amendments that are "made public before their application." (5)

Regrettably, there is no evidence that the Ontario government's retroactive amendment of the Retail Sales Tax Act was informed by any of these factors. Further, instead of a timely measure to correct a clear defect in the Retail Sales Tax Actor to stanch a demonstrable abuse, the 2008 legislation represents a bald attempt to overturn a judicial defeat--and to apply the new law retrospectively to 1997. That there were no public consultations with affected parties (litigants and others) reflects either governmental hubris or, perhaps, implicit recognition that the indefensible could not be defended.


Tax Executives Institute strongly urges the Minister of Finance to reconsider the merits of this retroactive legislation. Equally important, we respectfully urge the Ministry to refrain from such types of retroactive legislation in the future and to adopt the federal ministry's recommendations concerning retroactive tax enactments. TEI stands ready to discuss these matters with appropriate governmental personnel. TEI's comments were prepared under the aegis of its Canadian Commodity Tax Committee, whose chair is Phil W. Riley of Arcelor Mittal Dofasco. If you should have any questions as it relates to our position on this matter, please do not hesitate to call Mr. Riley at 905.548.4475 or Munir A. Suleman TEI's Vice President for Canadian Affairs at 416.866.4698.

(1.) Session Paper 8512-351-79, September 1995, Comprehensive Response of the Government of Canada to the Seventh Report of the Standing Committee on Public Accounts (Finance Response) at 15.

(2.) Id.

(3.) Id. at 15.

(4.) Id. at 16-17. See also United States v. Carlton, 512 U.S. 26 (1994), where the Supreme Court of the United States set out an analytical framework for determining the propriety of a retroactive tax legislative enactment. The Court upheld the retroactive legislation because the legislation was necessary to preserve the Government's revenue base; but the retroactive measures were prompt and only applied to a modest period of time.

(5.) Id. at 15 (emphasis added).
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Publication:Tax Executive
Date:Jul 1, 2008
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