[1] The Applicant seeks judicial review of a decision made by the Respondent on June 18, 1999, to collect tax debts owing by the Applicant to the United States Government (the "debt").

[2] Four issues are arising from this matter. The first issue is whether the Court should draw certain inferences because of the failure of the Minister to produce any persons for discovery with respect to cross-border communications between the Internal Revenue Service ("IRS") and Revenue Canada regarding international collection of the Applicant's U.S. tax debt. Second, is whether the Applicant brought this application out of time. Third, is whether Article XXVI A of the Convention Between Canada and the United States With Respect to Taxes on Income and Capital, 26 September 1980, Can. T.S. 1984, No. 15.1, as amended ("Convention") is ultra vires the federal Parliament. Finally, the principal issue in this matter is whether Article XXVI A of the Convention offends subsection 15(1) of the Charter of Rights and Freedoms ("Charter").

FACTS:

[3] In November 1977, the Applicant became a permanent resident in Canada. At that time, she was a citizen of Malaysia, the country of her birth.

[4] In 1980, the Applicant purchased a family residence in Vancouver, B.C. This residence was the Applicant's Canadian home from 1980 through 1984, when she sold it and replaced it with her current residence also in Vancouver.

[5] In 1981, the Applicant and her husband acquired a residential vacation property in Hawaii, U.S.A. The Applicant disposed of her interest in this property in 1986 and remitted withholding taxes to the IRS at the time of her disposition.

[6] In March 1988, the IRS refunded part of the remitted withholding taxes to the Applicant.

[7] On October 31, 1990, the Applicant became a citizen of Canada.

[8] On November 6, 1991, the IRS issued a Notice of Deficiency for the Applicant's 1986 U.S. taxation year, setting out that she owed income tax of US$166,748.59, interest of US$70,590.65 and penalties of US$24,844.50, totalling US$262,183.74. The Applicant had ninety days from November 6, 1991 within which to file a petition with the United States Tax Court to dispute the revenue claim. Because the law in 1991 in Canada made foreign tax debts uncollectible in Canada, the Applicant did not contest the Notice of Deficiency.

[9] On July 9, 1996, a Revenue Canada official advised the Applicant that the IRS had requested that the Respondent help collect the debt, then totalling US$273,986.44, and that Revenue Canada had accepted this request for assistance. Following correspondence between the parties, on June 18, 1999, Revenue Canada obtained a Certificate of Judgment from the Federal Court, Trial Division certifying part of the debt. On June 23, 1999, Revenue Canada filed the Certificate in the British Columbia Land Title Registry against the Applicant's British Columbia property. On June 30, 1999, the Applicant filed a Notice of Application in the Federal Court, requesting judicial review of the Respondent's decision to take collection action.

[10] On July 20, 1999, Revenue Canada obtained a Certificate of Judgment from the Federal Court, Trial Division certifying an additional $49,204.17 of the debt against the Applicant.

[11] On July 30, 1999, Revenue Canada produced documentary evidence relating to the present matter, including a Certificate from Gary Zed of Revenue Canada refusing to disclose the IRS letter requesting collection assistance. Paragraph 4 of that Certificate states:

The disclosure of the letter of request for assistance in collection with respect to the Applicant, issued to the Applicant by the Internal Revenue Services pursuant to Article XXVIA of the Canada-US Tax Convention, 1980, should not take place, on the grounds that to allow such disclosure would be injurious to international relations between Canada and the United States, as they relate to the administration of the Canada-US Tax Convention, 1980. 

THE CONVENTION

[12] The Convention was signed at Washington, D.C. on September 26, 1980, and has been amended by protocols signed on June 14, 1983, March 28, 1984, March 17, 1995¹ (hereinafter referred to as the "Third Protocol") and July 29, 1997. The Convention was incorporated into Canadian law by the Canada-United States Tax Convention Act, 1984, S.C. 1984, c. 20, (the "Convention Act").

[13] Tax treaties, including the Convention and Third Protocol, have two main purposes. First, to expand opportunities for international trade and investment by reducing income tax related barriers such as double taxation and withholding taxes. Second, to ensure that governments collect the revenue due to them by dividing the sums due from taxation and combatting tax avoidance and evasion.

[14] The Third Protocol was signed on August 31, 1994, revised and re-signed on March 17, 1995 and finally proclaimed on November 9, 1995. Negotiations between Canada and the United States with respect to the Third Protocol had been ongoing for several years. Canada wished to alleviate the impact of the 1988 U.S. estate tax legislation on estates of deceased Canadians with U.S. property. The U.S. agreed to provide relief from estate tax, but in the context of an overall package which would include such things as: assistance in tax collection, the reduction of the rate of withholding tax and interest payments to U.S. residents, and anti-treaty shopping provisions.

[15] The United States Treasury Department released a Technical Explanation of the Third Protocol on June 13, 1995 ("Technical Explanation"). The purpose of the Technical Explanation is stated in the preamble:

This Technical Explanation is an official guide to the Protocol. It explains policies behind particular provisions, as well as understandings reached during the negotiations with respect to the interpretation and application of the Protocol. The Technical Explanation is not intended to provide a complete comparison between the Protocol and the Articles of the Convention that it amends. To the extent that the Convention has not been amended by the Protocol, the Technical Explanation of the Convention remains the official explanation.

By press release dated June 13, 1995, Finance Minister Paul Martin indicated that Canada agreed that the Technical Explanation accurately reflected understandings reached in the course of negotiations with respect to the interpretation and application of the various provisions of the Third Protocol. Article XXVI A (Assistance in Collection) of the Convention was brought into the Treaty by Article 15 of the Third Protocol. Canadian treaties which include collection assistance provisions are those with the Netherlands and the United States. Prior to the Third Protocol, the United States had reciprocal collection provisions in its treaties with Denmark, Netherlands and France. Besides incorporating Article XXVI A, the Third Protocol also made amendments to Article XXVII, which expanded the sharing of tax information to state and provincial tax authorities and expanded the types of information which could be exchanged. This was of particular concern to the United States. The U.S. Treasury Department felt that it needed more information and weapons to effect the voluntary tax system. An estimated 2.3 million U.S. citizens, excluding military and official U.S. personnel, lived outside the United States in 1990, but in that year, fewer than 250,000 returns were filed. The U.S. was also concerned about the effects of the decision of the Supreme Court of Canada in United States of America v. Harden, [1963] S.C.R. 366, which limited the ability of the U.S. authorities to enforce a U.S. tax judgment in Canada.

[16] The Technical Explanation to Article 15 of the Third Protocol provides some insight into the reasons why the U.S. and Canada entered into an agreement with respect to assistance in collection:

Article 15 of the Protocol adds to the Convention a new Article XXVI A (Assistance in Collection). Collection assistance provisions are included in several other U.S. income tax treaties, including the recent treaty with the Netherlands, and in many U.S. estate tax treaties. U.S. negotiators initially raised with Canada the possibility of including collection assistance provisions in the Protocol, because the Internal Revenue Service has claims pending against persons in Canada that would be subject to collection under these provisions. However, the ultimate decision of the U.S. and Canadian negotiators to add the collection assistance article was attributable to the confluence of several unusual factors.

Of critical importance was the similarity between the laws of the United States and Canada. The Internal Revenue Service, the Justice Department, and other U.S. negotiators were reassured by the close similarity of the legal and procedural protections afforded by the Contracting States to their citizens and residents and by the fact that these protections apply to the tax collection procedures used by each State. In addition, the U.S. negotiators were confident, given their extensive experience in working with their Canadian counterparts, that the agreed procedures could be administered appropriately, effectively, and efficiently. Finally, given the close cooperation already developed between the United States and Canada in the exchange of tax information, the U.S. and Canadian negotiators concluded that the potential benefits to both countries of obtaining such assistance would be immediate and substantial and would far outweigh any cost involved.

[17] Although there would be substantial benefits to Canada from entering into an assistance in collection agreement with the United States, to the Canadian government at the time, this was by no means the most important change to the Convention to come from the Third Protocol. This is in part evidenced by the lack of any mention of the new Article XXVI A in the Press Release from the Department of Finance on the initial signing of the Third Protocol on August 31, 1994. Among the benefits to Canada arising from the Third Protocol were: a decrease in the rate of withholding taxes on dividends, interest and royalty payments; rules with respect the limitation of treaty benefits (anti-treaty shopping rules); and, coordination of regimes on taxes imposed upon death. The exemption for citizens of the Requested State was an important issue for the U.S. The U.S. had ratified the OECD/Council of Europe Multilateral Convention on Mutual Administrative Assistance in Tax Matters, 25 January 1988, E.T.S. No. 27, with the reservation that the U.S. would not provide assistance in the recovery of any tax against American citizens.

[18] Paragraph 8 of Article XXVI A, states as follows:

No assistance shall be provided under this Article for a revenue claim in respect of the taxpayer to the extent that the taxpayer can demonstrate that:

a) Where the taxpayer is an individual, the revenue claim relates to a taxable period in which the taxpayer was a citizen of the Requested State, ...

The effect of this paragraph is to exempt Canadian citizens from the IRS using Revenue Canada to pursue collection in Canada of U.S. debts, provided they were a Canadian citizens in the taxable period concerned.

[19] Paragraph 10 of Article XXVI A, provides:

Nothing in this Article shall be construed as:

...

b) Imposing on either Contracting State the obligation to carry out administrative measures of a different nature from those used in the collection of its own taxes or if it would be contrary to its public policy (ordre public).

[20] Article 21, paragraph 3 of the Third Protocol allows for retroactive application of Article XXVI A. This paragraph reads as follows:

Notwithstanding provisions of paragraph 2, Article XXVI A (Assistance in Collection) of the Convention shall have effect for revenue claims finally determined by a Requesting State after the date that is ten years before the date on which the Protocol enters into force.

Although the Third Protocol was implemented November 9, 1995, the effect of this paragraph was to make Article XXVI A effective as of November 9, 1985. It is this retroactive provision which gives rise to the matter before me.

ANALYSIS:

i. negative inferences

[21] The Applicant submits that she attempted to obtain important factual information to aid the Court in determining matters raised in this application. Counsel attempted to examine the IRS agent, but the Minister refused to produce him on the eve of cross-examination. The Applicant served a Notice to Attend on Revenue Canada official Bryceson Sheehan to examine him on his Certificate. The Minister refused to comply. The Minister refused to disclose the letter of request for collection assistance sent by Stephen Ehrlich, an employee of the IRS, to Mr. Sheehan on the purported ground that "international relations" would be injured thereby. On counsel for the Minister's urging, the Applicant approached the IRS directly with questions about the debt and about communications between the IRS and Revenue Canada regarding the Applicant's file and was told to return these questions to counsel for the Minister. The Applicant returned these questions to counsel for the Minister and was told the questions would not be answered.

[22] The Applicant suggested that I should draw adverse inference against the Minister in respect of these matters. However, by Order dated October 13, 1999, Rouleau J. found that the information relating to the amount of the U.S. tax was irrelevant. The Court refused to commit Mr. Ehrlich to be discovered. Accordingly, since these matters that are set out by the Applicant are irrelevant, there can be no adverse inference drawn against the Minister. However, the Applicant's inability to get any answers from the IRS is relevant to the question of whether the Applicant received due process.

ii. decision at issue

[23] In its "out of time" argument, the Respondent states that the letter sent by Revenue Canada (now the Canada Customs and Revenue Agency) to the Applicant on July 9, 1996, "as the actual letter being complained of". At best, this letter is a tentative determination on the part of the Respondent to grant collection assistance to the IRS. As the letter indicates, the Respondent did not know if the Applicant was a Canadian citizen at the time U.S. tax arose. Counsel for the Applicant then submitted a letter to the Respondent dated September 11, 1996, detailing the Applicant's Charter concerns. There was further communication between the parties lasting throughout the spring of 1999. In the circumstances, the letter of July 9, 1996, cannot be considered a final decision qualifying as the decision for judicial review purposes. Moreover, because the Applicant raised a Charter issue, she was forced to wait until the Respondent actually did something that tangibly affected her rights.

[24] The Respondent sent the Applicant a letter dated April 19, 1999, stating that the U.S. requested the Respondent's help to collect US$295,164.57 owing, and enclosed a Statement of Foreign Tax Payable regarding this amount. In my view, this is also not the decision.

[25] The Applicant requested permission from Court to amend the Notice of Application, to remove the use of the word "decision" therein and to substitute the words "administrative act". The Notice of Application refers to a "decision" of June 18, 1999. This was the Respondent's act of obtaining a Certificate of Judgment from the Federal Court, Trial Division, certifying part of the alleged debt, which then allowed the Respondent, on June 23, 1999, to file the Certificate against the Applicant's property in the British Columbia Land Title Registry. On June 30, 1999, the Applicant filed a Notice of Application requesting judicial review. I am satisfied that the Minister created a "decision" when he obtained a Certificate against the Applicant on June 18, 1999, and that the Applicant, having filed a Notice of Application on June 30, 1999, was within the thirty days permitted under the Federal Court Rules, 1998.

[26] In the alternative, if the decision at issue is seen to have been communicated by the Respondent's letter of April 19, 1999, I grant the Applicant an extension of time to file an amendment to its Notice of Application. There is no prejudice to the Respondent. Furthermore, it is clear from the correspondence that the Applicant formulated an intention to file a Notice of Application within 30 days of the April 19, 1999 letter. The Applicant clearly has an arguable case. Therefore, the Notice of Application is duly filed.

iii. division of powers

[27] The Applicant submits that the provision in question falls within provincial jurisdiction because collection is a matter that directly affects the property and civil rights of the debtor. The enforcement of civil debts, including foreign civil debts reduced to judgment, is therefore a matter falling within subsection 92(13) of the Constitution Act, 1867, namely "Property and Civil Rights in the Province". The Applicant submits that the IRS tax claims are foreign civil debts.

[28] In my view, because of the doctrine of paramountcy, this is not where the analysis should begin. The question is whether the federal legislation is valid. The analysis must begin with a determination of whether the provision in question falls within a federal head of power under section 91 of the Constitution Act, 1867. If the provision in question falls within a federal head of power under section 91, then, because of the doctrine of federal paramountcy, it does not matter if the provision also falls within a provincial head of power under section 92. It is only if the legislation does not fall within a federal head of power that I must look to see if it falls within a provincial head of power. Only then can the legislation be considered ultra vires Parliament.

[29] The Applicant first submits that because the debt collection affects property and civil rights, it is a matter falling within provincial legislative competence. However, to determine whether a debt collection provision is intra vires Parliament, I am required to examine the nature of the debt. If a debt deals with a subject matter within an area of federal jurisdiction, it is only reasonable that the manner and form of its enforcement fall within Parliament's jurisdiction. Subsection 91(3) gives the federal Parliament power "for the Raising of Money by any Mode or System of Taxation". Parliament's jurisdiction over taxation is very wide.

[30] The Applicant submits that the Labour Conventions case, A.G. Canada v. A.G. Ontario, [1937] 1 D.L.R. 673, (P.C.) governs here. The Privy Council warned against the dangers of allowing Parliament to usurp provincial jurisdiction through treaty making. However, the case stands for the proposition that section 132 of the Canada Constitution Act, cannot support the right of the federal parliament to implement treaties since it is limited to treaties of the British Empire. In 1867, it was not contemplated that Canada, as an independent country, would enter any treaties.

[31] The Privy Council held that the federal Parliament could make treaties with respect to federal matters but could not affect the classes of subjects enumerated in section 92. Lord Atkin stated at page 683-684:

It must not be thought that the result of this decision is that Canada is incompetent to legislate in performance of treaty obligations. In totality of legislative power, Dominion and provincial together, she is fully equipped. But the legislative powers remain distributed and if in the exercise of her new functions derived from her new international status she incurs obligations they must, so far as legislation be concerned when they deal with provincial classes of subjects, be dealt with by the totality of powers, in other words by co-operation between the Dominion and the Provinces.

Since then, however, the Supreme Court of Canada has doubted that the Labour Conventions case, supra, is still good law. [See, for example, Francis v. The Queen, [1956] S.C.R. 618 at page 621; Re Offshore Mineral Rights of British Columbia, [1967] S.C.R. 792 at page 815-817; MacDonald v. Vapor Canada Ltd., [1977] 2 S.C.R. 134 at pages 167-172.] Laskin C.J. reviewed the cases which have questioned the Labour Conventions case and concluded at page 169 of MacDonald, supra:

Although the foregoing references would support a reconsideration of the Labour Conventions case, I find it unnecessary to do that here because, assuming that it was open to Parliament to pass legislation in implementation of an international obligation by Canada under a treaty or Convention (being legislation which it would be otherwise beyond its competence), I am of the opinion that it cannot be said that s. 7 was enacted on that basis.

[32] Laskin C.J. went on to say at page 171:

In my opinion, assuming Parliament has power to pass legislation implementing a treaty or convention in relation to matters covered by the treaty or convention which would otherwise be for provincial legislation alone, the exercise of that power must be manifested in the implementing legislation and not be left to inference. The Courts should be able to say, on the basis of the expression of the legislation, that it is implementing legislation. Of course, even so, a question may arise whether the legislation does or does not go beyond the obligations of the treaty or convention.

[33] In addition, there are cases which support the implementation of a treaty whose subject matter falls within federal powers, but has some relationship to property and civil rights in the province.

[34] In Northern Sales Company Ltd. v. Compania Maritima Villa Nova S.A., [1992] 1 F.C. 550 (C.A.) the Appellant argued that the United Nations Foreign Arbitral Awards Convention Act, S.C. 1986, c. 21, was unconstitutional as it was ultra vires Parliament. The Federal Court of Appeal held that Parliament did possess the power to adopt the act in question as valid legislation for recognition and enforcement in Canada of foreign arbitral awards having a federal character in a constitutional sense (i.e., maritime law, a federal legislative subject matter under subsection 91(10)). The Court of Appeal also recognized that federal law governs certain kinds of contracts. At page 567, Stone J.A. stated:

It thus seems to me to be entirely proper for a court, faced with determining whether an award may be recognized and enforced in accordance with the Act, to have regard to its origin in a charterparty agreement, an undoubted maritime contract, and to the underlying claim for demurrage, an undoubted maritime claim, for it is that agreement and that claim which allows for the award to be made and it is the existence of the award which opens the way to its enforcement by legal action.

 

In my opinion, the creation of a cause of action for the recognition and enforcement of the foreign arbitral award in issue, arising as it does from a breach of the charterparty agreement for payment of demurrage, is a maritime matter or is so integrally connected to a maritime matter as to be legitimate Canadian maritime law.

[35] Similarly, the Superior Court of Québec recognized Parliament's jurisdiction pursuant to its power in relation to marriage and divorce under subsection 91(26) of the Constitution Act, 1867, to legislate with respect to the recognition of foreign orders of divorce. [See A.K. v. H.S.K., [1997] A.Q. No. 638 (QL) (sub nom. Droit de la Famille - 2054) (Que. S.C.).]

[36] In my view, in the case before me, the foreign debts are strictly foreign tax debts which can be collected. This is legislation which deals with taxation and therefore falls within the competence of the federal Parliament under subsection 91(3) as legislation in respect of taxation.

[37] The law is clear that the federal Parliament can collect tax debts. The Supreme Court of Canada approved the collection of taxes in Reference Re GST, [1992] 2 S.C.R. 445. Lamer C.J., for the majority, referred to General Motors of Canada Ltd. v. City National Leasing, [1989] 1 S.C.R. 641, where Dickson C.J. commented (at page 669):

In determining the proper test it should remembered that in a federal system it is inevitable that in pursuing valid objectives for legislation of each level government will impact occasionally on the sphere of power of the other level of government; overlap of legislation is to be expected and accommodated in the federal state. Thus is a certain degree of judicial restraint and proposing strict tests which will result in striking down such legislation is appropriate.

[38] Lamer C.J. found that the GST Act is a valid exercise of the federal taxation power under subsection 91(3). La Forest J., in a concurring opinion, stated as follows at page 492:

The collection provisions of the GST are simply part and parcel the mode or system of taxation adopted by Parliament, there is no indication that these provisions were enacted for any other purpose than to collect the tax; and colourability is not likely to be imputed.

As Laskin C.J. (as he then was) stated in Reference re Anti-Inflation Act, [1976], 2 S.C.R. 373 at page 390:

The Parliament of Canada is authorized to raise money by "any mode or system of taxation", and it would be an unusual case where this power, so apparently limitless, could be challenged as colourably used and thus make it appropriate for a Court to consider extrinsic material that show colourability.

 

...

 

That these provisions may come, as I already noted, have an impact on property and civil rights is of no moment. As I stated in Bank of Montreal v. Hall, [1990] 1 S.C.R. 121 at p. 145, there is no hermetic division between the federal legislative domain and that covered by property and civil rights. Some spillover is inevitable.

 

[39] In the case before me, Canada has to collect the tax debts from non-residents. It would be unthinkable not to collect debts that exist in the U.S. It is not therefore unreasonable that the U.S. would demand reciprocal treatment. I acknowledge that the U.S. was the party that wished to include the mutual collection agreement. However, this does not mean Article XXVIA is not part of the Canadian tax system. The Convention as a whole is an important part of the Canadian tax system.

[40] In TransGas Ltd. v. Mid-Plains Contractors Ltd., [1994] 3 S.C.R. 753, the Supreme Court of Canada affirmed that collection of debts by garnishment is provided for in subsection 224 (1.2) of the Income Tax Act, which enabled the government to garnish amounts owing for the withheld source deduction was part of the general scheme for the collection of taxes and fell within subsection 91(3) of the Constitution Act, 1867.

[41] In my view, therefore, the proper characterization of Article XXVI A of the Convention (as implemented by statute) is that it is concerned with taxation.

[42] The Applicant submits that Harden, supra, is still good law. In that case, the Supreme Court of Canada cited the rule set out by Tomlin J. in re Visser, The Queen of Holland and Drukker, [1928] Ch. 877 at 884:

... there is a well-recognized rule, which had been enforced for at least 200 years or thereabouts, under which these courts will not collect the taxes of foreign States for the benefit of the sovereigns of those foreign States.

The Supreme Court of Canada went on to find that a foreign state could not escape the application of this rule by taking a judgment in its own courts and bringing suit in Canada on that judgment, since the claim asserted remains a claim to collect taxes. The Supreme Court, at page 370, sets out the reason why courts refuse to enforce foreign tax judgments (quoting Lord Keith of Avonholm in Government of India, Ministry of Finance (Revenue Division) v. Taylor, [1955] A.C. 491 (H.L.) at pages 511-512):

One explanation of the rule thus illustrated may be thought to be that enforcement of a claim for taxes is but an extension of the sovereign power which imposed the taxes, and that an assertion of sovereign authority by one State within the territory of another, as distinct from a patrimonial claim by a foreign sovereign, is (treaty or convention apart) contrary to all concepts of independent sovereignties.

[44] In my view, if Canada implements a treaty in allowing another country to come and collect revenue by way of Canada itself making the claim within Canada, the sovereignty of Canada is protected by the conditions set out in the treaty. Canada, under the legislation implementing the Convention, collects the debt itself. The debt must be a final tax debt and Canada will not do anything contrary to the laws or public policy of Canada in collecting it. The tax debt has no greater status than any other Canadian debt or tax. The Convention and legislation implementing the treaty more than adequately protect the sovereignty of Canada.

[45] Accordingly, Article XXVI A of the Convention is within the legislative competence of the federal Parliament and is intra vires Parliament pursuant to subsection 91(3) of the Constitution Act, 1867.

iv. subsection 15(1) of the Charter

[45]² The Applicant became a citizen of Canada on October 31, 1990. As stated in the Commemoration of Canadian Citizenship certificate presented to her:

Under the provisions of the Citizenship Act, a Canadian citizen is entitled to all the rights and privileges and is subject to all the duties and responsibilities of being a Canadian citizen.

[46] As stated in the affidavit of Mr. Ehrlich, the Applicant did not respond to the Notice of Deficiency which was issued on May 3, 1991, nor did she register an appeal of the adjustment of the amount of her tax in the 1986 taxation year, which arose in conjunction with a detailed audit and resulted in the Notice of Deficiency. At that time, Harden, supra was the law and there was no provision in Canadian law which would allow the IRS to collect U.S. taxes in Canada through Canadian courts. This did not change until November 9, 1995, when the amendments to the Convention became law.

[47] On November 9, 1995, the Third Protocol came into force. For the first time, a reciprocal collection provision was introduced into Canada. Paragraph 3 of Article 21 of the Third Protocol provides that Article XXVI A of the Convention shall have effect for a revenue claim finally determined by the requesting State after the date that is 10 years before the date of the entry into force. The effect is that Article XXVI A is deemed to have retroactive effect back to November 9, 1985. However, on November 9, 1995, all appeal rights of the Applicant with respect to the amount owing to the IRS in the United States had expired. There was also no judicial review available in Canada of the decision made in the U.S. as to the amount of tax owing; the Convention requires that the tax debt be final.

[48] Paragraph 8 of Article XXVI A of the Convention provides for a citizenship preference. No tax can be collected by the U.S. from a Canadian citizen in Canada nor can Canada collect tax from the U.S. citizen in the U.S. However, paragraph 8 also requires that the person be a citizen at the time when the revenue claim arose. In this case, the revenue claim by the IRS arose in the 1986 calendar year, although the actual amount of the claim and Notice of Deficiency was never provided to the Applicant until 1991, a year after she became a Canadian citizen.

[49] This case impacts upon Canadian citizens in a similar position to Mrs. Chua who were not citizens at the time the claim arose, but who were citizens at the time the Notice of Deficiency was forwarded. It would not apply to a person who became a Canadian citizen after November 9, 1995. It would also not apply to a person who received a Notice of Deficiency before that time and the time for appeal had not expired by November 9, 1995, since they would have notice of the Convention provisions and could appeal the amounts set out in the Notice of Deficiency. This case does not concern discrimination between non-residents and Canadian citizens, but rather, concerns discrimination between one group of Canadian citizens in the position of Mrs. Chua (who for convenience, I will call "Convention citizens") and all others "Canadian citizens".

[50] Paragraph 10(b) of the Third Protocol appears to give protection to Canadian citizens with respect to due process and the Charter. This provision gives both parties notice that, for example, public policy reasons in Canada may defeat a request from the U.S. Government for Canadian assistance in recovering taxes owed from a person in Canada.

[51] Subsection 15(1) of the Charter reads as follows:

15. (1) Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability.

 

15. (1) La loi ne fait acception de personne et s'applique également à tous, et tous ont droit à la même protection et au même bénéfice de la loi, indépendamment de toute discrimination, notamment des discriminations fondées sur la race, l'origine nationale ou ethnique, la couleur, la religion, le sexe, l'âge ou les déficiences mentales ou physiques.

[52] Under subsection 15(1) of the Charter, true equality does not necessarily result from identical treatment. I must look at the impact of the law upon the individual or group to whom it applies. Iacobucci J. confirms this in Law v. Canada (Minister of Employment and Immigration), [1999] 1 S.C.R. 497, where he cites the reasoning of McIntyre J. in Andrew v. Law Society of British Columbia, [1989] 1 S.C.R. 143. Iacobucci J. writes at page 517-518 of the decision:

The main consideration, McIntyre J. stated, at p. 165, must be the impact of the law upon the individual or group to whom it applies, as well as upon those whom it excludes from its application. He explained that the determination of the impact of legislation, by its nature, must be undertaken in a contextual manner, taking into account the content of the law, its purpose, and the characteristics and circumstances of the claimant, among other things. Hence, equality in s. 15 must be viewed as a substantive concept. Differential treatment, in a substantive sense, can be brought about either by a formal legislative distinction, or by a failure to take into account the underlying differences between individuals in society.

[53] Iacobucci J. continues at page 518:

Moving on to discuss the requirement that a s. 15(1) claimant show that differential treatment is discriminatory in order to establish a Charter violation, McIntyre J. defined "discrimination" in the following terms, at pp. 174-75:

...discrimination may be described as a distinction, whether intentional or not but based on grounds relating to personal characteristics of the individual or group, which has the effect of imposing burdens, obligations, or disadvantages on such individual or group not imposed upon others, or which withholds or limits access to opportunities, benefits, and advantages available to other members of society. Distinctions based on personal characteristics attributed to an individual solely on the basis of association with a group will rarely escape the charge of discrimination, while those based on an individual's merits and capacities will rarely be so classed.

[54] Iacobucci J. went on to discuss the purpose of subsection 15(1) at page 524:

The purpose of s.15(1) is to be sought, in the words of Dickson J. (as he then was) in Big M, supra, at p. 344,

 

by reference to the character and the larger objects of the Charter itself, to the language chosen to articulate the specific right or freedom, to the historical origins of the concepts enshrined, and ... to the meaning and purpose of the other specific rights and freedoms with which it is associated within the text of the Charter.

[55] Finally, Iacobucci J. stated at page 525 that the equality provision,

is a guarantee against the evil of oppression, ... designed to remedy the imposition of unfair limitations upon opportunities, particularly for those persons or groups who have been subject to historical disadvantage, prejudice, and stereotyping.

[56] I must now decide whether the Applicant and the "Convention citizens" group are being discriminated against based on grounds relating to personal characteristics.

[57] In Law, supra, Iacobucci J. summarizes the approach taken by McIntyre J. in Andrews, supra. At pages 516-517, Iacobucci J. writes:

McIntyre J. in Andrews adopted an approach to s. 15(1) which focuses upon three central elements: (1) whether a law imposes differential treatment between the claimant and others; (2) whether an enumerated or analogous ground of discrimination is the basis for the differential treatment; and (3) whether the law in question has a "discriminatory" purpose or effect. In these reasons, for the sake of convenience, I will refer only to discriminatory laws, and not to the various other forms of potentially discriminatory state action. The first element -- differential treatment -- relates to, but is not determinative of, the issue of equality for the purpose of s. 15(1). The second and third elements in McIntyre J.'s approach determine whether the differential treatment in question constitutes discrimination within the meaning of s. 15(1) of the Charter. In his detailed discussion of these three elements, McIntyre J. made clear that the analysis of each element is to be undertaken in a purposive and contextualized manner, taking into account the "large remedial component" (p. 171) of s. 15(1), and the purpose of the provision in fighting the evil of discrimination.

[58] The impact of the Convention Applicant is three-fold. The Applicant's human dignity is affected since Convention citizens, it appears, have less rights than all other Canadian citizens. The second effect is that Convention citizens are deprived of fundamental justice. In 1991, there was no fair notice of the Third Protocol to the Applicant when she could have resorted to the U.S. courts. The third effect is on her property in Canada. It is put at risk through seizure by a foreign state. She could lose her property, whereas a long standing Canadian citizen would not.

[59] Accordingly, because (1) the Applicant was not a citizen of Canada when her U.S. tax liability arose; (2) because the Applicant, in relying on well established common law principles, relinquished her rights to challenge in the U.S. the amount assessed by the IRS; and, (3) because Article XXVI A retroactively, and to the Applicant's detriment, changed the law on which the Applicant relied, she is now vulnerable to breaches of procedural and substantive justice in respect of this escalating IRS claim.

[60] The Applicant's circumstances are analogous to those of a person who refused to submit to the jurisdiction of the Court that then pronounced judgment against that person. Such judgment, under established conflicts of law rules, would be unenforceable in Canada because it violates the principle that in personam judgments of foreign courts are recognizable and enforceable in Canada, only if the defendant submitted to the jurisdiction of that court.

[61] The citizenship preference and mutual collection provision in Article XXVI A was designed to prevent injustice arising upon the abrogation of the above principle. However, in the Applicant's case, the effect of the provision on the Applicant and Convention citizens is unjust indeed.

[62] In summary, the requirements for an infringement of section 15 of the Charter appear to apply here. There must be a distinction which is an apparent personal characteristic of the person. In this case, it was the Applicant's prior status as a non-citizen and then as a new citizen that triggered the applicability of the Convention mutual collection provisions. Discrimination under subsection 15(1) must be based on an enumerated or analogous ground. In the Andrews case, supra, it was found that non-citizenship was an analogous ground. In the matter before me the Applicant is a member of a group of "Convention citizens", who is being disadvantaged because of her previous group (i.e., non-citizen). In this case, the law in question has a discriminatory purpose or effect. At page 549 of Law, supra, Iacobucci J. states at page 552:

(4) In general terms, the purpose of section 15(1) is to prevent the violation of essential human dignity and freedom through the imposition of disadvantage, stereotyping, or political or social prejudice, and to promote a society in which all persons enjoy equal recognition at law as human beings or as members of Canadian society, equally capable and equally deserving of concern, respect and consideration.

 

Iacobucci J. in Law, supra, at page 40 reviewed some important contextual factors influencing the determination of whether section 15(1) had been infringed. The fourth factor is particularly relevant in the facts before me where he states at page 40:

(D) The nature and scope of the interest affected by the impugned law. The more severe and localized the consequences of the legislation for the affected group, the more likely that the differential treatment responsible for these consequences is discriminatory within the meaning of s. 15(1).

 

There can be no doubt that Convention citizens are a small group for whom the consequences of the retroactive portion of the Convention are very severe. Iacobucci J. in Law, supra, noted that it was only in rare cases that differential treatment based on one or more of the enumerated analogous grounds in subsection 15(1) is not discriminatory. In my view, this is not one of the rare grounds.

[63] Having determined that the Article XXVI A of the Convention (as implemented by statute) violates subsection 15(1) of the Charter, I will now turn to the section 1 analysis. The test for the application of section 1 is the test enunciated in R v. Oakes, [1986] 1 S.C.R. 103. First, the Respondent must establish that the objective of the legislation is pressing and substantial. Secondly, the means chosen to attain this legislative end must be reasonable and demonstrably justified in a free and democratic society. In order to satisfy the second requirement, three criteria must be satisfied: (a) the rights violation must be rationally connected to the aim of the legislation; (b) the impugned provisions must minimally impair the Charter guarantee; and, (c) there must be a proportionality between the effect of the measure and its objective so that the attainment of the legislative goal is not outweighed by the abridgement of the right.

[64] At each stage of a section 1 analysis, close attention must be paid to context. This includes consideration of the Convention Act as a whole and the particular provision at issue.

[65] As a result of the provision in question being part of a negotiated treaty and resulting from the give and take which is necessary in any treaty negotiation, the purpose of the entire Article XXVI A of the Third Protocol and the Convention itself should be considered along with the purpose of the particular provision in question. The basic purpose of the Convention is to avoid double taxation and fiscal evasion. It deals with a variety of tax issues for the mutual benefit of the signatories. The purpose of the Third Protocol was to deal with concerns of both Canada and the U.S. Canada sought relief from double taxation which arose from the application of U.S. estate tax. The U.S. agreed, but in the context of an overall package which would include, among other things, a mutual tax collection agreement. Article XXVI A was needed to permit both countries to collect taxes owed extraterritorially. Under international law, the collection of taxes is seldom a right exercisable within another state. Canada, in Harden, supra, determined that foreign tax debts were not collectible in Canada. The inclusion of Article XXVI A in the Convention addressed a substantial need in the context of the purpose of the Convention as a whole. In my view, the first part of the Oakes test is met. The inclusion of Article XXVI A in the Convention was a pressing and substantial need in the context the Convention as a whole and the benefits to Canada brought about by the Third Protocol.

[66] Nevertheless, the Third Protocol distinguishes between Convention citizens and all other Canadian citizens. As I stated earlier, I do not have to decide whether the distinction between citizens and non-citizens meets the requirements of the Charter. Accordingly, in this case I do not have to go further than finding that section 1 does not save the retroactive application of Article XXVI A, to the extent that it would apply to Convention citizens. The following comments on Article XXVI A must be taken in the context which I just set out. The exemption of citizens of the Requested State from collection proceedings recognizes the sovereignty issue that arises from the collection of taxes outside a state's borders. In this case, Canada can collect taxes owed by its own citizens and non-citizens alike, with the exception of U.S. citizens in the U.S. This means the Canadian taxpayer citizens (and non-citizens who are not U.S. citizens at the time the Canadian tax debt arose) cannot avoid the payment of Canadian taxes by either moving to the U.S. or moving their assets to the U.S. However, in the case of the Applicant, she did not obtain citizenship in order to avoid the U.S. tax debt. She was totally unaware that any specific amounts were owing the U.S. The tax claim related to a period four years earlier than when she became a Canadian citizen. If the U.S. had any concerns about the tax return, they should have communicated the same to the Applicant within the four-year period.

[67] I note the Respondent's submissions with respect to the question of whether Article XXVI A minimally impairs the Applicant's Charter guarantee of equal benefit under the law, and whether the effect of exempting citizens from collection proceedings in respect of the U.S. tax liabilities for the object of tax avoidance is proportional to the denial of that protection to all other non-citizens. The Respondent submits that both countries have similar administrative and judicial procedures to ensure procedural fairness to taxpayers in the determination of their tax liability. These procedural rights are available to citizens and non-citizens alike. However, I cannot see how procedural fairness is accorded to the Applicant and other Convention citizens. Article XXVI A requires that the requesting state certify the debt is finally determined as that term is defined in the Convention. The Respondent submits that this means that the non-citizen has had the opportunity to exercise their procedural rights. I cannot agree that the Applicant has had any such opportunity. When the Third Protocol came into effect in 1995, the Applicant's rights to challenge the Notice of Deficiency had expired.

[68] I agree with the Respondent that the evidence supports the inference that the exemption of citizens from collection proceedings from another State was a non-negotiable tax policy of the United States. The U.S. tax laws have a citizenship base whereas under our tax laws, all residents are treated equally. The U.S. has always exhibited concern for due legal process when one country attempts to collect its taxes across international borders. In Canada, Article XXVI A resolves such concerns in favour only of long standing citizens and to the discriminatory prejudice of Convention citizens. The problem under Article XXVI A would not have arisen if there had not been the retroactive application of the legislation. All taxpayers would have been put on notice that if they received a Notice of Deficiency subsequent to the passing of the Convention, Harden, supra, was no longer the law and if they wished to challenge the proposed tax they should do so then. The Applicant was deprived of her due process protection by not being given an opportunity to challenge the Notice of Deficiency.

[69] In respect of the proportionality submission, the Respondent submits that the benefits of a mutual collection assistance provision itself would outweigh the infringement of the equality right in question. The Respondent further submits that the interest in issue here is purely an economic one. What is involved is assistance to recover a tax debt which is collectible under a system of justice which requires an administrative and judicial means of establishing the correctness and lawfulness of the tax debt. The Respondent goes on to suggest that the tax debtor had every opportunity to challenge the debt prior to the request for collection assistance.

[70] While I agree that this submission applies to Article XXVI A as a whole, it does not apply to people who are in the position of the Applicant and other Convention citizens as I have described them herein. The nature and scope of the interest does not have only an economic and monetary effect. In highlighting the importance of citizenship at the time of the tax claim arising, Canada and the U.S. wished to prevent persons from switching their citizenship in order to avoid taxes. It was a desire to guarantee due process that led to the passage of the legislation in the form in which we find Article XXVI A. This is confirmed by the Technical Explanation to the Third Protocol. In its discussion of paragraph 10 the new Article XXVI A, the Technical Explanation states:

The Mutual Agreement Procedure paragraph, which is more common in U.S. tax treaties, provides for collection assistance in cases in which a Contracting State seeks assistance in reclaiming treaty benefits that have been granted to a person that is not entitled to those benefits. Subparagraph (b) of paragraph 10 makes clear that nothing in Article XXVI A can require a Contracting State to carry out administrative measures of a different nature from those used in the collection of its own taxes, or that would be contrary to its public policy (order public).

However, because the retroactive provisions of Article XXVI A sets up two classes of citizens, Convention citizens and all other citizens, it cannot be said that the impugned provisions minimally impair the Charter guarantee. Nor can it be said that the retroactive application of Article XXVI A is proportional between the effect of the measure and the objective, if the abridgement of the right outweighs the legislative goal. Thus, Article 21, paragraph 3 of the Third Protocol of the Convention (as implemented by S.C. 1995, c. 34, Schedule IV) cannot be saved by section 1 of the Charter.

[71] I said that I would give the parties an opportunity to make submissions on remedies in light of my findings before selecting the appropriate remedy in the matter before me. Pursuant to Rule 394 of the Federal Court Rules, 1998, counsel for the Applicant shall prepare written submissions in writing and a draft order within three weeks of receipt of these Reasons. Counsel for the Respondent will have an additional two weeks from the date of filing of the Applicant's written submissions to respond to any concerns over the form and substance of the draft order.

"W. P. McKeown"

JUDGE

OTTAWA, ONTARIO
September 12, 2000

¹ Can. T.S. 1995 No. 17. Parliament implemented the Third Protocol by An Act to amend the Canada-United States Tax Convention Act, 1984, S.C. 1995, c. 34 (See Schedule IV).

² Re-publisher's editorial note: Two successive paragraphs are numbered "45" in the original.