Administrative
federalism has been nurtured and sustained by the federal spending
power, the power asserted by Ottawa to spend funds on matters
falling outside its legislative jurisdiction. Yet this power is
mentioned nowhere in sections 91 or 92 of the Constitution Act,
1867. What then is its basis in constitutional doctrine? Legal
scholars have proposed a number of theories. Some have suggested
that the power flows from the royal prerogative,26
others from federal authority with respect to appropriation,27
and still others from Parliament's power to legislate in relation
to the public debt and property.28
None
of these theories is particularly convincing. The suggestion that
the spending power flows from the prerogative ignores two important
facts. The first is that all funds spent by the executive must
be expended in accordance with the terms of appropriating legislation,
such legislation being subject to the division of powers in sections
91 and 92. The second is that, even if one could view the act
of spending independently from its authorizing legislation, it
is a well established principle of Canadian constitutional law
that the grant of prerogative powers follows that of legislative
powers.29
Sections
102 and 106 of the Constitution Act, 1867, establish a Consolidated
Revenue Fund of Canada "to be appropriated for the Public Service
of Canada". Some have sought to read into these provisions a conferral
of power upon Parliament to enact appropriating legislation for
any purpose including one which would otherwise fall within provincial
jurisdiction. Even if it were accepted that the limiting words
"Public Service" in section 106 and "Public Service of Canada"
in section 102 do not, of themselves, restrict spending to purposes
falling within the federal legislative sphere, it is improbable
that the framers of these sections intended them to have so broad
an effect. The primary purpose of these clauses is to establish
the Consolidated Revenue Fund and to provide the means for its
appropriation. To read them as somehow qualifying the division
of powers in sections 91 and 92 is to give them a significance
that their wording and placement in the Constitution simply do
not justify. Had so fundamental a qualification been intended,
one would expect to see it spelled out in unequivocal language.30
In the absence of such language, it seems more credible to interpret
these appropriation provisions as not disturbing the general pattern
of legislative powers provided elsewhere in the Constitution.
Arguments
supporting the federal spending power on the basis of Parliament's
authority to legislate with respect to the public debt and property
are also problematic. Such arguments are founded upon the assertion
that, for the purposes of constitutional characterization, a law
which provides for an expenditure of funds should be viewed differently
from a law which establishes a scheme of compulsory regulation.
Proponents of the spending power argue that, while a law regulating
a matter ought to be characterized as a law in relation to that
matter, a law authorizing funds to be spent on that matter should
be characterized as a law in relation to spending (that is, the
disposition of public property), a subject that falls within section
91(1A).
An
initial problem with this spending/regulating dichotomy is that
it finds little support in the words of the Constitution. The
opening words of section 92 of the Constitution Act, 1867 bestow
upon provincial legislatures exclusive power to make laws "in
relation to matters", not to make laws regulating those
matters. There is no basis in language or in logic for suggesting
that when Parliament authorizes expenditures of funds with respect
to some matter it acts any less "in relation" to that matter
than when it regulates with respect to the same matter. Put another
way, there is no greater justification for characterizing a law
that provides for expenditures on hospitals as a law in relation
to spending than there is for characterizing a law that regulates
hospitals as a law in relation to regulation.
The
argument in favour of viewing "spending" as a separate matter
embraced within the above classes of subjects is analogous to
arguments made in the past by federal and provincial governments
with respect to the implementation of treaties and Crown immunity.
In the Labour Conventions case,31
the federal government maintained that labour legislation enacted
by Parliament in fulfillment of Canada's treaty obligations should
be upheld as a law "in relation" to treaties, and therefore outside
the scope of powers assigned to the provinces under section 92
of the Constitution Act, 1867. The Privy Council rejected this
argument on the ground that it was inappropriate to characterize
legislation in such a way as to avoid the division of powers in
sections 91 and 92. For the purpose of the federal distribution
of legislative powers, said Lord Atkin, "there is no such thing
as treaty legislation as such. The distribution is based on classes
of subjects; and as a treaty deals with a particular class of
subjects so will the legislative power of performing it be ascertained".32
What Lord Atkin said about treaty implementation can be said with
equal force with respect to spending. Just as treaties are not
implemented for their own sake, Parliament does not appropriate
funds for the purpose of giving away property. In each case, there
is some underlying purpose which identifies the "matter" of the
legislation.
In Amax Potash Ltd. v. The Government of Saskatchewan,33
the Saskatchewan government argued that a statute enabling it
to retain taxes collected unconstitutionally was legislation in
relation to Crown immunity and could be supported on the basis
of a number of heads of section 92, including amendment of the
constitution of the province (section 92(1)), "property and civil
rights in the province" (section 92(13)), "administration
of justice in the province" (section 92(14)), and matters of a
local nature in the province (section 92(16)). The Supreme Court
of Canada rejected Saskatchewan's claim on the basis that Crown
immunity was not a valid characterization of the legislation.
Rather, the court held that one had to look behind the immunity
to ascertain the purpose for which the immunity was being invoked.
Again, the same can be said with respect to spending.
Another problem with the alleged dichotomy between spending and
regulating is its tenuous and artificial nature. The monies that
governments spend are, for the most part, monies that have been
generated through compulsory measures such as taxation. Thus it
is unrealistic to characterize spending as though it were an independent
governmental function. Rather, spending should properly be viewed
as one component of a larger reallocative activity. This is a
point that has been crossed over by many writers, yet it is key
to understanding the significance of the limited case law on the
spending power.
There
is only one case concerning the federal spending power which has
reached the Supreme Court of Canada or the Privy Council.34
The Employment and Social Insurance Act Reference35
concerned the constitutionality of a statutory scheme of unemployment
insurance proposed by the depression-era government of R.B. Bennett.
Under the scheme, a fund was to be created by means of compulsory
contributions from employers and employees. The purpose of the
fund was to provide a pool of monies from which insurance benefits
could be paid to contributing employees who became unemployed.
The federal Government argued before the Supreme Court that the
scheme could be sustained on the basis that the compulsory contributions
constituted a form of taxation within the meaning of section 91(3),
and that the fund comprised public property which Parliament had
an unfettered right to dispose of as it wished under section 91
(1A).
The
Supreme Court majority rejected this argument, but their reasons
for doing so are confusing and contradictory. On the one hand,
the majority voiced support in principle for unlimited powers
of taxation and spending. Kerwin J. (with the concurrence of Rinfret
and Crockett JJ.) said:36
It
is quite true that Parliament, by properly framed legislation
may raise money by taxation and dispose of its public property
in any manner that it sees fit. As to the latter point, it is
evident that the Dominion may grant sums of money to individuals
or organizations and that the gift may be accomplished by such
restrictions and conditions as Parliament may see fit to enact.
On
the other hand, the majority refused to invoke these powers to
uphold the legislation, deciding instead that the combination
of mandatory collection and spending, made the statute, in pith
and substance, a law in relation to employment services and unemployment
insurance rather than one in relation to taxation and public property.
Rinfret J. (with the concurrence of Kerwin and Crockett JJ.) put
it this way:37
The
object of the Act, the end sought to be accomplished by it is
a scheme for employment service and unemployment insurance;
the contributions levied from the employers and employees are
only incidents of the proposed scheme, and, in fact, merely
means of carrying it into effect. The Act does not possess the
character of a taxing statute, but it is 'legislation intending
to do precisely what the title says: to establish an employment
insurance commission, to provide for a national employment service,
for insurance against unemployment, for aid to unemployed persons,
or other forms of social insurance and security and for purposes
related thereto.
It
being well understood and, in fact, conceded that these are
subject-matters falling within the legislative authority of
the provinces, the Dominion Parliament may not, under pretext
of the exercise of the power to deal with its property, or to
raise money by taxation, indirectly accomplish the ends sought
for in this legislation. If it were otherwise, the Dominion
Parliament, under colour of the taxing power, would be permitted
to invade almost any of the fields exclusively reserved by the
Constitution to the legislatures in each province.
It
is difficult to know how to reconcile these two positions. What
the majority seems to have failed to grasp is that the only reason
that Parliament need resort to spending powers is to achieve indirectly
ends that fall within provincial legislative competence. Nor does
it help to emphasize, as the majority did elsewhere,38
the fact that the conditions imposed by the Act (that is, the
contributions) were made compulsory. Taxation is by its nature
compulsory.
When
the case reached the Privy Council, it fell to Lord Atkin to try
to resolve the confusion created by the conflicting views contained
within the majority opinions of the Supreme Court. He did so in
the following terms:39
That
the Dominion may impose taxation for the purpose of creating
a fund for special purposes, and may apply that fund for making
contributions in the public interest to individuals, corporations
or public authorities could not as a general proposition be
denied. Whether in such an Act as the present compulsion applied
to an employed person to make a contribution to an insurance
fund out of which he will receive benefit for a period proportionate
to the number of his contributions is in fact taxation it is
not necessary finally to decide. . . But assuming that the Dominion
has collected by means of taxation a fund, it by no means follows
that any legislation which disposes of it is necessarily within
Dominion competence.
It
may still be legislation affecting the classes of subjects enumerated
in s. 92, and, if so, would be ultra vires. In other
words, Dominion legislation, even though it deals with Dominion
property, may yet be so framed as to invade civil rights within
the Province, or to encroach upon the classes of subjects which
are reserved to Provincial competence. It is not necessary that
it should be a colourable device, or a pretence. If on the true
view of the legislation it is found that in reality in pith
and substance the legislation invades civil rights within the
Province, or in respect of other classes of subjects otherwise
encroaches upon the provincial field, the legislation will be
invalid. To hold otherwise would afford the Dominion an easy
passage into the Provincial domain.
Some
writers have sought to minimize the impact of this passage. La
Forest, for example, describes Lord Atkin's words as having, "a
some- what delphic character" and argues that they must be read
in light of the Supreme Court's judgment.40
Yet the basic thrust of the passage seems straight forward enough.
Unlike the Supreme Court, the Privy Council rejected the notion
that money raised by means of taxation could be disposed of by
Parliament "in any manner that it sees fit" - While allowing that
the contributions required under the legislation might be regarded
as taxation, Lord Atkin went on to state that legislation disposing
of these contributions would nevertheless be unconstitutional
if its pith and substance fell within provincial heads of power.
The clear implication is that laws governing spending must be
characterized according to the underlying purpose that the spending
seeks to achieve. On this basis, Lord Atkin was able to agree
with the Supreme Court majority that "in pith and substance this
Act is an insurance Act affecting the civil rights of employers
and employed in each Province, and as such is invalid".41
The
federal government appears to have interpreted the Privy Council
decision as being confined to situations in which federal spending
is directly related to a specific revenue raising measure. Smiley
has noted that:42
. . . the effect of the Privy Council judgment
. . . has been to inhibit the federal government from supporting
an activity within provincial jurisdiction partly or wholly
from a federal levy made for that purpose. Thus, when the government
decided to finance its program of old age pensions to persons
70 and over partly through a special income tax levy, an amendment
to the B.N.A. Act was secured with unanimous provincial consent
to give Parliament concurrent jurisdiction in that field. If
the policy had been to make these payments from the Consolidated
Revenue Fund, as in the case of family allowances, no such amendment
would have been necessary according to the understanding of
the federal spending power which has prevailed in Ottawa in
recent years.
What
this federal position amounts to is an assertion that legislation
appropriating monies from the Consolidated Revenue should be characterized
differently for constitutional purposes from legislation appropriating
monies from other funds. The federal Government seems to believe
that if the relationship between the spending measure and the
taxing measure is not made explicit, the constitutional problem
will simply evaporate. Not only does this interpretation disregard
Lord Atkins' emphasis upon the disposition of tax revenues, but
it treats as mindlessly formalistic the objections expressed in
the Supreme Court and the Privy Council that Parliament not be
able to use taxing and spending as means of circumventing the
division of legislative responsibilities set out in sections 91
and 92. Indeed, if the federal position were correct, it would
mean that precisely the same scheme of unemployment insurance
that was struck down by the Supreme Court and the Privy Council
would have been upheld had the contributions been collected under
separate legislation and channelled through the Consolidated Revenue
Fund before being spent in the form of insurance benefits.
This
brings us back to a point raised earlier. Underlying the federal
position, and the position of many constitutional writers, is
the belief that spending is somehow different from, and less in
need of constitutional containment than, other forms of governmental
activity. Scott43
and Driedger44
equate spending with gifting, and express shock at the suggestion
that private persons could make gifts but that governments could
not. Hogg states:45
There
is a distinction, in my view, between compulsory regulation,
which can obviously be accomplished only by legislation enacted
within the limits of legislative power, and spending or lending
or contracting, which either imposes no obligations on the recipient
. . .or obligations which are voluntarily assumed by the recipient.
. . There is no compelling reason to confine spending or lending
or contracting within the limits of legislative power, because
in those functions the government is not purporting to exercise
any peculiarly governmental authority over its subjects.
With
respect, the views of these scholars have a sense of unreality
about them. What they seem to forget is that governmental spending
is not an isolated activity. When a government spends, it must
derive the revenue from somewhere. The way that Government usually
does this is through the imposition of taxation, something which
is, without doubt, the exercise of a "peculiarly governmental
authority". The importance of the Privy Council judgment in the
Employment and Social Insurance Act Reference is that it
recognized this relationship and rejected arguments that it should
characterize the spending function as though it were unrelated
to the taxing function. Rather, it correctly saw them as part
and parcel of a single redistributive activity.
The
corollary to the suggestion that Parliament has unlimited spending
power with respect to tax revenues is that Parliament has the
power to levy taxes for any purposes. Yet this is a proposition
that flies directly in the face of the well-established limitation
against Parliament levying direct taxation for provincial purposes.46
It also flies in the face of sections 54 and 90 of the Constitution
Act, 1867 which, as Laskin pointed out,47
clearly contemplate that Governmental responsibility for the raising
of a revenue for provincial purposes by any means of taxation
rests exclusively with the provincial authorities.48
It
might be asserted that, since non-tax revenues are derived through
activities which are not "peculiarly governmental", the federal
government ought to have unlimited authority to spend these revenues.49
Put another way, it could be argued that legislation disposing
of non-tax revenues should be characterized as a purely allocative
activity falling within federal jurisdiction over public debt
and property. This, however, is a much narrower claim and one
that has little relevance to conditional grants. An examination
of the growth of federal spending following the Second World War
establishes that the rise in conditional grant programs has been
directly related to the rise in tax revenues. Indeed, the federal
government has done nothing to disguise this relationship, as
evidenced by the fact that, in 1977, when it changed the formula
with respect to contributions for post secondary education, hospital
insurance and medicare (the "established programs"), it shifted
from cash payments to a combination of cash payments and tax points.
Perhaps the most obvious indication that conditional grants are
largely attributable to tax revenues, however, is the fact that
the amount of such grants far exceeds the amount of federal non-tax
revenues. In 1984, for example, conditional transfers to the provinces
alone exceeded all federal non-tax revenues by more than eleven
billion dollars.50
There is a related point that needs to be addressed. It concerns
the difficulty of distinguishing between tax and non-tax revenues
flowing through the Consolidated Revenue Fund. Trudeau argued
in 1957 that this difficulty "makes it impossible, in practice,
to know what money may be used without limitations for grants,
and what money may not".51
This conclusion may have made sense at a time when conditional
grants for provincial programs constituted a small percentage
of total federal expenditures and could be attributed solely to
non-tax revenues.52
But where, as is the case today, conditional grants comprise a
substantial portion of federal expenditures, one that far exceeds
non-tax revenues, there can be no justification for shielding
such grants from constitutional scrutiny simply because they have
been "laundered" through the Consolidated Revenue Fund. On the
contrary, there, is ample reason to proceed on the assumption
that such grants derive from tax revenues.
See Liquidators of the Maritime Bank of Canada v. Receiver-General
of New Brunswick, supra, footnote 3.
30.
It is significant that, despite similarly worded provisions
in sections 81 and 83 of the Australian Constitution, the
framers saw fit to provide explicitly in section 96 for a
parliamentary power to "grant financial assistance to any
State on such terms and conditions as the Parliament thinks
fit".
31.
Attorney-General
for Canada v. Attorney-General for Ontario, [1937]
A.C. 326, [1937] 1 D.L.R. 673 (P.C.).
32
Ibid., at pp. 351 (AC), 682 (D.L.R.).
33
[1977]
2 S.C.R. 576, (1976) 71 D.L.R. (3rd) 1.
34
There have been a number of cases decided by lower courts,
the most recent being Winterhaven Stables Ltd. v. Attorney-General
of Canada (1988), 53 D.L.R. (4th) 413 (Alta. C.A.). For
a discussion of the lower court decisions, see A Lajoie, The
Federal Spending Power and Meech Lake, in K.E. Swinton and
C.J. Rogerson (eds.), Competing Constitutional Visions: The
Meech Lake Accord (1988), pp. 175-185.
35
Attorney-General
for Canada v. Attorney-General for Ontario, [1937]
AC 355, [1937] 1 D.L.R. 684 (P.C.), affg., [1936] 3 D.L.R.
644.
36
Ibid.,
at pp. 457 (S.C.R.), 669 (D.L.R.)
37
Ibid.,
at p. 454 (S.C.R.), 666-667 (D.L.R.)
38
Ibid.,
at pp. 455 (S.C.R.), 667 (D.L.R.) (per Rinfret J.).
39
Attorney-General
for Canada v. Attorney-General for Ontario, supra,
footnote 35, at pp. 366-367 (A.C.), 687 (D.L.R.).
40
La Forest, op. cit., footnote 23, p. 48.
41
Attorney-General
for Canada v. Attorney-General for Ontario, supra,
footnote 35, at pp. 367 (AC), 687-688 (D.L.R.).
42
Smiley, op. cit., footnote 2, p. 23 (notes in text
deleted).
43
Loc.
cit., footnote 22, at p. 6.
44
Loc. cit., footnote 24.
45
Op.
cit., footnote 6, p. 126.
46
Caron v. The King, [1924] AC 999, [1924] 4 D.L.R.
105 (P.C.).
47
B. Laskin, Provincial Marketing Levies: Indirect Taxation
and Federal Power (1959-60), 13 U.TL.J. 1, at pp. 20-21.
48
It
is ironic that La Forest, recognizing this, has argued that
such limitations on federal taxation should be ignored because
"[t]hey were made when the device of transfer payments might
still have been considered doubtful...": op. cit.,
footnote 23, p. 52. This is bizarre reasoning. It relies upon
a contentious political practice to cast doubt upon an established
constitutional limitation. Neither the Privy Council nor the
Supreme Court has passed judgment on the constitutionality
of transfer payments whereas both institution have held that
Parliament does not possess the authority to levy direct taxes
for provincial purposes. If a conflict arises, therefore,
surely it is more appropriate to invoke the established limitation
to cast doubt on the contentious practice, rather than the
other way around.
49
See
RE. Trudeau, Federal Grants to Universities, in Federalism
and the French Canadians (1968), pp. 79 and 99.
50
Canadian Tax Foundation, op. cit., footnote 19, pp.
3:2 and 16:26, and letter from McLarty, supra, footnote
19.
51
Trudeau,
op. cit., footnote 49, p. 98. See also La Forest, op.
cit., footnote 23.
52
In
1957, federal expenditures on conditional transfers stood
at $145 million, just 2.6 per cent of total budgetary expenditures
and less than one third of the $426 million derived from non-tax
revenues: Leacy, op. cit., footnote 10, series H16,
H34 and H489.
