



COURT OF APPEAL FOR ONTARIO

CITATION: National Steel Car Limited v. Independent
    Electricity System Operator, 2019 ONCA 929

DATE: 20191127

DOCKET: C65677 & C65678

Lauwers, van
    Rensburg and Trotter JJ.A.

BETWEEN

DOCKET: C65677

National
    Steel Car Limited

Applicant/Responding Party

(Appellant)

and

Independent
    Electricity System Operator, Ministry of Attorney

General
    (Ontario), Minister of Energy (Ontario)

Respondents/Moving Parties

(Respondents)

AND BETWEEN

DOCKET: C65678

National
    Steel Car Limited

Applicant/Responding Party

(Appellant)

and

Independent
    Electricity System Operator, the Attorney General

of
    Ontario, and Her Majesty the Queen in Right of Ontario

Respondents/Moving Parties

(Respondents)

Earl A. Cherniak, Q.C., Jerome R. Morse and David
    Trafford, for the appellant

Alan H. Mark and Melanie Ouanounou, for the respondent
    Independent Electricity System Operator

Robin K. Basu and Padraic Ryan, for the respondents
    Ministry of Attorney General (Ontario) and Her Majesty the Queen in Right of
    Ontario

Heard: April 24, 2019

On appeal from the
    orders of Justice Wendy Matheson of the Superior Court of Justice, dated June
    20, 2018, with reasons reported at 2018 ONSC 3845.

Lauwers
    J.A.:

I.

Overview

[1]

National Steel Car Limited, the appellant / applicant, manufactures
    steel rail cars and is a heavy electricity user. Changes to the pricing formula
    have led to dramatic price increases for electricity paid by heavy users like
    National Steel Car. The electricity pricing formula in Ontario is administered
    by the Independent Electricity System Operator (IESO) under
the
Electricity Act, 1998,
S.O. 1998, c. 15,
as amended by

the
Green Energy and
    Green Economy Act, 2009
, S.O. 2009, c. 12.

[2]

When it sets electricity prices, the IESO makes a Global Adjustment to
    the price of electricity. A component of the Global Adjustment funds
    electricity procurement contracts under the feed-in tariff program (FIT program).
    The appellant fingers this component of the Global Adjustment as the main culprit
    behind the dramatic price increases for electricity.

[3]

The appellant states as a fact and complains that:

[I]n 2009, with the enactment of the [
Green Energy and Green
    Economy Act
] and the introduction of the FIT Program, the cost of
    electricity in Ontario began to increase exponentially, despite the fact that
    Ontario was generating far more electricity than it needed. For example, the
    costs of the Global Adjustment paid by NSC increased from $207,260 in 2008 to
    $3,390,645.08 in 2016, or by 1,335.94%, when NSCs use of electricity only
    increased by 21.06% (inflation was approximately 13.28% over the same time
    period).

[4]

The appellant asserts that the FIT program was actually designed to
    accomplish social goals unrelated to the generation of electricity, that is, in
    order to redress the economic harm perceived by the government suffered by
    rural and aboriginal communities, municipalities and co-operatives  as a
    response to the 2008 economic crisis. Because the true purpose of this
    component of the Global Adjustment was to provide economic stimulus and
    subsidies to the Preferred Communities, in legal terms it is not really a
    regulatory charge but is instead a tax aimed at achieving broader social goals
     dubbed the Policy Goals. The component does more than merely pay for the
    generation of electricity. Because the Global Adjustment was not enacted as a
    tax, the appellant argues that it was unconstitutional under s. 53 of the
Constitution Act, 1867
; it also breached the
Taxpayer Protection Act, 1999
,
    S.O. 1999, c. 7, which required the
government to seek approval of the Global
    Adjustment by a referendum. The government failed to do so, rendering the
    legislation void
.

[5]

The appellant submits that the Policy Goals can be achieved by Ontario
    in several ways, just not through the electricity pricing formula.

[6]

To advance its challenge, the appellant brought two applications for
    declarations in favour of its arguments, under r. 14 of the
Rules of Civil
    Procedure
, R.R.O. 1990, Reg. 194. The respondents did not address the
    applications in the customary way by filing responding material and developing
    a full evidentiary record for the consideration of an application judge. Instead
    they brought a motion under
r. 21.01(1)(b) of
    the
Rules of Civil Procedure
to strike each application on the ground
    that it discloses no reasonable cause of action.

[7]

The motion judge ruled on the merits of the applications. She held that
    the Global Adjustment in the electricity pricing formula challenged by the
    appellants was a regulatory charge and not a tax, and, further, that it could
    not be a tax because of the way the pricing formula was constructed as a
    closed system. The motion judge struck the applications on the basis that it was
    plain, obvious and beyond doubt that they could not succeed. She added that if
    the Global Adjustment or the challenged component of it was a tax, then its
    enactment complied with s. 53 of the
Constitution Act, 1867.
Because
    she found that the Global Adjustment was not a tax, she did not address the
    application of the
Taxpayer Protection Act
.

[8]

Ontario and IESO support the motion
    judges reasoning, although Ontarios
counsel advised the court that the
    current Ontario government does not agree with the former governments
    electricity procurement policy (since-repealed). The governments view is
    that: The solution does not lie with the courts, but instead in the political
    arena with political actors. The motion judge noted, at para. 48, that: The
Energy
    Statute Law Amendment Act, 2016
, S.O. 2016, c. 10 then brought the FIT
    program to an end, but the contracts previously entered into subsist until the
    end of their terms.

[9]

The appellants principal claim is that the Global Adjustment was a colourable
    attempt to disguise a tax as a regulatory charge with the purpose of funding
    the costs of the Policy Goals. The appellant pressed this argument before the
    motion judge and before this court. The motion judge did not directly or adequately
    address it.

[10]

The appellants claim is sufficiently plausible on the evidentiary
    record it put forward that the applications should not have been dismissed on a
    pleadings motion before the development of a full record.
It is not plain,
obvious and beyond doubt that
    the Global Adjustment, and particularly the challenged component, is properly
    characterized as a valid regulatory charge and not as an impermissible tax.

[11]

In these reasons I describe the factual context, set out the issues, and
    then present the analysis.

II.

The Factual Context

(1)

The Legislative Scheme

[12]

Section 25.33 of the
Electricity Act
directs the IESO to make
    adjustments in accordance with the regulations in order to incorporate certain
    costs payable by government agencies into the price of electricity by means of
    the Global Adjustment
.
The pricing formulas objective is to fully
    recover these costs in the electricity bills sent to commercial and residential
    consumers. The IESO calculates the precise Global Adjustment every month
    according to the detailed formula prescribed by s. 1.1 of O.Reg 429/04.

[13]

One component of the costs to be recovered  and a significant portion
    of the Global Adjustment according to the evidence of the appellants  is the
    amounts paid to private entities with which the IESO has procurement contracts
    under the FIT program. Under this program, private suppliers of renewable
    energy are paid a fixed rate over the twenty-year or so term of the contract to
    feed in energy to Ontarios electricity grid, hence the name feed-in tariff
    program.

[14]

Section 25.35 of the
Electricity Act
authorized the provincial
    government to enter into FIT contracts. The section expressly incorporated policy
    goals relating to the participation by aboriginal peoples and the involvement
    of members of the local community in the development and establishment of
    renewable energy projects. Under s. 25.35(1), the Minister was authorized to
    direct the development of a feed-in tariff program that is designed to procure
    energy from renewable energy sources. Under s. 25.35(2), the Ministers
    direction may:

set out the goals to be achieved during the period to be
    covered by the program, including goals relating to,

(a)
the participation by aboriginal peoples
in the
    development and establishment of renewable energy projects; and

(b)
the involvement of members of the local community
in
    the development and establishment of renewable energy projects. [Emphasis
    added.]

[15]

The members of the local community were further differentiated into co-operative
    ownership, or municipality/public sector ownership. Together, these are the
    entities the appellant calls the Preferred Communities who benefit from the Policy
    Goals. For convenience, I will use these terms even though they are
    tendentious
.

[16]

The FIT program also provided price incentives, called adders. These
    adders increased the rates paid for electricity generated for some FIT
    program generators. Specifically, the adders supplemented the rates for
    projects with a minimum percentage of aboriginal ownership, co-operative
    ownership, or municipality/public sector ownership. The adders are depicted in
    the table below. The appellant argues that the adders provide further
    evidence that the governments Policy Goals were to provide economic stimulus
    and subsidies to the Preferred Communities. I observe that the revenue to the
    beneficiaries increased without any increase in their costs of generation.

FIT Price Adders





Indigenous Population Project

Community Participation Project

Municipal or Public Sector Entity Participation
          Project



Participation Level
          (Economic Interest)

> 50%

≥15% ≤50%

>50%

≥15% ≤50%

>50%

≥15% ≤50%



Price Adder (¢/kWh)

1.5

0.75

1.0

0.5

1.0

0.5



(2)

The Effects of the FIT Program on the Price of Electricity

[17]

The dramatic price increases in electricity resulting from the FIT
    program were summarized earlier. According to the appellants factum, which
    fairly summarized the factual evidence in the affidavits, the affidavit
    evidence demonstrates that the FIT program component of the Global Adjustment
    has nothing to do with the true costs of generating electricity but was aimed
    at financing the Policy Goals by providing large surpluses to the Preferred
    Communities for their own use:

[The FIT program costs are] the principal targets of NSCs
    complaint, based on the publicly available information that the Global
    Adjustment is used to fund the cost of the Policy Goals. Professor McKitrick,
    NSCs expert (who was not cross-examined) concluded that
more than 50% of
    the Global Adjustment is attributable to the above fair market rates payable to
    FIT Program generators to achieve the Policy Goals
.



The following are some examples of the consequences that flow
    from the government funding the cost of the Policy Goals by levying the Global
    Adjustment:

(1) Ontario has, since 2009, produced more electricity than it
    can use (which, in 2016, was exported to other provinces and the USA at 1.6
    cents KwH);

(2)
FIT Program generators are paid not to generate
    electricity and are paid rates that increasingly exceed market prices each year
as the market prices for renewable energy declines (in the case of solar, a 68%
    decline in the price from 2009 to 2016 in the US); and,

(3) Ontario consumers pay some of the highest cost of
    electricity per KwH in the world.



Not all of the facts concerning the costs of implementing the
    Policy Goals through renewable energy projects are publicly known. Most
    importantly, there is little to no publicly available information as to how the
    IESO determined the quantum of the costs incurred that are recovered by [the
    challenged components] of the Formula for the Global Adjustment. There is no
    information relating these costs to the costs of the regulatory scheme for
    electricity, except that those costs are paid to generators and recovered
    within the regulatory scheme. The record establishes that
the IESO has not
    disclosed and has refused to disclose details of the costs comprising the
    Global Adjustment
.



[The following evidence] supports the principal claim that the
    Global Adjustment is a colourable attempt to disguise a tax as a regulatory
    charge with the primary purpose of funding the Policy Goals:

(i) no business case was undertaken by IESO when setting the
    FIT Contract rates;

(ii)
rates are guaranteed for 25 years at rates far above
    market, and, in some cases, upwards of 350% of market rates
;

(iii)
generators are paid on a deemed generation basis for
    electricity not needed or used
;

(iv)
rates are increased for FIT Program generators with
    involvement of the Preferred Communities
as equity stakeholders;

(v) the FIT Program had a made in Ontario requirement;

(vi) electricity demand in Northwest Ontario decreased
    substantially despite substantial clean energy generation facilities and the
    transmission grid in that area did not have the capacity to transmit excess
    clean energy generation. Nonetheless, the government awarded lucrative FIT
    Contracts to the Preferred Communities to be renewable energy generators in
    Northwest Ontario because they met the criteria for the Policy Goals,
even
    though the electricity generated was not needed, could not be transmitted or
    used
;

(vii) the FIT Program provided for an Aboriginal Energy
    Partnership Program, created with
the specific purpose to build sustainable
    and stronger economics in Aboriginal communities
 and, among others; and

(vii) the Minister of Energy and his Deputy Assistant who were charged
    with designing and implementing the FIT Program stated under oath that
the
    purpose of the FIT Program was to achieve the Policy Goals
. [Emphasis
    added.]

[18]

Overall, the appellant submits that these facts demonstrate that the FIT
    program component of the Global Adjustment was not truly related to the
    purposes of the
Electricity Act
or the regulation of electricity, and
    had nothing to do with the true costs of generating electricity. Rather, the FIT
    program component was intended to support the Policy Goals by conferring a financial
    benefit on the Preferred Communities.

III.

The Issues

[19]

The main issue in this appeal is whether it
    is plain,
obvious and beyond doubt that the component of the Global
    Adjustment that pays for the FIT program was a regulatory charge and not a tax.
    The second issue is whether, if it was a tax, it fails because its imposition
    did not comply with s. 53 of the
Constitution Act, 1867
and the
Taxpayer Protection Act.
The third issue is whether this court should stay the applications
    pending determination of the issues by the Ontario Energy Board.

IV.

Analysis

[20]

I begin with a review of the legal principles engaged in the motion and
    the appeal. I then set out the governing constitutional principles and apply
    them to the facts of this case. I next address the application of s. 53 of the
Constitution Act, 1867
and the
Taxpayer
    Protection Act
. Finally, I consider
    Ontarios request to stay the applications so that the Ontario Energy Board can
    decide them.

(1)

The Governing Principles

[21]

I set out here the principles governing: a) the courts approach to a
    motion striking a notice of application and an appeal therefrom; b) the
    constitutional principles governing taxes and regulatory charges; and c) the
    colourability doctrine.

(a)

The Courts Approach to a Motion Striking a Notice of Application

[22]

I am mindful of the caution Carthy J.A. once expressed in considering a
    similar appeal.
Because th
ere was some
    chance that [the appellants] can prove their allegations, he instructed
    himself, I must be careful not to suggest that the issues have ultimate merit,
    and so restricting myself may do less than justice to the intricacies of the
    arguments on each side of the point:
Energy
    Probe v. Canada (Attorney-General)
(1989), 68 O.R. (2d) 449, [1989] O.J. No. 537 (C.A.), at para. 20, leave to
    appeal refused, [1989] S.C.C.A. No. 223.
I adopt the same cautious approach.

[23]

The standard of review on the appeal from a motion to strike is
    correctness:
McCreight v. Canada (Attorney General)
, 2013 ONCA 483,
    116 O.R. (3d) 429, at para. 38.

[24]

The motion judge cited the correct legal principles governing a motion
    to strike a notice of application under
r. 21.01(1)(b)
    of the
Rules of Civil Procedure
. She noted, at para. 12, that the
    threshold for success on this type of motion is high, and that it must be
    plain, obvious and beyond doubt that the applications cannot succeed. She
    also observed, at para. 6, that because the motion attacked notices of
    application: Some degree of caution must be exercised. In consequence, the
    motion judge noted, at para. 7, that the supporting affidavits are also
    treated as pleaded material facts.

[25]

The appellant asserts that the motion judge did not follow the principles
    she enunciated. In particular, she did not accept as true and take into account
    the factual claims made in the three supporting affidavits filed by the
    appellant that were to be treated as pleadings. The affiants were Tom Adams, an
    independent energy and environmental advisor and researcher; Ross McKitrick, a
    Professor of Economics at the University of Guelph specializing in
    environmental economics; and Vincenzo De Luca, the Chief Financial Officer of
    National Steel Car Ltd. No responding materials were filed and the affiants
    were not cross-examined. Their factual evidence was uncontested.

(b)

Tax or Regulatory Charge: The Governing Constitutional Principles

[26]

Is it arguable that Ontario crossed the line between a valid regulatory
    charge and an impermissible tax in the electricity pricing formula, as the
    appellant claims?

(i)

Ontarios Power to Levy Taxes

[27]

Ontario has power to levy direct taxes under s. 92(2) of the
Constitution
    Act
,
1867
to raise a Revenue for Provincial Purposes. By contrast,
    the federal government has power under s. 91(3) to raise money by any Mode or System
    of Taxation. While the federal government can levy indirect taxes, Ontario
    cannot. But Ontario can levy regulatory charges within certain limits. (
I point out that the distinction between indirect and
    direct taxes plays no role in this case, but it is the conceptual starting
    point for the pertinent distinction between taxes and regulatory charges.)

[28]

The difference between direct and indirect taxes was explored at
    length by Iacobucci J. in
Ontario Home Builders Association v. York Region
    Board of Education
,
[1996]
    2 S.C.R. 929, at paras. 34-49.

He concluded, at para. 49, that because
education development charges cling as a
    burden to new buildings when they are brought to market they constitute
    indirect taxation and are
ultra vires
provincial competence under s.
    92(2)
of the
Constitution Act
,
1867
.
However, Iacobucci J. went on, at para. 50, to identify another permissible way
    for a province to extract levies to meet expenses, and that is as ancillary to
    a valid regulatory scheme.

[29]

It is common ground that a levy is a tax if
    it is:
(1) enforceable by law; (2) imposed under the authority of the
    legislature; (3) levied by a public body; and (4) intended for a public purpose:
620 Connaught Ltd. v. Canada (Attorney General)
, 2008 SCC 7, [2008] 1
    S.C.R. 131, per Rothstein J., at para. 22, citing
Eurig
    Estate (Re)
,
[1998] 2 S.C.R.
    565
. However, the problem, he observed at para. 23, is that t
he characteristics of a tax will likely apply to most
    government levies. How, then, to distinguish regulatory charges from taxes?

(ii)

Regulatory Charges

[30]

The Supreme Court addressed the distinction between regulatory charges
    and taxes in
Westbank First Nation v. British Columbia Hydro and Power
    Authority
, [1999] 3 S.C.R. 134, per Gonthier J., at para. 30:

Although in today's regulatory environment, many charges will
    have elements of taxation and elements of regulation, the central task for the
    court is to determine whether the levy's primary purpose is, in pith and
    substance: (1) to tax, i.e., to raise revenue for general purposes; (2) to
    finance or constitute a regulatory scheme, i.e., to be a regulatory charge or
    to be ancillary or adhesive to a regulatory scheme; or (3) to charge for
    services directly rendered, i.e., to be a user fee.

[31]

Because the characteristics of a tax will likely apply to most
    government levies, where the issue is whether a levy is a tax or a regulatory
    charge, there is a fifth consideration, which Rothstein J. noted in
620
    Connaught
, at para. 24, drawing on
Westbank
:

[A] government levy would be in pith and substance a tax if it
    was unconnected to any form of a regulatory scheme (para. 43). This fifth
    consideration provides that even if the levy has all the other indicia of a
    tax, it will be a regulatory charge if it is connected to a regulatory scheme.

[32]

The pith and substance analytical framework or test for determining
    whether a government levy is a tax or regulatory charge was explained in
620
    Connaught
, per Rothstein J. at para. 16:

The task for the Court is to identify whether the fees paid by
    the appellants are, in pith and substance, a tax or a regulatory charge.
The
    pith and substance of a levy is its dominant or most important characteristic.
    The dominant or most important characteristics are to be distinguished from its
    incidental features
(P. W. Hogg,
Constitutional Law of Canada
(5th
    ed. 2007), vol. 1, at pp. 433-36). The fees in this case have characteristics
    of both a tax and regulatory charges. The Court must ascertain which is
    dominant and which is incidental. [Emphasis added.]

[33]

Rothstein J. set out the two-step test at paras. 25 and 27 of
620
    Connaught
, building on para. 44 of
Westbank
. The
first step
is to identify the existence of a relevant regulatory scheme. The indicia
    are:

(1) a complete, complex and detailed code of regulation; (2) a
    regulatory purpose which seeks to affect some behaviour; (3) the presence of
    actual or properly estimated costs of the regulation; (4) a relationship
    between the person being regulated and the regulation, where the person being
    regulated either benefits from, or causes the need for, the regulation.

[34]

Rothstein J. pointed out that the first three indicia establish the
    existence of a regulatory scheme, while the fourth establishes that the
    regulatory scheme is relevant to the person being regulated.

[35]

Once the court has identified the regulatory regime, the
second step
is
    to find a relationship between the charge and the scheme itself. In the words
    of
Westbank
, at para. 44: This [relationship] will exist when the
    revenues are tied to the costs of the regulatory scheme, or where the charges
    themselves have a regulatory purpose, such as the regulation of certain
    behaviour.

[36]

There is no doubt that a levy may be imposed by provincial legislation
    on regulated producers and sellers in order to cover the costs of regulation:
Reference
    re

Agriculture Products Marketing Act,

[1978] 2 S.C.R.
    1198, 1978 CarswellOnt 606, per
Laskin C.J.
at para.
    48.

[37]

Whether a levy is a valid regulatory charge sometimes turns on whether
    it is designed to reasonably recover regulatory costs or whether it is designed
    to produce an unreasonable surplus.

[38]

Under the legislation at issue in
Ontario Home Builders Association
,
education development charges were
    levied on each new residential unit to fund schools required by the new residential
    development.
Iacobucci
J. noted, at para.
    55, that the mechanism for the calculation and disbursement of [education
    development charges], is meticulous in its detail, and clearly operates so to
    limit recoupment to the actual costs involved in providing educational
    facilities occasioned by new development.  There was close correspondence
    between the costs and the revenue generated by the charges. The impugned levies,
    he added at para. 67, were therefore properly adhesive to the provinces
    planning and development regime, and accordingly, are
intra vires
the
    province of Ontario, pursuant to ss. 92(9), (13) and (16) of the
Constitution
    Act, 1867
.

[39]

As to the existence of a surplus, Iacobucci J. stepped back from executing
    a detailed financial analysis in
Allard Contractors

Ltd v. Coquitlam
    (District)
, [1993] 4 S.C.R. 371, 1993 CarswellBC 317, at para. 83:

[I]t is not for this Court to undertake a rigorous analysis of
    a municipality's accounts.  A surplus itself is not a problem so long as
    the municipalities made reasonable attempts to match the fee revenues with the
    administrative costs of the regulatory scheme, which is what occurred in this
    case.  It is easy to imagine reasons for the existence of a so-called surplus
    at any given time.

However, he added an important qualification, at para.
84
:

Although

it might be possible to attack a fee
    structure demonstrably intended to raise revenue in excess of regulatory needs
    on constitutional grounds,

in this case no evidence of such
    intention has been proved.  On this point, therefore, the municipalities
    may be given reasonable leeway
.
In the result, I am of the view
    that the volumetric levy in this case was intended only to cover the costs of
    the regulatory scheme, including road repair.  [Emphasis added
.
]

[40]

In
620 Connaught
, Rothstein J. considered the degree of
    correspondence required between a regulatory charge and the costs it was
    designed to pay, at para. 40:

[T]he government needs to be given some reasonable leeway with
    respect to the limit on fee revenue generation.
While a significant or
    systematic surplus above the cost of the regulatory scheme would be
    inconsistent with a regulatory charge and would be a strong indication that the
    levy was in pith and substance a tax
, a small or sporadic surplus would
    not, as long as there was a reasonable attempt to match the revenues from the
    fees with the cost associated with the regulatory scheme. [Emphasis added.]

He added, at para. 46: 
Where
    the connection between the use of the revenues generated from a government levy
    and the persons being regulated is doubtful, the courts will scrutinize the
    facts to ensure that the Constitution is not circumvented by executive or
    bureaucratic edict.

[41]

The appellant invokes this doubt as part of its argument.

(c)

The Colourability Doctrine

[42]

The appellant asserts forcefully that the FIT program component of the Global
    Adjustment is not related to the regulatory scheme, properly understood. Instead,
    it was inserted into the electricity pricing formula in order to achieve a
    collateral purpose  to generate a significant revenue surplus for the benefit
    of the Preferred Communities. The appellant argues that Ontario's effort was therefore
    caught by the colourability doctrine.

[43]

Professor Peter Hogg notes that colourability depends on the divergence
    between form and substance. He explains: The colourability doctrine is
    invoked when a statute bears the formal trappings of a matter within jurisdiction,
    but in reality is addressed to a matter outside jurisdiction It simply means
    that form is not controlling in the determination of the essential character.
    He adds: [T]he colourability doctrine applies the maxim that the legislative
    body cannot do indirectly what it cannot do directly:
Constitutional Law of
    Canada
, loose-leaf (2018-Rel. 1), 5th ed. (Toronto: Thomson Reuters Canada
    Ltd., 2007), vol. 1, at para. 15.5(g).

[44]

The colourability doctrine draws on language from several constitutional
    cases. In
Reference re Agricultural Products Marketing Act
, Pigeon J.,
    writing for the majority of the Supreme Court, stated at para. 149:

It is axiomatic in constitutional law that
the courts will
    look through any scheme in order to strike down all attempts to do indirectly
    what cannot be done directly
: regard must be had to the substance and not
    to the mere form of the enactment, so that you cannot do that indirectly which
    you are prohibited from doing directly [citation omitted]. If the complex scheme
    was valid and
not just a colourable device
, this is proof enough, in my
    view, that the direct method, the adjustment levies, are not unconstitutional [Emphasis
    added.]

[45]

Similar language was used in the
Reference re
Firearms Act
    (Canada),
2000 SCC 31, [2000] 1 S.C.R. 783, at para. 18:

In other words, a law may say that it intends to do one thing
    and actually do something else.
Where the effects of the law diverge
    substantially from the stated aim, it is sometimes said to be colourable
.
    [Emphasis added.]

[46]

The issue of a surplus from a levy and colourability converged in the
Reference
    Re Farm Marketing Products Act (Ontario)
,
[1957] S.C.R. 198, where the Supreme Court observed, at para. 175:

[F]ees for services rendered by the Province or by its authorized
    instrumentalities may validly be charged, under the powers given in s. 92(13)
    and (16) of the
British North America Act
. Such service charges are not
    invalid merely because they may exceed the actual expenses of the recipient.
The
    nature of the use thereafter made of such surplus might, in certain
    circumstances, indicate a colourable attempt to tax, or do indirectly what
    could not be validly done directly
, but nothing that was submitted to us
    supports the contention that any such use is here contemplated. [Emphasis
    added.]

[47]

The appellant invoked the language of colourability in its challenge.

(2)

The Motion Judges Decision

[48]

The motion judge accurately described the details of the applicable
    legislation, the constitutional context, and the pith and substance test for
    distinguishing a tax from a regulatory charge. She found, at para. 65, that the
    Global Adjustment limits recoupment to actual costs incurred by the IESO for
    the purpose of procuring, generating and conserving electricity. The motion
    judge also found the primary purpose for the Global Adjustment was not to
    raise revenue for general purposes and the funds do not go into general
    revenue. She noted that the FIT contracts were authorized by the legislation,
    at para. 66, and added that the participation of the Preferred Communities was
    expressly authorized by the legislation, at para. 69.

[49]

The motion judge found, at para. 77, that there was a regulatory regime,
    according to the first step of the test in
620 Connaught
: [T]he electricity
    regulatory regime is a complete, complex and detailed code of regulation. The scheme
    addressed the regulation of electricity in Ontario, including with respect to
    the generation, distribution, transmission, procurement, consumption, conservation
    and planning of electricity within the province.

[50]

The motion judge found, at para. 78, that the regime has a regulatory
    purpose that seeks to affect some behaviour, by promoting cleaner energy
    sources and technologies and encouraging electricity conservation and the
    efficient use of electricity. She added, at para. 80, that Ontario consumers
    benefit from this regulatory scheme, under which they are provided with
    electricity in order to satisfy their demand for energy.

[51]

The motion judge found that the regime also met the second step of the
620
    Connaught
test. A sufficient relationship between the levy and the
    regulatory scheme exists, as she said at para. 81, because: the revenues are
    tied to the costs of the regulatory scheme or the charges themselves have a
    regulatory purpose, such as the regulation of certain behaviour.

[52]

The motion judges conclusion, stated at para. 84, is that it is plain,
    obvious and beyond doubt that the Global Adjustment is not a tax. This was
    based on her analysis at paras. 82-83:

The Global Adjustment is tied to the costs of the regulatory
    scheme and, as a price adjustment, has a regulatory purpose. Section 25.33 of
    the
Electricity Act
identifies the costs of the regulatory scheme for
    the procurement, generation and conservation of electricity in Ontario that
    need to be accounted for and recovered in the Global Adjustment, and s. 1.1 of
    the Regulation sets out the formula for calculating the Global Adjustment based
    on these costs. The regulatory scheme is essentially a closed system in which
    only actual costs are included in the Global Adjustment, and those actual costs
    all arise from the regulatory regime itself and the purpose of that regime.

Thus, the Global Adjustment is not a tax because its purpose,
    in pith and substance, is not to tax, and it is a regulatory charge and
    therefore, again, not a tax.

[53]

The motion judge went on to find in the alternative, at para. 85, that
    even if the Global Adjustment was a tax, its imposition did not breach s. 53 of
    the
Constitution Act, 1867
, because: The Ontario Legislature itself
    imposes the Global Adjustment under s. 25.33 of the
Electricity Act
.

(3)

The Principles Applied

[54]

I do not see it as this court's task, in a pleadings motion appeal, to
    finally determine the merits of the applications, in part because the record is
    inadequate. The motion judges definitive ruling avoided the need for
    additional evidence. But, in my view, the ruling was premature. As I will
    explain, additional argument and evidence are necessary to establish either
    that the levy was a proper regulatory charge, or that it was a tax, and to
    consider the consequences of the determination.

[55]

My approach is to identify concerns about several steps in the motion
    judge's analysis. While her selfinstructions were correct, in my view her
    analysis sidestepped the appellant's colourability challenge and the evidence.

(a)

The Colourability Challenge

[56]

The colourability challenge is expressed pointedly in the appellant's
    factum:

The record before [the motion judge] established that the
    stated purpose of the FIT Program (paid for by the Global Adjustment) was to
    provide an economic stimulus to the Preferred Communities and was not related
    to the regulation of the generation, transmission, delivery and use of
    electricity in Ontario. More particularly, NSC claims that the government
    intentionally disguised the Global Adjustment within the complex regulatory
    scheme for electricity in pursuance of its colourable attempt to tax through
    regulation.

[57]

The motion judge relied on the fact that the legislation expressly
    authorizes the FIT program. However, the mere fact of express legislative authority
    does not immunize the program from challenge, as the cases note. The
    colourability doctrine requires a careful assessment of the legislation and the
    underlying intent where the claim is that the effects of the law diverge
    substantially from the stated aim, or whether the stated aim was permissible as
    part of a regulatory scheme.

[58]

Sometimes the questionable purpose of a levy is evident on the face of
    the legislation, as in
Eurig
. But sometimes the real intent is more
    difficult to ferret out and requires more evidence than the words of the legislation
    itself, including evidence put forward by the appellant and evidence put
    forward by the respondents accompanied by cross-examination. The appellants
    colourability challenge attacks the governments true intent.
I would reject Ontarios argument that the colourability
    challenge must be limited to the face of the legislation. That would not be
    consistent with the
case law on colourability.
    Moreover, it would not be consistent with much of the case law on determining
    whether a levy is a tax or a regulatory charge, given that many of these cases
    have relied on evidence, and specifically, on evidence of the mechanics and
    accounting of the scheme in question
.

(i)

The Application of the Test in
620 Connaught


[59]

As to the first step of the test in
620
    Connaught
, the motion judge was correct in finding that the
    electricity regulatory regime is a complete, complex and detailed code of
    regulation. But that finding does not immunize the FIT program component of
    the Global Adjustment from judicial scrutiny for colourability.

[60]

The appellant calls into question three of the indicia to be considered
    by the court in applying the first step of
620 Connaught
. The first is
    whether the FIT program had a regulatory purpose which seeks to affect some
    behaviour. The FIT program incentivized the production of renewable energy, as
    the motion judge noted, particularly by the Preferred Communities.

[61]

However, at issue is whether the production of renewable energy was the
    FIT programs dominant purpose. Based on the affidavit evidence, which must be
    accepted as true for the purpose of the motion, the appellant establishes that
    much of the electricity generated under the FIT program is both very expensive
    and useless. The motion judge does not appear to have taken these facts into
    account. Was this outcome predicted and planned, or was it unexpected and
    incidental? This question is pertinent to the colourability argument, but there
    was no evidence on it before the motion judge.

[62]

The appellant submits that the pleaded facts show that the FIT programs
    true purpose was not actually to generate electricity but to generate a surplus
    of revenue for the Preferred Communities. The motion judge did not ask or
    answer the critical question: Was the dominant purpose of the FIT program to
    generate useful electricity, or was it to produce a substantial revenue surplus
    for redistribution to the Preferred Communities? This question remains open.

[63]

The second indicium the appellant challenges is: the presence of actual
    or properly estimated costs of the regulation. The motion judges description
    of how the formula accounts for costs incurred by the IESO is accurate, but she
    assumes without question that the inputted costs were incurred legitimately.

[64]

The appellant agrees that the Global Adjustment picks up the liabilities
    already incurred by the IESO, but the point of its complaint is that the IESO,
    with government approval, but without legislative authority, purposefully
    incurred excessively inflated liabilities through the FIT Program and similar
    programs to create an indirect economic benefit to the Preferred Communities,
    to achieve the Policy Goals. The importation of inflated costs was the
    mechanism of the colourable action, according to the appellant. The motion
    judge stated, at para. 67: Put simply, the applicant's position is that the
    FIT program was improvident. But this misstates the appellants position,
    which was that in funding the FIT program, the Global Adjustment was a
    colourable attempt to disguise a tax as a regulatory charge. This was the
    Governments ulterior purpose and its concealed purpose. The motion judge
    did not address this argument.

[65]

Next, the appellant challenges the indicium of a proper relationship
    between to the person being regulated and the regulation where the person being
    regulated either benefits from, or causes the need for, the regulation. To
    some extent this criterion picks up the second step of the test in
620
    Connaught
, so I will address them together. To repeat for convenience, the
    words of Gonthier J. at para. 44 in
Westbank
that were adopted in
620
    Connaught
: This [relationship] will exist when the revenues are tied to
    the costs of the regulatory scheme, or where the charges themselves have a
    regulatory purpose, such as the regulation of certain behaviour.

[66]

The appellant argues that there is no real effort to tie the revenue to
    the cost of the regulatory scheme. The idea behind the FIT program was to
    generate a revenue surplus over the true costs of electricity generation paid
    by the participants in the FIT program, for the benefit of the Preferred
    Communities at the expense of all electricity consumers.

[67]

For a levy to constitute a regulatory charge and not a tax, the cases
    require a reasonable correspondence between the levy and its costs. Exact
    correspondence is not required; the court is willing to permit reasonable
    forecasting on the part of the government of prospective costs and to tolerate
    an occasional surplus. Is the surplus significant and systematic as
620
    Connaught
asked? Does the surplus come within the margin of reasonable
    leeway noted in
Allard
, or is it grossly disproportionate? How does the
    concept of proportionality apply in the circumstances of the relationship
    between the component of the Global Adjustment that pays for the FIT program
    and the balance of the amount charged under the Global Adjustment? These
    questions were not addressed by the motion judge.

(ii)

The Closed System Analysis

[68]

The respondents argued that the Global Adjustment revenues did not
    raise revenue for the government or any other public authority, although funds
    flowed between consumers and producers of electricity. This was a closed
    system because only the actual costs, that is, the money paid to generators of
    electricity, were accounted for in the Global Adjustment, which was a cost
    recovery mechanism tied to a complex regulatory scheme, and was thus a valid
    regulatory charge, not a tax.

[69]

The closed system analysis proposed by counsel for Ontario and adopted
    by the motion judge as the clinching argument does not address the appellant's
    colourability argument that the electricity pricing formula was manipulated to
    provide a windfall surplus to the Preferred Communities at the expense of all
    Ontario electricity consumers.

[70]

The appellant plainly challenges what the motion judge assumed: the government's
    good faith in setting up the closed system. Although Ontario could provide
    financial support to the Preferred Communities through a system of grants
    funded by tax revenues, it did not do so, but instead impermissibly chose the
    electricity pricing mechanism as the vehicle.

[71]

The motion judge accepted Ontarios argument that because the proceeds
    of the FIT program component of the Global Adjustment did not go into its coffers,
    it cannot be a tax. But the appellant argues that, in effect, the structure of
    the system was to set up an off-book wealth transfer mechanism. If it was
    aimed at the betterment of the Preferred Communities, was this aim a
    regulatory purpose or a general purpose usually funded by tax revenues? The
    motion judge did not address this argument.

(b)

The Application of s. 53 of the
Constitution Act
,
1867

[72]

The respondents argued, in the alternative, that even if the Global
    Adjustment was a tax, its imposition did not breach s. 53 of the
Constitution Act, 1867.
The

motion judge gave short shrift to the
    appellant's argument that the FIT program breached s. 53. The respondents argument
    on this issue before this court was not robust, perhaps because it tended to
    undermine their main argument that the Global Adjustment was a regulatory
    charge in a closed system.

[73]

The important constitutional role of s. 53 of the
Constitution Act,
    1867
in Canadas polity was explored by Professor Hogg in a short article
    entitled, Can the Taxing Power be Delegated?", (2002) 16 S.C.L.R. (2d)
    305. As I see it, the question is less whether the power to tax has been
    delegated to the IESO, and more to do with the proper form of the exercise of
    legislative power. That is quite muffled in the legislative text, which does
    not use the word tax. This issue deserves more comprehensive development
    before it is addressed by this court.

[74]

The motion judge did not address the
Taxpayer Protection Act
at
    all. I would not do so either without a Superior Court decision taking into
    account evidence and argument.

(c)

Conclusion

[75]

In sum, the appellants central claim  that the Global Adjustment, or a
    component of, it is a colourable attempt to disguise a tax as a regulatory
    charge  is plausible on the evidentiary record that it put forward. Without
    regard to the ultimate merit of that claim, in my view, it is not plain,
    obvious and beyond doubt that the applications could not succeed. The merits should
    not have been determined on a pleadings motion and without the development of a
    full record, and the motion judge erred in granting Ontarios motion to strike
    the applications. The potential applicability and effect of s. 53 of the
Constitution
    Act, 1867
and the
Taxpayer Protection Act
also deserve more robust
    development.

V.

The Costs Appeal

[76]

The motion judge awarded costs to the moving parties, Ontario costs in
    the amount of $50,000 and the IESO in the amount of $75,000: 2018 ONSC 5165.
    The appellant sought leave to appeal costs.

[77]

If the appeal is allowed, there would be no need to address the
    appellants costs appeal.

VI.

Disposition

[78]

I would allow the appeal with costs to the appellant, set aside the
    judgment of the motion judge, and remit the application to the Superior Court
    to be heard on the merits. I have not addressed all the appellants arguments
    about the Global Adjustment. In my view, none of the motion judges findings
    are binding and the appellant is free to pursue all of its arguments.

[79]

Nothing prevents the respondents from seeking a stay in the Superior
    Court pending a hearing by the Ontario Energy Board under the
Electricity
    Act, 1998
. The Ontario Energy Board has heard similar claims in the past: see
    its decision in EB-2010-0184, dated December 8, 2011. However, Ontario only
    sought this relief from the motion judge in the alternative, and given the
    motion judges ultimate decision, she did not rule on the stay. It would be
    premature for this court to rule on the issue, although it seems incongruous
    for Ontario to argue that the Superior Court is the convenient forum in which
    to seek to dismiss the applications as meritless, but that it is not the
    convenient forum for assessing the merits of the applications.

[80]

While this decision was under reserve, this court and the Court of
    Appeal for Saskatchewan issued decisions concerning the constitutionality of
    the federal
Greenhouse Gas Pollution Pricing Act
: 2019 ONCA 544, 146 O.R. (3d) 65, and 2019 SKCA 40.

The parties provided
further submissions on the relevance of these decisions. I am persuaded that
    the federal legislative scheme under consideration in those cases is distinctly
    different from the legislation at issue in this appeal. Nothing in those
    decisions impacts this appeal.

[81]

I would permit the parties to make written costs submissions on the
    appeal and with respect to the costs of the motion, limited to 5 pages exclusive
    of any bill of costs, on a two-week turnaround starting with the appellant,
    with the reply limited to 2 pages.

Released: P.L. November 27, 2019

P. Lauwers J.A.

I agree. K. van
    Rensburg J.A.

I agree. Gary Trotter
    J.A.


