



COURT OF APPEAL FOR ONTARIO

CITATION: Grand River Enterprises Six Nations Ltd. v. Ontario
    (Finance), 2017 ONCA 680

DATE: 20170905

DOCKET: C62599

Strathy C.J.O., Cronk and Pepall JJ.A.

BETWEEN

Grand River Enterprises Six Nations Ltd.

Applicant
(Appellant)

and

The Minister of Finance for Ontario

Respondent
(Respondent)

Brian Duxbury and Ben A. Jetten, for the appellant

Lise G. Favreau, Michael S. Dunn and Padraic Ryan, for
    the respondent

Heard: May 9, 2017

On appeal from the order of the Divisional Court (Justices
    Sidney N. Lederman, David L. Corbett, and Charles T. Hackland), dated March 31,
    2016, with reasons reported at 2016 ONSC 2061, 347 O.A.C. 240, dismissing the
    application for judicial review.

Strathy C.J.O.:

A.

OVERVIEW

[1]

This
    appeal concerns s. 12(2)(f.1) of the
Tobacco Tax Act
, R.S.O. 1990, c.
    T.10 (
TTA
), which requires the Minister of Finance (the Minister)
    to demand security from parties, like the appellant, who manufacture and sell
    tobacco intended for export or for sale on First Nations reserves. The
    appellant claims that the Minister erred in his interpretation and application
    of the provision when he demanded that it provide security. Alternatively, the appellant
    claims that the provision is unconstitutional because it is an indirect tax on
    exported goods.

[2]

For
    the reasons that follow, I would dismiss the appeal. I agree with the
    Divisional Court that the Ministers interpretation of the provision was
    reasonable and is entitled to deference. Section 12(2)(f.1) is constitutionally
    valid because it is incidental to a scheme of direct taxation within the
    province.

B.

bACKGROUND

[3]

The
    appellant is the largest Canadian exporter of tobacco. It manufactures tobacco
    on the Six Nations of the Grand River Reserve Territory in Ontario. In addition
    to producing tobacco for export, the appellant produces tobacco products for
    sale to Indians and bands located on reserves, within the meaning of the
Indian
    Act
, R.S.C. 1985, c. I-5. It does not sell tobacco to retailers outside reserves
    and does not sell to consumers who are required to pay taxes under the
TTA
.

[4]

The
    appellants tobacco produced for export is partially processed and then packaged
    in large boxes. It is further refined and packaged by the foreign purchaser for
    sale and consumption in the export market.

[5]

In
    order to manufacture tobacco products in Ontario, the appellant, like all
    participants in the industry, must hold a permit. It has held permits since
    1998 and in that year it was required to post $550,000 as security. In January
    2014, as a result of legislative amendments to the
TTA
, persons distributing
    and selling unmarked fine cut tobacco (UFCT), as defined in the
TTA
,
    were required to hold a permit. Prior to that time, the only permit the
    appellant required under the
TTA
for its unmarked tobacco products was
    for the purchase and sale of unmarked cigarettes.

[6]

In
    December 2013, the Minister issued two permits to the appellant. One authorized
    the possession, storage and sale of UFCT for export. The other authorized the sale
    of UFCT to First Nations retailers. The Minister informed the appellant that he
    would be seeking security in relation to those permits and in September 2014, demanded
    security in the amount of $3,209,000. Ministry staff calculated the amount of
    security based on the monthly returns filed by the appellant. In particular,
    Ministry staff used the amount of tobacco listed as Other Tobacco on the monthly
    returns.

[7]

After
    this proceeding was commenced, the amount of the demand was reduced to
    $1,397,000 when Ministry staff determined that some of the tobacco used in the
    original calculation was not UFCT.

[8]

The
    appellant took the position that the Ministers demand for security was
    unlawful, because no tax was payable on tobacco produced for export or for sale
    on reserves. When the issue was not resolved, the appellant brought an
    application for judicial review. On March 31, 2016, the Divisional Court dismissed
    the application. This court granted the appellant leave to appeal.

[9]

Before
    turning to the reasons of the Divisional Court, I will explain and summarize
    the relevant provisions of the
TTA
.

C.

tHE
tta

[10]

The
TTA
imposes a tax on consumers of tobacco products. As the Divisional Court noted,
    all consumers in Ontario are required to pay the tax on tobacco products they
    purchase, with one exception: tobacco products sold to Indians on a reserve
    for use by Indians are not subject to the tax. This exemption exists by
    virtue of ss. 87(1)(b) and 87(2) of the
Indian Act
, which provide that
    the personal property of an Indian or a band situated on a reserve is exempt
    from tax and no Indian is subject to tax in respect of the possession or use
    thereof.

[11]

Although the tax is
    paid by the consumer at the time of purchase from the retailer, the tax is
    actually collected from manufacturers, who remit the tax on their products,
    collecting it as part of the price charged to wholesalers, who in turn charge
    the cost as part of the price they charge to retailers. The retailer, in turn,
    charges the tax as part of the price charged to the consumer.

[12]

The
TTA
regulates
    the manufacture, distribution and retail sale of tobacco products in order to collect
    the tax. As the Divisional Court noted, at para. 14 of its reasons, [t]he
TTA
regulates the entire tobacco industry in Ontario with a view to ensuring that
    the taxes payable under the
TTA
are collected and remitted to the
    Minister.

[13]

As part of the
    regulatory system established by the
TTA
, each party in the
    distribution chain  manufacturers, wholesalers and retail dealers  is
    required to obtain a permit or registration certificate and to account for its tobacco
    supplies. This includes entities, like the appellant, whose tobacco is not
    subject to taxable sale in Ontario because it is intended for export or sale on
    reserves. The system also includes an elaborate marking and labelling regime
    for tobacco products to identify whether tax on a product has been pre-paid.

[14]

As with many regulatory
    regimes, there are provisions for penalties and fines for breaches of the
    statute. Participants in the system are required to provide security as a
    condition of receiving a permit. The Minister is entitled to assess penalties
    and taxes owed by a participant and to satisfy them from the security provided.
    These provisions protect the integrity of the tax system by ensuring that the
    tax is paid, collected and remitted to the Minister.

[15]

With this background,
    I turn to the specific statutory provisions.

[16]

Section 2 imposes a
    tax, to be paid by every consumer, at the rate of 16.475 cents on every
    cigarette and on every gram or part gram of a tobacco product other than
    cigarettes and cigars purchased by the consumer.
[1]
A tobacco product is defined in s. 1(1) as tobacco in any form in which it is
    used or consumed and includes snuff.

[17]

The Ministers demand
    for security in this case is related to UFCT. This is defined by s. 1(1) as
    fine cut tobacco that is not marked fine cut tobacco. This definition, and
    the definition of marked fine cut tobacco, are key to the appellants
    statutory interpretation argument.

[18]

Marked fine cut
    tobacco is defined under s. 1(1) as fine cut tobacco in a package that is
    marked or stamped with an indicium as required under the regulations. This
    refers to fine cut tobacco that has a mark or stamp on its packing to indicate
    that taxes have been paid.

[19]

The term fine cut
    tobacco is not defined in the
TTA
, but it is defined in a regulation
    made under the
TTA
, namely R.R.O. 1990, Reg. 1034 (the 
Regulation
).
    Section 1(1) of the
Regulation
defines fine cut tobacco as loose
    tobacco product that has been refined to the point where it could be formed
    into a cigarette.

[20]

The Ministers demand
    for security was made pursuant to the provision at issue in this appeal, s.
    12(2)(f.1):

(2) The Minister
shall demand
security in a form acceptable to the Minister from,



(f.1) every person who applies for or is the holder of a permit
    to purchase or sell unmarked fine cut tobacco in an amount equal to the greater
    of $500,000 or the average three months tax that would be collectable or
    payable by the person calculated on the basis of the 12-month period preceding
    the Ministers demand, if the persons acquisition of unmarked fine cut tobacco
    were marked fine cut tobacco that was sold to consumers in Ontario during the
    12-month period. [Emphasis added.]

[21]

Other provisions of
    the
TTA
are designed to ensure that the tobacco tax is properly
    collected. For example, s. 9.0.1(1) provides that no person shall possess,
    store or sell UFCT in Ontario unless the person has applied for and been issued
    a permit to purchase and sell UFCT under the regulations. This describes the
    permits issued to the appellant by the Minister in December 2013.

[22]

Section 9.0.1 also
    provides for penalties and fines in the event the tobacco is sold in
    circumstances where tax is required to be paid. For example, s. 9.0.1(4)
    provides that a UFCT permit holder who sells UFCT to a person who is liable to
    collect or pay the tobacco tax is liable to pay a penalty, equal to the tax
    avoided. Section 9.0.1(5) provides for a fine in respect of the same conduct.
    Similarly, s. 9.2 provides for a penalty and fine to be paid by a person who
    delivers UFCT to a person in Ontario who is not authorized to purchase,
    possess, sell or store UFCT or to deliver UFCT for sale to consumers.

[23]

Sections 19(1)(b) and 19(2)
    of the
TTA
give the Minister authority to assess any tax, interest or
    penalty payable by a person under the statute and to assess a penalty against
    any person who fails to collect tax that the person is responsible for
    collecting. Section 12(5) provides that where the Minister has assessed a
    person who has provided security, all or part of the security may be paid into
    the Consolidated Revenue Fund in satisfaction of the persons assessed
    liability.

D.

The reasons of the divisional court

[24]

The Minister concluded
    that by virtue of s. 12(2)(f.1), the appellant was required to provide
    security, even though the tobacco was not intended to be sold in taxable
    transactions. The appellant argued that this interpretation was erroneous, and that
    s. 12(2)(f.1) does not require treating non-taxable UFCT as if it were destined
    for taxable sale. The Divisional Court found that the Ministers interpretation
    of s. 12(2)(f.1) was reasonable and entitled to deference. It rejected the
    appellants interpretation.

[25]

The Divisional Court
    also found that the Ministers calculation of the amount of security was reasonable
    and entitled to deference.

[26]

The Divisional Court
    did not address the constitutional validity of s. 12(2)(f.1), because it was of
    the view that the appellant had not asserted this challenge in its application.

E.

the issues

[27]

There are two issues
    raised by this appeal. The first is whether the Ministers demand for security
    was unreasonable and arbitrary. The answer to that question largely depends on
    whether the appellants tobacco was UFCT.

[28]

The second issue is whether
    s. 12(2)(f.1) is constitutionally valid or applicable to tobacco destined for
    export or for sale on a reserve.

F.

overview of the parties submissions

[29]

Dealing first with the
    interpretation and application of s. 12(2)(f.1), the appellant says that the Ministers
    demand for security was unreasonable and arbitrary because the Minister simply
    assumed that all the tobacco listed as Other Tobacco in the appellants monthly
    returns was UFCT. According to the appellant, over 95% of the product in
    question (the exported tobacco) was not UFCT, either as a matter of statutory
    interpretation or as a matter of fact.

[30]

Instead, it says that
    the exported tobacco was partially manufactured tobacco, a term that is found
    nowhere in the
TTA
or
Regulation
, but is used in the
Excise
    Act, 2001
, S.C. 2002, c. 22. This, says the appellant, is because its
    exported tobacco is not packaged in such a way that it could be sold at retail.
    Its exported tobacco requires further refining before it can be sold in a form
    where it would be used or consumed by a consumer and, as such, does not
    constitute fine cut tobacco under the
TTA
.

[31]

While the appellant
    acknowledges that it holds permits for two types of UFCT (including the
    exported tobacco), it submits that the Minister cannot improperly issue permits
    and then demand security in respect of those permits.

[32]

The Minister makes
    several responses to these submissions. First, he says that having applied for
    and received permits to sell UFCT, it is too late for the appellant to argue
    that its product is something else. Second, he says that the exported product
    falls within the statutory definition of UFCT. Third, the appellants witness
    acknowledged that the product possessed the characteristics of UFCT. Fourth, and
    finally, the Ministers calculation of the security demand was reasonable and
    is entitled to deference, as is the Ministers interpretation of s. 12(2)(f.1).
    The Minister was entitled to assume that the Other Tobacco was UFCT because
    the appellant only had permits to export cigarettes and fine cut tobacco, and
    cigarettes were listed separately.

[33]

The appellants second
    submission is that the Divisional Court failed to address the constitutional
    validity of s. 12(2)(f.1) and that this court should consider its
    constitutionality as a matter of first instance. It argues s. 12(2)(f.1) is unconstitutional
    if it applies to tobacco sold for export because the province may only impose
    direct taxes within Ontario and has no jurisdiction to tax goods destined for
    export. It submits the provision must be read down to apply only to sales to
    consumers in Ontario.

[34]

The appellant submits
    that the purpose of the security requirement in the
TTA
is to protect
    the revenue against taxes owing in respect of the sale of the product in its
    intended market. Since the province can only impose direct taxation within the
    province, it cannot tax goods sold for export. Moreover, sale of tobacco on a
    reserve is exempt from taxation pursuant to ss. 87(1) and (2) of the
Indian
    Act
. Because the tobacco in question is exempt from taxation, whether
    exported or sold on a reserve, the Minister is not entitled to demand security
    in respect of that tobacco. Section 12(2)(f.1) should be read down to apply
    only to persons who sell UFCT to consumers in Ontario.

[35]

The Minister, on the
    other hand, submits that the
TTA
is a valid exercise of provincial
    legislative jurisdiction because its purpose and effect are to impose direct
    taxation within the province. While the overall purpose of the statute is to
    collect taxes from consumers through a system of wholesale dealers, not every
    provision of the
TTA
is itself a tax  taxing statutes may provide for
    administrative and enforcement mechanisms, including penalties, fines,
    withholding or remitting requirements, and security, which are not themselves
    taxes.

[36]

Thus, says the
    Minister, the requirement for security in s. 12(2) falls within provincial
    legislative competence because its purpose and effect is in furtherance of a constitutionally
    valid direct taxation scheme.

G.

Analysis

(1)

Standard of
    Review

[37]

The Ministers
    interpretation and application of s. 12(2)(f.1) is entitled to deference and is
    subject to a standard of review of reasonableness:
Dunsmuir v. New
    Brunswick
, 2008 SCC 9, [2008] 1 S.C.R. 190.

[38]

The Divisional Court
    did not address the constitutional validity of s. 12(2)(f.1), apparently concluding
    that the issue was being addressed in other proceedings. This assumption appears
    to have been erroneous. A notice of constitutional question was served in these
    proceedings. The parties invited us to address the issue. In the circumstances,
    as this court has a complete record and has received written and oral
    submissions from both parties on the issue, it is my view that the
    constitutional issue should be addressed.

(2)

Unreasonable and
    Arbitrary Demand for Security

[39]

The interpretation of
    s. 12(2)(f.1) advanced by the appellant in the Divisional Court, and rejected
    by that court, was not pursued before us. Instead, the appellant argues that s.
    12(2)(f.1) only applies to tobacco packaged for retail and that, in any case, as
    a matter of fact, its product was not UFCT. Thus, the appellant says, it was
    improper for the Minister to rely on the Other Tobacco category in the
    appellants monthly returns when most of this tobacco was allegedly not UFCT.

[40]

I agree with the Minister
    that there are several answers to this argument. It was reasonable for the
    Minister to calculate the amount of security with reference to the exported
    tobacco that was included in the Other Tobacco category.

[41]

First, and in my view,
    foremost, the appellants interpretation of the statute is illogical. It
    submits that the definition of UFCT, when read with the definition of marked
    fine cut tobacco, means that UFCT must be in a box, tin or other container
    used for retail sale. The appellant argues that since its export tobacco is not
    packaged in this manner, it is not UFCT.

[42]

As expressed in the
    appellants factum, the argument is:

Unmarked fine cut tobacco is defined in the
TTA
as fine
    cut tobacco that is not marked fine cut tobacco. Marked fine cut tobacco is
    defined as fine cut tobacco in a package that is marked or stamped with an
    indicium as required under the regulations. A package is defined as a box,
    tin or other container in which a tobacco product is sold at retail. Therefore,
    unmarked fine cut tobacco is
fine cut tobacco in a box, tin or other
    container in which a tobacco product is sold at retail that is not marked or
    stamped with an indicium as required under the regulations.
[Emphasis in
    original.]

[43]

In my view, this
    interpretation distorts the language of the statute and is plainly wrong. The
    modern approach to statutory interpretation requires that the words of an Act
    are to be read in their entire context and in their grammatical and ordinary sense
    harmoniously with the scheme of the Act, the object of the Act, and the
    intention of Parliament:
Rizzo & Rizzo Shoes Ltd. (Re)
, [1998] 1
    S.C.R. 27, at para. 21, quoting Elmer Driedger,
Construction of Statutes
,
    2d ed. (Toronto: Butterworths, 1983), at p. 87.

[44]

UFCT is defined as
    fine cut tobacco that is not tobacco falling within the definition of marked
    fine cut tobacco. Fine cut tobacco is not defined in the
TTA
. It
    is, however, defined in the
Regulation
as loose tobacco product that
    has been refined to the point where it could be formed into a cigarette. The
    appellants affiant acknowledged that, in theory, any of its exported tobacco
    could be used in a roll-your-own cigarette. Since the appellants tobacco is fine
    cut tobacco and is not marked fine cut tobacco, it clearly falls within the
    definition of UFCT.

[45]

Put another way,
    marked fine cut tobacco is defined as being fine cut tobacco that is in a
    marked package. Marked fine cut tobacco must be in a package. UFCT need not
    be. Thus, UFCT is fine cut tobacco that is not in a package that is marked or
    stamped as required by the
Regulation
.

[46]

Second, the appellant
    acknowledges that it was required to have a permit in respect of its UFCT. It
    received two permits from the Minister for this purpose. One permit authorized
    the appellant to possess and store and sell [UFCT] for export out of Ontario.
    The other authorized the appellant to purchase, possess and store [UFCT] for
    sales of [UFCT] only to authorized First Nations retailers. The appellant
    acknowledged that it held no other applicable permit. It filed returns with
    respect to its inventory and exports of unmarked tobacco. As the Divisional
    Court found, the requirement for security applies to every person who holds a
    permit to purchase and sell UFCT. The appellant held two such permits. It never
    objected to the issuance of the permits. The words of s. 12(2) (shall demand)
    are mandatory. Therefore, the Minister was required to demand security.

[47]

Finally, the
    appellants submission that its product is partially manufactured tobacco and
    not fine cut tobacco is contradicted by the evidence of its own witness,
    referred to above.

[48]

For these reasons, I
    would reject the first ground of appeal.

(3)

The Constitutional
    Issue

[49]

The appellant
    acknowledges that the
TTA
is within the constitutional competence of
    the provincial legislature because it imposes a direct tax, within the
    province, for the raising of a revenue for provincial purposes: see
Bank of
    Toronto v. Lambe
(1887), 12 App. Cas. 575 (P.C.), at pp. 584-85.

[50]

It submits, however,
    that the purpose and scheme of the
TTA
dictates that a demand for
    security under s. 12(2) must be intended as security for taxes that are payable
    on the consumption of the tobacco in question. Since 95% of the tobacco
    produced by the appellant is for export, and since a manufacturer is not required
    to collect taxes on exported tobacco, it cannot be required to provide security
    in relation to tobacco intended for export. The appellant says that interpreting
    the legislation as applicable to tobacco manufactured for export has the effect
    of imposing an unconstitutional indirect tax on a manufacturer and is
ultra
    vires
the province.

[51]

The Minister, on the
    other hand, argues that the demand for security is not itself a tax. Rather, as
    the Divisional Court found, the legislature intended that security would be
    provided to secure against loss to the public purse as a result of the
    diversion of tobacco from non-taxable markets into the domestic (taxable)
    market. In addition, it provides security for taxes, penalties or interest
    payable in the event of the appellants breach of its obligations under the
TTA
.

[52]

In order to address
    these submissions, I will begin with a review of the applicable constitutional
    framework, as well as the pertinent constitutional principles.

(1)

The
    Constitutional Framework

[53]

Parliaments exclusive
    legislative jurisdiction, defined in s. 91 of the
Constitution Act, 1867
,
    includes: (2) the regulation of trade and commerce; (3) the raising of money by
    any mode or system of taxation; and (24) Indians, and lands reserved for the
    Indians.

[54]

Section 92 gives the
    provinces exclusive jurisdiction to make laws in relation to matters coming
    within specified classes of subjects, including: (2) direct taxation within the
    province in order to the raising of a revenue for provincial purposes; and (15)
    the imposition of punishment by fine, penalty, or imprisonment for enforcing
    any law of the province made in relation to any matter coming within any of the
    classes of subjects enumerated in s. 92.

(2)

Applicable
    Constitutional Principles

[55]

The parties refer to three
    principles of constitutional law: (a) the search for the pith and substance
    of the legislation; (b) the double aspect doctrine; and (c) the incidental
    effects principle.

(a)

The Pith and
    Substance of Legislation

[56]

As this court observed
    in
Canada Post Corp. v. Hamilton (City)
, 2016 ONCA 767, 134 O.R. (3d)
    502, at para. 32, the first step in a division of powers analysis is to determine
    the pith and substance of the impugned legislation to determine the matter
    to which the law relates. This, in turn, requires a consideration of the
    purpose and effect of the law. See
Canadian Western Bank v. Alberta
,
    2007 SCC 22, [2007] 2 S.C.R. 3, at paras. 25-32.

[57]

Where, as here, the
    statutory provision is part of a larger scheme, the pith and substance
    analysis begins with the challenged provision, but the matter of the
    provision must be considered in the context of the larger scheme, as its
    relationship to that scheme may be an important consideration in determining
    its pith and substance:
Quebec (Attorney General) v. Canada (Attorney
    General)
, 2015 SCC 14, [2015] 1 S.C.R. 693, at para. 30.

(b)

The Double Aspect
    Doctrine

[58]

This principle holds
    that subjects which in one aspect and for one purpose fall within sect. 92,
    may in another aspect and for another purpose, fall within sect. 91:
Hodge
    v. The Queen
(1883), 9 App. Cas. 117 (P.C.), at p. 130;
Canada Post
,
    at para. 43; and
Canadian Western Bank
, at para. 30. Where there is a
    conflict, in the sense that the provincial law makes it impossible to comply
    with the federal law, or the operation of the provincial law frustrates
    Parliaments purpose, the conflict must be resolved in favour of the federal
    legislation:
Canada Post
, at para. 45.

(c)

The Incidental
    Effects Principle

[59]

A corollary of these principles
    is that the incidental effects of a law whose pith and substance is within
    the jurisdiction of the enacting legislature may intrude into the jurisdiction
    of the other legislature without impairing its constitutionality:
Canadian
    Western Bank
, at paras. 28-32.

(3)

Application of
    the Principles

[60]

The pith and substance
    analysis supports the constitutionality of s. 12(2)(f.1).

[61]

Recognizing that the
    focus is on the constitutionality of the provision itself and not the statute,
    the provision cannot be divorced from its context. The appellant acknowledges
    that the direct tax imposed by the
TTA
is constitutionally valid: see
Bomberry
    v. Ontario (Minister of Revenue)
(1989), 70 O.R. (2d) 662 (Div. Ct.), at pp.
    665-66 and
Atlantic Smoke Shops Ltd. v. Conlon
, [1943] 4 D.L.R. 81
    (P.C.). The collection of the tax from wholesalers rather than retailers does
    not transform it into an
ultra vires
indirect tax:
Bomberry
, at
    pp. 665-66. Nor does the enforcement process for the collection of the tax have
    the effect of taxing parties who are part of the collection process:
Hill
    v. Ontario (Minister of Revenue)
(1985), 50 O.R. (2d) 765 (H.C.).

[62]

The pith and substance
    of the
TTA
is plainly the imposition of a tax on the consumption of
    tobacco. This is direct taxation within the province and falls squarely within
    provincial jurisdiction under s. 92(2). The elaborate marking regime, the registration
    and permitting system and the collection machinery are all designed to serve
    that end. This is the purpose and effect of the legislation.

[63]

What, then, is the
    pith and substance of the impugned s. 12(2)(f.1)?

[64]

Section 12(1) provides
    that the Minister may demand information from any person for the purpose of
    determining their suitability to be a collector of taxes, an exporter or
    registered importer of tobacco products or their suitability to hold a permit
    to engage in certain functions under the
TTA
, such as marking or
    stamping cigarettes and fine cut tobacco, manufacturing tear tape, and purchasing
    and selling unmarked cigarettes or UFCT. Subsection 12(2) requires the Minister
    to demand security from some 12 classes of persons, including collectors of
    taxes, importers, exporters of tobacco and holders of permits under the
TTA
,
    such as permits to mark or stamp cigarettes or fine cut tobacco and holders of
    permits to purchase or sell unmarked cigarettes.

[65]

The security is
    plainly intended to provide a source of funds for any assessment made by the
    Minister for taxes, interest or penalties in the event of a contravention of
    the
TTA
. This, in turn, ensures compliance with the statute.

[66]

In my view, having
    regard to the scheme and purpose of the
TTA
as a whole, and the
    context of the impugned provision, it is in pith and substance a provision in
    furtherance of the legislative scheme to ensure the integrity of the machinery
    for collection of the tax. As the Divisional Court observed, at para. 42:

On the plain language of s. 12(2)(f.1), it is clear that the
    legislature intended that security be provided for tax payable as a result of
    possible diversion of tobacco products, and that security is not limited to
    taxes that will be collectable on intended taxable sales to consumers.

[67]

Section 12(2)(f.1) should
    be understood as part of what Krever J., as he then was, described as the
    elaborate machinery to be found in the [
TTA
] that is designed to
    facilitate the collection of the tax: see
Hill
, at pp. 768, 770. The
    security is not imposed in relation to taxes on the sale of tobacco if used for
    its
intended (non-taxable) purpose
. It is imposed
    and calculated on the basis of the sale of the tobacco in a taxable market,
    because it serves as security in the event, among others, that the tobacco is
    not sold in its intended market.

[68]

I would reject the
    appellants submission that such security is not required because of strict
    federal controls on the export of tobacco products. This is a case in which the
    double aspect doctrine permits both levels of government to legislate in
    relation to different aspects of the regulation of the same commodity. Further,
    I would reject the appellants argument that because it has never been involved
    in illegal diversion of tobacco products, the security demand is unjustified.
    The purpose of the legislative provision is not to single out or punish
    wrongdoers; it is to proactively protect against lost tax revenue should
    product be diverted out of non-taxable markets and into the domestic market. The
    security requirement is imposed on every person who holds a permit to purchase
    or sell UFCT.

[69]

The case of
Guindon
    v. Canada
, 2015 SCC 41, [2015] 3 S.C.R. 3 is instructive. There, a penalty
    under the
Income Tax Act
, R.S.C. 1985, c. 1 (5th Supp.) (the 
ITA
)
    had been assessed against a lawyer for issuing an opinion letter in support of
    a sham charitable donation program and for signing tax receipts on behalf of
    the charity. The provision in question made it an offence to make a false
    statement that could be used by or on behalf of another person for the purpose
    of the
ITA
 i.e., in that case, to obtain a charitable deduction.

[70]

The appellant in
Guindon
argued that the provision was criminal in nature and that she was entitled to
    the protection of s. 11 of the
Canadian Charter of Rights and Freedoms
.
    In rejecting her submission, the Supreme Court stated, at para. 70:

[The appellant] argues that s. 163.2(4) is not an
    administrative offence because it is not restricted to the regulated class in
    the
ITA
(taxpayers) and departs from the general purpose of the Act:
    the collection of tax. While the individuals targeted by s. 163.2(4) of the
ITA
are not the taxpayers themselves, this does not detract from the provision's
    administrative nature. The
ITA
regulatory scheme encompasses more than
    those who pay taxes: employers, banks, brokers, charities, and other entities
    are required to file information returns and to produce information in order to
    verify taxpayer compliance. Provisions, such as administrative monetary
    penalties, that encourage compliance by these non-taxpayers are integral to the
ITA
's regulatory regime and are not criminal in nature simply because
    the target is not the taxpayer.

[71]

Similarly, in this
    case, the administrative penalties, fines and other assessments in the
TTA
are integral to the scheme of the Act. The provision of security is not itself
    a tax. It is a means of ensuring collection of amounts payable under the
    statute, including taxes, interest and penalties.

[72]

I agree with the Minister
    that s. 12(2)(f.1) falls within Ontarios legislative jurisdiction because it
    is in furtherance of a valid scheme of direct taxation within the province. It
    ensures that manufacturers account for the products they manufacture, possess,
    purchase or sell and that, where applicable, the tax is ultimately collected
    from the consumer.

[73]

I would also reject
    the appellants submission that the Minister was not entitled to calculate the
    security based on the amount of product manufactured by the appellant. It
    argues that the definition of acquire in the
TTA
(to obtain tobacco
    products by any means, including through manufacturing) must be read down to
    exclude manufactured products, because the tobacco tax would otherwise be an
    unconstitutional indirect tax on manufacturing. It says that because the
    Minister has no constitutional authority to tax a manufacturer based on the
    amount of product manufactured, he has no authority to demand security on that
    basis.

[74]

For the reasons set
    out above, the
TTA
creates a tax on consumption of tobacco. The
    requirement for security is incidental to the regulatory scheme. The
    requirement for security from a permit holder calculated on the amount of
    tobacco it manufactures does not turn a tax on consumption into a tax on
    manufacturing.

H.

disposition

[75]

For these reasons, I
    would dismiss the appeal, with costs to the Minister in the amount of $30,000,
    inclusive of disbursements and all applicable taxes.



Released: GS  SEP 05 2017

George R. Strathy
    C.J.O.

I agree. E.A. Cronk
    J.A.

I agree. S.E. Pepall
    J.A.





[1]
Section 2(1) of the
TTA
states that
    the tobacco tax rate is 11.1 cents.
Pursuant to s. 2(2.2) of
    the
TTA
,
    the Minister may make regulations prescribing a different rate of tax. The
    current tax rate (effective April 28, 2017) is
16.475 cents:
Tobacco Tax Rates
, O. Reg. 5/05.


