Sask. faces tough fight in carbon tax lawsuit with CRA, legal experts say

Saskatchewan’s latest legal challenge to its carbon tax is “ambitious” but would require the federal courts to “make new law” while attempting to revisit a case decided just three years ago by the Supreme Court of Canada, according to a trio of legal experts.

Last week, the Saskatchewan provincial government filed a lawsuit in federal court seeking to stop the Canada Revenue Agency (CRA) from seizing $28 million it says the province owes for failing to collect and remit a portion of its carbon tax.

An application for an injunction and judicial review has been filed in federal court in Vancouver with the aim of having the case heard as soon as possible, said Saskatchewan Justice Minister Bronwyn Eyre.

An interim injunction was issued on Monday pending a more detailed hearing on the merits of the case.

While the CRA is trying to seize the $28 million, documents filed in court show the federal government believes the province could be owed as much as $56 million since the end of April.

That number will grow over time. The provincial government says it is only passing on a portion of the carbon tax, opting not to pass on the portion that applies to natural gas for home heating.

The province has hired Osler, Hoskin & Harcourt LLP as outside legal counsel to handle the dispute. The Canadian trade law firm has former premier Brad Wall as special counsel.

SEE | Saskatchewan attorney general to use court order to stop CRA from taking provincial carbon tax:

Saskatchewan attorney general to use court order to try to stop CRA from taking carbon tax from province

Saskatchewan Attorney General Bronwyn Eyre says Ottawa is “sending the Canada Revenue Agency after the province’s bank account,” and the government has filed an injunction to stop them. The province refused to waive its carbon tax on home heating after the federal government exempted heating oil, which benefited Atlantic Canada.

Experts who have reviewed the court records say the province faces an uphill battle in its lawsuit.

“If you’re betting, you’re always betting that Saskatchewan will lose here,” said Rory Gillis, a law professor at Western University.

Other experts stressed that the lawsuit has a legal basis, even if it appears to be politically motivated.

“I think this is a case that is presented with real constitutional arguments,” said Eric Adams, a law professor at the University of Alberta.

“But having a real constitutional argument doesn’t mean you’re going to win.”

Moving to deem carbon tax unconstitutional

Court documents show the province is making two separate arguments in court.

First, the argument has been made that the Greenhouse Gas Pricing Act (GGPPA) is currently unconstitutional.

Adams describes this as a “pretty big shift in position” that contradicts a 2021 Supreme Court of Canada ruling that found the GGPPA constitutional.

“(Saskatchewan) unsuccessfully made that argument in the Supreme Court of Canada. They lost. Now they’re coming back,” he said.

This time, the province says the federal government’s decision to exempt heating oils from the carbon tax for three years is unfair.

The exemption is nationwide, but it affects different numbers of residents in different parts of the country. About a quarter of homes in Atlantic Canada use heating oil, according to the federal government, compared with about six per cent in the rest of the country — and just 2.6 per cent in Saskatchewan.

According to SaskEnergy, approximately 370,000 households use natural gas to heat their homes.

Gillis said Saskatchewan is trying to argue that the exemption is unfair because it treats some provinces more favourably than others.

This argument is strengthened by citing the Supreme Court of Canada ruling, which held that the federal government has jurisdiction to set national minimum greenhouse gas emission standards.

“So the moment Saskatchewan starts exempting some provinces and not others, it will no longer be setting minimum standards,” Gillis said.

If this argument proves successful, it will mean that the GGPPA is now unconstitutional and tax cannot be levied on an unconstitutional piece of legislation.

Adams believes this will be difficult to prove because the act has always included exceptions, such as for agricultural products.

“Expanding those exemptions may have been a bad idea … but it’s not clear to me that it suddenly makes the entire statute unconstitutional,” he said.

Federalism put to the test

Another argument put forward by the province is that it “has a constitutional right to be free from fees and charges imposed by the federal government without the consent of the province.”

This goes to the heart of federalism, which creates two sovereign levels of government — federal and provincial — that are equal and have their own responsibilities.

“Saskatchewan is arguing that at the most basic level, it doesn’t have to pay the taxes that the federal government wants because one level of government can’t tax another,” Adams said.

Although this logic is consistent with the Constitution, it in itself raises certain problems.

“If there is no federal law that could ever impose a tax or penalty on a provincial government, that would effectively render ineffective a number of regulatory acts of the federal parliament,” Adams said.

Minister Dustin Duncan, who is responsible for all major state-owned corporations, welcomed the interim order issued on Monday. (Alexander Quon/CBC)

He added that this is a difficult constitutional issue that the courts will have to grapple with if they wish to address it.

Gillis said Saskatchewan’s argument has another problem.

He pointed to the Supreme Court of Canada ruling that the GGPPA is a regulatory fee, not a tax, meaning lower courts are unlikely to be sympathetic to the province’s interpretation that the act is a tax.

The order is a rigid test

Although a federal court granted a temporary injunction on Monday, a more permanent version will still need to be presented on its merits.

Gerard Kennedy, a law professor at the University of Alberta, said the province would have to show it faced irreparable harm — a key test for an injunction — if the CRA seized the $28 million.

“Saskatchewan is clearly saying that if the federal government does something that is unconstitutional, that is inherently irreparable harm,” Kennedy said.

“This argument has found favor in courts in the past, but has not always been successful.”