Court of Appeal for Ontario

Date: November 27, 2019

Docket: C65677 & C65678

Judges: 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)

Counsel

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 NSC's 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 judge's reasoning, although Ontario's counsel advised the court that the current Ontario government "does not agree with the former government's electricity procurement policy (since-repealed)." The government's 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 appellant's 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 appellant's 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 formula's 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 Ontario's 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 Minister's 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 government's 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.

	Indigenous Population Project	Community Participation Project	Municipal or Public Sector Entity Participation Project
Participation Level (Economic Interest)	> 50%	≥15% ≤50%	> 50%
Price Adder (¢/kWh)	1.5	0.75	1.0

(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 appellant's 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 NSC's complaint, based on the publicly available information that the Global Adjustment is used to fund the cost of the Policy Goals. Professor McKitrick, NSC's 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

(viii) 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 Ontario's 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 court's 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 Court's 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 there 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), 68 O.R. (2d) 449, 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) Ontario's 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 the 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, 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 province's 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, 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 Judge's 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 judge's 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 judge's 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 self–instructions 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 appellant's colourability challenge attacks the government's true intent. I would reject Ontario's 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 program's 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 program's 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 judge's 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 appellant's 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 Government's "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 Ontario's 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 Canada's 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 appellant's 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 Ontario's 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 appellant's 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 appellant's arguments about the Global Adjustment. In my view, none of the motion judge's 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 judge's 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: November 27, 2019

"P. Lauwers J.A."

"I agree. K. van Rensburg J.A."

"I agree. Gary Trotter J.A."