Air Canada v. Ontario (Liquor Control Board), 1997 CanLII 361 (SCC), [1997] 2 SCR 581

Air Canada Appellant

v.

The Liquor Control Board of Ontario,

the Attorney General of Canada,

the Liquor Licence Board of Ontario and

the Attorney General for Ontario Respondents

and

The Attorney General of Quebec,

the Attorney General of Nova Scotia,

the Attorney General of Manitoba,

the Attorney General for Alberta and

the Société des alcools du Québec Interveners

and between

Canadian Airlines International Ltd. Appellant

v.

The Liquor Control Board of Ontario,

the Attorney General of Canada,

the Liquor Licence Board of Ontario and

the Attorney General for Ontario Respondents

and

The Attorney General of Quebec,

the Attorney General of Nova Scotia,

the Attorney General of Manitoba,

the Attorney General for Alberta and

the Société des alcools du Québec Interveners

Indexed as: Air Canada v. Ontario (Liquor Control Board)

File No.: 24851.

1997: February 17; 1997: June 26.

Present: La Forest, L’Heureux‑Dubé, Sopinka, Gonthier, Cory, McLachlin and Iacobucci JJ.

on appeal from the court of appeal for ontario

Air law ‑‑ Provincial liquor control ‑‑ Markups ‑‑ Gallonage fees ‑‑ Provincial liquor control authorities charging airlines markups and gallonage fees on alcohol imported into Canada for use on domestic flights ‑‑ Whether liquor “intoxicating liquor” within meaning of Importation of Intoxicating Liquors Act ‑‑ Whether liquor imported “into any province” within meaning of Act ‑‑ Whether provincial liquor monopoly constitutionally inapplicable to airlines ‑‑ Whether airlines entitled to recover gallonage fees and markups paid ‑‑ Whether punitive damages or compound interest warranted ‑‑ Importation of Intoxicating Liquors Act, R.S.C., 1985, c. I‑3, ss. 2, 3.

The respondent Liquor Control Board of Ontario (“LCBO”) enjoys a monopoly over the sale, transportation, delivery and storage of liquor in Ontario pursuant to several statutes including the Importation of Intoxicating Liquors Act (“IILA”), which prohibits the importation into a province of liquor that has not been purchased on behalf of and consigned to the government of the province. The appellant airlines provide liquor to their passengers, some of which is purchased abroad, stored in customs bonded warehouses at Pearson international airport and eventually placed aboard aircraft there. The LCBO charges a “markup” on liquor that is transferred out of the bonded area of the customs warehouses at Pearson for use on domestic flights. It does this on the strength of the IILA, which, in its view, makes it the owner of all alcohol imported into Ontario, and hence entitles it to extract a profit as the price of conveying the liquor back into the airlines’ possession. Until recently, the appellant airlines held Ontario liquor licences, believing that provincial law required them to do so, and paid gallonage fees to the LCBO pursuant to those licences. In 1983, a consultant working for Wardair concluded that airlines were not required to hold licences, and an agreement was reached with the LCBO whereby Wardair stopped paying markups and gallonage fees. Canadian Airlines learned of the arrangement in 1989, when it merged with Wardair, but the LCBO refused to concede that it had ever released Wardair from the obligation to pay markups. In the result, Canadian agreed to continue paying markups, but only under protest. In 1990, the LCBO informed the appellant airlines that it would not approve the storage of liquor in customs bonded warehouses at Pearson unless the airlines acknowledged in written applications that the liquor they brought into Ontario was subject to the IILA. A condition of the approval was that the airlines should purchase their liquor as agents of the LCBO and should pay the appropriate markups. Air Canada signed the application. Canadian signed under protest.

The airlines asked the Ontario Court of Justice to determine the applicability of the various liquor statutes to them. In addition, they sought to recover in restitution monies that they had paid to the LCBO and the Liquor Licence Board of Ontario under the liquor statutes. The trial judge found that the province was liable to the airlines for the amount of gallonage fees and markups paid since January 1, 1984. He decided that, on the facts before him, neither punitive damages nor compound interest was warranted. The Court of Appeal allowed the provincial authorities’ appeal in part. It concluded that the airlines were entitled to recover the gallonage fees they had paid after January 1, 1984, but found that the LCBO had lawfully collected the markups.

Held: The appeal should be allowed in part.

The LCBO was entitled to charge a markup on the liquor that the airlines purchased abroad and kept in bond at Pearson because that liquor was subject to the IILA. Section 2 of the Act defines “intoxicating liquor” as liquor “that it is unlawful to sell or have in possession without a permit or other authority” of the provincial government. While the airlines did not require a licence to keep their liquor in Ontario, if they had wished to sell that liquor in Ontario they could have done so only under authority of a licence. “Intoxicating liquor” is not liquor that actually will come within the ambit of a provincial licensing scheme, but liquor that would come within the ambit of such a scheme if it were to be sold or possessed within the province. Because the liquors that the airlines brought into Pearson are liquors that could not ordinarily be sold in Ontario without a licence, they are intoxicating liquors within the meaning of the IILA. They are also imported into Ontario for purposes of the IILA; the words “into any province” in s. 3(1) refer to physical presence within the boundaries of a province.

The provincial liquor monopoly is not constitutionally inapplicable to the appellant airlines. The provision of liquor is not an integral part of their federal aeronautical undertaking.

The provincial authorities concede that they should make restitution of the gallonage fees paid by the airlines after January 1, 1984. They should also be liable for the fees paid before that date. The trial judge and the Court of Appeal justified their choice of the date on the ground that it was then that the provincial authorities realized that they could not require the airlines to hold liquor licences, but Canadian law has never required a showing of bad faith as a precondition to the recovery of monies collected by a governmental agency under an inapplicable law.

Both punitive damages and compound interest might have been appropriately ordered on the facts of this case. The conduct of the provincial authorities was improper to say the least, since government agents continued to collect fees from the appellants under a regime that they knew was inapplicable to airlines. The awarding of punitive damages and compound interest is, however, discretionary. Because it cannot be said that the trial judge misdirected himself on any applicable principle of law or that his exercise of discretion was so clearly wrong as to amount to an injustice, his refusal to award punitive damages or compound interest should be allowed to stand.

Cases Cited

Referred to: Air Canada v. British Columbia, 1989 CanLII 95 (SCC), [1989] 1 S.C.R. 1161; Subilomar Properties (Dundas) Ltd. v. Cloverdale Shopping Centre Ltd., 1973 CanLII 11 (SCC), [1973] S.C.R. 596; Attorney‑General of Manitoba v. Manitoba Licence Holders’ Association, [1902] A.C. 73; Attorney‑General for Ontario v. Attorney‑General for the Dominion, [1896] A.C. 348; R. v. Gautreau (1978), 1978 CanLII 2114 (NB CA), 88 D.L.R. (3d) 718; The Queen in Right of Manitoba v. Air Canada, 1980 CanLII 16 (SCC), [1980] 2 S.C.R. 303; Bell Canada v. Quebec (Commission de la santé et de la sécurité du travail), 1988 CanLII 81 (SCC), [1988] 1 S.C.R. 749; Irwin Toy Ltd. v. Quebec (Attorney General), 1989 CanLII 87 (SCC), [1989] 1 S.C.R. 927; Johannesson v. Rural Municipality of West St. Paul, [1952] S.C.R. 292; Murray Hill Limousine Service Ltd. v. Batson, [1965] Que. Q.B. 778; Canadian Pacific Railway Co. v. Attorney‑General for British Columbia, 1949 CanLII 278 (UK JCPC), [1950] A.C. 122; Construction Montcalm Inc. v. Minimum Wage Commission, 1978 CanLII 18 (SCC), [1979] 1 S.C.R. 754; Eadie v. Township of Brantford, 1967 CanLII 13 (SCC), [1967] S.C.R. 573; LaPointe v. Canada (Minister of Fisheries & Oceans) (1992), 4 Admin. L.R. (2d) 298; Brock v. Cole (1983), 1983 CanLII 1952 (ON CA), 40 O.R. (2d) 97; Wallersteiner v. Moir (No. 2), [1975] 1 All E.R. 849; Vorvis v. Insurance Corporation of British Columbia, 1989 CanLII 93 (SCC), [1989] 1 S.C.R. 1085; Elsom v. Elsom, 1989 CanLII 100 (SCC), [1989] 1 S.C.R. 1367.

Statutes and Regulations Cited

Constitution Act, 1867, s. 92(16).

Courts of Justice Act, R.S.O. 1990, c. C.43, s. 130.

Customs Bonded Warehouses Regulations, SOR/86‑1063, s. 13.

Importation of Intoxicating Liquors Act, R.S.C., 1985, c. I‑3, ss. 2 “intoxicating liquor”, “province”, 3.

Liquor Control Act, R.S.O. 1990, c. L.18, ss. 1, 2, 3, 5, 8.

Liquor Licence Act, R.S.O. 1990, c. L.19, ss. 1 “liquor”, 2, 5, 6, 11, 12, 22, 27, 42, 62.

R.R.O. 1990, Regs. 717, 718, 719, 720.

Authors Cited

Côté, Pierre‑André. The Interpretation of Legislation in Canada, 2nd ed. Cowansville: Yvon Blais, 1991.

Hogg, Peter W. Constitutional Law of Canada, vol. 1, 3rd ed. Scarborough, Ont.: Carswell, 1992 (loose‑leaf).

House of Commons Debates, vol. II, 2nd sess., 16th Parl., at p. 2482.

APPEAL from a judgment of the Ontario Court of Appeal (1995), 1995 CanLII 979 (ON CA), 24 O.R. (3d) 403, 126 D.L.R. (4th) 301, 82 O.A.C. 81 and 1995 CanLII 8919 (ON CA), 26 O.R. (3d) 158, 127 D.L.R. (4th) 767, 86 O.A.C. 70, allowing in part an appeal from a decision of the Ontario Court (General Division) (1994), 2 G.T.C. 7186, allowing the airlines’ actions. Appeal allowed in part.

Neil Finkelstein, Q.C., and Jeffrey Galway, for the appellants.

Tom Marshall, Q.C., Peter Landmann and Michel Lapierre, for the respondents the Liquor Control Board of Ontario, the Liquor Licence Board of Ontario and the Attorney General for Ontario.

Roslyn J. Levine, Q.C., and Charles D. Johnston, for the respondent the Attorney General of Canada.

Monique Rousseau, for the intervener the Attorney General of Quebec.

Written submissions only by Alison W. Scott and Brian Seaman, for the intervener the Attorney General of Nova Scotia.

Shawn Greenberg, for the intervener the Attorney General of Manitoba.

Margaret Unsworth and J. A. Bowron, for the intervener the Attorney General for Alberta.

Gérald Tremblay and Madeleine Renaud, for the intervener the Société des alcools du Québec.

The judgment of the Court was delivered by

1Iacobucci J. -- This appeal raises several questions of which the most important is whether provincial liquor control authorities may charge the appellant airlines a markup on alcohol imported into Canada, stored in bond at customs warehouses, and then loaded onto aircraft for consumption in Canadian airspace. I conclude that, pursuant to federal and provincial legislation, the liquor control authorities may charge the airlines such a markup. A subsidiary issue is whether the respondent the Liquor Control Board of Ontario (“LCBO”) should have to make restitution to the appellants of the entire amount of certain fees that were wrongly collected from them, or whether for equitable reasons the amount of restitution should be something less than whole. I conclude that restitution should be made of the full amount.

2In addition, the appellants pose several minor questions about the delegation of federal authority to the provinces. But in the light of my resolution of the principal issue, I do not need to answer these questions. Other arguments, about the awarding of compound interest and of punitive damages, present no problem: the trial judge acted within his discretion in refusing to award them. Finally, a question arises about whether a province may charge a markup on liquor purchased within its boundaries for consumption elsewhere. The answer to that question is the same as the answer to the first question: it is entirely within a province’s competence to charge a markup on liquor purchased within its boundaries.

1. Facts

3The LCBO enjoys a monopoly over the sale, transportation, delivery, and storage of liquor in Ontario. Three statutes operate together to create and secure this monopoly: the Liquor Control Act, R.S.O. 1990, c. L.18, the Liquor Licence Act, R.S.O. 1990, c. L.19, and the Importation of Intoxicating Liquors Act, R.S.C., 1985, c. I-3 (“IILA”). The Liquor Control Act creates the LCBO and gives it authority over dealings with liquor within the province. The Liquor Licence Act creates the Liquor Licence Board of Ontario (“LLBO”) and gives it the power to licence the keeping of liquor for sale and the selling of liquor. The IILA prohibits the importation into a province of liquor that has not been purchased on behalf of and consigned to the government of the province.

4The appellants, Air Canada and Canadian Airlines International, provide liquor to their passengers. Some of this liquor is placed aboard their aircraft at Pearson International Airport in Ontario. The airlines purchase most of their liquor abroad, though they purchase some in Ontario.

5Bonded carriers deliver to Pearson liquor that the appellants have purchased abroad for eventual in-flight consumption. At Pearson, the liquor is placed in customs bonded warehouses, where it can remain for up to five years. Federal regulations require the airlines to receive the permission of the LCBO before they may place liquor into these warehouses or remove it from them. The Government of Canada provides for the operation of customs bonded warehouses so that those who have purchased goods abroad may defer the payment of duties and excise taxes until they require the goods.

6The customs bonded warehouses are divided into three areas: the bonded area, the international area, and the domestic area. Initially all liquor is placed in the bonded area. When it is required for use on an international flight, liquor is moved under seal to the international area. Likewise, when it is required for use on a domestic flight, liquor is moved under seal to the domestic area. Upon entering the domestic area, liquor becomes subject to federal duties and excise taxes. No federal duties or excise taxes are payable on liquor that enters the international area.

7The practice of the LCBO has been to charge a “markup” on liquor that is transferred to the domestic area but not on liquor that is transferred to the international area. A markup is a margin of profit that the LCBO adds to the value of the alcohol that it sells. In the case of the alcohol held in bond at Pearson, the LCBO takes its markup not on the basis of any actual sale to the airlines, but on the strength of the IILA, which, in its view, makes it the owner of all alcohol imported into Ontario, and hence entitles it to extract a profit as the price of conveying the liquor back into the airlines’ possession.

8Until recently, the appellants held Ontario liquor licences. They believed that provincial law required them to do so. In Ontario, licence holders must pay a charge, called a “gallonage fee”, based on the volume of alcohol they purchase. Accordingly, for many years, the LCBO (on behalf of the LLBO) collected gallonage fees from the airlines.

9In 1983, a consultant working for an airline called Wardair discovered what he thought was a flaw in Ontario’s liquor laws. He concluded that airlines were not required to hold licences under the Liquor Licence Act. Wardair confronted the LLBO with this conclusion. The LLBO consulted the Ministry of the Attorney General and received from it the opinion that Ontario probably did not have the authority to require airlines to hold licences for the keeping of liquor intended to be consumed in flight.

10There followed a flurry of correspondence. Wardair sought a refund of fees that it claimed it had paid mistakenly to the LCBO. Representatives of the LCBO declined to pay a refund, on the ground that any liquor that Wardair had brought into Ontario had been consigned to the Board by operation of the IILA. It is clear that by this time lawyers in the Ministry of the Attorney General had concluded that airlines were not required to be licenced but were subject to the federal statute.

11Apparently worried that it could be liable for a considerable sum if the larger airlines were to become aware of the “loophole” in the Ontario legislation, the LCBO reached an agreement with Wardair. Wardair surrendered its liquor licence and, from January 1, 1984, stopped paying markups and gallonage fees. It seems that a lawyer employed by the LCBO agreed that Wardair would not have to pay markups so long as it kept the arrangement secret. Subsequently, the LCBO attempted only once, in March of 1984, to collect markups from Wardair. Wardair did not pay and the LCBO did not pursue the matter.

12In 1989, Wardair merged with Canadian Airlines International. At that time, Canadian learned that Wardair did not hold a liquor licence in Ontario and had not paid markups or gallonage fees since January 1, 1984. For obvious reasons, Canadian was interested in securing the same treatment for its own operations in Ontario. The LCBO for its part refused to concede that it had ever released Wardair from the obligation to pay markups. In the result, Canadian agreed to continue paying markups, but only under protest.

13In 1990, the LCBO informed the airlines that it would not approve the storage of liquor in customs bonded warehouses at Pearson unless the airlines acknowledged in written applications that the liquor they brought into Ontario was subject to the IILA. Air Canada signed the application. Canadian signed under protest.

2. Relevant Statutory Provisions

14The Liquor Control Act confers on the LCBO a monopoly over the sale, transportation, delivery, and storage of liquor within the province:

3. The purposes of the [Liquor Control] Board [of Ontario] are, and it has power,

(a) to buy, import and have in its possession for sale, and to sell, liquor and other products containing alcohol and non-alcoholic beverages;

(b) to control the sale, transportation and delivery of liquor;

(c) to make provision for the maintenance of warehouses for liquor and to control the keeping in and delivery from any such warehouses;

15 Section 1 of the Liquor Licence Act defines “liquor” as follows:

1. In this Act,

“liquor” means spirits, wine and beer or any combination thereof and includes any alcohol in a form appropriate for human consumption as a beverage, alone or in combination with any other matter;

Section 5 of the same Act forbids the sale of liquor in Ontario except under the authority of a licence and s. 27 forbids the purchase of alcohol except from the Government of Ontario or from a licensed seller:

5. -- (1) No person shall keep for sale, offer for sale or sell liquor except under the authority of a licence or permit to sell liquor or under the authority of a manufacturer’s licence.

6. No person shall purchase liquor except from a government store or from a person authorized by licence or permit to sell liquor.

16 The IILA lends federal power to the provinces to cement their liquor monopolies. Section 2 defines “intoxicating liquor” and “province”:

2. In this Act,

“intoxicating liquor” means any liquor that is, by the law of the province for the time being in force, deemed to be intoxicating liquor and that it is unlawful to sell or have in possession without a permit or other authority of the government of the province or any board, commission, officer or other governmental agency authorized to issue the permit or grant the authority;

“province” means any province in which there is in force an Act giving the government of the province or any board, commission, officer or other governmental agency control over the sale of intoxicating liquor therein.

Section 3 IILA consigns all alcohol imported into a province to that province’s liquor control authority. Subsection (2) takes certain transactions outside this scheme:

3. (1) Notwithstanding any other Act or law, no person shall import, send, take or transport, or cause to be imported, sent, taken or transported, into any province from or out of any place within or outside Canada any intoxicating liquor, except such as has been purchased by or on behalf of, and that is consigned to Her Majesty or the executive government of, the province into which it is being imported, sent, taken or transported, or any board, commission, officer or other governmental agency that, by the law of the province, is vested with the right of selling intoxicating liquor.

(2) The provisions of subsection (1) do not apply to

(a) the carriage or transportation of intoxicating liquor into and through a province by means only of a common carrier by water or by railway, including any necessary transfer by truck from railway car to ship or vice versa, if, during the time the intoxicating liquor is being so carried or transported, the package or vessel containing the intoxicating liquor is not opened or broken or any of the intoxicating liquor drunk or used therefrom;

17 Section 13 of the Customs Bonded Warehouses Regulations, SOR/86-1063, provides for the receipt of alcohol into and the transfer of alcohol from customs bonded warehouses:

13. No intoxicating liquor shall be received in or transferred from a bonded warehouse in a province unless the licensee has obtained written approval to receive or transfer the intoxicating liquor from the board, commission or agency authorized by the laws of that province to sell or authorize the sale of intoxicating liquor in that province.

3. Judgments in Appeal

A. Ontario Court (General Division) (1994), 2 G.T.C. 7186

18 The airlines asked the Ontario Court of Justice to determine the applicability of the various liquor statutes to them. In addition, they sought to recover in restitution monies that they had paid to the LCBO and LLBO on the mistaken understanding that they were required to do so.

19 Saunders J. found that the airlines were not required to hold licences to acquire and handle liquor for in-flight consumption. He pointed out that s. 5 of the Liquor Licence Act mandates licences only for those who are keeping liquor for sale, offering it for sale, or selling it. Saunders J. reasoned that this could not mean more than that licences are required to keep liquor for sale in Ontario, because without the geographical qualification s. 5 would be ultra vires the province. Ontario, he thought, could not require licences for the keeping of liquor for sale outside Ontario, because to do so would be to “affect and interfere with the export of liquor from Ontario” (p. 7191); and the export of liquor across a provincial boundary is a matter of exclusive federal competence.

20 It followed, in Saunders J.’s judgment, that the LCBO was not entitled to collect gallonage fees from the airlines.

21 Having found that the airlines were not required to hold licences in respect of their liquor-provisioning operations, Saunders J. concluded that liquor purchased abroad by the airlines and brought into bond at Pearson was not subject to the IILA. He based his conclusion on the definition of “intoxicating liquor” that appears in the federal statute. “Intoxicating liquor”, for purposes of the IILA, is liquor that provincial law deems to be intoxicating and “that it is unlawful to sell or have in possession” without a licence. Because the airlines did not require a licence to possess the liquor they kept in bond at Pearson, that liquor was not “intoxicating” within the meaning of the IILA and therefore was not subject to its provisions. From this it followed that the LCBO was not entitled to charge a markup on the liquor that the airlines kept in bond at Pearson.

22 Saunders J. expressly rejected the airlines’ argument, advanced in the alternative, that liquor held in bond at Pearson was not “in” Ontario. He could not accept the U.S. position, that items stored in a customs bonded warehouse are juridically not in the jurisdiction in which the warehouse is located.

23 Saunders J. also rejected the airlines’ argument that they, as federal undertakings, are not subject to provincial liquor monopolies. He was willing to assume for the sake of argument that the provision of liquor is an integral part of the airlines’ undertaking, but he found nevertheless that the airlines are subject to valid provincial laws.

24 Turning to the question of restitution, Saunders J. found that the province was liable to the airlines for the amount of gallonage fees and markups paid since January 1, 1984. However, he restricted the period of recovery on the basis of equitable considerations. In his view, the fact that until the end of 1983 all the parties had believed that the gallonage fees and markups were validly imposed was sufficient reason not to order restitution of monies collected prior to that date.

25 Saunders J. decided that, on the facts before him, neither punitive damages nor compound interest was warranted.

B. Ontario Court of Appeal (1995), 1995 CanLII 979 (ON CA), 24 O.R. (3d) 403

26 The LCBO and allied parties appealed from Saunders J.’s judgment. The Court of Appeal allowed the appeal in part.

27 Because the LCBO and LLBO conceded that airlines did not require licences to acquire and handle liquor for in-flight consumption, Robins J.A. accepted that no licences were required. However, he did not accept Saunders J.’s reasoning on this point. In the Court of Appeal’s view, the only reason that licences were not required is that Ontario had no applicable class of liquor licence. The licences that the airlines held before this dispute arose were of a class known as “liquor sales licences”. Such licences authorize “the sale and service of liquor for consumption on the premises to which the licence applies”. Because airborne premises are not within Ontario, ordinary liquor sales licences cannot apply to them. What would be needed to bring the airlines within the scheme of the Liquor Licence Act would be a class of licence that authorizes the keeping of liquor in Ontario. But as matters stood during the relevant period, Ontario law recognized no licence of that kind.

28 The Court of Appeal expressly declined to endorse Saunders J.’s conclusion that the requirement of a licence to keep liquor in Ontario for sale outside the province would be an unconstitutional interference with a federal power.

29 Neither did the Court of Appeal accept Saunders J.’s finding that liquor kept in bond is not “intoxicating liquor” within the meaning of the IILA. Relying on an extensive legislative history, Robins J.A. concluded that the qualifying words “that it is unlawful to sell or have in possession without a permit” were included in the definition of “intoxicating liquor” to distinguish between provinces in which liquor was prohibited and provinces in which liquor was merely controlled. He pointed out that if the definition contained no reference to licences, then the IILA might have been interpreted to permit the importation of liquor into “dry” provinces. Robins J.A. admitted that the language is now surplus, because all provinces permit the consumption of alcohol; but the evolution of the words into a vestige did not change their original meaning. The words in question distinguish among provinces, not kinds of liquor.

30 Robins J.A. observed further that the interpretation accepted by Saunders J. would render s. 3(2)(a) IILA superfluous. Section 3(2)(a) allows that a common carrier may take liquor through a province without having to consign it to any provincial authority. Because common carriers typically do not require licences to carry alcohol, on Saunders J.’s understanding of the definition of “intoxicating liquor” such carriers would not be caught by the IILA in any event. That Parliament thought it necessary to declare that common carriers are not subject to the IILA suggests that it did not understand the definition of “intoxicating liquor” in the same way as Saunders J. did.

31 For the same reasons that Saunders J. gave, the Court of Appeal rejected the airlines’ submission that liquors held in bond at Pearson were not “in” Ontario. To Robins J.A.’s mind, “[t]he applicable legislation does not treat a bonded warehouse as a sort of foreign embassy” (p. 420).

32 The Court of Appeal also agreed with Saunders J. in rejecting the airlines’ claim that as federal undertakings they are not subject to provincial liquor laws, though it did so for reasons slightly different from those given at first instance. Whereas the trial judge was willing to accept for the sake of argument that the provision of liquor is an integral part of the airlines’ undertaking, the Court of Appeal was not so credulous. Robins J.A. observed that Ontario’s liquor laws do not “undermine or impair a vital part of the management or operation of the airlines’ undertaking” (p. 424).

33 Before proceeding to the question of restitution, the Court of Appeal rejected the LLBO’s argument that the airlines were liable to pay gallonage fees merely by virtue of the fact that they held licences, whether they were required to hold licences or not. Robins J.A. pointed out that the regulation authorizing the collection of gallonage fees authorizes the collection of fees only with respect to liquor “purchased for sale or consumption under the licence”. Because the airlines did not purchase any liquor for sale and consumption under the licence, they were not liable to pay gallonage fees.

34 Taking his cue from the reasons of La Forest J. in Air Canada v. British Columbia, 1989 CanLII 95 (SCC), [1989] 1 S.C.R. 1161, Robins J.A. concluded that the airlines were entitled to recover the gallonage fees that they had paid. Because the LCBO had lawfully collected the markups, no question of restitution arose with respect to them.

35 In the Court of Appeal’s view, the erroneous payments of gallonage fees were the result of a misapplication of the law. Restitution of them would not be a windfall to the airlines because, as Saunders J. found, the airlines did not pass the increased cost of liquor on to passengers in the form of increased ticket prices.

36 However, the Court of Appeal decided that the airlines were entitled to restitution only of the erroneous payments made after January 1, 1984. Before that date, the LCBO and LLBO were no more aware of the error of law than were the airlines. And indeed, the responsibility for looking into the validity of the payments lay with the airlines and not with the LCBO or LLBO. It was only after Wardair had drawn the matter to their attention that the provincial liquor authorities became responsible for the erroneous payments.

37 The Court of Appeal also set aside Saunders J.’s declaration that the airlines are not subject to the provincial retail sales tax, and rejected the airlines’ claims that punitive damages should be awarded and that interest on the amount awarded should be compounded.

4. Issues

38 Several issues arise in this appeal. The first is whether the IILA applies to liquor that the airlines purchased abroad and kept in bond in warehouses at Pearson International Airport. A subsidiary issue is whether provincial authorities should be permitted to make the giving of their permission under s. 13 of the Customs Bonded Warehouses Regulations conditional upon the payment of markups. The second issue is a constitutional one, which this Court stated in the following terms:

Are the Liquor Control Act, R.S.O. 1990, c. L.18, ss. 1, 2, 3, 5 and 8, the Liquor Licence Act, R.S.O. 1990, c. L.19, ss. 1, 2, 5, 6, 11, 12, 22, 27, 42 and 62 and Ontario Regulations, R.R.O. 1990, Regs. 717, 718, 719 and 720, ultra vires or constitutionally inapplicable to the appellant airlines’ liquor provisioning system?

The third issue is whether the airlines should be entitled to recover only monies paid to provincial authorities after January 1, 1984, or whether monies paid before that date should be recoverable as well. The fourth issue is whether the trial judge erred in deciding that punitive damages and compound interest should not be awarded. The fifth issue is whether s. 27 of the Liquor Licence Act bars the appellants from purchasing alcohol directly from Ontario liquor manufacturers.

5. Analysis

A. Whether the IILA Applies to the Liquor Held in Bond

(1) The Definition of “Intoxicating Liquor”

39 The appellants offer several reasons why the IILA should not apply to liquor that they purchase abroad and keep in bond at Pearson. The first reason is the one that Saunders J. accepted and that the Court of Appeal rejected: that, for purposes of the IILA, intoxicating liquors are only those that cannot be kept in a province without a permit. Because the respondents concede that airlines may keep their liquor in Ontario without a licence, goes the argument, it follows that that liquor is not intoxicating liquor within the meaning of the IILA.

40 The answer to this argument lies in the language of the statutory definition. The IILA provides, in s. 2, that

“intoxicating liquor” means any liquor that is, by the law of the province for the time being in force, deemed to be intoxicating liquor and that it is unlawful to sell or have in possession without a permit or other authority of the government of the province or any board, commission, officer or other governmental agency authorized to issue the permit or grant the authority; [Emphasis added.]

41 Reading this definition, I am not certain that the appellants’ argument even gets off the ground. Though it is true that the appellants required no licence to keep their liquor in Ontario, it is equally true that if they had wished to sell that liquor in Ontario they could have done so only under authority of a licence. Literally, then, the liquor that the appellants kept in bond at Pearson is liquor that “it is unlawful to sell . . . without a permit or other authority”. Because the language about sale and possession is disjunctive, it is irrelevant that the appellants were able to possess the liquor without a licence. That they would have needed a licence to sell it is enough.

42 It is also irrelevant that the appellants did not in fact intend to sell their liquor in Ontario. The operation of the IILA is triggered not by an actual sale of liquor but by the simple hypothesis or possibility of sale. In determining whether the IILA is applicable, the relevant question is whether a permit would be required in the event of sale or possession, not whether a permit actually will be needed.

43 If it were otherwise then the IILA would become applicable not at the moment of importation, as it is clear from s. 3(2) that it was intended to do, but at the moment of sale; and by that time the liquor would already be well within provincial jurisdiction and so beyond the area of exclusive federal jurisdiction within which the IILA was intended to operate. The IILA would then be needless: it would be a federal attempt to secure for the provinces a jurisdiction that they already have.

44 More generally, if the IILA were understood to apply only to liquor in respect of which a permit actually will be required, then the Act would serve no purpose. As all the parties concede, and as the historical record makes clear, Parliament enacted the IILA to assist the provinces in their efforts to control the traffic in liquor. See House of Commons Debates, vol. II, 2nd sess., 16th Parl., April 27, 1928, at p. 2482. Therefore, the IILA must confer a power on the provinces that, without the intervention of the federal government, they would not have. Otherwise the IILA would not make any distinctively federal contribution to the securing of the provincial liquor monopolies.

45 Almost by definition the provinces have power over any alcohol for the possession of which they can require a permit. If they did not have such power, they would not be able to require permits. Therefore, if the IILA applied only to those particular quantities of alcohol in respect of which a permit actually is or will be required, then it would concern matters that are already entirely within the jurisdiction of the provinces. The IILA would then be a very strange creature indeed: an act that purports to be in aid of provincial legislation but that in fact renders no aid.

46 To avoid this consequence, it is necessary to understand the definition of “intoxicating liquor” in the IILA as specifying those kinds of liquor that can be sold or possessed inside the province only with a licence. The element of hypothesis or possibility in the definition is critical.

47 Supporting this conclusion is the historical argument on which the Court of Appeal relied. At the heart of that argument is the thought that Parliament, when it enacted the IILA in 1928, included the language about permits in order to distinguish between “temperance provinces” and “liquor control provinces” and so to avert the possibility that the IILA might authorize the importation of alcohol into one of the former. Because the dry provinces, when there were dry provinces, did not provide for the sale or possession of liquor even under a permit, the mere mention of permits in the definition of “intoxicating liquor” was sufficient to ensure that the IILA would not have any untoward impact on prohibition.

48 Consistently with this understanding of its purpose, the reference to permits in the IILA should be taken as meaning nothing more than that those liquors are intoxicating that can be sold or possessed only under authority of the province. More than that is not necessary to serve the purpose of distinguishing dry provinces from non-dry ones; and, as I have said, more than that would not be consistent with the nature of the legislation and its wording.

49 It follows, I think, that “intoxicating liquor” is not liquor that actually will come within the ambit of a provincial licencing scheme, but liquor that would come within the ambit of such a scheme if it were to be sold or possessed within the province. Because the liquors that the airlines brought into Pearson are liquors that could not ordinarily be sold in Ontario without a licence, they are intoxicating liquors within the meaning of the IILA.

(2) Whether Liquor Held in Bond is Imported “into any province”

50 The appellants argue that even if the liquor they purchased abroad and stored in bond at Pearson was intoxicating liquor, nevertheless it was not subject to the IILA because it was never brought “into any province” within the meaning of s. 3 of that Act. The appellants argue that there is a distinction between physical presence in a province and juridical presence in a province. They say that it is only the latter kind of presence that the IILA regulates, and they urge that their liquor never was juridically present in Ontario.

51 Juridical presence, according to the appellants, is that kind of presence that engages the purposes of a provincial liquor monopoly. Alcohol that is purchased abroad and kept within the physical boundaries of a province awaiting eventual in-flight consumption is not juridically present in the province, say the appellants, because its presence does not engage any of the purposes of a provincial liquor monopoly. The presence of such alcohol poses none of the dangers to public order that alcohol sometimes poses. Any mischief that its intoxicating qualities might produce will be produced outside the province. And, as the appellants would have it, the purchase of alcohol abroad does not conflict with the revenue-raising purpose of provincial liquor monopolies, because a province can have no claim to a financial stake in business transacted beyond its boundaries. Essentially, then, the appellants’ claim is that the presence of liquor in customs bonded warehouses in Ontario is at best merely incidental and is of no justifiable interest to provincial liquor control authorities.

52 Although it is initially plausible, ultimately I do not find this argument persuasive.

53 If the IILA is to have any purpose at all, it must apply more broadly than the appellants suggest. As all the parties concede, and as I have already noted, Parliament enacted the IILA in aid of provincial liquor monopolies. Accordingly, the IILA must accomplish something that it was not within the competence of the provinces to accomplish themselves. Otherwise, the IILA would be surplus legislation; and it is a strong presumption of statutory interpretation that laws should be read in a way that gives them effect. See Subilomar Properties (Dundas) Ltd. v. Cloverdale Shopping Centre Ltd., 1973 CanLII 11 (SCC), [1973] S.C.R. 596, at p. 603; P.-A. Côté, The Interpretation of Legislation in Canada (2nd ed. 1991), at pp. 233-234.

54 The provision of the Constitution Act, 1867 that authorizes the establishment of provincial liquor monopolies is s. 92(16). See Attorney-General of Manitoba v. Manitoba Licence Holders’ Association, [1902] A.C. 73 (P.C.), at p. 78. That section gives the provinces jurisdiction over “[g]enerally all Matters of a merely local or private Nature in the Province”. Section 92(16) has been understood to permit regulation by a province of the keeping of liquor within its boundaries. Indeed, s. 92(16) authorizes the provinces entirely to prohibit the keeping of liquor within their boundaries. See ibid. at pp. 74, 80. Therefore, federal assistance is not needed to close the borders of a province to liquor that is imported for storage.

55 It follows that, even if the provinces do not have the authority to prohibit the importation of liquor -- and the decision of the Privy Council in Attorney-General for Ontario v. Attorney-General for the Dominion, [1896] A.C. 348, at p. 371, established that provinces do not have that authority -- they do have the authority to forbid its storage within provincial boundaries. See R. v. Gautreau (1978), 1978 CanLII 2114 (NB CA), 88 D.L.R. (3d) 718 (N.B.C.A.), at p. 722. Thus, a province, by legislation of its own, may effectively limit commerce in alcohol to the mere carrying of spirits through its territory. By prohibiting the storage of alcohol on its territory, or by making that privilege contingent on the possession of a licence, the province can leave an importer with no choice but to bear his goods back out of the province. Obviously one who imports something into a jurisdiction where it is forbidden to store what he has imported must necessarily soon depart with his goods, because to stay would be to violate the prohibition.

56 I note in passing that this means that, with respect, Saunders J. was mistaken to conclude that Ontario cannot require a licence for the keeping of liquor in Ontario for consumption elsewhere. It would not be ultra vires the Legislature of Ontario to require a licence for the keeping of liquor in Ontario for whatever purpose. However, the matter of the licences is not at issue here, because the respondents concede that under Ontario regulations as they existed at the relevant times the appellants were not required to hold licences for the possession of liquor held in bond awaiting consumption in airspace.

57 Nevertheless, my conclusions about the extent of provincial jurisdiction over the regulation of liquor are important for the implications that they have for the meaning of the IILA. As I have said, if the IILA does anything to assist the provincial liquor monopolies, it can only be by conferring on the provinces an authority that they do not have under the Constitution Act, 1867. And it appears on the basis of the foregoing that the only relevant authority that the provinces do not possess as a matter of constitutional law is the power to prohibit the carrying of alcohol through provincial territory. It is only this kind of importation, which does not involve the manufacture, keeping, sale, purchase, or use of liquor, that the provinces are not competent to prohibit on their own. Accordingly, it follows that the IILA, to the extent that it makes any distinctively federal contribution to the securing of provincial liquor monopolies, employs the exclusive federal power over the importation of alcohol to consign to the provinces any alcohol that is carried through their territory.

58 In addition, of course, the IILA consigns to the provinces liquor that the provinces could consign to themselves; and indeed it is this role that the IILA plays in this appeal. However, what is distinctive about the IILA is that it consigns to the provinces liquor that has only a transitory presence inside provincial boundaries.

59 The appellants are mistaken, then, to suggest that the words “into any province” signify only juridical presence and not physical presence. Quite the contrary, those words refer to even the kind of momentary and transitory presence that this Court has found not to be sufficient to ground the exercise of the provincial taxing power. See The Queen in Right of Manitoba v. Air Canada, 1980 CanLII 16 (SCC), [1980] 2 S.C.R. 303, at pp. 316, 319. This is unsurprising because, as I have said, the IILA would be entirely unnecessary if it did not exercise some power that it is not within the competence of the provinces to exercise.

60 In addition to the constitutional argument, there are other indications that the interpretation I have set forth is the correct one. Section 3(2)(a) IILA provides that the terms of the Act shall not extend to “the carriage or transportation of intoxicating liquor into and through a province by means only of a common carrier by water or by railway”. If s. 3(1) IILA did not, by its own terms, extend to liquor that merely passes through a province, then the exception that appears in s. 3(2)(a) would be unnecessary. Because Parliament is presumed not to have acted needlessly, the expansive interpretation of s. 3(1), which gives meaning to s. 3(2)(a), is the better one.

61 What is more, the physical presence of alcohol in Ontario is of more interest to the province than the appellants allow. It may be true, as they contend, and as Saunders J. accepted, that there is no danger that liquor stored in bond at Pearson will ever “leak” in Ontario and be consumed there. However, the intoxicating qualities of alcohol are not the only ones that interest provincial authorities. The potential income that liquor represents is also of great interest to them. And though it is perhaps true that Parliament did not intend to authorize the provinces to extract revenue without some sufficient foundation for doing so, in this case there is such a foundation: physical presence in Ontario.

62 Despite what the appellants say, physical presence in Ontario is a commodity that has value. To see that this is so, it is necessary only to consider the situation in which the airlines would find themselves if they were not permitted to continue provisioning their aircraft in Ontario. If the appellants did not purchase their liquor abroad and place it aboard their aircraft at Pearson, then they would either have to purchase it in Ontario or place it aboard their aircraft in some other province or country. As the appellants themselves insist, “flying dry” is not an option. Therefore, if it were not for current purchasing practices, the appellants would have to bear either the cost of purchasing liquor in Ontario -- which is to say that they would have to pay the regular markup -- or the cost of provisioning flights originating in Ontario outside Ontario. Possibly the latter cost might be less than the former, so that the appellants would choose not to purchase their liquor in Ontario. But even if it were so, Ontario liquor control authorities would have the option of lowering their markup to the point at which it would begin to be attractive to the airlines to purchase their liquor within the province. Therefore, not to permit Ontario to impose some markup on the appellants’ liquor would represent a cost to the province -- a cost that is equal to the value to the airlines of provisioning their aircraft at Pearson. Because this is a cost that is intimately linked to the fact of presence in Ontario, it cannot be said that the presence of the alcohol in Ontario is merely incidental and of no concern to the province.

63 Against all of this, there remains one objection, and it is that a broad interpretation of the words “into any province” would permit the provinces to extract fees from airlines even for the bearing of alcohol through their airspace. The appellants suggest that, under an expansive interpretation of the IILA, the alcohol on an aircraft leap-frogging through Canada, from Halifax to Montreal to Toronto to Winnipeg to Edmonton to Vancouver, might be marked up six times. They submit that such a result would be absurd.

64 Perhaps accepting that the prospect of a sextuple markup is troubling, the respondents answer that the proprietor of a leap-frogging aircraft would have to pay a markup only once, at the point of provisioning. They say the presence of the aircraft in the other provinces would be momentary and transitory, and suggest that, under the doctrine of The Queen in Right of Manitoba v. Air Canada, supra, the provinces in which the aircraft simply lands would have no jurisdiction to impose a markup.

65 It is perhaps sufficient to observe that the respondents have not attempted to impose markups on liquor stored aboard aircraft simply touching down in or flying over Ontario. Therefore, the appellants’ fear is speculative and a far cry from the facts before us. Consequently nothing more need be said on the point on this occasion.

66 I conclude, then, that the words “into any province” in s. 3(1) IILA refer to physical presence within the boundaries of a province. Therefore, liquor purchased abroad and held in bond at Pearson awaiting eventual consumption in airspace is imported into Ontario for purposes of the IILA.

B. The Role of the Customs Bonded Warehouses Regulations

67 In 1990, pursuant to s. 13 of the Customs Bonded Warehouses Regulations, the LCBO required the airlines to apply for approval to receive intoxicating liquors from the bonded warehouses at Pearson. A condition of the approval was that the airlines should purchase their liquor as agents of the LCBO and should pay the appropriate markups. It was clear that if the airlines did not complete the applications, the LCBO would withhold its approval; and without the LCBO’s approval, the airlines would not be able to receive liquor from the warehouses. Air Canada completed the application. Canadian Airlines completed it under protest.

68 The appellants submit that the LCBO overstepped the bounds when it demanded payment of markups as a condition for the granting of its approval. They advance several arguments in support of this submission.

69 In my view, there is no need to address any of these arguments. No evidence was produced to suggest that the LCBO ever actually withheld its permission to remove alcohol from the bonded warehouses at Pearson. Moreover, any markups that the LCBO did actually collect were collected under authority of s. 3(1) IILA and s. 3(I) of the Liquor Control Act. The application forms that the airlines completed simply confirmed the applicability of laws that applied quite independently of the consent of the applicants. Accordingly, the application forms have no part to play in this appeal.

C. The Constitutional Question

70 The appellants argue that the provincial liquor monopoly, if it does permit the provincial liquor authorities to charge markups on liquor purchased abroad and intended for in-flight consumption, is constitutionally inapplicable to them. Their argument is simple. They say that Canada’s airlines are federal undertakings. Aeronautics, they observe, is a matter of exclusive federal competence. Accordingly, the airlines are not subject to provincial regulation in any department of their affairs that can be described as vital or integral to their undertaking. Professor Hogg describes this “vital part” doctrine in these terms:

Until 1966, the provincial laws that were held inapplicable to federally-regulated undertakings were laws that asserted a power to sterilize (paralyze or impair) the federally-authorized activity. This possibility, however unlikely in practice, was the basis of each decision. In the Quebec Minimum Wage case [Commission du Salaire Minimum v. Bell Telephone Co., 1966 CanLII 1 (SCC), [1966] S.C.R. 767], the Supreme Court of Canada abandoned the language of sterilization, and held that the Bell Telephone Company (an interprovincial undertaking) was immune from a provincial minimum wage law on the lesser ground that such a law “affects a vital part of the management and operation of the undertaking”.

P. W. Hogg, Constitutional Law of Canada (3rd ed. 1992 (loose-leaf)), vol. 1, at p. 15-27. The federal power to make laws touching on a vital part of a federal undertaking is exclusive. See Bell Canada v. Quebec (Commission de la santé et de la sécurité du travail), 1988 CanLII 81 (SCC), [1988] 1 S.C.R. 749. However, a provincial law that does not purport to control an undertaking directly will be invalid only if it impairs, sterilizes, or paralyses that undertaking. See Irwin Toy Ltd. v. Quebec (Attorney General), 1989 CanLII 87 (SCC), [1989] 1 S.C.R. 927, at p. 955.

71 The airlines say that the provision of liquor is an integral part of their undertaking. They say further that the provincial liquor monopoly purports to control the provision of liquor directly. They submit that the monopoly is accordingly constitutionally inapplicable to them.

72 The simple answer to this argument is that the provision of liquor is not an integral part of the appellants’ federal aeronautical undertaking. The courts below, the respondents, and the interveners are all united in saying so, and all are persuasive. This Court has defined the scope of the federal aeronautics power by reference to the physical act of flight. Aeronautics is:

The flight and period of flight from the time the machine clears the earth to the time it returns successfully to the earth and is resting securely on the ground.

Johannesson v. Rural Municipality of West St. Paul, [1952] S.C.R. 292, at p. 319. Thus, the federal aeronautics jurisdiction encompasses not only the regulation of the operation of aircraft, but also the regulation of the operation of airports. Proceeding on this understanding, courts have held zoning laws that affect the location and design of airports to be constitutionally inapplicable. See ibid. By contrast, laws that affect matters incidental to the operation of aircraft -- for example, laws that affect the operation of an airport limousine service -- have not run afoul of the “integral part” doctrine. See, e.g., Murray Hill Limousine Service Ltd. v. Batson, [1965] Que. Q.B. 778.

73 It is true that under certain circumstances the provision of food and beverages can form a vital or integral part of a federal undertaking. See, e.g., Canadian Pacific Railway Co. v. Attorney-General for British Columbia, 1949 CanLII 278 (UK JCPC), [1950] A.C. 122 (P.C.), at p. 144. For example, if a province were to forbid an airline to place food and water on its aircraft, it might affect a vital part of that airline’s undertaking. Food and water may not propel the vehicle, but without them on board it is unlikely that an aircraft could venture safely from Canada to a very distant destination.

74 But having said that, I agree with Robins J.A. that the facts of this case are more closely akin to the facts that this Court had to consider in Construction Montcalm Inc. v. Minimum Wage Commission, 1978 CanLII 18 (SCC), [1979] 1 S.C.R. 754. In Construction Montcalm, the argument had been advanced that a provincial minimum wage was constitutionally inapplicable to a contractor that was working on the construction of an airport runway. The Court rejected that argument on the ground that the impugned legislation did not attempt to govern any matter that had “a direct effect upon [the airport’s ] operational qualities and, therefore, upon its suitability for the purposes of aeronautics” (p. 771). In just the same way, the provision of liquor, though it may be important if the airlines are to maintain their “competitive edge”, is not essential to the operation of aircraft.

75 The airlines urge nevertheless that the provision of liquor is essential to their undertaking. They say that if they did not serve liquor on their flights, or did serve it but at an elevated price, customers would flock to other airlines. But I do not see that this outcome is at all likely. The provincial liquor monopoly applies equally to all airlines that stock their aircraft with liquor at Toronto or elsewhere in the province. Accordingly, there is no way that a competitor flying out of Toronto could evade the monopoly and gain a competitive advantage.

76 For all of these reasons, I conclude that there is no merit to the airlines’ argument that they, as federal undertakings, should be exempt from the provincial liquor monopoly.

D. Restitution

77 The respondents concede that the Court of Appeal did not err in ordering restitution of the gallonage fees paid by the airlines after January 1, 1984. And in the light of my conclusion that the provincial authorities were entitled to charge a markup on liquor purchased abroad and kept in Ontario awaiting eventual consumption in flight, no question arises about restitution of markups.

78 The only real issue about restitution is whether the provincial authorities should be made to disgorge only gallonage fees paid after January 1, 1984, or whether they should be liable as well for the fees paid before that date.

79 In my view, the restriction of restitution to gallonage fees paid after January 1, 1984 is arbitrary. The trial judge and the Court of Appeal justified their choice of that date on the ground that it was then that Wardair brought the matter of the licence to the attention of the provincial authorities. The courts below concluded that before January 1, 1984, the parties were in pari delicto, and perhaps even that the airlines were more “delictus” than the provincial authorities. Both the trial judge and the Court of Appeal seem to have thought that the burden was on the airlines to discover that Ontario’s liquor licencing laws were inapplicable to them.

80 This “compromise” approach may seem to have a certain “equitable” appeal, but in truth it has little to recommend it. Essentially, the position of the trial judge and the Court of Appeal is that a governmental agency may never be liable for amounts collected under an inapplicable law unless it can be shown that the agency knew that the law was inapplicable and nevertheless continued to apply it. But Canadian law has never required a showing of bad faith as a precondition to the recovery of monies collected by a governmental agency under an inapplicable law. This Court has said that monies paid under such a law may be recovered even if it appears that the governmental agent responsible for collecting them did not know that the law was inapplicable:

In this case, the appellant, as a taxpayer and inhabitant of the defendant corporation, was dealing with the Clerk-treasurer of the corporation and that Clerk-treasurer was under a duty toward the appellant and other taxpayers of the municipality. When that Clerk-treasurer demands payment of a sum of money on the basis of an illegal by-law despite the fact that he does not know of its illegality, he is not in pari delicto to the taxpayer who is required to pay that sum. [Emphasis added.]

(Eadie v. Township of Brantford, 1967 CanLII 13 (SCC), [1967] S.C.R. 573, at p. 583).

81 In my view, the rule in Eadie is a sensible one. If the question is which of two parties should be responsible for guaranteeing the applicability of a law, and the choice is between the governmental agency charged with administering that law and the citizen who is subject to that law, surely the better choice is the governmental agency. I cannot see that it matters how sophisticated an actor the citizen is. Governments make laws and governments administer them. Citizens do not. The responsibility for taking care that the law is legal and applicable must rest with the party that makes and administers the law. And in any case, to make the apportionment of responsibility depend on the sophistication of the actors would be to introduce a vague idea into an area of the law that is otherwise clear.

82 Therefore, I conclude that the trial judge and the Court of Appeal erred in restricting restitution to the gallonage fees collected after January 1, 1984. The provincial authorities should be made to restore all the monies that they wrongfully took from the airlines.

E. Punitive Damages and Compound Interest

83 Both punitive damages and compound interest might have been appropriately ordered on the facts of this case. The conduct of the provincial authorities was improper to say the least. Agents of Ontario contrived to continue to collect fees from the appellants under a regime that they knew was inapplicable to airlines. In similar cases, Canadian courts have not hesitated to impose punitive damages on the government.

84 In LaPointe v. Canada (Minister of Fisheries & Oceans) (1992), 4 Admin. L.R. (2d) 298 (F.C.T.D.), the Minister of Fisheries suspended a fishing licence in the face of legal advice that he had no jurisdiction to do so. The Trial Division of the Federal Court awarded punitive damages against him, saying (at p. 318):

By proceeding to follow a chosen course of action, without heed to its legality and with complete indifference to the rights of the plaintiffs, the defendants caused undue hardship to the plaintiffs. The potential loss to the plaintiffs as a result of the defendants’ action was considerable.

The facts of the case under appeal are precisely parallel to the facts of LaPointe. The provincial authorities had the advice of the Attorney General that the airlines probably did not require liquor licences and therefore probably were not liable to pay gallonage fees, but persisted nevertheless in collecting such fees.

85 The propriety of compound interest is just as clear:

[I]n equity interest is awarded whenever a wrongdoer deprives a company of money which it needs for use in its business . . . . On general principles I think it should be presumed that the company (had it not been deprived of the money) would have made the most beneficial use open to it . . . . Alternatively, it should be presumed that the wrongdoer made the most beneficial use of it. But, whichever it is, in order to give adequate compensation, the money should be replaced at interest with yearly rests, i.e. compound interest.

Brock v. Cole (1983), 1983 CanLII 1952 (ON CA), 40 O.R. (2d) 97 (C.A.), at p. 103, citing Wallersteiner v. Moir (No. 2), [1975] 1 All E.R. 849 (C.A.), at p. 856. The provincial liquor authorities deprived the airlines of money that they almost certainly could have used in the conduct of their business. The presumption is hardly unreasonable that if the airlines had had the money, they would have put it to good use. In short, what the airlines lost to the provincial authorities was not just money, but the future value of that money. Therefore, compound interest might have been appropriate.

86 Having said all that, however, I hesitate to interfere with the decision of the trial judge. The awarding of punitive damages and compound interest is discretionary. See Vorvis v. Insurance Corporation of British Columbia, 1989 CanLII 93 (SCC), [1989] 1 S.C.R. 1085, at pp. 1104-5; Courts of Justice Act, R.S.O. 1990, c. C.43, s. 130. It is a well-established principle that an appellate court should not lightly upset a trial judge’s exercise of discretion. See Elsom v. Elsom, 1989 CanLII 100 (SCC), [1989] 1 S.C.R. 1367, at pp. 1374-75. Because it cannot be said that the trial judge misdirected himself on any applicable principle of law or that his exercise of discretion was so clearly wrong as to amount to an injustice, his refusal to award punitive damages or compound interest should be allowed to stand.

F. Section 27 of the Liquor Licence Act

87 The appellants suggest that s. 27 of the Liquor Licence Act is inapplicable to them. That section provides:

27. No person shall purchase liquor except from a government store or from a person authorized by licence or permit to sell liquor.

The argument is that s. 27 cannot apply to purchases of liquor intended for export. If it did, say the appellants, it would be an unconstitutional interference with the export of liquor -- a matter of federal competence.

88 The answer to this argument is that when the LCBO charges a markup on liquor purchased in Ontario, it does so in virtue of a transaction that takes place entirely within Ontario. As such, it is acting within its power under s. 92(16) of the Constitution Act, 1867.

6. Conclusion

89 I would allow the appeal in part, varying the order of the Court of Appeal to provide for restitution by the LCBO of all gallonage fees collected from the appellants. I would award costs on a party-and-party basis throughout.