Wendy G. Baker

The Province of British Columbia appealed a decision holding that a statutory trust created by the Social Service Tax Act for collected but unremitted sales tax did not give the Province priority over other creditors under the Bankruptcy Act.

The Supreme Court of Canada dismissed the appeal, holding that the statutory trust is not a trust within the meaning of s. 47(a) of the Bankruptcy Act once the funds are commingled and cannot be traced.

Instead, it is merely a Crown claim under s. 107(1)(j) of the Bankruptcy Act, which ranks lower in priority.

The appellant airlines challenged the application of British Columbia's Social Service Tax Act to their aircraft and parts, as well as to in-flight sales of alcoholic beverages.

The Supreme Court of Canada held that the Act, properly construed, did not apply to aircraft and parts brought into the province temporarily for interprovincial flights.

The Court also held that in-flight liquor sales lacked sufficient presence in the province to attract the tax.

Furthermore, the Court ruled that Air Canada could recover the taxes unlawfully collected on its aircraft and parts, despite being paid under a mistake of law, but could not recover the taxes collected from passengers for liquor sales, as it acted merely as a tax collector.

The airlines sought to recover gasoline taxes paid to British Columbia between 1974 and 1976 under a statute that was ultra vires because it imposed an indirect tax.

The province amended the statute in 1976 to make it a valid direct tax, and in 1981 enacted retroactive legislation to impose the valid tax for the 1974-1976 period and confiscate the invalidly collected taxes.

The Supreme Court of Canada held that the 1976 and 1981 amendments were constitutionally valid.

The Court also held that, as a general rule, taxes paid under an unconstitutional statute are not recoverable, rejecting the application of restitutionary principles in this context due to public policy concerns about fiscal chaos.