Restitution, 'Passing On,' and the Recovery of Unlawfully Demanded Taxes: Why Air Canada Doesn't Fly

PAUL MICHELL

ABSTRACT

There is an emerging doctrine in the law of restitution that taxes paid under an unlawful statute may be recovered as of right. The Supreme Court of Canada has been reluctant to fully accept this principle, however. In Air Canada v. British Columbia, and in Canadian Pacific Airlines v. British Columbia, the Court accepted a 'passing on' defence. The defence allows public authorities to argue that any enrichment they received in the form of taxes did not come at the expense of the taxpayer, because it 'passed on' the cost of taxes so paid to its customers. More recently, lower courts have disagreed over the proper scope of the `passing on' defence. The author argues that the 'passing on' defence should not be accepted, because it is inconsistent with the law of unjust enrichment, it reduces the ability of commercial taxpayers to recover tax payments from public authorities, thus undermining important constitutional principles, and it is economically misconceived. The better approach is to refuse the 'passing on' defence, but in some cases to require a commercial taxpayer to hold any moneys recovered on constructive trust for those of its customers who paid the tax.

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Citation: (1995) 53(1) U.T. Fac. L. Rev. 130.
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