Undermining Competition

Commentary, Crown Corporations, Mike Bridge (historic), Uncategorized

Imagine if you went to the trouble of starting a small business, including finding the seed money, working long hours and successfully turning a profit each year. You then, of course, paid all taxes every year and on time. Imagine then that the government excused your competitor from paying those taxes. That would violate any notions of equity, neutrality and fairness which should be the highlights of any tax regime.

Something just like such an egregious double-standard happens all the time in Canada in the form of the constitutional tax exempt status for Crown corporations. In addition to the violation of basic tax principles, this causes unfair market distortions.

By virtue of section 125 of the Constitution Act, 1867, each level of government is immune from taxation by the other. Provincial governments, therefore cannot be compelled to pay federally imposed taxes and vice versa. The law extends this immunity and protection to all agents of those governments including Crown corporations.

That is fine insofar as it makes no sense for one level of government to tax another. However, it becomes unfair and inequitable when governments through Crown corporations enter the marketplace and engage in commercial activities. In such cases, this tax exempt status results in unfair competition for private sector firms who may be interested in the same market opportunities. This creates an uneven playing field.

That is problematic not only for the private sector business that needs to be allowed to fairly compete. It also hinders the ability of governments or taxpayers to judge whether such government involvement in the marketplace is justified on the basis of efficiency. If the obligation to pay taxes, a major input cost for any business, is not factored in, then any ostensible comparative public advantage for government-run businesses is impossible to measure, or justify.

There may be a rationale for maintaining this tax exempt status for government agencies not engaged in commercial activities. If they are performing purely public functions, which the private sector would not or could not choose to engage in, then no unfair market distortion arises.

However, Canadian law has not recognized such a distinction in the application of this tax exemption. Therefore this unfair tax status applies across the board to all government agencies. This is to be contrasted with the situation in the United States. Although American courts have recognized a similar tax exempt status for state entities, they have drawn a clear line between governmental and commercial activities and have denied the application of this tax exempt status when the state enters into the marketplace. Therefore, in the United States no such market distortion occurs. It is a pity that to date Canadian courts have chosen not to make this same distinction.

The result is that it is left to governments, that often have a vested interest in maintaining such tax exempt status, to decide if they are prepared to voluntarily waive this tax privilege. It is usually not in their self-interest to do so; although it has been done in some cases. But this has been neither uniform nor consistent.

What is necessary is a commitment and determination by all governments, federal and provincial, to eliminate this distortion and this unfair tax advantage and to do so across the board.

Fortunately, a model precedent already exists. In 2003, the British Columbia legislature adopted the Coastal Ferries Act. That act, although it kept the BC Ferries Corporation as a government regulated entity that would carry on the commercial activity of providing ferry services on the B.C. coast, changed its status. The corporation was no longer an agent of the government. This simple provision eliminated this Crown Corporation’s tax exempt status. It’s tax burden is now the same as any other private sector entity carrying on business.

In short, there are no technical or legal reasons why all governments in Canada should not introduce such legislation and apply it to all of their agencies and corporations that carry on commercial activities in the marketplace. The only reason they might not do so is a lack of principled political will.

Canadians need to urge their governments to get on with this needed and yet simple legal reform and bring to an end this unfair tax exemption and the market distortions that it creates.