Pith and Substance
This article was written by a law student for the general public.
Pith and Substance is the first tool that courts use to determine which level of government has authority over a certain matter or issue. At its most basic, a pith and substance analysis asks what the essential character of a law is. The goal is to determine what the most basic purpose and effect of the law is and then to determine the appropriate jurisdiction based on those characteristics.
To determine the purpose of a law, courts use both intrinsic and extrinsic evidence. Intrinsic evidence consists of what the law itself says. Often the preamble of a piece of legislation will contain wording indicating what the law intends to accomplish and this can very useful to a court. Extrinsic evidence, on the other hand, is evidence that is found outside the piece of legislation. This will often come in the form of debates over the law that occurred in the legislature or comments made by the government when the law was introduced. Extrinsic evidence can often be very valuable when the government is trying to mask the true intentions of the legislation as was the case in R v Morgentaler . In that case, the true aim of a piece of legislation of the government of Nova Scotia was to stop abortion clinics from being set up in the province. That much is clear from the transcripts of the debate in the legislature. However, the legislation itself was written to appear to be aimed at regulation of medical services within hospitals. The Supreme Court saw through the wording of the legislation and instead looked at those debates to come to its conclusion as to the true purpose of the legislation.
The effects of a law can also be divided into legal and practical effects. Legal effects are those stated effects that were planned as part of the law while practical effects can include effects which may not have been intended but occurred. Oftentimes a law will be deemed unconstitutional because the practical effects cause the law to be outside the constitutional powers of the jurisdiction that created it even though the legal effects were jurisdictionally valid.
Once a Pith and Substance analysis has been accomplished, the Court can then move on to determining which appropriate head of power the law fits into.
Prominent Pith and Substance Cases:
R v Morgentaler
Re: Firearms Reference
Canadian Western Bank
B.C. Premier Vows to Shut Down Northern Gateway Pipeline Project if 5 “Bottom-Lines” Aren’t Met: Can She, Constitutionally?
Introduction
In July 2012, British Columbia (BC) Premier Christy Clark and Alberta Premier Alison Redford engaged in a dispute over Enbridge’s proposed Northern Gateway Pipeline, raising issues related to the division of powers in Canada’s Constitution.[1]
The Northern Gateway Pipeline project, proposed by Enbridge, would stretch from Bruderheim, Alberta to Kitimat, the coast of BC. The pipeline would be built for export of bitumen to Asia by sea. Enbridge estimates that the pipeline will generate $81 billion in additional government revenue over 30 years.[2] Of that, only a small share would go to BC, less than Ontario is projected to receive (because it produces some of the pipeline’s key input materials).[3] The Canadian Energy Research Institute projects that, over 25 years, Northern Gateway’s development will generate $352 billion for Alberta’s economy, $11.4 billion for Ontario’s economy, and only $5.1 billion for BC’s economy.[4]
BC’s Position: Premier Christy Clark argues that, of the three governments involved (the Federal Government, Alberta, and BC), her province is being asked to take on the biggest environmental and safety risk for the smallest reward. Clark has taken a hard-line stance, describing five “bottom-line” conditions that must be met before her government will agree to the pipeline deal. The most contentious of these is Clark’s demand that BC receive a “fair share” of the pipeline’s revenue.[5]
Alberta’s Position: In 2012, Premier Alison Redford was not willing to offer BC a share of oil royalties and she held that BC’s position was unreasonable. In a statement, Redford said, “Our confederation works as well as it does because of the free flow of goods and products through provinces and territories — including forest products, oil, liquefied natural gas, potash, uranium, grain and manufactured goods.”[6]
But, this dispute raises the question – does the Constitution require provincial consent in order to build a pipeline? Does BC have the power to prevent the pipeline’s development? This dispute must be understood within its constitutional context. The Constitution Act, 1867 divides power between the provinces and the Federal Government, giving each their own exclusive jurisdiction in several areas. This separation is referred to as the “division of powers.” How does the division of powers apply to this situation?
Division of Powers in the Constitution and the Northern Gateway Pipeline
Issue 1: Can BC, legally, prevent the Northern Gateway Pipeline from being built?
It appears that they cannot.
First, BC cannot use the existing federal structure for approving pipelines to prevent it from being built. The Northern Gateway Pipeline approval process is administered by the National Energy Board (NEB). Though the Government of British Columbia is able to participate in the hearings as an intervener, the province’s consent is not required for NEB approval.
If BC is able to articulate a constitutional right, it may be able to prevent Northern Gateway from being built by going to court. Does the Constitution give the province any power to prevent Northern Gateway from being built?
It appears that the Federal Government has jurisdiction over the Northern Gateway Pipeline project, in accordance with the division of powers established in the Constitution Act, 1867.[7] Section 91 of this Act describes the Federal Government’s powers, and provincial powers are listed in section 92. Relevant to the pipeline project, section 91(29) gives the Federal Government all powers that are “expressly excepted” from provincial jurisdiction, in the sections that list provincial powers.[8] One of those “expressly excepted” powers is listed in section 92(10). Section 92(10) indicates that provinces do not have the power to legislate in the following areas: a. Lines of Steam or other Ships, Railways, Canals, Telegraphs, and other Works and Undertakings connecting the Province with any other or others of the Provinces, or extending beyond the Limits of the Province; b. Lines of Steam Ships between the Province and any British or Foreign Country; c. Such Works as, although wholly situate within the Province, are before or after their Execution declared by the Parliament of Canada to be for the general Advantage of Canada or for the Advantage of Two or more of the Provinces.”[9]
Section 92(10)(c) is referred to as the “declaratory power,” and allows the Federal Government to take jurisdiction of undertakings that are in the national interest. It must include an explicit declaration by Parliament and needs to be for the “general advantage” of Canada (which is determined by the court).[10] The Federal Government has said that Northern Gateway is “vital” to Canada’s interests,[11] but thus far the pipeline is under federal jurisdiction by virtue of section 92(10)(a), not the “declaratory power”, as no court has been asked to rule on this.
A “work” in section 92(10) refers to a “physical structure”, whereas an “undertaking” is not; instead, it is an arrangement “under which of course physical things are used.” [12] Section 92(10)(a) lists several “works”, all of which deal with the interprovincial transport of goods and services, and then generalises to “other works.” Because of the specific examples ahead of it, “other works” is read ejusdem generis (of the same kind, similar)[13] – “works” in 92(10)(a) have to be similar to the transportation infrastructure listed. As a pipeline also transports goods, it is considered a “work.”
However, section 92(10) is not an automatic grant of power to the Federal Government. These powers are subject to limits, to safeguard overlapping provincial jurisdiction, but do these limits apply to the Northern Gateway Pipeline situation? Limits of Federal Power via Section 92(10) of the Constitution Act, 1867
Does BC’s localised interest in the safety and environmental risks of oil spills matter, given section 92(10) of the Constitution Act, 1867? Case law reveals that even though the Constitution lists “exclusive” areas in which provincial and Federal Governments can legislate, it isn’t as clear-cut as it might appear.
As Justice Rothstein noted in Consolidated Fastfrate Inc. v. Western Canada Council of Teamsters, section 92(10) “embodies the dual principles of local and centralized decision making that are essential to balancing local diversity with national unity.”[14] Rothstein, writing for the majority, also pointed out that the nature of 92(10) is an exception to the general provincial power over “local works,” rather than a grant of federal authority.
Provincial governments can legislate on some aspects of undertakings that are, otherwise, federal jurisdiction. For example, Canada Post is a federally regulated institution. The provinces set and enforce speed limits. What happens if a Canada Post employee is given a ticket for speeding while doing his or her job for Canada Post? Does a province have the power to exert its authority over a federal crown corporation in this way? To deal with this type of question, the court looks at which government has the core competency to legislate – so, if a federal jurisdiction to regulate Canada Post conflicts with the provincial power to legislate speed limits on its roadways, the court would assess whether getting a speeding ticket significantly obstructs the Federal Government’s ability to achieve its goals with Canada Post. The Federal Government’s core objective in establishing Canada Post is to effectively transport mail. Speeding is not necessary to fulfil this objective. Therefore, the provincial government’s authority would be “paramount” (of primary importance). This is referred to as the “doctrine of paramountcy.”
It is sometimes complicated to assess which level of government has the “paramount” interest in a division of powers case. With respect to section 92(10), specifically, labour law has frequently been the subject of legal disputes. Take Ontario Hydro v. Ontario Labour Relations Board,[15] for example. In this case, the Supreme Court ruled (in a 4-3 decision) that, because the Federal Government had declared (under section 92(10c)) that nuclear generating plants were a matter of national importance, thereby taking jurisdiction of them, a union at the Ontario Hydro generating station would have to register through the federal, and not provincial, labour relations board.[16] As is made clear in Justice Iacobucci’s dissent, the key area of disagreement on the Supreme Court in this case was whether regulating labour was “integral” to the federal interest.[17]
Canadian Western Bank v. Alberta[18] is an example where the province’s interest was deemed to be “paramount.” This case will not be examined in greater detail in this article, as it dealt with a different power divided within the Constitution Act, 1867.
The question here is whether BC can prevent the Northern Gateway Pipeline from being built. The Northern Gateway Pipeline crosses provincial boundaries and so would appear to be within the Federal Government’s jurisdiction to legislate, as a “work” under section 92(10). Under the principle of paramountcy, local interests can translate into provincial authority to legislate, but only if the provincial law does not undermine the main thrust of federal authority, therein. Those circumstances do not appear to apply in the present case. Any attempt by BC to prevent the Northern Gateway Pipeline from being built would entail obstructing an “integral” part of federal jurisdiction listed in section 92(10) of the Constitution. But does BC, constitutionally, have any power over the bitumen that is to go through the Northern Gateway Pipeline?
Federal Power to Regulate Trade and Commerce
Alison Redford’s comments have focused on the actual trade and export of oil rather than on the pipeline itself.[19] The argument that stopping the Northern Gateway Pipeline would have the effect of limiting Alberta’s ability to export oil to Asia is a valid one, though other options may be available (for example, via a pipeline through the Northwest Territories).[20] These arguments deal with the ability to trade across borders, traditionally an area of federal jurisdiction. The Federal Government, in section 91(2) of the Constitution Act, 1867, has the power to regulate trade and commerce.
In Murphy v. Canadian Pacific Railway, Justice Rand elaborated on this idea:
“Apart from matters of purely local and private concern, this country is one economic unit; in freedom of movement its business interests are in an extra-provincial dimension, and, among other things, are deeply involved in trade and commerce between and beyond provinces.”[21]
It was later concluded in Regina v. Klassen[22] that the Wheat Board Act applied to a grain producer who only traded within his province, because the Act’s “pith and substance” (general intention) was the regulation of interprovincial trade. So, even though its impact on this local producer was “incidental and ancillary” (tangential, supplementary) to the main purpose of the Wheat Board Act, it applied to him as part of the general goal of setting up an “export market for surplus grains, a matter which had undoubtedly assumed a national importance.”[23] This was perceived as an expansive view, by the Court, of federal power to legislate trade and commerce.[24] It should be noted that trade and commerce are dealt with under section 91(2) of the Constitution Act, 1867 whereas a pipeline is, as described above, federal jurisdiction by virtue of section 92(10) and section 91(29). The trade of goods is not the same as the roads (or other transit routes, in this case a pipeline) used to transport them. Therefore, jurisprudence for section 91(2) and section 92(10) is not identical. Presumably, though, federal jurisdiction to regulate trade and commerce would mean that neither BC nor Alberta would have the power to order that the flow of oil through the pipeline stop.
As a result, the Constitution gives the Federal Government power with respect to the pipeline (via section 92(10)) and the good that transits through it (via section 91(2)). Therefore, there appears to be no question – from a constitutional perspective – that the Northern Gateway Pipeline is a federal matter.
Issue 2: Does BC’s claim that it deserves a “fair share” of economic benefits (derived from the pipeline) have a basis in law?
Again, it would appear not. First, Alberta is correct; it is entitled to all revenues from resources extracted in its provincial territory. In 1982, the Constitution of Canada was amended and section 92A was added to the Constitution Act, 1867.[25] Section 92A gives the province ownership of and jurisdiction over, “non-renewable natural resources, forestry resources and electrical energy.”[26] In particular, section 92A(4) states that, “In each province, the legislature may make laws in relation to the raising of money by any mode or system of taxation in respect of
a. “non-renewable natural resources and forestry resources in the province and the primary production therefrom; and b. sites and facilities in the province for the generation of electrical energy and the production therefrom.”[27]
Therefore, based on this section of the Constitution, it appears that BC cannot directly impose resource royalties on oil that has been extracted in Alberta, and Alberta is under no constitutional obligation to surrender any royalties that they collect on Albertan oil. The question of whether BC would be able to tax the Northern Gateway Pipeline is discussed in greater detail here.[28]
Conclusion
It appears that BC has no legal basis to stop the Northern Gateway Pipeline from being constructed. Nor does it have a clear basis to litigate its demand for what it feels is its “fair share” of the pipeline’s economic benefits. Political scientist Tom Flanagan has observed that, “It has become routine for provincial politicians to speak as if they had the power to block the construction of pipelines,” [29] even though they do not. The province’s claims do not appear to have abasis in constitutional law, but they may prove to be an effective political argument. After all, there is a difference between the Federal Government’s legal power to regulate and its political willingness to exercise that power. If Premier Christy Clark’s arguments for fairness resonate with the Canadian public, they may have a policy impact despite BC’s “weak” [30] legal position.
[1] Josh Wingrove & Jane Taber, “B.C. Vows to Block Pipeline Unless Alberta Ponies Up” The Globe and Mail (24 July 2012).
[2] “B.C. and Alberta Take Pipeline Fight to Premiers’ Conference” CBC News (25 July 2012).
[3] Tamsyn Burgmann, “B.C. to Collect Far Less Pipeline Tax Revenue than Ontario and Alberta: Report” Global TV Edmonton News (31 July 2012). [4] Ibid.
[5] Peter Shawn Taylor, “Northern Gateway Pipeline Proposal a Shakedown by Christy Clark” Canadian Business (8 August 2012).
[6] “Redford Responds to BC’s Pipeline Requirements” Global Edmonton News (23 July 2012).
[7] Constitution Act, 1867 (UK), 30 & 31 Vict, c 3, s 91, reprinted in RSC 1985.
[8] Supra note 4 at s.91(29)
[9] Ibid, s 92(10).
[10] For a good explanation of the declaratory power, see Iacobucci’s dissent in Ontario Hydro v. Ontario Labour Relations Board.
[11] Jason Fekete, “Science, Not Economics, Will Determine Fate of Pipeline, Harper Says” Edmonton Journal (7 August 2012).
[12] Consolidated Fastfrate Inc. v. Western Canada Council of Teamsters (2009), SCC53, [2009] 3 SCR 407 at para 41-44.
[13] Ibid.
[14] Supra note 11 at para 31.
[15] Ontario Hydro v. Ontario Labour Relations Board, [1993] 3 SCR 327.
[16] Ibid.
[17]Ibid at p71-116.
[18] Canadian Western Bank v. Alberta, 2007 SCC 22, [2007] SCR 3.
[19] “Redford Responds to BC’s Pipeline Requirements” Global Edmonton TV (23 July 2012). [20] “Northern Gateway Pipeline Could go North” CBC News (4 August 2012).
[21] Murphy v. Canadian Pacific Railway, [1958] SCR 626 at 638.
[22] Regina v. Klassen (1959), 29 WWR 369.
[23] Ibid.
[24] John Saywell, The Lawmakers: Judicial Power and the Shaping of Canadian Federalism (Toronto: University of Toronto Press, 2002) at p52.
[25] Supra note 7 at s92A.
[26] Ibid.
[27] Ibid.
[28] Nigel Bankes “British Columbia and the Northern Gateway Pipeline” ABlawg.ca (25 July 2012).
[29] Tom Flanagan, “To Connect the Pipeline, Connect the Dots” The Globe and Mail (4 August 2012).
[30] Supra note 28.
Reference re Securities Act (2011): Does Parliament Have the Power to Establish a Canada-wide Securities Regulator?
Introduction
In a decision released November 22, 2011, the Supreme Court of Canada provided its opinion on whether the government’s proposed Securities Act[1] was within the constitutional authority of the federal Parliament.[2]
The decision in Reference re Securities Act is the result of a “reference” question posed to the Supreme Court. A reference asks the Court to give an advisory opinion on a particular question.[3] In this case, the question for the Supreme Court’s consideration was whether the proposed Securities Act, as drafted, fell “within the legislative authority of the Parliament of Canada.”[4] In other words, the question for the Supreme Court was whether the proposedSecurities Act was within federal jurisdiction.
The proposed Act would create a Canada-wide securities regulator, and was described as a “comprehensive foray” by the federal government into the area of securities regulation.[5] A number of provinces argued that the regulation of securities is a provincial matter, and so the federal government did not have the legislative authority to pass the Act.
As noted by the Supreme Court, the word “securities” refers to a “class of assets that conventionally includes shares in corporations, interests in partnerships, debt instruments such as bonds and financial derivatives.”[6] Currently, securities are regulated in each province by provincial laws and regulatory bodies.[7] The Question for the Supreme Court
As noted above, the question for the Supreme Court’s consideration in this reference case was whether the proposed federal Securities Act falls within the legislative authority of the federal government as outlined in the Constitution Act, 1867.
Sections 91 and 92 of the Constitution Act, 1867 divide the power to legislate in specific areas between the federal and provincial governments. For example, the federal government has jurisdiction in areas such as banking and criminal law, while the provincial government has jurisdiction over other areas such as natural resources and hospitals. This separation is referred to as the “division of powers.” For a federal system (such as Canada’s) to function, some powers are allocated to the federal government and others to the provinces.
However, not all questions of jurisdiction are answered easily by the text of sections 91 and 92 of the Constitution Act, 1867. Questions frequently arise regarding how a particular subject or area should be classified. The task of interpreting the Constitution Act, 1867 falls to the courts. In the Securities Reference, the conflict was between the federal power over “the regulation of trade and commerce” (section 91(2) of the Constitution Act, 1867) and the provincial power over “property and civil rights in the province” (section 92(13)). Specifically, the key question was whether the words “the regulation of trade and commerce” include the regulation of securities, or whether the regulation of securities is part of “property and civil rights in the province.”
In a unanimous decision, the entire Supreme Court concluded that the proposed Securities Act was not part of the federal government’s power to regulate trade and commerce. Accordingly, the proposed Act was outside the legislative authority of Parliament and thus deemed unconstitutional.[8] The Two Sides of the Argument
The arguments of the federal and provincial governments were canvassed in an earlier article.
In short, the Government of Canada (along with the government of Ontario and several interveners) argued that the Securities Act is a constitutional exercise of the federal government’s general power to regulate trade and commerce, pursuant to section 91(2) of the Constitution Act, 1867.[9] Canada did not dispute that some aspects of securities regulation are within the power of a province to regulate, including the regulation of contracts and property. Instead, Canada argued that the securities market has evolved such that it is now a matter affecting the country as a whole.[10] The “general” branch of the federal trade and commerce power gives the federal government the jurisdiction to legislate trade that affects the entire country, as opposed to a specific industry. Canada argued that without a national approach to the regulation of securities, the securities industry might not be adequately controlled, putting the entire country’s financial system at risk.
The provincial governments of Alberta, Quebec, Manitoba, and New Brunswick – also supported by a number of interveners – argued that the proposed Act was unconstitutional. They contended that the legislation would be an intrusion into their exclusive constitutional authority over property and civil rights(pursuant to section 92(13) of the Constitution Act, 1867), which includes authority over the regulation of contracts, property, and professions.
The Provincial Reference Cases: The Opinions of Two Provincial Courts of Appeal
In earlier references brought by provincial governments, both the Alberta Court of Appeal and the Quebec Court of Appeal were asked to advise on the constitutionality of the proposed Act. Both courts concluded that the proposed Act was unconstitutional.[11]
The Alberta Court of Appeal, in a unanimous decision, concluded that the proposed Act was an unconstitutional intrusion into provincial power over property and civil rights, and that it essentially “mirrors” existing provincial legislation dealing with securities regulation.[12]
In a split decision, a majority of the Quebec Court of Appeal came to the same conclusion. One judge, Justice Dalphond, disagreed. He concluded that the Canadian securities market is a “single, integrated, pan-Canadian market”, and so power to regulate it falls under the federal government’s power over trade and commerce.[13]
Overarching principles guiding the Supreme Court
Before embarking on its detailed analysis of whether the proposed Securities Act was, in essence, under federal or provincial jurisdiction, the Supreme Court canvassed general principles relating to Canadian federalism, the regulation of securities, and the proper role of the Court in this matter.
Canadian federalism: flexible cooperation, but no erosion of the division of powers
The Supreme Court noted that, since 1949, the trend has been to adopt a “flexible” view of federalism and the division of powers. Instead of emphasizing “watertight compartments” of jurisdictional control to ensure each level of government has exclusive control over a defined list of areas, the Supreme Court has accommodated overlaps in jurisdiction and encouraged “intergovernmental cooperation.” As former Chief Justice Dickson famously noted in Ontario (Attorney General) v OPSEU, Canadian constitutional law permits a significant amount of overlap in the division of powers between federal and provincial legislative authority.[14] Chief Justice Dickson described this overlap as the “dominant tide of constitutional doctrines.”[15]
But, the concepts of “overlap” and “flexible federalism” did not decide the matter for the Supreme Court. As the opinion in the Securities Reference shows, the Supreme Court is only willing to go so far in supporting overlap and flexibility. The Court said that this approach “cannot override or modify the separation of powers.”[16] With respect to the trend emphasizing a flexible approach to federalism, the Supreme Court stated:
Notwithstanding the Court’s promotion of cooperative and flexible federalism, the constitutional boundaries that underlie the division of powers must be respected. The “dominant tide” of flexible federalism, however strong its pull may be, cannot sweep designated powers out to sea, nor erode the constitutional balance inherent in the Canadian federal state.[17]
The concept of balance was central to the Supreme Court’s decision.[18] The Court emphasized that, while overlap is permitted and cooperation is to be encouraged, one power cannot be given an interpretation so broad that it would effectively “eviscerate” a power of another level of government.[19]
The regulation of securities and the role of the Supreme Court
In addition to emphasizing the concept of balanced federalism generally, the Supreme Court discussed the role of federalism in the context of securities regulation specifically. It acknowledged that the regulation of securities has both provincial and federal aspects and that there have been several proposals over the years to institute a federal securities regulator, dating back as far as 1935.[20]
The most recent proposal (and the proposal that lead to the proposed Securities Act under consideration) was developed in 2009 by an expert panel on securities regulation – the “Hockin Panel.”[21] The Hockin Panel recommended the creation of a “comprehensive national regime” to regulate Canadian securities, and provided for transitional measures as provinces opt-in to the proposed scheme.[22]
However advantageous a federal securities regulator may be to the Canadian securities market (as was suggested by the Hockin Panel), the Supreme Court declined to comment on the effectiveness of the regime. The Supreme Court was careful to note throughout the decision that its role was not to determine the “optimal model” for securities regulation because “the policy question of whether a single national securities scheme is preferable … is not one for the courts to decide.”[23] And further: “our answer to the reference question is dictated solely by the text of the Constitution, fundamental constitutional principles and the relevant case law.”[24] In other words, the Court’s role was only to decide whether the proposedSecurities Act was constitutional, and not whether it was good federal policy.
The classification exercise: does the proposed Act fall under federal or provincial jurisdiction?
As noted above, sections 91 and 92 of the Constitution Act, 1867 divide legislative powers between the federal and provincial governments. Because these sections do not make it absolutely clear whether securities regulation should be under federal or provincial jurisdiction, the Supreme Court undertook a process that can be described as a “classification exercise.”
The “pith and substance” of the proposed Act
The first step for the Court in the classification exercise is to determine the essence, “main thrust”, or “pith and substance” of the legislation at issue. This involves a tool known as the pith and substance analysis. The analysis looks to both the purpose of the legislation and the legislation’s effects to determine its main thrust.[25]
To determine the purpose of the proposed Securities Act, the Supreme Court looked both to the preamble of the Act and its specific provisions. According to the Act’s preamble, its purpose is to create a single Canadian securities regulator. Section 9 of the Act states that the legislation’s broader purposes are to “provide investor protection, to foster fair, efficient and competitive capital markets and to contribute to the integrity and stability of Canada’s financial system.”[26] As the Supreme Court noted, all of these broader purposes have both federal and provincial aspects.
The Supreme Court found that the direct effect of the proposed legislation is to establish a federal securities regulator, and in so doing to effectively displace any existing provincial regulatory schemes dealing with securities.[27]
The Supreme Court concluded that the pith and substance of the proposed Act is “to regulate, on an exclusive basis, all aspects of securities trading in Canada, including the trades and occupations related to securities in each of the provinces.”[28]
Does the Act fall within the federal power to regulate trade and commerce?
Having determined that the main thrust of the proposed Act is the exclusive regulation of securities at the federal level, the Supreme Court then turned to the next step in the classification exercise – whether the Securities Act fell within the federal government’s power to regulate trade and commerce.
The federal government had to argue against decades of case law establishing that the regulation of securities was a matter of provincial jurisdiction under the province’s authority over property and civil rights.[29] The federal government argued that the transformation of the securities market over recent years made securities regulation now a federal matter under the federal trade and commerce power.
But, what does “trade and commerce” really mean? In an early division of powers case, the Judicial Committee of the Privy Council determined that the words “the regulation of trade and commerce” should not be interpreted literally.[30] To do so would not achieve the balance that sections 91 and 92 aim to strike between the different levels of government. Instead, the federal trade and commerce power has two branches:
1. Power over interprovincial and international commerce; and
2. The “general” trade and commerce power – the power to regulate trade and commerce affecting the “whole dominion.”[31]
As the Supreme Court noted multiple times in the Securities Reference opinion, the government of Canada sought to establish that the proposedSecurities Act was valid legislation based only on this second branch of the trade and commerce power – the general power. Accordingly, the Supreme Court did not consider whether the legislation would be valid under other federal heads of power, nor did the Supreme Court consider whether provisions of the Act dealing with areas of provincial competence were valid as supporting the exercise of a federal power.[32]
A number of more recent division of powers cases have aimed to elaborate on the meaning of the general branch of the trade and commerce power. In Attorney General of Canada v Canadian National Transportation Ltd, Justice Dickson of the Supreme Court wrote that in order for legislation to fall under the general trade and commerce power, it must be qualitatively“ different from anything that could practically or constitutionally be enacted by the individual provinces either separately or in combination.”[33]
Later, in General Motors of Canada Ltd v City National Leasing, the Supreme Court developed a framework of questions to be used as a tool to help determine if legislation meets this test of “qualitative difference.”[34] The decision outlined five indicators that suggest the federal government has jurisdiction under the general trade and commerce power (the “General Motors” inquiry):
1. If the legislation is part of a general regulatory scheme;
2. If the scheme is under the oversight of a regulatory agency;
3. If the legislation is concerned with trade as a whole rather than with a particular industry;
4. If the legislation is such that individual provinces, acting alone or together, would be constitutionally incapable of enacting it; and
5. If the legislation is such that the failure to include one or more provinces would jeopardize its successful operation in other parts of the country.[35]
In the Securities Reference opinion, the Supreme Court had no difficulty concluding that the first two steps of the inquiry were satisfied: the proposed Securities Act was clearly part of a general regulatory scheme under the oversight of a regulatory agency.[36]
This left the final three questions of theGeneral Motors inquiry.
The third question asks whether the proposed Securities Act is concerned with trade as a whole, or a particular industry. Here, the Supreme Court acknowledged that the maintenance of “Canada’s financial stability” and the “preservation of capital markets” go beyond the regulation of a single industry and are concerned with trade as a whole.[37] However, the Supreme Court noted that the proposed Act is not merely concerned with these broader concerns, but also with the day- to-day, detailed regulation of all aspects of securities in the country. In doing so, the legislation overreaches areas of federal concern and descends into areas of provincial concern.[38] The government of Canada argued that the securities industry has been transformed in the modern era, and now must be regulated federally. However, the Supreme Court did not think that the federal government proved this claim.[39]
The fourth question asks – is the legislation such that individual provinces, acting alone or together, lack the constitutional capacity to enact it? The Supreme Court did not believe so. It emphasized that the legislation goes too far into the detailed, day-to-day regulation of provincial matters.[40]
Finally, is the scheme such that the failure to include one or more provinces would jeopardize its successful operation? In answering this question, the Supreme Court emphasized that this step should not involve an assessment of whether the legislation involves good policy.[41] Instead, the focus should be on what is “constitutionally permissible.”[42] Under the proposed Securities Act, provinces have the choice to decide whether to opt-in to the federal scheme. The legislation itself contemplates the possibility that not all provinces will be involved. This feature undermines any argument that the failure to include one or more of the provinces would jeopardize the scheme’s successful operation, because even the legislation itself permits provinces to opt- out.[43]
Accordingly, the Supreme Court concluded that the proposed Securities Act was not a valid exercise of the federal government’s general trade and commerce power. The Court determined that the Act’s main focus was the regulation of contracts and property within each of the provinces, a matter of provincial legislative authority. As a result, the Act was found to be unconstitutional and beyond the federal government’s legislative power.
What happens next: is the idea of a federal securities regulator dead?
The Supreme Court’s opinion in the Securities Reference is interesting for a couple of reasons.
First, while the Supreme Court was asked to answer a reference question, it chose to answer the question in a limited way because of the arguments put before it by the federal government. As a result of the limited nature of the federal government’s argument, the Supreme Court’s opinion assessed the proposed Securities Act’s constitutionality based only on the second, general branch of the trade and commerce power. The decision does not go so far as to speculate whether the proposed Securities Act could be a justifiable exercise of federal government jurisdiction under another head of power, including the first branch of the trade and commerce power (the power to regulate interprovincial and international trade), or the federal power to make laws for the “peace, order, and good government of Canada.”[44]
Second, the Supreme Court emphasized throughout the decision that its opinion on the constitutionality of the proposed legislation does not preclude the different levels of government from working together in a cooperative manner to come to an optimal solution for the good of all Canada:
It is open to the federal government and the provinces to exercise their respective power over securities harmoniously, in the spirit of cooperative federalism.[45]
The Supreme Court thus indicated that a national securities regulator is still constitutionally possible for Canada – it would just need to involve cooperation and collaboration between the provinces and the federal government. The Supreme Court suggests that there is some experience in other federal states suggesting that this kind of “power sharing” between different levels of government in the area of securities regulation can be successful.[46]
As a result, the idea of a federal securities regulator is not entirely dead. Such a body may still emerge in the future. It is clear, however, that the proposedSecurities Act, as drafted, does not fall under the federal government’s power to regulate general trade and commerce affecting the whole dominion.
Further Reading
James Raworth, “Securities Regulation and the Division of Powers”, Centre for Constitutional Studies(2011).
Ken Dickerson, “Reference Case to Confirm Constitutionality of Federal Securities Regulation” (16 October 2009).
Maxime-Olivier Thibodeau, “Creating a Federal Securities Regulator – Has the Debate Been Settled?”Library of Parliament (20 June 2012).
Maxime-Olivier Thibodeau, “Proposed Federal Securities Regulator 2. Constitutional Aspects” Library of Parliament (17 May 2012).
Andrew Kitching, “Securities Regulation: Calls for a Single Regulator” Library of Parliament (16 February 2009).
Tara Grey and Andrew Kitching, “Reforming Canadian Securities Regulation” Library of Parliament (19 September 2005).
[1] The proposed Securities Act was set out in Order in Council PC 2010-667. [2] Reference re Securities Act, 2011 SCC 66, [2011] 3 SCR 837 [Securities Reference].
[3] The reference question was brought under s 53 of the Supreme Court Act, RSC 1985, c S-26, which permits the Governor in Council to refer a question regarding the interpretation of any federal or provincial legislation to the Supreme Court for its consideration.
[4] Securities Reference, supra note 2 at para 1 [Securities Reference].
[5] Ibid at para 2.
[6] Ibid at para 40.
[7] Ibid at para 41.
[8] Ibid at para 134.
[9] Ibid at para 32.
[10] Ibid at para 4.
[11] Reference re Securities Act (Canada), 2011 ABCA 77; Quebec (Procureure generale) c Canada (Procureure generale), 2011 QCCA 591.
[12] Securities Reference, supra note 2 at para 37.
[13] Ibid at para 39.
[14] Ibid at paras 57-58.
[15] Ontario (Attorney General) v OPSEU, [1987] 2 SCR 2 at para 27. Chief Justice Dickson’s full description was: The history of Canadian constitutional law has been to allow for a fair amount of interplay and indeed overlap between federal and provincial powers. It is true that doctrines like interjurisdictional and Crown immunity and concepts like ‘watertight compartments’ qualify the extent of that interplay. But it must be recognized that these doctrines and concepts have not been the dominant tide of constitutional doctrines; rather they have been an undertow against the strong pull of pith and substance, the aspect doctrine and, in recent years, a very restrained approach to concurrency and paramountcy issues.”
[16] Securities Reference, supra note 2 at para 61.
[17] Ibid at para 62.
[18] Ibid. The Court references the “balance” of Canadian federalism at least 15 times throughout the decision.
[19] Ibid at para 7.
[20] Ibid at para 12.
[21] Ibid at para 26.
[22] Ibid at para 27.
[23] Ibid at para 10.
[24] Ibid.
[25] Ibid at para 63.
[26] Ibid at para 95.
[27] Ibid at para 99. Specifically, the Act contains requirements dealing with registration of securities dealers, prospectus filing, and disclosure in addition to specific requirements for participants in the securities market. The Act also provides a framework for both civil remedies and regulatory/criminal offences for violations. See ibid at para 30.
[28] Ibid at para 106.
[29] Ibid at para 44. See Multiple Access Ltd v McCutcheon, [1982] 2 SCR 161 at 183.
[30] Citizens Insurance Co of Canada v Parsons (1881), 7 App Cas 96.
[31] Securities Reference, supra note 2 at para 46.
[32] Ibid at para 32.
[33] Attorney General of Canada v Canadian National Transportation Ltd, [1983] 2 SCR 206 at 267.
[34] General Motors of Canada Ltd v City National Leasing, [1989] 1 SCR 641 [General Motors v City National].
[35] Securities Reference, supra note 2 at para 80, citing General Motors v City National, ibid at 661-62.
[36] Ibid at para 110.
[37] Ibid at para 114.
[38] Ibid.
[39] Ibid at para 116.
[40] Ibid at para 122.
[41] Ibid at para 90.
[42] Ibid.
[43] Ibid at para 123.
[44] See ibid at para 132.
[45] Ibid at para 9.
[46] Ibid at para 48. Securities Regulation and the Division of Powers
Introduction
On May 26, 2010, the Federal Minister of Finance tabled the Canadian Securities Act in the House of Commons and initiated a Supreme Court Reference[1]. The Reference question put to the Supreme Court was whether the proposedCanadian Securities Act was within the legislative authority of the Parliament of Canada[2].
Up to this point the regulation of securities has been performed at the provincial level. Each province has legislation similar to the proposed federal act regarding security regulation, and each has its own agency set up to enforce that legislation. In the past decade, provinces have worked to harmonize their efforts at securities regulation through the development of a “passport” system which has aimed to create unified standards and practices. However, there are still 13 regulators operating in separate jurisdictions. TheCanadian Securities Act aims to replace them with one national regulator.
There have long been calls for the Federal Government to establish a single national securities regulator. Canada pointed out in their arguments that numerous commissions and panels dating from the 1930s have recommended that a national regulator be created[3]. The most recent recommendation for such reform came from the “Hockin Panel”, commissioned by the Minister of Finance, which issued its report in 2009. The panel argued that a national regulator would “provide clear national accountability, reduce compliance burdens, reduce systemic risks, strengthen enforcement, and better serve the needs of investors”.[4] Based mainly on this most recent report, the Federal Government moved to initiate legislation that would become the proposed Canadian Securities Act.
The principal opponents of the federal effort to create a national securities regulator are the provinces of Alberta and Quebec. Both these provinces initiated their own reference question with their respective Courts of Appeal. In March of 2011, the Alberta Court of Appeal ruled that the federal initiative was an unconstitutional intrusion into provincial jurisdiction[5]. In April of 2011, the Quebec Court of Appeal reached the same conclusion[6]. Although these decisions are no doubt influential, the decision of the Supreme Court will be the final and authoritative ruling.
This article will examine the major arguments that both sides presented to the Supreme Court in March of 2011, focussing on the arguments made by the Government of Canada and the Government of Alberta.
The Character of the Securities Act
The substantive portion of the arguments put forward by the Federal and Provincial Governments focus on differing interpretations of the trade and commerce clause of the Constitution[7]. However, the arguments put forward by each side were heavily influenced by their differing interpretations of the essential character of the proposed Canadian Securities Act itself. The essential character of a piece of legislation is important because it represents the starting point for any further analysis regarding which level of government has authority to enact laws in that area according to thedivision of powers. Determining this essential character of the legislation is done through a pith and substance analysis. The contesting sides were at odds over how such an analysis should be conducted. Canada argued that such an analysis should be done on a high level of generality focusing on the stated purposes laid out in the Act itself[8]. Not surprisingly, using this method of analysis, Canada argued that the Act aimed at comprehensive national securities regulation and as such was justified under the trade and commerce power in the Constitution Act, 1867.[9]
Alberta, on the other hand, argued that precision and specificity were needed in any pith and substance analysis of the Act[10]. This was because of the high level of intrusion by the Federal Government into traditional areas of provincial jurisdiction[11]. A general purpose laid out in the Act is simply not sufficient to determine its essential character. Based on this approach, Alberta argued that the essential character of the Act was regulation of the trading in securities and was an intrusion into the provincial power over property and civil rights[12].
The Nature and Limits of the Trade and Commerce Clause
In section 91(2) of the Constitution Act of 1867, the Federal Government was given jurisdiction over trade and commerce[13]. At the same time, the provinces were given jurisdiction over property and civil rights in section 92(13)[14]. These two similar powers inevitably came into conflict. In 1881, the Judicial Committee of the Privy Council, at that time the highest court in Canada, made its famous ruling in Citizens Insurance v Parsons[15]. Parsons would set the parameters for the use of the trade and commerce clause for the next century, adopting a very narrow interpretation of the powers that the clause gave to the Federal Government. The Privy Council ruled that the clause gave the Federal Government power over two branches of trade: interprovincial and international trade, and general regulation of trade affecting the dominion as a whole.[16] While the first branch, international and interprovincial trade, would be dealt with often by the courts, it would be nearly a century before the second branch, general regulation of trade affecting the whole dominion, would be seriously examined.
The “general branch” of the trade and commerce clause came into much wider use beginning in the 1970s and moving into the 1980s. In General Motors of Canada v City National Leasing[17], Justice Dickson set out the five criteria to be used in determining the validity of invoking the general branch of the trade and commerce clause:
1. the impugned legislation must be part of a regulatory scheme;
2. the scheme must be monitored by the continuing oversight of a regulatory agency;
3. the legislation must be concerned with trade as a whole rather than with a particular industry;
4. the legislation should be of a nature that provinces jointly or severally would be constitutionally incapable of enacting; and
5. the failure to include one or more provinces or localities in a legislative scheme would jeopardize the successful operation of the scheme in other parts of the country[18]
The Court made it clear that this is not an exhaustive list and that the presence or absence of any of the criteria is not determinative. Rather, examining where the federal trade and commerce clause begins is a useful starting point[19]. Indeed, in this case it represented the crux of the argument for both sides.
Arguments of the parties.
On April 13th, 2011, the Supreme Court of Canada heard the arguments of Canada and Alberta over the constitutionality of the Canadian Securities Act. Both sides conceded that the first two General Motors criteria were met in the Act. The points of the contention revolved around the last three criteria.
The legislation must be concerned with trade as a whole rather than with a particular industry
Canada argued that securities law transcends any one particular industry[20]. Trading in securities is a tool used by every major industry to raise capital to invest in their business. As such, it must be recognized as something that has to be regulated on a national level. Canada compares securities laws to competition laws, which apply nationally. All industries compete so competition law affects trade as a whole. Similarly, all industries trade in securities, so regulation of that practice is also concerned with trade as whole[21].
To show that the Canada Securities Act is aimed at general regulation, Canada pointed to the preamble of the Act. The preamble makes broad references to the national importance of the securities market and the need for a national system of regulation to manage such things as risk to the entire securities system[22]. In addition, the recent economic crisis was cited as an instance in which a national regulator would be essential to systemic risk management[23].
Alberta countered that Canada weathered the economic crisis better than any other G8 country and did it with 13 provincial and territorial regulators instead of one national one. In contrast, the United States, which has a national regulator, fared the worst[24].
Alberta argued that what was truly important in considering the “trade as a whole” criteria was not what the proposed Act said but rather what Courts have ruled in the past regarding the securities industry[25]. Alberta pointed to numerous cases which referred to trading in securities as an industry in itself. While these past Court decisions were not directly aimed at securities regulation, they do illustrate a trend in Canadian jurisprudence to view the trading in securities as a specific industry and not as a national trade[26].
Alberta compared the securities industry to the insurance industry. Just as all industries make heavy use of securities trading to raise capital, they also make heavy use of insurance to mitigate risk. The Parsons case specifically ruled that insurance could not be regulated by the Federal Government under the trade and commerce clause. Considering the similarity of insurance to securities, the same treatment should apply to both, and securities should be considered a separate industry and not part of trade as a whole[27].
The legislation should be of a nature that provinces jointly or severally would be constitutionally incapable of enacting.
Canada acknowledged that the provinces do work together and have created a somewhat consistent system of regulation through their passport system. However, just because the provinces can band together to act does not mean that the Federal Government lacks the authority to act as well[28]. The provinces simply cannot regulate the securities industry in the manner necessary in the modern age.[29] Canada argued that this failing stems from a number of constitutional limitations placed upon them:
· For starters, the provinces cannot apply their regulations extra-provincially. Orders and sanctions can only apply in the province that issues them. For example, a securities trader was forced to cease trading in BC due to fraudulent activities, but was still allowed to continue operating in New Brunswick. This is a glaring inefficiency that can only be countered by a national system of regulation[30].
· Furthermore, the securities industry has become primarily international in scope. There are numerous international organizations that work towards common standards in trading. Currently Canada has no voice at these organizations because provinces cannot sit as members. Only a national regulator could represent Canada at these vital organizations[31].
· There are two additional factors that impact on the provinces ability to regulate securities. First, provinces cannot regulate federally incorporated companies[32] and second, provinces lack the ability to include criminal sanctions with their regulations[33]. Both of these are constitutional limitations placed on the provinces.
Alberta countered that the passport system has been effective in creating consistent rules for those entering the securities market and that, presently, security traders often only need to be registered once to trade throughout Canada. Even if Canada is correct in pointing out the flaws in the passport system, the provinces still retain the constitutional ability to fix them[34].
Alberta pointed out that Canada has adopted regulations in their proposed Act that are nearly identical to those contained in the supposedly flawedAlberta Securities Act.[35] It appears inconsistent for Canada to copy a regulatory scheme that it argues is deeply flawed. The only true difference is that Canada’s scheme would apply nationally. Alberta argues this is simply not enough of a difference to make out a case that Alberta is incapable of regulating in this area.[36]
The failure to include one or more provinces or localities in a legislative scheme would jeopardize the successful operation of the scheme in other parts of the country.
In addressing this final criterion, Alberta pointed out that the proposed Act contains an opt-in clause. This clause obviously envisions that the system of national regulation will not apply in every province. On its very face, this shows that unanimous provincial involvement is not necessary[37].
The purpose of this criterion was discussed extensively in General Motors. When discussing it, Justice Dickson was clear that one of its main purposes was to protect the sphere of provincial powers by delineating specific criteria indicating that the Federal Government alone was capable of regulating effectively in a particular area[38]. If the proposed Act could end up not applying nationwide then is should be considered an area that the provinces are more than capable of regulating without the involvement of the Federal Government.
Canada argued that we now live in the modern era of co- operative federalism and that the opt-in clause contained in the proposed Act is a great example of that principle in action.[39] Ever since the agricultural cases of the 1970s that led to co-operative ventures between provinces, the Supreme Court has been ready to accept arrangements that are the product of co-operation between different jurisdictions even when that co-operation strains the limits imposed by the federal-provincial division of powers. It would be an odd situation for the Court to rule that the proposed Act would be constitutional only if participation were mandatory and forced on the provinces rather than voluntary. While unanimous provincial involvement is essential if the regulator is to be fully functional, Canada will accommodate provincial interests through the opt-in clause in the name of co-operative federalism. In so doing, they are still fulfilling the spirit of the fifth criterion of the general branch of the trade and commerce clause[40].
Conclusion
Both Canada and Alberta put forward compelling arguments in favour of their view on the constitutionality of a national securities regulator. While Canada focused much of their argument on the broad themes of effective economic management of what they see as a national issue, Alberta focused on the specific nature of the securities industry and argued that the provinces were best positioned to effectively regulate it. Alberta also relied on numerous prior cases in which the securities industry was acknowledged as an area of provincial concern. However, Canada is correct in responding that no Court has ever definitively ruled on a federal role in the regulation of securities trading[41].
The stakes are high. The Federal Government is seeking to dramatically expand its powers over the economic management of the country. Alberta, along with Quebec, is fiercely resisting this effort. What the Court will ultimately decide is hard to predict. Given the strong arguments on either side, the case may well divide the court. Whatever the Court does end up ruling, this decision will add a critical chapter to the history of the general branch of the trade and commerce clause in our Constitution. A decision on this important case is expected in the fall of 2011.
In the news:
http://www.financialpost.com/news/Quebec+Court+Appeal+opposes+ federal+securities+regulator/4541869/story.html
[1] Both the Federal and Provincial governments have the ability to direct reference questions to their Courts of Appeal on questions of Constitutionality.
[2] Robert J Frater and Peter W Hogg QC, In the Matter of a Reference by Governor in Council concerning the proposed Canadian Securities Act, as set out in Order in Council P.C. 2010-667, dated May 26, 2010(Appellants Factum filed at the SCC, December 17, 2010) at para 44, (http://www.scc-csc.gc.ca/factums-memoires/33718/FM010_Attorne y-General-of-Canada.pdf) [Canada]- The question focussed on whether the proposed Act fell within the federal powers over Trade and Commerce which are contained in section 91(2) of the Constitution Act, 1867 infra note 13.
[3] Canada at para 33.
[4] Canada at para 40.
[5] Reference re Securities Act (Canada), 2011 ABCA 77, 41 Alta. L.R. (5th) 145 [Alberta Reference].
[6] Québec (Procureur général) c. Canada (Procureur général), 2011 QCCA 591, 2011 CarswellQue 2938 [Québec].
[7] Section 91(2) of the Constitution Act, 1867, infra note 13, grants the Federal Government power overTrade and Commerce.
[8] Canada Supra note 2 at para 47.
[9] Ibid at para 50.
[10] E David D Tavender Q.C, E Brian Foster Q.C, L Christian Enns and Jordan C Milne, In the Matter of a Reference by Governor in Council concerning the proposed Canadian Securities Act, as set out in Order in Council P.C. 2010-667, dated May 26, 2010 (Interveners Factum filed at the SCC, February 10, 2011) at para 76, http://www.scc-csc.gc.ca/factums-memoires/33718/FM094_Inte rvener_Attorney-General-of-Alberta.pdf[Alberta].
[11] Ibid.
[12] Ibid at para 57.
[13] Constitution Act, 1867 (UK), 30 & 31 Vict, c 3, s 91(2), reprinted in RSC 1985, App 11, no 5.
[14] Ibid at s 92(13).
[15] Parsons v. Citizens’ Insurance Co. of Canada, 1881 CarswellOnt 253, All ER Rep 1179 Parsons[ ].
[16] Parsons at para 26.
[17] City National Leasing Ltd. v. General Motors of Canada Ltd, [1989] 1 SCR 641, 58 D.L.R. (4th) 255 [General Motors].
[18] This list was summarized in this fashion in01; 358211258Kirkbi AG v. Ritvik Holdings Inc. / Gestions Ritvik Inc., 2005 SCC 65 at para 17, [2005] 3 S.C.R. 302 [Kirkbi].
[19] General Motors Supra note 17 at para 36.
[20] Canada Supra note 1 at para 90.
[21] Ibid at para 91.
[22] Ibid at para 49.
[23] Ibid at para 29.
[24] Alberta Supra note 10 at para 40.
[25] Ibid at para 94.
[26] Ibid.
[27] Ibid.
[28] Canada at para 107.
[29] Ibid at para 105.
[30] Ibid at para 109.
[31] Ibid at para 118.
[32] Ibid at para 116.
[33] Ibid at para 117.
[34] Alberta Supra note 10 at para 95. [35] Ibid at para 51.
[36] Ibid at para 52.
[37] Ibid at para 96.
[38] General Motors supra note 17 at para 60.
[39] Canada Supra note 2 at para 132.
[40] Ibid at para 134.
[41] Canada Supra note at para 65.