Name of Case: Syndicat national des employes de l'aluminium d'Arvida inc. c. Canada (Procureur general)

Judgment under Appeal: Judgment of the Quebec Court of Appeal dated November 15, 2006

Facts: According to federal Auditor General Sheila Fraser's November 2003 report, the Employment Insurance fund was projected to show a $43.8 billion dollar surplus — about three times the maximum reserve recommended by the Chief Actuary of Human Resources Development Canada to comply with s.66 of the Employment Insurance Act. That section requires the Employment Insurance Commission to set premiums at a rate that "will, to the extent possible, (a) ensure that there will be enough revenue over a business cycle to pay the amounts authorized to be charged to the Employment Insurance Account; and (b) maintain relatively stable rate levels throughout the business cycle." Over the previous five years alone, despite lowering contribution rates, the Canadian federal government collected $29.9 billion more in employment insurance contributions than it paid out in EI benefits.

However, because EI premiums go directly into the federal government's Consolidated Revenue Fund, the surplus credited to the Employment Insurance Account, described as "an accounting fiction," has been applied to reduce the federal deficit.

Quebec's largest labour organization, the Confederation of National Trade Unions, and an aluminum workers' union launched constitutional challenges to the Employment Insurance Act, arguing that the federal government acted unconstitutionally by illegally collecting, appropriating, and spending the surplus while depriving the majority of unemployed Canadians of benefits.

The unions contended that the provisions of the Employment Insurance Act providing for "active measures" – such as public employment services and administration, labour market training, youth measures, subsidized employment, job sharing, and vocational training programs - encroached on the exclusive provincial jurisdiction to legislate in relation to "property and civil rights in the province" under s.92(13) of the Constitution Act, 1867. According to the unions, the federal government's jurisdiction in unemployment insurance matters under s.91(2A) of the Constitution Act, 1867 was limited to paying unemployment insurance benefits, and everything else fell within the provincial sphere. In addition, the unions argued that s.66 of the Employment Insurance Act was unconstitutional. Because the premiums were far in excess of the amount needed to sustain the program, the unions argued, they amounted to a hidden tax adopted by the federal Cabinet in violation of s.53 of the Constitution Act, 1867, which requires that any tax "shall originate in the House of Commons." The unions asked for a declaration that the surplus belonged to those who had contributed to it, namely, employers and employees, and that the federal government could not legally spend it.

The Attorney General of Canada maintained that "active measures" – such as the national employment service - had been part of the EI program since its inception and fell within the scope of the federal government's jurisdiction to legislate in relation to "unemployment insurance" under s.91(2A) of the Constitution Act, 1867. The fact that the federal government contributed no money to EI was irrelevant to the constitutionality of the statute, the Attorney General maintained. In addition, the government claimed that the choice of EI programs and the allocation of the surplus were political, not legal, issues, and were therefore not reviewable by the courts.

Case History: Judge Clément Gascon of the Quebec Superior Court dismissed the action, ruling that the impugned "active measures" fell within the scope of the federal government's jurisdiction to legislate in relation to "unemployment insurance" under s.91(2A) of the Constitution Act, 1867. In addition, Gascon ruled that the premiums did not constitute an illegal tax, and that the federal government had not violated the law by applying the surplus to reduce the deficit.

The plaintiffs' appeal was unanimously dismissed by the Quebec Court of Appeal. 

In dealing with the constitutionality of the "active measures" provisions, Chief Justice Michel Robert relied extensively on the judgment of the Supreme Court of Canada in Reference re Employment Act,[2005] S.C.J. No. 57 (QL), which dealt with maternity and parental benefits, and in which the Court held that "[t]he nature of unemployment has changed as prevailing conditions in Canada, and the needs of Canadians, have changed. Parliament must adapt its actions to new circumstances, in a manner consistent with the limits resulting from the constitutional division of powers. In a case such as this, where a specific power has been detached from a more general power, the specific power cannot be evaluated in relation to the general power, because any evolution would then be regarded as an encroachment. Rather, it is necessary to consider the essential elements of the power and to ascertain whether the impugned measure is consistent with the natural evolution of that power."

Reviewing in detail the history of unemployment insurance in Canada, Robert found that "it can be concluded that from the outset returning the unemployed to work was part of the objectives of unemployment insurance alongside the fight against the poverty caused by unemployment…. Since its creation, the unemployment insurance system has contained active measures…. These days, new forms of unemployment require adapting the measures intended to maintain the link between the unemployed and the labour market."

Based on the history of the federal jurisdiction over unemployment insurance, Robert found that, a national job placement program and programs linked to training were part of the unemployment insurance scheme from the outset and had always been contemplated in the transfer of jurisdiction to the federal government, and that job sharing was closely related to training. All these measures were therefore constitutional.

Robert then turned to funding measures such as supplementing very low wages paid to the previously-unemployed in order to enable them to return to work and gain experience, partial reimbursements to employers of wages paid to some newly-hired unemployed, job-creation partnerships, and financial assistance to the unemployed to enable them to start their own businesses or become self-employed. He cited the decision of the Supreme Court in the 2005 Reference regarding maternity and parental benefits, noting that "it appears that the power over unemployment insurance today authorizes a greater freedom of manoeuvre with regard to the objectives that can be pursued within a framework that corresponds to the essential elements of an unemployment insurance system. As for the measures that cannot validly be undertaken under this power, the federal spending power remains a sufficient justification."

In this regard, Robert noted, "all these measures of a financial nature that cannot be justified by virtue of the federal power over unemployment insurance have expressly been made subject to provincial agreement. Thus, it is provided that the [Employment Insurance] Commission must work in concert with the governments of each province to put into effect employment benefits and other support measures. As well, the agreement of a province is needed to implement measures related to training." He held that, based on these restrictions, "it is easy to conclude that the federal legislator does not intend to arrogate unto itself the power to legislate in matters of training and instruction aimed at returning workers to employment nor in matters of research, of innovation and of support or maintenance of employment or of return to the labour market. Consequently, it is impossible to conclude that these measures are unconstitutional. That being the case, the Court does not have the power to control how the federal government uses its spending power.

Justices Paul-Arthur Gendreau and Andre Brossard wrote the part of the Court of Appeal's decision dealing with the federal government's collection and use of EI premiums. Here too, the Court unanimously found no unconstitutionality.

Justices Gendreau and Brossard noted that "s.91(2A) of the Constitution Act, 1867 is not a provision dealing with the raising of money. It aims solely at giving Parliament a power of a social nature, unemployment insurance…. The power of Parliament to raise money for public purposes is conferred by s.91(3)." Therefore, they held, the unions were wrong to claim a direct constitutional link between the federal government's power over unemployment insurance and its raising of funds for the purpose. Rejecting the unions' contention that the federal government could not set EI premiums in excess of the cost of the services provided, Gendreau and Brossard emphasized that Parliament has power over "the raising of money by any mode or system of taxation," while the power of the provinces in this regard is strictly circumscribed by s.92(2)." Therefore, they held, "if the premiums imposed under the Employment Insurance Act are not costs, they are a direct or indirect tax, and either one is within the powers of Parliament."

Acknowledging that the EI fund has a "considerable, some would say excessive" surplus and that some people claim that the federal government is thereby overtaxing a group of citizens relative to others, the judges held that "these claims are of a political nature and everyone can evaluate them according to his own analytical framework and draw the conclusions that will determine his political action, but this is outside the judicial arena."

The judges also noted that, although the EI premiums go into the federal government's Consolidated Revenue Fund and surpluses in the fund must by law be applied to programs where there is a deficit or used to pay down the federal debt, these premiums are credited to the EI account and the Commission is a creditor of the government in that respect. Therefore, they considered, in the event of a major economic downturn leading to dramatically increased unemployment and much higher costs to the EI system, the government would be obliged to provide the necessary funds as debtor to the Commission with respect to the current surpluses, whatever effect that would then have on its books.

While the unions had argued that there was no explicit guarantee in the Employment Insurance Act that in the event of such a crisis the federal government would in fact provide the necessary funds rather than cut benefits or raise premiums, Gendreau and Brossard held, the government had ample means to deal with such a situation, including resorting to its borrowing power and incurring an overall deficit if necessary. They observed that the unions "appear to anticipate future bad faith on the part of the government, which nothing in the evidence supports, let alone allows one to presume." Even in the worst case scenario, if the government did in fact increase premiums or reduce benefits, "this would be a strictly political question, certainly of interest to all contributing employees in Canada, but one over which the courts have no power." Therefore, they held, the federal government's setting, collection and use of EI premiums did not raise any valid constitutional concern.

Issue(s): The issues on appeal include: (i) whether the federal government has exceeded its constitutional powers in respect of taxation and/or unemployment insurance in maintaining employment insurance premium rates at levels that have generated a substantial surplus in the employment insurance fund? (ii) whether the "active measures" provisions of the Employment Insurance Act encroach on the exclusive provincial jurisdiction in relation to property and civil rights? and (iii) whether the surplus premiums collected by the federal government pursuant to s.66 of the Employment Insurance Act, and used for purposes other than paying unemployment benefits, such as paying down the national debt, amounts to a hidden tax in violation of s.53 of the Constitution Act, 1867?

Status: The Supreme Court of Canada granted leave to appeal on May 24, 2007. 

Lancaster Reference: For a summary of the Quebec Superior Court's decision, see Lancaster's Pension and Benefit Law Reporter, November/December, 2003.