Municipalities are finding it increasingly difficult to fund the growing cost of local services and other municipal operations. Financial support from higher levels of government is limited, while increases in property taxes often face stiff resistance from the electorate. While certain municipalities have been given special powers to assess and collect tax other than just property taxes, most municipalities must rely on property taxes as their principal means of funding many of the services they provide.
Under these circumstances, most local governments have been compelled to consider user fees and regulatory charges to meet the growing cost of, and demand for, municipal services. Implementing new fees and charges requires special care as they are vulnerable to court challenges alleging that they are in fact taxes and therefore beyond the power of most municipalities to assess or collect. The cost and distraction of litigation is something every local government tries to avoid.
Fortunately, when properly implemented, user fees and regulatory charges are within the statutory authority of a municipality to enact. Importantly, the courts have provided guidance as to what constitutes a permissible user fee and regulatory charge and what is required to defend a legal challenge alleging a fee or charge is a tax.
WHAT IS A TAX?
In Lawson v. Interior Tree Fruit and Vegetable Committee of Direction  SCR 357, the Supreme Court of Canada established a foundation for this discussion by pronouncing that taxes met the criteria of being:
• Enforceable by law;
• Imposed under the authority of the legislature;
• Levied by a public body; and
• Intended for a public purpose
On their own, however, the above criteria are not helpful in distinguishing taxes from permissible fees and charges, which may also meet all of the above criteria. In later cases, the Supreme Court went on to further differentiate taxes, fees, and regulatory charges.
WHAT IS A PERMISSIBLE USER FEE?
In 620 Connaught Ltd. v. Canada (Attorney General), 2008 SCC 7, (“Connaught”) the Supreme Court of Canada established that:
19 It will be useful to first differentiate a regulatory charge from a user fee. A user fee, by definition, is a fee charged by the government for the use of government services or facilities. In the case of user fees, as stated by this Court in Eurig, there must be a clear nexus between the quantum charged and the cost to the government of providing such services or facilities. The fees charged cannot exceed the cost to the government of providing the services or facilities. However, "courts will not insist that fees correspond precisely to the cost of the relevant service. As long as a reasonable connection is shown between the cost of the service provided and the amount charged, that will suffice" (see Eurig, at para. 22).
The court does not insist on an exact balance between cost and fee but rather, looks for a “reasonable connection”. Accordingly,...