1

A weak federal government, getting weaker iPolitics, INSIGHT, 17 October 2013 By James Matkin QC and Clive Cocking

There was something pathetic about the sight of Canada’s finance minister, Jim

Flaherty, flanked by the finance ministers of Ontario and British Columbia,

announcing on September 19th the creation of a new voluntary, “cooperative”

securities regulator.

It would involve Canada, Ontario and BC integrating their securities commissions as

a first step to encouraging the other provinces and territories to join in making the

agency into a national securities regulator by 2015. Why this diffident, cap-in-hand

approach to a widely-expressed national need?

Evidently this had become the path of least resistance after the Supreme Court ruled

in 2011 that federal legislation to unilaterally establish a national securities

regulator was unconstitutional because – despite having authority over trade and

commerce -- it would violate provincial jurisdictions. The federal government had

not in fact passed legislation; it had merely submitted a reference case following

opposition by Quebec and Alberta. The two provinces continue to fight the idea.

For decades Canada has been under international pressure to do something about

its inadequate patchwork of 13 security regulators. Among major industrial

countries, Canada is the only nation lacking a single market regulator able to

facilitate investment, protect investors and reduce white collar crime. In fact,

Canada has a poor record in combating money-laundering and stock fraud. The

financial community has long pressed for a strong national regulator, as in the

2

United States. It remains to be seen whether this “cooperative” venture will end that

inadequacy.

The pitiful impotence of the federal government to solve the security regulation

problem must have the Fathers of Confederation writhing in their graves. Sadly, this

reflects a much bigger problem. It is that Canada has strayed far from the

fundamental aim of the constitution drafted in 1867, which was to empower a

strong national government. Instead, we have become one of the most decentralized

federations in the world, ranking with Switzerland. Contrary to the founding intent,

and virtually unique among modern states, Canada lacks a true economic union with

internal free trade and its federal government is hamstrung to effectively manage

the national economy.

Modern-day Canada is trapped and frustrated by its own historic errors. The prime

cause is a long series of wrong-headed judicial decisions on constitutional cases that

has emasculated the federal authority, shifting power to the provinces. At the root of

it all has been equally wrong-headed politics. Chronically faint-hearted federal

governments, focused on cultivating voters in provincial-minded Quebec and, more

recently, Alberta, have acquiesced to and perpetuated this fateful trend to a

decentralized Canada.

The original national concept has been largely reversed. Canada as a nation began

with the British colonies coming together to counter the loss of trade reciprocity

with America. As John A. Macdonald said during the Confederation debates, Canada

wanted “unrestricted free trade between people of the five provinces”. George-

Etienne Cartier, George Brown, Alexander Galt and other leaders said the same. In

the British North America Act (now the Constitution Act 1867), the Fathers of

Confederation set forth their clear intention to have a strong economic union with

internal free trade. Instead, Canada today has a poor common market rife with

restrictions and the weakest economic union of any nation. So bad is the situation

that Canada often seems less of a nation than just a confederation of semi-

3

autonomous provinces with a currency union, some railways, interprovincial roads

and airports. Canada stands alone as the only federal country in the world bereft of

effective national regulatory authority over international trade and treaties,

securities and insurance, and employment and labour relations so essential to

economic success in an era of fast-paced global trade.

Defenders of strong national authority have not received much media-time in recent

years, compared to promoters of provincial rights. But various constitutional, legal and

political experts have documented how faulty court decisions, based on some egregious

misinterpretations, coupled with political inadequacy in Ottawa have crippled the

national authority over the most important aspects of our economy. As former Supreme

Court judge Ian Binnie wrote, the primary culprit is “the persistent feebleness of the

federal [constitutional] power over trade and commerce.”

A review of the Confederation debates and the Constitution Act 1867 reveals that

the founders were set on the national government having strong powers to govern

all matters of national interest. Three constitutional clauses clearly formulate the

federal power. First, the opening preamble (section 91) to the Constitution Act 1867

gives Parliament authority “to make Laws for the Peace, Order, and good

Government of Canada” in all matters not specifically assigned to the provinces.

Next, section 91(2) gives Parliament exclusive, unqualified authority for “The

Regulation of Trade and Commerce”. Finally, as a key goal of the founders, section

121 prescribed an economic union with free trade: “All Articles of the Growth,

Produce, or Manufacture of any one of the Provinces shall, from and after the Union,

be admitted free into each of the other Provinces”.

Losing internal free trade

For the first three decades of the new Dominion, the British Privy Council (then

serving essentially as our supreme court) extended a strong, centralizing

interpretation of federal powers based on the general “Peace, Order, and good

4

government” power. But from 1896 on, the Privy Council decisions changed

dramatically with the election that year of Laurier’s federal Liberal government.

According to constitutional expert Edward McWhinney, “The Privy Council

jurisprudence on Canada under [went] a sea change, characterized by a strong

decentralizing imperative...”. This is largely attributed to a series of privy council

judgments led by Viscount Haldane who, many other constitutional experts argue,

“tortured” the terms of the BNA Act to reduce the federal authority and increase the

powers of the provinces. The noted Eugene Forsey described the viscount as “the

wicked step-father of the Canadian Constitution”. His baleful influence continued

through a subsequent series of precedent-setting cases, notably in the 1920s, where

the courts pulled the rug out from under the constitution deciding most matters in

favour of the provincial authority and against federal laws to regulate the economic

union.

One “risibly wrong” judicial decision in 1921 (Gold Seal Limited v. The Attorney-

General of Alberta) alone nullified the constitution’s guarantees of internal free

trade, according to a paper written by constitutional law expert, Ian Blue. Defending

a prosecution by prohibitionist Alberta before the Supreme Court, Gold Seal, a liquor

merchant, argued that a new federal temperance act prohibiting transport of liquor

from Alberta to Saskatchewan or Manitoba violated internal free trade. Ruling

against Gold Seal, the court enunciated a wrongly narrow interpretation of section

121, ignoring the plain language of the clause, saying it prohibits only “the

establishment of custom duties” or “the levying of custom duties”, despite the fact

that the clause does not mention “duties”, which had never been an issue in

interprovincial trade. Mr. Blue also quotes a judge’s letter revealing how the case

was tainted by political collusion between the minister of justice and two members

of the Supreme Court. He concludes: “The Gold Seal interpretation, in effect, has

rendered section 121 completely impotent”.

Losing labour relations

Other judicial misreadings have similarly weakened the national role in labour

5

relations. Strangely, unlike all other countries the national involvement is less than

10 percent and has been confined to a few large enterprises in transportation, banks

and telecommunications. The reason is that since the quirky Snider case (1925)

ruling that labour relations in Canada is only a matter of “Property and Civil Rights”,

our constitutional law holds that the provinces have the dominant power governing

workers. That ruling set the pattern. The famous denunciation of the Snider

judgment by Harry Arthurs, a distinguished labour scholar, reveals its destructive

impact:

This characterization represents an impoverished and anachronistic view of employment relations as involving “merely private” arrangements and resting only on contractual (“civil”) rights. It forecloses the possibility that labour market regulation for public purposes — to enhance social protection, prevent conflict or promote economic growth — might have independent constitutional significance.

The broader view countered by Arthurs would recognize modern economic reality,

bringing under federal regulation the many Canadian enterprises involved in

international and interprovincial trade, export resource industries and manufacturing

that are not now covered by the Canada Labour Code. But the dead hand of Snider

continues to apply, perpetuating the inefficiency of multiple provincial jurisdictions in

much the same way as our provincial securities laws. Evidence that the courts have

repudiated any role or meaning for the federal government’s trade and commerce

provision in labour relations can be seen in a 2013 BC Supreme Court decision

concerning whether an international log export business, Canwood, was subject to

the federal Code. But arguments based on the federal trade and commerce clause

international prong as the basis for federal rule under the Canada Labour Code like

banking failed and appeals to the BCCA and the SCC fared no better leaving s. 91(2)

a dead letter.

Losing national securities law

The distortion of our fundamental law becomes even more incredible and

objectionable when we more closely examine how the federal government’s

6

proposed National Securities Act was blocked. It’s now a fair question whether the

Harper government was really committed to exercise its federal authority in the

national interest, or just to appear decisive while actually bowing to its provincial-

rights supporters. Ottawa could have chosen to rely on its trade and commerce

power to boldly legislate and let the chips fall where they may. But instead the

government opted to present a reference case, asking the Supreme Court to rule on

constitutionality, which was a feeble if not predictably doomed approach, judging by

past precedents. Reference cases have a poor record of success because they lack

concreteness. As distinguished American Justice Felix Frankfurter famously said,

reference cases are like “ghosts that slay”; which is exactly what happened to the

proposed securities law.

The federal government argued that the proposed national securities regulator fell

within Parliament’s power over general trade and commerce endorsed by expert

panels, which had concluded that fragmented provincial securities regulation was a

national concern warranting a national regulator. They argued the draft new law

preserved major capital markets to fuel Canada’s economy and maintain financial

stability, and that “this is a matter that goes beyond a particular ‘industry’ and engages

‘trade as a whole’.” As an intervener, the Canadian Bank Association contributed

strong arguments on the need and benefits of a national regulator:

Capital and securities markets are increasingly national and international; provincial securities regulation does not provide for the regulation of

systemic risk (i.e., the risk of the entire financial system failing); multiple provincial regulators increase regulatory costs and discourage

investment; multiple provincial regulators have slow regulatory responses; there is inadequate enforcement and inconsistent investor protection across

Canada; and Canada lacks a national voice on the international stage.

Despite the relevance of these facts in support of the federal authority, the justices

unanimously determined that proposed federal legislation represented an

unjustified “wholesale takeover” of securities regulation and as such was ultra vires

7

of the government of Canada. Referring to the need to maintain “the constitutional

balance”, the Court held that the new securities law would upset the balance of

power between federal and provincial governments. They said:

It is a fundamental principle of federalism that both federal and provincial powers must be respected, and one power may not be used in a manner that effectively eviscerates another. Rather, federalism demands that a balance be struck, a balance that allows both the federal Parliament and the provincial legislatures to act effectively in their respective spheres. Accepting Canada’s interpretation of the general trade and commerce power would disrupt rather than maintain that balance. Parliament cannot regulate the whole of the securities system simply because aspects of it have a national dimension.

This is a revealing and questionable doctrine, as University of Ottawa political

scientist Gordon DiGiacomo writes in a paper analyzing the Supreme Court’s

understanding of federalism in this case. He notes that in another case where the

balance doctrine arose, it was disputed by Justices Binnie and Lebel who argued that

this wasn’t really the court’s business: “the task of maintaining the balance of

powers in practice falls primarily to governments”. To Professor DiGiacomo, the

view expressed by the justices in the Securities Reference of where the balance of

power should lie is inconsistent with the founders’ intention and the words of the

constitution.

The justices strongly endorsed “cooperative federalism” without defining it. But

DiGiacomo notes that “while the Court has shown great sympathy for provincial

diversity and autonomy, it seems eager to dilute the powers that would give the

federal government regulatory muscle”. This was illustrated by the justices’ stated

preference to “take a restrained approach to the federal paramountcy power”.

Later, the justices sharply clarify their view of federalism in stating that: “The

Canadian federation rests on the organizing principle that the orders of government

are coordinate and not subordinate one to the other”. DiGiacomo says this is “the

most radical comment in the opinion.”

8

The ghost of Viscount Haldane haunts us still. It’s incredible that our Supreme Court

could so badly misconstrue the essence of our constitution. The justices’ description is

totally at odds with the motives of the colonies that came together to form Canada and

with the plain language of our founding constitution. Constitutional scholars, historians

and political scientists widely agree that Canada’s founders were dead set on making the

federal government the dominant government in the country. The provinces were given

appropriate defined powers (and some individually unique ones, as with Quebec), but the

federal authority was given sweeping powers to govern the nation, including its own

defined powers as well as all residual powers and even (though very rarely used) the

power to disallow provincial legislation. So professor DiGiacomo is correct, if unduly

gentle, in his criticism of the Court: “It is not the role of the judiciary to decide on cases

in a way that would render federal powers meaningless because of some vision of

federalism that it may hold. It is not its role to pursue a vision of Canada that would turn

it from a federation into a confederation”.

Nothing left but a fading smile?

Canada has clearly been led astray by a myopic, conservative and ultimately timid

judiciary. The continuing lack of courage by federal political leaders to defend the

original constitutional vision of strong federal authority over the economy has

contributed to our constitutional enfeeblement. Canada seems increasingly

handicapped in keeping up with fast-moving global affairs. The distinguished Chief

Justice Bora Laskin, in a speech 40 years ago, lamented the sad state of our division

of powers which remain unchanged today: “I know of no federal system in which the

constituent units have as extensive a regulatory authority as have the provinces of

Canada and in which the federal commerce power is as truncated as is that of the

central government.” He went on to list the missing powers which taken together

define a healthy economic union: “One need only look at the position in insurance

regulation, in securities regulation, in the marketing of natural products, in

manufacturing, in the retail, distribution and service trades, in labour relations.”

9

There are clearly areas of our constitution that need revision (the Senate for

example) but not the federal authority; it just needs to be accepted, dusted off and

put to vigorous use in modernizing this country. The first federal step should be to

finally forge a true economic union with internal free trade. Political reality of

course suggests that Ottawa should pursue “cooperative federalism” involving the

provinces in a partnership approach – while never losing sight of its need to govern

for the whole nation.

We worry that fear of federal action has perhaps entered the Canadian soul. Any

hint of the national government enacting strong legislation or otherwise boldly

using its powers in the national interest, has Canadians everywhere rushing to their

provincial ramparts. This has become a knee-jerk reaction in Quebec, which might

have been justified in an earlier time. Little wonder there is no sense of community

in Canada and that editorialists frequently lament our weak Canadian identity.

Throughout his 87 years as a scholar, social activist and constitutional expert,

Eugene Forsey was a staunch advocate of the original intention that Canada be "a

real federation, a real union -- une grande et puissante nation." On the occasion of

his funeral in 1991, his daughter, Helen, gave a eulogy well worth considering today:

Over the past few decades, various provincial governments have used their growing power to wage war on federal involvement in areas like labour, health care, and the environment. In too many cases, enforceable national standards aimed at ensuring equality and fairness have fallen by the wayside. As a result, we have suffered from an inter-provincial race to the bottom, as provinces compete to curry favour with the private sector and attract big-time corporate investment.

Dad warned that this trend would end up reducing the central government and Parliament to "mere conveniences, to do for the glorious and immortal Provinces a few things they cannot easily do for themselves." Canada would risk becoming nothing more than a collection of semi-independent minor states with little power or influence in an increasingly interdependent world.

Eugene Forsey is no longer here to respond in person to the Maxime Berniers of our own time. But his warnings, and the reasoning behind them, remain as valid as ever. "Our country," he noted, is "already [a very] decentralized

10

federation. How much farther can we go without making Canada a political Cheshire cat, of which, you may remember, nothing remained but the smile?"

James Matkin QC is an experienced lawyer and business leader, former director of the

Bank of Canada and BC deputy minister of labour and intergovernmental relations.

Clive Cocking is a veteran Vancouver journalist, currently western Canada

correspondent for The Economist.

Article originally published in iPolitics (www.ipolitics.ca) 18 October 2013.