Executive Summary: Key Legal and Evidentiary Issues

• Air Canada challenged the constitutionality of Ontario’s aviation fuel transfer tax under s. 2(4.1) of the Gasoline Tax Act.

• The airline argued that the tax impaired the federal government’s exclusive jurisdiction over aeronautics.

• A secondary challenge was based on territorial overreach, claiming Ontario could not tax fuel used on international flights.

• The court examined whether the tax interfered with the “core” of federal aeronautics power under interjurisdictional immunity.

• The court applied the Unifund framework to evaluate whether there was sufficient connection between the tax and Ontario.

• Both constitutional challenges were dismissed, and the fuel transfer tax was upheld as valid and applicable.

Background and nature of the dispute
Air Canada, Canada’s largest airline, appealed the Ontario Minister of Finance’s decision denying repayment of aviation fuel taxes levied under section 2(4.1) of the Gasoline Tax Act (GTA). This provision imposes a tax on the transfer of fuel into aircraft tanks in Ontario, regardless of where the fuel was purchased. Air Canada claimed that the tax was unconstitutional in two respects: first, that it interfered with federal jurisdiction over aeronautics, and second, that it exceeded Ontario’s territorial jurisdiction when applied to fuel used on international flights but purchased and delivered from Quebec.

Interjurisdictional immunity claim
Air Canada argued that because fuel is essential to flight, Ontario’s tax trenches on the core of federal jurisdiction over aeronautics, which includes aircraft operation. The court rejected this argument. It ruled that the transfer tax does not regulate aviation fuel or aircraft operations—it merely taxes a transaction occurring in Ontario. The court emphasized that taxation is not equivalent to regulation, and pointed to longstanding precedent confirming that federal undertakings, such as airlines, are subject to provincial taxes that apply generally, unless those taxes impair the essential federal function. Here, no such impairment was shown.

The judge found that there was no precedent supporting the idea that taxing aviation fuel constitutes a constitutional impairment. In fact, similar claims had been rejected by the Supreme Court of Canada in prior cases involving provincial taxation of airlines and fuel. Air Canada’s claim rested on a theoretical concern that Ontario could raise taxes to the point of impeding airline operations, but the court found this speculative and insufficient to trigger constitutional immunity.

Territorial jurisdiction challenge
Air Canada further argued that Ontario lacked territorial jurisdiction over the tax, as the fuel was purchased in Quebec and used in international flights. The court revisited earlier decisions—including Air Canada v. Ontario (Gen. Div.) and Air Canada v. Ontario (ONCA)—that had already upheld the Transfer Tax as valid. The court held that the location of the taxable event—the fuel transfer into the aircraft tank—occurred in Ontario, providing sufficient nexus.

Even under the more recent Unifund test, which requires a “sufficient connection” between the jurisdiction, the law, and the party affected, the court concluded that all elements of the transaction—transport, storage, and transfer—occurred in Ontario. The court dismissed Air Canada’s argument that Unifund created a materially new legal framework, noting that the prior precedents remained binding and that Unifund did not overrule them. The facts had not changed in any way that would justify departing from existing precedent.

Final judgment and outcome
Justice Penman of the Ontario Superior Court of Justice dismissed both of Air Canada’s constitutional challenges. The interjurisdictional immunity doctrine did not apply, and Ontario’s tax had sufficient territorial nexus to be valid. The court confirmed that section 2(4.1) of the Gasoline Tax Act is both valid and applicable to the aviation fuel used by Air Canada on international flights departing from Ottawa.

The parties had agreed on costs, and no refund was ordered. The ruling is binding for several other related appeals between Air Canada and the Ontario Ministry of Finance.