By The Canadian Press
OTTAWA – The Supreme Court of Canada says the federal government broke the law in financing the employment insurance system by transforming premiums paid by workers and employers into an unconstitutional tax.In a 7-0 judgment, the court ruled Thursday the former Liberal governments of Jean Chretien and Paul Martin collected EI contributions illegally in 2002, 2003 and 2005.In those years, EI rates were set directly by cabinet without proper authorization from Parliament, violating the ancient constitutional principle of no taxation without representation.However, the court said Ottawa legitimately collected premiums in all other years since 1996 and rejected claims by organized labour that the Liberals deliberately ran up massive surpluses in the EI fund, then diverted the money to balance the federal budget and fund other initiatives.The Confederation des Syndicats Nationaux, one of Quebec’s leading labour organizations, had demanded that $54 billion in allegedly diverted premiums be returned to the EI system and used to fund future benefits to jobless workers.The court issued no order for repayment and suspended the effect of its judgment for one year in order to give the federal government time to sort out the legislative tangle.The confederation also contended that federal jurisdiction is strictly limited to providing such benefits, and that any training, placement or other social services should be left to the provinces. The court rejected that claim, as well.The dispute has its roots in the deficit-fighting efforts of Martin as finance minister under Chretien. Critics have long maintained the strategy amounted to balancing the federal books on the backs of the unemployed.The Liberals brought in legislation in 1996 that tightened eligibility rules for EI benefits but simultaneously opened the door to new training, education, placement and other programs.Critics say the government then went on to set the premiums charged to workers and employers at higher rates than were necessary to fund the reduced benefits and new programs.The result was a ballooning surplus in the EI fund – a revenue windfall critics said could be used first to balance the budget and later to support other Liberal initiatives that had no connection to EI.Opposition MPs, labour unions, business groups and Auditor General Sheila Fraser all complained repeatedly about the new regime but to no avail.The current Conservative government promised earlier this year to set up an independent Crown corporation to run EI on a break-even basis. But the Tories didn’t offer to restore the $54 billion diverted in the past.The confederation, backed by an aluminum workers union in the northern Quebec town of Arvida, launched a legal challenge to the system in 2003.Their claims were rejected by both Quebec Superior Court and the Quebec Court of Appeal, but for different legal reasons in each case.The Canadian Labour Congress intervened at the Supreme Court to back the demand for repayment of the $54 billion in diverted premiums.The CLC balked, however, at the idea of leaving training and other programs solely to the provinces. It urged the high court to maintain the federal ability to run such programs across the country.Federal lawyer James Mabbutt argued in May that the rules advocated by the unions would put future governments in a “constitutional straitjacket” in managing the system.Much of the dispute hinged on the interpretation of a 1940 constitutional amendment that first gave Ottawa the power to set up a national employment insurance system.The case also raised a host of related questions about federal taxation and spending powers and whether Ottawa had been poaching on provincial turf.