I have been a tax lawyer for about 50 years and I am amused at both the press and the profession’s reaction to the 2013 federal budget’s attack on Income Tax Act “loopholes.”
The finance department’s role is to screw down anomalies in the act that work to the benefit of the taxpayer.
The profession’s goal is to find new anomalies. The battle is constant and ongoing.
The public, as an observer, is at best bemused and at worst infuriated at how wealthier taxpayers can organize their affairs so as to pay the least amount of tax.
My first observation is that paying tax is not a moral issue. The act, like the criminal law, requires strict observance by the taxpayer. If the taxpayer does not pay legally assessed and owing tax, then there is a civil if not criminal remedy for collection. If the legislation strictly does not apply to the taxpayer or the taxpayer’s activities, then there is no moral obligation to pay the tax. The House of Lords settled that issue in the last century.
That said, if there is an anomaly in the legislation (“loophole”), it is up to the Department of Finance to fix it and Parliament to enact the fix. The legal and accounting professions are then off on another quest to find new anomalies.
Screwing down the tax system too tightly has its own downside. I was a consultant to the Department of Finance in the 1980s and was part of the budget process for several years. The department is made up of consummate professionals who are as likely to see tax anomalies as are members of the legal and accounting professions. Sometimes, correcting the anomaly costs more than leaving it in place. Other times, correcting the anomaly will have an adverse effect on other provisions of the act.
If the legislation is screwed down too tightly, taxpayers will go underground. You can be assured that where the anomaly makes the government look inept or stupid, the anomaly will be quickly fixed.
Looking at tax legislation alone does not give the whole picture of how the tax system works. For example, there is a provision in the Income Tax Act that deems a taxpayer to have sold his or her assets on the day before his or her death (in itself an anomaly since no one knows the day of their death).
This was enacted as a result of the abolition of the estates tax in 1972 and imposes a capital tax on the now-dead taxpayer’s estate.
But that’s not how it works in reality. In reality, a taxpayer with substantial assets will “freeze” the value of those assets and pass growth to future generations. This kind of planning quantifies tax liability on death where funding can take place through insurance policies, the proceeds of which, in themselves, are tax-favoured. Future generations may pay the tax but in my experience tax deferred is tax saved. Just factoring in inflation will have the effect of eroding the value of the tax when paid well into the future.
Why does the government allow this kind of convoluted planning? Because it was decided, long ago, that heavy taxes levied when a taxpayer dies are economically counterproductive. The taxpayer, having died, has no way to regenerate the deceased taxpayer’s estate. If the pressure-relief valve of estate planning were removed, wealthy taxpayers could fly off to some tax haven in the Caribbean and live free of tax.
So, as a matter of policy, this “loophole” is allowed to exist. There are many other so-called “loopholes” that make up a demilitarized zone between the Department of Finance and legal and accounting professions.
Screwing down “loopholes” is a way of raising taxes on the few while not raising taxes on the many. Several of the technical adjustments in the budget will raise almost $1 billion in revenues without raising taxes generally.
What I object to is when the technical adjustments are directed at what the government of the day calls tax cheats. That is just political posturing and part of the name-calling that has become the hallmark of current politics.
Let’s call it what it is. Finance and the government have decided, for good and valid reasons (sometimes) to pick up the slack in the tax system. Unless these adjustments have unintended consequences, it’s a good use of fiscal management.
Tax professionals won’t like it, but their clients will properly compensate them for finding new “loopholes.” And so the war goes on.
Bernard Shinder is an Ottawa tax lawyer and consultant in areas of international tax and trade.
