Posting: 02

November 13, 2013
H. Michael Dolson
Felesky Flynn LLP, Edmonton 

In his inaugural post for this blog, Phil Jolie argues that taxpayers who engage in legally permissible avoidance transactions that achieve results that might not have been intended by Parliament are immoral.  In the author’s view, the reasoning underlying this conclusion is suspect.  Moreover, assigning taxpayers to “moral” or “immoral” groups is inherently problematic, and necessitates the legalistic approach to taxation that Mr. Jolie disparages. 

To begin, it is trite to say that tax is a necessary incident of a civilized society; one need look no further than John Locke’s Two Treatises of Government to see this point made in a convincing manner.  Governments are necessary to avoid living in a state of nature and to eliminate the risks to one’s life and property posed by the state of nature, but they operate at a great expense.  Taxes are the manner in which this expense is paid, and everyone should pay a “proportionate” share of that expense from their estate (i.e. their property). 

Notwithstanding that property rights are secured through the government, property cannot be seized from citizens to pay for the government without their consent, which consent is secured exclusively through the legislature.  This Lockean principle was enacted in the English Bill of Rights, 1689, and is received constitutional law in Canada.  An individual’s income is his property, and, in keeping with this principle, can only be seized to the extent authorized by a democratically elected legislature. 
It is also useful to consider the purpose for the creation of societies.  With respect to Mr. Jolie, the author suggests that the principle purpose of an organized society may not be to take collective action, whether hunting mammoths or otherwise.  Rather, societies may be formed in order to safeguard property rights and to allow justice to be dispensed in a uniform and predictable manner, based on laws and not on the varying standards of those who observe transgressions of natural law.  

In this alternative conceptualization of society, the Palaeolithic hunter who captures the mammoth must give up some portion of the mammoth as a cost of living in a cave with other Palaeolithic hunters, where his mammoth is protected from other hunter-gatherers, where those who violate the rules of the cave can be punished in accordance with known rules, and where disputes can be resolved in a consistent manner.  It is not for the other inhabitants of the cave to give some portion of the mammoth to the hunter who killed it.  The mammoth is the property of the hunter, a product of his or her labour; nevertheless, he or she understands that, in accordance with the rules that the hunter agreed to when he or she decided to live in the cave, a pre-determined portion of the mammoth must be given up. 

Viewed through this Lockean lens, it is clear why a legalistic approach to taxation is not just a mechanism to arbitrate disputes, but the only approach by which tax could possibly be imposed in keeping with the principles on which our society is established.  All taxes are a confiscation of the property that society is intended to preserve, and can therefore only be imposed based on pre-determined rules that are known to every individual who may choose to live in that society.  In contrast, determining the proper allocation of the tax burden on the nebulous and unlegislated concepts of “fairness” and “morality” exposes every individual to the varying judgments of every other individual, a feature of the state of nature that societies are created to avoid.  In this sense, the Duke of Westminster principle is not a blessing of tax avoidance schemes – the rule that an individual cannot be made to pay more tax than is expressly authorized by Parliament in the taxpayer’s unique circumstances is simply a restatement of Lockean principles. 

Concerns relating to non-universal standards of “fairness” and “morality” are not abstract problems, and an example of legally permissible behaviour that reduces an individual’s tax burden that was not cited by Mr. Jolie can be used to illustrate this point.  This example involves the children’s arts and fitness tax credits, but this reasoning could be applied to many elective credits or deductions, including charitable donation credits.

Sections 118.03 and 118.031 of the Income Tax Act provide that an individual with children is legally entitled to claim certain tax credits if the individual’s child is enrolled in qualifying activities.  These credits are effectively elective, so a decision to claim the credits is properly characterized as a decision to minimize an individual’s share of the total tax burden.  Claiming these credits is thus a form of tax avoidance, albeit one that is explicitly sanctioned by Parliament. 

Suppose that the individual is a high-earning tax professional and a reader of the Canadian Tax Journal.  The individual is undoubtedly aware that these arts and fitness credits are likely of very little value in achieving their stated purpose of assisting parents with the cost of enrolling their children in organized arts or fitness activities that might otherwise be unaffordable.  A charitable person would describe these credits as “poorly targeted”, while a cynic would call them an exercise in “vote buying” or “retail politics”. Suppose further that the individual knows that, as a relatively affluent person, he or she would enroll his or her children in the qualifying activities regardless of whether or not the cost of the activities was subsidized by a tax expenditure. 

Is it “moral” to claim the tax credits in this situation?  Applying his own standards, the author would suggest that it may not be.  The hypothetical individual knows that these credits are not consistent with good tax policy, and that he or she is shifting the tax burden to other individuals as a result of his or her inelastic consumption.  The moral argument for claiming the tax credits is simply that they are found in the Act, and that Parliament did not specify that the credits cannot be claimed by individuals in these particular circumstances.  This would not satisfy Kant’s categorical imperative, a useful standard of morality: doing something because you can is not a desirable universal rule. 

 Is our hypothetical taxpayer able to defend against a charge of immorality on the basis that the author’s standard of morality is flawed?  No, this cannot be the case.  When one allows for actions to be measured using an inherently subjective and undefined concept such as morality, separate and apart from the laws enacted with the consent of the majority, one must allow for divergent standards, and the (figurative) war between men that results from each citizen applying his or her own subjective standard to the actions of others.  Furthermore, to believe otherwise would be to accept that taxpayers engaged in aggressive tax avoidance could completely resist Mr. Jolie’s allegations of immorality by simply stating that his definition of morality is incorrect, without any further explanation. 

Does the fact that claiming these credits will avoid only a minimal amount of tax impact the morality of the hypothetical taxpayer?  No, it cannot.  To define morality by reference to the amounts in issue is to explicitly acknowledge that the definition fails the categorical imperative, or to tacitly acknowledge that tax avoidance is moral – the principle can only be reduced to a universal rule if we accept that tax avoidance is an appropriate action in all circumstances. 

Can the hypothetical taxpayer claiming these credits truthfully state that he or she is more moral than the taxpayer engaged in aggressive tax avoidance?  No, he or she cannot.  In our Lockean conceptualization of property and society, there is no obvious reason why an elective reduction in tax payable by virtue of Parliament’s explicit authorization is any better than a reduction in tax payable by virtue of Parliament’s decision to remain silent.  The result is the same in either case: the income retained by the taxpayer always was, and will always remain, the property of the taxpayer, and Parliament has determined, either explicitly or tacitly, that it will confiscate only a certain amount of that property. 

In the author’s view, the problems illustrated by this hypothetical demonstrate why Mr. Jolie must be incorrect, and why legality and morality cannot be separated in the realm of taxation.  To allow for morality separate from the law is to expose the actions of every citizen to accusations of immorality that cannot be defended against by reference to any identifiable standard, and that could not have been known at the time that the action was taken.  By defining morality by reference to democratically enacted laws, we create universal standards and allow citizens to determine whether or not their actions are moral before they are taken, thereby avoiding the resulting (figurative) war between men, in keeping with the Lockean rationale for the existence of our society. 

The advantage of accepting that laws are the codification of morality is that a majority of citizens, acting through Parliament, may change the moral standards of society by revising the law to provide a remedy against immorality.  If a majority of citizens does indeed “vigorously resent” a particular tax avoidance scheme that cannot be defeated using the existing statutory remedies (such as the general anti-avoidance rule), then they may, through their elected representatives in Parliament, amend the legislation to reflect their judgment and to prohibit the use of that particular scheme in the future.  It will then be possible to say, with great certainty, that the use of that particular scheme is immoral. 

The argument against immorality having been made to the best of the author’s ability, it is unnecessary to write anything further.  To conclude, the inherently personal and subjective nature of concepts such as “fairness” or “morality” makes those concepts ill-suited for passing public judgment on the legally permissible behaviour of others.  What is “fair” and “moral” must be determined by reference by laws consented to by the majority, which may be changed in response to immoral behaviour.  While private judgments of morality will always be made, one gives up his or her right to compel others to act in accordance with a non-legislated standard of morality when one enters into society.  In the tax context, reducing one’s tax burden by acting on the silence of Parliament is not morally impermissible since it is legally permissible.


1 The author would like to thank Jon D. Gilbert and S. Dane ZoBell of Felesky Flynn LLP for their comments on this topic, many of which are incorporated into this blog post. The author would also like to thank Jeremy J. Herbert and Timothy P. Kirby of Felesky Flynn LLP for their comments on earlier drafts of this blog post. Any errors or omissions herein are the responsibility of the author. .


  • Phil Jolie 11/14/2013 11:54:17 PM +2

    John Locke lived in the17th century where until very recently, the monarch had owned everything and decided everything. Tax in that world was a unilateral confiscation of property by the power of the monarch without any consultation with the taxpayer about the amount of tax or the use to which it would be put. At the time, the idea that this power should be restricted was, literally, revolutionary. Like many great ideas, it has since become so widely accepted that it now appears trite. We all agree that the government's power to collect tax should be limited to the amount set by law approved by the people, without reference to any conception of fairness not explicit in the law. Moral considerations do not and should not result in an increase in the amount of tax that the government or society can demand from a person. You, John and I are all on the same side of that argument. My comments related only to the morality of aggressive plans that successfully reduce the person's tax. You get to keep the money; I am only asking whether you should feel guilty about it, and whether your acquaintances would think less of you if they knew about it.

    It is worthwhile to debate, as you suggest, the morality of government expenditures like the Children's Fitness Tax Credit (or like Old Age Security, foreign aid, Senate travel or any other) both from the perspective of the government and that of the person claiming their benefits. But raising the issue of claiming CTFC is a distraction from the specific question I posed about the morality of taking tax advantages that were clearly not foreseen by Parliament. Morality is or should be a factor in every decision that a person makes, but this cannot lead to the contradictory conclusion that it is not a factor in any tax-relevant decision, as you seem to suggest. Furthermore, it was perhaps disingenuous of you to describe the comparison between claiming CFTC and an aggressive tax plan in these words: “ ... there is no obvious reason why an elective reduction in tax payable by virtue of Parliament’s explicit authorization is any better [morally] than a reduction in tax payable by virtue of Parliament’s decision to remain silent.” The implication that Parliament had considered weak currency loans, leveraged donations, etc., and made a “decision to remain silent” on them before they were first implemented is very probably false. Your description also simply defines away the basis of my question about unanticipated tax benefits rather than responding to it.

    You argue that by “defining morality by reference to democratically enacted laws, we create universal standards and allow citizens to determine whether or not their actions are moral before they are taken.” With respect, morals and laws serve different purposes in society and have different drivers. There is a considerable overlap between their content and their goals, but they are not substitutes for one another. It is legal for an adult to have sex with the spouse of a sibling, but most would think it immoral because of the deleterious impact it could have on the families involved. It was illegal for Gandhi to disobey the laws of South Africa and colonial India, but few would say it was immoral. Laws define rights and obligations of a person that can be enforced by the government. Morals measure every action of a person against a standard that is internal and unique to each observer, including that person. They have no enforcement mechanism other than that person's conscience and the risk of societal opprobrium (or “passing public judgment on the legally permissible behaviour of others” in your words) but they effectively restrain our behaviour without any government involvement. Legality does not equal morality; a conclusion to the contrary would again define away my question. The flaw in your position is apparent in your assertion: “What is “fair” and “moral” must be determined by reference [to] laws consented to by the majority, which may be changed in response to immoral behaviour”. If morality is judged solely by reference to laws, how could any behaviour that conforms to those laws be immoral and require an amendment? Obviously, you recognize that behaviour can be legal and still immoral.

    Also, no one knows whether a particular tax scheme will be successful until after it is litigated. It is illogical that the affected taxpayers do not know until then if they acted morally, or that they were retroactively immoral if unsuccessful. The morality of an action can be determined long before its legality can.

    To restate, my position is that undertaking a tax scheme can be both legally effective and immoral.

  • Hugh Thorne 11/28/2013 9:07:52 AM +1

    both parties here seem to start with the assumption that the deceased mammoth is wholly the property of our victorious hunter and it is within that context the carving of the carcus is to be considered and morally judged.

    i would have to disagree with this assumption as it fails to consider that the skills and assets accumulated by this hunter were attained because our dweller lived within a group of similar cave dwellers. This collective systematically imparted on our hunter the knowledge and skills based on their current and historical hunting experiences. That our hunter was successfull bagging his mammoth only confirms that this a posteriori knowledge was effectively transferred to him over time.

    It is from this socialization event that arises the question of how much of our caveman's mammoth is to be collectively carved. So, as long as we allow the the framework of our discussions to be boxed in by moving the starting line to the point of our hunters kill, we will not be able to properly deal with the moral issues around how much of the kill should be shared with others.

  • Anonymous 12/3/2013 1:23:51 PM +4

    Hugh, you are getting into the discussion that was purposefully omitted from the original article: How much is an individual's fair share? 20%? 30%? 22.1273%? of what? These calculations are derived at by economists and politicians and are an art based on science, but not themselves a science.

    Everyone would have a different opinion on what the fair share is, but we have to accept that "it is what it is while it is" and you can try to influence that policy debate on a go-forward basis to the best of your abilities if you wish.

    The question being debated by Mr. Jolie and Mr. Dolson is "Should I avail of a tax benefit even though I know the government did not intend for me to have it?"

    Mr. Jolie wouldnt be able to sleep at night if he was taking such a benefit; whereas Mr. Dolson argues that, morally, we are not entitled to a dime of his money in the first place, so until the law specifically says we can take it, its his.

    Both are different views of morality, not different views of the interpretation of the law. I would suggest, as an irrelevant personal opinion, that the people in Jolie's camp are a happier, albeit slightly poorer lot; whereas those in Dolson's camp are the Ebenezer Scrooge's of the world: miserable and marginally wealthier, buried in a world of tedium. If you are an already presumably wealthy tax practitioner, you can choose to be in whatever camp you want. If you are a wealthy businessman who pleads ignorance to the tedium of taxation, you pay someone else to bury themselves in your tedium (Mr. Dolson), or you don't and remain ignorant (Mr. Jolie).

  • Anonymous 12/20/2013 4:20:22 PM

    In the July/August 2013 publication of Foreign Affairs, J. Bradford DeLong in discussing the causes of the 2008 Financial Crisis lays a great deal of blame on financiers and their lack of morality in believing they could take large risks to earn large bonuses knowing that they could make a killing and personally “get out” before the crash. What they did was legal. I have a lot of sympathy for this explanation as to why we got to where we are today possibly facing another decade of stagnant growth.

    In that article, DeLong says that “financiers should have very strong incentives not to walk up to the edge of defrauding the public”. This struck a chord.

    This discussion of whether morality should enter into decisions on what is acceptable tax planning has some of the same issues. I would rephrase the above statement and say that “taxpayers and their advisors should have very strong incentives not to walk up to the edge of defrauding the government”. There has to be a disincentive to engage in tax planning that tiptoes up to the edge of tax evasion. Should tax planners, lawyers or accountants, be engaged in tax planning that is described by the Federal Court of Appeal in Antle as a “sham”? Why would you want to be anywhere close to this line?

    I personally think that it is a “mug’s game” to try to convince at least a certain cadre of tax planners that a level of morality should be a part of their tax practice. You are basically asking them to reduce their livelihood by adopting a purposive rather than a literal interpretation of the Income Tax Act. Advising clients how to stay away from the tax cliff is just not as profitable as helping them walk along the edge.

    I suspect that the only real answer is to take the approach of the United States (that bastion of free enterprise) and adopt a significant penalty for transactions that are found to be subject to GAAR. Why is the Department of Finance dithering?

  • Sasan Ansari 1/26/2014 11:45:24 AM +1

    A Rejoinder to the Rejoinder and the Rejoinder's Rejoinder

    I read both the original post (11/08/2013) and the rejoinder (as well as the comments to both) with great interest. As Mr Jolie has identified some of the logical weaknesses in Mr. Dolson's rejoinder (acontextual reliance on Locke, example of strictly intended tax deduction – though not the mythical versions of society, whether in the state of nature or with stone-age mammoth hunters), I will attempt to add only to the question of morality and the law in taxation.

    The moral content of law and the legal content of morality has been an area of intense debate. The two pillars of the debate are Lon L. Fuller (see "Positivism and Fidelity to Law - A reply to Professor Hart" (1958) 71 Harv L Rev 630) and H.L.A. Hart (see "Positivism and the Separation of Law and Morals" (1958) 71 Harv L Rev 593). The debate is ongoing and I will not venture into it as part of a Blog Comment.

    However, I do believe that the common ground that exists between Hart and Fuller may be informative. Both agree that law and morality exist, though they disagree as to the state-action results of the breach or adherence to them. The same goes for our debate - both sides agree that morality and law both have roles to play - but in unlike Hart and Fuller there is no disagreement about the state-action results. Both agree that the state ought to do nothing where morality is breached, but they disagree about whether the person ought to feel guilty when an unintended benefit is conferred though the application of laws. It is in this difference between the legal effect of morality that I think the debate at hand is most fruitful. I will come back to this near the end of my comment.

    If I may venture to surmise – and I do this at the peril of being wholly wrong – Messers. Jolie and Dolson appear to differ on only the propriety of a personal feeling of guilt. They both appear to agree (or at least do not disagree) that income (I assume pre-tax market income) is property, that tax laws are rule, that income taxation is confiscation of that property, that this confiscation is only property when done through democratically enacted laws, (as said above) that outside the law the state ought to take no action when morality is breached, and in their assignment and timing of a person’s entitlement to market income. I too agree with all of the preceding points, save two: (1) that tax laws are rules; and (2) the assignment and timing of a person’s entitlement to market income.

    (1) that tax laws are rules

    Tax laws, as we as tax professionals are aware, are made up of a series of guidelines that set out the tax base, tax unit, tax rates, tax period, etc – the technical tax provisions that give shape to the area under taxation. Some of these guidelines are rules, while others are (as in many other areas of law) standards. Standards are intentionally nebulous guidelines that are meant to cover an area whose bounds are not known in advance, depend on changing circumstances, and are responsive to context. A common standard is the concept of “standard of care” in negligence torts – the aim of the standard is always clear but the content is responsive.

    In the income tax arena, a number of guidelines are standards. This is evinced by the existence and wording of the GAAR. As this is a discussion as to what ought to be and not what it, I will allow myself to venture outside of court decisions (as decisions though binding for the time being can be ultimately wrong). Where tax guidelines are concepts, the correct outcome is not the one obtained by narrow application of the words, but one that is achieved through a broad and liberal interpretation that achieves the intended outcome. For example, the children’s arts and fitness tax credits aims to give all persons who meet the pre-requisites a credit – it is a rule whose bounds are defined. However, let us assume (as I believe) that the Capital Dividend Account concept is a standard (not a rule) whose aim is to allow the tax free return to an individual investor of an amount equal to the tax free portion of any capital gains realised though a corporation. In applying this standard, any planning that results in more than the tax free portion of any capital gain realised being returned tax free contravenes the standard and would be wrong in law. This view of the matter takes the discussion beyond guilt to illegality. Morality’s interaction with the law becomes the requirement to apply standards in good faith to achieve the intended outcome – making spurious strict interpretation and application of standards both wrong and illegal. Though we may disagree as to which tax guidelines are standards and which are rules, I believe the above analysis to be acceptable by all.

    (2) The assignment and timing of a person’s entitlement to market income

    On my reading of the posts, the authors agree that a person’s property entitlement is pre-tax market income, and that taxation is a taking of that income that must be otherwise justified. Though I agree that tax law, like all law, must be valid before it is applied, I disagree as to the relation of this justification to entitlement of Income. Mr. Dolson, in his able argument casually dismissed a vital element. He states that “notwithstanding that property rights are secured through the government, property cannot be seized from citizens […] without their consent [being though taking to] the extent authorised by a democratically elected legislature”. It is the “notwithstanding” that I take issue with. I doubt that many would argue that a person’s entitlement to anything (under the rule of law) arises until the application to that “thing” of all relevant laws. For example, a person’s entitlement to real property in Canada is determined through the combined application of a variety of property granting laws, property dispersing laws, and property limiting laws. Though human emotion may mislead us, the reality is that a real property right is not violated by the application of expropriation statutes – a person’s entitlement arises only after the consideration of all the statutes that define the bounds of a person’s right.

    The same goes for “income” as property. Pre-tax market income arises from the application of only some of the laws that delineate the bounds of a person’s right – the property, contract, securities, corporate, etc rights created, granted, and enforced by government. There are a whole set of other laws – tax laws for example – that also delineate the bounds of that person’s right. No one can claim an entitlement until all relevant laws have been applied to the matter at hand, and therefore a person can only claim a right in, and therefore accuse the government of taking, after-tax income.

    It is the combination of the two arguments above – the legal effect of standards and the entitlement only to after-tax income – that I believe informs the morality-legality debate of aggressive tax planning resulting in unintended benefits (I narrow the context to be in line with the other authors). If we accept that morality requires a good faith interpretation of standards, then where standards are used to tax plan in a manner that frustrates the aim of the standards, the action is immoral and illegal. I acknowledge that the area for debate as to what in the income tax law is a standard and what is a rule, and what the aim of the standards are, but this openness to debate doesn’t counter the conclusion as to the legal and moral effect of standards in relation to tax planning.

    [A great deal that could be expanded on was left for future argument, and foreseeable rejoinders have been left unanswered, due to nature of this encounter – the blogosphere]

  • Hugh Neilson 1/28/2014 3:32:47 PM

    I attended a Round Table several months ago which began with a comment from a CRA representative noting the huge volume of documents which the CRA must process every year, and how simple human error renders some errors inevitable. He asked that we, and our clients, be understanding and patient as such matters are resolved.

    I found myself of two minds on these comments. On the one hand, if I am fair, probably the most remarkable aspect of true CRA errors is that they are as infrequent as they are. Human error, huge volumes and complex issues do combine to make errors inevitable.

    On the other hand, each and every document the CRA must process was prepared and filed by a taxpayer, with or without professional assistance. The CRA is a large organization which benefits from economies of scale, and the ability to specialize. I would suggest the vast majority of documents are processed by a person with equal or greater (often far greater) knowledge and experience in the particulars of the document and its underlying rules than the drafter or the filer. With that in mind, errors by those persons seem far more inevitable.

    And how does the CRA respond when such inevitable errors are discovered? In my experience, they demonstrate their own understanding and patience by imposing penalty and interest charges on the filer whose filing reflects that inevitable error. They will, of course, waive these on formal request, provided the circumstances of the error were truly extraordinary (ie not the usual cases where errors will inevitably arise).

    I think, if the CRA (or Finance, or Justice, or Parliament) expects taxpayers, and their advisors, to apply not only the letter of the law, but its spirit, consistent with the suggestion of morality in taxation, it would be appropriate for them to similarly administer the act in this spirit of fairness, equity and morality.

    Perhaps that might reasonably extend to a more generous interpretation of the Taxpayer Relief provisions, which might conclude that it is "just and equitable" that penalties applicable to honest, and inevitable, errors be waived.

    One of the questions at the Round Table in question asked that the CRA comment on circumstances where they would find it "just and equitable" that certain penalties be imposed and upheld. In their verbal response (the written response is yet to come), CRA indicated that it was not for them to assess whether a penalty was "just and equitable", but that this was a role of Finance, and parliament. The CRA was asked to consider the fact that Finance and Parliament has provided the CRA with the ability to waive any penalty or interest charge, within a ten year timeframe, in the for m of Subsection 220(3.1).

    Perhaps their eventual written response will consider the morality of upholding penalty charges on honest taxpayers making a bona fide effort to comply with the complexities of the Canadian tax system when they make one of these inevitable errors.