Posting: 049

April 26, 2013

Morality, Taxation, and Morning Coffee
This is a special edition of the Arnold Report, jointly prepared by Brian Arnold and Larry Chapman

Is there a moral obligation to pay tax? The topic is not new. Our Google search of “Morality and Taxation” yields many millions of hits.

This issue has received a lot of attention recently with Starbucks’ decision to voluntarily pay income tax to the United Kingdom after it was revealed that despite operating there for over 10 years, it had not paid any income tax. The public and the politicians have reacted with outrage against the tax avoidance strategies of multinational corporations  even staunch defenders of corporate interests, such as conservative George Osborne, the U.K. Chancellor of the Exchequer, who calls tax avoidance “morally repugnant” Not surprisingly, the media reporting on the issue has been simplistic and uninformative. Nevertheless, the issue is important and this type of incident can trigger significant repercussions. For example, the OECD Base Erosion and Profit Shifting initiative has likely received a real shot in the arm from the Starbucks affair.

As tax professionals, we realize that there are many reasonable explanations for Starbucks not paying any tax in the United Kingdom. We know about tax, the boundary between tax evasion and tax avoidance, and the sometimes subtle differences between acceptable tax minimization and aggressive tax planning. Although we are not moral philosophers, what we want to do here is to try and provide a foundation for a thoughtful conversation about the issue of morality and taxation. After some considerable debate, we have managed to agree on a few basic principles at the outset.

First, we reject out of hand the outrageously nutty comments that taxation is legalized theft or illegitimate confiscation of private property or that taxation can be resisted on the ground that governments just waste the money. We are not libertarians and we fully subscribe to the Oliver Wendell Holmes Jr. quote that “Taxes are the price we pay for a civilized society.”

Second, we lament the widespread lack of acknowledgement of the link between taxation and government services. Too many people – the media, politicians and our citizens – seem to believe that there is a free lunch when it comes to government services – we can enjoy them but someone else will pay for them. (As Senator Russell Long so eloquently put it: “Don’t tax you, don’t tax me, tax that fellow behind the tree.”)

Third, we also acknowledge that an inevitable element of self-interest is at work here; it is difficult, both personally and professionally, for us to accept that by advising taxpayers on tax minimization strategies we are acting immoral. But it is important for us to ask ourselves whether what we do is acceptable.

If a moral obligation to pay tax is to mean anything, it must be different from a legal obligation to pay tax. Consider the following example, suppose you receive an amount that you know should be included in your income but you also know that the CRA will never find out about the amount. Should you report the amount on your tax return and pay tax on it? We would say the answer is unequivocally, yes – you have both a legal and a moral obligation to pay tax in this situation. The fact that your legal obligation to pay cannot be enforced does not make it non-existent. That is why this is an easy case. The obligation to pay is supported by both legal and moral considerations. Therefore, it can be argued that the moral obligation is irrelevant.

So let’s think about a situation in which you have no legal obligation to pay tax. Say you win the lottery or get some other type of windfall that isn’t taxable but obviously makes you better off. Do you have a moral obligation to pay tax on the amount? Does a person who wins the Nobel Prize or a similar cash prize have a moral obligation to pay tax on the prize despite the specific exclusion in the Act for such prizes? We would be very surprised if anyone would say yes. It would be like saying that someone who makes a capital gain has a moral obligation to pay tax on the exempt portion of the gain.

So maybe morality becomes relevant only when someone takes positive action to avoid paying tax. In other words, do you have a moral obligation not to try to reduce or avoid paying your fair share of tax? This seems like a more difficult issue.

The law is quite clear on this issue. The foundational principle established in the Duke of Westminster case is that taxpayers have the right to arrange their affairs to reduce tax. This principle is equally applicable in the United States, as Judge Learned Hand has memorably said: “Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” (Gregory v. Helvering, 69 F2d 809 (2d Cir. 1934). And just in case you think he didn’t deal with whether or not there is a moral duty to pay tax, in Com’r v. Newman he said:
Over and over again the courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor, and all do right, for nobody owes any public duty to pay more tax than the law demands: taxes are enforced extractions, not voluntary contributions. To demand more in the name of morals is mere cant. (159 F 2d. 848 (2d Cir. 1942)).
In our view, most people would accept that there is a fundamental principle that persons who are members of a society have an obligation to pay taxes to finance public goods and services. Whether or not this obligation to pay one’s fair share of tax is a moral principle, we both agree it is impossible to operationalize such a fundamental principle without reference to the law. “Fair share” may a useful guidepost in setting up a tax system, but it is of little value when deciding how tax legislation should be applied to a particular taxpayer.

Recent comments by politicians that taxpayers who structure their affairs to legally minimize their taxes are somehow engaged in morally questionable behaviour are disingenuous and motivated by political considerations. The quantum of tax legally paid or legally avoided by a taxpayer is not a moral issue; it is not immoral to legally minimize your taxes. Taxation must be imposed in accordance with explicit rules that can be enforced.

So perhaps the question becomes, how far can you go in reducing your tax or in advising others to do so? Taxpayers, tax professionals, tax collectors and people in general will inevitably make different judgments about the acceptable boundaries of tax-avoidance strategies; and moral and reputational considerations may be important factors in those judgments for some people.

It makes no sense to discuss moral issues with respect to corporations, despite U.K. politicians’ calls for corporations to pay their fair share. Although corporations are persons under the law (for many, but not all purposes: a U.S. court recently rejected a commuter’s argument that he was entitled to use a traffic lane dedicated for vehicles with multiple passengers because his company’s constating documents were with him in the car), they are legal fictions; they don’t really exist. As a result, standards of morality can’t be applied to corporations in any meaningful way. They can be applied only to real persons – directors, officers, shareholders, and employees.

With this background, let’s look at the Starbucks affair. Starbucks, along with Google and Amazon, have been sharply criticized by U.K. politicians for not paying any (or enough) U.K. tax. This generated a consumer protest that could have had a devastating impact on Starbucks’ business in the United Kingdom. So Starbucks tried to do damage control – without perhaps talking to their tax advisers – by offering voluntarily to pay tax of 10 million GBP in each of the next 2 years, even if it doesn’t have any profit. It says this result will be achieved by not claiming deductions for intercompany royalties. Google and Amazon have refused to follow Starbucks’ lead.

The voluntary payment of tax by Starbucks is extraordinary. As tax people, we note that a voluntary payment of tax is not a tax; it’s a gift to the state. From a practical perspective, Starbucks is paying the tax to protect its reputation and its business. Other payments that it might have made to achieve the same purpose – charitable donations, advertising campaigns, carbon offsets – would be deductible for tax purposes. A voluntary payment of tax will not be. It is somewhat unclear to us how a voluntary payment of tax could be made. In practice, of course, taxpayers can voluntarily decline to claim the deduction of amounts to which they are entitled and often the tax authorities will have no reason to challenge such strange behaviour. That said, it is worth noting that the tax authorities are under an obligation to collect the proper amount of tax owing in accordance with the law – no more and no less.

Starbuck’s so-called voluntary payment of tax is a public relations gesture in response to public outrage about corporate tax avoidance. This is not a sensible method of extracting corporate tax. Starbucks is susceptible because of the nature of its business, but Google and Amazon are not retail businesses in the same sense as Starbucks, so they can decline to pay one penny more than they legally owe. That doesn’t seem fair, especially when we know that Starbucks, Amazon and Google are not special cases. Many other multinational corporations – and it isn’t limited to U.S. multinationals – are not paying any tax in many countries in which they do business, not just the United Kingdom.

We are nervous when companies like Starbucks volunteer to pay tax. How do we know that 10 million GBP per year is the right number – Starbucks’ fair share? – maybe it should be twice as much. A voluntary payment like this is not objective! It cannot be evaluated on legal or moral grounds but simply as a public relations gesture.

Starbucks is a commercial enterprise in a capitalist society. Its purpose is to maximize its profits within the law. The purpose of government is to regulate companies doing business and to tax them. So perhaps the United Kingdom should stop whining about foreign-based multinationals not paying their share – if Starbucks isn’t paying any U.K. tax that might be a clue that the U.K. tax system isn’t working properly. The United Kingdom could change the tax rules to make Starbucks pay more U.K. tax; however, that would run counter to the recent U.K. tax reforms to make the United Kingdom the jurisdiction of choice for multinational companies doing business in Europe. This may turn the issue into a political argument, but it certainly isn’t a moral one.

The role of tax professionals in assisting multinationals to avoid tax may require some serious soul-searching. Without our “creative” talents in manipulating legal relationships, complex legislation and tax treaties, this type of international tax avoidance would not be possible. We can, often do say, in our own defence – that if the law allows something or, more precisely, if it doesn’t prohibit something, then we are not only free, but have a professional duty, to advise our clients that they can do it. As noted above, the difficulty arises where the law is unclear or where the intent of the law is reasonably clear but the words of the law do not fully capture that intent. What is our responsibility then? As professionals, are we or should we be held to a higher standard of behaviour than other business people? If not, then what does it mean to be members of a profession?




  • Anonymous 4/25/2013 7:42:56 PM +2

    While believing that all taxation is state-sanctioned "theft" may "outrageously nutty", I question whether if it still "nutty" to view incremental taxes(e.g., temporary surtaxes on high income) in that light.

  • Kevyn Nightingale 4/26/2013 6:48:16 AM +3

    Brian, I'm concerned about the use of "we", particularly in respect of the "libertarian" comment. Who is "we"? If you mean the entire body of the CTF, I am certain you lack unanimity on that point, or even necessarily consensus.

    Tax may be the price we pay for a civilized society, but government is the great fiction through which everybody endeavors to live at the expense of everybody else [Frederic Bastiat]. Seen in this light, tax is at best a game played for advantage by everyone, and at worst, legalized theft by the politically astute (or lucky).

  • Larry Chapman 4/26/2013 9:56:45 AM +1


    Sorry for the confusion. The recent addition to the posting hopefully will clear it up. This version of the Arnold Report is a jointly prepared opinion piece written by Brian and me (Larry Chapman). Hence the frequent use of "we" throughout the text. It represents Brian's and my personal views and is in no way intended to be an expression of the collective views of the Canadian Tax Foundation. Brian and I hope that this report will spawn a less simplistic debate than has been seen to date in the media which has overlooked the complex issues involved in finding the difficult and often imprecise boundaries of acceptable tax planning.


  • David Spiro 4/26/2013 1:55:25 PM +2

    This piece is extraordinarily useful for starting an informed and intelligent discussion around the issues. I know that reading The Arnold Report is one of privileges of membership in the CTF, but if you'd like your call to action to resonate with the media, you may wish to consider making this particular piece more widely available.

  • Phil Jolie 4/27/2013 10:12:28 PM +2

    Most advisors do not want to be associated with planning that is not successful in court. That used to provide a reasonable limit to what got sold. Around 25 years ago, the courts swung towards "if it's not prohibited by specific words, it's fine", removing that limit. It put professionals in a bind, since many things that have an aroma of artificiality (weak currency loans?) provided great tax savings, to which their clients were entitled. How could they not participate in finding the next scheme? A lot of tax advisors would probably be overjoyed if the courts (buttressed by legislative amendments?) retired the Duke, struck down some planning and allowed them to act more as professionals and less as sales agents for magic beans.

  • Thomas McDonnell 4/29/2013 4:31:37 PM +1

    April 29, 2013
    Dear Brian and Larry:

    The topic of morality and tax practice is one that surfaces periodically. I recall that one of my earliest appearances on a CTF Annual Conference panel (1976) was on the subject of “Professional Responsibility in Tax Practice.”

    Let me add a few comments to those that your note is provoking.

    I believe the tension here is due to the very uneasy marriage of our moral obligation to share in the cost of maintaining the community in which we live and our legal right to minimize our own taxes. This is in many ways a forced marriage because as individuals we have very little practical input into how the taxes we pay benefit our communities, but we do have the legal right to take steps to minimize the taxes that are levied to support them. Add to that the fact that the parties to the marriage are far from perfectly reasonable, and often disagree on what is morally right, and you have a very confused public when it comes to questions such as the ones raised in your note. I’m not smart enough to provide a philosophical answer to the question: what’s my fair share of the tax burden? But I do have some thoughts about it.

    My starting point is the belief that you don’t get very far in trying to legislate morality. So trying to define a “fair share” that each of us should pay on moral grounds is doomed to failure. Some people think taxes are too low, others think they are too high. In this context, I don’t want my obligation to pay based on either of their personal beliefs. For me, this is what the rule of law is about when it comes to taxes. I don’t think we should apologize for saying, as we do as tax professionals, that tax planning is a morally neutral activity. Anything else leaves us at the mercy of the politics of the mob.

    The logical consequence of this view is that some of us will be perceived as paying less than we should, notwithstanding that our actions are perfectly legal. So be it. As Starbucks is learning, loss of reputation can be harmful to your (business) health. I happen to think that the way Starbucks has chosen to respond is naïve, but that’s not the point. If they feel shamed into contributing something more to the public purse, then they are morally free to do so. But their response should not be taken as a condemnation of anybody else’s right to take a different approach to tax planning.

    Let me conclude (at least for now) with a comment about the tax advisor’s role as enabler. Each of us will have a personal view as to what is acceptable when it comes to tax planning. I don’t believe that the more aggressive minded among us need apologize. It goes without saying in this discussion that we are talking about planning that does not cross the line into evasion. We should feel free to advise on aggressive tax plans as long as we continue to respect this line. However, it is not just the client that has to be concerned about reputational risk. Tax advisors should also expect to be examined in public when their involvement in aggressive planning becomes known. But it is up to each of us to decide whether accepting that risk is worthwhile in any particular case, not because of a misplaced sense of moral obligation, but based on our own view of what is appropriate to do in the circumstances.

    Thomas E. McDonnell
    Thorsteinssons LLP,

  • Robert Kepes 4/30/2013 3:05:22 PM +1

    Here are my random thoughts, not over coffee but over a fine Woodford. And I preface my comments by saying that ethics is far outside my area of expertise, which at every Budget seems to barely cover tax.

    I fully agree that characterizing taxation as theft or confiscation is unhelpful in this debate because it leads to a fallacy. In a democracy, if taxation were a form of theft then citizens would be stealing from themselves to redistribute the funds back to themselves.

    I think governments legislate morality all the time. Isn’t the Criminal Code based on what society thinks is immoral? Isn’t the Charter based on what society thinks is moral? Isn’t the in-field fly rule in baseball based on fairness to the base runner?

    Religion is often cited as the source of morality. With respect to the issue of whether there’s a moral obligation to pay tax, the Bible is no help. There’s no eleventh commandment Thou Shall Pay Tax! Unless it was on the third tablet that Moses broke in Mel Brooks’ History of the World Part 1. Regardless, it didn’t make it into the final version of the Book.

    If ethics is to help distinguish right from wrong, then doing no harm would seem to be a guiding principle. If no one paid tax, then the negative consequences seem obvious. It seems to follow that if not paying tax would be harmful, then one could conclude it’s immoral. Conversely, paying tax is moral because it is beneficial.

    However, harm may depend on what the tax authority does with the money. At the sake of proving Godwin’s Law, arguably it was immoral for Germans to pay tax to the Nazi regime (and therefore moral for them to reduce tax). It would follow that it’s moral for citizens to pay tax in a free and democratic society where the tax authority uses the money for a beneficial public purpose. I question whether spending $10 million on the Shania Twain museum in Timmins was a beneficial public purpose, but let’s just leave it that “beneficial” is an elastic concept depending on the eye of the beholder. Like GAAR.

    On the other hand, the example of paying tax to fascist regimes versus democracies assumes the taxpayer has the freedom to make the ethical choice to pay the tax. Choosing to pay tax to the Nazis would be immoral. However, the question of moral choices would seem to go out the window if citizens in either 1943 Germany or 2013 Canada are compelled to pay the tax. If taxpayers can go to jail for non-payment of tax, then in paying the tax have they really made an ethical choice? I think not.

    In fact, in distinguishing a gratuitous payment from a tax, Canadian courts have said that the essentials of a tax are that (1) it must be enforceable, (2) imposed by a public body under legislative authority and for a public purpose, and (3) compulsion is an essential feature. (Meyer v. The Queen 2004 TCC 199).

    It seems, then, that it may not be possible to conclude whether there is a moral obligation to pay tax. If one is compelled to pay the tax, then it’s not a moral choice. It wasn’t immoral for Germans to pay tax then and it’s not moral for Canadians to pay tax now – they have to pay it.

    And if there is no compulsion, then it’s a gratuitous payment and not a tax at all!

    Which leads me to think that if paying tax is not a moral choice, then the only framework is what the law allows and requires. Judge Learned Hand captured it precisely when he said that no one owes a public duty to pay more tax than the law demands. That also means the fisc can enforce no more tax than the law requires. Tax planning, even aggressive tax planning, is legal.

    Robert Kepes
    Morris Kepes Winters LLP

  • Terry Wichman 5/2/2013 10:02:23 AM

    Dear Brian and Larry

    I have read with great interest your thoughts on morality and taxation, and the thoughtful comments that have been offered in response. As a tax professional of more years than I care to remember, advising clients from multi-nationals to shopkeepers, I have frequently wrestled with this issue on a practical as well as philosophical basis. With regard to the latter I fully subscribe to the principles outlined in your article.

    It is the application of these principles in practice that is more troubling to me. Generally speaking I have had no trouble with aggressive tax planning except when it is designed to achieve results that clearly are contrary to the spirit and intent of income tax law. As Brian well knows from his involvement with the development of GAAR, clearly delineating this spirit and intent is often the problem. That is where the rubber meets the road, so to speak!

    Terry Wichman
    Dube & Cuttini

  • Phil Jolie 5/2/2013 11:38:00 PM +5

    You went to lunch with about twenty other tax practitioners. Everybody ordered several courses; you had four. At the end, one bill came for everyone. Larry and Brian decided that the only fair way to divide it was that everyone pay $25 for each plate they had ordered, regardless of what each one actually cost. You kicked in $100. But when Larry and Brian totalled the cash, it was short. They told everyone to kick in another $5, which you did. As you were all leaving, a smiling colleague commented to you that it had been a great $5 lunch. When you looked surprised, he explained that the direction from Larry and Brian had been to pay for each plate he ordered. "I ordered food. It came on a plate, but I did not order the plate. So I didn't have to pay anything on the first round. I only paid the $5." "Goodness" you replied "that IS a valid interpretation of what they said. That was very clever of you, and I admire your creativity!"
    When 33 million Canadians share the meal, and the directions of what each diner is to pay get more complex, it is less obvious but no less true that one person's excellent tax planning increases everyone else's lunch tab. It's legal. But what would you really have said to that colleague? It goes to Thomas' comment about what is appropriate.

  • Anonymous 9/17/2013 1:11:21 PM

    Every once in awhile I search back to see if anyone has come up with any refutation of Phil Jolie’s very simple way of framing the issue. So far, no one has. A question not addressed by Jolie is what is the “fair share” of each citizen. In his example, it is rather simple, everyone would agree that the “fair share” was $100 per person (with the possible exception of the one who not only contributed just $5 but admitted to it).

    Much of this is how we look at the world, whether we have a Hobbesian view of life that it is a “dog eat dog” world and “every man for himself” or whether we take a more positive view of our social contract with the state by recognizing that we get a lot out of our society and it is only right that we contribute our “fair share” to maintain it.

    So who then determines “fair share”? In a democracy that determination has to be made by our elected representatives. If you do not like the government we have then either you become active politically to change the government or its policies or you search for another country that is more to your liking. If you prefer living on an isolated island in the Caribbean then that is your choice. Adios. Just pay your bill when you leave.

    I do not think we have the right to decide for ourselves what is our “fair share” and then engage in aggressive tax planning to get our tax burden down to what we personally consider to be an acceptable level. That is anarchy. People who use this justification to engage in tax avoidance for themselves or their clients are in my mind no different (or better) than the “sovereignists” who dot the country burning their driver’s licences and denying that they are subject to the laws of Canada.

    For tax professionals there is obviously a difficulty with discussing morality in tax practice and this may explain why not many tax practitioners have taken up the offer by Brian and Larry to engage in this discussion. Large fees are not made by advising how to stay within the spirit of the Act but instead how to avoid the provisions of the Act in a way that does not land your client in jail or subject to large penalties. When did we start using the term “filable position”?

    There are only two rationalizations I have seen for engaging in tax avoidance. First of all, by “tax avoidance” I mean taking steps that are clearly outside the spirit of the Act. I find the term “abusive tax avoidance” as too pejorative. “Tax planning” is the term I would use for steps that are within the spirit of the Act. One can argue whether a Singleton transaction is or is not within the “spirit of the Act” but how many tax practitioners felt that the Lipson transaction (turning an anti-avoidance provision “upside down” to use the words of Bowman CJTC) was within the “spirit of the Act”? Without being disingenuous, I suspect there are not many who believe that “reverse attribution” is within the spirit of the Act (although admittedly this “not many” does include Binnie J. in Lipson).

    The first rationalization for engaging in such tax avoidance is that the Act is a very detailed statute and who knows what any specific provision means until the Supreme Court of Canada tells us? But we have moved past the “literal interpretation” approach of Shell Canada and Antosko and since Canada Trustco the Supreme Court of Canada has made it clear that the provisions of the Act are to be given a “textual, contextual and purposive interpretation”. After Canada Trustco should not any tax professional have to be fully satisfied in his mind that his tax plan accords with the “spirit of the Act”? In other words, when advising or writing an article on a “planning opportunity” should there not be a discussion in the advice or article as to why the “planning opportunity” accords with the “spirit of the Act” using a textual, contextual and purposive interpretation of the relevant provisions?

    The second rationalization for such tax avoidance is the attitude that I have described above which allows the planner to justify taking steps that the planner knows are outside the spirit of the Act as a way of fighting back against an intrusive state. This rationalization is not openly admitted but seems to underlie a lot of the justification for tax avoidance at least in its more aggressive forms. As argued above, this cannot be a legitimate reason for engaging in tax avoidance.

    To be engaged in a tax plan that the planner believes is outside the spirit of the Act is, in my view, not moral. Yes, it is immoral. There, I said the word.

    PS. With respect, I do not agree with Thomas McDonnell’s comment above that the line on “aggressive tax planning” is drawn at whether the advice can be construed to be counselling tax evasion. Certainly, as a lawyer, the ethical test is one that requires a lawyer not to counsel someone to contravene the law, not just the criminal law. There is no question that the line is not clearly demarcated when attempting to interpret a statute using a TCP approach but surely the line is not just where you cross into tax evasion.

  • Thomas McDonnell 10/16/2013 3:26:37 PM +1

    The previous contributor to this thread (9/17/2013) raises an important question about the morality of tax planning. I have some thoughts on this, and on Phil Jolie's post of 5/2/2013 in which he sets out an example of what he suggests is unacceptable tax planning.

    First to the question of whether tax planning is immoral. The previous contributor suggests that it is, based on his definition of tax avoidance as involving steps that are clearly outside the spirit of the Act. I have difficulty with this hypothesis. Speaking generally, we speak of a moral act as one that is "right," in the context of an action being either right or wrong. What do we mean by right or wrong? The answer may depend on the subjective views of the questioner. Some actions are accepted as morally as well as legally wrong in this country - murder is an easy example. But others are not so clear. For example, some people believe that consuming alcohol is immoral. While most in this country do not, those that do feel pretty strongly about the wrongness involved in drinking. In this example, the determinative factor in deciding whether an action is immoral is essentially a subjective one. I don’t think this sort of subjectivity is an appropriate way to measure the consequences of an action governed by a statute such as the Income Tax Act.

    Consider another example. Some people feel pretty strongly that personal tax rates ought to be higher than they are now (or lower, if you prefer). Does either belief make the current rate structure immoral? I don't think so. Why not? - Because the current rate structure is the one in force as a matter of duly enacted law. So suppose I file my tax return and apply a higher rate to my taxable income than required because I personally feel an obligation to pay a higher rate of tax. May I be accused (among other things) of acting immorally? I very much doubt it. But this illustrates (to me) the danger of looking at tax decisions as either moral or immoral. That characterization depends on a personal, rather than an objective, standard and as such is of little relevance where the consequences of an action are dictated by law. To anticipate my conclusion here, a tax avoidance step of itself is neither moral nor immoral. The only objectively relevant question here is whether the step is based on a supportable interpretation of the Act.

    This brings me back to the previous contributor's definition of immoral tax planning as one that involves steps that are clearly outside the spirit of the Act (my emphasis). This recognizes that there is often uncertainty whether a particular step is, or is, not in accord with the spirit of the Act. I assume that the contributor would agree that where the interpretation is unclear, there is nothing morally offensive in adopting a position that is favourable to the taxpayer. A more difficult case is one in which the plan depends on an interpretation that the planner feels is contrary to the spirit of the provision, but is nonetheless open on a literal reading of it. An example of this might be the case where Parliament did not consider the fact situation when the provision was enacted. The planner says to himself: it's clear to me that Parliament never would have left this gap if they had been aware of this particular set of facts. But he proceeds with his plan on the basis that the courts have been clear that it's not the court's job to fill in the gaps in the guise of interpretation. And let us suppose, as was the case in Spruce Credit Union, or in Collins & Aikman, that the CRA disagrees but the court refuses to support CRA's interpretation of the provisions. On what basis could it be said that the planner had acted immorally in putting forward the plan? As determined by the court, the steps involved were in accordance with the provisions of the Act then in force. But suppose the court does find for the CRA, does this make the plan retroactively immoral? It means that the planner was wrong in thinking there was a gap in the Act, but is this the kind of wrongness that we want to describe as immoral? What does saying so add to the argument against aggressive tax planning? Not much in my view, so I disagree with the contributor’s analysis on this point.

    Although I disagree with the suggestion that it is useful to label certain types of tax avoidance as immoral, I do think that such planning raises a different question, which I would put as follows: assuming a tax plan that is on the right side of the planning/evasion line, are there nonetheless non-moral constraints on proceeding with it? I think there are and that they can be found in the ethical standards that govern the legal and accounting professions. Both groups require their members to act with integrity and good faith. As a lawyer, I am ethically bound to advise my client on what the law is. If there is some uncertainty about its application in a particular case, I must advise accordingly. It’s not my professional responsibility to suggest that the client act in accordance with what the law might or should be. If I honestly believe that a certain position is supportable, even if I think it may not be a clear winner if it is taken to court, I should advise my client of this, and am ethically free to assist if the client decides to proceed with the plan. The fact that some other person may characterize the plan as aggressive (and immoral) is irrelevant. The ultimate approval of the planning in the Canda Trustco Mortgage and the Shell Canada cases illustrates this.

    But there will be other times when I believe that a proposed tax plan is not supportable on any reasonable basis. If so, I am ethically bound to so advise the client and to refuse to assist in implementing it. An example might be an individual or a Canco that wishes to reduce Canadian taxes by setting up an offshore subsidiary in a tax haven. If I believe that the client will not take the steps necessary to make the subsidiary legally and factually resident in the haven, but will file tax returns as if it were, then I cannot ethically assist in the implementation of the plan.

    With these thoughts in mind, let me turn to the example of unacceptable planning postulated by Phil Jolie in his comment of 5/2/13. Phil says that the colleague who refused to pay for lunch on the basis that Larry and Brian asked for a payment of $25 “per plate” and he only ordered food, not a plate, was complimented by Larry and Brian for his creativity and cleverness on the basis that his interpretation of “plate” was a valid interpretation of what they said. I don’t think so. Brian for sure and probably Larry, too, would have pointed out that “plate” is to be interpreted by applying a textual, contextual, and purposive analysis. Clearly, the clever colleague did not intend to buy a “plate;” he was only interested in the food that was served on it. The clearest indication of this is the fact that he didn’t leave the restaurant with the plate! I think the colleague would be forced to admit that his purported interpretation was unsupportable. So I don’t think this example adds much to the discussion. But Phil uses the example for another purpose, which is of a more serious nature.

    He says that when one taxpayer reduces tax otherwise payable in some way, the rest of us have to pay more to make up the shortfall in revenues. Conclusion: those who actively plan to reduce their taxes are not acting in the best interests of society as a whole. This is superficially appealing, but I don’t think it stands up to analysis. Suppose, for example, that I make a contribution to a RRSP. This entitles me to a deduction. If I reduce my taxes by claiming the deduction, am I acting contrary to the best interests of society as a whole? If you answer yes, then you’re really saying that each of us has an obligation to maximize our taxes by not claiming deductions otherwise permitted.

    Isn’t the conclusion to be drawn from this that I act properly whenever I claim a deduction (or credit, or favourable characterization of an amount) allowed by the Act? If so, the issue here isn’t one of morality, or ethics. As long as the claim for the deduction, etc. is supportable, nothing is gained by attaching some other label to it. What is important here is the principle that in a democratic society such as ours, we are governed by the rule of law. If, as a society, we don’t like the way the law operates in a particular case, we change the law. But when we act in accordance with the law as it is, we should not be criticized on the basis of some alleged moral or ethical principle.

    Thomas E. McDonnell
    Thorsteinssons LLP, Toronto

  • Anonymous 11/13/2013 3:26:42 PM +2

    I would first like to commend the above tax practitioners for engaging in this debate. As a lawyer who does not practice tax law but who has a reasonable understanding of the Income Tax Act, I find that I am in the unique position of not being on either “side” so to speak. I have to admit that I often tend to find myself on the Phil Jolie side but on the other hand I fully understand that we have to have a system that does ensure certainty and predictability for the taxpayer.

    As an aside, I do wish that commentators on decisions on GAAR would limit their constant references to the House of Lords 1936 decision in Duke of Westminster and focus on the requirement that the rule of law requires that its citizens are able to plan their affairs knowing what the tax consequences of those actions will be. I find it especially ironic that the 80 year old Duke is quoted when the House of Lords itself has at least in one of the Ramsay line of cases questioned whether the Duke would have fared so well today in England given the changing views (morality?) about what is and what is not acceptable tax planning. No one argues that a taxpayer has a right to arrange his affairs to reduce the amount of tax payable as long as he plays within the rules. The devil is in the details.

    Where I disagree with a number of commentators is that the law must be clear and concise when we are dealing with transactions that have a primary focus on reducing tax rather than simply carrying out a commercial transaction. I would have thought that this is exactly where there should be a “fuzziness” to discourage such transactions. What public purpose is served by having clear words to assist in aggressive tax planning? The key issue is to ensure that our laws allow most commercial transactions to proceed without hindrance from uncertain provisions. In my corporate commercial practice it is very seldom that the provisions of the Act create a level of uncertainty that in any way impacts the progress of business. It is only when tax accountants and lawyers attempt to recast the transaction in some way to make it more “tax-efficient” that questions arise. Having said this, it may be argued that the Canada Trustco and Copthorne decisions on the extended definition of a “series of transactions” have complicated too many legitimate commercial transactions.

    So back to morality. Is there a place for morality in a day to day tax practice? I appreciate that Brian Arnold’s question starts out asking as to whether there is a moral obligation to pay tax. I think the more interesting question is whether tax professionals, accountants and lawyers, have a moral obligation not to assist clients in a transaction that they believe to be contrary to the law. Of course, if the law is unclear then things are rather simple.

    There is no question that in the “real world” outside of the two professions, there is a strong belief that tax advisors have assisted their clients to avoid paying what should be their “fair share” (whatever that means). When the leaders of the OECD have on their agenda “Agressive Tax Planning” you know that they are not happy with the lawyers and accountants who assist in these transactions. As well, we have the “advisor penalties” in our Act and, although I am not familiar with the specifics, I understand that the IRS has rules that will limit certain advisors from practising US federal tax law if they have previously engaged in aggressive tax planning. So I find it hard to say that issues of “right and wrong” (ie morality) do not enter into the world of the tax planner unless he has blinders on. Morality may be subjective but when a majority hold the same moral views they often become the law.

    Having argued that “morality” should enter into a consideration of what a tax planner should or should not recommend to his or her client, the question is then how does it impact tax planners. For professionals, our legal “morality” is based upon the ethical requirements of our profession. I appreciate that Thomas McDonnell has above made a distinction between morality and “non-moral’ constraints” in which he includes (or equates) ethical standards. I think that the ethical standards of a profession have their underpinning on morality so I think we are talking about the same thing. But I would agree with him that what I would call our “legal moral obligations” are those found in our ethical standards.

    But when we discuss the ethical standards of a lawyer there are two duties. The one he rightly points out is the duty to fully represent the interests of the client and provide him with full information on his rights and not exclude some option that you find morally objectionable. However, an equally important ethical requirement for a lawyer is his or her duty to the state to uphold its laws and not to participate in transactions that are intended to get around those laws. I have often thought for that reason that tax litigation was a much easier area for lawyers than tax planning.

    I will follow up on what I think the duties are of a lawyer whether they are cast in the terms of ethics or morality but I would first like to suggest some areas of interpretation of the Act where tax planners do have some moral or ethical issues that they have to face.

    There are in my mind at least two principal ways in which the Act may be unclear. The first is where a specific provision of the Act could apply literally to a particular transaction but on a textual, contextual, purposive analysis, the advisor is quite sure that the provision was not meant to apply. Matthew is an example of this kind of uncertainty. The second is where there is clearly a “gap” in the legislation. Had the drafter thought about the fact situation, he would have dealt with it but he did not consider it. I would put Copthorne in this category.

    I would tend to agree with some of the commentators that in the Copthorne case there is a serious question as to whether GAAR should have been extended to “fill in the gap” based upon a textual, contextual and purposive interpretation of the provisions dealing with paid up capital. I would have no problem in representing a client wishing to preserve its paid up capital in that situation, advising the client that there could be a risk under GAAR. I think “fill the gap” cases at least in the past were much easier to deal with. But given Rothstein J’s approach to GAAR in Copthorne they may become somewhat more difficult because my reading of Copthorne suggests that Rothstein J is returning to his analysis found in the OSFC decision. This would suggest that the Supreme Court may be prepared to “fill in the gap” much more than what I would have otherwise thought. I thought Copthorne would be a win for the taxpayer.

    But what about the triad of “value shift” cases creating an artificial capital loss using existing provisions of the Act or what are called the “75(2) surplus strips”? On a literal reading of the Act, they work. But is it proper for a lawyer to assist clients in transactions of this nature? I have no problem with advising the client that such schemes are “out there” (if he asks) but I do have a problem in being involved in the execution of them.

    Another more difficult example which does not really fit into either of the above categories is an Antle-like transaction. Should a lawyer be involved in a transaction that utilizes a discretionary trust existing for days when there is no intention whatsoever that the trustee will exercise any discretion under the trust deed? Here we have a panel of the Federal Court of Appeal finding that the transaction is a “sham”. That means that the lawyers who structured this transaction were involved in a sham. Does any lawyer want to be anywhere near a transaction where a judge of the Federal Court of Appeal is even discussing why a charge of tax evasion may not apply to the false impression created by the documents in that case? This is what happens when lawyers do not ask themselves the question as to whether or not they should be part of such a transaction. On the other hand, what really is the difference between saying you have put in place a discretionary trust for a few days (or hours) with saying that you have a partnership carrying on business for a profit for three days in the Continental Bank case. Perhaps the lawyers in Antle could be forgiven for thinking this would be acceptable given the decision in Continental Bank. Does this show a changing attitude (morality?) in the courts towards what is acceptable tax planning or just the difference in the “fiscal morality” of one panel of judges? My guess is that a critical difference between these cases is the brazen attempt in Antle to avoid taxation in Canada of a capital gain that had accrued in Canada. These are the kind of things in which I do not think we as professionals should participate. This is a moral question.

    Without the use of some sort of moral compass, law firms and accounting firms can get into trouble. We only have to remind ourselves as to what happened to one of the most respected international accounting firms as a result of the Enron scandal. The underlying reason why this accounting firm is no longer in existence is that they applied a “literal” interpretation to the relevant accounting rules rather than a “purposive” one. We have to ask ourselves questions of what is right and wrong when conducting our practice. Whether this is cast in language of morality or ethics is somewhat academic because ethical obligations have their underpinning in morality.

    Returning to ethics, the ethical duty of a lawyer is not just to act with integrity and good faith as suggested by Thomas McDonnell. Surely there is a duty to conduct yourself with integrity and good faith. But the duty of a lawyer extends to the state to maintain its integrity and the law. That is the integrity of the state and its law not the integrity of the lawyer. At least in my particular jurisdiction that duty also includes an obligation not to “aid, counsel or assist any person to act in any way contrary to the law.” Schemes put together that clearly frustrate specific provisions (if not the spirit) of the Income Tax Act should be shunned by lawyers.

    To sum up, it is my personal view that lawyers and accountants should not be able to hide behind a “literal interpretation” of an existing provision or provisions of the Act to justify participation in the execution of the scheme where the professional, based upon his knowledge of the Act, is satisfied that it is outside a textual, contextual and purposive interpretation of the provision or provisions. This is exactly what happened in the Enron scandal. In my mind, it brings the practice of law into disrepute when lawyers are associated with schemes that are clearly outside the intention of the Act.

  • Joel Nitikman 5/11/2016 5:14:54 PM

    two tennis players are playing the final match of an important tournament. They are tied at two sets all and are playing a tie-breaker in the fifth and final set. The score is 7-6, for player A, so if A wins the next point, the match is over. Player B hits a shot when A is on the other side of the court. There is no way A can get to the ball. The ball is called in by the linesman. But A calls for an instant replay, and it shows that the ball was out by the smallest fraction of a nanometre. A wins the match. Afterwards, B says to A, you should have given me that point: you were totally out of position, morally I won the point.

    A's obvious response is, morality, shmorality. The ball was out, the rules say I win, too bad, so sad.

    That is my feeling about tax law (or Phil's "plate" analogy. If you write a rule, then you have to live by the rule. You can't say, well, yes the rule says this, but REALLY everyone knows we really meant THAT. If you don't like the rule, change the rule. If you REALLY don't like the rule, change it retroactively, with all the political consequences that entails. But don't write a rule and then complain that people are not following it on a moralistic basis. There's no such thing in tax law.

  • Phil Jolie 10/4/2016 8:19:24 PM

    Man, that was a long gap between posts!
    With respect, there is a fundamental difference between rules made by an authority to govern the conduct of two people neither of whom is the authority, and rules made by a group of people to govern the activity of that very group. The government that writes tax laws is not a third party imposing rules on us, it IS us (it is we?).
    Furthermore, there was no pre-existing view of who should win a tennis match (or any other artificial contest) before the rules of the game were invented; any game is entirely a creation of its arbitrary rules. In contrast, there was a pre-existing view of how the nation's tax bill should be divvied up even before the rules were first written: "fairly". That makes the tennis example irrelevant.