Recent examples include Apple’s CEO being called before the United States Congress to defend its tax strategy, and the suggestion in the recent American election by the media that the application of prior-year losses is a loophole.
Other examples include the so-called Panama Papers, in which leaked law firm files led to a public outcry about possible unreported offshore income, and the perceived unfairness of secret deals being granted by the Canada Revenue Agency under the voluntary disclosure program, as well as when the shareholders of Silver Wheaton last year launched a class action lawsuit against the company alleging fraudulent tax filings because of a disputed CRA reassessment.
The winds of public opinion toward taxes are changing and the Canadian government has been quick to take advantage, zealously issuing press releases to provide real-time updates to promote the aggressive audit of those named in the Panama Papers.
In litigation, allegations of sham — suggesting that taxpayers entered into improper transactions with an intent to deceive the government — are increasingly being added to government pleadings with little consideration as to the impact of such accusations on a taxpayer’s reputation.
Even if successfully defended in court, the tarnish on a company’s image from the assertion of sham will remain. Similarly, the language used by the government when publicizing the 2016 budget is concerning.
The government emphasized in the budget that it would provide the CRA with an additional $444.4 million over five years to “address tax evasion and aggressive avoidance.”
In discussing the expected returns from its increased investment, the government has been quick to conflate the concepts of legal tax avoidance and illegal tax evasion as being equally deplorable.
This is in direct contrast to our laws, which have long allowed taxpayers to organize their affairs to reduce taxation.
The principle is named after the Duke of Westminster, who famously won a 1936 House of Lords case.
The duke had restructured his gardener’s wages as a covenant to pay in order to make them tax deductible and the House of Lords endorsed his ingenuity.
In Canada, the Duke of Westminster principle is alive and well.
The Income Tax Act prohibits through the General Anti-Avoidance Rule only the most abusive tax avoidance — which is admittingly difficult to define and even harder to prove. Otherwise, the Supreme Court has continually affirmed the Duke principle, including in the recent decision, Jean Coutu Group (PJC) Inc. v. Canada.
Some taxpayers are so afraid of being tax shamed for non-abusive planning that they are accepting either legally indefensible reassessments or voluntarily paying additional taxes.
Starbucks famously paid 20 million pounds in U.K. taxes as a result of negative publicity. I have personally seen taxpayers walk away from, or settle at a discount, otherwise strong cases out of fear of the reputational damage that might arise from publicly engaging in a tax dispute.
There is no basis in Canadian law for voluntary payments of additional taxes. Taxes are calculated under the Income Tax Act with only limited taxpayer discretion mainly relating to the timing of deductions such as depreciation on capital assets or the application of prior losses.
In fact, taxpayers may be denied the assistance from the competent authorities under Canada’s various tax treaties for help to reduce double taxation that results from a taxpayer-initiated voluntary adjustment, as opposed to a post-audit government-initiated adjustment.
This leads to an interesting question for lawyers. In the event that a government, or public opinion, pressures or “tax mails” a client into voluntarily paying more taxes, what is our role as advocates? Should we sit back and let clients willingly pay additional taxes to avoid potential reputational risks or should we advocate for them to respect the rule of law and defend their rights to manage their tax affairs?
Perhaps the right approach is to fight by educating the public.
The next time an accusation is made that an infamous president-elect improperly used a loophole by carrying forward losses, an explanation should be given about how unfair it is to tax to businesses based upon arbitrary calendar years.
Startup costs can be substantial and markets are volatile, leading to possible losses between January and December of any given year.
It has been a long-standing principal of fairness in almost every tax system to allow such losses to be applied against other years’ profits.
That is not a loophole.
And when it is suggested that the CRA’s voluntary disclosure program unfairly lets people get off easy through secret deals, it should be explained that the only deal being offered is the waiver of penalties that are applicable only after the non-reporter is caught. Every dollar of newly reported tax must still be paid in full along with partial interest.
These are taxes that likely would either never have been collected or would have been collected only after an expensive and time-consuming audit.
The voluntary disclosure program has been an unmitigated success.
Despite operating on a shoestring budget, the program captured in fiscal 2014-2015 more than $1.3 billion of previously unreported income.
One thing is clear: In this day and age, while the duke may not be dead, he needs a better publicist.
Brandon Siegal is the founder of Siegal Tax Law, a boutique tax dispute resolution firm, and has experience with McCarthy Tétrault LLP and the Department of Justice. He can be reached at email@example.com.