Is aggressive tax avoidance immoral? Some people think so, but I don’t. (I’ve been on this topic before – see my blog post, June 5, 2013, “Tax Planning, Morality and Cowboys”). The bottom line for me is this: if the rules as written allow for the reduction of taxes through legally permissible planning, then no one should be heard to say that doing so is somehow immoral.
Most critics of aggressive tax planning argue that a literal reading of the Act is somehow not “right” if it results in what they think is an unintended tax benefit. Instead of relying on the words as written, they would have us go behind the words to surmise what Parliament really intended when enacting the provision in question. My response is that if we believe in the rule of law, we should be very wary of buying into a system in which the obligation to pay a particular amount of tax depends on what someone feels should be right as opposed to one in which the obligation is determined by the words Parliament actually uses.
I got to thinking about this again when for some reason The Merchant of Venice came to mind. Shakespeare’s play tells the story of a kind business man (Antonio) who guaranteed a loan to a friend from a local moneylender (Shylock). The terms of the loan called for no interest, but included a tough forfeiture clause – a pound of Antonio’s flesh – if the principal was not paid on time. Antonio was unable to pay the loan when it came due and Shylock, relying on a strict interpretation of the loan agreement, went to court demanding his pound of flesh. Antonio was defended by what today we might call a clever tax lawyer (Portia). She made the case that Shylock was indeed entitled to a strict interpretation of the agreement, but pointed out that the agreement referred to a pound of flesh. No mention of blood here, so Shylock could only realize on his security if he could shave off a pound of flesh without drawing blood. The court agreed with Portia’s interpretation and, as I remember my reaction the first time I read the play, it was “awesome!” I doubt that I was alone in thinking so.
Fast forward to the assertion that it is immoral to rely on the actual words of the Income Tax Act in assessing the consequences of tax avoidance planning. I can’t imagine anyone suggesting that Portia’s defense was immoral because it relied strictly on the actual words used in the agreement. At least in the context of the play, we applaud her cleverness in saving Antonio this way. I’m not suggesting there is an exact parallel between the interpretation of a public statute like the Income Tax Act and the terms of a private agreement, but I do suggest that the way we react to Portia’s defense is instructive. There is a basic fairness in the proposition that where the meaning of the words is clear, they should be applied as written.
Some will nonetheless argue that it seems unfair to apply the plain meaning if the result exploits a gap in the Act. While I recognize that some may feel this way, I suggest that the emotional reaction is irrelevant in a system based on the rule of law. And I should point out that strict interpretation does not always favour the taxpayer. Any experienced tax professional knows of cases in which a court regretfully dismisses a taxpayer’s appeal saying something like: “The result in this case is patently unfair to the taxpayer but, unfortunately, this court is bound to apply the law regardless of any unfairness this may cause.” See the OK Payday Loans Inc. case, 2013 TCC 17, for a recent example.
Unfairness can (and does) work both ways when the subject matter is the application of a provision of the Act. For me, unfairness (of either kind) has nothing to do with morality, and I think we are better off not trying to conflate the two. The underlying issue here is the proper interpretation of the words used by Parliament. To be very specific, a system based on the rule of law depends on what the words actually say and not on what someone wishes the words would say. Consider the implications of accepting an “even if it’s legal, it’s not right” approach to interpretation. How would we govern our conduct if there was no certainty that the rules as written would govern? We would object strenuously to any decision in which a judge rejected the legal approach to statutory interpretation in favour of an approach based on a personal view of what was “right.” The correct application of the tax rules in any specific case is often unclear – that’s why there are so many reported tax court decisions each year. Even in cases where the tax plan is aggressive, the courts may agree that the taxpayer has correctly applied the provisions of the Act, as the 2005 decision of the Supreme Court in the Canada Trustco Mortgage Co case makes clear. Adding a requirement that the plan be morally “right” would create impossible hurdles for the taxpayer, the CRA and the court. Whose standard of “right” would govern?
That is not to say that non-legal factors are necessarily irrelevant when considering an aggressive tax plan. For the taxpayer, even if the plan is upheld there may be reputational risk involved in adopting it: consider theStarbucks experience in the United Kingdom. And for the professional advisor, the applicable rules of professional conduct may impose ethical constraints when opining on the plan. I’ll return to this ethical issue in a subsequent posting.