“In quantifying a taxpayer’s tax liability under the Income Tax Act… is it ever necessary to evaluate the morality of a taxpayer’s conduct? As a matter of general principle, the answer should be no…. nothing in the Income Tax Act expressly permits or requires the Minister of National Revenue, or the Courts, to apply the Income Tax Act differently depending on the morality of the taxpayer’s conduct.” (Justice K. Sharlow in the Canadian Imperial Bank of Commerce case, Federal Court of Appeal, May 6, 2013.)
“It’s a crime against humanity every time a bright young person decides to become a tax lawyer.” (William Watson, Financial Post, May 23, 2013, p.FP11.)
“Mammas, don’t let your children grow up to be cowboys…
Let ‘em be doctors and lawyers and such.”
(Willie Nelson +Waylon Jennings, 1978.)
As a practicing tax lawyer, I take a lot of comfort from Justice Sharlow’s comment in the very recent CIBC case. It is a clear statement that bears repeating in light of the high level of confusion in the popular media these days about the interaction of tax planning and morality. Most of the confusion starts with the idea that there is something called a “fair share of taxes” that each of us should be paying. When I ask my non-professional friends to be specific about how much others should pay as a fair share, the answer usually boils down to “more than they’re paying now,” especially if any sort of tax planning is involved. When I suggest that the only fair measure is the amount legally required under the Income Tax Act, I can expect to be told that it’s not what’s legal that matters – it’s what’s “right” that counts.
In a way I think I know where my friends are coming from on this. Most of us don’t enjoy paying taxes, and we feel that we pay more than we should when it appears that “others” –read here the rich and large corporations – are getting away with paying less. It’s just not right that they should be able to use highly paid tax lawyers and accountants to help them avoid paying their fair share. So why would a highly respected appellate court judge say that morality has nothing to do with application of the tax rules?
The answer has everything to do with the relationship between the citizen and the state in a democracy such as ours. As citizens, we accept that the state will set the rules by which we agree to live together. Most of the rules will have the effect of limiting our freedom to act in some way, and, in the case of taxes, will take something from us that is otherwise our property. But we agree to the state doing this as long as the rules are clear and applied in accordance with their terms. Especially when it comes to taxes, no rational person would agree to a system in which the tax to be paid depends on the whim of the tax collector or the mood du jour of the general populace. If the rules as enacted allow for the reduction of taxes through legally permissible planning, then no one should be heard to say that following those rules is in some way immoral.
It is particularly ironic when the complaints about the evils of legal tax planning come from politicians, who, after all, are the ones who make (and change) the rules. It is disturbing (to me, anyway) that this irony is apparently lost on most of them, at least if I take their public complaints at face value. As the Economist noted recently (May 25, 2013, p.30), the “Lawmakers write the loopholes.”
A closing word about William Watson and Willie Nelson. I’ve quoted Mr. Watson out of context. The quote from his May 23rd piece is accurate, but was made as part of a general complaint about a tax system that makes it attractive for bright young people to become tax lawyers. Correct the system – by broadening the base, lowering the rates and eliminating loopholes – and the talent these people represent can be put to more productive uses. A sentiment with which I wholeheartedly agree, although I am not holding my breath waiting for that system to emerge. In the meantime, perhaps Willie has it right in suggesting that it is better to grow up to be a doctor or lawyer – although it’s probably significant that he didn’t recommend that growing up to be a tax lawyer is a good thing.