Benjamin Alarie

Legislated Interpretation and Tax Avoidance in Canadian Income Tax Law

Predictable statutory interpretation helps ensure the reliable operation of contemporary systems of taxation. Tax liabilities that are not clearly expressed and articulated by legislatures lead to over-reliance on litigation as a means to enforce and clarify legislative intent. For this reason, modern legislatures continually amend and draft new tax provisions, reformulating existing rules and introducing new ones to address ever-changing social and economic environments. Moreover, legislatures also respond with amendments directed at judicial decisions with which they disagree, as well as the transactions and arrangements at issue in these cases. As these amended and new rules are then subject to application and interpretation by revenue departments, taxpayers, tax advisors, and the courts, all of which legislatures may respond to through further subsequent amendments, tax legislation at any given time can be regarded as the recursive product of an ongoing dialogue. At the same time, the proliferation of ever-more detailed provisions in tax legislation greatly increases the complexity of these statutes. The consequent tendency toward textual interpretation of tax legislation can facilitate tax avoidance that undermines the capacity of a tax system to raise revenue in a manner that is fair or equitable. For this reason, tax statutes like the Canadian Income Tax Act (ITA) typically combine detailed statutory provisions with more broadly-worded anti-avoidance rules that deny unintended tax advantages that might otherwise result from other statutory provisions. At the apex of these anti-avoidance rules stand general anti-avoidance rules (GAARs) like section 245 of the ITA. Section 245 denies tax benefits resulting from tax-motivated transactions that result in a misuse of other provisions of the ITA or other relevant enactments, or an abuse having regard to these provisions read as a whole. In order to “legislate” statutory interpretation, therefore, legislatures generally employ two different approaches: enacting detailed rules in response to changing circumstances and judicial decisions, while simultaneously directing courts to prevent abusive tax avoidance by applying more generalized standards that require them to go beyond or behind the text of the tax legislation in order to deny tax benefits claimed by taxpayers that conflict with the object, spirit or purpose of these provisions. As this paper explains, judicial experience in Canada demonstrates a tension between these two approaches, since the existence of detailed statutory rules can make courts reluctant to apply a general anti-avoidance rule that requires them to depart from the statutory text. This paper considers the GAAR in section 245 of the ITA as an example of legislated statutory interpretation, explaining the origins and structure of this provision and the extent to which it has shaped the interpretation of Canadian income tax law. Part II provides a background to the GAAR, contrasting the textual and formalist approach to tax statutes that was traditionally adopted by English and Canadian courts with the more purposive and substantive approach adopted by U.S. courts as well as English and Canadian courts in the 1980s and early 1990s. Part III explains the basic structure of the GAAR and the way in which Canadian courts have interpreted key elements of this provision. Part IV reviews key tax avoidance cases after the GAAR was introduced, illustrating a lingering affect of pre-GAAR interpretive approaches in the post-GAAR world, from which the courts have only begun to depart. Part V concludes.

Law in the Future

The set of tasks and activities in which humans are strictly superior to computers is becoming vanishingly small. Machines today are not only performing mechanical or manual tasks once performed by humans, they are also performing thinking tasks, where it was long believed that human judgment was indispensable. From self-driving cars to self-flying planes; and from robots performing surgery on a pig to artificially intelligent personal assistants, so much of what was once unimaginable is now reality. But this is just the beginning of the big data and artificial intelligence revolution. Technology continues to improve at an exponential rate. How will the big data and artificial intelligence revolutions affect law? We hypothesize that the growth of big data, artificial intelligence, and machine learning will have important effects that will fundamentally change the way law is made, learned, followed, and practiced. It will have an impact on all facets of the law, from the production of micro-directives to the way citizens learn of their legal obligations. These changes will present significant challenges to human lawmakers, judges, and lawyers. While we do not attempt to address all these challenges, we offer a short and positive preview of the future of law: a world of self-driving law, of legal singularity, and of the democratization of the law.

The path of the law: Towards legal singularity

Abstract:In the Harvard Law Review in 1897, Oliver Wendell Holmes, Jr., wrote that ‘[f]or the rational study of the law the black-letter man may be the man of the present, but the man of the future is the man of statistics and the master of economics.’ Now, nearly 120 years later, the future that Holmes foresaw is arriving. Much of the global population has transitioned from an analogue, paper-based world with unreliable, slow, and costly communication to a digitally connected world with almost universal real time and nearly costless communication. And within this digital world, we are witnessing substantially greater availability of data and improved methods of machine learning through advances in computer-assisted modelling and inference. The implications for law of an abundance of data of all kinds and dramatically more effective statistical tools are becoming visible. The ultimate consequences for law will be profound. I propose referring to the culmination of these developments as ‘the legal singularity.’ The legal singularity will affect all areas of the law. For the purposes of illustration, I focus my attention here on tax law. I predict that the coming decades will witness three gradual transitions as the legal singularity draws nearer: (a) improved dispute resolution and access to justice in tax law, primarily through the transition from our current reliance on standards (adjudicated ex post) to greater reliance on query-able systems of complex rules (knowable ex ante); (b) a transition to superior and increasingly more complete specifications of tax law (that is, a gradual transition from the complex, unwieldy, uncoordinated tax systems of today to tax systems that are massively complex and yet precisely and effectively distribute benefits and burdens); and (c) with the realization of the legal singularity, a complete specification of tax law (and, indeed, all of the other areas of law), which will thenceforth remain (more or less) in positive and normative equilibrium. The equilibrium achieved by the legal singularity will be a type of reflective equilibrium along the lines described by John Rawls in A Theory of Justice.

Panel selection on high courts

Outcomes of appeals to high courts will depend in part on the ideological preferences of the justices who decide the appeals. The institutional structure of a high court may affect how far these preferences influence outcomes. The US Supreme Court, for example, hears almost all appeals en banc, which means that there is no opportunity to ‘game’ the outcome by choosing which justices hear the appeal. High courts in other countries such as Canada, the United Kingdom, Australia, and Israel, on the other hand, hear appeals in panels of varying sizes and therefore provide potential opportunities for the choice of panel composition to influence outcomes. However, differing panel sizes also provide the opportunity to use judicial resources more efficiently, such as by tailoring panel size to the importance or difficulty of the particular appeal. In the article, we examine both these potential uses of varying panel sizes using data on how chief justices of the Supreme Court of Canada chose panels over the period from 1954 to 2013. We find some evidence of strategic panel composition but the practical impact of such gaming is negligible. In order to examine non-strategic motivations for why chief justices choose different sizes of panels, we develop a model for optimal choice of panel size. The model suggests that, in the presence of scarce judicial resources, panel sizes can be deliberately adjusted to improve allocative efficiency. Using data from the Supreme Court of Canada over the 1954– 2013 period, we uncover evidence consistent with our model’s prescriptions for optimal panel sizes.

The Challenge of Tax Avoidance for Social Justice in Taxation

The Occupy Wall Street (OWS) movement has been criticized for not having a tax policy agenda. Critics contend that it has “no message,” “no goals,” and “no leaders.” This contribution accounts for this policy agenda deficit. Various tax policy prescriptions that address social resource inequality, including a wealth tax proposed by Pikkety and Goldhammer (Capital in the twenty-first century, 2014), suffer from serious weaknesses. More specifically, I explain why the most salient of the income tax policy ideas (increasing rates) is not, on its own, a solution. To see why, consider the US. The US has high corporate income tax rates; nevertheless, large American corporations such as Apple, GE, Starbucks and Google have been able to reduce their effective corporate income tax rate liability below statutory rates, often close to zero. The crux of the problem is that increasing income tax rates leaves those confronting such rates with greater incentive to engage in various activities in order to avoid those taxes. It also increases the return from lobbying for tax changes that make avoiding that burden more possible. Therefore, increasing income tax rates is not the clear-cut effective policy prescription one might think it should be. The example of the Bush tax cuts for individuals, and certain kinds of capital income, illustrates that cutting income tax rates is also not the right approach. In many countries, claims that cutting taxes will increase tax revenues (i.e., that we “are on the wrong side of the Laffer curve”) are incorrect. Thus, if income tax rates are increased, it is not necessarily the wealthiest that will bear the greatest burden, and if tax rates are cut, it is not certain—or even particularly likely—that it will be the least well off who will benefit. OWS ought therefore not to be criticized for not articulating a message with respect to income tax policy. Recent developments show that popular political pressure on leaders has led the G20 to the right—albeit difficult—track. The best income tax reform is one of base broadening and increasing international tax cooperation, perhaps coupled with making a transition from reliance on income tax to a greater reliance on coordinated wealth taxes. Responding intelligently to demands for a more progressive tax system that promotes the realization of social justice will require us to confront difficult practical and political challenges. These tax policies are available only if the political will can be found to sustain their introduction and implementation.

Price Discrimination in Income Taxation

Governments throughout the developed world worry incessantly about the implications of sophisticated tax planning for their tax revenues. And yet the same governments routinely stop short of doing all that they can legally do to combat tax avoidance. Why? One response is that a thick conception of the rule of law constrains governments to adopt only certain kinds of responses to tax avoidance. Another response is that inherent structural limitations in tax administrative capacity or features of the political economy environment constrain the available responses to a subset of those that are possible de jure. Even considered jointly, however, the rule of law and political economy explanations do not provide an adequate account of the observed behavior of governments in the context of anti-avoidance. The main inadequacy is that the accounts fail to provide an explanation of the circumstances that will give rise to aggressive measures countering tax avoidance. This paper introduces the “integrated price discrimination” account of income taxation. The integrated price discrimination account provides an original and superior explanation of lax anti-avoidance. An advantage of the integrated price discrimination account is that it better explains the observed practice of most developed countries. Another advantage of the price discrimination account is that it does not require that governments adopt this counter-intuitive approach consciously; it could simply be an unintentional byproduct of decisions taken for different reasons. Several policy implications of the integrated price discrimination account are addressed.

Exploring the Source Concept of Income: The Taxation of Poker Winnings in Canada

The source concept of income is difficult to pin down in Canadian income tax law. It is elusive and defies simple explication. Nowhere is this more true than in the context of gambling winnings. In this essay, the tax treatment of poker and other gambling winnings is used as a window into how the Canadian courts have reasoned about the source concept of income. For the purposes of establishing and explaining the legal foundation for this essay, Part II canvasses the relevant Canadian income tax legislation and case law on gambling gains and synthesizes the results. Part III analyzes in general the case of the potential tax liability of poker players and suggests that based on the current state of the case law it is probably in only unusually active and financially successful circumstances that taxpayers would even potentially face income tax liability on gains from poker playing in Canada. Part IV concludes with linking the foregoing analysis to the source concept of income more generally.