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Taxes and Duties

May 1, 2009

Question: Should a good corporate citizen go to any length to avoid taxes?

by Fil Fraser

The Case:
It’s tax time again. If you’re self-employed, you have until June 15 to file your return, although you should have already paid what you think you owe by the end of April. People will sit up nights looking for loopholes in the regulations. Some will even offer to sell you magic formulas to minimize your taxes. It’s no different with a publicly traded company. If you have shareholders, you have an obligation to them to maximize returns; thus, you may have the same motivation as a private owner. At the same time, Swiss banks are now backing away from secrecy regimes that allow people to hide wealth that should be subject to taxation. U.S. President Barack Obama has vowed to close loopholes which allow American businesses to avoid billions in taxes. Undoubtedly, Canada will not be far behind in implementing similar measures. Tax evasion is illegal, but the line between tax evasion and lawful tax avoidance can be hazy. To what lengths should the ethical corporation go to exploit the loopholes?

The Panel:
Ken Chapman:
a lawyer, blogger and principal in Cambridge Strategies Inc., a public policy consulting firm
Janet Keeping: a lawyer and president of the Sheldon Chumir Foundation for Ethics in Leadership
Harold Milavsky: former CEO of Trizec Corporation; serves on a number of corporate and non-profit boards

Harold Milavsky: There’s nothing wrong with loopholes. Eventually the tax authorities find out that there’s a loophole and try to close it. If they don’t do it correctly they sometimes open other loopholes. We have used them. It’s not against the law. I always think that it’s better to have that money in the hands of the people as opposed to the government because I think people can handle it better and use it better. It’s OK to use loopholes when you can find them.

Janet Keeping: A loophole is a tax provision that lets people off the hook, and we think that it’s inappropriate. That’s why it’s called a loophole. Otherwise we’d think it’s a legitimate deduction or credit. There’s not enough talk about bearing your fair share. I actually find some of the situations we encounter on tax avoidance or tax evasion perplexing. When some people say it’s perfectly all right to pay somebody in cash so that he won’t have to declare that income, I think, “You know, bud, if you don’t pay tax, somebody else is going to have to pay more.” What kind of fairness is that?

Tax evasion is illegal, of course. Most of us feel that we’re morally bound to obey the law except where it’s egregiously out of line with public values, such as [South Africa’s old] law on apartheid. There is always the notion of civil disobedience if one is morally and strongly opposed to certain laws. The Boston Tea Party – “No taxation without representation” – was a revolt against an unfair tax.

Ken Chapman: The law says you are entitled to avoid every possible tax you can. In fact some feel it is the duty of a citizen to arrange their personal and business affairs in order to do so. However it is illegal to evade legitimate taxes that you are responsible to pay. The tax laws are so complicated and constantly changing that it is impossible for mere mortals to know entirely what they are entitled to claim, and that has created the tax preparation business. If you want to maximize your avoidance possibilities, you pretty much have to have professional tax preparers do your taxes and that is still no guarantee.

Milavsky: With the increase in the number of professional tax advisers over the years and the tax authorities being made more aware of loopholes, most if not all of the loopholes have been closed. In fact, the tax authorities put in a General Anti-Avoidance Rule known as “GAAR” a number of years back to effectively give the tax authorities unilateral power to challenge any tax filing position. With GAAR in place, tax advisers are less willing and really unable to come up with any aggressive tax structure that would guarantee no challenge by the tax authorities. This effectively takes away much of the creativity of the tax advisers and places them more in a pure compliance role.

Keeping: The far more interesting thing to talk about concerns tax minimization. We’re taught as lawyers that taxation legislation is a different kind of legislation; it’s always to be construed as against the government. Hence you have this whole legitimate, at least legally speaking, activity of designing your own operations and activities so as to minimize taxation.

And most of us take advantage of the basic tools. It’s not so much a question of clear public policy, but we begin to feel a bit uncomfortable, if we are people of conscience, about taking tax-minimization strategies that are available, but that maybe have not been well thought out. We may think we shouldn’t be taking advantage of them.

For example, when I was ready to go to work as a lawyer, I set up a small consulting firm with a classmate, and an accountant said, “If you’re now running a consulting firm, you can deduct a portion of the mortgage payments on your house.”

I told him that I have an office and that’s where I do my work, and I’m not going to take a deduction on the mortgage payments on my house.

One of the things that worries me when accountants give you this kind of advice is that while I don’t know what the exact rule is in the eyes of the law, I certainly don’t want to be on the wrong side of it. And to just say that some accountant told me that I could deduct up to 20% or 25 % of my mortgage payments, I think, isn’t good enough. And if you combine that with a misgiving that I had under the circumstances, which was, “OK, I am running this consulting business but I’m not going to use my house to carry out that work,” that’s where I draw the line. I don’t care if the rules allow me to deduct a certain percentage.

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