An Interview With Ed Kroft, QC, LLB, LLM, CGA (Hon.)
By Patrick Schryburt
Instead of Ed Kroft’s regular column, in this issue we turned the tables on one of Outlook magazine’s most popular contributors to discuss the latest developments in tax, including changes in policy and recent case settlements, and how they might affect taxpayers at both the individual and business level. To read more from this interview, please go to the cga-bc.org website.
Outlook Magazine: You have been writing the ‘Tax Matters’ column in Outlook for the past decade. What are the most significant changes you have seen in the area of tax law?
Ed Kroft: Speaking in general terms, I would point to the broadening of the tax base and the concurrent lowering of the tax rate as one of the most significant changes. I would also note that the introduction of the GST [in 1991] and the increase in the application of the General Anti-Avoidance Rule (GAAR) have also been important developments.
OM: Let’s examine one of those developments. In 1988, the federal Department of Finance introduced the GAAR, which essentially states that tax avoidance, while perhaps legal in the strictest interpretation, can still be abusive if it undermines the spirit and intent of tax law. As the tax community awaits the Supreme Court’s ruling in the Copthorne case (not yet released at the time of this interview), can you tell us what you expect and whether their decision – the fourth from this court to deal with the interpretation of the GAAR – will lift much of the veil of uncertainty that seems to blanket this area of tax law?
EK: In 1936, the Duke of Westminster case established that one of the fundamental principles of tax law – that taxpayers have the right to order their affairs as they see fit to minimize their taxes payable. Duke of Westminster essentially implied that a textual reading of a tax provision should take precedence. What is unclear is whether – and to what extent – the GAAR can erode that rule, particularly because case law in Canada has moved to a textual, contextual and purposive interpretation of statutes.
The Duke of Westminster principle was attenuated by the courts because of the belief that as the government passed statutory rules to close seeming loopholes, then people’s ability to arrange their affairs perhaps would be more limited. Every time a case goes to the court with respect to the GAAR, people wonder whether or not the judges will indicate if the principle in the Duke of Westminster case about organizing one’s affairs to minimize taxes is still alive.
Copthorne will again deal with the interpretation of the GAAR. Practitioners will be looking for the court’s opinion on what is the state of affairs with respect to statutory interpretation. We need clarity on whether you still look at the text, context, and purpose of legislation in order to decide whether a provision or series of provisions should be read in a particular way.
OM: So there may be some hope for taxpayers that the Copthorne ruling will provide a measure of consistency in how judges rule going forward.
EK: Sometimes practitioners find it hard to reconcile some of the court’s principles and it leads people to express the view that perhaps there’s a smell test that allows judges to decide how to determine whether a transaction is acceptable or not, rather than analyzing the words that are actually found in the statute. It leads people to become cynical about how judges read legislation when they see differing perspectives even expressed by the same judges in different cases.
OM: In your most recent column, you provided a preview of future case law, noting that the Supreme Court of Canada had agreed to hear the St. Michael Trust Corp. case, which deals with determining the residence of a trust. What are the potential implications of their ruling in this case?
EK: Let me first begin by providing a little background. The case will be argued on March 13, 2012, and it will deal with whether the residence of a trust, which is a legal relationship, is to be determined by reference to what is known as the ‘central management and control test’ or by virtue of the residence of the trustee who administers the affairs of the trust.
The St. Michael case, which is also known as the Garron case, is important for determining the Canadian tax residence of the non-resident trust. It will also be important for determining the residence of a trust for provincial income tax purposes. A lot of times taxpayers will set up trusts with trustees located in one province but with beneficiaries located in another. The question will be to what extent the residence of the beneficiary should hold any sway whatsoever.
The CRA has an audit program examining this issue and has taken a view that the residence of the trustee does not determine the residence of the trust for provincial income tax purposes. It is also necessary to look at the residence of the beneficiary. Given that the CRA is taking this position, it is necessary for taxpayers and accountants to recognize that the holding in St. Michael could have some significance, not just for offshore trusts versus Canadian trusts, but also with respect to the provincial income tax determination. So the case has broad implications.
OM: If you reflect broadly on Canada’s current system of taxation, what changes would you make?
EK: It’s never that simple, of course. In fact, I think that people who work in senior positions for the CRA have difficult jobs because they have to balance a number of interests in the administration and enforcement of taxing statutes. But for the sake of discussion, I would want tax officials to be more accountable for actions that are taken. In other words, I would want decisions that were made by tax officials and that were ultimately reversed and were found to be without any substance whatsoever, to be subject to some censure.
OM: Is there a danger that this could inhibit their ability to do their job effectively?
EK: Yes, I agree with you. However, I see the anguish of taxpayers and the frustration that taxpayers and members of the Association have felt when they have gone through the audit process where adjustments have been made – harsh adjustments – and the adjustments have been eliminated in due course. Taxpayers (and their representatives) are likely angry and frustrated because they feel these CRA adjustments could have been eliminated sooner. I’m not saying this as a general comment. There are many, many CRA folks who do their jobs faithfully, with a view to the duties they are bound to serve, and I know there are often legitimate differences of opinion. Besides, some taxpayers are not always right.
Nevertheless, if I could change things, I would. I have said many times in teaching and presenting seminars that when taxpayers deal with revenue agencies and tax authorities there is a unilateral exercise of power. Taxpayers who are at the whim of tax officials may have to go to court to compel them to act reasonably. Although there may be a legal remedy that one might seek to compel an official to act properly, most taxpayers do not exercise that right. Even if a remedy is sought, it might take years to obtain. Therefore, it’s hard for people to always obtain satisfaction. That’s why I would change the system to create more accountability and try to eliminate the need for people to have to resort to the ultimate legal remedy of a trial.
OM: What are some of the biggest challenges facing our members in the future?
EK: The economy is always a challenge for everyone. When economic growth is strong, there is more work for members, particularly for those who work in public practice. When the economy is slower, people become more demanding, more price sensitive, and it becomes more of a challenge for members from a risk-reward perspective. Members have challenges just like in other professions when the economy is not as vibrant.
Putting the economy aside and speaking from an income tax perspective, I think the challenges for all members – those in public practice and in industry – is that the government needs money to fund expenditure programs, and to the extent that government needs funds, it needs to raise revenues. When there is an imperative to raise revenue, and to ensure that tax revenues are stable for the purpose of budgeting, people from tax authorities have to verify and enforce, they have to do proper risk assessments, and they have to determine what taxpayers are most vulnerable to audit. This means there is more paperwork, more reporting requirements and more resources that have to be committed by accountants to tax compliance and verification and defence of audit.
OM: What are some other areas of concern that could dominate discussion in 2012?
EK: We are seeing continuing worldwide cooperation between governments with respect to initiatives that try to ensure that taxpayers pay the appropriate amounts of tax. Of course, what’s appropriate or not sometimes can be in the eye of the beholder. The definition of what governments might perceive as aggressive tax planning is something that is uncertain. Governments around the world say that aggressive tax planning occurs when people comply with the letter of the law but not the spirit of the law. And if you are a person who lives in a country like Canada, and wants certainty with respect to what you can and can’t do, it’s hard to run your business if people are going to question what the spirit of the law is and whether or not you violated the spirit of the law. That uncertainty coupled with economic uncertainty gives rise to concerns for people.
What do I see ahead? More compliance, more debate, more disputes and, regrettably, more cost. I would hope that what appears to be a growing adversarial relationship between Canadians and tax authorities would abate because it’s in the interest of business and it’s in the interest of individuals who are affected by these developments for there to be some sort of peace treaty concluded. The difficulty is that there are always going to be differences about how the laws are to be interpreted and concerns of tax authorities about the credibility of taxpayers.
OM: Thank you for speaking with us. We know the membership would welcome your insight into Copthorne after its release and when there has been some time for careful consideration.
EK: Thank you. I wish all CGA members and students health and prosperity for 2012!