As with a jigsaw puzzle, we need to look at the picture on the front of the box before we start putting the pieces together. Hence, we examine the nature and meaning of taxes, the constitutional authority to levy them, the analytical framework of fiscal legislation, administrative considerations and the processes for dispute resolution. In addition, we look at the policy underpinnings of the income tax system and its role in economic and social structures.
I. The Federal Income Tax
The federal income tax is a charge that the government imposes on certain annual gains of individuals, corporations, or other taxable entities derived through labour, business, investments, and other financial dealings in accordance with the Income Tax Act (Canada) ("Act"). We tend to think about income tax law solely as a numbers exercise and a source of revenues to finance public expenditures. To be sure, revenue generation is the most significant purpose of the income tax law, but it is not its only purpose. Indeed, we can, and do, generate revenues from many other taxes such as, sales, consumption, and the "sin" taxes. Income tax also plays an important role in the development of public and political policies. Witness the number of tax promises made by all the political parties in the 2019 federal election.
Historically, taxes had considerable religious meaning and were a fundamental part of ancient Greece, and the Roman Empire. We can see the religious aspect of taxation in the Brancacci Chapel in Florence, where the fresco Rendering of the Tribute Money depicts the gods approving the Florentine income tax.
Modern income tax systems are less religious but no less zealous. Most tax systems were introduced to finance revolutions and wars. The Boston Tea Party, for example, was essentially a revolution against Great Britain's Stamp Tax on everything from tea to legal documents. Early tax levies were often referred to as "stamp duties" as in, for example, the hat stamp tax. The American revolution gave birth to the phrase "No taxation without representation", which is incorporated in the Westminster parliamentary system of Canadian tax law.1 The Canadian income tax statute was enacted in 1917 to finance the First World War and, indeed, was even called the Income War Tax Act.
However, income tax law has evolved beyond wars, and is now also concerned with social, economic, and political objectives. Income redistribution has become one of the dominant themes of tax legislation. Witness the debate in the United States in the lead up to the 2020 Presidential election.
Tax law is behavioral finance. Tax rules are used to invoke behavioural responses from taxpayers to respond to incentives and sanctions. For example, there are special tax rules to encourage Canadian culture and films [see: section 125.5], discourage investments in foreign magazines [subsection 19(1)], encourage digital subscriptions [see: section 118.02] and promote gender equality. The February 27, 2018 Federal Budget of 362 pages mentioned women 358 times.
Ultimately, taxpayers and tax administrators must be capable of understanding the law if they are expected to comply with it. This is not an easy task and has substantial deadweight financial costs in the form of administrative compliance and dispute resolution. The multiple purposes served by, and responses to, income tax law contribute to its complexity. As we pass through into the second century of the Canadian income tax system, it is useful to compare the size of the original statute of 11 pages with the current version of the Act of approximately 3,000 pages. The 2018 Budget alone extended to 362 pages, with a vast volume of technical amendments.
Since income tax is the appropriation of private property for public purposes, it inevitably creates friction between taxpayers, who want to minimize their taxes, and legislators, who seek new ways to curb "tax leakage". The tension results in prolonged and costly litigation. There is no alternative dispute resolution process in tax law. Middle income taxpayers have limited access to justice.
Income tax law has a reputation of being a difficult and dry subject. To be sure, tax law is difficult, but it is neither dry nor unpleasant. Yes, tax law is replete with difficult and obtuse language. Even Albert Einstein, conceded: "The hardest thing in the world to understand is the Income Tax."
Nevertheless, taxpayers must live with the statute as it is, and not with the one that they wish the legislators had written. Indeed, the most terrifying statements issued by politicians is when they say they want to "simplify" the tax system.
We must comply with the law or face severe sanctions. Advisors advise, litigators litigate, and judges adjudicate, on uncertain, changing, complex, and poorly drafted provisions. Tax litigation is long and expensive process beyond the financial resources of middle-income taxpayers, who bear the greatest burden of raising tax revenues.
Click here to continue reading.
1 The Westminster system is a parliamentary system of government modelled after that which developed in the United Kingdom. The term comes from the Palace of Westminster, the seat of the British Parliament. The system is a series of procedures for operating a legislature.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
