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UBC Theses and Dissertations

Tax avoidance : the Canadian experience 1992

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TAX AVOIDANCE — THE CANADIAN EXPERIENCE by JANE HEDDLE MICHIE LL.B (Hons), Aberdeen U n i v e r s i t y , 1990 D.L.P., Aberdeen U n i v e r s i t y , 1991 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OP THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS i n THE FACULTY OF GRADUATE STUDIES (FACULTY OF LAW) We a c c e p t t h i s t h e s i s as c o n f o r m i n g t o t h e r e q u i r e d s t a n d a r d THE UNIVERISTY OF BRITISH COLUMBIA September 1992 (c) Jane Heddle M i c h i e , 1991 In presenting this thesis in partial fulfilment of the requirements for an advanced degree at the University of British Columbia, I agree that the Library shall make it freely available for reference and study. I further agree that permission for extensive copying of this thesis for scholarly purposes may be granted by the head of my department or by his or her representatives. It is understood that copying or publication of this thesis for financial gain shall not be allowed without my written permission. Department The University of British Columbia Vancouver, Canada DE-6 (2/88) ABSTRACT S e c t i o n 245 was p r o p o s e d as p a r t o f t h e t a x r e f o r m package i n i t i a t e d by t h e government on 18 June, 1987. I t i n t r o d u c e d an extended g e n e r a l a n t i - a v o i d a n c e r u l e i n t o Canadian t a x law. The r u l e has been i n e f f e c t s i n c e September 13, 1988, b u t has y e t t o be j u d i c i a l l y c o n s i d e r e d . T h i s paper a d o p t s a methodology w h i c h i n c o r p o r a t e s a p o l i t i c a l p e r s p e c t i v e . I n p a r t i c u l a r , t h e r u l e i s a n a l y z e d w i t h i n t h e g e n e r a l e n vironment - t h e s o c i o - p o l i t i c a l , economic and h i s t o r i c a l backgrounds - i n e x i s t e n c e a t t h a t t i m e . I t was f e l t t h a t s uch an approach was n e c e s s a r y t o e x p l a i n c e r t a i n i s s u e s . F o r example, why t h e Canadian government d e c i d e d t o i n t r o d u c e s e c t i o n 245 and why c e r t a i n m o d i f i c a t i o n s were made t o t h e p r o p o s a l i n i t s passage t h r o u g h t h e l e g i s l a t i v e p r o c e s s . O v e r a l l , t h i s paper hopes t o e x t e n d our u n d e r s t a n d i n g o f t h e r u l e by e x p o s i n g t h e f a c t o r s w h i c h c r e a t e d a f a v o u r a b l e p o l i t i c a l e n vironment f o r t h e enactment o f t h e p r o v i s i o n . TABLE OP CONTENTS Page ABSTRACT i i TABLE OF CONTENTS i i i ACKNOWLEDGEMENTS V CHAPTER I - INTRODUCTION 1 A. G e n e r a l 1 B. M e t h o d o l o g i c a l Approach 7 CHAPTER II - SECTION 245 22 A. S e c t i o n 245 - I t s R e c e p t i o n 22 B. S e c t i o n 245 - I t s S ubstance 25 C. S e c t i o n 245 - E x t e r n a l A i d s t o I n t e r p r e t a t i o n 26 D. S e c t i o n 245 - I t s I n t e r p r e t a t i o n and A p p l i c a t i o n 31 E. S e c t i o n 245 - I t s L e g i s l a t i v e H i s t o r y 34 CHAPTER III - SOCIAL AND POLITICAL CONTEXT 48 A. U n d e r l y i n g A ssumptions 38 B. The Looming E l e c t i o n 48 ( i ) G e n e r a l I n t r o d u c t i o n 48 ( i i ) P o l i t i c a l A p p e a l 50 ( i i i ) M o d i f i c a t i o n o f t h e Proposed GAAR 82 ( i v ) S p e c i a l I n t e r e s t Groups 91 C. S e c t i o n 245 as P a r t o f t h e Tax Reform Package 100 D. Tax Reform i n t h e U n i t e d S t a t e s 105 E. C o n c l u s i o n 111 CHAPTER IV - ECONOMIC CONTEXT 116 A. Economic C o n d i t i o n s 116 B. I n f l u e n c e on S e c t i o n 245 118 C. C o n c l u s i o n 125 CHAPTER V - HISTORICAL CONTEXT 129 A. I n t r o d u c t i o n 129 B. L e g a l Background 130 C. S o c i a l and P o l i t i c a l H i s t o r i c a l Background 137 CHAPTER VI - CONCLUSION 150 BIBLIOGRAPHY 179 ACKNOWLEDGEMENTS T h i s s t u d y was co m p l e t e d under t h e s u p e r v i s i o n o f P r o f e s s o r P i t m a n P o t t e r (UBC) whose h e l p f u l comments and s u p p o r t t h r o u g h o u t were g r e a t l y a p p r e c i a t e d . I would a l s o l i k e t o t h a n k my second r e a d e r . P r o f e s s o r Anthony Shepperd (UBC) f o r h i s i n v a l u a b l e e x p e r t i s e and a s s i s t a n c e . B o t h o f f e r e d t h e i r t i m e and e x p e r i e n c e d e s p i t e d a u n t i n g w o r k l o a d s . I am i n d e b t e d t o t h e f i n a n c i a l a i d w h i c h I r e c e i v e d , w i t h o u t w h i c h I would have been u n a b l e t o pur s u e my work h e r e . I woul d l i k e t o thank t h e Leverhulme T r u s t who p r o v i d e d t h e m a j o r i t y o f my monies. I am a l s o g r a t e f u l f o r t h e b e q u e s t from t h e C.B. Da v i d s o n Fund a t Aberdeen U n i v e r s i t y and p a r t i a l f u n d i n g f r o m t h e U n i v e r s i t y o f B r i t i s h Columbia (UGF). F i n a l l y , I thank my f a m i l y and f r i e n d s f o r t h e i r s u p p o r t and encouragement. CHAPTER I INTRODUCTION A. GENERAL Tax a v o i d a n c e i s c e r t a i n l y n o t a r e c e n t o r n o v e l phenomenonJ I n f a c t , i n l i g h t o f i t s a p p a r e n t i m m o r t a l i t y , one may be excused f o r r e g a r d i n g i t as a n a t u r a l consequence o f t h e i m p o s i t i o n o f t a x e s , owing i t s e x i s t e n c e t o t h e f a l l i b i l i t y o f human n a t u r e ! ^ However, whatever one a t t r i b u t e s t a x a v o i d a n c e t o , i t s e x i s t e n c e i s i n e s c a p a b l e and w i l l c o n t i n u e as l o n g as t h e i n c e n t i v e and o p p o r t u n i t y t o a v o i d t a x e s p e r s i s t . ^ As r e g a r d s t h e fo r m e r , i t seems t h a t t h e i n c e n t i v e w i l l a l ways be I t i s n o t e d t h a t t h e term " t a x a v o i d a n c e " i s a misnomer i n a l e g a l i s t i c c o n t e x t , i n t h e sense t h a t i f t a x - m i n i m i z i n g schemes a r e c l a s s i f i e d as such, t h e n t h e l e g a l consequences a r e t h a t t h e t a x l i a b i l i t y i s n o t r e d u c e d ( o r av o i d e d ) i n a c c o r d a n c e w i t h t h e t r a n s a c t i o n . C o n v e r s e l y , i f schemes a r e s u c c e s s f u l , t h e n t h e y a r e g i v e n e f f e c t t o by t h e t a x i n g a u t h o r i t i e s , and t h e r e f o r e , t e c h n i c a l l y , s h o u l d n o t be termed " t a x a v o i d a n c e " . cf. D.C. Nathanson, " G e n e r a l A n t i - A v o i d a n c e R u l e and Tax Reform - The B u s i n e s s Purpose T e s t : Proposed S e c t i o n 245" paper p r e s e n t e d a t I n s i g h t C o n f e r e n c e , November 14, 1988 a t 11. However, u n l e s s o t h e r w i s e i n d i c a t e d , t h e t e r m " t a x a v o i d a n c e " i s used i n t h i s paper i n a l o o s e , n o n - l e g a l i s t i c s e n s e , t o g e n e r a l l y mean a t t e m p t s a t a v o i d i n g t a x . ^ B. B r a c e w e l l - M i l n e s , Tax Avoidance and Evasion: the Individual and Society (London: Panopticum P r e s s , 1979) a t 72. More c o n c r e t e causes have however been a d v o c a t e d o v e r t h e y e a r s , i n c l u d i n g s uch f a c t o r s as t h e d e g e n e r a t i o n i n m o r a l s t a n d a r d s o f t a x p a y e r s , p u b l i c d i s a p p r o v a l o f government e x p e n d i t u r e and h i g h r a t e s o f t a x : A. S e l d o n , " P r o l o g u e " i n A. S e l d o n , ed. , Tax Avoision: The Economic, Legal and Moral Inter-Relationships Between Avoidance and Evasion, I n s t i t u t e o f Economic A f f a i r s R e a d i n g 22 (London: The I n s t i t u t e o f Economic A f f a i r s , 1979) 3 a t 7. ^ I t i s n o t e d t h a t t h i s i s a somewhat s i m p l i s t i c v i e w p o i n t , and t h a t o t h e r f a c t o r s ( f o r example, t h o s e mentioned i n n o t e 2) may p l a y a r o l e i n g e n e r a t i n g a t t e m p t s a t t a x a v o i d a n c e . p r e s e n t , a t l e a s t i n i n d u s t r i a l i s e d n a t i o n s , due t o t h e f a c t t h a t t h e revenue needs o f t h e s e c o u n t r i e s do n o t a l l o w t h e e s t a b l i s h m e n t o f s u f f i c i e n t l y low r a t e s o f t a x t o make s t r u c t u r e d t a x a v o i d a n c e uneconomic.^ I n r e l a t i o n t o t h e l a t t e r , t h e o p p o r t u n i t y t o a v o i d t a x w i l l c o n t i n u e i n i n d u s t r i a l i s e d n a t i o n s as l o n g as comprehensive bases w h i c h t a x a l l s o u r c e s u n i f o r m l y a r e n o t implemented. However, i n r e a l i t y , t a x systems a r e g e n e r a l l y i n c o n s i s t e n t w i t h t h i s comprehensive base model I n p r a c t i c e , n o t o n l y a r e d i f f e r e n t i a t i o n s made between t y p e s o f income, b u t a l s o t a x p a y e r s a r e a c c o r d e d d i f f e r e n t t r e a t m e n t by t a x l e g i s l a t i o n due t o t h e e x i s t e n c e o f s p e c i a l i n c e n t i v e s . As r e g a r d s t h e fo r m e r , i t f o l l o w s t h a t i f one form o f "income"^ i s n o t t a x e d ( o r i s t a x e d a t a l o w e r r a t e , e t c . ) , t h e n t h e p r o p e n s i t y i s t o at t e m p t t o a v o i d t a x e s by c o n v e r t i n g what o t h e r w i s e would be f u l l y t a x a b l e i n t o a n o n - t a x a b l e o r l e s s t a x e d r e c e i p t . F o r example, i n Canada a t p r e s e n t , c a p i t a l g a i n s a r e d i f f e r e n t i a t e d from o t h e r t y p e s o f income (on t h e b a s i s o f p o l i c y r e a s o n s , i . e . K.W. Gideon & R.E. Kent, "Mrs G r e g o r y ' s N o r t h e r n Tour: Canadian P r o p o s a l s t o Adopt t h e B u s i n e s s Purpose R u l e and t h e Step T r a n s a c t i o n D o c t r i n e " i n R e p o r t of Proceedings of the Thirty-Ninth Conference 1987 Co n f e r e n c e R e p o r t ( T o r o n t o : C a n a d i a n Tax F o u n d a t i o n , 1988) 7:1 a t 7:12. ^ The c l a s s i c e x p o s i t i o n o f such a model b e i n g t h e C a r t e r Commission: R o y a l Commission on T a x a t i o n Report (Ottawa: Queen's P r i n t e r , 1966) ( C h a i r : K. LeM. C a r t e r ) . ^ T h i s t e r m i s used l o o s e l y t o connote some k i n d o f r e c e i p t , n o t i n t h e t e c h n i c a l sense c o n t a i n e d w i t h i n t h e t a x l e g i s l a t i o n . t o encourage i n v e s t m e n t ) , and as such a r e n o n - t a x a b l e w i t h i n t h e l i m i t s o f t h e l i f e t i m e c a p i t a l g a i n s exemption and a r e n o t t a x e d i n f u l l , w i t h o n l y t h r e e - q u a r t e r s o f t h e g a i n b e i n g t a x a b l e . That such d i f f e r e n c e s a r e u t i l i s e d t o a v o i d t a x can be seen from t h e " s u r p l u s - s t r i p p i n g " schemes o f t h e 1960s and 1970s.^ However, such d i f f e r e n t i a l t r e a t m e n t o f forms o f income i s g e n e r a l l y l e s s commonplace now,° w i t h t h e r e s u l t t h a t would-be a v o i d e r s must r e s o r t t o o t h e r means t o r e d u c e t h e i r t a x b i l l s . T h i s b r i n g s us t o t h e second g e n e r a l means a v a i l a b l e f o r a v o i d i n g t a x e s : making use o f p r e f e r e n t i a l t a x p r o v i s i o n s , t o r e d u c e t h e t a x t h a t would o t h e r w i s e be p a y a b l e . ' Such Fo r a f u l l e r d i s c u s s i o n on t h e u t i l i s a t i o n o f t h i s t y p e of t a x a v o i d a n c e scheme i n Canada, see R.A. F r i e s e n & D.Y. T i m b r e l l , "Shams and S i m u l a c r a I I - The C a p i t a l G a i n s A s p e c t " (1979) 27 Canadian Tax Journal 135; T.E.J. M c D o n n e l l , "Tax A v o i d a n c e : S e c t i o n 137(2) as a C h a r g i n g S e c t i o n " (1968) 16 Canadian Tax Journal 281; G. McGregor, " D i v i d e n d S t r i p p i n g : The B u s i n e s s Purpose T e s t " (1968) 16 Canadian Tax Journal 16; S. S i l v e r , " S u r p l u s S t r i p p i n g : A P r a c t i t i o n e r ' s View" (1974) 22 Canadian Tax Journal 430. ^ F o r example, i n t h e U n i t e d Kingdom, c a p i t a l g a i n s have been f u l l y t a x a b l e s i n c e 1972. ' F o r e v i d e n c e t h a t such p r o v i s i o n s r e m a i n o f r e c e n t c o n c e r n , one need l o o k no f u r t h e r t h a n t h e f i g u r e s p r o d u c e d by t h e C a nadian government v a l u i n g t h e l o s s o f revenue i n t h e u t i l i s a t i o n o f t h e s e measures. So, f o r example, i n 1985 t h e Department o f F i n a n c e i n Account of the Cost of Selective Tax Measures e s t i m a t e d such l o s s e s as r u n n i n g i n t o t h e t e n s o f b i l l i o n s o f d o l l a r s : Canada, Department o f F i n a n c e , Tax Reform '87: Report of the Standing Committee on Finance and Economic A f f a i r s tabled in the House of Commons on November 16, 1987 (Don M i l l s : R i c h a r d De Boo, 1987) a t 21. More r e c e n t l y , t h e Canadian government h i g h l i g h t e d t h e use o f s p e c i a l t a x p r e f e r e n c e s i n i t ' s t a x r e f o r m package o f 1987 as t h e means by w h i c h h i g h - e a r n i n g i n d i v i d u a l s and c o r p o r a t i o n s were a b l e t o r e d u c e t h e i r t a x l i a b i l i t i e s : Canada, Department o f F i n a n c e , Tax Reform 1987: p r o v i s i o n s a r e known c o l l o q u i a l l y as " l o o p h o l e s " , o r more t e c h n i c a l l y as t a x e x p e n d i t u r e s J ° B r i e f l y , t h e y a r e p r o v i s i o n s i n t h e t a x l e g i s l a t i o n w h i c h have no r e v e n u e - r a i s i n g f u n c t i o n , whose purpose i n s t e a d i s t o a c h i e v e non-tax s o c i a l o r economic p o l i c y o b j e c t i v e s . ' ' ^ I n most c a s e s t h e y a r e f u n c t i o n a l l y e q u i v a l e n t t o a d i r e c t government s p e n d i n g p r o g r a m . H o w e v e r , i t s h o u l d be n o t e d t h a t , i n l i g h t o f t h e i r v e r y n a t u r e , t a x systems cannot d i s a l l o w a l l t r a n s a c t i o n s w h i c h make use o f t h e s e s p e c i a l i n c e n t i v e s t o reduce t a x e s . O t h e r w i s e , t h e e f f e c t i s t o n u l l i f y t h e s e p r o v i s i o n s , as t h e purpose o f t h e i r i n t r o d u c t i o n i s t o encourage c e r t a i n t y p e s o f b e h a v i o u r , by o f f e r i n g t h e Income Tax Reform (Ottawa: t h e Department, June 18 1987) a t 7-8 and 11 ( e s p e c i a l l y . T a b l e 2.3). °̂ T h i s c o n c e p t was d e v e l o p e d by t h e l a t e S t a n l e y S u r r e y , an Ame r i c a n l e g a l s c h o l a r , w h i l e he was t h e A s s i s t a n t S e c r e t a r y f o r Tax P o l i c y i n t h e U.S. T r e a s u r y Department. F o r a d e s c r i p t i o n o f t h e development o f t h e c o n c e p t see S.S. S u r r e y , Pathways to Tax Reform (1973) as r e f e r r e d t o i n N. B r o o k s , " F u t u r e D i r e c t i o n s i n Canadian Tax Law S c h o l a r s h i p " (1985) 2 3 Osgoode Hall Law Journal 441 a t 457, f o o t n o t e 39. '''' B r o o k s , i b i d , a t 465. F o r a d i s c u s s i o n o f t h e a n a l y t i c p r o c e s s by w h i c h p a r t i c u l a r i t e m s i n t a x l e g i s l a t i o n a r e c l a s s i f i e d as t a x e x p e n d i t u r e s , see S.S. S u r r e y & P.R. M c D a n i e l , Tax Expenditures (Cambridge: H a r v a r d U n i v e r s i t y P r e s s , 1985) C . 7 , as r e f e r r e d t o by P.R. M c D a n i e l , "The Impact o f t h e Tax E x p e n d i t u r e Concept on Tax Reform" i n W.N. B r o o k s , ed. , The Quest for Tax Reform ( T o r o n t o : C a r s w e l l , 1988) 389 a t 389, f o o t n o t e 12. A d i s t i n c t i o n s h o u l d be made between t h o s e t a x p a y e r s whose a f f a i r s f a l l n a t u r a l l y w i t h i n one o f t h e t a x p r e f e r e n c e s , f o r example, s t u d e n t s who b e n e f i t from t h e d e d u c t i o n o f t u i t i o n f e e s , and t h o s e t a x p a y e r s who a r r a n g e t h e i r a f f a i r s so as t o b e n e f i t from s p e c i a l i n c e n t i v e s , f o r example, by c r e a t i n g a t a x s h e l t e r . I t i s o n l y i n r e s p e c t o f t h e l a t t e r t h a t c o n c e r n i s e x p r e s s e d r e g a r d i n g t h e "abuse" o f p r e f e r e n t i a l t a x p r o v i s i o n s , i n t h e sense t h a t b e n e f i t s a r e c o n f e r r e d i n c i r c u m s t a n c e s t h a t were u n i n t e n d e d by P a r l i a m e n t . i n c e n t i v e o f r e d u c i n g ( o r a v o i d i n g ) t a x . Thus, i f s t a t e s w i s h t o p l a c e l i m i t s on w h i c h t a x - m i n i m i z a t i o n schemes w i l l be s u c c e s s f u l ( i n t h e sense t h a t t h e y a r e g i v e n e f f e c t t o by t h e t a x i n g a u t h o r i t i e s ) , t h e n some b a s i s o f d i s t i n c t i o n must be adopted. C o n s e q u e n t l y , s t a n d a r d s such as " a r t i f i c i a l i t y " o r " b u s i n e s s p u r p o s e " a r e o f t e n u t i l i s e d . B e f o r e p r o c e e d i n g f u r t h e r , i t s h o u l d be e x p l a i n e d t h a t i t i s not i n t e n d e d t h a t t h e m e r i t s o f t a x a v o i d a n c e be d i s c u s s e d h e r e . Debate has o c c u r r e d i n t h e p a s t o v e r whether any t a x m i n i m i z a t i o n t r a n s a c t i o n s s h o u l d be c u r t a i l e d , r e g a r d l e s s o f t h e b l a t a n c y w i t h w h i c h such schemes " f l i r t w i t h t h e f o u r c o r n e r s o f t h e s t a t u t e " . However, i n t h e p r e s e n t c l i m a t e , namely. However, a f u r t h e r ground o f d i s t i n c t i o n r e f e r r e d t o i n r e s p e c t o f t h e Canadian t a x system i s t h e " s m e l l t e s t " o r t h e repugnancy i n d e x : D.A. Ward, "Has Revenue Canada Become ' B i g B r o t h e r ' ? " (1984) 117 C.A. Magazine 4:22-36 a t 22. See a l s o , J.A. S t a c e y , "Revenue Canada's A d m i n i s t r a t i o n o f t h e G e n e r a l A n t i - A v o i d a n c e R u l e : An Update" i n Report of Proceedings of the Forty-Second Tax Conference 1990 C o n f e r e n c e R e p o r t ( T o r o n t o : C a n a d i a n Tax F o u n d a t i o n , 1991) 4:2 a t 4:3 i n r e l a t i o n t o t h e enactment o f s e c t i o n 245 o f t h e Income Tax A c t , RSC 1952, c . l 4 8 [t h e A c t ] : " [ w ] h i l e t h e ' s m e l l ' t e s t was b e i n g l e g i s l a t e d , what was n o t so c l e a r was whose o l f a c t o r y s e n s e s were t o be a p p l i e d " . Such a t e s t i s a r g u a b l y i n d i c a t i v e o f t h e absence o f a c l e a r d i s t i n c t i o n w i t h i n t h e Canadian t a x system p r i o r t o (and even a f t e r ) t h e enactment o f s e c t i o n 245, on w h i c h t o d i s t i n g u i s h between a c c e p t a b l e and n o n - a c c e p t a b l e t a x m i n i m i z a t i o n . For example, such debate was p a r t i c u l a r l y p r e v a l e n t i n t h e U n i t e d Kingdom i n t h e 1960s and 1970s, see A.A. S h e n f i e l d , The P o l i t i c a l Economy of Tax Avoidance, The I n s t i t u t e o f Economic A f f a i r s , O c c a s i o n a l Paper 24 (London: The I n s t i t u t e o f Economic A f f a i r s , 1968), p a r t i c u l a r l y 19 f f . and B. B r a c e w e l l - M i l n e s , supra, n o t e 2. Other m a t e r i a l i n c l u d e s M.B. A n g e l l , "Tax E v a s i o n and Tax A v o i d a n c e " (1938) 38 Columbia Law Review 80. F o r a Canadian d i s c u s s i o n on t h e m e r i t s ( o r e v i l s ) o f t a x a v o i d a n c e , see C a r t e r Commission R e p o r t , supra, n o t e 5 V o l . 3 a t a n i m o s i t y towards t a x p l a n n i n g , i t would t a k e a b r a v e p e r s o n i n d e e d t o countenance o p e n l y a l l t y p e s o f t a x m i n i m i z a t i o n . The c u r r e n t debate t h e r e f o r e i s based on t h e f u n d a m e n t a l a s s u m p t i o n t h a t some s o r t o f l i m i t must be imposed on t a x p l a n n i n g , and from t h i s , t h e door i s l e f t open me r e l y f o r d i s c u s s i o n o f t h e a p p r o p r i a t e s t a n d a r d f o r d i s t i n g u i s h i n g between a c c e p t a b l e and u n a c c e p t a b l e t a x m i n i m i z a t i o n , and t h e means o f g i v i n g e f f e c t t o such a s t a n d a r d . I n c o n s i d e r i n g t h e Canadian t a x system, i t i s p r o p o s e d t h a t t h i s p a p er c o n c e n t r a t e on s e c t i o n 245 o f t h e Act,^^ w h i c h s e t s f o r t h t h e b a s i s o f t h e d i s t i n c t i o n c u r r e n t l y adopted i n Canada, namely between " a b u s i v e t a x a v o i d a n c e " and i t s a n t i t h e s i s , " l e g i t i m a t e t a x p l a n n i n g " . The s t a n d a r d f o r d e t e r m i n i n g whether a t a x - m i n i m i z a t i o n scheme i s " a b u s i v e " o r n o t , and t h e r e f o r e w i t h i n t h e ambit o f s e c t i o n 245, c o n s i s t s o f t h r e e f a c t o r s : t h e t a x p a y e r ' s m o t i v e , t h e p o l i c y o f t h e p a r t i c u l a r s t a t u t o r y p r o v i s i o n i n p l a y and t h e p o l i c y s t r u c t u r e o f t h e A c t r e a d as a whole. 540-3. T h i s p r o v i s i o n i s more commonly known as t h e G e n e r a l A n t i - A v o i d a n c e R u l e ( o r t h e "GAAR"). T e c h n i c a l Notes i s s u e d by t h e M i n i s t e r o f F i n a n c e , c o n t a i n e d i n : Canada, Department o f F i n a n c e , Tax Reform 1987: Income Tax Reform, supra, n o t e 9 a t 137. V. K r i s h n a , Tax Avoidance: The General Anti-Avoidance Rule ( T o r o n t o : C a r s w e l l , 1990) a t 40. B. METHODOLOGICAL APPROACH The enactment o f s e c t i o n 245, from t h e t i m e o f i t s i n i t i a l p r o p o s a l , r e c e i v e d a g r e a t d e a l o f a t t e n t i o n , a l b e i t p r i m a r i l y w i t h i n t h e t a x and b u s i n e s s communities. I t c o n s e q u e n t l y g e n e r a t e d a s t a g g e r i n g amount o f l i t e r a t u r e , i n c l u d i n g an e n t i r e book d e v o t e d t o t h i s p r o v i s i o n a l o n e H o w e v e r , q u a n t i t y does n o t en s u r e q u a l i t y , and a g r e a t d e a l o f t h i s l i t e r a t u r e was l i m i t e d t o e i t h e r m e r e l y d e s c r i b i n g o r i n t e r p r e t i n g t h e r u l e i t s e l f , o r , i f a n a l y z i n g i t , g e n e r a l l y d o i n g so from a l i m i t e d , l e g a l i s t i c p e r s p e c t i v e , w i t h o u t c h a l l e n g i n g any u n d e r l y i n g a s s u m p t i o n s . I t i s pr o p o s e d t h a t t h i s t h e s i s advance beyond t h e s e l i m i t a t i o n s and adopt i n s t e a d a more i n c i s i v e approach. The c o n v e n t i o n a l approaches adopted i n t a x p o l i c y a n a l y s i s t u r n on t h e d i s t i n c t i o n between t e c h n i c a l t a x p o l i c y a n a l y s i s and t a x e x p e n d i t u r e a n a l y s i s . ^ " T e c h n i c a l t a x p r o v i s i o n s a r e d e s c r i b e d as s t r u c t u r a l p r o v i s i o n s e s s e n t i a l t o implement t h e t a x , whereas Some o f t h e more n o t a b l e t h e s e s on s e c t i o n 245 i n c l u d e : a s e r i e s o f a r t i c l e s by B. J . A r n o l d & J.R. W i l s o n , "The G e n e r a l A n t i - A v o i d a n c e R u l e - P a r t 1" (1988) 36 Canadian Tax Journal 829; "The G e n e r a l A n t i - A v o i d a n c e R u l e - P a r t 2" (1988) 36 Canadian Tax Journal 1123; "The G e n e r a l A n t i - A v o i d a n c e R u l e - P a r t 3" (1988) 36 Canadian Tax Journal 1369; H.J. K e l l o u g h , "A Review and A n a l y s i s o f t h e R e d r a f t e d G e n e r a l A n t i - A v o i d a n c e R u l e " (1988) 26 Canadian Tax Journal 2 3 and D.A. Dodge, "A New and More Coherent Approach t o Tax A v o i d a n c e " (1988) 36 Canadian Tax Journal 1. '̂ K r i s h n a , supra, n o t e 17. Br o o k s , supra, n o t e 10 a t 457. t a x e x p e n d i t u r e s a r e n o t e s s e n t i a l f e a t u r e s o f t h e normal t a x system, b u t a r e f u n c t i o n a l l y e q u i v a l e n t t o government s p e n d i n g programs. Methods o f a n a l y z i n g t a x p o l i c y r e c o g n i s e t h i s d i s t i n c t i o n : ^ ^ t e c h n i c a l t a x p r o v i s i o n s a r e a n a l y z e d a c c o r d i n g t o t a x c r i t e r i a ; ^ ^ t a x e x p e n d i t u r e s a r e a n a l y z e d a c c o r d i n g t o b u d g e t a r y c r i t e r i a . S e c t i o n 245 c l e a r l y f a l l s w i t h i n t h e c a t e g o r y o f a t e c h n i c a l t a x p r o v i s i o n , and a c c o r d i n g l y , n o r m a t i v e t r a d i t i o n s s h o u l d be u t i l i s e d . However, b e f o r e t h e s e p o l i c y a n a l y s i s t o o l s a r e a u t o m a t i c a l l y a p p l i e d , i t s h o u l d be n o t e d t h a t t h e y have been d i s c r e d i t e d somewhat i n r e c e n t t i m e s , a common theme b e i n g t h a t t h e y do n o t a d e q u a t e l y t a k e a c c o u n t o f p o l i t i c a l r e a l i t y . 21 Ibid. 22 Ibid. ^ The t r a d i t i o n a l n o r m a t i v e s t a n d a r d s b e i n g e q u i t y , e f f i c i e n c y and s i m p l i c i t y : i b i d . 2^ B a s i c a l l y , t h e c r i t e r i a i n v o l v e s q u e s t i o n i n g whether t h e r e i s a need f o r t h e p a r t i c u l a r f e d e r a l s u b s i d y , w h i c h may be answered i n t h e n e g a t i v e , e i t h e r on t h e m e r i t s o f t h e program o r on t h e p h i l o s o p h i c a l v i e w t h a t government i n t e r v e n t i o n i n t h e market i s p e r se bad: M c D a n i e l , supra, n o t e 11 a t 392-3. A f u r t h e r i d e o l o g i c a l h y p o t h e s i s w h i c h c o u l d r e s u l t i n a n e g a t i v e answer i s t h a t t a x e x p e n d i t u r e s a r e i n a p p r o p r i a t e i n s t r u m e n t s f o r e f f e c t i n g n o n - t ax p o l i c i e s . 2^ See B r o o k s , supra, n o t e 10; S.L. Winer & W. H e t t i c h , "The S t r u c t u r e o f t h e S i e v e : P o l i t i c a l Economy i n t h e E x p l a n a t i o n o f Tax Systems and Tax Reform" (1988) 26 Osgoode Hall Law Journal 409 ["The P o l i t i c a l Economy o f T a x a t i o n " ] a t p.416 [ i n r e s p e c t o f t h e n o r m a t i v e t r a d i t i o n o f e q u i t y ] and D. H a r t l e , P o l i t i c a l Economy of Tax Reform: Six Case Studies, D i s c u s s i o n Paper No.290 f o r t h e Economic C o u n c i l o f Canada (Ottawa: November, 1985) a t p.2 f f . [ i n r e s p e c t o f c o n v e n t i o n a l e c o n o m i c s ] . I n e x p l a n a t i o n , i t s h o u l d be n o t e d t h a t t h e t a x s t r u c t u r e , a t any g i v e n t i m e , i s t h e r e s u l t o f a h i g h l y complex p o l i t i c a l p r o c e s s w h i c h a t t h e v e r y h e a r t i n v o l v e s p o l i t i c i a n s v y i n g f o r v o t e s o f t h e e l e c t o r a t e w h i c h w i l l bestow t h e p r i z e o f p o l i t i c a l power: p o l i t i c i a n s a r e l e s s c o n c e r n e d w i t h what i s i n t h e i n t e r e s t s o f s o c i e t y , t h a n w i t h what w i l l keep them i n o f f i c e . I t i s o n l y by s t u d y i n g t h i s b r o a d e r p i c t u r e t h a t we can a c c o u n t f o r t h e a p p a r e n t i n a d e q u a c i e s (by t h e s t a n d a r d s o f n o r m a t i v e t r a d i t i o n s ) t h a t p e r s i s t i n t h e t a x system and a l s o e x p l a i n t h e e l u s i v e n e s s o f t h e "good" system - major changes o r r e f o r m s , a l t h o u g h a d v o c a t e d as p r o m o t i n g f a i r n e s s , s i m p l i c i t y o r whatever, never q u i t e seem t o match up t o t h e s e norms i n r e a l i t y . T h e r e f o r e , e x c l u s i v e r e l i a n c e on n o r m a t i v e t r a d i t i o n s has i n h e r e n t l i m i t a t i o n s imposed by i t s f a i l u r e t o t a k e i n t o a c c o u n t t h e p o l i t i c a l and s o c i a l r e a l i t y o f t a x a t i o n . S u p p o r t f o r i m p l e m e n t i n g a p o l i t i c a l l y - c o n s c i o u s a p p r o a c h can be drawn from e x i s t i n g work. I n c r e a s i n g l y , t h e l i t e r a t u r e on t a x m a t t e r s i s moving beyond n o r m a t i v e t r a d i t i o n s , and i s i n s t e a d a d o p t i n g a more p r a g m a t i c approach by h i g h l i g h t i n g t h e p o l i t i c a l 2* W.I. G i l l e s p i e , "Tax Reform: The B a t t l e f i e l d , t h e S t r a t e g i e s , t h e S p o i l s " (1983) 26 Canadian Public Administration 182 a t 183. T h i s i s n o t t o say t h a t t h e two approaches c a n n o t be i n t e g r a t e d , f o r example, Winer & H e t t i c h , supra, n o t e 25 a t 416- 20, c o n s i d e r t h e i m p l i c a t i o n s t h a t t h e i r p o s i t i v e p o l i t i c a l economy model has f o r n o r m a t i v e t h e o r i e s i n t a x a t i o n , i n p a r t i c u l a r , e q u i t a b l e t a x a t i o n . p o l i t i c a l economy approach i s deemed r e l e v a n t t o t h i s paper due t o i t s i n c l u s i o n o f t h e p o l i t i c a l element. I n p a r t i c u l a r , t h e w r i t i n g s o f Winer and H e t t i c h a r e h i g h l i g h t e d . I t i s f e l t t h a t t h e i r model can make t h e g r e a t e s t c o n t r i b u t i o n t o t h e methodology o f t h i s t h e s i s , due t o i t s i n c o r p o r a t i o n o f t h e p o l i t i c a l ' v o i c e ' t o g e t h e r w i t h i t s a s s u m p t i o n t h a t t h e t a x system i s a n a t u r a l outcome o f s e l f - i n t e r e s t e d d e c i s i o n making. ̂ 2 B a s i c a l l y , t h e model i n t e g r a t e s f o u r s t r a n d s : economic r e s p o n s e , s e l f - i n t e r e s t e d p o l i t i c a l b e h a v i o u r , t h e p o l i t i c a l e q u i l i b r i u m w i t h c o s t s and b e n e f i t s . 1̂ Supra, n o t e 25; W. H e t t i c h & S.L. Winer, "A P o s i t i v e Model o f F i s c a l S t r u c t u r e " (1984) 24 Journal of Public Economics 67; W. H e t t i c h & S.L. Winer, "Economic and P o l i t i c a l F o u n d a t i o n s o f Tax S t r u c t u r e " (1986) C a r l e t o n Economics P a p e r s 86-01, C a r l e t o n U n i v e r s i t y ; W. H e t t i c h & S.L. Winer, "Economic and P o l i t i c a l F o u n d a t i o n s o f Tax S t r u c t u r e " (1988) 78 American Economic Review 701 [ r e f e r e n c e s a r e t o A m e r i c a n Economic R e v i e w ] ; S.L. Winer & W. H e t t i c h , "The E v o l u t i o n o f Revenue Systems: A T h e o r e t i c a l and E m p i r i c a l I n v e s t i g a t i o n " (1987) C a r l e t o n Economics P a p e r s 87-104, C a r l e t o n U n i v e r s i t y . ^2 Ibid. ("Economic and P o l i t i c a l F o u n d a t i o n s o f Tax S t r u c t u r e " ) a t 701. O t h e r t h e o r e t i c a l l i t e r a t u r e on t a x a t i o n assumes p u b l i c d e c i s i o n makers choose and implement p o l i c i e s a c c o r d i n g t o g e n e r a l and s o c i a l c r i t e r i a such as e f f i c i e n c y and e q u i t y . T a x p a y e r s ' economic a d j u s t m e n t s a r e commonly r e f e r r e d t o as t h e ' e x i t ' and have been much d i s c u s s e d i n t h e l i t e r a t u r e on t a x a t i o n : Winer & H e t t i c h , supra, n o t e 25 a t 412. Governments w i s h t o maximize t h e i r e x p e c t e d s u p p o r t t o e n s u r e t h e i r c o n t i n u e d s t a y i n o f f i c e . I n d i v i d u a l s u p p o r t f o r t h e government depends on t h e b e n e f i t s from p u b l i c goods and t h e l o s s i n f u l l income; on c h a r a c t e r i s t i c s w h i c h d e t e r m i n e how a p a r t i c u l a r i n d i v i d u a l ' s n e t economic b e n e f i t from t h e f i s c a l s y s tem i s t r a n s l a t e d i n t o a p r o b a b i l i t y o f v o t i n g f o r t h e government and on t h e i n d i v i d u a l ' s p o l i t i c a l i n f l u e n c e (which i s e f f e c t e d by such f a c t o r s as membership and s t r e n g t h o f i n t e r e s t groups and p e r s o n a l w e a l t h ) : H e t t i c h & Winer, supra, n o t e 31 ("Economic and P o l i t i c a l F o u n d a t i o n s o f Tax S t r u c t u r e " ) a t 702. component o f t a x a t i o n , a l b e i t , sometimes o n l y i m p l i c i t l y . ^ However, e x p l i c i t p o l i t i c i z a t i o n o f t a x a t i o n i s i n t e g r a t e d i n some models t h a t a r e s p e c i f i c a l l y f o r m u l a t e d t o i n c o r p o r a t e t h e p o l i t i c a l element. I n p a r t i c u l a r , a body o f l i t e r a t u r e has d e v e l o p e d w i t h i n t h e d i s c i p l i n e o f economics, g e n e r a l l y known as t h e p o l i t i c a l economy o f t a x a t i o n . ^ ' U n f o r t u n a t e l y , i n t e g r a t i o n o f t h e p o l i t i c a l component i n t h i s manner, namely i n c o n j u n c t i o n w i t h economics, o f t e n makes t h e models r a t h e r complex t o one n o t kn o w l e d g a b l e i n t h i s f i e l d . B e i n g one who f a l l s w i t h i n t h i s l a t t e r c a t e g o r y , i t i s hoped t h a t t h e p r o b a b l e o v e r - s i m p l i f i c a t i o n o f t h e s e models w i l l be ov e r l o o k e d . ^ " The For example, R.M. B i r d , "The Tax K a l e i d o s c o p e : P e r s p e c t i v e s on Tax Reform i n Canada" (1970) 18 Canadian Tax Journal 444; M. B u c o v e t s k y , "Tax Reform i n Canada: A P r o g r e s s R e p o r t " (1972) 25 National Tax Journal 15; A. Peacock, " F i s c a l Theory and t h e 'Market' f o r Tax Reform", i n K.W. Roskamp & F.F. F o r t e , eds.. Reforms of Tax Systems P r o c e e d i n g s o f t h e 3 5 t h Congress o f I n t e r n a t i o n a l I n s t i t u t e o f P u b l i c F i n a n c e ( D e t r o i t : Wayne S t a t e U n i v e r s i t y P r e s s , 1981) 11; Winer & H e t t i c h , supra, n o t e 25 and D.A. W o l f e , " P o l i t i c s , t h e D e f i c i t and Tax Reform" (1988) 26 Osgoode Hall Law Journal 347. The use o f models based on p o l i t i c a l e q u i l i b r i u m r a t h e r t h a n t h e p o l i t i c a l p r o c e s s has i t s r o o t s i n t h e w r i t i n g s o f A. Downs, An Economic Theory of Democracy (New York: H a r per & Row, 1957) and J.A. Schumpeter, Capitalism, Socialism and Democracy, 3d. (New York: H a r per & Row, 1950). L a t e r works i n c l u d e : G.S. B e c k e r , "A Theory o f C o m p e t i t i o n Among P r e s s u r e Groups f o r P o l i t i c a l I n f l u e n c e " (1983) 98 Quarterly Journal of Economics 371; S. Pelzman, "Toward a More G e n e r a l Theory o f R e g u l a t i o n " (1976) 19 Journal of Law and Economics 219 and G.J. S t i g l e r , "The Economic Theory o f R e g u l a t i o n " (1971) 3 Bell Journal of Economics 3. °̂ O ther models have been p o s i t e d w h i c h do n o t r e l y q u i t e so h e a v i l y on economics. F or example, G i l l e s p i e , supra, n o t e 26, has d e v e l o p e d a p o s i t i v e model w h i c h does n o t e x p l i c i t l y i n c o r p o r a t e t h e economic component. However, i n e s s e n c e , h i s model c l o s e l y r e s e m b l e s ( a l t h o u g h i s n o t as e x t e n d e d as) t h a t o f H e t t i c h & Winer i n t h a t he b a s i s i t upon t h e c o n c e p t s o f i n f l u e n c e o f a d m i n i s t r a t i o n c o s t s ^ ^ and t h e he t e r o g e n e o u s n a t u r e o f economic and p o l i t i c a l b e h a v i o u r among t a x p a y e r s . T h e s e f a c t o r s , i t i s contended, g e n e r a t e t h e e s s e n t i a l e l e m e n t s o f t h e t a x system ( t a x b a s e s , r a t e s t r u c t u r e s and s p e c i a l p r o v i s i o n s ) . A t any g i v e n t i m e , t h e s t r u c t u r e o f t h e t a x system, c o m p r i s i n g t h e s e t h r e e e l e m e n t s , r e f l e c t s t h e e q u i l i b r i u m t h a t has been r e a c h e d i n terms o f t h e b a l a n c i n g o f p o l i t i c a l c o s t s ^ ^ and benef i t s . ^ ^ A d m i n i s t r a t i v e c o s t s a f f e c t t h e t a x s t r u c t u r e as s a v i n g s a r e made i n g r o u p i n g t a x p a y e r s i n t o r a t e b r a c k e t s where, d e s p i t e i n t e r p e r s o n a l d i f f e r e n c e s , t h e y pay t h e same t a x e s . Any r e s u l t i n g p o l i t i c a l l o s s e s a r e o f f s e t by t h e s e s a v i n g s w h i c h can be used t o p r o v i d e more p u b l i c goods and t h e r e f o r e o b t a i n i n c r e a s e d s u p p o r t : H e t t i c h & Winer, i b i d , a t 706. F o r example, h e t e r o g e n e i t y o c c u r s i n economic terms i n t h e a b i l i t y o f t a x p a y e r s t o a l t e r t h e i r b e h a v i o u r and t o escape i n t o n o n -taxed a c t i v i t i e s . P o l i t i c a l l y , v a r i a t i o n s e x i s t i n w e a l t h , i n t e r e s t group membership, v o t i n g and p o l i t i c a l a c t i v i t y : Winer & H e t t i c h , supra, n o t e 25 a t 412. See, supra, n o t e 34 and accompanying t e x t . P o l i t i c a l c o s t s t o t h e government a r e d e t e r m i n e d as b e i n g t h e r e s u l t i n g l o s s i n income, t o g e t h e r w i t h t h e p o l i t i c a l e f f e c t i v e n e s s o r i n f l u e n c e o f t h e t a x e d i n d i v i d u a l : Winer & H e t t i c h , supra, n o t e 25 a t 411. See, supra, n o t e 34 and accompanying t e x t . P o l i t i c a l b e n e f i t s a r e t h e b e n e f i t s from p u b l i c goods: H e t t i c h & Winer, supra n o t e 31 ("Economic and P o l i t i c a l F o u n d a t i o n s o f Tax S t r u c t u r e " ) a t 702. Other b e n e f i t s have been i d e n t i f i e d as i n c l u d i n g t h e p r o v i s i o n o f s e r v i c e s and t r a n s f e r payments f o r i t s c i t i z e n s : G i l l e s p i e , supra, n o t e 26 a t 184. However, as r e g a r d s t h i s p a p e r , i t i s t h e a p p l i c a t i o n o f t h i s model t o t h e i n c i d e n c e o f t a x reform,^' w h i c h , i t has been c l a i m e d " . . . p r o v i d e s a new p e r s p e c t i v e f o r u n d e r s t a n d i n g t h e t r a n s f o r m a t i o n o f t a x systems"^" t h a t i s most r e l e v a n t . H e t t i c h and Winer s u g g e s t t h a t shocks t o t h e system n e c e s s i t a t e r e - e s t a b l i s h i n g t h e e q u i l i b r i u m by t h e a d j u s t m e n t o f revenue i n s t r u m e n t s . ^ ^ T h e r e f o r e , c o n t i n u a l change can be r e g a r d e d as t h e l o g i c a l outcome o f t h e government's a t t e m p t t o r e t a i n o f f i c e . They i d e n t i f y s e v e r a l f a c t o r s w h i c h t h e y b e l i e v e may e x p l a i n major t a x changes i n t h e p a s t , f o r example, as r e g a r d s economic r e s p o n s e s , changes i n t h e age d i s t r i b u t i o n , i n l a b o u r f o r c e p a r t i c i p a t i o n and i n t h e r a t e o f i n f l a t i o n . I n r e l a t i o n t o p o l i t i c a l r e a c t i o n s , examples i n c l u d e changes i n t h e c o s t o f p o l i t i c a l o r g a n i z a t i o n , i n c o n s t i t u t i o n a l r e s t r i c t i o n s , i n t h e c o s t o f a c q u i r i n g i n f o r m a t i o n and i n p o l i t i c a l Tax r e f o r m has been d e f i n e d by G i l l e s p i e , supra, n o t e 2 6 a t 186, as "a major change i n t h e s t r u c t u r e o f a t a x o r o f t h e t o t a l t a x system. T h i s c o u l d i n v o l v e e i t h e r a change i n t h e comprehensiveness o f t h e base o f t h e revenue s o u r c e o r a l a r g e change i n t h e e f f e c t i v e t a x r a t e f o r a revenue s o u r c e . . . o r some c o m b i n a t i o n t h e r e o f . " Winer & H e t t i c h p r o f f e r a s i m i l a r d e f i n i t i o n : " [ t a x r e f o r m i s ] any s u b s t a n t i v e change i n t h e e q u i l i b r i u m s t r u c t u r e o f t h e t a x system, r e g a r d l e s s o f what form i t t a k e s o r f o r what purpose i t has been i n i t i a t e d " : supra, n o t e 25 a t 412. Winer & H e t t i c h , supra, n o t e 25 a t 414. Ibid. " Ibid. e n t r e p r e n e u r s h i p / ^ As a r e s u l t o f t h e s e s h o c k s , t h e e q u i l i b r i u m a d j u s t s and w i l l i n v o l v e changes t h a t a f f e c t s e v e r a l a s p e c t s o f t h e t a x s t r u c t u r e a t t h e same t i m e . I t i s p r o p o s e d t h a t t h e above models be t h e f o u n d a t i o n s o f t h e methodology employed i n t h i s p a p e r . I t s h o u l d be n o t e d t h a t i t i s n o t p r o p o s e d t h a t t h e s e be f o l l o w e d r e l i g i o u s l y , as s e v e r a l i n h e r e n t l i m i t a t i o n s e x i s t so as t o r e n d e r t h i s i n a p p r o p r i a t e . F i r s t , i t i s p r o p o s e d t h a t o n l y t h e r e v e n u e - r a i s i n g s i d e o f t h e p u b l i c budget be examined. I t s h o u l d be e x p l a i n e d t h a t a c o m p l e t e p i c t u r e c o u l d r e a l l y o n l y be g a i n e d by a n a l y z i n g t h e e x p e n d i t u r e p r o c e s s a l s o , as o b v i o u s l y t h e d i s t r i b u t i o n o f goods, s e r v i c e s and o t h e r b e n e f i t s a f f e c t s t h e e x i s t e n c e and e x t e n t o f " b e n e f i t s " ( f o r example, exemptions, d e d u c t i o n s e t c . ) p r o v i d e d t h r o u g h t h e t a x system. However, t h e r e l e v a n c e o f i n c o r p o r a t i n g b o t h s i d e s i s q u e s t i o n a b l e i n l i g h t o f t h e c o n t e n t i o n t h a t no d i r e c t l i n k a g e e x i s t s anyway, i n terms o f v o t e r s u p p o r t , between e x p e n d i t u r e and t a x s t r u c t u r e s as, a r g u a b l y , i n d i v i d u a l t a x p a y e r s see no c o n n e c t i o n between t h e l e v e l o f s e r v i c e s p r o v i d e d and t h e i r own t a x b u r d e n . I t i s n o t p r o p o s e d t h a t t h e m e r i t s o f t h i s c o n t r o v e r s i a l p r o p o s i t i o n be d i s c u s s e d on t h e b a s i s t h a t o t h e r more c o n c r e t e r e a s o n s e x i s t f o r n o t i n c o r p o r a t i n g b o t h s i d e s : f i r s t s u c h models a r e Ibid, a t 414-5. H e t t i c h & Winer, supra, n o t e 25 a t 703. d i f f i c u l t t o c o n s t r u c t , a n d second, g e n e r a l l y a c c e p t e d p r a c t i c e v e r i f i e s t h e c o n c e n t r a t i o n on o n l y one s i d e o f t h e budget ( t h e l i t e r a t u r e f o c u s e s a l m o s t e x c l u s i v e l y on t h e e x p e n d i t u r e side*^) . From t h e above t h e r e f o r e , i t i s s u b m i t t e d t h a t t h i s paper w i l l n ot be i m m e d i a t e l y d i s a d v a n t a g e d because i t c o n c e n t r a t e s p r i m a r i l y on t h e t a x s t r u c t u r e s i d e o f t h e p u b l i c budget. However, more s e r i o u s l i m i t a t i o n s e x i s t due t o t h e f o c u s o f t h i s p a p er b e i n g p r e d o m i n a n t l y on a s i n g l e p r o v i s i o n w i t h i n t h e whole t a x s t r u c t u r e . H e t t i c h and Winer emphasize t h a t a l l t h e e s s e n t i a l e l ements o f t h e t a x s t r u c t u r e a r e i n t e r d e p e n d e n t , and t h a t any a n a l y s i s s h o u l d approach t h e s t r u c t u r e as i n t e g r a t e d systems o f e s s e n t i a l e lements and n o t m e r e l y as c o l l e c t i o n s o f u n r e l a t e d o r i l l - d e s i g n e d c o m p o n e n t s . H o w e v e r , b e a r i n g i n mind space c o n s t r a i n t s , i t w i l l be p r e f e r a b l e t o c o n c e n t r a t e on one i s s u e and a n a l y z e i t i n d e p t h , r a t h e r t h a n s k a t e t h i n l y o v e r t h e whole t a x system. T h e r e f o r e , i t i s p r o p o s e d t h a t t h i s paper c o n c e n t r a t e p r i m a r i l y on t h e enactment o f a s i n g l e p r o v i s i o n w i t h i n t h e t a x s t r u c t u r e . T h i s a pproach, on t h e f a c e o f i t , o b v i o u s l y f a i l s t o f u l f i l t h e above c r i t e r i a by n o t o n l y o m i t t i n g t o s t u d y t h e i n t e r p l a y o f a l l t h e e l e m e n t s o f t h e t a x H e t t i c h & Winer, supra, note 31 ("A P o s i t i v e Model o f Tax S t r u c t u r e " ) a t 69. J j b i d . a t 68. Supra, n o t e 31 ("Economic and P o l i t i c a l F o u n d a t i o n s o f Tax S t r u c t u r e s " ) a t 709. system, but moreover, n o t even f o c u s i n g on any s i n g l e element i n t h e f i r s t p l a c e . However, i t i s s u b m i t t e d t h a t t h e narrow p e r s p e c t i v e o f t h i s paper i s n o t f a t a l . To e x p l a i n , i t i s n o t i n t e n d e d t h a t t h e t h e s i s s t u d y s e c t i o n 245 i n an i s o l a t e d manner. I t i s p r o posed t h a t t h e p r o v i s i o n be a n a l y z e d i n i t s economic, h i s t o r i c a l , p o l i t i c a l and s o c i a l s u r r o u n d i n g s . T h i s w i l l n e c e s s i t a t e c o n s i d e r i n g t h e e s s e n t i a l e l e m e n t s o f t h e t a x s t r u c t u r e as a whole, a l b e i t p erhaps i n d i r e c t l y , t o a s s i s t i n t h e e x p l a n a t i o n o f , f o r example, t h e i n t r o d u c t i o n o f t h e r u l e . L a s t l y , t h e models w i l l n o t be a p p l i e d w i t h o u t m o d i f i c a t i o n due t o t h e i r i m p l i c a t i o n s f o r t a x r e f o r m a n a l y s i s . Winer and H e t t i c h s u g g e s t t h a t s uch a n a l y s i s c o u l d be u t i l i s e d t o e x p l a i n r e f o r m s as t h e outcome o f s e l f - i n t e r e s t e d b e h a v i o u r by government a g e n t s i n r e s p o n s e t o s h i f t s i n economic and p o l i t i c a l f a c t o r s , ' ^ ^ However, t h e y go on t o p o s i t t h a t such work would r e q u i r e t h e f o r m u l a t i o n o f h y p o t h e s e s about how exogenous f a c t o r s i n f l u e n c e t h e n a t u r e o f p o l i t i c a l c o s t f u n c t i o n s a s s o c i a t e d w i t h d i f f e r e n t t a x i n s t r u m e n t s , and how t h e y cause s h i f t s i n such f u n c t i o n s . ^ ' Supra, n o t e 25 a t 414. Ibid. I t i s pr o p o s e d t h a t a s i m i l a r approach be adopted i n r e s p e c t o f s e c t i o n 245, namely i t s a n a l y s i s w i t h i n i t s p o l i t i c a l and economic environment. However, i t i s n o t i n t e n d e d t h a t t h e f a c t o r s w h i c h i n f l u e n c e d and u l t i m a t e l y s h i f t e d t h e p o l i t i c a l c o s t f u n c t i o n s ( t h u s r e s u l t i n g i n t a x reform) be i d e n t i f i e d as s u g g e s t e d above. The r e a s o n s and j u s t i f i c a t i o n s f o r d e v i a t i n g from t h i s approach a r e as f o l l o w s . F i r s t , d i f f i c u l t i e s e x i s t i n a s c e r t a i n i n g p o l i t i c a l c o s t s f u n c t i o n s - governments have o n l y l i m i t e d knowledge o f such functions,^° c o n s e q u e n t l y , someone who does n o t have n e a r l y t h e e x t e n t o f r e s o u r c e s a v a i l a b l e t o government a t t h e i r d i s p o s a l s t a n d s l i t t l e chance. S e c o n d l y , as o u t l i n e d above, due t o space c o n s t r a i n t s , i t i s p r o p o s e d t h a t t h e f o c u s o f t h i s paper be on s e c t i o n 245 (opposed t o t h e whole t a x r e f o r m p a c k a g e ) , a l b e i t , t h e package w i l l r e c e i v e some c o n s i d e r a t i o n as p a r t o f t h e p r o c e s s o f a n a l y z i n g t h e c o n t e x t o f t h e p r o v i s i o n . T h i s t h e r e f o r e r e n d e r s i t i m p o s s i b l e t o i d e n t i f y e i t h e r p o l i t i c a l c o s t f u n c t i o n s , o r t h e p o l i t i c a l f a c t o r s i n f l u e n c i n g them, w h i c h a r e s p e c i f i c t o t h e GAAR. To c o n c l u d e t h u s f a r , i t i s s u g g e s t e d t h a t t h e methodology o f t h i s paper draw on t h e models d i s c u s s e d above, r a t h e r t h a n r e l i g i o u s l y a p p l y i n g them. I n p a r t i c u l a r , t h e fu n d a m e n t a l themes o f t h e models w i l l be t h e b a s i s o f t h i s p a p e r , namely, t h e a s s u m p t i o n s t h a t t a x a t i o n i s a p o l i t i c a l p r o c e s s , and t h a t i t i s t h e e q u i l i b r i u m outcome o f s e l f - i n t e r e s t e d b e h a v i o u r o f ^° Ibid, a t 415. t h e governinent. However, due t o t h e d i f f i c u l t i e s o u t l i n e d above, i t i s n o t s u g g e s t e d t h a t a t t e m p t s be made t o i d e n t i f y t h e f a c t o r s w h i c h e f f e c t e d t h e s h i f t i n t h e e q u i l i b r i u m and r e s u l t e d i n t h e t a x r e f o r m i n June 1987. I n s t e a d , i t i s p r o p o s e d t h a t t h e f o c u s be on t h e p r o v i s i o n i t s e l f (and n o t t h e whole r e f o r m p a c k a g e ) , a l t h o u g h i t w i l l be a n a l y z e d w i t h i n i t s c o n t e x t - as p a r t o f t h e r e a d j u s t m e n t o f t h e e q u i l i b r i u m p r o c e s s . I t i s s u b m i t t e d t h a t t h e p e r s p e c t i v e adopted be t h e r u l e as r e f l e c t i n g t h e outcome o f t h e f a c t o r s l e a d i n g t o t h e d i s e q u i l i b r i u m , r a t h e r t h a n t h e o t h e r way about, namely, s t a r t i n g o u t by i d e n t i f y i n g t h e f a c t o r s r e s u l t i n g i n t h e r u l e . T h i s i s m e r e l y a change i n p r o c e d u r e as b o t h methods g e n e r a t e t h e same outcome: exposure o f t h e f a c t o r s w h i c h made i t v i a b l e f o r s e c t i o n 245 t o be e n a c t e d . From a p r a c t i c a l s t a n d p o i n t , i t w i l l be e a s i e r t o adopt t h e former method, as t h e l a t t e r would i n v o l v e t h e a n a l y s i s o f f a c t o r s r e s p o n s i b l e f o r t h e d i s e q u i l i b r i u m , and t h e r e s u l t a n t t a x r e f o r m package, and t h e n , a f u r t h e r s c a l i n g down o f t h o s e f a c t o r s t o d e t e r m i n e w h i c h ones a r e s p e c i f i c t o t h e GAAR. Fu r t h e r m o r e , such an approach may l e a d t o t h e e x c l u s i o n o f f a c t o r s n o t a p p l i c a b l e t o t h e t a x r e f o r m package, b u t w h i c h a r e r e l e v a n t t o t h e GAAR, f o r example, t h e l e g a l background. The a p p l i c a t i o n o f such an approach w i l l i n v o l v e a n a l y z i n g s e c t i o n 245 w i t h i n i t s whole e n v i r o n m e n t a l b a c k d r o p , from t h e economic c o n d i t i o n s t o t h e p o l i t i c a l and s o c i a l f a c t o r s and h i s t o r i c a l c o n t e x t . I t i s r e c o g n i s e d t h a t t h e s e f a c t o r s a r e i n t e r t w i n e d and i n t e r d e p e n d e n t , and any a t t e m p t t o s e p a r a t e them i s a d i f f i c u l t , i f n o t i m p o s s i b l e t a s k . However, t o a c h i e v e any d egree o f c oherence and l o g i c i n t h i s s t u d y , such an a t t e m p t must be made. The r e a d e r has been f o r e w a r n e d , and may t h u s f i n d t h a t many p r o p o s i t i o n s o v e r l a p from one c o n t e x t t o t h e o t h e r . However, t h e o n l y a l t e r n a t i v e would r e s u l t i n d i s t o r t i o n o f t h e arguments i n t r y i n g t o f i t them w i t h i n n e a t c a t e g o r i e s . To a m p l i f y , an example o f t h e i n t e r r e l a t i o n o f t h e s e c o n t e x t s i s as f o l l o w s : a d v e r s e economic c o n d i t i o n s a r g u a b l y a f f e c t t a x p a y e r s * a t t i t u d e s t o t h e a v o i d a n c e o f t a x ( i e . t h e y a r e l e s s t o l e r a n t o f i t i n t i m e s o f economic h a r d s h i p t h a n t h e y a r e d u r i n g an e r a o f p r o s p e r i t y ) w h i c h i n t u r n may r e s u l t i n t h e p o l i t i c a l c o n d i t i o n s b e i n g amenable t o t h e i n t r o d u c t i o n o f a l e g i s l a t i v e measure t o c u r b t a x a v o i d a n c e , t h e i n t e r p r e t a t i o n and a p p l i c a t i o n o f w h i c h may be i n f l u e n c e d by t h e economic c o n d i t i o n s p r e v a l e n t a t t h e t i m e ( f o r example, t h e t a x i n g a u t h o r i t i e s may adopt a more a g g r e s s i v e a t t i t u d e i n a h a r s h economic c l i m a t e ) . The v a l i d i t y o f a d o p t i n g such a p o l i t i c a l l y - c o n s c i o u s approach i s v e r i f i e d i n l i g h t o f t h e amount o f o p p o s i t i o n t h a t was v e n t e d a g a i n s t t h e r u l e a t t h e t i m e o f i t s p r o p o s a l . R e f l e c t i o n on t h e enactment o f t h e p r o v i s i o n r a i s e s s e v e r a l i s s u e s : what was t h e government's pu r p o s e , was i t p r o m o t i n g some norm such as f a i r n e s s o r e q u i t y (as i t c l a i m e d ) o r , was i t a c t i n g i n i t s own s e l f - i n t e r e s t t o e nsure i t s r e - e l e c t i o n ; why d i d t h e government p r o p o s e t h e r u l e i n t h e f i r s t p l a c e when i t must have been a b l e t o p r e d i c t b e f o r e h a n d t h e vehement o p p o s i t i o n i t would g e n e r a t e , c o n s i d e r i n g t h e wide c o n s u l t a t i o n p r o c e s s i t embarked upon i n d r a f t i n g t h e White Pap e r ; why was t h e r u l e n o t s u b s t a n t i a l l y changed i n i t s passage t h r o u g h P a r l i a m e n t , e s p e c i a l l y as i t o r i g i n a t e d i n a White Paper and n o t as a l e g i s l a t i v e p r o p o s a l and, i n g e n e r a l , was i t f o l l y on t h e government's p a r t t o e n a c t such a r e f o r m , i f on t h e f a c e o f i t , t h e p o l i t i c a l c o s t s outweighed t h e b e n e f i t s ? I t i s s u b m i t t e d t h a t a t t e m p t s t o answer t h e s e and o t h e r q u e s t i o n s can o n l y be made by l o o k i n g beyond t h e r u l e t o t h e w i d e r c o n t e x t w h i c h e x i s t e d a t t h e t i m e . W i t h h i n d s i g h t , we can say t h a t p o l i t i c a l , s o c i a l , economic and o t h e r r e l e v a n t f a c t o r s o b v i o u s l y made i t v i a b l e f o r t h e government t o p r o c e e d w i t h t h e r e f o r m package, and i n p a r t i c u l a r , s e c t i o n 245. Not o n l y were t h e i n i t i a l p r o p o s a l s e n a c t e d w i t h o u t t o o many major changes (and s e c t i o n 245, w i t h no major c h a n g e s ) , b u t t h e C o n s e r v a t i v e Government was s u c c e s s f u l i n r e t a i n i n g i t s o f f i c e a t t h e g e n e r a l e l e c t i o n w h i c h o c c u r r e d i n t h e y e a r f o l l o w i n g t h e p r e s e n t a t i o n o f t h e t a x r e f o r m p a c k a g e E x p e r i e n c e has shown us ( t h e c l a s s i c example b e i n g t h e d i l u t i o n o f t h e C a r t e r Commission Report^^j t h a t i f t h e 1̂ A f e d e r a l e l e c t i o n was h e l on November 21, 1988. ^2 Supra, n o t e 5. T h i s R e p o r t was d e s c r i b e d , a t t h e t i m e , by t h e t h e n F i n a n c e M i n i s t e r M i t c h e l l Sharp as "one o f t h e most f a r - r e a c h i n g , e x p l o s i v e , r e v o l u t i o n a r y s e t o f p r o p o s a l s e v e r p u t b e f o r e t h e Cana d i a n p e o p l e " [as quoted by D.K. Hugget t , "An A p o c r y p h a l A p o c a l y p s e ? " i n B r o o k s , ed., supra, n o t e 11 381 a t 381 ] . However, d e s p i t e t h e s e g l o w i n g c r e d e n t i a l s , t h e recommendations were never e f f e c t e d i n f u l l : t h e y were o n l y p a r t i a l l y implemented some n i n e y e a r s a f t e r t h e r e p o r t was f i r s t c ommissioned, and o n l y t h e n , i n a g r e a t l y d i l u t e d form. [ F o r a u n d e r l y i n g p o l i t i c a l and economic f a c t o r s do n o t s u p p o r t t h e pro p o s e d changes, t h e n a d i s e q u i l i b r i u m i s l i k e l y t o be c r e a t e d , and t h e changes a r e n o t l i k e l y t o be implemented i n t h e f i r s t p l a c e , o r i f g i v e n e f f e c t t o , t h e n n o t s u s t a i n e d . To c o n c l u d e t h e r e f o r e , i t i s pro p o s e d t h a t an approach be adopted w h i c h h i g h l i g h t s t h e g e n e r a l environment i n e x i s t e n c e a t t h e t i m e o f t h e enactment o f s e c t i o n 245. H o p e f u l l y , such an approa c h w i l l e x t e n d o ur u n d e r s t a n d i n g o f t h e p r o v i s i o n i n e x p l a i n i n g why t h e Canadian government d e c i d e d t o i n t r o d u c e i t and why c e r t a i n m o d i f i c a t i o n s were made t o t h e p r o p o s a l i n i t s passage t h r o u g h t h e l e g i s l a t i v e p r o c e s s . I n a c h i e v i n g t h e s e o b j e c t i v e s , i t i s pr o p o s e d t h a t t h e r u l e f i r s t be a n a l y z e d i n i s o l a t i o n from i t s e x t e r n a l environment. I n p a r t i c u l a r , i t i s s u g g e s t e d t h a t t h e s a l i e n t p o i n t s be d i s c u s s e d and t h e p r o c e s s o f enactment o u t l i n e d , w i t h t h e changes made t o t h e i n i t i a l d r a f t b e i n g h i g h l i g h t e d . From h e r e , i t i s t h e n i n t e n d e d t h a t t h e environment i n w h i c h t h i s whole p r o c e s s t o o k p l a c e be s y n t h e s i z e d , t o i l l u s t r a t e how i t i s a p r o d u c t o f t h e s e exogenous f a c t o r s . f u l l e r d e s c r i p t i o n , see D.G. H a r t l e , "Some A n a l y t i c a l , P o l i t i c a l and N o r m a t i v e L e s s o n s from C a r t e r " i n B r o o k s , ed., i b i d . 397 a t 412-3.] T h i s outcome i s g e n e r a l l y a t t r i b u t e d t o t h e power o f s p e c i a l i n t e r e s t groups who opposed t h e r e p o r t : J . G i l l i e s , " F e d e r a l Tax Reform i n a P l u r a l i s t i c S t a t e : Can i t Be Done?", i n B r o o k s , ed., i b i d . 343 a t 343. For a more d e t a i l e d d i s c u s s i o n , see C h a p t e r IV, H i s t o r i c a l C o n t e x t , n o t e s 16-32. was w e l l r e c e i v e d , i n f a c t , q u i t e t h e c o n t r a r y was t r u e : t h e b u l k o f t h e commentary on t h e p r o p o s e d p r o v i s i o n s t r o n g l y denounced i t f o r a v a r i e t y o f r e a s o n s . The range o f c r i t i c i s m s was a p t l y summarised by t h e House o f Commons F i n a n c e Committee,^ and was g e n e r a l l y f o c u s e d on t h e scope,^ n e c e s s i t y ( o r l a c k o f ) ,̂  u n c o n s t i t u t i o n a l i t y ^ and impact^ o f t h e r u l e . The f u l l change, new d e d u c t i o n s a r e i n t r o d u c e d and o l d ones a r e c a n c e l l e d . I n o t h e r words, most o f t h e w h i t e paper p r o p o s a l s do n o t go t o t h e f u n d a m e n t a l s o f t h e system. But t h e a n t i - a v o i d a n c e p r o p o s a l t a k e s away t a x p a y e r s ' s i n h e r e n t r i g h t t o p l a n t h e i r economic a f f a i r s under w e l l - d e f i n e d r u l e s and i t makes a l l p l a n n i n g s u b j e c t t o government c o n s e n t . I t ... a l l o w s t h e government t o t e l l each an e v e r y t a x p a y e r how much i n t a x e s he o r she w i l l pay. Drache, supra, n o t e 2. ^ Canada, House o f Commons, Tax Reform '87: Report of the Standing Committee on Finance and Economic A f f a i r s tabled in the House of Commons on November 16, 1987 (Don M i l l s : R i c h a r d De Boo, 1987) ["the B l e n k a r n R e p o r t " ] a t 197-200. ^ F o r example, t h a t i t was t o o wide i n t h a t i t would d i s a l l o w c e r t a i n t r a n s a c t i o n s t h a t would o t h e r w i s e be c o n s i s t e n t w i t h t h e o b j e c t and s p i r i t o f t h e A c t on t h e b a s i s t h a t t h e s e t r a n s a c t i o n s l a c k e d a b u s i n e s s purpose and were d e s i g n e d t o s e r v e o n l y a s o c i a l o r economic p u r p o s e . Due t o c r i t i c i s m r e g a r d i n g t h e scope, t h e r u l e was s l i g h t l y a l t e r e d i n t h a t t h e b u s i n e s s purpose was s u b s t i t u t e d w i t h a n o n-tax purpose t e s t . ^ F o r example, i t was contended t h a t e x i s t i n g s t a t u t o r y and j u d i c i a l a n t i - a v o i d a n c e measures were adequate t o e f f e c t i v e l y combat o f f e n s i v e t a x a v o i d a n c e . These arguments were p a r t i c u l a r l y r e l i e d upon by t h e J o i n t Committee o f CBA/CICA: "Recommendations on t h e F e d e r a l Reform P r o p o s a l s o f June 18, 1987 t o Amend t h e Income Tax A c t " , S u b m i s s i o n t o t h e House o f Commons S t a n d i n g Committee on F i n a n c e and Economic A f f a i r s , r e p r i n t e d i n V. K r i s h n a , Tax Avoidance: The General Anti- Avoidance Rule ( T o r o n t o : C a r s w e l l , 1990) A p p e n d i x A.2, 101 a t 103 and " P o w e r f u l Committee Takes More S h o t s a t Tax Reform" (December 1988) Bottom Line 22. CHAPTER II SECTION 245 A. SECTION 245 - ITS RECEPTION S e c t i o n 245 was i n i t i a l l y p r o p o s e d as p a r t o f t h e t a x r e f o r m package p r e s e n t e d by t h e C o n s e r v a t i v e government i n 1987.^ I t g e n e r a t e d a g r e a t d e a l o f i n t e r e s t and p u b l i c i t y from t h e moment of i t s i n i t i a l p r o p o s a l , a l b e i t g e n e r a l l y o n l y w i t h i n t h e t a x p r o f e s s i o n a l and b u s i n e s s communities.^ I t s i n t r o d u c t i o n was h e r a l d e d by one commentator as b e i n g " p r o b a b l y t h e s i n g l e most s i g n i f i c a n t l e g i s l a t i v e development i n t h e h i s t o r y o f Canadian income t a x a t i o n " . ' However, t h i s i s n o t t o i m p l y t h a t t h e r u l e ^ The main government documents d e t a i l i n g t h e t a x r e f o r m measures were as f o l l o w s : Canada, Department o f F i n a n c e , Tax Reform 1987 (Ottawa: t h e Department, June 18, 1987); Canada, Department o f F i n a n c e , Tax Reform 1987: Income Tax Reform, (Ottawa: t h e Department, June 18, 1987); Canada, Department o f F i n a n c e , Tax Reform 1987: Economic & F i s c a l Outlook (Ottawa: t h e Department, June 18, 1987). ^ Concern was e x p r e s s e d a t t h e t i m e r e g a r d i n g t h i s l a c k o f a t t e n t i o n w i t h i n t h e g e n e r a l media: " A n t i - A v o i d a n c e P r o p o s a l Goes Too F a r " (1987) 9 Canadian Taxpayer 121 a t 122. Examples o f w r i t i n g s w i t h i n t h e p u b l i c media i n c l u d e : D. Beach, " A n t i - a v o i d a n c e R u l e s a r e an End Run Around t h e C o u r t s " Financial Times (29 June 1987) 25; P. DeMont, " C l o s i n g t h e L o o p h o l e s : G e n e r a l Tax R u l e D e a l t Blow" Financial Times (5 O c t o b e r 1987) 3; A. Drache, " U g l y Weapon L u r k s i n Tax White Paper" Financial Post (27 J u l y 1987) 9; M. D r o u i n , " C l e a r l y D e f i n e d R u l e s a r e Needed on T i g h t e n i n g Tax Escape H a t c h e s " Montreal Gazette (27 June 1987) H3; D. F r a n c i s , " S t r a n d e d on t h e Road t o Reform" ( J u l y 1987) 100 Maclean's 5; B. L i t t l e , " A c c o u n t a n t s , Lawyers Say P l u g Too B i g f o r Tax Gaps" The Globe and Mail (20 June 1987) B l & B4; "Ottawa t o P r o c e e d w i t h GAAR" The Globe and Mail (17 December 1987) B8 & E. Roseman, " A n t i - a v o i d a n c e Law I r k s Tax P l a n n e r s " The Globe and Mail (28 November 1988) B l & B4. ' V. K r i s h n a , "GAAR: The U l t i m a t e Tax A v o i d a n c e Weapon" (1988) 2 Canadian Current Tax C75. Reasons f o r i t s p e r c e i v e d i m p o r t a n c e a r e s u g g e s t e d i n t h e f o l l o w i n g s t a t e m e n t : [W]hen f i s c a l and economic c i r c u m s t a n c e s d i c t a t e , t a x r a t e s f o r c e o f t h e condemnation even f o r c e d a Department o f F i n a n c e o f f i c i a l t o p u b l i c l y come t o i t s d e f e n c e . ' Moreover, t h e t i r a d e a g a i n s t t h e r u l e was b o t h constant^" and came from i n f l u e n t i a l q u a r t e r s : n o t o n l y was i t c h a l l e n g e d by t h e t a x p r o f e s s i o n a l and b u s i n e s s communities, b u t a l s o by an element o f t h e government i t s e l f . 11 I t i s a g a i n s t t h i s b ackdrop t h a t i t i s p r o p o s e d t h a t ^ F o r example, i t was argued t h a t t h e r u l e was, i n t e r a l i a , v o i d f o r vagueness, c o n t r a r y t o t h e r u l e o f law o r i n c o n s i s t e n t w i t h t h e C h a r t e r o f R i g h t s and Freedoms. ° For example, i t was a l l e g e d t h a t t h e u n c e r t a i n t y i t would g e n e r a t e would s e v e r e l y hamper b u s i n e s s l i f e and moreover, would i n c r e a s e c o m p l i a n c e c o s t s by f o r c i n g t a x p a y e r s t o seek advance r u l i n g s . I t was a l s o argued t h a t t h e r u l e v e s t e d t o o much power (and t h u s p o t e n t i a l f o r abuse) i n Revenue Canada a s , u n t i l j u d i c i a l l y c o n s i d e r e d , i t would be d e t e r m i n i n g i t s scope and a p p l i c a t i o n , a r o l e i t i s not e q u i p p e d t o u n d e r t a k e . ' See D.A. Dodge, "A New and More Coherent Approach t o Tax A v o i d a n c e " (1988) 3 6 Canadian Tax Journal 1 and "Tax Reform and t h e A n t i - A v o i d a n c e P r o p o s a l s " 1987 B r i t i s h Columbia Tax Conference, t a b 4. 1° The p r o v i s i o n was c r i t i c i s e d from t h e moment o f i t s i n i t i a l c o n c e p t i o n , up t o and beyond, i t s f i n a l enactment. I n p a r t i c u l a r , o p p o s i t i o n was v e n t e d a t e v e r y s t e p t h r o u g h o u t t h e l e g i s l a t i v e p r o c e s s - t h e changes e f f e c t e d i n subsequent d r a f t s ( t h e r e were 2 major d r a f t s - t h e o r i g i n a l v e r s i o n and t h e 18 December 1987 d r a f t ) were a t t a c k e d , even though such a l t e r a t i o n s may have been i n t r o d u c e d i n r e s p o n s e t o p r e v i o u s c r i t i c i s m . I n a l l , i t i n d i c a t e s t h a t t h e t a x community was d e t e r m i n e d n o t t o be m o l l i f i e d . 11 B l e n k a r n R e p o r t , supra, n o t e 4, w h i c h a l t h o u g h s u p p o r t e d t h e g e n e r a l p r i n c i p l e o f a GAAR, recommended t h a t a d i f f e r e n t form be adopted - s i g n i f i c a n t l y , w i t h o u t a b u s i n e s s purpose t e s t . Compare t h i s w i t h t h e s t r o n g d e r i s o r y comments made by t h e S t a n d i n g Senate Committee on B a n k i n g Trade and Commerce: Canada, Department o f F i n a n c e , Tax Reform '87: Report of the Standing Committee on Banking, Trade and Commerce tabled on December 1, 1987 (Don M i l l s : R i c h a r d De Boo, 1987) a t 55: "... a v a s t m a j o r i t y o f b r i e f s and t e s t i m o n y r e f e r r e d t o t h e Government's new a n t i - a v o i d a n c e p r o v i s i o n . W i t h good r e a s o n , not a s i n g l e v o i c e was h e a r d i n s u p p o r t o f t h i s p r o p o s a l " . t h e mechanics o f s e c t i o n 245 w i l l be b r i e f l y d i s c u s s e d . B. SECTION 245 - ITS SUBSTANCE S u c c i n c t l y p u t , t h e purpose o f GAAR i s t o p r e v e n t " a b u s i v e " t a x a v o i d a n c e t r a n s a c t i o n s o r arrangements by i n t r o d u c i n g a b u s i n e s s p u rpose t e s t ( o r t e c h n i c a l l y , a non-tax purpose t e s t ) and a s t e p t r a n s a c t i o n d o c t r i n e . I n t h e p r a c t i c a l s e n s e , i t implements t h i s o b j e c t i v e by p r o v i d i n g t h a t such t r a n s a c t i o n s w i l l n o t be g i v e n e f f e c t t o by t h e t a x i n g a u t h o r i t i e s : i n s t e a d t h e t a x consequences w i l l be d e t e r m i n e d as i s " r e a s o n a b l e i n t h e ci r c u m s t a n c e s " . ^ ^ The r u l e i s f r i g h t e n i n g l y s i m p l e i n i t s scope o f a p p l i c a t i o n : w i t h one e x c e p t i o n , any t a x m o t i v a t e d t r a n s a c t i o n o r s e r i e s o f t r a n s a c t i o n s t h a t r e s u l t i n a t a x b e n e f i t w i l l be r e g a r d e d as an " a v o i d a n c e t r a n s a c t i o n " . ^ ' The e x c e p t i o n r e l a t e s t o t h e r e c o g n i t i o n a f f o r d e d by t h e government t o t h e f a c t t h a t t h e A c t i s i n t e n d e d t o a p p l y t o t r a n s a c t i o n s w i t h r e a l economic s u b s t a n c e , and t h a t t h e A c t i t s e l f encourages t r a n s a c t i o n s t h a t a r e p r i m a r i l y t a x - m o t i v a t e d , ^ ^ f o r example, " b u t t e r f l y " r e o r g a n i s a t i o n s under p a r a g r a p h 5 5 ( 3 ) ( b ) . C o n s e q u e n t l y , t h e r u l e w i l l n o t a p p l y t o deny t a x b e n e f i t s t h a t r e s u l t from t r a n s a c t i o n s w h i c h a r e n o t c o n t r a r y t o t h e " o b j e c t and s p i r i t o f t h e p r o v i s i o n s o f t h e A c t r e a d as a whole", even s u b s e c t i o n 2 4 5 ( 2 ) . s u b s e c t i o n 2 4 5 ( 3 ) . Canada, Department o f F i n a n c e , Explanatory Notes to Draft L e g i s l a t i o n and Regulations Relating to Income Tax Reform (Ottawa: A p r i l 1988) a t 348. though t h e y a r e p r i m a r i l y t a x motivated.''^ One f i n a l p o i n t t o n o t e i n t h e mechanics o f t h e GAAR i s t h a t i t i s i n t e n d e d as a p r o v i s i o n o f l a s t r e s o r t a f t e r t h e a p p l i c a t i o n o f t h e o t h e r p r o v i s i o n s o f t h e A c t , i n c l u d i n g s p e c i f i c a n t i - a v o i d a n c e measures. C. SECTION 245 - EXTERNAL AIDS TO INTERPRETATION From t h e t i m e o f t h e p r o p o s a l o f s e c t i o n 245, i t seems t h a t t h e government f o r e s a w t h e problems t h a t would be g e n e r a t e d by t h e u n c e r t a i n t y o f t h e r u l e . However, r a t h e r t h a n c h a n g i n g t h e fo r m a t o f s e c t i o n 245 i t s e l f , t h e government a t t e m p t e d t o assuage f e a r s by, i n t e r a l i a , p r o d u c i n g e x p l a n a t o r y n o t e s b o t h a t t h e t i m e o f i n t r o d u c t i o n o f t h e pr o p o s e d p r o v i s i o n ^ ^ and J j b i d . Ibid, a t 345. I t i s a r g u a b l e t h a t s e c t i o n 245 was d e l i b e r a t e l y s t r u c t u r e d t o be u n c e r t a i n t o enhance i t s t h r e a t e n i n g p r e s e n c e , as t h e more u n c e r t a i n t a x p a y e r s a r e o f t h e i r p o s i t i o n , t h e l e s s l i k e l y t h e y a r e t o be adventuresome: R.D. Brown e t a l , "GAAR and Tax P r a c t i c e : More Q u e s t i o n s t h a n Answers" i n Report of Proceedings of the F o r t y - F i r s t Tax Conference, 1989 Co n f e r e n c e R e p o r t ( T o r o n t o : Canadian Tax F o u n d a t i o n , 1990) 11.1 a t 11:3. However, f o r a d i s c u s s i o n on t h e problems o f d r a f t i n g a more p r e c i s e p r o v i s i o n , see t h e comments by Mr J i m W i l s o n ( G e n e r a l C o u n s e l / G e n e r a l D i r e c t o r , Tax C o u n s e l D i v i s i o n , Department o f Fi n a n c e ) i n "Minutes t o t h e Commons S t a n d i n g Committee on F i n a n c e and Economic A f f a i r s (Chairman: Don B l e n k a r n ) f o r June 29, 1987 on t h e g e n e r a l a n t i - a v o i d a n c e r u l e p r o p o s e d as p a r t o f t h e June 18 t a x r e f o r m package" as quoted i n K r i s h n a , supra, n o t e 6, Appendix A.7 a t 134-6. Tax Reform 1987: Income Tax Reform, supra, n o t e 1, Annex 1 a t 137. l a t e r i n A p r i l 1988, t o e x p l a i n t h e December 1987 amendments. 1' F u r t h e r m o r e , i t committed i t s e l f t o p u b l i s h one o r more i n t e r p r e t a t i o n b u l l e t i n s o r c i r c u l a r s a t a l a t e r d a t e , 2 ° w h i c h i t d u l y d i d w i t h t h e i s s u a n c e o f Information C i r c u l a r 88-2, " G e n e r a l A n t i - A v o i d a n c e R u l e : S e c t i o n 245 o f t h e Income Tax A c t " , O c t o b e r 21, 1988^^ and a supplements^ t h e r e t o , 1' Explanatory Notes to Draft L e g i s l a t i o n and Regulations Relating to Income Tax Reform, supra, n o t e 14. Notes were a l s o p u b l i s h e d a t t h e t i m e o f t h e s e amendments: Canada, Department o f F i n a n c e , Supplementary Information Relating to Tax Reform Measures tabled in the House of Commons by the Honourable Michael H. Wilson, Minister of Finance (Ottawa: 16 December 1987) . 2° Tax Reform: Income Tax Reform, supra, n o t e 1 a t 130. 21 I t i s i n t e r e s t i n g t h a t an I n f o r m a t i o n C i r c u l a r was p u b l i s h e d r a t h e r t h a n an I n t e r p r e t a t i o n B u l l e t i n . The f o r m e r i s u s u a l l y a s t a t e m e n t o f t h e a p p l i c a t i o n o r a d m i n i s t r a t i v e p r o c e d u r e o f t h e A c t , r a t h e r t h a n an i n t e r p r e t a t i o n o f t h e law. I t has been s u g g e s t e d t h a t t h i s c o u r s e o f a c t i o n c onnotes Revenue Canada•s r e c o g n i t i o n o f t h e u n c e r t a i n t y r e g a r d i n g t h e i n t e r p r e t a t i o n and i n d e e d , fundamental s i g n i f i c a n c e o f t h e new p r o v i s i o n . J.S. W i l k i e , "The World A c c o r d i n g t o GAAR" (1988) Canada Tax Letter, No. 368 (De Boo, 1988). 22 Supplement 1, J u l y 13, 1990. T h i s I n f o r m a t i o n C i r c u l a r and Supplement a r e t h e o n l y p o l i c y s t a t e m e n t s o f Revenue Canada's p o s i t i o n as r e g a r d s t a x a v o i d a n c e . A p r e v i o u s s t a t e m e n t c o n t a i n e d i n Information C i r c u l a r 73-10R2 (24 A p r i l 1978) was d e l e t e d when t h e C i r c u l a r was r e v i s e d by Information C i r c u l a r 73-10R3 "Tax E v a s i o n " , 13 F e b r u a r y 1987: H.J. K e l l o u g h , "A D i s c u s s i o n o f t h e White P a p e r ' s P r o p o s e d G e n e r a l A n t i - A v o i d a n c e R u l e " 1987 B r i t i s h Columbia Tax Conference, t a b 6 a t 14. 2^ The F i n a n c e Department a l s o r e l e a s e d a b o o k l e t , " Q u e s t i o n s and Answers on Tax Reform", c o n t a i n i n g g e n e r a l i n f o r m a t i o n on t h e White Paper p r o p o s a l s ( i n c l u d i n g t h e GAAR): D. Beach, " F i n a n c e Department Book Answers Tax Reform Q u e s t i o n s " Financial Times (19 October 1987) 26. These e f f o r t s have been promoted by t h e government as b e i n g s u c c e s s f u l i n a c h i e v i n g t h e i r p urpose, n o t e comments made by one Department o f F i n a n c e o f f i c i a l : "...much has been done t o However, none o f t h e s e p u b l i c a t i o n s was met w i t h g r e a t e n t h u s i a s m by t h e t a x community, b e i n g c r i t i c i s e d on t h e b a s i s o f t h e i r l i m i t e d v a l u e i n p r o v i d i n g g u i d a n c e as t o t h e a p p l i c a t i o n o f t h e r u l e . I n p a r t i c u l a r , t h e c i r c u l a r m e r e l y o u t l i n e s v a r i o u s t r a n s a c t i o n s , and t h e n makes t e r s e s t a t e m e n t s as t o whether such t r a n s a c t i o n s w i l l be t r e a t e d as b e i n g " a b u s i v e " o r n o t . There i s a d i s t i n c t l a c k o f e x p l a n a t i o n as t o t h e t h o u g h t - p r o c e s s i n v o l v e d i n c l a s s i f y i n g t h e s e d i f f e r e n t t r a n s a c t i o n s , ^ * ^ and t h e r e f o r e , u n l e s s t r a n s a c t i o n s f a l l e x a c t l y w i t h i n t h e examples g i v e n i n t h e c i r c u l a r , t a x p a y e r s a r e b e r e f t o f any s u b s t a n t i v e g u i d a n c e as t o how a p a r t i c u l a r t r a n s a c t i o n would be t r e a t e d by t h e t a x i n g a u t h o r i t i e s , w i t h t h e r e s u l t t h a t advance t a x r u l i n g s w i l l i n c r e a s i n g l y be s o u g h t . I t i s m i n i m i z e t h e u n c e r t a i n t y s u r r o u n d i n g t h e i m p l e m e n t a t i o n o f t h e new r u l e . The l o n g p e r i o d o f c o n s u l t a t i o n , t h e changes made t o t h e o r i g i n a l v e r s i o n o f t h e r u l e , t h e e x t e n s i v e t e c h n i c a l n o t e s , and t h e p r o m i s e t h a t Revenue Canada w i l l p r o v i d e f u r t h e r i n f o r m a t i o n b e f o r e t h e r u l e i s implemented w i l l h e l p r e d u c e t h e u n c e r t a i n t y t o an a c c e p t a b l e l e v e l " : Dodge, supra, n o t e 9 ("A New and More Coherent Approach t o Tax Avoidance") a t 22. For example, B .J. A r n o l d & J.R. W i l s o n , "The G e n e r a l A n t i - A v o i d a n c e R u l e - P a r t 3" (1988) 36 Canadian Tax Journal 13 69 a t 1376 who o b s e r v e t h a t Revenue Canada's d e c i s i o n s r e g a r d i n g t h e a p p l i c a b i l i t y o f t h e r u l e i n some examples ( i n t h i s c a s e , Examples 22 and 23 i n t h e C i r c u l a r ) a r e based n o t on an o b j e c t and s p i r i t a pproach, b u t i n s t e a d on some u n s p e c i f i e d s t a n d a r d t h a t l o o k s v e r y much l i k e a " s m e l l " t e s t . P o s s i b l e r e a s o n s advanced f o r t h e l i m i t e d n a t u r e o f t h e C i r c u l a r i n c l u d e : Revenue Canada b e l i e v e t h e s u b s t a n t i v e law on t a x a v o i d a n c e t o be unchanged and t h a t i t was t o o premature i n t h e s t a g e o f t h e GAAR's l i f e t o make a g e n e r a l s t a t e m e n t o f i n t e r p r e t a t i o n . W i l k i e , supra, n o t e 21. As p r e v i o u s l y mentioned, t h e i n c r e a s e d c o s t s g e n e r a t e d i n s e e k i n g advance t a x r u l i n g s have been t h e s u b j e c t o f c r i t i c i s m : supra, n o t e 8. t h e r e f o r e d i f f i c u l t t o d i s c e r n w i t h any degree o f a c c u r a c y t h e g e n e r a l approach t o be t a k e n by Revenue Canada beyond t h e s p e c i f i c t r a n s a c t i o n s d i s c u s s e d . The E x p l a n a t o r y Notes a r e n o t o n l y s u b j e c t e d t o t h e same c r i t i c i s m , 2 7 b u t i n a d d i t i o n , t h e i r p r a c t i c a l s i g n i f i c a n c e was i n i t i a l l y q u e s t i o n e d i n l i g h t o f t h e c o n t r o v e r s y o v e r t h e i r a d m i s s i b i l i t y i n c o u r t . m r e s p o n s e t h e government p r o p o s e d t h a t a p r o v i s i o n be i n c l u d e d e x p r e s s l y d i r e c t i n g t h a t r e c o u r s e may be had t o t h e s e Notes.2 ' However, a f t e r an h e a t e d debate r e g a r d i n g t h e m e r i t s o f such a provision,^° t h e measure was 2̂  Note, however comments made t o t h e c o n t r a r y : " [ T ] h e main v a l u e o f t h e c i r c u l a r . . . l i e s i n what i t d i s c l o s e s about Revenue Canada's g e n e r a l approach t o t h e a p p l i c a t i o n o f t h e r u l e " : A r n o l d & W i l s o n , "The G e n e r a l A n t i - A v o i d a n c e R u l e - P a r t 3", supra, n o t e 24 a t 1374. 27 However, f o r a c o n t r a r y v i e w t h a t t h e E x p l a n a t o r y Notes a r e a r g u a b l y o f g r e a t e r a s s i s t a n c e , i n t h a t t h e y go beyond m e r e l y p r o v i d i n g examples of t h e c i r c u m s t a n c e s i n w h i c h t h e GAAR w i l l be a p p l i e d by a l s o o u t l i n i n g t h e r a t i o n a l e o f t h e r u l e and e x p l a i n i n g i t s o p e r a t i o n : A r n o l d & W i l s o n , ibid, a t 1372. But, n o t e o t h e r v i e w p o i n t s , f o r example, t h a t t h e y c o n t a i n o n l y a p a r t i a l l i s t o f t r a n s a c t i o n s and t h e r e f e r e n c e s t o g e n e r a l p u r pose do n o t n e c e s s a r i l y add a n y t h i n g t o t h e l e g i s l a t i o n : H.A. J a c q u e s , "A P r a c t i c a l Overview o f GAAR and P a r t s IV.1 and V I . 1 D i v i d e n d Taxes", 1988 P r a i r i e Tax Conference ( T o r o n t o : Canadian Tax F o u n d a t i o n , 1988), t a b 11 a t 8. 2̂  F o r example, K e l l o u g h , supra, n o t e 22 a t 72-5. 2' S u b s e c t i o n 245(10) o f t h e December 16, 1987 amendments. °̂ F or example, t h a t such a p r o v i s i o n would a c c o r d t h e Notes q u a s i - l e g i s l a t i v e s t a t u s , t h a t problems may o c c u r i n t h e f u t u r e r e g a r d i n g t h e i r m o d i f i c a t i o n i f government p o l i c y changed, o r what t h e p o s i t i o n would be i f Revenue Canada a d m i n i s t r a t i v e p o l i c y c o n f l i c t e d w i t h t h e Notes. F o r a vehement c r i t i q u e o f t h e s u b s e c t i o n , see J o i n t Committee o f CBA/CICA, "Comments on t h e GAAR" as r e p r i n t e d i n K r i s h n a , supra, n o t e 6, Appendix A.5 d e l e t e d and d i s a p p e a r e d from t h e f i n a l v e r s i o n o f t h e r u l e . Thus, i t i s s t i l l n o t c l e a r what s t a t u s w i l l be a c c o r d e d t h e s e Notes i f , o r when, t h e l e g i s l a t i o n i s c o n s i d e r e d by t h e c o u r t s . ' ^ a t 123-4. An i m p o r t a n t i n i t i a l p o i n t t o n o t e i n d e b a t i n g t h i s i s s u e i s t h a t q u e s t i o n s r e g a r d i n g t h e a d m i s s i b i l i t y o f e x t e r n a l a i d s o n l y a r i s e i f t h e r e i s an a m b i g u i t y i n t h e i n t e r p r e t a t i o n o f t h e p r o v i s i o n : K e l l o u g h , supra, n o t e 22 a t 74. However, c o n s i d e r i n g t h e u n c e r t a i n t y t h a t c u r r e n t l y shrouds s e c t i o n 245, t h e r e would n o t seem t o be much doubt t h a t a m b i g u i t i e s would e x i s t i n i t s a p p l i c a t i o n b e f o r e t h e c o u r t s . F o r a g e n e r a l d i s c u s s i o n on t h e a d m i s s i b i l i t y o f e x t r i n s i c e v i d e n c e i n c o u r t s , see V. K r i s h n a , "Use o f E x t r i n s i c E v i d e n c e i n D e t e r m i n i n g t h e " O b j e c t and S p i r i t " o f Tax L e g i s l a t i o n " (1985) 1 Canadian Current Tax C117. Our c o u r t s have n o t r e f e r r e d t o E x p l a n a t o r y Notes i n t h e i r i n t e r p r e t a t i o n o f s t a t u t o r y p r o v i s i o n s : K e l l o u g h , supra, n o t e 22 a t 72. However, t h e r e i s commentary t o t h e e f f e c t t h a t c a s e - l a w [ N o w e g i j i c k v. The Queen, 83 DTC 5041 and H a r e l v. The Deputy M i n i s t e r o f Revenue o f t h e P r o v i n c e o f Quebec, (1978) 1 S.C.R. 851] " p r o v i d e s c o n s i d e r a b l e scope f o r t h e s o u r c e o f a d m i n i s t r a t i v e p o l i c y and i n t e r p r e t a t i o n [ b e i n g ] u s e d as a i d s i n c o n s t r u i n g t h e Income Tax A c t " : D.W. S m i t h , Q.C., "Recent J u d i c i a l D e c i s i o n s C o n c e r n i n g Income Tax A d m i n i s t r a t i o n " i n Report of Proceedings of T h i r t y - S i x t h Tax Conference, 1984 C o n f e r e n c e R e p o r t ( T o r o n t o : Canadian Tax F o u n d a t i o n , 1985) 38 a t 77. I n l i g h t o f t h e above and t h e a d m i s s i b i l i t y o f I n t e r p r e t a t i o n B u l l e t i n s and P a r l i a m e n t a r y d e b a t e s as r e c o r d e d i n Hansard, i t i s s u b m i t t e d t h a t , i n c o n t i n u a t i o n o f t h i s j u d i c i a l t r e n d , e x p l a n a t o r y n o t e s would most p r o b a b l y be a c c e p t e d as e x t r i n s i c e v i d e n c e by t h e c o u r t s . D. SECTION 245 - ITS INTERPRETATION AND APPLICATION I t has g e n e r a l l y been conceded t h a t t h e r u l e w i l l d e v e l o p on two l e v e l s : a d m i n i s t r a t i v e l y and j u d i c i a l l y ^ ^ w i t h t h e c o u r t s b e i n g t h e f i n a l a r b i t e r s i n d e t e r m i n i n g t h e e x a c t scope and ambit o f s e c t i o n 245. However, t h e r u l e has n o t y e t been c o n s i d e r e d by t h e j u d i c i a r y , and u n t i l t h a t t i m e . Revenue Canada's a d m i n i s t r a t i v e approach p r e v a i l s . One may be j u s t i f i e d i n e x p r e s s i n g s u r p r i s e r e g a r d i n g t h i s l a c k o f j u d i c i a l i n t e r p r e t a t i o n , c o n s i d e r i n g t h a t t h e p r o v i s i o n has been i n f o r c e f o r a l m o s t f o u r y e a r s . D u r i n g t h i s p e r i o d however t h e r e has been some a c t i v i t y i n r e l a t i o n t o t h e p r o v i s i o n : advance t a x r u l i n g s have been i s s u e d , t e c h n i c a l i n t e r p r e t a t i o n l e t t e r s o b t a i n e d ^ ^ and a l l e g e d l y , t h e GAAR has been B. J . A r n o l d & J.R. W i l s o n , "The G e n e r a l A n t i - A v o i d a n c e R u l e - P a r t 2" (1988) 36 Canadian Tax Journal 1123 a t 1180. See f o r example. Advance Tax Rulings No.ÀTR-42, " T r a n s f e r o f s h a r e s " ( d a t e d December 13,1991); ATR-44, " U t i l i z a t i o n o f d e d u c t i o n s and c r e d i t s w i t h i n a r e l a t e d c o r p o r a t e group" ( d a t e d F e b r u a r y 17, 1992) and ATR-47, " T r a n s f e r o f A s s e t s t o R e a l t y c o " ( d a t e d F e b r u a r y 24, 1992). I n t h e f i r s t two r u l i n g s , t h e t a x - m i n i m i z i n g schemes were s t a t e d t o be " a v o i d a n c e t r a n s a c t i o n s " , b u t y e t s u b s e c t i o n 245(2) was c o n s i d e r e d t o be i n a p p l i c a b l e on t h e grounds t h a t t h e y d i d n o t c o n s t i t u t e a misuse o f t h e p r o v i s i o n s and/or an abuse o f t h e A c t r e a d as a whole. I n t h e l a t t e r r u l i n g , t h e s u b s e c t i o n was t e r s e l y s t a t e d n o t t o a p p l y , w i t h o u t any i n d i c a t i o n o f t h e p r e m i s e s on w h i c h t h i s d e c i s i o n was based. R e f e r e n c e t o t h e c o n t e n t o f such l e t t e r s i s made by Claud e Desy, ed., Access to Canadian Income Tax (Don M i l l s : CCH Canadian) ( l o o s e l e a f ) , p a r a g r a p h 87,130, " A p p l i c a t i o n t o T r a n s a c t i o n " : see J.A. S t a c e y , "Revenue Canada's A d m i n i s t r a t i o n of t h e G e n e r a l A n t i - A v o i d a n c e R u l e : An Update" i n Report of Proceedings of the Forty-Second Tax Conference, 1990 Co n f e r e n c e R e p o r t ( T o r o n t o : Canadian Tax F o u n d a t i o n , 1991) 4:2 a t 4:3. t h r e a t e n e d , ' ^ c i t e d i n p r o p o s a l l e t t e r s and r e a s s e s s m e n t s have been i s s u e d . ' ^ However, as o f y e t , t h e w r i t e r i s n o t aware o f any c a s e p e n d i n g b e f o r e t h e c o u r t s where t h e a p p l i c a t i o n o f t h e GAAR i s an i s s u e . ' ^ S u g g e s t i o n s , n o t a b l y from a p u r e l y academic p e r s p e c t i v e , f o r t h i s l a c k o f j u d i c i a l i n t e r p r e t a t i o n may i n c l u d e t h e h e s i t a t i o n on t h e p a r t o f Revenue Canada t o r e l y on s e c t i o n 245, p a r t i c u l a r l y when t h e same r e s u l t can be a c h i e v e d by a r g u i n g t h e a p p l i c a b i l i t y o f o t h e r measures ( s t a t u t o r y o r j u d i c i a l ) , o r i f t h e r u l e i s b e i n g i n v o k e d t o d e f e a t t a x p l a n n i n g schemes, t h e n t h e u n w i l l i n g n e s s o f t a x p a y e r s o r Revenue Canada t o have t h e m a t t e r s e t t l e d i n c o u r t . Of t h e two o p t i o n s , i t i s s u g g e s t e d t h a t t h e c o r r e s p o n d e n c e mentioned above ( f o r example, advance t a x r u l i n g s e t c . ) i s i n d i c a t i v e somewhat o f Revenue Canada's p r o p e n s i t y t o r e l y on t h e GAAR as a u t h o r i t y f o r n o t g i v i n g e f f e c t t o t a x - m i n i m i z a t i o n t r a n s a c t i o n s . T h i s would be c o n s i s t e n t w i t h t h e more a g g r e s s i v e a t t i t u d e t h a t Revenue Canada has adopted i n r e c e n t y e a r s towards 35 II [-̂ j T o r o n t o t a x l a w y e r was r e c e n t l y i n v o l v e d i n a r e a l e s t a t e s y n d i c a t i o n d e a l t h a t seemed t o be a f f e c t e d by t h e g e n e r a l a n t i - a v o i d a n c e r u l e . The d e a l was f i n a l l y a b o r t e d a f t e r r e p e a t e d phone c a l l s and l e t t e r s t o Ottawa." E. Roseman, " A n t i - A v o i d a n c e Law I r k s Tax P l a n n e r s " The Globe and Mail (28 November 1988) B l a t B4. '̂  "Revenue Canada Round T a b l e " i n R e p o r t o f P r o c e e d i n g s o f 1991 B r i t i s h Columbia Tax Conference ( u n p u b l i s h e d ) a t 7. '̂  However, i t s h o u l d be n o t e d t h a t t h i s s t a t e m e n t s h o u l d be q u a l i f i e d i n t h e sense t h a t i t i s based o n l y on a r e a d i n g o f c u r r e n t t a x l i t e r a t u r e , and t h a t o f t e n such i n f o r m a t i o n i s w i d e l y known w i t h i n t h e t a x community, y e t n o t communicated t o t h e p u b l i c a t l a r g e . t a x p l a n n i n g . I f t h i s i s t h e c a s e , t h e n t h e i s s u e r e m a i n s as t o why t h e a p p l i c a t i o n o f t h e p r o v i s i o n has n o t y e t been c h a l l e n g e d i n c o u r t . One v i a b l e r e a s o n i s perhaps t h a t a t p r e s e n t t h e r e has n o t been a s u f f i c i e n t l a p s e o f t i m e s i n c e t h e enactment o f t h e r u l e f o r r e a s s e s s m e n t s t o be i s s u e d , t h e i n t e r n a l a p p e a l p r o c e d u r e o f Revenue Canada t o be e x h a u s t e d and f o r c a s e s t o t h u s f i n d t h e i r way i n t o t h e j u d i c i a l s t r u c t u r e . A l t e r n a t i v e l y , p e rhaps t h e r e i s a r e l u c t a n c e on b o t h t h e p a r t o f t a x p a y e r s (due t o t h e c o s t s o f l i t i g a t i o n , u n c e r t a i n t y o f s u c c e s s - p a r t i c u l a r l y t h e payment o f t a x and i n t e r e s t i f u n s u c c e s s f u l e t c . ) and Revenue Canada ( i n case t h e c o u r t s l i m i t t h e scope o f t h e r u l e ) t o have t h e m a t t e r debated i n court.^® Whatever t h e r e a s o n , i n t h e i n t e r i m p e r i o d b e f o r e j u d i c i a l c o n s i d e r a t i o n , t a x p a y e r s a r e l e f t a t t h e mercy o f Revenue Canada.^' F o r p r e d i c t i o n s on t h e p o s s i b l e j u d i c i a l i n t e r p r e t a t i o n s t o be g i v e n t o t h e GAAR, see R.D. Brown e t al supra, n o t e 17 a t 11:5 and A r n o l d & W i l s o n , "The G e n e r a l A n t i - A v o i d a n c e R u l e - P a r t 3" supra, n o t e 24 a t 1409-1410. A p o s s i b l e c a v e a t t o t h e e x c l u s i v e n e s s o f Revenue Canada's d i s c r e t i o n i n d e t e r m i n i n g t h e a p p l i c a t i o n o f s e c t i o n 245 ( i n t h e absence o f j u d i c i a l i n t e r p r e t a t i o n ) r e l a t e s t o t h e p o t e n t i a l i n v o l v e m e n t o f p o l i t i c i a n s . A r g u a b l y , i t i s p o s s i b l e t h a t t a x p a y e r s c o u l d a p p e a l t o p o l i t i c i a n s r e g a r d i n g t h e a p p l i c a t i o n o f t h e p r o v i s i o n . The p o l i t i c i a n s c o u l d i n t u r n a p p l y p r e s s u r e t o Revenue Canada t o d e t e r m i n e t h e i s s u e i n f a v o u r o f t h e t a x p a y e r . The c o n c e i v a b i l i t y o f t h i s h y p o t h e s i s i s s u p p o r t e d by p a s t e x p e r i e n c e w h i c h g i v e s some i n d i c a t i o n o f t h e i n v o l v e m e n t o f C a b i n e t M i n i s t e r s i n t h e a d m i n i s t r a t i o n o f t h e Income Tax A c t . F o r example, t h e d e c i s i o n r e g a r d i n g t h e s u c c e s s of t a x m i n i m i z a t i o n schemes u n d e r t a k e n by t h e Reichmanns i n t h e i r t a k e o v e r o f G u l f Canada ( r e s u l t i n g i n t a x b r e a k s o f o v e r $500 m i l l i o n ) were s u p p o s e d l y t a k e n a t C a b i n e t l e v e l : L. McQuaig, Behind Closed Doors: How the Rich Won Control of the Tax System ... And Ended Up Richer (Markam, Ont.: V i k i n g , 1987) a t 294-9. See a l s o , " W i l s o n May R e v e a l C o r p o r a t e Tax B r e a k s " Montreal Gazette (31 O c t o b e r 1985) B l . E. SECTION 245 - ITS LEGISLATIVE HISTORY The government f i r s t e x p r e s s e d i t s i n t e n t i o n t o e n a c t a g e n e r a l a n t i - a v o i d a n c e r u l e i n i t s F e b r u a r y , 1987 budget/° C o n s e q u e n t l y , t h e GAAR was i n c l u d e d w i t h i n t h e 1987 t a x r e f o r m package as a means o f a s s i s t i n g i n t h e achievement o f t h e o v e r a l l o b j e c t i v e s o f b r o a d e n i n g t h e t a x base and r e d u c i n g t a x r a t e s . D r a f t l e g i s l a t i o n was d u l y i n c l u d e d i n t h e W h i t e Paper, r e v i s e d d u r i n g t h e l e g i s l a t i v e p r o c e s s ( w i t h t h e r e v i s e d v e r s i o n s e t o u t i n B i l l C-139) , and e n a c t e d , w i t h t h e e f f e c t i v e d a t e b e i n g September 13, 1988. However, t h i s v e r y b r i e f and c l i n i c a l s y n o p s i s does n o t r e v e a l t h e t u r m o i l w h i c h s u r r o u n d e d t h e r u l e d u r i n g i t s passage t h r o u g h t h e p a r l i a m e n t a r y p r o c e s s . N e i t h e r can t h e changes t h a t were made t o t h e o r i g i n a l d r a f t be r e g a r d e d as i n d i c a t i v e , b e i n g o f such a l i m i t e d n a t u r e . However, t h e s e m o d i f i c a t i o n s a r e p r o o f o f t h e f i n a l outcome o f t h e n e g o t i a t i o n s between t h e government and t h e b u s i n e s s and t a x c o m m u n i t i e s , and as s u c h , s h o u l d a t l e a s t be h i g h l i g h t e d . °̂ Canada, Department o f F i n a n c e , Budget P a p e r s , S e c u r i n g Economic Renewal: The Budget Speech, F e b r u a r y 18, 1987, 11 as c i t e d i n B . J . A r n o l d , B r i a n J . & J.R. W i l s o n , "The G e n e r a l A n t i - A v o i d a n c e R u l e - P a r t 1" (1988) 36 Canadian Tax Journal 829 a t 839. S e v e r a l r e a s o n s were p r o f f e r e d by t h e Government t o e x p l a i n i t s i n t r o d u c t i o n , i n c l u d i n g , i n t e r a l i a : a v o i d a n c e arrangements erode t h e t a x base and undermine t h e f a i r n e s s o f t h e Canadian t a x system; t h e e x i s t i n g r u l e s were i n a d e q u a t e t o p r e v e n t such a v o i d a n c e t r a n s a c t i o n s ; t e c h n i c a l a n t i - a v o i d a n c e r u l e s a r e u n d e s i r a b l e - t h e y make t h e system more complex, t h e y sometimes c r e a t e u n i n t e n d e d l o o p h o l e s and t h e y do n o t d e a l w i t h t r a n s a c t i o n s completed b e f o r e t h e amendments become e f f e c t i v e ; C a n a d i a n C o u r t s have c o n t i n u o u s l y r e j e c t e d t h e b u s i n e s s purpose t e s t : Tax Reform 1987: Income Tax Reform, supra, n o t e 1 a t 129. See a l s o . Dodge, ("Tax Reform and t h e A n t i - A v o i d a n c e P r o p o s a l s " ) , supra, n o t e 9 a t 2-4. I n a l l , t h e r e were two main d r a f t s o f t h e r u l e : t h e i n i t i a l v e r s i o n and a December 1987 d r a f t , t h e l a t t e r b e i n g m o d i f i e d by two f u r t h e r r e v i s i o n s , b e f o r e t h e f i n a l v e r s i o n o f s e c t i o n 245 was enacted.^1 B r i e f l y , t h e main d i f f e r e n c e s between t h e o r i g i n a l v e r s i o n as c o n t a i n e d i n t h e June 18, 1987 White Paper^^ ^^d t h e f i n a l v e r s i o n as e n a c t e d a r e as f o l l o w s : - t h e o r i g i n a l v e r s i o n o f t h e r u l e a p p l i e d n o t w i t h s t a n d i n g any o t h e r p r o v i s i o n o f t h e A c t . T h i s n o t w i t h s t a n d i n g c l a u s e was d e l e t e d . - t h e b u s i n e s s purpose t e s t was changed t o a non-tax purpose t e s t - t h e i n c l u s i v e n a t u r e o f " a v o i d a n c e t r a n s a c t i o n " was a l t e r e d t o be n o n - e x c l u s i v e - t h e purpose c l a u s e was r e p l a c e d by s u b s e c t i o n 245(4) w h i c h e x c l u d e s t r a n s a c t i o n s t h a t do n o t i n v o l v e a m i s u s e o r abuse o f t h e p r o v i s i o n s o f t h e A c t - t h e a d j u s t m e n t p r o v i s i o n s were s u b s t a n t i a l l y r e v i s e d - an e f f e c t i v e d a t e was added A n o t h e r v e r s i o n was s u g g e s t e d by t h e House o f Commons S t a n d i n g Committee on F i n a n c e and Economic A f f a i r s , B l e n k a r n R e p o r t , supra, n o t e 4 a t 205-7. ^2 Tax Reform 1987: Income Tax Reform, supra, n o t e 1 a t 143- t h e p r o v i s i o n added by t h e December 16, 1987 v e r s i o n a u t h o r i z i n g c o u r t s t o have r e c o u r s e t o t h e e x p l a n a t o r y n o t e s as an a i d t o c o n s t r u c t i o n o f t h e r u l e was d e l e t e d - t h e p r o v i s i o n s r e g a r d i n g t h e i s s u a n c e o f an assessment, r e a s s e s s m e n t o r a d d i t i o n a l assessment i n r e s p e c t o f a r e q u e s t f o r an a d j u s t m e n t were a l t e r e d . I n i t i a l l y , one may t h i n k t h a t t h i s e x t e n s i v e l i s t o f changes r a d i c a l l y a l t e r e d t h e i n i t i a l p r o p o s a l . However, t h e r u l e r emained l a r g e l y t h e same as r e g a r d s i t s impact and substance.^' T h e r e f o r e , o v e r a l l i t i s f a i r t o say t h a t t h e s e changes were o n l y o f a l i m i t e d n a t u r e - t h e y d i d n o t s t r i k e a t t h e s t r u c t u r e o f t h e r u l e . ^ ^ On t h e f a c e o f i t , t h e most n o t a b l e a l t e r a t i o n i s p e rhaps t h e r e p l a c e m e n t o f t h e b u s i n e s s p u r p o s e t e s t w i t h a n on-tax purpose t e s t , p a r t i c u l a r l y as i t a f f e c t e d t h e scope o f t h e r u l e , and a r g u a b l y because t h e main impetus f o r t h e enactment o f s e c t i o n 245 i n t h e f i r s t p l a c e was t h e a p p a r e n t r e j e c t i o n by t h e Supreme C o u r t o f Canada^^ o f t h e b u s i n e s s purpose t e s t . ^ ^ However, i t i s d e b a t a b l e whether t h e H.J. K e l l o u g h , "A Review and A n a l y s i s o f t h e R e d r a f t e d G e n e r a l A n t i - A v o i d a n c e R u l e " (1988) 3 6 Canadian Tax Journal 23 a t 36. One commentator o b s e r v e d : " [ t h e changes amounted t o a] t i n k e r i n g w i t h a number o f s p e c i f i c i t e m s . " K e l l o u g h , i b i d . S t u b a r t I n v e s t m e n t s L i m i t e d , v. The Queen, [1984] 1 S.C.R. 536, [1984] C.T.C. 294, 84 D.T.C. 6305, 53 N.R. 241. V. K r i s h n a , "GAAR: The U l t i m a t e Tax A v o i d a n c e Weapon" (1988) 2 Canadian Current Tax C43. s u b s t i t u t i o n r e a l l y amounted t o much i n t h a t i t o n l y r e s t r i c t i v e l y narrowed t h e ambit o f r u l e / ^ so t h a t i n e f f e c t t h e non-tax purpose t e s t i s e s s e n t i a l l y t h e b u s i n e s s purpose t e s t i n a l l o t h e r r e s p e c t s , e x c e p t f o r t h i s s m a l l t e c h n i c a l amendment. T h i s c o n c l u d e s t h e d i s c u s s i o n on t h e s u b s t a n c e and l e g i s l a t i v e h i s t o r y o f s e c t i o n 245. From t h i s s o l i d g r o u n d i n g , we can now t u r n t o t h e a n a l y s i s o f t h e r u l e i n i t s s o c i o - p o l i t i c a l and economic c o n t e x t t o enhance our u n d e r s t a n d i n g o f b o t h t h e p r o v i s i o n and t h e i n f l u e n c e o f t h e exogenous f a c t o r s w h i c h s u r r o u n d e d i t s enactment. The amendment was o f a r e l i e v i n g n a t u r e i n t h a t i t e x c l u d e d t r a n s a c t i o n s w h i c h were p r e v i o u s l y caught by s e c t i o n 245, namely, t h o s e t r a n s a c t i o n s w h i c h were n o t c a r r i e d o ut f o r " b u s i n e s s " p u r p o s e s , y e t were n o t p r i m a r i l y t a x m o t i v a t e d e i t h e r , t h e most n o t a b l e example b e i n g f a m i l y t r a n s a c t i o n s . Dodge, supra, n o t e 9 ("A New and More Coherent Approach t o Tax A v o i d a n c e " ) a t 18-19. CHAPTER III POLITICAL AND SOCIAL CONTEXT A. UNDERLYING ASSUMPTIONS I n a n a l y z i n g t h e p o l i t i c a l and s o c i a l c o n t e x t w i t h i n w h i c h s e c t i o n 245 was e n a c t e d i t i s pr o p o s e d t h a t t h e ass u m p t i o n s u n d e r l y i n g t h i s a n a l y s i s f i r s t be d i s c u s s e d . I n p a r t i c u l a r , t h e p r i m a r y a s s u m p t i o n s a r e t h a t t h e t a x system i s t h e outcome o f th e p o l i t i c a l p r o c e s s and t h a t t h e o v e r a l l aim o f t h e government i n i n t r o d u c i n g t h e p r o v i s i o n was t o r e t a i n o f f i c e . T h i s l a t t e r p r e m i s e i n v o l v e s two s t r a n d s w h i c h were b e i n g promoted s i m u l t a n e o u s l y : f i r s t , t h e government wanted t o maximize v o t e s w i t h t h e e l e c t o r a t e t o ens u r e i t s r e - e l e c t i o n , and second, i t wanted t o p l a c a t e t h e s p e c i a l i n t e r e s t g r o u p s , i n p a r t i c u l a r , t h e b u s i n e s s s e c t o r and high-i n c o m e i n d i v i d u a l s . These p r o p o s i t i o n s a r e d i s c u s s e d i n g r e a t e r d e t a i l below. The enactment o f t h e GAAR i s a good i l l u s t r a t i o n o f t h e s e competing f a c t o r s . The f i r s t a s s u m p t i o n o u t l i n e d above can be e x p l a i n e d i n t h e f o l l o w i n g b a s i c t erms: t h e whole c o n c e p t o f t a x a t i o n i s p u r e l y a c r e a t u r e o f s t a t u t e . I n d e m o c r a t i c s t a t e s , s t a t u t e s a r e t h e c r e a t i o n o f l e g i s l a t i v e b o d i e s . T h e r e f o r e , t a x l e g i s l a t i o n , l i k e a l l o t h e r l e g i s l a t i o n , i s a p r o d u c t o f t h i s p o l i t i c a l p r o c e s s . T h i s b r i n g s i n t h e second a s s u m p t i o n as a t t h e v e r y h e a r t o f t h e p o l i t i c a l p r o c e s s l i e s t h e government. I n most d e m o c r a t i c s t a t e s i t i s t h e government w h i c h p r e d o m i n a n t l y d e t e r m i n e s t h e l e g i s l a t i v e agenda. I n p a r t i c u l a r , i t c o n t r o l s , t o a l a r g e e x t e n t , t h e f o r m u l a t i o n and enactment (by way o f p a r t y l o y a l t y ) o f p r o p o s a l s . I n d o i n g s o , governments a r e s u s c e p t i b l e t o o u t s i d e i n f l u e n c e s - t h e y do n o t j u s t p a s s laws w h i c h t h e y t h i n k w i l l be i n t h e i n t e r e s t s o f s o c i e t y . ^ The v e r y essence o f t h e d e m o c r a t i c s t a t e means t h a t t h e y have t o be v o t e d i n t o o f f i c e by t h e e l e c t o r a t e . T h e r e f o r e , p o l i t i c i a n s a r e v y i n g f o r v o t e s and governments a r e s e e k i n g t o be r e - e l e c t e d . However, i t does n o t f o l l o w t h a t p o l i t i c i a n s a r e o n l y d o i n g what w i l l most l i k e l y a p p e a l t o t h e e l e c t o r a t e . They a r e a l s o a t t e m p t i n g t o p l a c a t e t h e p o w e r f u l members o f s o c i e t y , i n p a r t i c u l a r , t h e s t r o n g s p e c i a l i n t e r e s t groups.^ T h i s h e l p s t o e x p l a i n why t h e t a x 1 However, t h i s i s n o t t o say t h a t governments do n o t p a s s laws w h i c h a r e i n t h e i n t e r e s t s o f s o c i e t y . R a t h e r , t h e y e n a c t laws w h i c h , i n t e r a l i a , w i l l h o l d p o l i t i c a l a p p e a l and h o p e f u l l y g e t them r e - e l e c t e d - such laws may o r may n o t be i n i n t e r e s t s o f t h e e l e c t o r a t e . What i s i m p o r t a n t i s t h a t t h e e l e c t o r a t e b e l i e v e s t h e laws a r e t o t h e i r b e n e f i t (whether i t i s i n t h e i r own s e l f - i n t e r e s t o r a s s i s t i n g d i s a d v a n t a g e d g r o u p s ) . R e l a t i n g t h i s h y p o t h e s i s t o t h i s paper would t h e r e f o r e e x p l a i n why t h e 1987 t a x r e f o r m package was p r e s e n t e d i n t h e way t h a t i t was. F o r example, i t emphasized t h e supposed f a i r n e s s o f t h e r e f o r m s a l t h o u g h t h e u n d e r l y i n g s t r u c t u r e was e s s e n t i a l l y u n f a i r . F o r a f u l l e r d i s c u s s i o n , see, f o r example, i n f r a , n o t e s 77-80 and accompanying t e x t . 2 L. McQuaig, Behind Closed Doors: How the Rich Won Control of Canada's Tax System ... And Ended Up Richer (Markam, Ont.: V i k i n g , 1987) seems t o l i m i t t h e p o w e r f u l t o h i g h - e a r n i n g i n d i v i d u a l s and t h e c o r p o r a t e s e c t o r . One example ( a t p . x x i v ) o f t h e numerous t h a t a r e s c a t t e r e d t h r o u g h o u t h e r book i s as f o l l o w s : system i s f u l l o f l o o p h o l e s as such t a x b r e a k s a r e , i n e f f e c t , e q u i v a l e n t t o d i r e c t f u n d i n g programs,' and a r e l e s s p o l i t i c a l l y c o s t l y . ^ F u r t h e r m o r e , t h e s e b r e a k s can be t a i l o r e d , so a l t h o u g h a v a i l a b l e t o a l l t a x p a y e r s , w i l l o n l y be u t i l i s e d by high- i n c o m e B e h i n d t h o s e d o o r s [ i e . o f t h e t a x w o r l d ] i s an i n t e r e s t i n g , l i t t l e known w o r l d where r i c h i n d i v i d u a l s and l a r g e c o r p o r a t i o n s have found ways t o s h i f t t h e burden o f b i l l i o n s o f t a x e s from t h e i r own b a c k s - o n t o t h e backs o f o t h e r C a n a d i a n s . They have been a b l e t o do t h i s by i n f l u e n c i n g Ottawa t o p u t i n p l a c e and keep i n p l a c e t a x laws t h a t work t o t h e i r advantage. However, t h i s i s a s i m p l i s t i c v i e w as i t does n o t t a k e i n t o a c c o u n t t h e e x i s t e n c e and r e l a t i v e s t r e n g t h s o f s p e c i a l i n t e r e s t g r o u p s . A d m i t t e d l y , s p e c i a l i n t e r e s t groups a r e more l i k e l y t o be p o w e r f u l i f t h e y c o m p r i s e o f r i c h i n d i v i d u a l s o r c o r p o r a t i o n s , such as t h e B u s i n e s s C o u n c i l on N a t i o n a l I s s u e s , as o b v i o u s l y , g r e a t e r f i n a n c i a l r e s o u r c e s means t h a t t h e i r a t t e m p t s a t l o b b y i n g can be more e f f e c t i v e . However, power and w e a l t h a r e n o t m u t u a l l y e x c l u s i v e . The s t r e n g t h o f s p e c i a l i n t e r e s t groups depends on o t h e r f a c t o r s , f o r example, t h e aver a g e p e r c e i v e d v a l u e o f t h e i s s u e a t s t a k e t o t h e i n d i v i d u a l s who have a common i n t e r e s t ; t h e number and g e o g r a p h i c d i s p e r s i o n o f t h e s e i n d i v i d u a l s ; t h e a b i l i t y o f t h e o r g a n i z a t i o n t o p r o v i d e some b e n e f i t o v e r and above t h e p u r s u i t o f t h e common i n t e r e s t t h r o u g h l o b b y i n g , as an added inducement t o membership and t h e a b i l i t y o f t h e o r g a n i z a t i o n t o m i n i m i z e t h e number o f " f r e e r i d e r s " - i n d i v i d u a l s who would s h a r e i n t h e b e n e f i t s p r o v i d e d by t h e o r g a n i z a t i o n but would n o t c o n t r i b u t e t h e i r s h a r e o f c o s t s i f t h e y c o u l d be a v o i d e d : D.G. H a r t l e , The Expenditure Budget Process of the Government of Canada: a Public-Choice Rent Seeking Perspective, Canadian Tax Paper No. 81 (T o r o n t o : C a n a d i a n Tax F o u n d a t i o n , 1988) a t 62. ' Supra, c h a p t e r 1, n o t e s 10-1 and accompanying t e x t . ^ McQuaig, supra, n o t e 2 a t 7-12. T h i s i s p r i m a r i l y due t o t h e h i d d e n n a t u r e o f t a x e x p e n d i t u r e s . I n o t h e r words, t h e y a r e not s u b j e c t e d t o t h e same p u b l i c s c r u t i n y as g r a n t s a r e , b e i n g wrapped up i n t h e t e c h n i c a l language o f t h e Income Tax A c t . See a l s o , N. B r o o k s , " C o n f u s i n g Tax Reform w i t h Government Spending" Financial Post (26 October 1987) 18. e a r n i n g i n d i v i d u a l s and c o r p o r a t i o n s . ^ T h e r e f o r e , t a x b r e a k s can be a good means o f k e e p i n g t h e s p e c i a l i n t e r e s t groups q u i e t i n a p o l i t i c a l l y c o s t l e s s way.' One may q u e s t i o n why t h e r i c h and p o w e r f u l a r e a f f o r d e d w e i g h t and i n f l u e n c e i f i t i s v o t e s t h a t a r e i m p o r t a n t a t t i m e s o f e l e c t i o n s t o keep governments i n o f f i c e . S e v e r a l r e a s o n s can be advanced f o r t h i s phenomenon. F i r s t , t h e b u s i n e s s community has g r e a t e r r e s o u r c e s a t i t s d i s p o s a l w i t h w h i c h i t can mount more e f f e c t i v e o p p o s i t i o n . ^ The p u b l i c a t l a r g e , on t h e o t h e r hand ^ [ A ] l t h o u g h t a x b r e a k s a r e t e c h n i c a l l y a v a i l a b l e t o e v e r y o n e , o n l y t h e w e l l - t o - d o a r e r e a l l y a b l e t o t a k e advantage o f them. The v a s t m a j o r i t y o f t a x b r e a k s o n l y a p p l y t o p e o p l e who r u n t h e i r own b u s i n e s s e s o r can a f f o r d t o make i n v e s t m e n t s . T h e r e f o r e , m i l l i o n s o f C a nadians a r e e x c l u d e d . But even some t a x b r e a k s t h a t a r e w i d e l y used by o r d i n a r y Canadians c o n f e r f a r l a r g e r b e n e f i t s on t h e r i c h . McQuaig, supra, n o t e 2 a t 12. A d e t a i l e d s t u d y c a r r i e d out i n 1979 by A l l a n M a s l o v e , P r o f e s s o r o f P u b l i c A d m i n i s t r a t i o n , C a r l e t o n U n i v e r s i t y , c o n c l u d e d t h a t t h e b e n e f i t s o f t a x b r e a k s go d i s p r o p o r t i o n a t e l y t o t h e r i c h - about one hundred t i m e s more: i b i d . ^ For example: " I n t h e l a t t e r p a r t o f t h e decade [ 1 9 7 0 s ] , t h e t a x i n c e n t i v e s c l e a r l y c o n s t i t u t e d an a t t e m p t t o p l a c a t e some o f t h e b u s i n e s s community's o u t r a g e o v e r what i t saw as t h e Trudeau government's g r o w i n g commitment t o s t a t e i n t e r v e n t i o n i n t h e economy." D.A. W o l f e , " P o l i t i c s , t h e D e f i c i t and Tax Reform" (1988) 26 Osgoode Hall Law Journal 347 a t 364. ^ F o r example, a c c o r d i n g t o a s t u d y i n 1981 by t h e Economic C o u n c i l o f Canada, an e s t i m a t e d t h r e e hundred b u s i n e s s , p r o f e s s i o n a l and t r a d e a s s o c i a t i o n s a t n a t i o n a l l e v e l spend i n e x c e s s o f $122 m i l l i o n a y e a r on l o b b y i n g . T h i s does n o t even i n c l u d e t h e s i g n i f i c a n t r e s o u r c e s a l l o c a t e d t o l o b b y i n g by i n d i v i d u a l companies. Compare t h i s w i t h t h e h a n d f u l o f p u b l i c i n t e r e s t groups whose r e s o u r c e s , i n t o t a l , amount t o about $2 m i l l i o n p e r annum: McQuaig, supra, n o t e 2 a t 195. E v i d e n c e t h a t t h i s d i s p a r i t y i n r e s o u r c e s a f f e c t s t h e a b i l i t y o f s p e c i a l i s g e n e r a l l y c o n f u s e d , d i s o r g a n i z e d and i l l - i n f o r m e d and w i l l p r o b a b l y n o t make much o f a f u s s i f t h e p o w e r f u l m i n o r i t y g e t s i t s way.^ F u r t h e r m o r e , t h e s e r e s o u r c e s can be used t o m o n o p o l i z e t h e media t o e n s u r e f u l l e x posure o f t h e b u s i n e s s s e c t o r ' s p o i n t o f v i e w and i n f l u e n c e t h e p u b l i c ' s p e r c e p t i o n o f t h e m a t t e r . ' However, i t i s f e l t t h a t t h i s s t a t e m e n t must be q u a l i f i e d i n t h e sense t h a t newspapers a r e b u s i n e s s o p e r a t i o n s - p u b l i s h e r s a r e b u s i n e s s men s t r i v i n g t o maximize p r o f i t s . ^ " T h e r e f o r e , newspaper o p e r a t o r s a r e p r i m a r i l y c o n c e r n e d w i t h r e p o r t i n g news w h i c h i s a p p e a l i n g t o a u d i e n c e s . G e n e r a l l y , t h e r e i s a b i a s i n f a v o u r o f p u b l i c i n t e r e s t groups w h i c h stems b o t h from t h e i d e o l o g i c a l b i a s o f t h e j o u r n a l i s t s and t h e "human i n t e r e s t groups t o mount e f f e c t i v e o p p o s i t i o n can be g l e a n e d from t h e f o l l o w i n g comments: V i r t u a l l y by d e f i n i t i o n , c l o s e l y k n i t , w e l l - i n f o r m e d and w e l l - f i n a n c e d , o r g a n i z e d s p e c i a l (narrow) i n t e r e s t groups have t h e r e s o u r c e s t o m a i n t a i n a p r o t r a c t e d s t r u g g l e t o keep t h e i r t a x a d v a n t a g e s ; p u b l i c i n t e r e s t groups a r e u s u a l l y n ot c l o s e l y k n i t , a r e p o o r l y i n f o r m e d i n r e l a t i v e t e r m s , and a r e f i n a n c i a l l y weak. P r o t r a c t e d p r o c e e d i n g s h e l d i n t h e n a t i o n ' s c a p i t a l soon d i s s i p a t e t h e f i n a n c i a l r e s o u r c e s , and o f t e n t h e e n t h u s i a s m , o f v o l u n t e e r w o r k e r s . H a r t l e , "Some A n a l y t i c a l , P o l i t i c a l and N o r m a t i v e L e s s o n s from C a r t e r " i n W.N. B r o o k s , ed.. The Quest for Tax Reform ( T o r o n t o : C a r s w e l l , 1988) 397 a t 413. ® McQuaig, supra, note 2 a t 300. ' "The enormous i n f l u e n c e o f o r g a n i z e d s p e c i a l i n t e r e s t g r oups l i e s i n t h e i r c a p a c i t y ... t o d e l i v e r v o t e s d i r e c t l y by i n f l u e n c i n g t h e d e c i s i o n s o f m a r g i n a l v o t e r s t h r o u g h , f o r example, media m a n i p u l a t i o n ....": H a r t l e , supra, n o t e 7 a t 416. °̂ H a r t l e , supra, n o t e 2 a t 65. " Ibid. i n t e r e s t " a s p e c t o f such s t o r i e s i t i s human i n t e r e s t s t o r i e s t h a t s e l l newspapers and magazines and a t t r a c t r a d i o l i s t e n e r s and t e l e v i s i o n v i e w e r s . T h e r e f o r e , t h e r e i s no g u a r a n t e e t h a t t h e b u s i n e s s s e c t o r can s e c u r e news c o v e r a g e , i f su c h a r t i c l e s a r e n o t r e g a r d e d as b e i n g o f newsworthy c h a r a c t e r . 1^ H a r t l e , supra, n o t e 7 a t 414. 1^ Ibid. However, i t i s f e l t t h a t some q u a l i f i c a t i o n o f t h i s s t a t e m e n t i s n e c e s s a r y . Note t h e f o l l o w i n g comments r e g a r d i n g t h e a b i l i t y o f s p e c i a l i n t e r e s t groups t o "buy" f a v o u r a b l e news co v e r a g e : The c a p a c i t y o f s p e c i a l i n t e r e s t groups t o i n f l u e n c e t h e mass media cannot be o v e r s t a t e d . Such groups a r e s o p h i s t i c a t e d ; t h e y a r e n o t beyond, f o r example, p a y i n g a h i g h l y r e s p e c t e d j o u r n a l i s t t o w r i t e a s t o r y t h a t d i s c r e d i t s t h e i r opponents. The j o u r n a l i s t s u b m i t s t h e s t o r y as a f e a t u r e t o a magazine o r newspaper w i t h o u t any r e f e r e n c e t o t h e f a c t t h a t i t was funded by t h e i n t e r e s t group and, i n d e e d , was v e t t e d by t h e group. H a r t l e , supra, n o t e 7 a t 414. See a l s o , L. S h i f r i n , " P i t f a l l s A w a i t Tax Reformer" Winnepeg Free Press (14 October 1986) 6. One example o f t h e m a n i p u l a t i o n of p u b l i c p e r c e p t i o n s by h i g h i n c o m e - e a r n i n g t a x p a y e r s r e l a t e s t o t h e American t a x r e f o r m s . N o t a b l y , m i s i n f o r m a t i o n was d i s t r i b u t e d t o t h e e f f e c t t h a t t h e U.S. r e f o r m s p r o v i d e d f o r o n l y two t a x b r a c k e t s , i n s t e a d o f t h r e e : i b i d . F u r t h e r m o r e , w i t h o u t s u p p o r t i n g e v i d e n c e , i t i s h y p o t h e s i s e d t h a t b u s i n e s s e s may be a b l e t o "buy" news c o v e r a g e by p r o m i s i n g t o p u r c h a s e ( o r t h r e a t e n i n g t o withdraw) a d v e r t i s i n g space. I t i s t h r o u g h t h e s a l e o f a d v e r t i s i n g t h a t r e v e n u e s a r e p r i m a r i l y o b t a i n e d : H a r t l e , supra, n o t e 2 a t 65. A n o t h e r r e a s o n f o r b u s i n e s s h a v i n g so much c l o u t w i t h government i s t h r o u g h t h e p r o v i s i o n o f campaign d o n a t i o n s B u s i n e s s can i n f l u e n c e governments w i t h t h e p r o m i s e , o r t h r e a t o f r e m o v a l , o f f i n a n c i a l a s s i s t a n c e . A l t h o u g h no f i g u r e s a r e p r o f f e r e d f o r t h e 1988 e l e c t i o n campaign, o t h e r e l e c t i o n e x p e r i e n c e s s e r v e t o i l l u s t r a t e how dependent p o l i t i c a l p a r t i e s a r e on r e c e i v i n g d o n a t i o n s from t h e b u s i n e s s community. F o r example, i n t h e r u n - up t o t h e 1974 e l e c t i o n , t h i r t y one p e r c e n t o f t h e P r o g r e s s i v e C o n s e r v a t i v e f u n d s were s u p p l i e d d i r e c t l y by dominant c o r p o r a t i o n s o r c o r p o r a t i o n s c o n t r o l l e d by them.^* R e l a t i n g t h i s t o t h e 1987 t a x r e f o r m package, t h e P r o g r e s s i v e C o n s e r v a t i v e s were a t t h a t t i m e i n a p a r t i c u l a r l y v u l n e r a b l e p o s i t i o n due t o an e l e c t i o n l o o m i n g sometime w i t h i n t h e near f u t u r e . McQuaig, supra, n o t e 2 a t 196. L. MacDonald, "Why t h e C a r t e r Commission Had t o Be Stopped, i n The Quest for Tax Reform, supra, n o t e 7 a t 362. The f o l l o w i n g comments r e i n f o r c e t h i s s t a t e o f a f f a i r s : S p e c i a l i n t e r e s t group c o n t r i b u t i o n s , i n c a s h o r i n k i n d , a r e used t o s e c u r e t h e s p o t announcements on r a d i o and TV, t h e p o s t e r s , t h e pamphlets, t h e campaign b u t t o n s and h a t s , t h e p l a n e s and t h e t r a i n s and t h e buses and t h e h o t e l rooms — i n sum, t h e r a z z l e - d a z z l e t h a t p u t s t h e p a r t y ' s image a c r o s s . H a r t l e , supra, n o t e 7 a t 416. A f u r t h e r r e a s o n f o r t h e b u s i n e s s s e c t o r ' s i n f l u e n c e o v e r t h e governinent l i e s i n t h e r e s o u r c e s w h i c h b u s i n e s s has a t i t s d i s p o s a l . 1^ C o n s e q u e n t l y , b u s i n e s s can e a s i l y i n t i m i d a t e a government w i t h t h r e a t s t h a t i t w i l l w i t h d r a w i n v e s t m e n t . 1® Whether i n f a c t i t would w i t h d r a w i n v e s t m e n t i f t h e government d e c i d e d t o " c a l l i t s b l u f f " i s a moot i s s u e . The i m p o r t a n t p o i n t i s t h e government cannot e a s i l y t a k e t h e r i s k , so t h e b a r g a i n i n g s t r e n g t h o f t h e c o r p o r a t e s e c t o r l i e s m e r e l y i n t h e i r t h r e a t s , n o t t h e i r a c t i o n . F i n a l l y , on a human l e v e l , c a b i n e t m i n i s t e r s a r e more l i k e l y t o u n d e r s t a n d and i d e n t i f y w i t h members o f t h e b u s i n e s s s e c t o r , r a t h e r t h a n w i t h w e l f a r e o r p u b l i c i n t e r e s t g r o u p s . 1' T h i s i s because q u i t e o f t e n c a b i n e t members p r e v i o u s l y worked i n b u s i n e s s and were p a r t o f , what i s c o l l o q u i a l l y known a s , t h e "Bay S t r e e t s e t " . 2 ° A t t h e v e r y l e a s t , c a b i n e t m i n i s t e r s a r e F o r example, t h e one hundred and f i f t y C h i e f E x e c u t i v e O f f i c e r s who make up t h e B u s i n e s s C o u n c i l on N a t i o n a l I s s u e s o v e r s e e 1.5 m i l l i o n employees and $700 b i l l i o n i n a s s e t s : McQuaig, supra, n o t e 2 a t 192. See, a l s o , L. MacDonald, "Why C a r t e r Had t o Be Stopped", i n The Quest for Tax Reform, supra, n o t e 7, 351 a t 362: "Through t h e i r c o n t r o l o v e r most o f our s o c i e t y ' s i n v e s t m e n t r e s o u r c e s , t h e l a r g e s t c o r p o r a t i o n s ... a r e c o l l e c t i v e l y Canada's most p o w e r f u l economic and s o c i a l p l a n n e r s . " 1° McQuaig, supra, note 2 a t 196. 1' J J b i d . 2° F o r example, M i c h a e l W i l s o n had "Bay S t r e e t i n h i s b l o o d " . He had been e x e c u t i v e v i c e - p r e s i d e n t o f Dominion S e c u r i t i e s b e f o r e e n t e r i n g p o l i t i c s and had "absorbed t h e v a l u e s i n t e n t on n u r t u r i n g t h e i r a f f i l i a t i o n w i t h t h e c o r p o r a t e s e c t o r ^ ^ due t o t h e r e a s o n s g i v e n , f o r example, t o r e c e i v e campaign d o n a t i o n s . T h i s a l l adds up t o g i v e t h e c o r p o r a t e s e c t o r g r e a t e r i n f l u e n c e and c l o u t w i t h t h e government. I n t o t a l , s p e c i a l i n t e r e s t g r o u p s , n o t a b l y t h o s e w i t h a c o r p o r a t e s l a n t , a r e a b l e t o e x e r c i s e c o n s i d e r a b l e i n f l u e n c e o v e r t h e government. T h i s i s r e f l e c t e d i n t h e t a x s t r u c t u r e w h i c h c o n t a i n s many p r o v i s i o n s w h i c h a r e o f b e n e f i t t o t h e s e g r o u p s . I t i s from t h i s p e r s p e c t i v e t h a t s e c t i o n 245 be approached. T h i s p r o v i s i o n i s i d e a l f o r i l l u s t r a t i n g t h e c o n f l i c t between t h e two d i f f e r e n t s t r a n d s o f government a c t i o n d i s c u s s e d above, namely, p l e a s i n g t h e g e n e r a l e l e c t o r a t e and s p e c i a l i n t e r e s t groups a t t h e same t i m e . I n t o t a l , i t may be f a i r t o say t h a t t h e 1987 t a x r e f o r m package was w e i g h t e d i n f a v o u r o f t h e of t h e b u s i n e s s community and b r o u g h t w i t h him t o Ottawa a d i s t i n c t l y Bay S t r e e t p o i n t o f v i e w . " McQuaig, i b i d , a t 313. For example, F i n a n c e M i n i s t e r M i c h a e l W i l s o n a p p o i n t e d W i l l i a m Mackness, r i g h t - w i n g Bay S t r e e t i n s i d e r (he was v i c e - p r e s i d e n t and c h i e f e c o n o m i s t o f t h e Bank o f Nova S c o t i a ) as h i s s p e c i a l a d v i s o r . Ibid. However, what o f t h e argument t h a t t a x e x p e n d i t u r e s a r e i n s e r t e d i n t o t h e t a x s t r u c t u r e t o promote some n o b l e s o c i o - economic g o a l , f o r example, t h e p r o m o t i o n o f t h e Canadian f i l m i n d u s t r y ? The r e s p o n s e i s t o q u e s t i o n whether t a x e x p e n d i t u r e s do i n f a c t a c h i e v e t h e i r p u r p o s e . I n p a r t i c u l a r , s t u d i e s done r e v e a l t h a t t a x e x p e n d i t u r e s a r e n o t s u c c e s s f u l i n s t i m u l a t i n g t h e economy: McQuaig, supra, n o t e 2 a t 66. c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s , o r a t l e a s t , d i d n o t harm them as much as i t c o u l d have.^^ However, on t h e f a c e o f i t , s e c t i o n 245 r e p r e s e n t s a d e p a r t u r e from t h i s s t a t e o f a f f a i r s . I t c l e a r l y was a p r o v i s i o n w h i c h a d v e r s e l y a f f e c t e d t h e c o r p o r a t e s e c t o r t o a g r e a t e x t e n t . T h i s perhaps e x p l a i n s why t h e p r o v i s i o n was a t t a c k e d so f e r o c i o u s l y by b u s i n e s s and i t s t a x r e p r e s e n t a t i v e s . I n f a c t , no o t h e r p r o v i s i o n w i t h i n t h e w h i t e p a p e r s r e c e i v e d as much a t t e n t i o n . G r e a t p r e s s u r e was e x e r t e d on t h e government t o e i t h e r w i t h d r a w t h e r u l e , o r a t l e a s t , t o g r e a t l y amend i t . Y e t , i n t h e f a c e o f such o p p o s i t i o n , t h e government s t i l l e n a c t e d t h e p r o v i s i o n , and moreover, i n a form w h i c h d i d n o t g r e a t l y d i f f e r from t h e " F o r a f u l l e r d i s c u s s i o n , i n f r a , n o t e s 77-80. E v i d e n c e t h a t t h e new GAAR was i n t e n d e d t o have a s i g n i f i c a n t impact on t h e c o r p o r a t e s e c t o r i s a p p a r e n t from t h e e s t i m a t e d amount o f e x t r a revenue w h i c h t h e p r o v i s i o n was supposed t o g e n e r a t e - namely $2240 m i l l i o n o v e r t h e p e r i o d 1988-92. T h i s g a i n was u n d o u b t e d l y t h e h i g h e s t o f a l l t h e g a i n s e s t i m a t e d t o be g e n e r a t e d under t h e o t h e r c o r p o r a t e base- b r o a d e n i n g p r o p o s a l s i n t h e w h i t e p a p e r s . Canada, Department o f F i n a n c e , Tax Reform 1987: Income Tax Reform (Ottawa: t h e Department, June 18, 1987) a t 67. 2^ " B u s i n e s s and t a x p r o f e s s i o n a l s a l i k e have r e s e r v e d t h e i r h e a v i e s t f i r e f o r t h e w h i t e p a p e r ' s p r o p o s e d g e n e r a l a n t i - a v o i d a n c e r u l e " : S. Poddar & A. Coyne, "Crunch i s Near f o r Tax Reform Review" Financial Post (19 O c t o b e r 1987) 4. T h i s would i n d i c a t e why s e c t i o n 245 was r e p e a t e d l y s i n g l e d out by t h e Department o f F i n a n c e as i n need of j u s t i f i c a t i o n and e x p l a n a t i o n . Note t h e w r i t i n g s o f one Department o f F i n a n c e o f f i c i a l : D.A. Dodge, "A New and More Coherent Approach t o Tax A v o i d a n c e " (1988) 36 Canadian Tax Journal 1 and "Tax Reform and t h e A n t i - A v o i d a n c e P r o p o s a l s " 1987 B r i t i s h Columbia Tax Conference, t a b 4. i n i t i a l p r o p o s a l . T h i s i s perhaps i n d i c a t i v e o f a c o m b i n a t i o n o f f a c t o r s , one o f w h i c h , was t h e w i s h t o a p p e a l t o t h e e l e c t o r a t e under t h e t h r e a t o f a f o r t h c o m i n g e l e c t i o n . From h e r e i t i s p r o p o s e d t h a t t h e s o c i a l and p o l i t i c a l b ackground w i t h i n w h i c h s e c t i o n 245 was e n a c t e d be a n a l y z e d . I t i s hoped t h a t some i n d i c a t i o n s w i l l be exposed as t o why t h e government d i d n o t r e t r e a t on i t s p o s i t i o n i n any major way i n t h e enactment o f t h e p r o v i s i o n , d e s p i t e t h e f u r o r e w h i c h s u r r o u n d e d i t s i n t r o d u c t i o n . B. THE LOOMING ELECTION ( i ) G e n e r a l I n t r o d u c t i o n A t t h e t i m e o f t h e i n t r o d u c t i o n o f t h e t a x r e f o r m package i n June 1987 t h e government had t o c a l l a g e n e r a l e l e c t i o n by t h e f a l l o f 1989.^^ Moreover, i t was g e n e r a l l y e x p e c t e d t h a t an e l e c t i o n would be c a l l e d e a r l i e r , sometime i n 1988.^^ The t h r e a t o f t h i s f o r t h c o m i n g f e d e r a l e l e c t i o n g r e a t l y a f f e c t e d t h e t a x r e f o r m package. I n p a r t i c u l a r , i t i n f l u e n c e d perhaps t h e v e r y i n i t i a t i o n o f t h e r e f o r m package, t h e s t r u c t u r e o r c o n t e n t ^ The P r o g r e s s i v e C o n s e r v a t i v e s were v o t e d i n t o o f f i c e i n September 1984. A g e n e r a l e l e c t i o n has t o be c a l l e d w i t h i n f i v e y e a r s , s e t t i n g a d e a d l i n e o f September 1989 f o r t h e r u l i n g p a r t y . F o r example, C. Goar, "Tax Reform Aims t o Boost Tory Chances" Montreal Gazette (29 O c t o b e r 1986) B3; " E l e c t i o n U n l i k e l y B e f o r e Tax Reform, MacKay Says" Toronto Star (18 March 1988) AlO & "MP Urges Tax Reform Passage B e f o r e E x p e c t e d F a l l E l e c t i o n C a l l " Winnepeg Free Press (4 August 1988) 17. o f t h e package, i t s p r e s e n t a t i o n and t h e a t t i t u d e adopted by t h e government when t h e package was c r i t i c i s e d . To s t a t e t h e o b v i o u s , t h e r e a s o n f o r t h e i n f l u e n c e o f t h e f o r t h c o m i n g e l e c t i o n was t h e d e s i r e o f t h e government t o maximize i t s s u p p o r t w i t h t h e e l e c t o r a t e w i t h t h e hope t h a t i t would be v o t e d back i n t o o f f i c e . A t t h e t i m e o f t h e i n t r o d u c t i o n o f t h e 1987 t a x r e f o r m package t h e P r o g r e s s i v e C o n s e r v a t i v e s were i n a p a r t i c u l a r l y v u l n e r a b l e p o s i t i o n . H a v i n g e n t e r e d o f f i c e i n 1984 w i t h t h e l a r g e s t m a j o r i t y i n Canadian h i s t o r y (211 s e a t s ) t h e government was d o i n g v e r y b a d l y i n t h e p u b l i c o p i n i o n p o l l s i n t h e y e a r o f t h e t a x r e f o r m package. A t t h e b e g i n n i n g o f t h e y e a r , i t was i n t h i r d p l a c e i n t h e p o l l s , w i t h a low o f twenty-two p e r c e n t support.'° M a t t e r s d i d improve towards t h e end o f t h e y e a r . Note t h e s t a t e m e n t s by one commentator t h a t " [ t ] h e f e d e r a l T o r i e s ' main ( o n l y ? ) g o a l i s t o w i n t h e n e x t e l e c t i o n - w h i c h i s why t h e y may l o s e i t . " P. W o r t h i n g t o n , " E l e c t i o n e e r i n g by 'Tax Reform'" Financial Post (2 August 1986) 9. McQuaig, supra, note a t 307. '° D. M c G i l l v r a y , "Grim Warning f o r T o r y P a r t y i n L a t e s t P o l l " Financial Times (16 F e b r u a r y 1987) 9; J . O ' D o n n e l l , " T o r i e s Drop t o L a s t P l a c e i n New P o l l G a l l u p Says" Toronto Star (15 J a n u a r y 1987) A l & M. S c o t t , "Government's R a t i n g i s 45-year L o w : P o l l " Montreal Gazette (19 F e b r u a r y 1987) A l . These low r a t i n g s r e l e g a t e d t h e government t o b e i n g t h e most u n p o p u l a r f e d e r a l a d m i n i s t r a t i o n i n a t l e a s t f o r t y - f i v e y e a r s : S c o t t , i b i d . T h i s poor s u p p o r t may have been p a r t l y due t o a t r e n d t h a t has been e v i d e n t i n most p e r i o d s o f m a j o r i t y government: g e n e r a l l y t h e r e i s a d e c l i n e i n s u p p o r t f o r t h e g o v e r n i n g p a r t y a f t e r an e l e c t i o n v i c t o r y , f o l l o w e d by a r e c o v e r y i n t h e p e r i o d b e f o r e t h e n e x t e l e c t i o n : M. Adams and D. Dasko, " T o r i e s R a l l y t o Second P l a c e as NDP Drops t o T h i r d " The Globe and Mail (29 w i t h t h e r a t i n g s p u s h i n g t h e p a r t y i n t o second p l a c e w i t h t h i r t y - t w o p e r c e n t s u p p o r t o f d e c i d e d v o t e r s . H o w e v e r , t h i s a l l made c h i l l i n g r e a d i n g f o r t h e government, p a r t i c u l a r l y w i t h a g e n e r a l e l e c t i o n due by t h e f a l l o f 1989. ( i i ) P o l i t i c a l A p p e a l I t i s s u b m i t t e d t h a t t h i s s t a t e o f a f f a i r s g r e a t l y a f f e c t e d t h e a t t i t u d e o f t h e government towards t h e i r t a x r e f o r m p r o p o s a l s . I t wanted t o u t i l i s e t h e p o l i t i c a l a p p e a l o f t a x r e f o r m t o i n c r e a s e i t s s u p p o r t . T h i s i s n o t t o say t h a t t a x r e f o r m was embarked upon s o l e l y t o b o l s t e r t h e government's s u p p o r t w i t h t h e e l e c t o r a t e . Indeed, t a x r e f o r m had been an i s s u e i n t h e December 1987) A l & A9 a t A l & A9. ^1 Adams & Dasko, i b i d . ^2 But t o anyone who t a k e s a l o o k a t t h e p o l i t i c a l c a l e n d a r , h i s [Honourable M i c h a e l H. W i l s o n , M i n i s t e r o f F i n a n c e ] t i m i n g makes p e r f e c t sense. By u n v e i l i n g h i s t a x r e f o r m s i n n e x t y e a r ' s budget, W i l s o n w i l l be i n a p o s i t i o n t o implement them i n 1988, t h e y e a r Prime M i n i s t e r B r i a n M u l r o n e y i s e x p e c t e d t o c a l l a g e n e r a l e l e c t i o n . T r a d i t i o n a l l y , t h e m i d - p o i n t o f a government's mandate i s when i t b e g i n s t o phase out t o u g h , a u s t e r i t y - m i n d e d measures and r e p l a c e them w i t h p o p u l a r , c o n s u m e r - o r i e n t e d p o l i c i e s . And t h i s i s e x a c t l y what W i l s o n a p p e a r s t o be d o i n g . As t h e P r o g r e s s i v e C o n s e r v a t i v e s head o u t on t h e campaign t r a i l , t h e y w i l l be a b l e t o p o i n t t o r e d u c e d p e r s o n a l t a x r a t e s , s i m p l e r t a x forms and h i g h e r take-home pay f o r most w o r k e r s as a few o f t h e i r a c c o m p l i s h m e n t s . I t would be h a r d e r t o come up w i t h a more a t t r a c t i v e r e c o r d t o p u t i n f r o n t o f Canada's 17 m i l l i o n v o t e r s . Goar, s u p r a , note 27. 1984 e l e c t i o n campaign and t h e government had been s e r i o u s about i t s i n c e e a r l y on i n i t s m a n d a t e . H o w e v e r , t h e r e i s g e n e r a l r e c o g n i t i o n t h a t t h e p o l i t i c a l a p p e a l o f t a x r e f o r m was a major im p e t u s . " G. P i t t s , '"We Need A l l Tax Elements on Same T r a c k ' : I n t e r v i e w w i t h M i c h a e l W i l s o n " Financial Post (2 August 1986) 4. Fo r example, J . Ferguson, "Tax Reform I s s u e More C o m p l i c a t e d Than I t Sounds" Calgary Herald (24 August 1986) B2; Goar, supra, n o t e 27; "The C o n t e x t o f Tax Reform" Halifax Chronicle Herald (23 June 1987) 6 & W.A. W i l s o n , " T o r i e s P i n Hopes on Tax Reform" Winnepeg Free Press (23 March 1987) 6. However, t h e government had changed t h e pace o f t a x change d u r i n g i t s mandate. I t i n i t i a l l y f a v o u r e d a g r a d u a l i s t approach t o p r e v e n t " u n c e r t a i n t y t h a t might harm Canada's economic p e r f o r m a n c e " : Canada, Department o f F i n a n c e , Tax Reform 1987 (Ottawa: t h e Department, June 18, 1987) a t 19. However, i t l a t e r o p t e d f o r a major t a x r e f o r m e x e r c i s e on t h e b a s i s t h a t many o f our major t r a d i n g p a r t n e r s had u n d e r t a k e n w i d e s c a l e r e f o r m and t h a t s i g n i f i c a n t changes t o s a l e s t a x and s o c i a l t r a n s f e r programs s h o u l d , f o r r e a s o n s o f f a i r n e s s , be i n t e g r a t e d w i t h p e r s o n a l income t a x : i b i d , a t 21. I n p r e s e n t i n g t h e t a x r e f o r m p r o p o s a l s , t h e government f o c u s e d on t h e o b j e c t i v e o f f a i r n e s s . ' ^ I n d o i n g s o , i t was a c t i n g i n i t s own s e l f - i n t e r e s t i n a t t e m p t i n g t o maximize t h e a p p e a l o f t h e t a x r e f o r m p r o p o s a l s t o t h e e l e c t o r a t e . ' ^ The government was p e r f e c t l y aware t h a t t h i s was t h e c r i t e r i o n t h a t was most '̂  T h i s i s c a p t u r e d i n t h e c a t c h - p h r a s e used t o s e l l t h e package w h i c h i s emblazoned on t h e f r o n t o f a l l t h e w h i t e paper documents: "Lower R a t e s , F a i r e r System". T h i s begs t h e q u e s t i o n - what does f a i r n e s s mean? I t has been i m p l i e d t h a t i t s d e f i n i t i o n depends on w h i c h s i d e o f t h e f e n c e you a r e s i t t i n g on. So, f o r example, f o r t h e government, i t i s a t h i n l y d i s g u i s e d message t h a t t h e t a x p a y e r / v o t e r w i l l pay l e s s , f o r t h e O p p o s i t i o n , i t i s t h a t t h e t a x p a y e r / v o t e r w i l l pay more: B. L i t t l e , "Some F a l l a c i e s About F a i r n e s s : Tax Reform Has R e v i v e d P o l i t i c i a n s ' P r e o c c u p a t i o n w i t h t h e N o t i o n o f F a i r n e s s " (October 1987) 4 Report on Business Magazine 19 a t 19. However, u n l e s s i n d i c a t e d o t h e r w i s e , f a i r n e s s i n t h i s paper i s t a k e n t o be t h e government's v e r s i o n . I n p a r t i c u l a r , f a i r n e s s connoted t h a t h i g h e r - i n c o m e i n d i v i d u a l s and p r o f i t a b l e c o r p o r a t i o n s c a r r y a l a r g e r s h a r e o f t h e income t a x burden; i n d i v i d u a l s i n s i m i l a r economic c i r c u m s t a n c e s be t a x e d more e q u i t a b l y ( t h i s r e l a t e d t o t h e r e m o v a l o f s p e c i a l i n c e n t i v e s ) ; t h e income t a x system be b e t t e r i n t e g r a t e d w i t h t h e s o c i a l t r a n s f e r system ( t h i s d e a l t w i t h t h e c o n v e r s i o n o f t a x exemptions and d e d u c t i o n s ) and t h e p r o g r e s s i v i t y o f t h e p e r s o n a l income t a x and t h e s a l e s t a x be improved: Tax Reform 1987, supra, n o t e 34 a t 3. I n p a r t i c u l a r , f o r r e a s o n s o f c o n v e n i e n c e and r e l e v a n c e , i t i s p r o p o s e d t h a t r e f e r e n c e t o t h e c o n c e p t o f f a i r n e s s i n t h i s p a per be t a k e n as b e i n g t h e i n c r e a s e i n t h e t a x burden of h i g h - e a r n i n g i n d i v i d u a l s and t h e c o r p o r a t e s e c t o r . The o t h e r o b j e c t i v e s of t h e t a x r e f o r m e x e r c i s e were i d e n t i f i e d as b e i n g c o m p e t i t i v e n e s s , s i m p l i c i t y , c o n s i s t e n c y and r e l i a b i l i t y : Tax Reform 1987, i b i d , and Tax Reform 1987: Income Tax Reform, supra, n o t e 24 a t 1-2. '̂  P o l i t i c i a n s , e s p e c i a l l y when t h e y f a c e an e l e c t i o n i n t h e n e x t y e a r o r so, cannot b r i n g t h e m s e l v e s t o go t o t h e h e a r t o f t h e what t a x r e f o r m s h o u l d r e a l l y be. I t i s s i m p l e r , and more r e w a r d i n g p o l i t i c a l l y , t o t o s s out r h e t o r i c a l f l o u r i s h e s f o r t h e b e n e f i t o f v o t e r s who, t h e p o l i t i c i a n s s ense, a r e l i k e l y t o v i e w t a x r e f o r m o n l y from t h e narrow p e r s p e c t i v e o f t h e i r own s e l f - i n t e r e s t . L i t t l e , supra, note 35 a t 19. p a l a t a b l e t o t h e e l e c t o r a t e . T h i s i s c o r r o b o r a t e d by a governinent p o l l , c a r r i e d o u t i n March 1987, w h i c h r e v e a l e d t h a t s e v e n t y - s i x p e r c e n t o f t h o s e s u r v e y e d wanted t h e f a i r n e s s o f t h e t a x system i m p r o v e d . T h e r e f o r e , t h e government emphasised a t e v e r y o p p o r t u n i t y t h e f a i r n e s s o f t h e w h i t e paper p r o p o s a l s . I t w ould even be a c c u r a t e t o say t h a t i t went as f a r as d i s t o r t i n g t h e e l e c t o r a t e s ' p e r c e p t i o n s o r even m i s l e a d i n g them, i n i t s e f f o r t s t o s e l l t h e package as p r o m o t i n g f a i r n e s s . ' ' ' There a r e r e a s o n s o t h e r t h a n f a i r n e s s t o r e f o r m a t a x system, b u t t h e y f a i l t h e p o l i t i c a l s ex a p p e a l t e s t . One r e a s o n i s t o make Canadian b u s i n e s s more c o m p e t i t i v e i n w o r l d m a r k e t s , b u t p o l i t i c i a n s assume t h a t few p e o p l e can g r a s p t h i s . A n o t h e r r e a s o n i s t o s i m p l i f y t h e u n w i e l d y and i n c o n s i s t e n t system, b u t t h e v i r t u e s o f t a x s i m p l i c i t y a r e more o f t e n p r e a c h e d t h a n p r a c t i s e d . B e s i d e a h a n d f u l o f p u b l i c p o l i c y a n a l y s t s , who knows, l e t a l o n e c a r e s , whether t h e t a x system i s ' i n t e r n a l l y c o n s i s t e n t and c o n s i s t e n t w i t h o t h e r government programs,' as t h e government's w h i t e paper on t a x a t i o n p u t s i t ? And who, o u t s i d e t h e government i t s e l f , v a l u e s a r e l i a b l e t a x system t h a t g e n e r a t e s a p r e d i c t a b l e revenue system? To h e a r W i l s o n t e l l i t , t h o s e a r e major r e a s o n s f o r r e f o r m i n g t h e t a x system. But t h e g r e a t e s t r e a s o n - t a x r e f o r m b e i n g a p o l i t i c a l e x e r c i s e - i s t o make i t f a i r e r . L i t t l e , i b i d , a t 19-20. 38 " P o l l S p e l l e d T r o u b l e f o r Tax-Reform P l a n s " Montreal Gazette (25 J u l y 1987) A7. These c o n c l u s i o n s were s u p p o r t e d by a n o t h e r s u r v e y conducted f o r Southam News by Angus R e i d A s s o c i a t e s w h i c h r e v e a l e d t h a t Canadians o v e r w h e l m i n g l y b e l i e v e d t h a t t h e t a x system was u n f a i r : J . Ferg u s o n , "Most Canadians Oppose Tax Reform P r o p o s a l s " Calgary Herald (21 March 1987) A3. 3' For example, by e m p h a s i s i n g t h e i n c r e a s e d burden on t h e c o r p o r a t e s e c t o r t h e government was m i s l e a d i n g t h e e l e c t o r a t e i n t h a t t h e r e d u c t i o n s i n p e r s o n a l income t a x r a t e s were met p r e d o m i n a n t l y , n o t by t h e i n c r e a s e d c o r p o r a t e t a x , b u t by changes t o t h e f e d e r a l s a l e s t a x and t h e a c c e l e r a t i o n o f t a x payments. F o r a f u l l e r d i s c u s s i o n , i n f r a , n o t e 79 and accompanying t e x t . For t h e c y n i c s amongst u s , some e x p l a n a t i o n i s n e c e s s a r y t o j u s t i f y t h e c l a i m t h a t t h e government was a c t i n g i n i t s own s e l f - i n t e r e s t , and n o t t h e p u b l i c i n t e r e s t i n g e n e r a l . The most p e r s u a s i v e e v i d e n c e t h a t i s a v a i l a b l e i s t h e t a x s t r u c t u r e i t s e l f . I f t h e t a x system was c o n s t r u c t e d s o l e l y i n t h e i n t e r e s t s o f t h e m a j o r i t y o f t a x p a y e r s ( i e . t h e g e n e r a l p u b l i c ) t h e n i t would n o t be i n t h e form i t i s t o d a y . As d i s c u s s e d earlier,^° t h e c u r r e n t t a x system i s l i t t e r e d w i t h s p e c i a l t a x b r e a k s , i n s e r t e d w i t h t h e i n t e n t i o n o f p l e a s i n g t h e c o r p o r a t e s e c t o r and high-income e a r n i n g i n d i v i d u a l s . Moreover, t h e s e c o n t i n u e d t o e x i s t a f t e r t h e t a x system had gone t h r o u g h a p r o c e s s o f s o - c a l l e d " r e f o r m " i n 1987. A l t h o u g h , some t a x b r e a k s were e l i m i n a t e d o r trimmed by v i r t u e o f t h i s t a x r e f o r m e x e r c i s e , s p e c i a l Canadian s i t u a t i o n s and s a c r e d cows were r e s p e c t e d , f o r example, t h e l i f e t i m e c a p i t a l g a i n s exemption was o n l y r e d u c e d ( t o $100,000 from $500,000) f o r most s e c t o r s , r a t h e r t h a n removed a l t o g e t h e r .̂ ^ Supra, n o t e s 3-6 and accompanying t e x t . H. Solomon, " W i l s o n Learned From MacEachen's F i a s c o " Financial Post (22 June 1987) 9. Fo r a f u l l e r d i s c u s s i o n on t h e c o n t i n u a n c e o f s p e c i a l i n c e n t i v e s , see i n f r a note 145 and accompanying t e x t . The GAAR was an i n t e g r a l p a r t o f t h e t a x r e f o r m package. The government p r e s e n t e d t h e s e c t i o n as b e i n g an i m p o r t a n t element i n t h e achievement o f i t s o b j e c t i v e s , i n p a r t i c u l a r , t h e c r i t e r i o n o f f a i r n e s s . A r g u a b l y , t h e d e s i r e o f t h e government t o produce a t a x r e f o r m package t o p a s s o f f t o t h e e l e c t o r a t e as a c h i e v i n g a f a i r e r system i n f l u e n c e d s e c t i o n 245. I n p a r t i c u l a r , i t i s s u b m i t t e d t h a t i t was perhaps an impetus f o r t h e i n t r o d u c t i o n o f t h e GAAR and a l s o i t s i n c l u s i o n w i t h i n t h e t a x r e f o r m p a c k a g e . T h e i n t r o d u c t i o n and i n c l u s i o n o f t h e p r o v i s i o n a s s i s t e d t h e government t o o s t e n s i b l y p r e s e n t an image of f a i r n e s s - i n p a r t i c u l a r , o f e a s i n g t h e t a x burden from t h e s h o u l d e r s o f t h e low and m i d d l e c l a s s t a x p a y e r s o n t o t h e r i c h Dodge, supra, n o t e 25 ("Tax Reform and t h e A n t i - A v o i d a n c e P r o p o s a l s " ) a t 2. '''' The government c o u l d have p r e s e n t e d t h e p r o p o s a l a t some o t h e r t i m e , f o r example, i n i t s F e b r u a r y , 1987 Budget. T h i s would have been more l o g i c a l . F o r example, i f t h e government was as c o n c e r n e d as i t c l a i m e d about w i d e s c a l e a b u s i v e t a x a v o i d a n c e (Dodge, i b i d , a t 2-3) i t would have made more sense t o i n t r o d u c e t h e r u l e as q u i c k l y as p o s s i b l e . I n s t e a d , t h e government i n c l u d e d i t w i t h i n t h e package so t h a t i m p l e m e n t a t i o n was d e l a y e d . T h i s r e s u l t e d i n a l t e r n a t i v e means o f c u r b i n g t a x a v o i d a n c e h a v i n g t o be adopted i n t h e i n t e r i m p e r i o d - f o r example, two a b u s i v e t r a n s a c t i o n s were o u t l a w e d by p r e s s r e l e a s e i n t h e p e r i o d between t h e i n t r o d u c t i o n o f t h e p r o p o s a l and i t s i m p l e m e n t a t i o n : D. Beach, " W i l s o n S t r i k e s a t Tax A v o i d a n c e " Calgary Herald (13 October 1987) F6 and P. DeMont, " C l o s i n g t h e L o o p h o l e s : G e n e r a l Tax R u l e D e a l t Blow" Financial Times (5 October 1987) 3. and c o r p o r a t e s e c t o r . T h i s i s e v i d e n c e d by t h e numerous r e f e r e n c e s t o s e c t i o n 245 w h i c h a r e s c a t t e r e d t h r o u g h o u t t h e w h i t e paper documents. I t i s a l s o s u b m i t t e d t h a t t h e lo o m i n g e l e c t i o n c o u l d have i n f l u e n c e d t h e c a l c u l a t i o n o f t h e p r o j e c t e d revenue i n c r e a s e s g e n e r a t e d by t h e a p p l i c a t i o n o f t h e GAAR. To e x p l a i n , t h e e s t i m a t i o n o f t h i s p a r t i c u l a r i n c r e a s e was t h e most p l i a b l e and u n p r i n c i p l e d o f a l l t h e b a s e - b r o a d e n i n g measures. W i t h t h e o t h e r measures, t h e government was a t l e a s t removing o r l i m i t i n g s o m ething t h a t a l r e a d y had a v a l u e t o i t . W i t h t h e GAAR, on t h e o t h e r hand, i t i s d i f f i c u l t t o see how t h e government c o u l d have c a l c u l a t e d t h e f i g u r e f o r i t s f u t u r e a p p l i c a t i o n . F o r example, on what b a s i s c o u l d i t p r e d i c t t h e f r e q u e n c y o f a p p l i c a t i o n o f t h e r u l e ( e s p e c i a l l y as i t i s Revenue Canada and n o t t h e Department o f F i n a n c e w h i c h i s r e s p o n s i b l e f o r t h e a d m i n i s t r a t i o n o f t h e p r o v i s i o n ) , t h e b e h a v i o u r i a l changes t h a t would o c c u r as a r e s u l t o f t h e t a x r e f o r m ( f o r example, t h a t t a x p a y e r s would d i s c o n t i n u e u s i n g t h e s p e c i a l i n c e n t i v e s a f f e c t e d by t h e w h i t e p a p e r s and r e l y i n s t e a d on o t h e r t a x s h e l t e r s n o t so a f f e c t e d ) and t h e e x t e n t and v a l u e o f abuse i n t h e f u t u r e (abuses f l a i r up when a l o o p h o l e i s d i s c o v e r e d - t h e s e cannot be p r e d i c t e d ) ? A p o s s i b l e i n d i c a t i o n o f t h e For example. Tax Reform 1987, supra, n o t e 34 a t 3, 5 & 57 and Tax Reform: Income Tax Reform, supra, n o t e 24 a t 2, 25, 42, 129-33 and 137-44 (Annex 1: E x p l a n a t o r y Notes t o t h e G e n e r a l A n t i - A v o i d a n c e R u l e ) . d i f f i c u l t i e s e n c o u n t e r e d i n e s t i m a t i n g t h e revenue i n c r e a s e s g e n e r a t e d by s e c t i o n 245 i s t h e l a c k o f i n f o r m a t i o n on t h e methodology used i n t h e c a l c u l a t i o n s / ' T h e r e f o r e , perhaps t h e government was prone t o shape t h e c a l c u l a t i o n s t o meet t h e c i r c u m s t a n c e s . F o r example, t h e e l e c t i o n prompted t h e government t o p r e s e n t t h e t a x r e f o r m package as a c h i e v i n g a f a i r e r system. But t o do so, i t had t o s u p p o r t i t s c l a i m s o f i m p o s i n g a h e a v i e r burden on t h e c o r p o r a t e s e c t o r w i t h economic f a c t s and f i g u r e s . These f i g u r e s had t o l o o k i m p r e s s i v e , p a r t i c u l a r l y as any g a i n s from t h e b a s e - b r o a d e n i n g measures were s i g n i f i c a n t l y o f f s e t by r e d u c t i o n s i n t h e c o r p o r a t e t a x r a t e s . T h e r e f o r e , t h i s may have encouraged t h e government t o g i v e t h e b e n e f i t o f t h e doubt t o t h e a p p l i c a t i o n o f t h e GAAR and t o p r e d i c t t h a t i t would be used e x t e n s i v e l y t o c u r b t a x a v o i d a n c e , t h e r e b y g e n e r a t i n g a s u b s t a n t i a l i n c r e a s e i n revenue. T h i s i s not t o s u g g e s t t h a t t h e government d i d t h i s d e l i b e r a t e l y - j u s t t h a t t h e c a l c u l a t i o n o f something as u n c e r t a i n as t h e f u t u r e a p p l i c a t i o n o f s e c t i o n 245 i s so u n p r e d i c t a b l e and f o r t u i t o u s t h a t t h e government c o u l d r e a l l y g i v e any f i g u r e , o b v i o u s l y w i t h i n some l i m i t s ( f o r example, i f i t had s t a t e d t h a t t h e GAAR would g e n e r a t e $100 b i l l i o n w i t h i n i t s f i r s t y e a r , i t might have been d i s b e l i e v e d ! ) , t o t h i s p r e d i c t i o n and h o n e s t l y b e l i e v e i t s e s t i m a t i o n s t o be a c c u r a t e . The problem i s t h a t t h e r e i s no way of p r o v i n g , o r f o r t h a t m a t t e r , d i s p r o v i n g , t h e f i g u r e s t h e I n f r a , note 75. government gave. I t s h o u l d be n o t e d t h a t t h i s p r o p o s i t i o n i s h y p o t h e t i c a l - no c o r r o b o r a t i n g e v i d e n c e i s p r o f f e r e d . However, i t i s hoped t h a t i t has a t l e a s t been shown t h a t t h i s p r o c e s s i s p e r f e c t l y r e a s o n a b l e and f o r e s e e a b l e . B e f o r e d i s c u s s i n g t h e o t h e r i n f l u e n c e s o f t h e l o o m i n g f e d e r a l e l e c t i o n on t h e GAAR i n g r e a t e r d e t a i l , t h e c o n s t r a i n t s imposed on t h e government a t t h a t t i m e s h o u l d f i r s t be mentioned. To r e i t e r a t e , t h e government, i n p u r s u i n g i t s own s e l f - i n t e r e s t o f r e - e l e c t i o n , sought t o s t r u c t u r e and p r e s e n t t h e t a x r e f o r m package so as t o maximize t h e a p p e a l i t would h o l d f o r t h e e l e c t o r a t e . ^ ' ' T h e r e f o r e , i t sought t o p a s s o f f t h e t a x r e f o r m s as p r o m o t i n g t h e o b j e c t i v e o f f a i r n e s s . However, i t had t o do so w i t h i n c o n s t r a i n t s , p r i m a r i l y t h e economic c o n d i t i o n s p r e v a l e n t a t t h e time^^ and t h e c o n c e r n s o f s p e c i a l i n t e r e s t '̂ V e r i f i c a t i o n o f t h i s p r o p o s i t i o n can be g l e a n e d from t h e f o l l o w i n g : " I n f a c t , f i n a n c e department o f f i c i a l s f l a t l y acknowledged t o Macleans' s t h a t t h e y d e s i g n e d t h e f i r s t s t a g e o f t a x r e f o r m t o a p p e a l t o t h e s e l f i s h i n t e r e s t s o f t h e m a j o r i t y of t a x p a y e r s . " M. J a n i g a n , " C a u t i o u s Reform" (29 June 1987) 100 Maclean's 34 a t 35. The government c o u l d n o t r e d u c e t a x r a t e s f u r t h e r i f t h i s had e n t a i l e d r e d u c i n g t h e o v e r a l l revenue c o l l e c t e d by t a x a t i o n , t h u s a d d i n g t o t h e d e f i c i t . The government p e r c e i v e d t h a t t h i s w o uld i n v o l v e i n c u r r i n g p o l i t i c a l c o s t s t h a t would exceed t h e p o l i t i c a l b e n e f i t s o f r e d u c i n g t a x r a t e s . T h i s c o n c l u s i o n was b orne by t h e r e s u l t s o f a government p o l l , Decima R e s e a r c h L t d . , w h i c h r e v e a l e d t h a t s e v e n t y - f i v e p e r c e n t o f C a nadians s u r v e y e d s t a t e d t h a t g e t t i n g t h e d e f i c i t under c o n t r o l s h o u l d be t h e government's t o p economic p r i o r i t i e s : " P o l l S p e l l e d T r o u b l e f o r Tax-Reform P l a n s " supra, n o t e 38. T h i s i s i n d i c a t i v e o f a p o l i t i c a l e q u i l i b r i u m whereby t h e p e r c e i v e d c o s t s and b e n e f i t s a r e weighed up a g a i n s t each o t h e r t o a c h i e v e a r e s u l t t h a t m aximizes t h e b e n e f i t s w h i l e m i n i m i z i n g t h e p o l i t i c a l c o s t s . g r o u p s / ' However, d e s p i t e t h e s e l i m i t a t i o n s , t h e government s t i l l a t t e m p t e d t o produce a package t h a t was p a l a t a b l e t o t h e e l e c t o r a t e . As o u t l i n e d above, t h e e l e c t i o n p r o v i d e d an impetus f o r t h e i n t r o d u c t i o n o f t h e GAAR and i t s i n c l u s i o n w i t h i n t h e t a x r e f o r m package. T h i s p r o p o s i t i o n r e l a t e s t o t h e i m p o r t a n t r o l e p l a y e d by t h e p r o v i s i o n i n t h e p r e s e n t a t i o n o f t h e image o f f a i r n e s s w h i c h t h e government w i s h e d t o g i v e . The r u l e added t o t h e c r e a t i o n o f t h i s image, f i r s t i n i t s own r i g h t , second, as p a r t o f t h e c o r p o r a t e b a s e - b r o a d e n i n g measures, and t h i r d , i n economic t e r m s . The f i r s t means by w h i c h t h e p r o v i s i o n c o n t r i b u t e d t o t h e p r o m o t i o n o f f a i r n e s s , and t h u s t h e p o l i t i c a l a p p e a l o f t h e t a x r e f o r m s , was i t s v e r y i n c l u s i o n i n t h e s e p r o p o s a l s . The c o n c e p t o f t h e p r o v i s i o n and what i t s t o o d f o r - a t t a c k i n g t h e p r i v i l e g e d p o s i t i o n o f t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s - g r e a t l y a s s i s t e d t h e c r e a t i o n o f an image o f The government c o u l d have f u r t h e r r e d u c e d p e r s o n a l income t a x r a t e s by, f o r example, i n c r e a s i n g t h e t a x burden on t h e c o r p o r a t e s e c t o r . A g a i n , t h i s would have e n t a i l e d p o l i t i c a l c o s t s t h a t outweighed b e n e f i t s . T h i s i s s u p p o r t e d by t h e c o m p l a i n t s made by t h e b u s i n e s s s e c t o r r e g a r d i n g t h e r e l a t i v e l y s m a l l i n c r e a s e i n t h e t a x burden w h i c h i t had t o endure under t h e t a x r e f o r m p r o p o s a l s . See f o r example, t h e a l l e g a t i o n s by t h e Canadian Chamber o f Commerce, Canada's b i g g e s t b u s i n e s s l o b b y group, t h a t t h e r e f o r m s "ask t o o much from t h e c o r p o r a t e community": D. S t e w a r t - P a t t e r s o n , " B u s i n e s s Lobby Slams W i l s o n ' s Tax Reform P l a n s " The Globe and Mail (20 August 1987) B5. f a i r n e s s . E v i d e n c e o f t h e government's r e c o g n i t i o n i s t h e r e f e r e n c e s t o t h e r u l e w h i c h a r e s c a t t e r e d t h r o u g h o u t t h e w h i t e p a per documents.^° The p r o v i s i o n a l s o c o n t r i b u t e d t o t h e p o l i t i c a l a p p e a l o f t h e t a x r e f o r m by b e i n g an i n t e g r a l component i n t h e t o t a l image t h a t t h e government a t t e m p t e d t o s e l l . I n p a r t i c u l a r , i t was i n c o r p o r a t e d w i t h i n a whole a r r a y o f o t h e r measures w h i c h were s u p p o s e d l y d e s i g n e d t o i n c r e a s e t h e t a x burden o f t h e c o r p o r a t e s e c t o r . F o r example, t h e government drew a t t e n t i o n t o t h e low l e v e l s o f t a x p a i d by b u s i n e s s e s b e f o r e t h e r e f o r m s i t c l a i m e d t h a t t h i s would end by v i r t u e o f t h e r e f o r m s - t h e means by w h i c h t a x l i a b i l i t i e s were r e d u c e d ( i e . s p e c i a l i n c e n t i v e s ) were g o i n g t o be r e s t r i c t e d o r e l i m i n a t e d i n v a s t numbers t h o s e i n c e n t i v e s t h a t were r e t a i n e d were j u s t i f i e d on what seemed v i a b l e g r o u n d s ; " and t h e c u t s made t o t h e c o r p o r a t e t a x ^" Supra, n o t e 45. Tax i n c e n t i v e d e d u c t i o n s and c r e d i t s ... undermine t a x f a i r n e s s , as t h e y r e s u l t i n p r o f i t a b l e c o r p o r a t i o n s p a y i n g l i t t l e o r no t a x . A f t e r a d j u s t i n g f o r f a c t o r s s u c h as r e c e i p t o f i n t e r c o r p o r a t e d i v i d e n d s and income a l r e a d y t a x e d i n a f o r e i g n c o u n t r y , some 110,000 out o f 32 0,000 p r o f i t a b l e c o r p o r a t i o n s d i d n o t pay t a x i n 1983. Tax Reform 1987: Income Tax Reform, supra, n o t e 24 a t 13. 52 "The c o r p o r a t e t a x p r o p o s a l s p r e s e n t e d i n t h i s paper w i l l ... c u t back s i g n i f i c a n t l y on t a x p r e f e r e n c e s . " Ibid, a t 24. 5' "The t a x r e f o r m p r o p o s a l s p u t f o r t h i n t h i s White Paper s t r i k e a b a l a n c e between removing s p e c i f i c p r e f e r e n c e s and r e c o g n i z i n g C anadian p r i o r i t i e s and needs," Ibid, a t 4. r a t e s were l e g i t i m a t e d / ^ I n a l l , t h e government managed t o g i v e t h e i m p r e s s i o n t h a t i t had done a l l t h a t i t c o u l d t o h u r t t h e c o r p o r a t e s e c t o r , and t h a t a l t h o u g h i n c e n t i v e s remained and c o r p o r a t e r a t e s were l o w e r e d , t h e i n c r e a s e i n t h e c o r p o r a t e t a x burden was s u f f i c i e n t / ^ The GAAR was o b v i o u s l y an i n t e g r a l p a r t o f t h i s v i s i o n as i t p r e v e n t e d t h e r e m a i n i n g i n c e n t i v e s b e i n g abused, and moreover, a l s o p r e c l u d e d abuses o f i n c e n t i v e s e n a c t e d i n t h e f u t u r e . I n a l l , i t g r e a t l y a s s i s t e d t h e government i n p a i n t i n g a r o s y p i c t u r e o f h e l p i n g t h e low and m i d d l e c l a s s e s a t t h e e x t e n t o f t h e c o r p o r a t e s e c t o r . ^ ' S e c t i o n 245 was a l s o i m p o r t a n t i n terms o f t h e c o n t r i b u t i o n i t made t o s u b s t a n t i a t i n g t h e c l a i m s o f f a i r n e s s w i t h f a c t s and f i g u r e s . To v e r i f y t h a t i t was s h i f t i n g t h e burden from i n d i v i d u a l s t o t h e c o r p o r a t e s e c t o r , t h e government r e q u i r e d some s o r t o f economic v a l i d a t i o n . F o r example, i t would make t h e C anadian system more c o m p e t i t i v e w i t h t h e U.S.; h i g h r a t e s s h o u l d be r e d u c e d because nobody pays them anyway and h i g h r a t e s b r e e d i n e f f i c i e n c y . N. B r o o k s & L. McQuaig, " M i c h a e l W i l s o n ' s G r e a t Reforms: T a x i n g Our I n t e l l i g e n c e " (November 1987) 21 ThisMagazine 14 a t 17. " [ I ] s i t [ t h e c o r p o r a t e t a x i n c r e a s e ] enough? W i l s o n t h i n k s so .... 'We've gone as f a r as we can a t t h e moment,' W i l s o n s a i d . " Solomon, supra, n o t e 41. Moreover, t h e government seemed t o have succeeded. Few commentators, p a r t i c u l a r l y newspaper j o u r n a l i s t s , e v e r g o t p a s t t h e i n i t i a l i m p r e s s i o n c r e a t e d . The media i n g e n e r a l c o n c e n t r a t e d i n s t e a d on t h e c r i t i c i s m made by t h e c o r p o r a t e s e c t o r t h a t t h e i n c r e a s e s were t o o l a r g e , o r on t h e t h r e a t o f t h e f u t u r e s a l e s t a x ( i g n o r i n g t h e i n c r e a s e s made t o t h e t h e n c u r r e n t f e d e r a l s a l e s t a x ) . The f i r s t p a r t o f t h e e q u a t i o n - t h e s h i f t i n g o f t h e burden from i n d i v i d u a l s - was implemented i n t h e w h i t e paper p r o p o s a l s by t h e r e d u c t i o n o f t h e p e r s o n a l income t a x burden o f i n d i v i d u a l s . F o r example, t h e c u t s i n p e r s o n a l income t a x e s amounted t o $2 b i l l i o n a l o n e i n 1988, and were a l l e g e d t o t o t a l n e a r l y $11 b i l l i o n f o r t h e p e r i o d 1 9 8 8 - 1 9 9 2 . T h i s r e d u c t i o n may appear q u i t e s u b s t a n t i a l i f c o n s i d e r e d i n i s o l a t i o n . However, i f one v i e w s i t i n t h e c o n t e x t o f t h e p e r s o n a l income t a x burden p r i o r t o t h e t a x r e f o r m - a p p r o x i m a t e l y $38 b i l l i o n p e r annum^^ - i t p a l e s somewhat i n t o i n s i g n i f i c a n c e . However, t h i s d i d n o t p r e v e n t t h e government p r e s e n t i n g t h e c u t s as i f t h e e l e c t o r a t e were g e t t i n g a g r e a t s a v i n g bestowed upon them - so m e t h i n g t o be g r a t e f u l f o r . " ^' Tax Reform 1987: Income Tax Reform, supra, n o t e 24 a t 31. 5° Canada, House o f Commons, Tax Reform '87: Report of the Standing Committee on Finance and Economic A f f a i r s tabled in the House of Commons on November 16, 1987 (Don M i l l s : R i c h a r d De Boo, 1987) ["the B l e n k a r n R e p o r t " ] a t 19, T a b l e 2 " T o t a l Government Revenue, 1986" [based on d a t a from S t a t i s t i c s Canada, CANSIM D i v i s i o n ] . " Tax r e f o r m measures w i l l . . . r e d u c e p e r s o n a l income t a x f o r e i g h t o u t o f t e n Canadian h o u s e h o l d s and a l m o s t n i n e o u t o f t e n Canadians o v e r 65. P e r s o n a l t a x w i l l f a l l by an average o f $460, o r r o u g h l y 5 p e r c e n t o f t h e i r t a x b i l l , f o r e i g h t out o f t e n t a x p a y e r s w i t h incomes between $30,000 and $50,000. Tax Reform 1987: Income Tax Reform, supra, n o t e 24 a t 17. Moreover, t h e p e r s o n a l income t a x c u t s were d i s t r i b u t e d i n such a way t o maximize e l e c t o r a l appeal.'° So f o r example, i n r e l a t i o n t o t h e v a s t m a j o r i t y o f t a x p a y e r s , r a t h e r t h a n r e d u c i n g j u s t a few o f t h e i r t a x b i l l s , t h e government l o p p e d o f f a t l e a s t a s m a l l amount from t h e t a x l i a b i l i t i e s o f o v e r e i g h t y p e r c e n t ( o r 8.9 m i l l i o n h o u s e h o l d s ) o f Canadian t a x p a y e r s . B y s p r e a d i n g t h e t a x g a i n s t h i n l y o v e r a l a r g e volume o f t a x p a y e r s , t h e government was a b l e t o maximize t h e p r o p o r t i o n o f t h e e l e c t o r a t e w h i c h would be f e e l i n g somewhat b e n e v o l e n t towards t h e government as a r e s u l t o f t h e s e t a x c u t s . ' ^ 60 II [• The J income t a x p r o p o s a l s ... a r e a t h i n l y d i s g u i s e d p r e - e l e c t i o n t a x b r e a k f o r lower-income and m i d d l e - c l a s s C a n a d i a n s . " P. Cook, "A R a s p b e r r y f o r t h e O p p o s i t i o n on Tax Reform" The Globe and Mail (7 J u l y 1987) B4. A l s o , " [ t ] h e C o n s e r v a t i v e s ' p o l i t i c a l s a l e s m a n s h i p w i l l n a t u r a l l y t a k e advantage o f t h e p r e - e l e c t i o n t i m i n g o f t h e i n i t i a l t a x c u t . " "The C o n t e x t o f Tax Reform", supra, n o t e 34. ' I Tax Reform 1987, supra, n o t e 34 a t 37. '2 " W i l s o n has r e d u c e d income-tax r a t e s i n t h e f i r s t s t a g e of r e f o r m . The p r o c e s s i s i n t e n d e d t o i n d u c e modest f e e l i n g s o f w e l l - b e i n g i n t h e t a x p a y e r . " P. H a d e k e l , "Don't Be Duped by Tax Reforms's F l u s h e r Paycheques" Montreal Gazette (15 J u l y 1988) D5. The O p p o s i t i o n P a r t i e s a t t e m p t e d t o d i f f u s e t h e s e f e e l i n g s by c o n s t a n t l y h i g h l i g h t i n g t h e i n c r e a s e s i n t a x l i a b i l i t i e s t h a t had o c c u r r e d s i n c e t h e government had t a k e n o f f i c e : J . Kohut, " T o r i e s F i n d Tax T a b l e s Turned as Reform Becomes I s s u e i n V o t e " The Globe and Mail (24 O c t o b e r 1988) B l . I n t h i s r e s p e c t , t h e s t u d y by A l l a n M a s l o v e , P r o f e s s o r o f P u b l i c A d m i n i s t r a t i o n , C a r l e t o n U n i v e r s i t y , w h i c h r e v e a l e d t h e f u l l e x t e n t o f t h e t a x i n c r e a s e s s i n c e t h e government t o o k o f f i c e [C. Goar, "Tax Reform i s L e s s Than i t Seems: Canadians S t i l l A r e n ' t Compensated f o r T o r y Tax H i k e s S i n c e 1984" Montreal Gazette (1 J u l y 1988) B3] was a godsend f o r t h e O p p o s i t i o n . I n t h e f a c e o f t h i s a d v e r s e p u b l i c i t y , one may have e x p e c t e d t h e government t o down-play i t s t a x r e f o r m as an e l e c t i o n p l o y . However, t h i s was n o t t h e case as t h e government was f o n d o f q u o t i n g t h e t a x s a v i n g s t h a t t h e I t may be argued t h a t t h e government was p r o m o t i n g o b j e c t i v e s o t h e r t h a n i t s own s e l f - i n t e r e s t i n r e d u c i n g p e r s o n a l income t a x r a t e s . F o r example, perhaps t h e government was b r i n g i n g t h e p e r s o n a l income t a x r a t e s i n l i n e w i t h t h o s e i n t h e U.S. However, t h e d i s p a r i t i e s between t h e two n a t i o n s would n o t be an i m p o r t a n t f a c t o r f o r t h e v a s t m a j o r i t y o f t a x p a y e r s as t h e y w ould c e r t a i n l y n o t be s i g n i f i c a n t enough t o cause r e l o c a t i o n t o t a k e advantage o f t h e low e r r a t e s i n t h e U.S.^' I f such arguments a r e v a l i d a t a l l , t h e n i t i s o n l y i n r e l a t i o n t o t h e c o r p o r a t e s e c t o r and h i g h i n c o m e - e a r n i n g i n d i v i d u a l s . F o r t h e s e t a x p a y e r s , t h e d i s p a r i t i e s have a g r e a t e r i m p a c t , and f u r t h e r m o r e , as a p r a c t i c a l m a t t e r , t h e y would f i n d i t e a s i e r t o r e l o c a t e t h e i r income t o t h e U.S. Moreover, t h e government o r c h e s t r a t e d t h e t i m i n g o f t h e t a x s a v i n g s so as t o maximum t h e p o l i t i c a l a p p e a l . F o r example, t h e r a t e r e d u c t i o n s were s c h e d u l e d t o come i n t o e f f e c t on 1 J a n u a r y 1988.^ However, s u p p o s e d l y t o g i v e employers t i m e t o a d j u s t , e l e c t o r a t e would e n j o y by v i r t u e o f t a x r e f o r m : Kohut, i b i d . It may be t h a t t h e government was r e l y i n g on t h e p o l i t i c a l s c h o o l o f t h o u g h t t h a t v o t e r s have v e r y s h o r t memories so t h a t t h e r e c e n t t a x c u t s and r e b a t e would be a l o t f r e s h e r i n v o t e r s ' minds t h a n t h e i n c r e a s e s s i n c e 1984: i b i d . McQuaig, supra, note 2 a t 73. ^ Tax Reform 1987: Income Tax Reform, supra, n o t e 24 a t 19 & 72. 65 M T o r i e s C o u l d Use Tax B i l l t o 'Buy' V o t e s " Montreal Gazette (18 J u l y 1988) B6. t h e t a x c u t s d i d n o t show up i n pay cheques u n t i l 1 J u l y 1988,'' j u s t i n t i m e f o r t h e e x p e c t e d s c h e d u l i n g o f t h e f e d e r a l e l e c t i o n . F u r t h e r m o r e , t h i s n e c e s s i t a t e d t h e payment o f a t a x r e b a t e f o r t h i s p e r i o d , w h i c h was n o t t o be p a i d o u t u n t i l e a r l y 1989 when t a x r e t u r n s f o r 1988 were f i l e d . ' ^ S u b j e c t t o t h e economic argument advanced below, t h e r e does n o t seem t o be any v i a b l e r e a s o n f o r t h e government t o s t r u c t u r e t h e t a x s a v i n g s i n t h i s way, o t h e r t h a n t o p l e a s e t h e e l e c t o r a t e . F o r example, why n o t j u s t i n t r o d u c e t h e t a x c u t s so as t o be e f f e c t i v e from 1 J u l y 1988? That would seem t o be more l o g i c a l , p a r t i c u l a r l y from an economic p e r s p e c t i v e i n l i g h t o f t h e b u l g i n g d e f i c i t a t t h a t t i m e . F u r t h e r m o r e , by a r r a n g i n g t h e t i m i n g so t h a t a r e b a t e would be p a i d , t h e government appears t o have a c h i e v e d two f a v o u r a b l e r e s u l t s : f i r s t , i t b e n e f i t t e d e c o n o m i c a l l y by b e i n g a b l e t o r e c e i v e i n t e r e s t on t h e r e b a t e f u n d s by not h a v i n g t o pay them out u n t i l t h e f o l l o w i n g y e a r , and a l s o , i t enhanced t h e p o l i t i c a l a p p e a l o f t h e t a x c u t s by a r r a n g i n g f o r t a x p a y e r s t o r e c e i v e a lump sum r a t h e r t h a n more f r e q u e n t payments o f s m a l l e r amounts, t h e f o r m e r o b v i o u s l y g i v i n g t h e i m p r e s s i o n o f a g r e a t e r s a v i n g . " Tax Reform 1987: Income Tax Reform, supra, n o t e 24 a t 19 & 72. 67 i i T o r i e s C o u l d Use Tax B i l l t o 'Buy' V o t e s " , supra, n o t e I n summary, i t has been shown t h a t t h e t a x r e f o r m p r o p o s a l s e f f e c t e d r e d u c t i o n s i n p e r s o n a l income t a x l i a b i l i t i e s . I n d o i n g so, t h e government was a c t i n g i n i t s own s e l f - i n t e r e s t t o enhance i t s s u p p o r t w i t h t h e e l e c t o r a t e . The c u t s were o r c h e s t r a t e d t o maximize p o l i t i c a l a p p e a l , f o r example, t h e means of d i s t r i b u t i n g t h e s a v i n g s and t h e t i m i n g o f t h e r e d u c t i o n s . However, t h e o v e r a l l o b j e c t i v e was t o p r e s e n t an image o f f a i r n e s s - t o s h i f t t h e t a x burden from i n d i v i d u a l s t o t h e c o r p o r a t e s e c t o r . The above d i s c u s s i o n s u b s t a n t i a t e s t h e f i r s t p a r t o f t h e e q u a t i o n . I t i s t o t h e second p a r t o f t h e e q u a t i o n - t h e i n c r e a s e i n t h e t a x burden o f t h e c o r p o r a t e s e c t o r - t h a t we now t u r n . The government c l a i m e d t o have s u b s t a n t i a l l y i n c r e a s e d t h e t a x burden o f t h e c o r p o r a t e sector.^® However, t o be p e r s u a s i v e , i t had t o v e r i f y t h i s c l a i m w i t h f a c t s and f i g u r e s . The GAAR p l a y e d a s i g n i f i c a n t r o l e i n t h e achievement o f t h i s o b j e c t i v e . 68 "Tax r e f o r m w i l l r e s u l t i n c o r p o r a t i o n s making a s i g n i f i c a n t l y h i g h e r c o n t r i b u t i o n t o t h e t o t a l t a x revenues c o l l e c t e d by t h e f e d e r a l government." Tax Reform 1987, supra, n o t e 34 a t 50. The n e t c o r p o r a t e t a x i n c r e a s e was e s t i m a t e d t o be $5 b i l l i o n o v e r t h e f i v e y e a r s f o l l o w i n g t h e t a x reforms.'' T h i s g i v e s t h e i m p r e s s i o n o f b e i n g a s u b s t a n t i a l i n c r e a s e when g i v e n as a t o t a l f i g u r e . However, when b r o k e n down t o a y e a r l y b a s i s , t h e i n c r e a s e s do n o t appear q u i t e so s i g n i f i c a n t . F o r example, i n 1988, t h e i n c r e a s e was o n l y $470 m i l l i o n , and i n 1989, $410 million.^° O v e r a l l , t h e c o r p o r a t e t a x burden was o n l y m o d e s t l y i n c r e a s e d from 15.6% t o 1 7 . 2 % . M o r e o v e r , t h i s i n c r e a s e d i d n o t r e t u r n t h e c o r p o r a t e t a x burden t o t h e l e v e l i t had been when t h e government had t a k e n o f f i c e i n 1984 .^2 However, t h e government s t i l l made a show o f p r e s e n t i n g t h e s e f i g u r e s as p r o m o t i n g a f a i r e r system - o f harming t h e c o r p o r a t e s e c t o r by i m p o s i n g a g r e a t e r t a x burden on them.^ I n a c h i e v i n g t h i s o b j e c t i v e , t h e GAAR p l a y e d an i m p o r t a n t r o l e . T h i s was p r i m a r i l y due t o t h e i n c r e a s e d revenue w h i c h t h e r u l e was supposed t o g e n e r a t e - some $2,240 m i l l i o n o v e r t h e p e r i o d 1988- Tax Reform 1987, supra, n o t e 34 a t 43 and Tax Reform 1987: Income Tax Reform, supra, n o t e 24 a t 24. ''° Tax Reform 1987: Income Tax Reform, supra, n o t e 24 a t 31. T h i s would h e l p e x p l a i n why t h e w h i t e p a p e r s r e f e r t o t h e t o t a l f i g u r e more f r e q u e n t l y , r a t h e r t h a n t h e a n n u a l i n c r e a s e s . Ibid. 1̂ Tax Reform 1987: Income Tax Reform, i b i d , a t 50. The p r i m a r y r e a s o n f o r t h e o v e r a l l n e t p o s i t i o n n o t b e i n g more damaging on t h e c o r p o r a t e s e c t o r was t h e t h a t t h e base- b r o a d e n i n g measures were o f f s e t w i t h c o r p o r a t e r a t e r e d u c t i o n s . 2̂ I n 1984-5, c o r p o r a t e income t a x e s a c c o u n t e d f o r 20.3 p e r c e n t o f t h e f e d e r a l major t a x r evenues - c l o s e t o a h i s t o r i c low. ( F o r example, i n 1975-6 t h e y made up 26.3 p e r c e n t o f revenues.) Brooks & McQuaig, supra, n o t e 54 a t 19. ^ Supra, note 68. 92.^* T h i s i n c r e a s e , i n r e l a t i o n t o t h e o t h e r c o r p o r a t e base- b r o a d e n i n g measures, was u n d o u b t e d l y t h e h i g h e s t o v e r a l l and ma r k e d l y t h e g r e a t e s t d u r i n g t h e f i r s t two y e a r s ( t h e r e a f t e r , i t was e s t i m a t e d t h a t t h e revenue g a i n e d i n t h e r e d u c t i o n o f C a p i t a l C o s t A l l o w a n c e would i n c r e a s e and f i n a l l y o v e r t a k e t h e g a i n s under t h e GAAR). Thus, i n terms o f revenue i n c r e a s e s g e n e r a t e d by b a s e - b r o a d e n i n g measures, s e c t i o n 245 was o b v i o u s l y t h e most l u c r a t i v e o f t h e p r o p o s a l s i n t h e w h i t e p a p e r s . W i t h o u t i t , t h e government would n o t have been a b l e t o p r e s e n t s u c h an i m p r e s s i o n o f h e l p i n g t h e poor a t t h e expense o f t h e r i c h . T h i s i s e v i d e n c e d by t h e f o l l o w i n g f i g u r e s : a b s e n t t h e GAAR, i n 1988, t h e c o r p o r a t e income t a x i n c r e a s e would have been a mere $60 m i l l i o n (not q u i t e so i m p r e s s i v e as $470 m i l l i o n ! ) ; i n 1989, t h e i n c r e a s e would have been z e r o - i n f a c t , t h e r e would have been a decrease i n c o r p o r a t e t a x e s o f $3 0 m i l l i o n . ( T h e r e a f t e r , t h e impact o f t h e r u l e was n o t q u i t e so pronounced.) T h e r e f o r e , i t i s a c c u r a t e t o c o n c l u d e t h a t t h e p r o v i s i o n p l a y e d an i m p o r t a n t r o l e i n t h e image o f f a i r n e s s w h i c h t h e government sought t o p r o j e c t . However, t h e s e r e v e n u e - g e n e r a t i n g f i g u r e s c a nnot be b l i t h e l y a c c e p t e d - some q u a l i f i c a t i o n i s n e c e s s a r y . F i r s t , t h e y do n o t r e l a t e s o l e l y t o t h e a p p l i c a t i o n o f t h e GAAR. The p r o v i s i o n was lumped t o g e t h e r w i t h t h e p r o p o s a l s on p r e f e r r e d s h a r e i s s u e s by Tax Reform 1987: Income Tax Reform, supra, n o t e 24 a t 67. n o n - t a x a b l e companies i n e s t i m a t i n g t h e i n c r e a s e d r e v e n u e s . No i n d i c a t i o n was g i v e n i n t h e document as t o t h e b a s i s o f a l l o c a t i o n o f t h e i n c r e a s e d revenue between t h e s e two s e p a r a t e a n t i - a v o i d a n c e measures. The d e c i s i o n t o combine t h e s e p r o v i s i o n s may have been a shrewd p o l i t i c a l move on t h e p a r t o f t h e government as t h e f i g u r e s would have been more v u l n e r a b l e t o c h a l l e n g e i f p r e s e n t e d on t h e i r own. Second, no i n d i c a t i o n was g i v e n as t o t h e methodology employed i n t h e c a l c u l a t i o n o f t h e s e f i g u r e s , t h u s f u r t h e r r e s t r i c t i n g t h e grounds on w h i c h t h e y c o u l d be a t t a c k e d . Indeed, t h e r e l i a b i l i t y o f t h e s e f i g u r e s may be more d o u b t f u l when one c o n s i d e r s t h a t t h e s c i e n c e o f t a x e s t i m a t i o n has been d e s c r i b e d as b e i n g " j u s t t h i s s i d e o f w i t c h c r a f t " ! ^ ' However, d e s p i t e t h e s e c a v e a t s , t h e i n c l u s i o n o f t h e GAAR w i t h i n t h e t a x r e f o r m package made a s u b s t a n t i a l impact i n b o l s t e r i n g t h e government•s p r e s e n t a t i o n o f t h e image o f f a i r n e s s . I n p a r t i c u l a r , t h e e s t i m a t e d revenue funds e n a b l e d I n p a r t i c u l a r , t h e r e was no d i s c u s s i o n i n Tax Reform 1987: Income Tax Reform, supra, n o t e 24 a t Annex 3, "Notes t o t h e T a b l e s and Methodology". '̂ P. Demont, "Tax Break P r o p o s a l s Cause D e f i c i t Headaches" Financial Times (23 November 1987) 3. Moreover, t h e a c c u r a c y o f t h e p r o j e c t e d i n c r e a s e s f o r t h e GAAR i s f u r t h e r q u e s t i o n e d when one r e g a r d s t h e methodology employed f o r t h e o t h e r base- b r o a d e n i n g measures. I n p a r t i c u l a r , i n c a l c u l a t i n g t h e f i g u r e s r e l a t i n g t o t h e r e m o v a l / c u r t a i l m e n t o f s p e c i a l i n c e n t i v e s , t h e government assumed t h a t c e r t a i n o f t h e s e t a x b r e a k s would be e l i m i n a t e d i n 1988 a l t h o u g h most o f them were n o t s c h e d u l e d t o d i s a p p e a r o r be trimmed u n t i l s e v e r a l y e a r s l a t e r . Moreover, t h e f i g u r e s f a i l t o t a k e a c c o u n t o f b e h a v i o u r i a l changes, namely t h a t h i g h - i n c o m e i n d i v i d u a l s and t h e c o r p o r a t e s e c t o r would s w i t c h t h e i r i n v e s t m e n t from t h o s e i n c e n t i v e s a f f e c t e d by t h e t a x r e f o r m s i n t o new s h e l t e r s n o t so a f f e c t e d . Brooks & McQuaig, supra, n o t e 54 a t 21. t h e government t o p r e s e n t an image t h a t i t was v e r i f y i n g i t s c l a i m t h a t t h e burden on t h e c o r p o r a t e s e c t o r was g o i n g t o be s u b s t a n t i a l l y i n c r e a s e d . From t h e p r e s e n t a t i o n o f t h e t a x r e f o r m package, one may be excu s e d f o r assuming t h a t t h e s e r e d u c t i o n s were g o i n g t o be p a i d f o r by e q u i v a l e n t i n c r e a s e s i n t h e c o r p o r a t e b u r d e n . ^ Not so. I n t h e f i r s t two y e a r s i n p a r t i c u l a r , t h e c o r p o r a t e i n c r e a s e s amounted t o o n l y about t w e n t y t o t w e n t y - f i v e p e r c e n t o f t h e p e r s o n a l income t a x r e d u c t i o n s . Moreover, n o t o n l y d i d t h e income t a x i n c r e a s e s have t o be met, b u t i n 1988-89 t h e r e was an net overall increase ( a f t e r a l l t h e i n c r e a s e s and r e d u c t i o n s ) o f $1,190 million.^® T h e r e f o r e , i n 1988-89, t h e government came up w i t h an e x t r a $2895 m i l l i o n ( t o pay f o r t h e income t a x Brooks & McQuaig, supra, n o t e 54 a t 19: "The w h i t e paper t r i e s h a r d t o l e a v e t h e i m p r e s s i o n t h a t t h e e x t r a revenue [ t o f i n a n c e t h e r a t e r e d u c t i o n s ] w i l l come m o s t l y from h e a v i e r c o r p o r a t e t a x e s . " The means by w h i c h t h e government f o s t e r e d t h i s image i n c l u d e d , f o r example, t h e c o r p o r a t e t a x measures b e i n g p r e s e n t e d p a r a l l e l t o t h e p e r s o n a l income t a x measures, t h u s g i v i n g t h e i m p r e s s i o n t h a t t h e former o f f s e t t h e l a t t e r . The f e d e r a l s a l e s t a x i n c r e a s e s and a c c e l e r a t i o n o f t a x payments ( t h e p r i m a r y means f o r m e e t i n g t h e p e r s o n a l income t a x c u t s ) , on t h e o t h e r hand, were h i d d e n away q u i t e f a r i n t o t h e w h i t e p a p e r s , f o r example, Tax Reform 1987, supra, n o t e 34 a t 58-9. Moreover, some i n d i c a t i o n o f t h e o b j e c t i v e s o f t h e p r e s e n t a t i o n can be i m p l i e d from t h e space t h a t was a s s i g n e d t o each s e t o f measures. So, f o r example, i n t h e w h i t e paper document. Tax Reform 1987, i b i d . , t h e c o r p o r a t e t a x p r o p o s a l s were s p r e a d o v e r n e a r l y s i x t e e n pages. Compare t h a t w i t h t h e page and a h a l f w h i c h t h e i n c r e a s e t o t h e f e d e r a l s a l e s t a x was g i v e n . ^® Tax Reform 1987, supra, n o t e 34 a t 75. r e d u c t i o n s and t h e $1,190 m i l l i o n n e t o v e r a l l i n c r e a s e ) , o f w h i c h o n l y $530 m i l l i o n was due t o t h e c o r p o r a t e income t a x i n c r e a s e s . I n o t h e r words, t h e i n c r e a s e d burden on t h e c o r p o r a t e s e c t o r o n l y amounted t o r o u g h l y e i g h t e e n p e r c e n t o f t h e o v e r a l l i n c r e a s e s t h a t were g e n e r a t e d . So, where d i d t h e o t h e r s e v e n t y - two p e r - c e n t come from? W e l l , i t came from i n c r e a s e s t o t h e f e d e r a l s a l e s t a x ( o f $1,105 m i l l i o n ) and a c c e l e r a t i o n o f t a x payments (o f $1,600 m i l l i o n ) . ^ ' However, t h i s i s n o t t h e p a r t o f t h e package w h i c h t h e government emphasised. I n s t e a d , i t drew a t t e n t i o n t o t h e measures i t was t a k i n g t o i n c r e a s e c o r p o r a t e t a x r e venues - t h u s p r o m o t i n g an image o f fairness.°° 79 Ibid. °° Supra, n o t e s 51-5 and accompanying t e x t . A s t r o n g a d v o c a t e o f t h e u n f a i r n e s s o f t h e t a x r e f o r m package based on s i m i l a r r e a s o n i n g i s L i n d a McQuaig, supra, n o t e 54 ( w i t h Brooks) & 2. She a l s o c l a i m s t h a t t h e t a x r e f o r m package was c a r e f u l l y d r e s s e d up t o l o o k l i k e a boon t o t h e l o w e r and m i d d l e c l a s s e s : Perhaps more t h a n a n y t h i n g , t h e June 87 t a x r e f o r m was an e x e r c i s e i n c l e v e r p u b l i c r e l a t i o n s . The government had gone t o e x t r a o r d i n a r y l e n g t h s t o make i t s p r o p o s a l s sound f a i r , h o l d i n g back r e l e v a n t i n f o r m a t i o n and even p r e s e n t i n g t h e numbers i n ways t h a t d i m i n i s h e d t h e g a i n s t o be e n j o y e d by t h e r i c h . The g o a l o f f a i r n e s s , w h i c h had r a n k e d below d e f i c i t - r e d u c t i o n i n t h e T o r i e s ' e a r l i e r t a x changes, had been e l e v a t e d t o t h e number one p r i o r i t y i n t h e w h i t e paper. Supra, n o t e 2 a t x v i i i - x i x . However, she a l l e g e s t h a t t h i s was a l l a c o v e r - u p t o e n a b l e t h e government t o a c h i e v e i t s o r i g i n a l m o t i v e - t o d e c r e a s e i t s emphasis on income t a x e s and i n c r e a s e t h e emphasis on s a l e s t a x , t h u s c o n t i n u i n g t h e t r e n d o f s h i f t i n g t h e t a x burden from t h e r i c h t o t h e m i d d l e c l a s s : supra, n o t e 2 a t x i x . I t i s s u b m i t t e d t h a t t h i s l e f t i s t i d e o l o g y i s t h e cause o f h e r u n d o i n g . I n p a r t i c u l a r , i t prompted h e r t o d i s c a r d o t h e r f a c t o r s w h i c h had a s i g n i f i c a n t b e a r i n g on t a x r e f o r m , f o r example t h e e l e c t i o n i t s e l f ( a c c o r d i n g t o McQuaig, t h i s was t h e m o t i v e f o r t h e p r e s e n t a t i o n o f t h e package as p r o m o t i n g f a i r n e s s , b u t n o t an The GAAR p l a y e d an i m p o r t a n t r o l e i n t h e achievement o f t h i s p u r p o s e . To summarise t h u s f a r , i t i s a p p a r e n t from t h e above d i s c u s s i o n t h a t t h e lo o m i n g f e d e r a l e l e c t i o n had an impact on t h e t a x r e f o r m package, and t h e GAAR i n p a r t i c u l a r . I t i s s u g g e s t e d t h a t t h e e l e c t i o n was a major impetus f o r t h e i n t r o d u c t i o n o f t h e t a x r e f o r m package as t h e government vi e w e d i t as a means o f b o l s t e r i n g i t s f l a i l i n g e l e c t o r a l s u p p o r t . Thus, t h e government s t r u c t u r e d and p r e s e n t e d t h e package t o maximize i t s p o l i t i c a l a p p e a l . I n p a r t i c u l a r , i t f o c u s e d on t h e c o n c e p t o f f a i r n e s s - of r e d u c i n g t h e t a x burden o f l o w e r and m i d d l e c l a s s i n d i v i d u a l s w h i l e i n c r e a s i n g t h e burden o f t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . The i n t r o d u c t i o n and i n c l u s i o n o f t h e GAAR w i t h i n t h e r e f o r m package was an i m p o r t a n t element i n t h e p r o m o t i o n o f t h i s o b j e c t i v e , b o t h i n t h e p r e s e n t a t i o n and economic v e r i f i c a t i o n o f t h i s c r i t e r i o n . However, i t i s a l s o o b j e c t i v e f o r embarking on t a x r e f o r m i n t h e f i r s t p l a c e ) , t h e U.S. t a x r e f o r m e x p e r i e n c e (which one n o t a b l e commentator has a l l e g e d was t h e main impetus f o r t h e Canadian e x p e r i e n c e : H a r t l e , supra, note 7 a t 401-2). I t i s conceded t h a t t h e s h i f t i n emphasis towards t h e s a l e s t a x d i d o c c u r i n t h e t a x r e f o r m package. However, i t i s p r o p o s e d t h a t t h i s was more i n c i d e n t a l t o t a x r e f o r m t h a n an a c t u a l cause. I n p a r t i c u l a r , t h e government had t o make up t h e s h o r t f a l l r e s u l t i n g from t h e p e r s o n a l income t a x r e d u c t i o n s . As d i s c u s s e d b e f o r e , supra, n o t e 49, t h e government o b v i o u s l y p e r c e i v e d i t t o be more p o l i t i c a l l y c o s t l y t o make up t h i s d i f f e r e n c e by, f o r example, i n c r e a s i n g t h e t a x burden on t h e c o r p o r a t e s e c t o r . To c o n c l u d e , t h i s t h e s i s c a s t s a s p e r s i o n s on t h e b e l i e f s o f McQuaig by showing t h a t o t h e r f a c t o r s had an i n f l u e n t i a l a f f e c t on t h e t a x r e f o r m package, beyond s i m p l y i t s p r e s e n t a t i o n . a c c u r a t e t o say t h a t t h e o b j e c t i v e o f f a i r n e s s was more i l l u s o r y t h a n r e a l - The t a x r e f o r m s d i d r e d u c e t h e income t a x burden o f i n d i v i d u a l s - b u t t h e y d i d n o t r a i s e t h e c o r p o r a t e l e v e l by a comparable amount. I n s t e a d , t h e s h o r t f a l l was made up i n o t h e r ways, n o t a b l y , i n c r e a s e s i n t h e f e d e r a l s a l e s t a x and t h e a c c e l e r a t i o n o f t a x payments. °i A d d i t i o n a l f a c t o r s , o t h e r t h a n t h e f i n a n c i n g o f t h e p e r s o n a l income t a x r a t e c u t s , have been i d e n t i f i e d as e x p o s i n g t h e f a l l a c i o u s n a t u r e o f t h e f a i r n e s s o f t h e t a x r e f o r m s . However, due t o space c o n s t r a i n t s and t h e narrow p e r s p e c t i v e of t h i s t h e s i s , i t i s n o t pr o p o s e d t h a t t h e s e f a c t o r s be d i s c u s s e d . Some have been i d e n t i f i e d , i n p a s s i n g , i n t h i s paper where t h e c o n t e x t deems them r e l e v a n t . F o r a more d e t a i l e d a n a l y s i s o f t h e f a i r n e s s o f t h e o v e r a l l t a x r e f o r m package, see g e n e r a l l y B r o o k s , supra, n o t e 4; Brooks & McQuaig, supra, n o t e 54 and McQuaig, supra, n o t e 2. However, i n a d d i t i o n t o p r o p o s a l s i n t h e t a x r e f o r m package w h i c h were i n c l u d e d and/or p r e s e n t e d as p r o m o t i n g f a i r n e s s , o t h e r measures were o r c h e s t r a t e d w h i c h a l t h o u g h d i d n o t f a l l i n t o t h e f a i r n e s s c a t e g o r y were n o n e t h e l e s s d e s i g n e d t o maximize °2 An i m p o r t a n t measure w i t h i n t h e t a x r e f o r m p r o p o s a l s w h i c h was d e s i g n e d t o promote t h e co n c e p t o f f a i r n e s s and t h u s be p o l i t i c a l l y a p p e a l i n g was t h e was t h e c o n v e r s i o n o f p e r s o n a l exemptions and o t h e r d e d u c t i o n s t o c r e d i t s . A l t h o u g h t h i s manoeuvre d i d n o t have any impact on t h e GAAR (so was n o t i n c l u d e d i n t h e e a r l i e r d i s c u s s i o n ) , i t i s f e l t t h a t some acknowledgement o f t h e s e measures s h o u l d be made due t o t h e i m p o r t a n t c o n t r i b u t i o n t h e y made t o t h e image o f f a i r n e s s . There can be l i t t l e doubt t h a t t h e y were i n c l u d e d t o maximize e l e c t o r a t e s u p p o r t as w e l f a r e groups had been c l a m o u r i n g f o r t h i s move f o r a l o n g t i m e p r i o r t o t h e t a x r e f o r m e x e r c i s e i n 1987: Brooks & McQuaig, supra, n o t e 54 a t 16 and McQuaig, supra, n o t e 2 a t 339. The e l e c t o r a l a p p e a l o f t h e c o n v e r s i o n s i s s u p p o r t e d by t h e c r i t i c i s m s w h i c h t h e s e measures have a t t r a c t e d . F o r example, t h e c r e d i t s were n o t r e f u n d a b l e and t h e t a x d e d u c t i o n s t h a t most b e n e f i t t e d t h e r i c h were n o t c o n v e r t e d i n t o c r e d i t s : B rooks & McQuaig, i b i d , a t 18. T h i s r e i n f o r c e s t h e " d r e s s i n g up" o f t h e t a x r e f o r m package t o be f a i r as i f t h e p r o p o s a l s had been s t r u c t u r e d t o promote a f a i r e r system t h e s e c r i t i c i s m s would have been a d d r e s s e d . Moreover, i n k e e p i n g w i t h i t s p r o m o t i o n o f s e l f - i n t e r e s t , t h e government was c a r e f u l t o t r e a t f a v o u r a b l y t h e d i s a d v a n t a g e d groups o f s o c i e t y - e s p e c i a l l y t h e low income e a r n e r s and t h e e l d e r l y . To be a p p e a l i n g t o t h e e l e c t o r a t e , t h e government s t r u c t u r e d t h e t a x r e f o r m package (and i n p a r t i c u l a r t h e c o n v e r s i o n o f p e r s o n a l exemptions and o t h e r d e d u c t i o n s t o t a x c r e d i t s ) so t h a t 850,000 lower-income Canadians were removed from t h e t a x r o l l s . T h i s may sound a t r i f l e c y n i c a l , b u t such c y n i c i s m may w e l l be j u s t i f i e d when one c o n s i d e r s t h e f o l l o w i n g : f i r s t , t h a t many f a m i l i e s below t h e p o v e r t y l i n e would s t i l l be p a y i n g income t a x a f t e r t h e r e f o r m . S e c o n d l y , t h e t a x r e f o r m s were j u s t removing some o f t h e one m i l l i o n t a x p a y e r s who had been added t o t h e r o l l s s i n c e t h e government t o o k o f f i c e i n September 1984. F i n a l l y , i t was a l l e g e d t h a t t h e s e t a x p a y e r s would be back on t h e r o l l s w i t h i n t h r e e t o f o u r y e a r s anyway due t o p a r t i a l i n d e x a t i o n : Brooks & McQuaig, i b i d , and L. S h i f r i n , " W i l s o n ' s P l a n s P o l i t i c a l l y B r i l l i a n t " Toronto Star (22 June 1987) A21. e l e c t o r a l s u p p o r t . Moreover, t h e y had some b e a r i n g on t h e GAAR, a l b e i t , sometimes o n l y m a r g i n a l . One means by w h i c h t h e government sought t o promote e l e c t o r a l a p p e a l (not r e l y i n g on t h e f a i r n e s s c oncept) was i n r e l a t i o n t o th e economic outcome o f t h e t a x r e f o r m s . I n p a r t i c u l a r , t h e government c l a i m e d t h a t t h e package was " f i s c a l l y n e u t r a l " . However, i n r e a l i t y , i t s t r u c t u r e d t h e p r o p o s a l s so t h a t t h e f i r s t y e a r o f r e f o r m s would g e n e r a t e an e x t r a $1,190 m i l l i o n . One v i a b l e r e a s o n f o r t h i s i s t h a t t h e government w i s h e d t o use t h i s e x t r a revenue i n t h e run-up t o t h e e l e c t i o n , f o r example, t o a s s i s t i n t h e r e i n f o r c e m e n t o f i t s c l a i m t h a t i t was s o l v i n g t h e d e f i c i t problem^^ o r t o a s s i s t i n t h e f u n d i n g o f s o c i a l programs. However i t u t i l i s e d t h e revenue i t c e r t a i n l y would have been a b o o s t t o t h e government i n i t s e x p e c t e d e l e c t i o n y e a r . F u r t h e r m o r e , a f t e r t h e f i r s t y e a r ( t h e e x p e c t e d e l e c t i o n y e a r ) t h e revenues a c t u a l l y d e c r e a s e d t o a n e g a t i v e amount, b e f o r e a c h i e v i n g a somewhat n e u t r a l p o s i t i o n by 1991-2. Tax Reform 1987, supra, n o t e 34 a t 75. ^ T h i s was p a r t i c u l a r l y p e r t i n e n t a t t h a t t i m e c o n s i d e r i n g t h a t t h e government was s u p p o s e d l y $3 b i l l i o n o f f i t s d e f i c i t r e d u c t i o n p r o j e c t i o n s : C. M o t h e r w e l l , "Tax L o o p h o l e P l u g s C a l l e d Empty T h r e a t [ c i t i n g John B u l l o c h , p r e s i d e n t o f t h e Canadian F e d e r a t i o n o f Independent B u s i n e s s ] " Winnepeg Free Press (19 F e b r u a r y 1987) 8. For example, i n 1989-90 t h e o v e r a l l p o s i t i o n was n e g a t i v e $1,310 m i l l i o n : Tax Reform 1987, supra, n o t e 34 a t 75. P o l i t i c a l c o n s i d e r a t i o n s a s i d e , i t would be f a i r t o say t h a t t h i s was n o t e c o n o m i c a l l y p r u d e n t c o n s i d e r i n g t h e c o u n t r y ' s economic c o n d i t i o n s a t t h e t i m e . ^ A n o t h e r i m p o r t a n t measure w h i c h can be s a i d t o promote e l e c t o r a l a p p e a l , y e t was n o t g e a r e d towards f a i r n e s s , was t h e s p l i t t i n g o f t h e t a x r e f o r m package i n t o two s t a g e s . T h i s d i v i s i o n was r e c o g n i s e d as b e i n g a "shrewd p o l i t i c a l move"^ due t o t h e c o n t e n t i o u s n a t u r e o f t h e i n t r o d u c t i o n o f a new s a l e s tax.°' To a m p l i f y , t h e s t r u c t u r i n g o f t h e package i n t h i s way was d e s i g n e d t o a p p e a l t o t h e e l e c t o r a t e w i t h t h e o b j e c t i v e o f i n c r e a s i n g t h e s u p p o r t o f t h e government. By p o s t p o n i n g t h e s a l e s t a x u n t i l a f t e r an e l e c t i o n t h e government was a b l e t o a v o i d u n d e r t a k i n g °̂ F o r a f u l l e r d i s c u s s i o n on t h e p r e v a i l i n g economic c o n d i t i o n s , see C h a p t e r IV "Economic C o n t e x t " . Stage One d e a l t w i t h p e r s o n a l income t a x and c o r p o r a t e t a x r e f o r m s : Tax Reform 1987: Income Tax Reform, supra, n o t e 24. Stage Two, on t h e o t h e r hand, f l o a t e d t h e i d e a o f t h e i n t r o d u c t i o n o f a new s a l e s t a x : Canada, Department o f F i n a n c e , Tax Reform 1987: Sales Tax Reform (Ottawa: t h e Department, June 18, 1987). A l t h o u g h b o t h were p r e s e n t e d as w h i t e p a p e r s . Stage One p r o p o s a l s were a good d e a l more d e f i n i t e and p r e c i s e t h a n Stage Two. The l a t t e r c o n s i s t e d o f t h r e e o p t i o n s b e i n g o u t l i n e d , w i t h no commitment made t o e i t h e r . "Two-Stage Tax Reform May Become a P o l i t i c a l Coup f o r W i l s o n " Montreal Gazette (6 J u l y 1987) CIO. ®' The government was f o r e w a r n e d about t h e e l e c t o r a t e ' s a n i m o s i t y towards t h e s a l e s t a x r e f o r m s . The government knew from i t s own p o l l i n g , done i n March 1987, t h a t t h e r e would be w i d e s p r e a d o p p o s i t i o n t o an expanded s a l e s t a x : 71 p e r c e n t o f t h o s e s u r v e y e d were u n c o m f o r t a b l e w i t h t h e i d e a o f a s a l e s t a x on f o o d : " P o l l S p e l l e d T r o u b l e f o r Tax-Reform P l a n s " , supra, n o t e 38. any e x e r c i s e t h a t c o u l d i n c u r e x c e s s i v e p o l i t i c a l c o s t s i n terms o f l o s i n g e l e c t o r a t e support.'" Moreover, t h e government c o u l d duck q u e s t i o n s r e g a r d i n g i t s p l a n s on t h e b a s i s t h a t i t was s t i l l s t u d y i n g t h e t h r e e p r o p o s a l s o u t l i n e d i n t h e i t s w h i t e papers.'1 V e r i f i c a t i o n t h a t t h i s move was d e s i g n e d t o g a i n e l e c t o r a t e s u p p o r t i s t h e c o n c e r n t h a t was e x p r e s s e d o v e r t h e s p l i t t i n g o f t h e t a x r e f o r m package - b o t h by t h e House o f Commons F i n a n c e Committee'^ and t h e b u s i n e s s s e c t o r i n g e n e r a l . " I n o t h e r words, t h e government, i n s t r u c t u r i n g t h e '" The e x p l a n a t i o n [as t o why t h e t a x r e f o r m package was d i v i d e d i n t o two s t a g e s ] i s p r o b a b l y p o l i t i c a l . W i t h t h e C o n s e r v a t i v e s t r a i l i n g i n t h e p o l l s and an e l e c t i o n due w i t h i n two y e a r s , many o b s e r v e r s f e e l t h e government c a n ' t a f f o r d t o i n t r o d u c e a new s a l e s t a x system. The C o n s e r v a t i v e s might p r e f e r t o approach t h e e l e c t o r a t e on t h e s t r e n g t h o f p e r s o n a l t a x c u t s r a t h e r t h a n a p o t e n t i a l l y u n p o p u l a r new s a l e s t a x . S. F i f e , "Tax Reform: The Heat i s On: Over 400 B r i e f s Seek Change t o W i l s o n ' s P l a n " Financial Times (7 September 1987) 1 & 14 a t 14. 91 "Two-Stage Tax Reform May Become a P o l i t i c a l Coup f o r W i l s o n " , supra, note 88. F i n a n c e M i n i s t e r , M i c h a e l W i l s o n , j u s t i f i e d t h e d i v i s i o n o f t h e t a x r e f o r m package on t h e b a s i s t h a t t h e s a l e s t a x r e q u i r e d more s t u d y because " [ i t s ] a f u n d amental change t h a t means r e p l a c i n g one system w i t h a t o t a l l y new one". T h i s would i n v o l v e c o n s u l t i n g w i d e l y w i t h t h e p r o v i n c e s and i n t e r e s t e d p a r t i e s . W i l s o n s t r e s s e d t h e i m p o r t a n c e o f u n d e r s t a n d i n g c l e a r l y t h e impact o f t h e new t a x b e f o r e p r o c e e d i n g . J . Ferguson, " W i l s o n Faces Bay S t . Crowd on Tax Reform" Toronto Star (25 June 1987) E l & E8 a t E8. '2 Supra, n o t e 58 a t 182. " M. Drohan, " S t a n d i n g F i r m on Tax Reform" (14 September 1987) 100 Macleans' s 28. Mind you, one p o s s i b l e e x p l a n a t i o n advanced f o r t h e b u s i n e s s s e c t o r ' s c o n c e r n was t h a t t h e d i v i s i o n o f t h e t a x r e f o r m package, t o g e t h e r w i t h o n l y s c a n t y i n f o r m a t i o n on t h e t i m e t a b l i n g o f Stage Two, r e d u c e d t h e i r scope f o r b a r g a i n i n g w i t h t h e F i n a n c e M i n i s t e r f o r changes t o h i s p r o p o s e d t a x r e gime: F i f e , supra, n o t e 90. t a x r e f o r m package t o c o n s i s t o f two S t a g e s , was n o t s e e k i n g t o promote o t h e r o b j e c t i v e s , such as p a c i f y i n g t h e b u s i n e s s s e c t o r o r i m p r o v i n g t h e economic c o n d i t i o n s p r e v a l e n t a t t h e t i m e . The s p l i t t i n g o f t h e t a x r e f o r m package i n t o two s t a g e s had a m a r g i n a l e f f e c t on t h e GAAR. I n p a r t i c u l a r , t h e d i v i s i o n meant t h a t b o t h p a r t s o f t h e package had t o make some a t t e m p t t o be " f i s c a l l y n e u t r a l " i n t h e i r own r i g h t . T h i s meant t h a t Stage One o f t h e r e f o r m package c o u l d n o t r e l y on a new s a l e s t a x t o meet t h i s o b j e c t i v e . ' ^ T h e r e f o r e , revenue had t o be found t o pay f o r t h e income t a x c u t s ( b o t h a t t h e p e r s o n a l and c o r p o r a t e For a more d e t a i l e d d i s c u s s i o n on t h e " f i s c a l n e u t r a l i t y " of S tage One, see Cha p t e r IV "Economic C o n t e x t " , n o t e 17 and accompanying t e x t . As r e g a r d s Stage Two, t h e F i n a n c e M i n i s t e r committed h i m s e l f t o p r o d u c i n g a " f i s c a l l y n e u t r a l " package [ J . Kohut, " T o r i e s F i n d Tax T a b l e s Turned as Reform Becomes I s s u e i n V o t e " The Globe and Mail (24 Oc t o b e r 1988) B l & B5 a t B5] due t o th e s t i r r i n g o f p o l i t i c a l w a t e r s by t h e O p p o s i t i o n P a r t i e s i n c l a i m i n g t h a t t h e government was i n t e n d i n g t o use Stage Two as a t a x g r a b : "The C o n t e x t o f Tax Reform" supra, n o t e 34. '5 I f t h e two s t a g e s had been i n t e g r a t e d i t i s l i k e l y t h a t t h e y would have been o f f s e t a g a i n s t each o t h e r f i n a n c i a l l y . E v i d e n c e o f t h i s p r o p o s i t i o n i s t h e p r o m i s e t h a t F i n a n c e M i n i s t e r , M i c h a e l W i l s o n made t h a t f u r t h e r p e r s o n a l income t a x r a t e c u t s would be made on i m p l e m e n t a t i o n o f Stage Two: A. Drache, "Two Opposing Views: Committee's R e p o r t O n l y T i n k e r s ..." Financial Post (23 November 1987) 6 and L. W h i t t i n g t o n , " W i l s o n T r i e s t o Ease C r i t i c i s m o f Tax Reform P l a n " Calgary Herald (23 June 1987) A3. The i m p l i c a t i o n i s t h a t i f t h e two s t a g e s had been combined t h e i n c r e a s e s from Stage Two would have been used t o reduce f u r t h e r t h e p e r s o n a l income t a x c u t s i n Stage One. The government o b v i o u s l y p e r c e i v e d t h a t t h e b e n e f i t s o f f u r t h e r income t a x c u t s d i d n o t exceed t h e p o l i t i c a l c o s t s o f i n t r o d u c i n g a new extended s a l e s t a x b e f o r e t h e f e d e r a l e l e c t i o n . l e v e l ) . T h i s i s where t h e GAAR e n t e r s t h e scene. The i n c r e a s e d revenue w h i c h t h e GAAR was e s t i m a t e d t o generate'' a s s i s t e d i n m e e t i n g t h e " f i s c a l n e u t r a l i t y " o f Stage One.''' F u r t h e r e v i d e n c e o f t h e government's e l e c t i o n e e r i n g ( a l t h o u g h n o t t h e p r o m o t i o n o f f a i r n e s s ) was t h e f a c t t h a t t h e government d i d n o t p u t t a x r e f o r m on i t s l e g i s l a t i v e p r i o r i t y list.'° I t was t h u s a b l e t o f o s t e r t h e vi e w t h a t u n l e s s i t was r e - e l e c t e d , t a x p a y e r s would l o s e t h e i r t a x s a v i n g s (and t h e r e b a t e ) w h i c h t h e t a x r e f o r m s had g e n e r a t e d . " " $2240 m i l l i o n i n t h e p e r i o d 1988-92: supra, n o t e 74 and accompanying t e x t . '̂  I t s h o u l d be n o t e d t h a t t h e i n c r e a s e d revenue g e n e r a t e d by s e c t i o n 245 was a r g u a b l y i n s i g n i f i c a n t when compared w i t h t h e changes t o t h e f e d e r a l s a l e s t a x and t h e a c c e l e r a t i o n o f t a x payments: see supra, n o t e 79 and accompanying t e x t . However, i t i s s u b m i t t e d t h a t e v e r y amount (however s m a l l ) was i m p o r t a n t t o a s s i s t t h e government i n " b a l a n c i n g i t s books". The GAAR d i d make a c o n t r i b u t i o n t o t h e " f i s c a l n e u t r a l i t y " o f Stage One, p a r t i c u l a r l y c o n s i d e r i n g t h a t i t was t h e most f i n a n c i a l l y l u c r a t i v e p r o p o s a l o f a l l t h e c o r p o r a t e b a s e - b r o a d e n i n g measures. F u r t h e r m o r e , t h i s p r e s s u r e t o a c h i e v e " f i s c a l n e u t r a l i t y " may have i n f l u e n c e d t h e c a l c u l a t i o n s o f t h e e s t i m a t e d revenue i n c r e a s e s g e n e r a t e d by t h e GAAR: supra, n o t e 46 and accompanying t e x t . 98 MTories C o u l d Use Tax B i l l t o 'Buy' V o t e s " , supra, n o t e 65. " " [ I ] t [ t h e government] may be h o l d i n g back so i t can d a n g l e t h e c a r r o t of t a x - r e f o r m r e b a t e i n f r o n t o f v o t e r s i n an e l e c t i o n [ c i t i n g A l l a n M aslove, P r o f e s s o r o f P u b l i c A d m i n i s t r a t i o n , C a r l e t o n U n i v e r s i t y ] " : i b i d . T h i s d e l a y meant t h a t s e c t i o n 245 was n o t e n a c t e d w i t h i n a s h o r t space o f t i m e a f t e r i t s i n i t i a l i n t r o d u c t i o n . The r e s u l t was t h a t f u r t h e r s p e c i f i c a n t i - a v o i d a n c e measures had t o be i n t r o d u c e d i n t h e i n t e r i m p e r i o d . I t was c l a i m e d , r a t h e r h o p e f u l l y , t h a t t h e s e measures d e a l t a blow t o t h e GAAR: i f many more shady b u s i n e s s t a x t r a n s a c t i o n s were o u t l a w e d b e f o r e t h e p r o v i s i o n was i n t r o d u c e d , t h e n i t c o u l d have r e d u c e d t h e a p p l i c a b i l i t y o f t h e r u l e and c a l l e d i n t o q u e s t i o n t h e need f o r i t i n t h e f i r s t p l a c e . H o w e v e r , r a t h e r t h a n harming t h e argument f o r t h e GAAR, i t would appear t h a t t h e p r e s s r e l e a s e s c o r r o b o r a t e d t h e a l l e g a t i o n s o f i t s n e c e s s i t y . By d i s a l l o w i n g a b u s i v e t r a n s a c t i o n s b e f o r e t h e i n t r o d u c t i o n o f t h e p r o v i s i o n , t h e Department o f F i n a n c e was e f f e c t i v e l y r e i n f o r c i n g t h a t s uch t r a n s a c t i o n s c o n t i n u e d t o e x i s t a f t e r t h e t a x r e f o r m e x e r c i s e , t h e r e b y d i s p u t i n g any c l a i m s t h a t t h e r e were no l o o p h o l e s l e f t t o e x p l o i t . F i n a n c e M i n i s t e r , M i c h a e l W i l s o n , o u t l a w e d two schemes by p r e s s r e l e a s e . One scheme i n v o l v e d t h e t r a n s f e r o f " c a p i t a l d i v i d e n d a c c o u n t s " from t a x p a y e r s who c o u l d n o t b e n e f i t them t o t a x p a y e r s who c o u l d . The o t h e r c o n c e r n e d t h e payment o f s p e c i a l d i v i d e n d s t o e f f e c t r e f u n d s o f t h e " r e f u n d a b l e d i v i d e n d t a x on hand": Beach, supra, n o t e 44. DeMont, supra, n o t e 44. I n t h a t most a v o i d a n c e t r a n s a c t i o n s have emanated from t h e abuse o f s o - c a l l e d p r e f e r e n c e p r o v i s i o n s under t h e A c t , w h i c h have now e i t h e r been r e p e a l e d o r a r e recommended t o be r e p e a l e d under t h e White Paper, why i s a g e n e r a l a n t i - a v o i d a n c e [ s i c ] n e c e s s a r y a t t h i s t i m e - has n o t t h e b a r n door been c l o s e d ? H.J. K e l l o u g h , "A D i s c u s s i o n on t h e White Paper P r o p o s e d G e n e r a l A n t i - A v o i d a n c e R u l e " 1987 B r i t i s h Columbia Tax Conference, t a b 6 a t 2. To c o n c l u d e , i t i s s u b m i t t e d t h a t t h e government embarked upon t h e t a x r e f o r m e x e r c i s e w i t h t h e d e s i r e , i n t e r a l i a , o f b o l s t e r i n g i t s s u p p o r t w i t h t h e e l e c t o r a t e i n t h e f a c e o f a lo o m i n g f e d e r a l e l e c t i o n . I n f u r t h e r a n c e o f t h i s o b j e c t i v e , i t sought t o p r e s e n t t h e package as a c h i e v i n g a f a i r e r system. I n p a r t i c u l a r , i t a t t e m p t e d t o c r e a t e t h e image o f r e d u c i n g t h e t a x burden o f t h e low e r and m i d d l e - c l a s s e s a t t h e expense o f t h e c o r p o r a t e s e c t o r and h i g h i n c o m e - e a r n i n g i n d i v i d u a l s . I n p u r s u i n g t h i s aim, t h e GAAR g r e a t l y a s s i s t e d t h e government. The i n t r o d u c t i o n and i n c l u s i o n o f t h e p r o v i s i o n w i t h i n t h e t a x r e f o r m package h e l p e d c r e a t e t h i s image o f f a i r n e s s , b o t h c o n c e p t u a l l y ( i e . t h e GAAR, by i t s e l f and as p a r t o f t h e c o r p o r a t e b a s e - b r o a d e n i n g measures a s s i s t e d i n t h e p r e s e n t a t i o n o f t h e i l l u s i o n t h a t t h e t a x burden o f t h e c o r p o r a t e s e c t o r had been s u b s t a n t i a l l y i n c r e a s e d ) and f i n a n c i a l l y ( i e . s e c t i o n 245 a i d e d t h e v e r i f i c a t i o n o f t h e " s i g n i f i c a n t " i n c r e a s e i n t h e c o r p o r a t e t a x burden by t h e i n c r e a s e s i n revenues i t was supposed t o g e n e r a t e ) . The u t i l i s a t i o n o f t h e p r o v i s i o n i n t h i s way was i n f l u e n t i a l . I n p a r t i c u l a r , i t was an impetus f o r t h e i n t r o d u c t i o n o f t h e p r o p o s a l and i t s i n c l u s i o n w i t h i n t h e t a x r e f o r m package. F u r t h e r m o r e , i t a r g u a b l y a f f e c t e d t h e c a l c u l a t i o n o f t h e revenue i n c r e a s e s w h i c h t h e r u l e was supposed t o g e n e r a t e . F i n a l l y , i t i s s u b m i t t e d t h a t p o l i t i c a l c o n s i d e r a t i o n s i n f l u e n c e d t h e a l t e r a t i o n o f t h e p r o p o s a l i n i t s passage t h r o u g h t h e p a r l i a m e n t a r y p r o c e s s . I t i s t o t h i s l a t t e r p r o p o s i t i o n t h a t we now t u r n . ( i i i ) M o d i f i c a t i o n o f t h e Proposed GAAR The GAAR, as i n i t i a l l y p r o p o s e d i n t h e June 1987 t a x r e f o r m package, underwent some a l t e r a t i o n d u r i n g i t s passage t h r o u g h t h e p a r l i a m e n t a r y p r o c e s s . However, as p r e v i o u s l y d i s c u s s e d , ^ " ' t h e s e changes d i d n o t s u b s t a n t i a l l y m o d i f y t h e b a s i c s t r u c t u r e and s u b s t a n c e o f t h e r u l e . I n i t i a l l y , t h i s may seem s u r p r i s i n g i n l i g h t o f t h e f u r o r e w h i c h t h e p r o p o s a l g e n e r a t e d i n t h e b u s i n e s s and p r o f e s s i o n a l communities. One may have e x p e c t e d such p o l i t i c a l p r e s s u r e t o r e s u l t i n t h e s i g n i f i c a n t m o d i f i c a t i o n o f t h e p r o p o s a l , i f n o t i t s w i t h d r a w a l . However, t h e government t o o k a f i r m s t a n c e and o n l y " t i n k e r e d i n c o n c l u s i v e l y " ^ " ^ w i t h t h e p r o v i s i o n . I t i s s u g g e s t e d t h a t t h i s was p r e d o m i n a n t l y due t o two f a c t o r s - p o l i t i c a l a p p e a l and economic c o n d i t i o n s . The l a t t e r i s d i s c u s s e d i n d e t a i l l a t e r i n t h i s t h e s i s . The p r e v a i l i n g p o l i t i c a l c o n d i t i o n s a t t h e t i m e o f t h e t a x r e f o r m e x e r c i s e meant t h a t t h e government c o u l d n o t a f f o r d p o l i t i c a l l y t o have t h e package u n r a v e l l e d . T r a d i t i o n a l l y , d i s c r e p a n c i e s between w h i t e p a p e r s and r e s u l t a n t l e g i s l a t i o n a r e Chap t e r I I , n o t e s 41-8 and accompanying t e x t . P. DeMont, " P o l i t i c a l Turns i n Tax Reforms: Smoother R i d e f o r D r i v e r s , b u t Banks H i t " Financial Times (21 December 1987) 1 & 18 a t 1. I n f r a , c h a p t e r IV, "Economic C o n t e x t " . s u p p o s e d l y e m b a r r a s s i n g f o r t h e government T h i s was more pronounced f o r t h e government a t t h e t i m e o f t h e 1987 t a x r e f o r m s . To e x p l a i n , t h e o n l y p e r s o n s who were c o m p l a i n i n g about t h e pr o p o s e d s e c t i o n 245 were b u s i n e s s p e r s o n s and t h e i r t a x r e p r e s e n t a t i v e s . I f t h e government had s u b s t a n t i a l l y a l t e r e d t h e p r o p o s a l under t h e i r p r e s s u r e i t would have been seen as p l a c a t i n g t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . T h i s was t h e v e r y i m p r e s s i o n t h e government was t r y i n g n o t t o g i v e i n r e l a t i o n t o i t s t a x r e f o r m . T h i s can a l l be t r a c e d back t o t h e attempt by t h e government t o make t h e t a x r e f o r m package as p o l i t i c a l l y a p p e a l i n g as p o s s i b l e t o t h e e l e c t o r a t e i n t h e hope o f b o l s t e r i n g i t s s u p p o r t i n l i g h t o f t h e lo o m i n g f e d e r a l e l e c t i o n . T h i s p r o p o s i t i o n i s f u r t h e r s u p p o r t e d by t h e changes made t o t h e t a x r e f o r m p r o p o s a l s , i n c l u d i n g t h e GAAR, i n r e s p o n s e t o t h e R e p o r t o f t h e House o f Commons Committee on F i n a n c e and Economic A f f a i r s , T h i s Committee h e l d p u b l i c hearings^^^ on t h e t a x r e f o r m package and t a b l e d i t s r e p o r t i n t h e House o f Commons on t h e 16 November, 1987. O v e r a l l , i t agreed w i t h t h e " s t a t e d ' Beach, supra, n o t e 44. Supra, n o t e 58. A d e t a i l e d a c c o u n t o f t h e Committee's p r e l i m i n a r y work on t h e t a x system i n g e n e r a l , and t h e w h i t e paper p r o p o s a l s i n p a r t i c u l a r , i s o u t l i n e d i n t h e Report, i b i d , a t 25-29. B r i e f l y , i n r e l a t i o n t o t h e l a t t e r , i t c o n s i s t e d o f b r i e f s b e i n g r e c e i v e d (o v e r 550), p u b l i c h e a r i n g s ( w i t h 174 w i t n e s s e s ) and numerous i n camera w o r k i n g m e e t i n g s . o b j e c t i v e and t h r u s t o f t a x reform".''"' I n t o t a l , t h e r e p o r t made e i g h t y - o n e recommendations."" I n p a r t i c u l a r , t h e s e t o f recommendations w h i c h r e c e i v e d t h e most media c o v e r a g e were t h o s e t h a t a d v o c a t e d an e x t r a $225 m i l l i o n be g i v e n t o Canadian f a m i l i e s . " ^ These (and o t h e r recommendations) were g o i n g t o be funded p r i m a r i l y by a minimum t a x b e i n g imposed on f i n a n c i a l i n s t i t u t i o n s . " ^ The government was i n i t i a l l y u n e n t h u s i a s t i c about t h e i d e a o f t h i s minimum t a x . " ' However, i t n e v e r t h e l e s s a l t e r e d t h e t a x r e f o r m p r o p o s a l s t o i n c o r p o r a t e t h e s e Ibid, a t 28. T h i s may n o t be s u r p r i s i n g c o n s i d e r i n g t h a t t h e t h i rteen-member committee had a T o r y m a j o r i t y : W. Johnson, " C o n s e r v a t i v e s Look P o i s e d t o B r i n g O f f Tax Reform" Montreal Gazette (18 November 1987) B3. C o n s e q u e n t l y , i t was s t a t e d t h a t t h e r e p o r t o n l y " t i n k e r s w i t h t h e p r o p o s e d t a x system, p r o v i d i n g t e c h n i c a l r e s p o n s e s t o t h e o r i g i n a l p r o p o s a l s . . . " : Drache, supra, n o t e 95. However, n o t e commentary t o t h e e f f e c t t h a t t h e "committee n e i t h e r rublaer stamps government p r o p o s a l s , nor b l i n d l y e n d o r s e s p l e a s f o r change even by p o w e r f u l i n t e r e s t g r oups. R a t h e r i t t a k e s , a c r i t i c a l l o o k a t each p r o p o s a l and makes recommendations Ottawa may n o t be a b l e t o i g n o r e . " S. Poddar, "Two Opposing Views...A C r i t i c a l Look W i l s o n Can't I g n o r e " Financial Post (23 November 1987) 6. "" Supra, n o t e 58 a t 3-11. "^ For example, J . Douglas, "MPs Propose $225 M i l l i o n i n Tax B r e a k s " Winnepeg Free Press (17 November 1987) 1. These s a v i n g s were t o be i n t h e form o f enhanced c h i l d b e n e f i t s , t a x a t i o n o f f a m i l y a l l o w a n c e s and i n c r e a s e s i n dependants' n e t income t h r e s h o l d : B l e n k a r n R e p o r t , i b i d , a t 42-52. "2 For a l i s t o f t h e revenue impact o f t h e recommendations, see B l e n k a r n R e p o r t , i b i d , a t 15, T a b l e 1. The Committee a p p l i e d t h e p r i n c i p l e o f revenue n e u t r a l i t y so t h a t i t s recommendations would n o t d i f f e r from t h e o v e r a l l revenue p r o j e c t i o n s i n t h e w h i t e paper documents: i b i d , a t 13-5. "' D. H a t t e r , "But R e j e c t i n g P r o p o s a l s C o u l d Be P o l i t i c a l l y C o s t l y " Financial Post (23 November 1987) 7. recommendations, a l b e i t i n a d i l u t e d form.^^^ I t i s g e n e r a l l y a c c e p t e d t h a t t h e s e m o d i f i c a t i o n s were m o t i v a t e d by p o l i t i c a l f a c t o r s . I n p a r t i c u l a r , i t i s s u g g e s t e d t h a t t h e government, i n t r y i n g t o b o l s t e r i t s s u p p o r t w i t h t h e e l e c t o r a t e , f e l t t h a t i t had t o make some at t e m p t t o implement t h e recommendations, e s p e c i a l l y i n l i g h t o f t h e i r p o p u l i s t n a t u r e i n g i v i n g more money t o C a n a d i a n f a m i l i e s . R e j e c t i n g t h e B l e n k a r n R e p o r t would have been p o l i t i c a l l y c o s t l y . F o r example, i f i t had i g n o r e d t h e recommendations, i t may have been seen as c o n t r a d i c t i n g i t s w h i t e paper message o f h e l p i n g t h e l o w e r and m i d d l e - c l a s s e s a t t h e expense o f t h e c o r p o r a t e s e c t o r . " ^ A l s o , i f t h e F i n a n c e M i n i s t e r had m e r e l y s h e l v e d t h e R e p o r t , i t c o u l d have been i n t e r p r e t e d as i g n o r i n g t h e committee p r o c e s s . " ' F u r t h e r m o r e , i t was s u g g e s t e d t h a t t h e Committee c o u l d d e l a y t h e p r o g r e s s o f The Committee recommended $225 m i l l i o n be g i v e n i n e x t r a f a m i l y and c h i l d b e n e f i t s . As a r e s u l t o f t h e December 1987 changes, t h e government e f f e c t i v e l y p r o m i s e d t o d e l i v e r $156 m i l l i o n : D. H a t t e r , "Tax Changes S t r i k e R i g h t P o l i t i c a l Note" Financial Post (21 December 1987) 3. T h i s was t o be f i n a n c e d by "what amounts t o , i n e v e r y t h i n g b u t name, a minimum t a x [on f i n a n c i a l i n s t i t u t i o n s ] " : DeMont, supra, n o t e 104. 115 "The r a t i o n a l b e h i n d t h i s b y z a n t i n e t w i s t [ i e . t h e i m p o s i t i o n o f t h e t a x on f i n a n c i a l i n s t i t u t i o n s ] i s p o l i t i c a l o f f i c i a l s a t t h e F i n a n c e Department concede. I f banks pay t a x each y e a r , t h e average p e r s o n i s more l i k e l y t o v i e w t h e new t a x system as f a i r . " DeMont, supra, n o t e 104. 116 „ j £ i g n o r e s [ t h e B l e n k a r n R e p o r t ] ... 'he's r e a l l y thumbing h i s nose a t a l l t h e t a x p a y e r s and companies and i n t e r e s t groups who t o o k t h e t r o u b l e t o p u t t h e i r v i e w s t o t h e committee' [ q u o t i n g M i c h a e l C a s s i d y , New D e m o c r a t i c P a r t y ' s f i n a n c e c r i t i c and member o f t h e House o f Commons F i n a n c e Committee]." " W i l s o n R i s k s H i s C r e d i b i l i t y o v e r Tax P l a n , C a s s i d y Says" Toronto Star (25 November 1987) F6. See a l s o , DeMont, supra, note 76. t h e B i l l i m p l e m e n t i n g t h e t a x r e f o r m p r o p o s a l s t h r o u g h P a r l i a m e n t as i t was t o be t h e f i r s t body t o a n a l y z e t h e B i l l . " ^ T h i s h y p o t h e s i s i s r e f l e c t e d i n t h e changes made t o t h e GAAR. A l t h o u g h , t h e B l e n k a r n R e p o r t endorsed t h e need f o r a g e n e r a l a n t i - a v o i d a n c e r u l e , " ^ i t made s e v e r a l recommendations as t o t h e f o r m a t o f t h e p r o p o s a l . " ' Indeed, i t p r o p o s e d a new d r a f t o f s e c t i o n 245 whi c h r e f l e c t e d i t s recommendations. The government i n c o r p o r a t e d a few o f t h e recommendations, a l t h o u g h i t m o s t l y i n t e g r a t e d them i n t o i t s v e r s i o n o f t h e r u l e r a t h e r t h a n a d o p t i n g t h e d r a f t p r o posed by t h e Committee. The government was under g r e a t p r e s s u r e from t h e c o r p o r a t e and p r o f e s s i o n a l communities t o e i t h e r w i t h d r a w o r s u b s t a n t i a l l y m o d i f y t h e r u l e . I t was a p p a r e n t l y s e t on t h e b a s i c c o n c e p t o f " 7 DeMont, i j b i d . supra, n o t e 58 a t 2 00-1. "' JJbid. a t 200-7. Ibid, a t 2 05-7. F o r example, o f t h e seven recommendations, t h e government i n c o r p o r a t e d t h r e e o f them. These i n c l u d e d d r o p p i n g t h e " s i g n i f i c a n t " from t h e d e f i n i t i o n o f a v o i d a n c e ; e l i m i n a t i n g t h e b u s i n e s s purpose t e s t (a non-tax purpose t e s t was s u b s t i t u t e d ) and e l i m i n a t i n g t h e ph r a s e " n o t w i t h s t a n d i n g any o t h e r p r o v i s i o n o f t h e A c t " ( t h e r u l e was changed t o be a p r o v i s i o n o f l a s t r e s o r t ) . F u r t h e r m o r e , t h e R e p o r t recommended t h a t t h e government n ot p r o c e e d w i t h t h e i m p o s i t i o n o f a p e n a l t y w h i c h i t had s u g g e s t e d i n t h e w h i t e paper: Tax Reform 1987, supra, n o t e 34 a t 143. The f i n a l v e r s i o n o f s e c t i o n 245 d i d n o t c o n t a i n any p r o v i s i o n w h i c h imposed p e n a l t i e s . a G A A R / ^ ^ a l t h o u g h i t was open t o change t h e e x a c t shape o f t h e r u l e J ^ ' I t i s f e l t t h a t t h e B l e n k a r n R e p o r t o f f e r e d a c o n v e n i e n t compromise f o r t h e government. The R e p o r t v a l i d a t e d t h e n e c e s s i t y o f t h e r u l e , ^ ^ ^ and s u g g e s t e d a l t e r a t i o n s w h i c h d i d n o t r e s u l t i n e x c e s s i v e m o d i f i c a t i o n o f t h e r u l e . By i n c o r p o r a t i n g some o f t h e B l e n k a r n R e p o r t recommendations r e l a t i n g t o t h e GAAR, t h e government was showing t h e b u s i n e s s community t h a t i t was p r e p a r e d t o be r e a s o n a b l e and make some changes t o p l a c a t e t h e b u s i n e s s and p r o f e s s i o n a l communities. However, i t would a l s o be a b l e t o r e p u d i a t e any c l a i m s t h a t i t was f u r t h e r i n g t h e i n t e r e s t s o f t h e c o r p o r a t e s e c t o r . The government c o u l d argue t h a t i t was m e r e l y a c t i n g i n ac c o r d a n c e w i t h t h e w i s h e s o f t h e Committee. 1 " DeMont, supra, n o t e 44 a t 6 [ c i t i n g a Department o f F i n a n c e o f f i c i a l ] . Ibid. See, a l s o . Dodge, supra, n o t e 25 ("Tax Reform and t h e A n t i - A v o i d a n c e P r o p o s a l s ) a t 19: "[W]e w i l l welcome a l l t h o u g h t f u l s u g g e s t i o n s d e s i g n e d t o improve t h e p r o p o s e d r u l e . " C o n t r a , Canada, Senate, Tax Reform '87: Report of the Standing Senate Committee on Banking, Trade and Commerce, tabled on December 1, 1987 (Don M i l l s : R i c h a r d De Boo, 1987) a t 55, p a r a g r a p h 6.106-8. However, t h e government d i d make o t h e r a l t e r a t i o n s w h i c h were not s u g g e s t e d by t h e B l e n k a r n R e p o r t . F o r example, i t i n t r o d u c e d a measure p r o v i d i n g f o r r e c o u r s e t o e x p l a n a t o r y n o t e s . T h i s s u b s e c t i o n was l a t e r d e l e t e d i n r e s p o n s e t o s t r o n g c r i t i c i s m by t h e l e g a l p r o f e s s i o n a l . These c o n c l u s i o n s r e g a r d i n g t h e i n f l u e n c e o f t h e p o l i t i c a l e n v i r onment a r e v e r i f i e d by t h e t r e a t m e n t o f t h e Senate Committee R e p o r t . T h i s R e p o r t s c a t h i n g l y a t t a c k e d t h e GAAR, and c o n c l u d e d t h a t i t s h o u l d not be p r o c e e d e d with.^^^ However, t o s t a t e t h e o b v i o u s , t h e s e recommendations were n o t implemented. V a r i o u s r e a s o n s can be s u g g e s t e d f o r t h i s phenomenon. F i r s t , t h e government d i d n o t s u p p o r t t h e c o n c l u s i o n s r e a c h e d , Second, t h i s Committee R e p o r t d i d n o t have as much p o l i t i c a l c l o u t as t h e B l e n k a r n R e p o r t . T h i r d , Supra, n o t e 124. 127 "With good r e a s o n , n o t a s i n g l e v o i c e was h e a r d i n s u p p o r t o f t h i s p r o p o s a l . " J j b l d . a t 44, p a r a g r a p h 6.106. 122 Ibid, a t 55-6, p a r a g r a p h 6.108. 12' I t was committed t o t h e c o n c e p t o f a GAAR, supra, n o t e 129. 130 T h i s i s perhaps due t o t h e u n d e r l y i n g p o l i t i c a l s t r u c t u r e . F o r example, t h e members o f t h e House o f Commons a r e e l e c t e d whereas t h e members o f t h e Senate a r e n o t . Quaere whether t h i s w i l l s t i l l be t h e s i t u a t i o n i n l i g h t o f t h e c u r r e n t C o n s t i t u t i o n a l debate r e g a r d i n g t h e T r i p l e - E Senate p r o p o s a l s . T h i s d i s p a r i t y i n t h e p o l i t i c a l i n f l u e n c e o f t h e two i n s t i t u t i o n s i s r e f l e c t e d i n t h e v a r y i n g amount o f media co v e r a g e each committee a t t r a c t e d : t h e B l e n k a r n R e p o r t was r e l e a s e d t o t h e accompaniment o f a f a n f a r e ( f o r example, an advance announcement o f t h e r e l e a s e d a t e , a p r e s s l o c k - u p and b r i e f i n g : D. Beach, " W i l s o n Has O p p o r t u n i t y t o Open Doors on Tax P o l i c y " Financial Times (16 November 1987) 25) and r e c e i v e d e x t e n s i v e media coverage [ f o r example, E. Beauchesne, " P r e s s u r e C o n f l i c t on Tax Reforms" Calgary Herald (12 September 1987) F6; G. B r e t t , W i l s o n R i s k s H i s C r e d i b i l i t y Over Tax P l a n , C a s s i d y Says" Toronto Star (25 November 1987) F6; "Bugs Noted i n Tax Package" Halifax Chronicle Herald (1 J u l y 1987) 4; P. Cook, "A F a i r e r Tax System i s No Easy T h i n g t o S e l l " The Globe and Mail (4 September 1987) B2; B. C o s t e l l o , "Watch as ' V u l t u r e s ' Move i n on Tax Reform" Calgary Herald (8 August 1987) D l ; DeMont, supra, n o t e 7 6; Douglas, supra, note 111; Drache, supra, n o t e 95; doubts have been e x p r e s s e d as t o t h e n e u t r a l i t y o f Senate Committee members^'^ w h i c h t h e government c o u l d have exposed as j u s t i f y i n g i t s l a c k o f i m p l e m e n t a t i o n o f t h e R e p o r t ' s recommendations. To c o n c l u d e , i t i s s u b m i t t e d t h a t t h e l i m i t e d n a t u r e o f t h e changes made t o t h e p r o p o s e d GAAR i n i t s passage t h r o u g h t h e p a r l i a m e n t a r y p r o c e s s can be t r a c e d t o t h e p o l i t i c a l and economic c o n d i t i o n s p r e v a l e n t a t t h e t i m e . I n p a r t i c u l a r , t h e p o l i t i c a l c o n d i t i o n s ( f o r example, t h e l o o m i n g e l e c t i o n , t h e Drohan, supra, n o t e 93; F i f e , supra, n o t e 90; H a t t e r , supra, n o t e 113; Johnson, supra, n o t e 109; T. LeMay, "Few Tax B e n e f i t s L i k e l y t o Get P a s t W i l s o n " Financial Post (23 November 1987) 7; W.A. Macdonald, " B l e n k a r n R e p o r t M i s s e s t h e Mark" Financial Post (23 November 1987) 19; Poddar, supra, n o t e 109; Poddar & Coyne, supra, n o t e 25; H. Solomon, " C r i t i c s Have Day a t Tax Reform H e a r i n g s " Financial Post (7 August 1987) 4 ] , t h e Senate R e p o r t , on t h e o t h e r hand, r e c e i v e d l i m i t e d c o v e r a g e [ f o r example, "Ottawa t o P r o c e e d w i t h G e n e r a l Tax-Avoidance R u l e " The Globe and Mail (17 December 1987) B 8 ] . F o r example, t h e Senate B a n k i n g Committee c o m p r i s e s o f l a w y e r s , e x e c u t i v e s and s t o c k h o l d e r s . F u r t h e r m o r e , t h e i r t i e s w i t h t h e f i n a n c i a l and i n v e s t m e n t w o r l d a r e c l o s e r t h a n might appear a t f i r s t g l a n c e . A l t h o u g h no e v i d e n c e i s o f f e r e d f o r t h e committee i n 1987, i n f o r m a t i o n r e l a t i n g t o c o m p o s i t i o n o f t h e committee a t t h e t i m e o f t h e h e a r i n g s on t h e 1970 government's t a x p r o p o s a l s p r o v i d e s a good i l l u s t r a t i o n . A t t h a t t i m e , a l m o s t a l l o f t h e t h i r t y - t h r e e members o f t h e committee h e l d a t l e a s t one c o r p o r a t e d i r e c t o r s h i p and many o f them s a t on numerous c o r p o r a t e b o a r d s . Between them t h e y h e l d 211 d i r e c t o r s h i p s , i n c l u d i n g d i r e c t o r s h i p s o f some o f t h e l a r g e s t and most p o w e r f u l Canadian companies. McQuaig, supra, n o t e 2 a t 169. However, whether t h e government would a c t u a l l y expose t h i s i s a n o t h e r m a t t e r . The i m p o r t a n t p o i n t i s t h a t i t a l l adds up t o r e d u c e t h e p o l i t i c a l p r e s s u r e w h i c h t h e committee can e x e r t on t h e government t o change t h e law i n l i n e w i t h t h e i r recommendations. government's poor e l e c t o r a l s u p p o r t ) meant t h a t t h e government was t r y i n g t o b o l s t e r i t s r a t i n g s w i t h t h e e l e c t o r a t e . T h e r e f o r e , t h e government w i s h e d t o promote t h e image o f c r e a t i n g a f a i r e r t a x system. C o n s e q u e n t l y , i t h e l d a f i r m s t a n c e a g a i n s t t h e p r e s s u r e e x e r t e d by t h e b u s i n e s s s e c t o r . F u r t h e r , i t implemented, a l b e i t i n a d i l u t e d form, t h e p o p u l i s t recommendations made by t h e House o f Commons Committee on F i n a n c e and Economic A f f a i r s . These p o l i t i c a l i n f l u e n c e s were a l s o r e f l e c t e d i n t h e m o d i f i c a t i o n s t o t h e GAAR. I n p a r t i c u l a r , t h e government remained committed t o t h e con c e p t o f t h e r u l e , d e s p i t e t h e f u r o r e c r e a t e d by t h e b u s i n e s s and p r o f e s s i o n a l c o m m u n i t i e s . I t d i d make some m o d i f i c a t i o n s - b u t n o t h i n g t h a t changed t h e s u b s t a n c e o f t h e r u l e . F u r t h e r m o r e , t h e m a j o r i t y o f t h e s e changes were i n re s p o n s e t o t h e recommendations o f B l e n k a r n R e p o r t . T h i s r e i n f o r c e s t h e p r o p o s i t i o n t h a t t h e government was w i s h i n g t o appear t o be a c t i n g i n t h e i n t e r e s t s o f t h e e l e c t o r a t e and not t h e b u s i n e s s community. The u n d e r l y i n g m o t i v a t i o n was t h e d e s i r e o f t h e government t o b o l s t e r i t s s u p p o r t w i t h t h e e l e c t o r a t e i n t h e f a c e o f a lo o m i n g e l e c t i o n . ( i v ) S p e c i a l I n t e r e s t Groups Two s t r a n d s c o m p r i s e t h e a s s u m p t i o n t h a t u n d e r l i e s t h i s t h e s i s t h a t governments want t o r e t a i n o f f i c e . The f i r s t p a r t c o n s i s t s o f governments w i s h i n g t o maximize v o t e s w i t h t h e e l e c t o r a t e t o e n s u r e i t s r e - e l e c t i o n . T h i s has been d i s c u s s e d above i n r e l a t i o n t o t h e t a x r e f o r m package i n g e n e r a l and s e c t i o n 245 i n p a r t i c u l a r . The second element i s t h a t governments w i s h t o p l a c a t e s p e c i a l i n t e r e s t groups.^'' I t i s s u b m i t t e d t h a t t h i s f a c t o r p l a y e d an i m p o r t a n t r o l e i n t h e f o r m u l a t i o n o f t h e t a x r e f o r m package, and s p e c i f i c a l l y , t h e GAAR. The p l a c a t i o n o f t h e b u s i n e s s community may n o t be e v i d e n t a t f i r s t s i g h t . T h i s i s due t o t h e a t t e m p t s o f t h e government t o s e l l t h e t a x r e f o r m package as p r o m o t i n g a f a i r e r system. C o n s e q u e n t l y , f o r example, t h e media c o n c e n t r a t e d on t h e c r i t i c i s m by b u s i n e s s o f t h e t a x r e f o r m s i n a l l e g e d l y i m p o s i n g t o o g r e a t a burden on t h e c o r p o r a t e s e c t o r . H o w e v e r , i n r e a l i t y , t h e government t r i e d t o p a c i f y t h e b u s i n e s s and p r o f e s s i o n a l communities i n two ways: t h e s e communities were I n r e l a t i o n t o t h i s s e c t i o n , s p e c i a l i n t e r e s t groups a r e g e n e r a l l y t a k e n t o be t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . A l t h o u g h s p e c i a l i n t e r e s t groups a r e n o t l i m i t e d t o t h e s e t a x p a y e r s , i t i s f e l t t h a t i n t h e c o n t e x t o f t h e 1987 r e f o r m s , t h e s e two groups a r e t h e most r e l e v a n t . To a m p l i f y , i t was t h e s e groups t h a t t h e government s i n g l e d o u t i n i t s w h i t e p a p e r s as n o t p a y i n g t h e i r f u l l burden o f t a x . F u r t h e r m o r e , t h e s e t a x p a y e r s ( i n p a r t i c u l a r , t h e c o r p o r a t e s e c t o r ) were most v o c a l about t h e e f f e c t s o f t h e t a x r e f o r m s . Supra, note 56. i n v o l v e d q u i t e h e a v i l y i n t h e p r e p a r a t o r y s t a g e s o f t h e r e f o r m s and c o n s e q u e n t l y , t h e s t r u c t u r e o f t h e t a x r e f o r m p r o p o s a l s were w e i g h t e d i n f a v o u r o f t h e c o r p o r a t e s e c t o r , o r a t l e a s t , were n o t as h a r s h as t h e y c o u l d have been. I n r e l a t i o n t o t h e f o r m e r , t h e government i n v o l v e d t h e b u s i n e s s and t a x communities q u i t e e x t e n s i v e l y i n t h e p r e p a r a t i o n o f t h e t a x r e f o r m proposals.'''^ These communities l o b b y t h e government a l l y e a r round, p a r t i c u l a r l y i n t h e run-up t o t h e f e d e r a l budget. However, t h i s l o b b y i n g and c o n s u l t a t i o n p r o c e s s was i n c r e a s e d f o r t h e t a x r e f o r m e x e r c i s e . The u s u a l round o f f o r m a l and i n f o r m a l meetings w i t h s p e c i a l i n t e r e s t groups were There a r e a number o f advantages f o r a d o p t i n g a c o n s u l t a t i v e p r o c e s s . F i r s t , i t a c t i v e l y b u i l d s i n many o p p o r t u n i t i e s f o r v o t e r feedback as t h e v i e w s o f t h e government a r e formed i n t o l e g i s l a t i o n . I n p a r t i c u l a r , t h e government can u t i l i s e t h e p r o c e s s o f feedback t o gauge t h e s t r e n g t h o f o p p o s i t i o n t o and s u p p o r t f o r pro p o s e d changes. F u r t h e r m o r e , e x t e n s i v e c o n s u l t a t i o n c a r r i e s w i t h i t t h e p o t e n t i a l f o r b e n e f i t as t h o s e who s t a n d t o g a i n a r e made aware o f t h e f a c t and p o l i t i c a l o p p o s i t i o n i s c o n s e q u e n t l y r e d u c e d . W.I. G i l l e s p i e , "Tax Reform: The B a t t l e f i e l d , t h e S t r a t e g i e s , t h e S p o i l s " (1983) 26 Canadian Public Administration 182 a t 193. C h r i s t m a s may be ov e r but 35 o r so major o r g a n i z a t i o n s a r e s t i l l c l i n g i n g t o t h e i r a n n u a l w i s h l i s t s , i t e m i z e d a c c o u n t s o f what t h e y would l i k e t o see i n c l u d e d i n t h e n e x t f e d e r a l budget. The groups have w h i s p e r e d t h e i r w i s h e s t o F i n a n c e M i n i s t e r M i c h a e l W i l s o n o r h i s j u n i o r p a r t n e r , Tom H o c k i n , i n a s e r i e s o f c o n s u l t a t i o n s w h i c h f i n i s h e d r e c e n t l y . D. Oxtoby, " B u s i n e s s C o n s u l t a t i o n s O f f e r Rare O p p o r t u n i t y : Door Open t o B u s i n e s s L o b b y i s t s t o I n f l u e n c e F e d e r a l Tax Reform" Financial Times (12 J a n u a r y 1987) 8. h e l d J''' F u r t h e r m o r e , an e l i t e group o f t a x s p e c i a l i s t s ^ ' ^ was formed t o g i v e a d v i c e t o t h e government r e g a r d i n g t h e t a x r e f o r m p r o p o s a l s . T h i s i n v i t a t i o n - o n l y ^ " group was formed i n November 1986̂ *̂ ° and met monthly t o a c t as a s o u n d i n g b o a r d f o r t h e Department o f F i n a n c e . The i n v o l v e m e n t o f t h e l e g a l p r o f e s s i o n a l i n t h i s way has been s t r o n g l y c r i t i c i s e d . The media f o c u s e d on t h e i n v a l u a b l e i n s i d e r ' s p e r s p e c t i v e t h e members o f t h e group would have gained.''^^ More f u n d a m e n t a l l y , t h e i n p u t o f such p r o f e s s i o n a l s was a t t a c k e d on t h e b a s i s t h a t t h e i r b i a s e s towards t h e c o r p o r a t e s e c t o r i n f l u e n c e d t h e c o n s u l t a t i o n p r o c e s s . T h i s was a p t l y c a p t u r e d by one McQuaig, supra, note 2 a t 94; Solomon, supra, n o t e 41 & "Tax T a l k s Kept S e c r e t " Calgary Herald (27 May 1987) F6. The e x a c t number o f t h i s group v a r i e s d e p ending on t h e s o u r c e . T h e r e f o r e , i t has been c l a i m e d t o be t w e n t y [E. Beauchesne, "Review F r a c a s : O p p o s i t i o n Says W i l s o n Breached P r i v i l e g e s " Halifax Chronicle Herald (18 June 1987) 1 & 24 and J . Wong, " E l i t e Group o f 20 Gets E a r l y Peak a t Tax Pap e r " The Globe and Mail (17 June 1987) B l & B2] o r t h i r t y - s i x [McQuaig, supra, n o t e 2 a t 100]. Note c r i t i c i s m o f t h e s e l e c t i o n o f t h e group on t h e b a s i s t h a t i t was p u r e l y p o l i t i c a l : " I know how t h e s e p e o p l e a r e p i c k e d . They're u s u a l l y t h e guys who g e t t h e i r name i n t h e paper. I t ' s p o l i t i c a l , [ q u o t i n g A. B o u l a n g e r , t a x p r i n c i p a l a t L a v e n t h o l & Horwath, T o r o n t o , a forme r Department o f F i n a n c e e m p l o y e e ] . " Wong, supra, n o t e 138. Ibid. Ibid. '"'̂  Beauchesne, supra, n o t e 138 & Wong, i b i d . [W]hat i s q u e s t i o n a b l e i s t h e e x t e n t t o w h i c h Ottawa has chosen t o i g n o r e t h e s e c o n n e c t i o n s [ i e . between t h e t a x and b u s i n e s s c o m m u n i t i e s ] , t r e a t i n g t a x p r a c t i t i o n e r s as indepen d e n t e x p e r t s r a t h e r t h a n as t h e t e c h n i c a l arm o f t h e commentator who s t a t e d t h a t " [ l ] e t t i n g t h e t a x community shape t a x l e g i s l a t i o n i s a b i t l i k e g e t t i n g t h e f o x t o b u i l d a s a f e r henhouse". T h e r e f o r e , i n l i g h t o f t h i s e x t e n s i v e c o n s u l t a t i o n p r o c e s s w i t h t h e b u s i n e s s and p r o f e s s i o n a l c o mmunities, i t i s o f no s u r p r i s e t h a t t h e t a x r e f o r m p r o p o s a l s were w e i g h t e d i n f a v o u r o f t h e c o r p o r a t e s e c t o r . The p l a c a t i o n o f t h e b u s i n e s s s e c t o r i s r e f l e c t e d i n t h e s t r u c t u r e o f t h e t a x r e f o r m p r o p o s a l s w h i c h d i d n o t h i t t h e b u s i n e s s s e c t o r and h i g h i n c o m e - e a r n i n g i n d i v i d u a l s as h a r d as t h e government c l a i m e d . The government o s t e n s i b l y c r e a t e d an image o f f a i r n e s s whereby t h e t a x burden on l o w e r and m i d d l e c l a s s e s was t o be s i g n i f i c a n t l y r e d u c e d , s e e m i n g l y a t t h e expense o f t h e c o r p o r a t e s e c t o r . However, as p r e v i o u s l y d i s c u s s e d , i n f i n a n c i a l t e rms, t h i s image was i l l u s o r y . Moreover, t h e t a x r e f o r m package was u n f a i r i n o t h e r r e s p e c t s . I n a d d i t i o n t o t h e measures a l r e a d y mentioned i n t h i s paper, o t h e r p r o p o s a l s r e i n f o r c e d t h e f a v o u r a b l e t r e a t m e n t o f t h e c o r p o r a t e s e c t o r and h i g h i n c o m e - e a r n e r s . F o r example, t h e t o p r a t e o f income t a x was r e d u c e d ; not a l l t a x b r e a k s were removed ;1^^ r a t e s were r e d u c e d i n 1988, b u t many t a x b r e a k s b u s i n e s s and i n v e s t m e n t community. McQuaig, supra, n o t e 2 a t 102. 1̂ "̂  McQuaig, i b i d , a t 99. 145 H t ^ Q d i d n ' t a r r i v e a t a p e r f e c t l y l e v e l p l a y i n g f i e l d . There a r e s t i l l i n c e n t i v e s l e f t w h i c h , i n t h e o r y , d i d n o t have t o r e m a i n and c o u l d be c a l l e d u n f a i r . But on b a l a n c e we worked s l a t e d f o r r e m o v a l were n o t phased o u t u n t i l 1991; t h o s e t a x b r e a k s t h a t were removed were n o t ones i m p o r t a n t t o t h e c o r p o r a t e s e c t o r and h i g h i n c o m e - e a r n e r s , b u t t o t h e m i d d l e c l a s s (eg. employment expense d e d u c t i o n and i n t e r e s t and d i v i d e n d d e d u c t i o n ) ; t h e d e d u c t i o n s u t i l i s e d by t h e c o r p o r a t e s e c t o r were n o t c o n v e r t e d t o c r e d i t s and were n o t c u t , t h e y were m e r e l y trimmed (eg. t h e l i f e t i m e c a p i t a l g a i n s exemption) . T h i s l i s t o f f a v o u r a b l e measures was p r i m a r i l y a r e s u l t o f t h e p l a c a t i o n o f t h e b u s i n e s s s e c t o r . I t has been s u g g e s t e d t h a t no a l t e r n a t i v e v i a b l e r e a s o n s e x i s t f o r t h e s e measures. t o r e a c h a p o i n t w h i c h would s a t i s f y business' own sense of f a i r n e s s ' [ q u o t i n g a s e n i o r c o r p o r a t e t a x o f f i c i a l ] [emphasis added]." Solomon, supra, n o t e 41. See, g e n e r a l l y Brooks & McQuaig, supra, n o t e 54 and McQuaig, supra, note 2 a t c h a p t e r 12. 147 iirphe most i m p o r t a n t o b j e c t i v e was t o a v o i d a g e n e r a l u p r i s i n g by b u s i n e s s , w h i c h c o u l d e a s i l y undermine t h e e n t i r e e x e r c i s e , weaken i f n o t d e s t r o y W i l s o n ' s c r e d i b i l i t y and, t h r o u g h him, s i n k B r i a n M u l r o n e y ' s government." Solomon, supra, n o t e 41. Fo r a d i s c u s s i o n as t o t h e l a c k o f r e a s o n a b l e j u s t i f i c a t i o n f o r t h e s e p r o p o s a l s , see g e n e r a l l y Brooks & McQuaig, supra, note 54 and McQuaig, supra, n o t e 2, c h a p t e r 12. However, t h i s i s n o t e n t i r e l y t r u e J * ' I n p a r t i c u l a r , t h e U.S. r e f o r m s n e c e s s i t a t e d a r e d u c t i o n i n t h e Canadian c o r p o r a t e t a x r a t e s . The p a c i f i c a t i o n o f t h e c o r p o r a t e s e c t o r i s v e r i f i e d by t h e low- key r e a c t i o n w h i c h t h e t a x r e f o r m s r e c e i v e d . I n t o t a l , t h e r e s p o n s e was q u i t e f a v o u r a b l e , a t l e a s t when compared w i t h t h e f u r o r e t h a t accompanied p r e v i o u s a t t e m p t s a t t a x r e f o r m . There were t h e e x p e c t e d c o m p l a i n t s from b u s i n e s s t h a t i t s t a x burden had been i n c r e a s e d e x c e s s i v e l y and t h e new s a l e s t a x had n o t been o u t l i n e d i n any g r e a t d e t a i l . However, w i t h i n two weeks t h e major newspapers had v i r t u a l l y l o s t i n t e r e s t i n t h e t a x r e f o r m p r o p o s a l s . T h i s has been i n t e r p r e t e d as r e f l e c t i n g t h e b e n i g n n a t u r e o f t h e t a x r e f o r m p r o p o s a l s towards t h e p o w e r f u l i n t e r e s t groups, t h e c o r p o r a t e s e c t o r and t h e h i g h 1^' I t i s a r g u a b l y a c c u r a t e i n r e s p e c t o f some o f t h e measures. F o r example, t h e r e would seem t o be no good r e a s o n f o r t h e c o n t i n u a n c e o f s p e c i a l i n c e n t i v e s i n l i g h t o f t h e e v i d e n c e w h i c h q u e s t i o n s t h e i r e f f e c t i v e n e s s i n a c h i e v i n g t h e s o c i o - e c o n o m i c purpose t h a t t h e y a r e s u p p o s e d l y meant t o promote. See supra, n o t e 22. 150 r p j ^ i s i s d i s c u s s e d i n g r e a t e r d e t a i l l a t e r : i n f r a , n o t e s 170-83 and accompanying t e x t . C. M o t h e r w e l l , " R e f l e c t i n g on Package Evokes S i g h s o f R e l i e f " , The Globe and Mail (20 June 1987) B l & McQuaig, supra, n o t e 2 a t x x x v i . F o r a more d e t a i l e d d i s c u s s i o n , see C h a p t e r V, " H i s t o r i c a l C o n t e x t " , S o c i a l and P o l i t i c a l H i s t o r i c a l Background. McQuaig, supra, note 2 a t x x x v i . i n c o m e - e a r n i n g i n d i v i d u a l s To e x p l a i n , because t h e 1987 t a x r e f o r m s were f a v o u r a b l e , t h e s e t a x p a y e r s d i d n o t f e e l t h e need t o m a n i p u l a t e t h e media t o g a i n maximum exposure o f t h e i r p o i n t o f v i e w w i t h t h e o b j e c t i v e o f e x e r t i n g p o l i t i c a l p r e s s u r e on t h e government t o a l t e r i t s p r o p o s a l s . However, i t would appear a t f i r s t g l a n c e t h a t t h e s i t u a t i o n o f t h e GAAR was s l i g h t l y d i f f e r e n t t o t h e one d e s c r i b e d above. A d m i t t e d l y , t h e t a x community was i n v o l v e d i n t h e p r e p a r a t i o n o f t h e r u l e . However, t h e r u l e d i d n o t f a v o u r t h e c o r p o r a t e s e c t o r as i t was d i r e c t e d s p e c i f i c a l l y a g a i n s t t h i s s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . ' ' ^ ^ N e v e r t h e l e s s , d e s p i t e t h i s l i m i t a t i o n , i t i s s u b m i t t e d t h a t t h e government d i d make e f f o r t s t o p l a c a t e t h e b u s i n e s s community. F o r example, a r g u a b l y i t Ibid. "The t a x community, w o r k i n g m a i n l y t h r o u g h t h e j o i n t t a x committee o f t h e CICA and t h e Canadian B a r A s s o c i a t i o n , has been m e e t i n g w i t h t h e F i n a n c e Department b u r e a u c r a t s t o work o u t a compromise on t h e w o r d i n g o f t h e r u l e . " DeMont, supra, n o t e 44. T h i s r a i s e s t h e same c o n c e r n s t h a t were p r e v i o u s l y d i s c u s s e d (supra, n o t e s 142-4 and accompanying t e x t ) i n r e l a t i o n t o t h e i n v o l v e m e n t o f t h e t a x community i n t h e f o r m a t i o n o f t a x l e g i s l a t i o n . F u r t h e r m o r e , i n p a r t i c u l a r , t h e CICA/CBA J o i n t Committee has been c r i t i c i s e d f o r unashamedly c a l l i n g f o r changes t h a t w i l l a i d t h e b u s i n e s s and i n v e s t m e n t community, whose members t h e y t e n d t o r e p r e s e n t : McQuaig, supra, n o t e 2 a t 100-1. These a r e t h e t a x p a y e r s who p r e d o m i n a n t l y make use o f a r t i f i c i a l t a x a v o i d a n c e schemes t o re d u c e t h e i r income. T h i s i s due t o a v a r i e t y o f f a c t o r s , f o r example, t h e c o s t s i n r e t a i n i n g t a x p r o f e s s i o n a l s and t h e v a l u e o f t h e i n v e s t m e n t r e q u i r e d t o make t h e r e t u r n f i n a n c i a l l y v i a b l e (when o f f s e t a g a i n s t t h e f e e s o f t h e t a x p r o f e s s i o n a l s e t c . ) . i n i t i a l l y i n d i c a t e d t h a t i t was n o t committed t o t h e r u l e / ^ ^ o r a t l e a s t t o i t s o r i g i n a l f o r m a t i t m o d i f i e d t h e r u l e i n r e s p o n s e t o c r i t i c i s m ^ ^ ' and produced i n t e r p r e t a t i v e a i d s , f o r example, e x p l a n a t o r y n o t e s , t o assuage f e a r s o f u n c e r t a i n t y . T h e r e f o r e , i t would appear t h a t t h e government, a l t h o u g h i n t r o d u c i n g a measure c o n t r a r y t o t h e i n t e r e s t s o f t h e c o r p o r a t e s e c t o r , d i d e v e r y t h i n g i t c o u l d w i t h i n t h e c i r c u m s t a n c e s t o p a c i f y t h e b u s i n e s s community. T h i s i s i m p l i e d from t h e absence o f an i m p l e m e n t a t i o n d a t e i n t h e i n i t i a l f o r m a t o f t h e r u l e . I t was s p e c u l a t e d t h a t t h i s " s u g g e s t s t h a t t h e Government i s w i l l i n g t o a c c e p t o t h e r ways o f s o l v i n g t h e t a x a v o i d a n c e problem. ' I f t h e y were s a t i s f i e d w i t h i t , t h e y would have s a i d i t ' s e f f e c t i v e now' [ q u o t i n g R. C o u z i n , Stikeman, E l l i o t ] . " B. L i t t l e , " A c c o u n t a n t s , Lawyers Say P l u g Too B i g f o r Tax Gaps" The Globe and Mail (20 June 1987) B l & B4. A l s o , McQuaig, supra, n o t e 2 a t 342. However, n o t e comments t o t h e c o n t r a r y t h a t t h e government was committed t o t h e co n c e p t o f t h e r u l e , supra, n o t e 122. L i t t l e , i b i d . Note a l s o t h e comments made by one Department o f F i n a n c e o f f i c i a l t h a t t h e government was open t o s u g g e s t i o n s as t o t h e c o n t e n t o f t h e r u l e : supra, n o t e 123. 159 For example, i t added s u b s e c t i o n (10) t o t h e December 1987 d r a f t p r o v i d i n g f o r r e c o u r s e t o e x p l a n a t o r y n o t e s . T h i s was l a t e r d e l e t e d when t h e p r o v i s i o n was s e v e r e l y a t t a c k e d , n o t a b l y by t h e J o i n t Committee o f CBA/CICA: "Comments on t h e GAAR - Re: Recommendations on t h e G e n e r a l A n t i - A v o i d a n c e R u l e o f December 1987" r e p r i n t e d i n V. K r i s h n a , Tax Avoidance: The General Anti-Avoidance Rule, ( T o r o n t o : C a r s w e l l , 1990), Appendix A.5 a t 123-4. 1'° Canada, Department o f F i n a n c e , Explanatory Notes to L e g i s l a t i o n Relating to Income Tax (Ottawa: t h e Department, A p r i l 1988). To c o n c l u d e , i t i s e v i d e n t from t h e above t h a t t h e government was a t t e m p t i n g t o p l a c a t e t h e b u s i n e s s and p r o f e s s i o n a l c ommunities i n r e l a t i o n t o t h e i n t r o d u c t i o n o f t h e t a x r e f o r m p r o p o s a l s , and t h e GAAR i n p a r t i c u l a r . A l t h o u g h t h e government was r e s t r a i n e d by o t h e r c o n s i d e r a t i o n s , f o r example, a d e s i r e t o a p p e a l t o t h e e l e c t o r a t e , i t s t i l l managed t o produce a package t h a t was h e a v i l y w e i g h t e d i n f a v o u r o f t h e s e communities. I t r e c o n c i l e d t h e s e two c o n f l i c t i n g o b j e c t i v e s by some v e r y a s t u t e p o l i t i c a l manoeuvring. I n p a r t i c u l a r , i t produce d a package whose u n d e r l y i n g s t r u c t u r e was f a v o u r a b l e towards t h e c o r p o r a t e s e c t o r , y e t was p r e s e n t e d t o appear t o be p r o m o t i n g a f a i r e r system. The s u c c e s s o f t h e s e p o l i t i c a l a n t i c s i s e v i d e n c e d by t h e f a c t t h a t t h e government was a b l e t o e n a c t t h e package w i t h o u t h a v i n g t o c o m p l e t e l y u n r a v e l i t . Such a consequence would have been c o s t l y t o t h e government b o t h p o l i t i c a l l y and f i n a n c i a l l y . T h i s whole s c e n a r i o exposes how t h e t a x system i s a d i r e c t r e s u l t o f t h e p o l i t i c a l p r o c e s s . F u r t h e r m o r e , i t h i g h l i g h t s t h e i n f l u e n c e t h a t e x t e r n a l f a c t o r s , s uch as a loo m i n g e l e c t i o n , can have on t h e t a x s t r u c t u r e . "Dressed up i n t h e l i n g o o f s o c i a l j u s t i c e , t h e p r o p o s a l s t h r e a t e n i n t h e l o n g r u n t o s h i f t t h e burden s i g n i f i c a n t l y — o f f t h e b a c k s o f c o r p o r a t i o n s and t h e r i c h . What i s g o i n g on i s n ' t t a x r e f o r m a t a l l , i t s ' s t h e h i j a c k i n g o f t a x r e f o r m . " McQuaig, supra, n o t e 2 a t 346. c. SECTION 2 45 AS P2VRT OF THE TAX REFORM PACKAGE The GAAR was pr o p o s e d as an i n t e g r a l p a r t o f t h e t a x r e f o r m s p r e s e n t e d i n June 1987. The o v e r a l l t h r u s t was t o p r e s e n t a package t h a t was a p p e a l i n g t o t h e e l e c t o r a t e , w h i l s t s i m u l t a n e o u s l y , p l a c a t i n g t h e b u s i n e s s community. However, t h e i s s u e i s whether t h e i n c l u s i o n o f t h e GAAR i n t h e t a x r e f o r m package had any impact on i t s development. A l t h o u g h i t i s conceded t h a t such q u e s t i o n s cannot be answered c o n c l u s i v e l y (due t o t h e absence o f a comparable s t a n d a r d , eg. t h e p r e s e n t a t i o n o f t h e r u l e i n i s o l a t i o n ) , i t i s s u b m i t t e d t h a t v i a b l e arguments can be made t h a t t h e p r e s e n t a t i o n o f t h e GAAR as p a r t o f t h e t a x r e f o r m package d i d have an i n f l u e n t i a l e f f e c t on t h e r u l e . The i n c l u s i o n o f t h e p r o p o s a l w i t h i n t h e t a x r e f o r m s perhaps p r o v i d e d an impetus f o r i t s i n t r o d u c t i o n . The government w i s h e d t o p r e s e n t an image o f f a i r n e s s t o t h e e l e c t o r a t e t o b o l s t e r i t s f l a i l i n g s u p p o r t . The GAAR was an i m p o r t a n t element i n t h e c r e a t i o n o f such an image, b o t h c o n c e p t u a l l y and f i n a n c i a l l y . T h i s perhaps m o t i v a t e d t h e government t o i n t r o d u c e t h e GAAR. Fu r t h e r m o r e , t h e government maybe would n o t have i n t r o d u c e d t h e r u l e i f i t had not been p a r t o f t h e t a x r e f o r m package. I n t r o d u c i n g t h e GAAR i n i s o l a t i o n may have r e s u l t e d i n t h e b u s i n e s s community's venom b e i n g d i r e c t e d e x c l u s i v e l y a t t h e r u l e . By i n c l u d i n g i t i n t h e t a x r e f o r m package, t h e government was e s s e n t i a l l y a b l e t o d e f l e c t some o f t h e f o c u s from t h e r u l e , as o b v i o u s l y o t h e r measures w i t h i n t h e package would a t t r a c t some degree o f a t t e n t i o n . The i n c l u s i o n o f t h e GAAR w i t h i n t h e t a x r e f o r m package a l s o s u b j e c t e d i t t o t h e t r a d e - o f f s and compromises w h i c h a r e i n h e r e n t i n s t r u c t u r i n g any t a x r e f o r m s . w i t h o u t p r o f f e r i n g any s u b s t a n t i v e e v i d e n c e , i t i s s u g g e s t e d t h a t t h e i n c l u s i o n o f t h e r u l e may have i n f l u e n c e d i t s development. F o r example, perhaps t h e government o n l y i n t r o d u c e d t h e r u l e because i t p e r c e i v e d t h a t i t was p o l i t i c a l l y s a f e t o do so i n l i g h t o f t h e o t h e r measures t h a t were f a v o u r a b l e t o t h e c o r p o r a t e s e c t o r . Maybe t h e i n t r o d u c t i o n o f t h e r u l e m o t i v a t e d t h e government t o s t r u c t u r e t h e o t h e r measures t o be f a v o u r a b l e . Perhaps i f t h e r e s p o n s e o f t h e c o r p o r a t e s e c t o r t o t h e t a x r e f o r m s had been s t r o n g e r , t h e government may have withdrawn o r s u b s t a n t i a l l y 1 " T h i s p r o c e s s was a p t l y c a p t u r e d by one commentator i n h i s s u b m i s s i o n s t o t h e S t a n d i n g Senate Committee on B a n k i n g , Trade and Commerce: "The t a x r e f o r m package was p u t t o g e t h e r w i t h f i n e l y b a l a n c e d t r a d e - o f f s between economic r a t i o n a l i t y and p o l i t i c a l e x p e d i e n c y , between immediate p a t c h i n g and l o n g - t e r m r e f o r m , between t h e c o m p e t i t i v e need t o b r i n g down p e r s o n a l and c o r p o r a t e t a x r a t e s and t h e obscene revenue r e q u i r e m e n t s o f t h e b u l g i n g government d e f i c i t and between d i f f e r e n t means o f numerous p r e s s u r e groups. O v e r a l l , t h e package s t a n d s as an e x c e l l e n t example o f t h e p o s s i b l e " [ R o b e r t D. Brown, "The E f f e c t s o f Tax Reform on B u s i n e s s " , i n Tax Reform: Perspectives on the White Paper, S u b m i s s i o n by t h e C D . Howe I n s t i t u t e , O c t o b e r 1987] and t h e Committee's r e s p o n s e : "Tax r e f o r m w i l l a l w a y s be t h u s " : Report, supra, n o t e 124 a t 14. a l t e r e d t h e pro p o s e d GAAR t o p a c i f y t h e b u s i n e s s coirununity A l t h o u g h t h i s i s a l l h y p o t h e t i c a l , i t s e r v e s t o i l l u s t r a t e t h e compromises and t r a d e - o f f s t h a t e x i s t i n p u t t i n g t o g e t h e r a package o f t a x r e f o r m s . By i n c l u d i n g t h e GAAR w i t h i n t h e 1987 t a x r e f o r m p r o p o s a l s , t h e government was e x p o s i n g i t t o t h i s p r o c e s s . A f i n a l major i n f l u e n c e o f t h e i n c l u s i o n o f s e c t i o n 245 w i t h i n t h e t a x r e f o r m package was t h e p r e s e n t a t i o n o f t h e r u l e as p a r t o f w h i t e paper documents, r a t h e r t h a n a B i l l . G i l l e s p i e has argued t h a t t h e p r o c e s s w h i c h t h e government adopts - whether i t be t h e c o n s u l t a t i v e ^ ^ ^ o r budget process^^^ - i s d e t e r m i n e d by t h e i n f o r m a t i o n i t has r e g a r d i n g t h e p o l i t i c a l c o s t s and The w i t h d r a w a l o r a l t e r a t i o n o f t h e r u l e would have been a good way t o p l a c a t e a l l s e c t o r s o f t h e b u s i n e s s community a t t h e same t i m e as t a x a v o i d a n c e i s n o t s p e c i f i c t o any one s e c t o r . A s t y l i z e d d e s c r i p t i o n o f such a p r o c e s s might be as f o l l o w s : t h e government s e l e c t s from a v a r i e t y o f c h o i c e s and p u b l i s h e s them as a w h i t e paper d i s c u s s i o n . I t t h e n c a l l s f o r b r i e f s and r e p r e s e n t a t i o n s and may conduct p u b l i c m e e t i n g s . I t sometimes p r e p a r e s d r a f t l e g i s l a t i o n w h i c h i s s u b m i t t e d t o P a r l i a m e n t f o r c o n s i d e r a t i o n . A l s o , i t may be c h a n n e l l e d t o s p e c i a l committees o f P a r l i a m e n t f o r s t u d y , r e v i e w and comments. Supra, n o t e 135 a t 193-4. 165 T h i s p r o c e s s d i s c o u r a g e s v o t e r f e e d b a c k , m i n i m i z e s t h e t i m e a v a i l a b l e t o p o t e n t i a l l o s e r s t o m a r s h a l l t h e i r r e s o u r c e s i n an a l l - o u t a t t a c k on t h e government's p r o p o s a l s and s t r i v e s t o t r a n s l a t e t h e p r o p o s a l s i n t o l e g i s l a t i o n w i t h m i n i m a l a l t e r a t i o n . T h i s p r o c e s s may e n t a i l t h e government i n t r o d u c i n g t h e p r o p o s a l s as p a r t o f t h e budget speech. L e g i s l a t i o n w i l l f o l l o w s h o r t l y t h e r e a f t e r . I t c l o s e l y r e s e m b l e s t h e i n i t i a l p r o p o s a l s , e x c e p t perhaps f o r a few t e c h n i c a l a d j u s t m e n t s . Ibid, a t 194. b e n e f i t s / ' ' I n p a r t i c u l a r , i t depends on whether i t i s c e r t a i n about t h e e x t e n t o f t h e w i n n e r s and l o s e r s from t h e p r o p o s a l s , whether t h e w i n n e r s a r e c l e a r l y i d e n t i f i e d and, i n terms o f p o l i t i c a l s u p p o r t , o u t w e i g h t h e l o s e r s and whether t h e l o s e r s a r e l o c a t e d i n d i f f e r e n t s e c t o r s o f t h e economy and have few, i f any, p r i o r l i n k s t o t h e p r o p o s a l s (and a r e t h u s u n a b l e t o mount a u n i f i e d a t t a c k ) / ' ^ The 1987 t a x r e f o r m p r o p o s a l s were i n t r o d u c e d as w h i t e paper documents^'^ - t h u s r e f l e c t i n g t h e c o n s u l t a t i v e p r o c e s s . T h i s i s f u r t h e r c o r r o b o r a t e d by o t h e r s t r a t e g i e s t h e government adopted i n f o r m u l a t i n g t h e package - t h e p r e - c o n s u l t a t i o n w i t h i n t e r e s t e d p a r t i e s ; t h e r e f e r r a l o f t h e package t o t h e House o f Commons F i n a n c e Committee and t h e Senate Committee on B a n k i n g , Trade and Commerce ( t h e former h o l d i n g p u b l i c h e a r i n g s w h i c h p r o v i d e d a forum f o r s p e c i a l i n t e r e s t g r o u p s ^ " ) ; t h e f a i r l y s i g n i f i c a n t amendments made t o t h e w h i t e paper p r o p o s a l s , i n p a r t i c u l a r , t o i n c o r p o r a t e t h e recommendations o f t h e House o f Commons F i n a n c e Committee. These f a c t o r s v e r i f y t h e p r o p o s i t i o n 1 " J j b l d . 1'^ J J b i d . 1'^ A t one p o i n t i n t i m e , i t was mooted t h a t t h e p r o p o s a l s may be i n t r o d u c e d as a gr e e n paper due t o d i s s e n s i o n s w i t h i n t h e government and t h e C a b i n e t i n p a r t i c u l a r . L. W h i t t i n g t o n , "Tax Paper May Turn Green" Calgary Herald (28 A p r i l 1987) A3. 1 " Cook, supra, n o t e 130 and F i f e , supra, n o t e 90. t h a t t h e government was a d o p t i n g a c o n s u l t a t i v e p r o c e s s and was t h e r e f o r e more w i l l i n g t o a c c e p t c r i t i c i s m and s u g g e s t i o n s as t o t h e f i n a l f o r m a t o f t h e p r o p o s a l s . The i n c l u s i o n o f t h e GAAR w i t h i n t h e t a x r e f o r m package r e s u l t e d i n i t s p r e s e n t a t i o n as a w h i t e paper p r o p o s a l . T h i s i n f l u e n c e d i t s development by i n d i c a t i n g t o t h e b u s i n e s s and t a x communities t h a t t h e government was n o t committed t o t h e f o r m a t o f t h e r u l e . T h i s exposed t h e r u l e t o c r i t i c i s m and u l t i m a t e l y , change. However, b e a r i n g t h i s i s mind, i t i s s u r p r i s i n g t h a t o n l y l i m i t e d changes were made, p a r t i c u l a r l y when one c o n s i d e r s t h e extreme p r e s s u r e t h e government was p u t under t o w i t h d r a w o r s u b s t a n t i a l l y amend t h e r u l e . One p o s s i b l e e x p l a n a t i o n i s t h a t , a l t h o u g h t h e GAAR was p r e s e n t e d as a w h i t e paper p r o p o s a l , t h e government was n o n e t h e l e s s committed t o t h e c o n c e p t o f t h e r u l e , and moreover, t o t h e b a s i c f o r m a t . T h i s p r o p o s i t i o n i s s u b s t a n t i a t e d by t h e f a c t t h a t t h e government i n c l u d e d d r a f t l e g i s l a t i o n o f t h e r u l e . Compare t h i s w i t h t h e p r e s e n t a t i o n o f t h e s a l e s t a x w h i c h o n l y c o n s i s t e d o f t h r e e o p t i o n s b e i n g o u t l i n e d , w i t h no commitment made t o e i t h e r nor t h e i n c l u s i o n o f a t i m e t a b l e . T h i s s u g g e s t s t h a t t h e government was l e s s h e s i t a n t p o l i t i c a l l y about t h e GAAR t h a n i t was about o t h e r p r o p o s a l s w i t h i n t h e package. To c o n c l u d e t h e r e f o r e , t h e i n c l u s i o n o f t h e GAAR w i t h i n t h e t a x r e f o r m package was i n f l u e n t i a l , b o t h as r e g a r d s i t s i n t r o d u c t i o n and i t s development. However, as p r e v i o u s l y mentioned, t h i s i s h y p o t h e t i c a l as no comparable s t a n d a r d e x i s t s a g a i n s t w h i c h t o judge t h e p r o p o s a l . N e v e r t h e l e s s , v i a b l e arguments have been advanced i l l u s t r a t i n g t h e impact o f t h e i n c l u s i o n i n t h e t a x r e f o r m p r o p o s a l s on t h e r u l e . D. TAX REFORM IN THE UNITED STATES The U.S. e x e r c i s e r e f l e c t e d a t r e n d i n t a x r e f o r m w h i c h was s p r e a d i n g a c r o s s i n d u s t r i a l i s e d n a t i o n s . T h i s t r e n d g e n e r a l l y r e s u l t e d i n t h e r e d u c t i o n o f t o p r a t e s o f t a x f o r i n d i v i d u a l s and c o r p o r a t i o n s , t h e b r o a d e n i n g o f t h e t a x base by t h e e l i m i n a t i o n o r c u t t i n g - b a c k o f numerous b e n e f i t s and t h e s h i f t i n g o f t h e burden o f t a x a t i o n from i n d i v i d u a l s t o c o r p o r a t i o n s . T h i s t r e n d towards more n e u t r a l and l e s s i n t e r v e n t i o n i s t t a x systems w i t h l o w e r r a t e s was t h e r e s u l t o f changes i n a t t i t u d e s r e g a r d i n g t a x a t i o n t h e o r y and p r a c t i c e . F o r example, t h e r e was a g r o w i n g p e r c e p t i o n t h a t t h e a p p r o p r i a t e r o l e o f t h e government i n f i n e - t u n i n g economic a c t i v i t y i s more l i m i t e d t h a n p r e v i o u s l y t h o u g h t , t h i s p h i l o s o p h y r e s u l t i n g i n an i n c r e a s e d r e l i a n c e on m a r k e t s ; t h e d e s i r e t o improve economic R.D. Brown & V. Morgan, " I n t e r n a t i o n a l C o m p e t i t i v e n e s s and T a x a t i o n " (1989) 37 Canadian Tax Journal 745 a t 745. Brown & Morgan, i b i d , and C. M o t h e r w e l l , "U.S. Tax Reform Leads Worldwide R e v o l u t i o n " The Globe and Mail (17 September 1986) B l . p e r f o r m a n c e m o t i v a t e d t h e r e d u c t i o n i n t h e p e r v e r s e n e s s o f e x i s t i n g t a x systems and t h e r e was a g r o w i n g r e a l i s a t i o n t h a t d o m e s t i c t a x p o l i c i e s must n o t o b s t r u c t i n t e r n a t i o n a l c o m p e t i t i v e n e s s T h i s w o r l d w i d e r e f o r m p u t p r e s s u r e on a l l i n d u s t r i a l i s e d n a t i o n s t o examine and r e f o r m t h e i r own t a x systems. Brown & Morgan, supra, n o t e a t 747-8 and R.D. Brown, "The P a i n f u l R e a l i t i e s o f Tax Reform" (June 1987) 120 CA Magazine 26 a t 26-8. The Canadian government's r e c o g n i t i o n o f t h i s p r e s s u r e i s i l l u s t r a t e d by t h e f o l l o w i n g : I t a l s o became e v i d e n t ... t h a t some o f our major t r a d i n g p a r t n e r s , whose t a x systems s u f f e r e d many o f t h e same d e f i c i e n c i e s as Canada's, were moving f o r w a r d more a g g r e s s i v e l y and more c o m p r e h e n s i v e l y w i t h a c t i o n s t o r e f o r m t h e i r t a x systems, and, i n p a r t i c u l a r , t o l o w e r t h e i r t a x r a t e s . I n an i n c r e a s i n g l y i n t e r d e p e n d e n t w o r l d , i t i s i m p o r t a n t n o t t o a l l o w Canada's t a x system t o p u t our t r a d e r s , b u s i n e s s e s , i n v e s t o r s and h i g h l y s k i l l e d i n d i v i d u a l s a t a c o m p e t i t i v e d i s a d v a n t a g e w i t h o t h e r c o u n t r i e s . Tax Reform 1987, supra, n o t e 34 a t 21. However, i t i s s u b m i t t e d t h a t t h e U n i t e d S t a t e s r e f o r m , i n p a r t i c u l a r , was i n f l u e n t i a l i n C a n a d a / ^ T h i s i n f l u e n c e was b o t h p o l i t i c a l and f i n a n c i a l . As r e g a r d s t h e f o r m e r , t h e C a n a d i a n government was seduced by t h e p o l i t i c a l a p p e a l w h i c h t a x r e f o r m s had f o r American c i t i z e n s , e s p e c i a l l y s i n c e t h e U.S. Congress was a l s o f a c i n g a l o o m i n g e l e c t i o n a t t h e time.^^^ j n r e l a t i o n t o t h e l a t t e r , t h e c l o s e c o n n e c t i o n s between t h e two economies meant t h a t t h e U.S. t a x r e f o r m was f i n a n c i a l l y p e r t i n e n t t o Canada. V e r i f i c a t i o n o f t h i s was p r o v i d e d by a s t u d y done by t h e C D . Howe I n s t i t u t e w h i c h c o n c l u d e d t h a t u n l e s s t h e U.S. t a x r e f o r m s were met i n Canada, t h e y c o u l d pose a t h r e a t because t h e y would make most f o r e i g n i n v e s t m e n t by A m e r i c a n c o r p o r a t i o n s l e s s a t t r a c t i v e . Tax Reform Act of 1986, P u b l i c Law 99-514, s i g n e d by P r e s i d e n t Reagan on O c t o b e r 22, 1986. F o r d e t a i l s o f t h e p r o m i n e n t f e a t u r e s o f U.S. t a x r e f o r m , see B l e n k a r n R e p o r t , supra, n o t e 58 a t 22-3. F o r a more i n - d e p t h d i s c u s s i o n , see H.D. Rosenbloom, "Recent US Tax Developments o f S i g n i f i c a n c e t o C a n a d i a n s " i n Report of Proceedings of the Forty-Second Tax Conference, 1990 C o n f e r e n c e R e p o r t ( T o r o n t o : Canadian Tax F o u n d a t i o n , 1991) 40:1. The government's r e c o g n i t i o n o f t h i s i s r e f l e c t e d i n t h e f o l l o w i n g s t a t e m e n t : "But we have t o be m i n d f u l o f what i s g o i n g on [ i n t h e U.S.], p a r t i c u l a r l y i n t a x r a t e s . T h a t ' s because o f t h e p r o x i m i t y and i n t e g r a t i o n between t h e two c o u n t r i e s and t h e r e f o r e t h e need t o be c o m p e t i t i v e [ q u o t i n g M i c h a e l W i l s o n , F i n a n c e M i n i s t e r ] . " P i t t s , supra, n o t e 33. Ferguson, supra, n o t e 34. 177 M^g j j Reform Dilemma: Study Warns We Must Match U.S." Vancouver Sun (22 J a n u a r y 1987) F6. 'With Canada's open economy and w i t h m u l t i n a t i o n a l s making up such a l a r g e p a r t o f t h e Canadian b u s i n e s s community, i f c o r p o r a t e t a x r a t e s i n Canada remai n s u b s t a n t i a l l y h i g h e r t h a n t h o s e i n t h e U n i t e d S t a t e s , t h e r e c o u l d be a p a i n f u l However, a l t h o u g h Canadian t a x r e f o r m needed t o p a r a l l e l t h e U.S. e x e r c i s e , i t was a c c e p t e d from t h e o u t s e t t h a t t h e former c o u l d n o t r e p l i c a t e t h e l a t t e r . I n p a r t i c u l a r , t h e Canadian system d i d n o t have t h e same p r o l i f e r a t i o n o f t a x i n c e n t i v e s t o choose from and u l t i m a t e l y , e l i m i n a t e , as t h e U.S. system had e r o s i o n o f t h e Canadian t a x base and C anadian t a x revenue' [ q u o t i n g R. Brown, v i c e - c h a i r m a n o f P r i c e Waterhouse, T o r o n t o , a u t h o r o f s t u d y ] . Ibid. See, a l s o , t h e S t a n d i n g Senate Committee on B a n k i n g , Trade and Commerce, Report, supra, n o t e 124 a t 12-3 w h i c h o u t l i n e d t h e p o s s i b l e r e s u l t o f r a t e d i s p a r i t i e s ( i e . p a r t i c u l a r l y , l o w e r r a t e s i n t h e U.S.) - t h e s h i f t i n g , by m u l t i n a t i o n a l s , o f income t o t h e U.S. and expenses t o Canada. One commentator who does not s u p p o r t t h e r e d u c t i o n i n Canadian c o r p o r a t e t a x r a t e s t o make our t a x system more i n t e r n a t i o n a l l y c o m p e t i t i v e i s L i n d a McQuaig. F i r s t , she does n o t b e l i e v e t h a t t h e d i s p a r i t i e s i n t a x r a t e s between Canada and o t h e r n a t i o n s a r e s i g n i f i c a n t c o n s i d e r a t i o n s t o c o r p o r a t i o n s i n c h o o s i n g t h e i r l o c a t i o n . She c l a i m s t h a t s t u d i e s have found t h a t t a x f a c t o r s a r e r e l a t i v e l y low on t h e l i s t o f r e a s o n s d e t e r m i n i n g where c o r p o r a t i o n s l o c a t e t h e m s e l v e s . She a l l e g e s more i m p o r t a n t f a c t o r s i n c l u d e , f o r example, a c c e s s t o m a r k e t s , t r a n s p o r t a t i o n and s k i l l e d l a b o u r : supra, n o t e 2 a t 76. F u r t h e r m o r e , as r e g a r d s l a r g e m u l t i n a t i o n a l c o r p o r a t i o n s and t h e s h i f t i n g o f t h e i r p r o f i t s / e x p e n s e s t o l o w / h i g h l y t a x e d j u r i s d i c t i o n s , she p o s i t s t h a t t h e s o l u t i o n does n o t l i e i n r e d u c i n g r a t e s , b u t i n a d o p t i n g o t h e r measures t o e f f e c t i v e l y d e a l w i t h t h i s p r oblem, f o r example, s t r e n g t h e n i n g our laws on t a x havens i n g e n e r a l : i b i d , a t 79. I t i s f e l t t h a t t h i s v i e w i s s i m p l i s t i c . I n p a r t i c u l a r , i t i g n o r e s t h e c l o s e t r a d i n g c o n n e c t i o n s between t h e U.S. and Canada. Canada cannot a f f o r d t o impose s t r i c t l a w s , e s p e c i a l l y a g a i n s t t h e U.S., r e g a r d i n g t h e o p e r a t i o n s o f m u l t i n a t i o n a l s , p a r t i c u l a r l y i n l i g h t o f t h e p r e s e n t i d e o l o g y o f minimum t r a d e b a r r i e r s . F u r t h e r m o r e , i t does n o t t a k e a c c o u n t o f t h e p o l i t i c a l a s p e c t o f t h e d i s p a r i t i e s . I n t h e c u r r e n t c l i m a t e o f h e i g h t e n e d i n t e r e s t i n t h e U.S. economy and i t s t a x system, t h e C anadian government c o u l d i l l - a f f o r d p o l i t i c a l l y t o be seen as n o t r e s p o n d i n g t o t h e U.S. r e f o r m s , o r r e a c t i n g i n a way t h a t was d i a m e t r i c a l l y opposed t o t h e i r d i r e c t i o n . p r e - r e f o r m . A l s o , some o f t h e Canadian i n c e n t i v e s , f o r p o l i t i c a l r e a s o n s , c o u l d n o t be removed/^' F u r t h e r m o r e , t h e Canadian system p r o v i d e s more b e n e f i t s t o i t s c i t i z e n s , s u ch as p u b l i c l y f i n a n c e d h e a l t h and h o s p i t a l c a r e ; g r e a t e r p u b l i c f i n a n c i n g o f p o s t - s e c o n d a r y e d u c a t i o n and more p u b l i c f i n a n c i n g o f t h e a r t s . P o l i t i c a l l y , t h e government was c a r e f u l t o s t r e s s t h a t t h e Canadian r e f o r m s would n o t d u p l i c a t e t h e U.S. e x e r c i s e . 121 T h i s was a c c e p t e d by t h e C a n a d i a n e l e c t o r a t e , i ^ ^ However, d e s p i t e t h e s e d i f f e r e n c e s , t h e r e i s no doubt t h a t t h e U.S. r e f o r m s d i d have an i n f l u e n t i a l impact on t h e Canadian t a x system. I n f a c t , i t has been c l a i m e d t h a t t h e y were t h e main impetus f o r t h e Canadian t a x r e f o r m e x e r c i s e , i ^ ' ^̂'̂  See H a r t l e , supra, n o t e 7 a t 398: "Because t h e o l d U.S. system was so r i f e w i t h l o o p h o l e s and s p e c i a l c o n c e s s i o n s , even p a r t i a l base b r o a d e n i n g t h e r e c o u l d f i n a n c e l a r g e r e d u c t i o n s i n r a t e s . T h i s easy o p t i o n was n o t a v a i l a b l e i n Canada." 1^' F o r example, t h e l i f e t i m e c a p i t a l g a i n s t a x exemption. C. M o t h e r w e l l , " P o l i t i c s May Hobble Canadian Tax Reform" The Globe and Mail (16 September 1986) B l & B8. 120 Brown & Morgan, supra, n o t e 170 a t 747. Brooks & McQuaig, supra, n o t e 54 a t 17. A l t h o u g h t h e U n i t e d S t a t e s spends more on d e f e n c e and r e l a t e d a c t i v i t i e s , i t has h i g h e r p e r c a p i t a income and a c c o r d i n g l y can a b s o r b t h e s e h i g h e r e x p e n d i t u r e s w h i l s t s t i l l a c h i e v i n g l o w e r t a x burdens: Brown & Morgan, i b i d . 121 P i t t s , supra note 33. 122 A s u r v e y c o n c l u d e d t h a t s e v e n t y - e i g h t p e r c e n t o f Canadians a g r e e d w i t h M i c h a e l W i l s o n ' s a s s e r t i o n t h a t t a x r a t e s must be h i g h e r t h a n i n t h e U n i t e d S t a t e s t o f i n a n c e government b e n e f i t s . F erguson, supra, n o t e 38. H a r t l e , supra n o t e 7 a t 401-2. See, a l s o , W o r t h i n g t o n , supra, note 28. However, t h e impact o f t h e U.S. t a x r e f o r m on s e c t i o n 245 cannot q u i t e be d i s c e r n e d a t f i r s t g l a n c e , c o n s i d e r i n g t h a t i t d i d n o t i n c l u d e a g e n e r a l a n t i - a v o i d a n c e r u l e as was p r e s e n t i n t h e C a nadian package. N e v e r t h e l e s s , i t i s s u b m i t t e d t h a t t h e U.S. t a x r e f o r m s d i d i n d e e d e x e r t some degree o f i n f l u e n c e , b o t h as r e g a r d s p o l i t i c a l a p p e a l and f i n a n c i a l c o n s i d e r a t i o n s . I n r e l a t i o n t o t h e f o r m e r , as p r e v i o u s l y d i s c u s s e d , t h e government t r i e d t o p r e s e n t t h e t a x r e f o r m s as p r o m o t i n g a f a i r e r system. However, i n c r e a t i n g an image of harming t h e c o r p o r a t e s e c t o r , l i m i t a t i o n s e x i s t e d . For example, t h e C anadian system d i d n o t c o n t a i n as many s p e c i a l i n c e n t i v e s as t h e U.S. system p r e - r e f o r m , and f u r t h e r m o r e , some o f t h e s p e c i a l i n c e n t i v e s were u n t o u c h a b l e . T h e r e f o r e , on t h e b a s i s o f t h e s e l i m i t a t i o n s , t h e government may have d e c i d e d t o i n t r o d u c e t h e GAAR t o e n a b l e i t t o p r e s e n t a more complete p i c t u r e o f f a i r n e s s . F o r example, t h e r u l e would p r e v e n t abuses of t h e r e m a i n i n g i n c e n t i v e s (an added j u s t i f i c a t i o n f o r t h e i r c o n t i n u a n c e ) and would p r e c l u d e abuses o f f u t u r e i n c e n t i v e s i n t r o d u c e s . O v e r a l l , t h e r e f o r e , t h e p r o v i s i o n g r e a t l y c o n t r i b u t e d t o t h e c r e a t i o n o f t h i s image. I n r e l a t i o n t o t h e f i n a n c i a l c o n s i d e r a t i o n s , f o r r e a s o n s s t a t e d above, t h e C anadian government was u n a b l e t o e l i m i n a t e / r e d u c e as many s p e c i a l i n c e n t i v e s as t h e U.S. system. T h i s meant t h a t t o The C anadian system does n o t have a j u d i c i a l b u s i n e s s p u rpose t e s t as t h e U.S. does. T h e r e f o r e , e x i s t i n g a n t i - a v o i d a n c e measures were a d v o c a t e d by t h e government as b e i n g i n a d e q u a t e . Tax Reform 1987: Income Tax Reform, supra, n o t e 24 a t 130. s u b s t a n t i a t e i t s image o f f a i r n e s s i t had t o i n c r e a s e t h e p r o j e c t e d r e venues o f i t s b a s e - b r o a d e n i n g measures u s i n g o t h e r measures. E n t e r t h e GAAR. To c o n c l u d e t h e r e f o r e , i t i s c l e a r t h a t t h e U.S. t a x r e f o r m e x p e r i e n c e had an i n f l u e n t i a l a f f e c t on t h e Canadian t a x system. I n p a r t i c u l a r , i t p r o v i d e d an impetus f o r t h e r e f o r m s and t h e n d i c t a t e d t o a l a r g e e x t e n t , t h e d i r e c t i o n o f t h e s e r e f o r m s - t h e l o w e r i n g o f r a t e s , t h e b r o a d e n i n g o f t h e base and t h e s h i f t i n g o f t h e t a x burden from i n d i v i d u a l s t o c o r p o r a t i o n s . I n r e l a t i o n t o t h e GAAR, t h e U.S. r e f o r m s p r o v i d e d an impetus f o r i t s i n t r o d u c t i o n as p a r t o f t h e Canadian t a x r e f o r m s . A l t h o u g h t h e U.S. package d i d n o t c o n t a i n a p a r a l l e l p r o v i s i o n , t h e Canadian r e f o r m s were h i n d e r e d by l i m i t a t i o n s r e g a r d i n g t h e e x t e n t o f s p e c i a l i n c e n t i v e s t h a t c o u l d be e l i m i n a t e d / r e d u c e d . T h e r e f o r e , t h e r u l e c o n t r i b u t e d i n making up t h e s h o r t - f a l l , b o t h c o n c e p t u a l l y and f i n a n c i a l l y . E. CONCLUSION To c o n c l u d e , i t has been shown t h a t t h e p o l i t i c a l and s o c i a l c o n t e x t had an i n f l u e n t i a l r o l e i n t h e i n t r o d u c t i o n , f o r m u l a t i o n and p r e s e n t a t i o n o f t h e t a x r e f o r m package, and t h e GAAR i n p a r t i c u l a r . F o r example, t h e lo o m i n g f e d e r a l e l e c t i o n a t t h e t i m e o f t h e 1987 t a x r e f o r m s , t o g e t h e r w i t h t h e government's poor e l e c t o r a l s u p p o r t were m a n i f e s t e d i n t h e government's s e l f - i n t e r e s t i n s e e k i n g r e - e l e c t i o n . T h i s i n v o l v e d two elements b e i n g promoted s i m u l t a n e o u s l y - t h e government t r y i n g t o maximize v o t e s w i t h t h e e l e c t o r a t e and t h e p l a c a t i o n o f t h e s p e c i a l i n t e r e s t g r o u p s , i n p a r t i c u l a r , t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . The former p r e m i s e r e s u l t e d i n , i n t e r a l i a , t h e government p r e s e n t i n g t h e t a x r e f o r m p r o p o s a l s as o s t e n s i b l y p r o m o t i n g a f a i r e r system. I n p a r t i c u l a r , i t sought t o g i v e t h e i m p r e s s i o n t h a t t h e t a x burden was b e i n g s h i f t e d from low and m i d d l e - c l a s s t a x p a y e r s t o t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . The GAAR was an i n t e g r a l component i n t h e c r e a t i o n o f t h i s image. I t g r e a t l y c o n t r i b u t e d t o t h e co n c e p t o f f a i r n e s s - i n i t s own r i g h t , as p a r t o f a p l e t h o r a o f o t h e r b a s e - b r o a d e n i n g measures and i n s u b s t a n t i a t i n g e c o n o m i c a l l y t h e c l a i m o f f a i r n e s s . These f a c t o r s i n t u r n i n f l u e n c e d t h e r u l e . F o r example, t h e y p r o v i d e d an impetus f o r t h e i n t r o d u c t i o n o f s e c t i o n 245, f o r i t s i n c l u s i o n w i t h i n t h e t a x r e f o r m package, and a r g u a b l y , i n f l u e n c e d t h e c a l c u l a t i o n o f t h e revenue t h e r u l e was e s t i m a t e d t o g e n e r a t e . However, i t has a l s o been shown t h a t t h i s image o f f a i r n e s s was i l l u s o r y . I n p a r t i c u l a r , t h e r e d u c t i o n o f t h e t a x r a t e s was n o t f i n a n c e d by an i n c r e a s e i n t h e c o r p o r a t e t a x burden as t h e government t r i e d t o make o u t . I n s t e a d t h i s r e d u c t i o n was funded p r i m a r i l y by i n c r e a s e s i n t h e f e d e r a l s a l e s t a x and a c c e l e r a t i o n o f t a x payments. The c o r p o r a t e s e c t o r was a l s o p a c i f i e d i n o t h e r ways by t h e t a x p r o p o s a l s . F o r example, c o r p o r a t e t a x r a t e s were r e d u c e d ; n ot a l l s p e c i a l i n c e n t i v e s were e l i m i n a t e d / t r i m m e d and t h o s e t h a t were removed were n o t t h e i m p o r t a n t ones p r i m a r i l y r e l i e d upon by t h e c o r p o r a t e s e c t o r . These f a v o u r a b l e measures a r e perhaps n o t t h a t s u r p r i s i n g when one c o n s i d e r s t h e e x t e n s i v e i n v o l v e m e n t o f t h e c o r p o r a t e s e c t o r and t h e i r t a x r e p r e s e n t a t i v e s i n t h e p r e p a r a t o r y s t a g e s o f t h e t a x r e f o r m p r o p o s a l s . T h i s i s i n d i c a t i v e o f t h e d e s i r e o f t h e government t o p l a c a t e t h e s p e c i a l i n t e r e s t g r o u p s , and i n p a r t i c u l a r , t h e c o r p o r a t e s e c t o r . I n r e l a t i o n t o t h e GAAR, i t would appear a t f i r s t g l a n c e t h a t t h e government was n o t p a c i f y i n g t h e b u s i n e s s community as t h e r u l e was e f f e c t i v e l y d i r e c t e d a g a i n s t t h i s group. However, a l t h o u g h t h i s i s t r u e t o some e x t e n t , t h e government s t i l l a t t e m p t e d t o m i n i m i s e t h e harm t h a t i t would do. F o r example, i t i n v o l v e d t h e t a x p r o f e s s i o n a l i n t h e p r e p a r a t i o n o f t h e p r o p o s a l , and f u r t h e r m o r e , amended i t i n r e s p o n s e t o t h e i r c r i t i c i s m . O v e r a l l , i t i s f a i r t o say t h a t t h e t a x r e f o r m package, and t h e GAAR i n p a r t i c u l a r , r e f l e c t s t h e c o n f l i c t i n g s t r a n d s o f t h e government's s e l f - i n t e r e s t i n s e e k i n g r e - e l e c t i o n . T h i s o b j e c t i v e was p e r t i n e n t a t t h e t i m e o f t h e 1987 t a x r e f o r m e x e r c i s e due t o a l o o m i n g e l e c t i o n w h i c h was due t o be h e l d by t h e f a l l o f 1989 and was g e n e r a l l y e x p e c t e d t o be c a l l e d sometime i n 1988. O t h e r a s p e c t s o f t h e p o l i t i c a l and s o c i a l e n v ironment a l s o had an impact on t h e t a x r e f o r m e x e r c i s e , and t h e GAAR i n p a r t i c u l a r . F o r example, t h e i n c l u s i o n o f t h e p r o v i s i o n w i t h i n t h e t a x r e f o r m package was perhaps an impetus f o r i t s i n t r o d u c t i o n - t o c o n t r i b u t e t o t h e image o f f a i r n e s s t h e government sought t o p r e s e n t o r , t o r e d u c e t h e e x c e s s i v e p o l i t i c a l c o s t s i n v o l v e d i n i n t r o d u c i n g t h e r u l e i n i s o l a t i o n . F u r t h e r m o r e , t h e r u l e was s u b j e c t e d t o t h e compromises and t r a d e - o f f s t h a t a r e i n h e r e n t i n t h e f o r m u l a t i o n o f any t a x r e f o r m package. F i n a l l y , i t s i n c l u s i o n i n t h e package n e c e s s i t a t e d t h e p r e s e n t a t i o n o f s e c t i o n 245 as p a r t o f w h i t e paper documents. T h i s a r g u a b l y exposed t h e p r o p o s a l t o i n c r e a s e d p r e s s u r e r e g a r d i n g i t s a l t e r a t i o n , t h a n i f , f o r example, i t had been i n t r o d u c e d as p a r t o f a s e t o f budget measures. The l a s t major p o l i t i c a l and s o c i a l c o n s i d e r a t i o n w h i c h i n f l u e n c e d t h e t a x r e f o r m e x e r c i s e was t h e r e f o r m t h a t had o c c u r r e d i n t h e U n i t e d S t a t e s . F o r f i n a n c i a l and p o l i t i c a l r e a s o n s , t h i s e x e r c i s e was an impetus f o r t h e Canadian r e f o r m and t o a l a r g e e x t e n t , d e t e r m i n e d t h e d i r e c t i o n s uch r e f o r m would t a k e . As r e g a r d s t h e GAAR, a l t h o u g h no p a r a l l e l p r o v i s i o n was i n c l u d e d i n t h e U.S. r e f o r m package, t h e l a t t e r s t i l l had an impact on t h e r u l e . F o r example, i t was a m o t i v a t i o n f o r t h e i n t r o d u c t i o n o f t h e p r o p o s a l due t o t h e d e c r e a s e d number of s p e c i a l i n c e n t i v e s w h i c h c o u l d be e l i m i n a t e d / r e d u c e d i n t h e Canadian t a x system. T h e r e f o r e , t o make up t h i s s h o r t - f a l l t o p r e s e n t an image o f f a i r n e s s and economic v e r i f i c a t i o n , t h e government i n t r o d u c e d t h e pr o p o s e d s e c t i o n 245. I n summary, i t can be seen t h a t t h e p o l i t i c a l and s o c i a l c o n t e x t w i t h i n w h i c h t h e t a x r e f o r m measures, and i n p a r t i c u l a r , t h e GAAR, was f o r m u l a t e d was v e r y i n f l u e n t i a l i n d e t e r m i n i n g t h e i n t r o d u c t i o n , s t r u c t u r e and p r e s e n t a t i o n o f t h e package. CHAPTER IV ECONOMIC CONTEXT A. ECONOMIC CONDITIONS A t t h e t i m e o f t h e i n t r o d u c t i o n o f s e c t i o n 245 t h e Canadian economy was i n a p r e c a r i o u s p o s i t i o n . I t was s t i l l i n a s t a t e o f r e c o v e r y from t h e r e c e s s i o n o f t h e e a r l y 1980s w h i c h had been caused by t h e w e s t e r n - w o r l d o i l c r i s i s and t h e p o l i c y r e s p o n s e s t h e r e t o . By 1987 t h e economy had improved somewhat from t h e low re a c h e d i n 1984/5 when t h e d e f i c i t (measured by debt-to-GDP r a t i o ) peaked a t $38.3 b i l l i o n . ^ However, t h i s does n o t i m p l y t h a t t h e C a n a d i a n economy was anywhere near t o b e i n g r e g a r d e d as h e a l t h y by t h e t i m e o f t h e t a x r e f o r m package i n June 1987 - as e v i d e n c e d by t h e f o l l o w i n g " s o b e r i n g f i g u r e s " / f e d e r a l d e f i c i t ($29.3 b i l l i o n ) , p u b l i c debt ($293.8 b i l l i o n ) , a n n u a l f e d e r a l d e b t c h a r g e s ($28.5 b i l l i o n ) and GDP ($537.8 b i l l i o n ) . ' The s i g n i f i c a n c e o f t h e s e f i g u r e s can be u n d e r s t o o d i f e x p l a i n e d i n lay-man's t e r m s , namely, t h a t t h e s t a t e was b a s i c a l l y i n t h e p o s i t i o n o f b e i n g "mortgaged t o t h e h i l t " ^ ( w i t h t h e p u b l i c debt b e i n g t h r e e t i m e s b u d g e t a r y revenues) and had a d e f i c i t t h a t was ' Canada, Department o f F i n a n c e , Tax Reform 1987: Economic & F i s c a l Outlook (Ottawa: t h e Department, June 18, 1987) a t 40-1 (C h a r t 5.2). 2 S t i k e m a n , E l l i o t , Tax Reform '87: an Analysis, Canada Tax S e r v i c e , S p e c i a l R e l e a s e , J u l y 17, 1987 (Don M i l l s : R i c h a r d De Boo, 1987) a t 1. ' F i g u r e s c o n t a i n e d w i t h i n Tax Reform 1987: Economic and F i s c a l Outlook, supra, n o t e 1. Stikema n , supra, n o t e 2 a t 1. s u b s t a n t i a l l y l a r g e r t h a n t h e U.S. d e f i c i t , i n f a c t , p r o b a b l y t w i c e as g r e a t i f t h e p r o v i n c e s and s t a t e s were t a k e n i n t o t h e comparison.5 However, d e s p i t e such f a c t o r s , t h e government s t i l l a t t e m p t e d t o p a i n t a b r i g h t o v e r v i e w o f t h e s t a t e o f t h e Canadian economy, w i t h even more e n t h u s i a s t i c p r o j e c t i o n s b e i n g a d v o c a t e d r e g a r d i n g i t s f u t u r e performance.^ However, t h e b u s i n e s s w o r l d was n o t t o be c o n v i n c e d o f t h i s r o s y p i c t u r e , as i n s t e a d i t r e c e i v e d t h e government's comments w i t h s c e p t i c i s m and r e s e r v a t i o n . ^ 5 T h i s o b s e r v a t i o n was made by t h e S t a n d i n g Senate Committee on B a n k i n g , Trade and Commerce: Canada, Senate, Tax Reform '87: Report of the Standing Committee on Banking, Trade and Commerce, tabled December 1, 1987 (Don M i l l s : R i c h a r d De Boo, 1987) a t 31. ^ A l t h o u g h , even t h e government had t o admit t h a t t h e pace o f d e f i c i t r e d u c t i o n had slowed down by 1986/7, a l t h o u g h , o f c o u r s e , i t a t t r i b u t e d t h i s t o e x t e r n a l , i n t e r n a t i o n a l f a c t o r s : Tax Reform 1987: The Economic and Fiscal Outlook, s u p r a n o t e 1, a t 35-36. ^ See f o r example, o b s e r v a t i o n s made by t h e S t a n d i n g Committee on F i n a n c e and Economic A f f a i r s : Canada, House o f Commons, Tax Reform '87: Report of the Standing Committee on Finance and Economic A f f a i r s tabled in the House of Commons on November 16, 1987 (Don M i l l s : R i c h a r d De Boo, 1987) ["Blenkarn R e p o r t " ] a t 32-3: [ t ] h e y [ i . e . some economic r e s e a r c h g r o u p s ] were c o n c e r n e d t h a t t h e economic p r o j e c t i o n s p r e s e n t e d i n t h e White Paper may be t o o o p t i m i s t i c , and t h a t t h e d e f i c i t c o u l d t u r n o u t t o be l a r g e r i f t h e economy p e r f o r m s worse t h a n p r o j e c t e d . I t was n o t e d t h a t t h e y i e l d from b a s e - b r o a d e n i n g measures i s u n c e r t a i n , and c o u l d be l o w e r t h a n p r o j e c t e d . The c o n c e r n about t h e p r o j e c t e d s i z e o f t h e f e d e r a l d e f i c i t was s h a r e d by a number of r e p r e s e n t a t i v e s o f t h e b u s i n e s s community. See a l s o comments made by t h e S t a n d i n g Senate Committee on B a n k i n g , Trade and Commerce, Report, supra, n o t e 5 a t 31. F o r a more d e t a i l e d d i s c u s s i o n on t h e economic background, see D. H a r t l e , The Expenditure Budget Process of the Government of Canada: a Public-Choice Rent-Seeking Perspective, C a n a d i a n Tax A g a i n s t t h i s background, i t i s pr o p o s e d t h a t s e c t i o n 245 be c o n s i d e r e d t o d e t e r m i n e t h e i n f l u e n c e , i f any, t h a t such p r e v a i l i n g c o n d i t i o n s may have had on t h e enactment o f t h e p r o v i s i o n . B. INFLUENCE ON SECTION 245 An i m p o r t a n t e f f e c t o f t h e a d v e r s e economic c o n d i t i o n s may have been t h e g a r n e r i n g o f p u b l i c a n i m o s i t y a g a i n s t t a x a v o i d a n c e schemes. A t t i m e s o f l a r g e d e f i c i t s and h i g h i n t e r e s t r a t e s t h e r e i s an i n c r e a s i n g s o c i a l v i e w t h a t a r t i f i c i a l t a x p l a n n i n g imposes u n d e s e r v e d c o s t s on o t h e r Canadians.^ T h i s i s perhaps r e l a t e d t o t h e i n c r e a s e i n t a x a v o i d a n c e w h i c h a d v e r s e economic c o n d i t i o n s may cause. O b v i o u s l y t a x p a y e r s ( n o t a b l y p r o f i t a b l e c o r p o r a t i o n s and h i g h - e a r n i n g i n d i v i d u a l s who can a f f o r d t h e f e e s o f t a x p r o f e s s i o n a l s and whose a t t e m p t s a t m i t i g a t i o n o f t h e i r t a x b i l l s a r e f i n a n c i a l l y v i a b l e ) a r e more l i k e l y t o e x e r c i s e c a u t i o n o v e r t h e i r e x p e n d i t u r e (eg. s e e k i n g ways t o m i n i m i z e t h e i r t a x l i a b i l i t i e s ) i n t i m e s o f economic h a r d s h i p . However, i t must be s t a t e d t h a t t h e r e i s no means a v a i l a b l e t o pr o v e such an h y p o t h e s i s e m p i r i c a l l y as t h e e x t e n t , i n revenue Paper No.81 ( T o r o n t o : Canadian Tax F o u n d a t i o n , 1988) c h . 1. 2 R.D. Brown e t a i , "GAAR and Tax P r a c t i c e : More Q u e s t i o n s Than Answers" i n Report of Proceedings of F o r t y - F i r s t Tax Conference, 1989 Co n f e r e n c e R e p o r t ( T o r o n t o : C a n a d i a n Tax F o u n d a t i o n , 1990) 11:1 a t 11:5. terms, o f t a x a v o i d a n c e cannot be e s t i m a t e d w i t h any degree o f a c c u r a c y , n or can i t be p r o v e n whether i t i s more p r e v a l e n t a t any t i m e compared w i t h t h e p a s t . ' However, i n r e s p e c t o f s e c t i o n 245, s u p p o r t f o r such a p r o p o s i t i o n can be g l e a n e d from s e v e r a l comments made by t h e government t o t h e e f f e c t t h a t t a x a v o i d a n c e was rampant i n t h e immediate y e a r s p r i o r t o 1987.''° I n o t h e r words, i t would appear t h a t t h e i n c r e a s e i n a g g r e s s i v e t a x p l a n n i n g i n t h e 1980s c o i n c i d e d w i t h h a r s h economic c o n d i t i o n s . However, even i f one was t o a c c e p t t h e government's s t a t e m e n t s as b e i n g a c c u r a t e ( a r g u a b l y , u n l i k e l y , b e a r i n g i n mind t h e m o t i v e s o f t h e government i n a l l e g i n g such abuse, namely t o j u s t i f y t h e enactment o f s e c t i o n 245), one s h o u l d be e x t r e m e l y c a u t i o u s i n d r a w i n g any c o n c l u s i o n s , as such l i n k a g e i s perhaps o n l y f o r t u i t o u s , w i t h o t h e r f a c t o r s b e i n g more i m p o r t a n t i n d e t e r m i n i n g t h e p r o p e n s i t y t o a v o i d t a x . N e v e r t h e l e s s , i f one ' B . J . A r n o l d & J.R. W i l s o n , "The G e n e r a l A n t i - A v o i d a n c e R u l e — P a r t 2" (1988) 3 6 Canadian Tax Journal 1123 a t 1128. F u r t h e r m o r e , i t has been s t a t e d t h a t e m p i r i c a l d a t a d e t a i l i n g l o s s e s i n revenue a r e " f a r t o o s k e t c h y t o s u p p o r t any c o n v i n c i n g c o n c l u s i o n s " : i b i d . °̂ See f o r example, comments made by Mr. J i m W i l s o n b e f o r e t h e S t a n d i n g Committee on F i n a n c e and Economic A f f a i r s , supra, n o t e 7 a t 128: " . . . o v e r t h e l a s t c o u p l e o f y e a r s ... t a x p a y e r s a r e becoming a b i t more a g g r e s s i v e t h a n t h e y have been h i s t o r i c a l l y " and D.A. Dodge, "Tax Reform and t h e A n t i - A v o i d a n c e P r o p o s a l s " 1987 B r i t i s h Columbia Tax Conference, t a b 4 a t 2-3: " W i t h i n t h e Canadian commercial community t h e r e has d e v e l o p e d a p r o f u s i o n o f s o p h i s t i c a t e d t a x - m o t i v a t e d s t r a t e g i e s i n v o l v i n g v a r i o u s t e c h n i c a l p r o v i s i o n s t h a t y i e l d u n i n t e n d e d and s i g n i f i c a n t t a x advantages." s u p p o r t s t h e t h e o r y t h a t such a c o r r e l a t i o n c o u l d e x i s t between t a x a v o i d a n c e and t h e economy, t h e n t h i s may a s s i s t i n e x p l a i n i n g why t h e government f e l t t h e need t o i n t r o d u c e s e c t i o n 245. I n o t h e r words, t h e i n c i d e n c e o f t a x a v o i d a n c e i n c r e a s e d , due perhaps t o a d v e r s e economic c o n d i t i o n s , w h i c h t o g e t h e r w i t h t h e p r e v a i l i n g s o c i o - p o l i t i c a l e n v i r o n m e n t , f o r c e d t h e government t o t a k e c o r r e c t i v e a c t i o n and i n t r o d u c e s e c t i o n 245. To r e i t e r a t e , one r e s u l t o f t h i s p o s s i b l e i n c r e a s e i n t a x a v o i d a n c e was a g r o w i n g p u b l i c r e s e n t m e n t a g a i n s t such t a x - m i t i g a t i o n schemes. G e n e r a l l y , t h i s i s p a r t i c u l a r l y p r e v a l e n t i n t i m e s o f h a r s h economic c o n d i t i o n s . I f t h e m a j o r i t y o f t a x p a y e r s a r e s u b j e c t e d t o r e d u c e d s p e n d i n g and h i g h e r t a x e s i n an a t t e m p t t o improve t h e economy, i t i s f a i r t o assume t h a t t h e y do not l o o k f a v o u r a b l y upon t h o s e who do n o t s u f f e r i n a l i k e manner and who i n s t e a d f i n d ways t o m i n i m i z e t h e i r t a x l i a b i l i t i e s , t h u s a d d i n g t o t h e t a x burden o f everyone e l s e . E v i d e n c e t h a t t h e s e a t t i t u d e s were f o s t e r e d d u r i n g t h e h a r s h economic c o n d i t i o n s o f t h e 1980s was t h e i n c r e a s e d p u b l i c i t y w h i c h t a x a v o i d e r s a t t r a c t e d d u r i n g t h i s p e r i o d . F o r example, t h e media r e p e a t e d l y h i g h l i g h t e d t h e v a s t number o f t a x p a y e r s who a v o i d e d p a y i n g t a x . " T h i s c u l m i n a t e d i n a g e n e r a l p u b l i c For example, J . M c A r t h u r , "Tax Reform i s E a s i e r S a i d Than Done" Toronto Star (19 August 1984) B l ; " W i l s o n May Opt F o r ' L i m i t on Tax P r e f e r e n c e s ' " Halifax Chronicle Herald (14 November 1985) 58 and "5,978 P a i d No '85 Tax on Income" The Globe and Mail (23 December 1987) A9. v i e w t h a t t h e t a x system was u n f a i r C o n s e q u e n t l y , t h i s p u t p r e s s u r e on t h e government t o t a k e a c t i o n t o r e c t i f y t h i s p e r c e i v e d u n f a i r n e s s . I t prompted t h e government t o produce a t a x r e f o r m package w h i c h was p r e s e n t e d and s t r u c t u r e d t o be p o l i t i c a l l y a p p e a l i n g t o t h e e l e c t o r a t e . I n p a r t i c u l a r , t h e government sought t o p r e s e n t t h e package as p r o m o t i n g a f a i r e r system, e s p e c i a l l y , t h e s h i f t i n g o f t h e t a x burden from low and m i d d l e - c l a s s t a x p a y e r s t o t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . S e c t i o n 245 was an i m p o r t a n t element i n t h e achievement o f t h e s e o b j e c t i v e s . I t c o n t r i b u t e d b o t h c o n c e p t u a l l y ( i e . t h e p r o v i s i o n i n i t s own r i g h t and as p a r t o f t h e p l e t h o r a o f c o r p o r a t e b a s e - b r o a d e n i n g measures) and e c o n o m i c a l l y ( i e . a s s i s t i n g i n t h e f i n a n c i a l v e r i f i c a t i o n o f t h e c l a i m o f an i n c r e a s e d c o r p o r a t e t a x burden) i n t h e f o r m u l a t i o n o f t h i s image o f f a i r n e s s . The u t i l i s a t i o n o f t h e r u l e i n t h i s way c o n t r i b u t e d t o a f a v o u r a b l e p o l i t i c a l c l i m a t e b e i n g c r e a t e d f o r t h e enactment o f s e c t i o n 245. Thus, t h e p r e v a i l i n g economic and p o l i t i c a l e nvironment p r o v i d e d an impetus f o r t h e i n t r o d u c t i o n o f t h e r u l e . F u r t h e r m o r e , t h e y encouraged t h e government t o t a k e a f i r m s t a n c e and d e f l e c t t h e p r e s s u r e t h a t P o l l s c o n d u c t e d c o n c l u d e d t h a t Canadians b e l i e v e d t h a t t h e t a x system s h o u l d be more f a i r : s e v e n t y - s i x p e r c e n t o f t h o s e s u r v e y e d t h o u g h t t h e system was u n f a i r : " P o l l S p e l l e d T r o u b l e f o r Tax-Reform P l a n s " Montreal Gazette (25 J u l y 1987). A n o t h e r s u r v e y r e v e a l e d t h a t s e v e n t y p e r c e n t o f t h o s e q u e s t i o n e d p e r c e i v e d t h a t l a r g e c o r p o r a t i o n s d i d n o t pay t h e i r f a i r s h a r e and s e v e n t y - s i x p e r c e n t t h o u g h t t h e r i c h were u n d e r t a x e d : J . Ferguson, "Most Canadians Oppose Tax Reform P r o p o s a l s " Calgary Herald (21 March 1987) A3. was e x e r t e d by t h e t a x p r o f e s s i o n and b u s i n e s s community t o w i t h d r a w / s u b s t a n t i a l l y a l t e r t h e r u l e d u r i n g t h e P a r l i a m e n t a r y l e g i s l a t i v e p r o c e s s . R e l a t e d t o t h e impact on p u b l i c a t t i t u d e s o f t a x m i t i g a t i o n i s t h e i n f l u e n c e o f t h e economic environment on t h e i n t e r p r e t a t i o n o f s e c t i o n 245. To a m p l i f y . Revenue Canada, i n i t s a d m i n i s t r a t i o n o f t h e r u l e , and t h e j u d i c i a r y , i n i n t e r p r e t i n g t h e p r o v i s i o n , may be a f f e c t e d by t h e economic s e t t i n g . Thus, a d v e r s e economic c o n d i t i o n s may e x p l a i n Revenue Canada's a p p a r e n t a g g r e s s i v e a t t i t u d e t o t a x p l a n n i n g and consequent r e l i a n c e on t h e r u l e t o d e f e a t t a x - m i n i m i z a t i o n t r a n s a c t i o n s . As r e g a r d s t h e l a t t e r , a l t h o u g h t h e p r o v i s i o n has n o t y e t been j u d i c i a l l y c o n s i d e r e d , i t i s f o r e s e e a b l e t h a t t h e economic s u r r o u n d i n g s w i l l i n f l u e n c e t h e i n t e r p r e t a t i o n g i v e n t o s e c t i o n 245. A n o t h e r p o t e n t i a l impact o f t h e a d v e r s e economic c o n d i t i o n s was t h e i n f l u e n c e t h e y may have had i n d e t e r m i n i n g t h e means a v a i l a b l e f o r e f f e c t i n g " l e g a l " a v o i d a n c e t h r o u g h s p e c i a l t a x i n c e n t i v e s . However, i t i s s u b m i t t e d t h a t t h e l i n k a g e between a d v e r s e c o n d i t i o n s and t h e p r e v a l e n c e o f t a x e x p e n d i t u r e s i s a t a b e s t a tenuous one as o t h e r f a c t o r s seem t o p l a y a major r o l e . So, f o r example, i t would appear t h a t t h e p r o l i f e r a t i o n o f t a x i n c e n t i v e s i n t h e e a r l y 1970s was t r a c e a b l e t o o t h e r f a c t o r s , n o t a b l y p o l i t i c a l and s o c i a l c o n s i d e r a t i o n s / ' The f i n a l p o s s i b l e i n f l u e n c e o f t h e economy on t a x a v o i d a n c e , and i n p a r t i c u l a r , s e c t i o n 245, was t h e p o l i t i c a l p r e s s u r e e x e r t e d on t h e government n o t t o use t h e e x e r c i s e as a means o f i n c r e a s i n g t o t a l r e v e n u e s . W i t h b u s i n e s s r e p e a t e d l y e x p r e s s i n g i t s c o n c e r n o v e r t h e l e v e l o f t h e d e f i c i t , and Canadian t a x p a y e r s b e l i e v i n g t h e d e f i c i t s h o u l d be r e d u c e d , t h e government was p u t i n a d i f f i c u l t p o s i t i o n . I n l i g h t o f t h e l o o m i n g f e d e r a l e l e c t i o n , i t w i s h e d t o s t r u c t u r e t h e t a x r e f o r m p r o p o s a l s t o be a p p e a l i n g t o t h e e l e c t o r a t e t o b o l s t e r i t s f l a i l i n g s u p p o r t . 1' A r e l a t i v e l y easy way o f a c h i e v i n g t h i s o b j e c t i v e would be t o g i v e t a x - s a v i n g s t o t h e e l e c t o r a t e . However, due t o t h e p r e s s u r e d i s c u s s e d above, i t c o u l d n o t 1' F o r example, a r g u a b l y i t was an a t t e m p t t o p l a c a t e some o f t h e b u s i n e s s community's o u t r a g e o v e r what i t r e g a r d e d as t h e Trudeau government's g r o w i n g commitment t o s t a t e i n t e r v e n t i o n i n t h e economy: D.A. W o l f e , " P o l i t i c s , t h e D e f i c i t and Tax Reform" (1988) 26 Osgoode Hall Law Journal 347 a t 364. 1'* For example, W.A. W i l s o n , " T o r i e s P i n Hopes on Tax Reform" Winnepeg Free Press (23 March 1987) 6. cf. C. H a r r i s , "How Four E c o n o m i s t s Rate Tax P r o p o s a l s " Financial Post (22 June 1987) 6. 15 S e v e n t y - f i v e p e r c e n t o f t h o s e s u r v e y e d t h o u g h t t h a t t h e government's t o p economic p r i o r i t y s h o u l d be g e t t i n g t h e d e f i c i t under c o n t r o l : " P o l l S p e l l e d T r o u b l e f o r Tax-Reform P l a n s " supra, n o t e 12. See g e n e r a l l y . C h a p t e r I I I , " P o l i t i c a l and S o c i a l C o n t e x t " and i n p a r t i c u l a r , s e c t i o n ( i i ) The Looming E l e c t i o n . implement t h i s aim i n a way t h a t would i n c r e a s e t h e a l r e a d y b u l g i n g d e f i c i t . The government p e r c e i v e d t h i s would i n v o l v e p o l i t i c a l c o s t s w h i c h would o u t w e i g h t h e b e n e f i t s o f any t a x - s a v i n g s . T h e r e f o r e , i t committed i t s e l f t o produce a f i s c a l l y n e u t r a l t a x r e f o r m package. F u r t h e r m o r e , t h e t a x r e f o r m package was d i v i d e d i n t o two d i s t i n c t s t a g e s , each one b e i n g f i s c a l l y n e u t r a l w i t h i n i t s own r i g h t . I n r e l a t i o n t o Stage One, t h e GAAR p l a y e d an i m p o r t a n t p a r t i n t h e achievement o f t h i s o b j e c t i v e . T h i s was p r i m a r i l y due t o t h e i n c r e a s e d revenue t h e p r o v i s i o n was e s t i m a t e d t o g e n e r a t e : $2,240 m i l l i o n o v e r t h e p e r i o d 1988-92.''° T h i s i n c r e a s e was u n d o u b t e d l y t h e h i g h e s t o v e r a l l and m a r k e d l y t h e g r e a t e s t d u r i n g t h e f i r s t two y e a r s ( t h e r e a f t e r , i t was e s t i m a t e d t h a t t h e revenue g a i n e d i n t h e r e d u c t i o n o f C a p i t a l C o s t A l l o w a n c e would i n c r e a s e and f i n a l l y o v e r t a k e t h e g a i n s under GAAR) o f t h e c o r p o r a t e b a s e - b r o a d e n i n g measures.^' However, t h e s e f i g u r e s p a l e i n t o s i g n i f i c a n c e somewhat when one c o n s i d e r s t h e i n c r e a s e s t h a t were p r o j e c t e d The w h i t e paper p r o p o s a l s were c l a i m e d t o be f i s c a l l y n e u t r a l : "The c u m u l a t i v e impact o f t h e t a x r e f o r m and r e l a t e d measures on t h e d e f i c i t and n e t d e b t o v e r t h e 1988-89 and 1991- 92 p e r i o d i s n e g l i g i b l e . " Canada, Department o f F i n a n c e , Tax Reform 1987 (Ottawa: t h e Department, June 18, 1987) a t 73. However, i n r e a l i t y , t h e o v e r a l l package was n o t n e u t r a l ( o r t h e impact n e g l i g i b l e ) : i n 1988-89, t h e r e f o r m s g e n e r a t e d o v e r $1 b i l l i o n e x t r a revenue. I n 1989-90, t h e r e was a s h o r t - f a l l o f o v e r $1 b i l l i o n - t h i s amount a d d i n g t o t h e a l r e a d y l a r g e d e f i c i t . Canada, Department o f F i n a n c e , Tax Reform 1987: Income Tax Reform (Ottawa: t h e Department, June, 18, 1987) a t 67. For q u a l i f i c a t i o n o f t h e s e f i g u r e s , see C h a p t e r I I I , n o t e s 75-6 and accompanying t e x t . from changes t o t h e f e d e r a l s a l e s t a x and a c c e l e r a t i o n o f t a x payments.20 However, i t i s s u b m i t t e d t h a t t h e GAAR s t i l l made an i m p o r t a n t c o n t r i b u t i o n as $2 b i l l i o n i s c e r t a i n l y n o t an i n s i g n i f i c a n t amount t o be p a s s e d o v e r l i g h t l y . T h e r e f o r e , as a r e s u l t o f t h e s e measures ( i e . b a s e - b r o a d e n i n g p r o p o s a l s and changes t o t h e f e d e r a l s a l e s t a x and a c c e l e r a t i o n o f t a x payments) t h e government was a b l e t o f i n a n c e t h e r e d u c t i o n i n t h e r a t e s o f t h e p e r s o n a l and c o r p o r a t e income t a x e s , and be i n an improved n e t f i s c a l p o s i t i o n . C. CONCLUSION To c o n c l u d e t h e r e f o r e , t h e economic environment p l a y e d an i n f l u e n t i a l r o l e i n t h e i n t r o d u c t i o n , s t r u c t u r e and p r e s e n t a t i o n o f t h e t a x r e f o r m package, and t h e GAAR i n p a r t i c u l a r . The most n o t a b l e example was t h e a f f e c t o f a d v e r s e economic c o n d i t i o n s on p u b l i c a t t i t u d e s . I n p a r t i c u l a r , t h e economic environment p e r h a p s caused t h e i n c i d e n c e o f t a x a v o i d a n c e t o i n c r e a s e . Enhanced media c o v e r a g e r e g a r d i n g t h i s i n c r e a s e a r g u a b l y f o s t e r e d a growth i n p u b l i c a n i m o s i t y towards would-be a v o i d e r s . T h i s r e s u l t e d i n a g e n e r a l p u b l i c a t t i t u d e t h a t t h e t a x system was u n f a i r and, i n p a r t i c u l a r , t h e b e l i e f t h a t h i g h - e a r n i n g i n d i v i d u a l s and l a r g e c o r p o r a t i o n s s h o u l d pay more t a x . T h i s 2° T o t a l l i n g $2,705 m i l l i o n i n 1988-89 a l o n e and $7,485 m i l l i o n o v e r t h e p e r i o d 1988-92: Tax Reform 1987, supra, n o t e 17 a t 75. 21 For example, i n 1988-89, t h e n e t o v e r a l l i m p a ct o f t h e t a x r e f o r m s was an added $1 b i l l i o n r a i s e d : supra, n o t e 17. e x e r t e d p r e s s u r e on t h e government t o r e c t i f y t h e s i t u a t i o n . The government was v u l n e r a b l e t o such p o l i t i c a l p r e s s u r e a t t h e t i m e o f t h e 1987 t a x r e f o r m s due t o i t s d e s i r e t o b o l s t e r i t s a p p e a l w i t h t h e e l e c t o r a t e i n l i g h t o f a l o o m i n g e l e c t i o n . Thus, t h e government was prompted t o produce a t a x r e f o r m package w h i c h i t p r e s e n t e d t o t h e e l e c t o r a t e as p r o m o t i n g a f a i r e r system. The GAAR was an i n t e g r a l p a r t i n t h e p r e s e n t a t i o n o f such an image, b o t h c o n c e p t u a l l y and f i n a n c i a l l y . However, i t s h o u l d be e x e m p l i f i e d t h a t t h e i n f l u e n c e o f t h e economic c o n t e x t i n t h e above s c e n a r i o was l a r g e l y i n d i r e c t . The a d v e r s e economic c o n d i t i o n s a l o n e d i d n o t cause t h e i n t r o d u c t i o n o f t h e t a x r e f o r m package, i n c l u d i n g t h e GAAR. To e x p l a i n , t h e economic c o n t e x t had an impact on p u b l i c p e r c e p t i o n s , w h i c h i n t u r n a f f e c t e d p u b l i c a t t i t u d e s . The s o c i o - p o l i t i c a l c o n t e x t (eg. t h e l o o m i n g e l e c t i o n , t h e government's f l a i l i n g s u p p o r t ) meant t h a t t h e government f e l t t h e need t o re s p o n d t o t h e p o l i t i c a l p r e s s u r e e x e r t e d by t h e e l e c t o r a t e . I f t h e s o c i o - p o l i t i c a l c o n t e x t had been d i f f e r e n t , f o r example, t h e government was newly e l e c t e d and/or was e l e c t o r a l l y p o p u l a r , t h e n i t perhaps would n o t have been q u i t e so v u l n e r a b l e t o p u b l i c p r e s s u r e . C o n s e q u e n t l y , i n t h e s e c i r c u m s t a n c e s , i t may n o t have f e l t t h e need t o i n t r o d u c e a t a x r e f o r m package w h i c h was gea r e d t o be e l e c t o r a l l y a p p e a l i n g . T h e r e f o r e , i t can be s a i d t h a t t h e economic c o n d i t i o n s i n d i r e c t l y p r o v i d e d an impetus f o r t h e t a x r e f o r m package t h r o u g h t h e s o c i o - p o l i t i c a l e n v i r o n m e n t . Other i n f l u e n c e s o f t h e economic c o n d i t i o n s i n c l u d e t h e l i m i t a t i o n s imposed on t h e government i n p r o d u c i n g a t a x package t h a t promoted f a i r n e s s . I n p a r t i c u l a r , f o r p o l i t i c a l r e a s o n s i t had t o produce a f i s c a l l y n e u t r a l t a x r e f o r m package - i t c o u l d n o t f i n a n c e t h e r a t e r e d u c t i o n s by a d d i n g t o t h e d e f i c i t . Such a move would have i n c u r r e d p o l i t i c a l c o s t s e x c e e d i n g t h e b e n e f i t s from t h e t a x s a v i n g s . Moreover, t h e government d i v i d e d t h e t a x r e f o r m package i n t o two d i s t i n c t p a r t s . B o t h o f t h e s e had t o be i n d e p e n d e n t l y f i s c a l l y n e u t r a l . I n r e l a t i o n t o Stage One, t h e GAAR p l a y e d an i m p o r t a n t r o l e i n t h e achievement o f t h i s o b j e c t i v e , p a r t i c u l a r l y as r e g a r d s t h e i n c r e a s e d revenue i t was e s t i m a t e d t o g e n e r a t e . A g a i n i t s h o u l d be n o t e d t h a t t h e i n f l u e n c e o f t h e economic c o n t e x t appears t o be i n d i r e c t . The government c o u l d have i n c r e a s e d t h e t a x s a v i n g s and added t o t h e d e f i c i t i n t h e p r a c t i c a l sense. However, i t was because o f t h e s o c i o - p o l i t i c a l environment t h a t t h i s o p t i o n was u n a t t r a c t i v e . I n p a r t i c u l a r , t h i s environment meant t h a t t h e government was v u l n e r a b l e t o p o l i t i c a l p r e s s u r e . C o n s e q u e n t l y , due t o a d v e r s e p o l i t i c a l r e a c t i o n t o i n c r e a s i n g t h e d e f i c i t , t h e government chose t o implement d i m i n i s h e d t a x s a v i n g s and n o t add t o t h e d e f i c i t . T h i s b a l a n c i n g o f p o l i t i c a l c o s t s and b e n e f i t s i s r e f l e c t i v e o f t h e p r o c e s s u n d e r t a k e n by governments t o maximize t h e i r p o l i t i c a l s u p p o r t . O v e r a l l , i t i s s u b m i t t e d t h a t t h e s e economic c o n d i t i o n s i n f l u e n c e d t h e p r o p o s e d s e c t i o n 245. As d i s c u s s e d above, t h e economic environment i n d i r e c t l y p r o v i d e d an impetus f o r t h e i n t r o d u c t i o n o f t h e t a x r e f o r m package and i t s p r e s e n t a t i o n as p r o m o t i n g a f a i r e r system. The GAAR was an i n t e g r a l p a r t o f t h i s package, e s p e c i a l l y i t s c o n t r i b u t i o n t o t h e f u l f i l m e n t o f t h e o b j e c t i v e s o f t h e t a x r e f o r m e x e r c i s e . CHAPTER V HISTORICAL CONTEXT A. INTRODUCTION I t i s p r o p o s e d t h a t t h e h i s t o r i c a l c o n t e x t be b r i e f l y c o n s i d e r e d i n t h e a n a l y s i s o f s e c t i o n 245. I n p a r t i c u l a r , two a s p e c t s o f t h i s c o n t e x t s h o u l d be d i s c u s s e d . F i r s t , t h e l e g a l background t o t h e enactment o f s e c t i o n 245 s h o u l d be h i g h l i g h t e d . T h i s w i l l i n v o l v e t r a c i n g t h e development o f a n t i - a v o i d a n c e measures. B r i e f l y , v a r i o u s a t t e m p t s have been made i n Canada, b o t h a t t h e l e g i s l a t i v e and j u d i c i a l l e v e l , t o c u r b what i s now termed " a b u s i v e " a v o i d a n c e . A n a l y z i n g t h e p r e c u r s o r s t o s e c t i o n 245 s h o u l d r e v e a l t h e i n f l u e n c e o f such f a c t o r s i n r e l a t i o n t o , f o r example, t h e i n t r o d u c t i o n and fo r m a t o f t h e r u l e . The second component i s t h e s o c i a l and p o l i t i c a l background. I n p a r t i c u l a r , i t i s p r o p o s e d t h a t p r e v i o u s a t t e m p t s a t t a x r e f o r m i n Canada be d i s c u s s e d . I t i s f e l t t h a t t h e s e e x p e r i e n c e s i n f l u e n c e d t h e 1987 t a x r e f o r m e x e r c i s e , p a r t i c u l a r l y t h e s t r a t e g y adopted by t h e government i n f o r m u l a t i n g and s t r u c t u r i n g t h e t a x r e f o r m package. B. LEGAL BACKGROUND The Income Tax A c t c o n t a i n s a wide a r r a y o f a n t i - a v o i d a n c e p r o v i s i o n s , o f b o t h a s p e c i f i c ^ and g e n e r a l ^ n a t u r e . I t i s t h e ^ F o r a f u l l l i s t i n g o f t h e s p e c i f i c a n t i - a v o i d a n c e r u l e s i n e x i s t e n c e a t t h e t i m e o f t h e 1987 t a x r e f o r m p r o p o s a l s , see H.J. K e l l o u g h , "A D i s c u s s i o n on t h e White P a p e r ' s Proposed G e n e r a l A n t i - A v o i d a n c e R u l e " 1987 B r i t i s h Columbia Tax Conference, t a b 6 a t 18-22. The government c i t e d m i n i m i z i n g t h e need f o r t h e enactment o f s p e c i f i c a n t i - a v o i d a n c e r u l e s as a f a c t o r s u p p o r t i n g t h e i n t r o d u c t i o n o f t h e GAAR. I t c l a i m e d t h a t t h e o b j e c t i v e o f c o u n t e r a c t i n g each u n f o r s e e n t r a n s a c t i o n w i t h s p e c i f i c , prompt l e g i s l a t i v e r e s p o n s e s was p r a c t i c a l l y u n a t t a i n a b l e . F u r t h e r m o r e , i t a l l e g e d t h a t such r u l e s r e s u l t i n c o m p l e x i t y ; i n c r e a s e d e t a i l ; d i m i n i s h f l e x i b i l i t y ; c r e a t e a d d i t i o n a l u n i n t e n d e d l o o p h o l e s ; do n o t d e a l w i t h t r a n s a c t i o n s c o mpleted b e f o r e amendments become e f f e c t i v e ; undermine t a x p a y e r m orale and o f t e n a d v e r s e l y a f f e c t l e g i t i m a t e t r a n s a c t i o n s : Canada, Department o f F i n a n c e , Tax Reform 1987: Income Tax Reform (Ottawa: t h e Department, June 18, 1987) a t 129 and D.A. Dodge, "Tax Reform and t h e A n t i - A v o i d a n c e P r o p o s a l s " 1987 B r i t i s h Columbia Tax Conference, t a b 4 a t 3-4. F o r a g e n e r a l d i s c u s s i o n o f s p e c i f i c a n t i - a v o i d a n c e r u l e s , see Canada, "Report o f t h e R o y a l Commission on T a x a t i o n " v o l . 3 (Ottawa: Queen's P r i n t e r , 1966) [ " C a r t e r Commission R e p o r t " ] 553-6. The d e m e r i t s i d e n t i f i e d by t h e C a r t e r Commission R e p o r t a r e m i r r o r e d i n t h e government's r e a s o n i n g o u t l i n e d above. C o n s e q u e n t l y , i t would appear t h a t t h e government had a s t r o n g c a s e f o r s e e k i n g t o d i s c o n t i n u e i t s r e l i a n c e on s p e c i f i c a n t i - a v o i d a n c e r u l e s , t h u s r e i n f o r c i n g t h e n e c e s s i t y o f t h e GAAR. However, a c a v e a t s h o u l d perhaps be added as i t would appear t h a t an a d d i t i o n a l r e a s o n f o r t h e inadequacy o f s p e c i f i c r u l e s i s l a c k o f gove r n m e n t a l a c t i v i t y i n e n a c t i n g t h e s e r u l e s , even a f t e r i d e n t i f i c a t i o n o f abuses. One example i s t h e S c i e n t i f i c and R e s e a r c h Tax C r e d i t w h i c h was o n l y o f f i c i a l l y i n p l a c e f o r t e n months i n 1984. However, d u r i n g t h i s s h o r t p e r i o d o f t i m e , t h e program managed t o d r a i n $2.8 b i l l i o n from t h e f e d e r a l t r e a s u r y : L. McQuaig, Behind Closed Doors: How the Rich Won Control of Canada's Tax System . . . And Ended Up Richer (Markham, Ont.: V i k i n g , 1987) a t 265. Moreover, t h e L i b e r a l Government knew about t h e s e abuses w i t h i n t h r e e t o f o u r months o f t h e program b e i n g i n t r o d u c e d : i b i d , a t 267-8. However, i t chose t o do n o t h i n g about them, p r i m a r i l y f o r p o l i t i c a l r e a s o n s . I n p a r t i c u l a r , w i t h a f e d e r a l e l e c t i o n looming t h a t f a l l , t h e l a t t e r t h a t a r e o f g r e a t e r s i g n i f i c a n c e i n r e l a t i o n t o t h e new GAAR, f o r r e a s o n s g i v e n below. I t s h o u l d be n o t e d t h a t t h e new s e c t i o n 245 r e p e a l e d a number o f g e n e r a l r u l e s , namely s u b s e c t i o n 55(1) d e a l i n g w i t h a r t i f i c i a l o r undue r e d u c t i o n s i n c a p i t a l g a i n s o r a d d i t i o n s t o c a p i t a l l o s s e s ; s u b s e c t i o n s 245(1) and 245(1.1) d e a l i n g w i t h a r t i f i c i a l t r a n s a c t i o n s and s u b s e c t i o n 247(1) d e a l i n g w i t h d i v i d e n d s t r i p p i n g . D e s p i t e t h e i r r e p e a l , i t i s s u b m i t t e d t h a t s uch p r o v i s i o n s can be o f a s s i s t a n c e i n t h e a n a l y s i s o f t h e new s e c t i o n 245. F o r example, g u i d a n c e may be o b t a i n e d from t h e i r s u b s t a n c e ( p a r t i c u l a r l y i f a n a l o g o u s c o n c e p t s a r e used i n t h e new GAAR), a p p l i c a t i o n , a d m i n i s t r a t i o n , i n t e r p r e t a t i o n and p r o c e s s o f development. But a word o f c a u t i o n i n u s i n g t h e s e p r o v i s i o n s f o r t h e p u r p o s e s o f f u r t h e r i n g our u n d e r s t a n d i n g o f t h e new s e c t i o n 245 - t h e s e r u l e s were a l s o i n f l u e n c e d by, and t h e r e f o r e s h o u l d be i n t e r p r e t e d i n l i g h t o f , t h e e x t e r n a l c o n d i t i o n s p r e v a l e n t a t t h e r e l e v a n t t i m e . I t i s n o t p r o p o s e d t h a t t h e s e g e n e r a l a n t i - a v o i d a n c e r u l e s , and i n p a r t i c u l a r , t h e i r r e l e v a n c e t o t h e new s e c t i o n 245, be d i s c u s s e d government d i d not want t o r i s k t h e w r a t h o f t h e b u s i n e s s community by w i t h d r a w i n g o r l i m i t i n g t h e program, e s p e c i a l l y s i n c e i t had o n l y been i n t r o d u c e d a few months e a r l i e r : i b i d , a t 269. C o n s e q u e n t l y , t h e government's arguments r e g a r d i n g t h e i n a d equacy o f s p e c i f i c r u l e s a r e n o t as c l e a r - c u t as i t makes o u t . I n p a r t i c u l a r , t h e i s s u e i s c l o u d e d by e x t e r n a l f a c t o r s , s u ch as p o l i t i c a l and s o c i a l c o n d i t i o n s . 2 The most n o t a b l e b e i n g s e c t i o n 245, t h e p r o v i s i o n f o r m i n g t h e s u b j e c t m a t t e r o f t h i s p aper. i n t h i s t h e s i s due t o space c o n s t r a i n t s . A g r e a t d e a l o f l i t e r a t u r e has been w r i t t e n on t h e s e s e c t i o n s , and i t i s t o t h e s e t h a t t h e r e a d e r i s d i r e c t e d . ' I n a d d i t i o n , v a r i o u s j u d i c i a l d o c t r i n e s have d e v e l o p e d o v e r t h e y e a r s t o c u r b c e r t a i n t a x a v o i d a n c e schemes. The most n o t a b l e a r e t h e i n e f f e c t i v e t r a n s a c t i o n s d o c t r i n e , t h e sham t r a n s a c t i o n d o c t r i n e , t h e s u b s t a n c e o v e r form d o c t r i n e , t h e s t e p t r a n s a c t i o n d o c t r i n e , t h e b u s i n e s s purpose t e s t and, more r e c e n t l y , t h e Stuhart"* i n t e r p r e t i v e g u i d e l i n e s . ^ Moreover, t h e s e d o c t r i n e s , u n l e s s j u d i c i a l l y o v e r r u l e d , ' c o n t i n u e t o have t h e f o r c e o f law - t h e y have n o t been s u p p l a n t e d by s e c t i o n 245. I t i s t h e r e f o r e f e a s i b l e t h a t t h e y may be argued i n tandem w i t h t h e p r o v i s i o n i f a c a s e r e g a r d i n g i t s a p p l i c a t i o n e v e r r e a c h e s t h e c o u r t s . The ' F o r example, f o r a d e t a i l e d d i s c u s s i o n c o v e r i n g a l l t h e a f o r e m e n t i o n e d g e n e r a l p r o v i s i o n s , see B . J . A r n o l d & J.R. W i l s o n , "The G e n e r a l A n t i - A v o i d a n c e R u l e - P a r t 1" (1988) 36 Canadian Tax Journal 829 a t 842-8. More s p e c i f i c a l l y , as r e g a r d s s u b s e c t i o n 2 4 5 ( 1 ) , see, K e l l o u g h , supra, n o t e 1 a t 23- 39; s u b s e c t i o n 2 4 5 ( 1 . 1 ) , see W. Templeton, " A n t i - A v o i d a n c e and t h e C a p i t a l G a i n s Exemption: P a r t Two" (1986) 34 Canadian Tax Journal 446 a t 447-450 and s e c t i o n 247, see Templeton, i b i d , a t 450-4. ^ S t u b a r t I n v e s t m e n t s L i m i t e d v. The Queen [1984] C.T.C. 294, 84 D.T.C. 6305 (S.C.C.) [ c i t e d t o D.T.C.] 5 F o r a g e n e r a l d i s c u s s i o n o f t h e s e v a r i o u s d o c t r i n e s , see, f o r example, A r n o l d & W i l s o n , supra, n o t e 3 a t 852-69 and K e l l o u g h , supra, n o t e 1 a t 40-52. ' I n r e l a t i o n t o t h e r e j e c t i o n o f t h e b u s i n e s s p u r p o s e t e s t i n t h e Stubart c a s e , see i n f r a , n o t e 7 and accompanying t e x t . The s u b s t a n c e o v e r form d o c t r i n e was o m i t t e d from t h e S t u b a r t g u i d e l i n e s and t h u s a l s o i m p l i c i t l y r e j e c t e d ( n o t w i t h s t a n d i n g t h e subsequent d e c i s i o n o f R. v. Bronfman T r u s t [1987] 1 S.C.R. 32) . main v a l u e o f t h e s e d o c t r i n e s i n r e l a t i o n t o s e c t i o n 245 i s t h e i r r e f l e c t i o n o f t h e t r e n d o f j u d i c i a l a t t i t u d e s t owards t a x a v o i d a n c e . However, a l t h o u g h t h e s e j u d i c i a l t e s t s a r e n o t d i s c u s s e d i n d e t a i l , i t i s p r o p o s e d t h a t t h e b u s i n e s s p u r p o s e t e s t m e r i t s a n a l y s i s i n g r e a t e r d e p t h . The s i n g l i n g o u t o f t h i s t e s t i s j u s t i f i e d on t h e b a s i s t h a t t h e Stubart c a s e (which, i t i s w i d e l y a c c e p t e d , r e j e c t e d a b u s i n e s s purpose t e s t o f g e n e r a l a p p l i c a t i o n ' ' ) was i d e n t i f i e d by t h e government as an impetus f o r t h e i n t r o d u c t i o n o f t h e GAAR.° A c c o r d i n g l y , i t i n c o r p o r a t e d t h e b u s i n e s s p urpose t e s t w i t h i n s e c t i o n 245,' a l b e i t , i n a d i l u t e d form as a bona f i d e purpose test.^° However, doubts as t o t h e v a l i d i t y o f t h i s a p p a r e n t v e r i f i c a t i o n o f t h e n e c e s s i t y o f ' " I would t h e r e f o r e r e j e c t t h e p r o p o s i t i o n t h a t a t r a n s a c t i o n may be d i s r e g a r d e d f o r t a x p u r p o s e s s o l e l y on t h e b a s i s t h a t i t was e n t e r e d i n t o by a t a x p a y e r w i t h o u t an i n d e p e n d e n t o r bona f i d e b u s i n e s s p u r p o s e . " E s t e y , J . a t 6322. ° Tax Refoirm 1987: Income Tax Reform, supra, n o t e 1 a t 129. See, a l s o . Dodge, supra, note 1 a t 4. ' P a r a g r a p h 2 4 5 ( 3 ) ( a ) °̂ The o r i g i n a l v e r s i o n c o n t a i n e d a b u s i n e s s p u r p o s e t e s t , p a r a g r a p h 2 4 5 ( 2 ) ( a ) , b u t t h i s was changed t o a non-tax purpose t e s t i n t h e December 1987 amendments. The r e a s o n f o r t h i s a l t e r a t i o n was t o e x c l u d e t r a n s a c t i o n s w h i c h were n o t c a r r i e d o u t f o r " b u s i n e s s " p u r p o s e s , y e t were n o t p r i m a r i l y t a x m o t i v a t e d e i t h e r : Canada, Department o f F i n a n c e , Supplementary Information Relating to Tax Reform Measures (Ottawa: t h e Department, 16 December, 1987). However, t h e bona f i d e p u r p o s e s t e s t i s e s s e n t i a l l y t h e b u s i n e s s purpose t e s t i n a l l o t h e r r e s p e c t s , e x c e p t f o r t h i s s m a l l t e c h n i c a l amendment: D.A. Dodge, "A New and More Coherent Approach t o Tax A v o i d a n c e " (1988) 3 6 Canadian Tax Journal 1 a t 18-9. s e c t i o n 245 e x i s t . F i r s t , i t i s u n c l e a r t h a t a b u s i n e s s purpose t e s t d i d n o t e x i s t i n some sense pre-GAAR." F u r t h e r m o r e , i f t h e government was t h a t c o n c e r n e d about t h e r e j e c t i o n o f t h e b u s i n e s s purpose t e s t , why d i d i t w a i t so l o n g t o i n t r o d u c e one i n t h e shape o f s e c t i o n 245? To e x p l a i n , t h e Stubart d e c i s i o n was r e l e a s e d by t h e Supreme C o u r t o f Canada on 7 June 1984. However, t h e government d i d n o t i n t r o d u c e t h e GAAR u n t i l some t h r e e y e a r s l a t e r as p a r t o f t h e 1987 t a x r e f o r m package. A l l o w i n g f o r c o n s u l t a t i o n and f o r m u l a t i o n o f t h e r u l e , t h i s t i m e " Commentary q u e s t i o n e d t h e r e j e c t i o n o f t h e b u s i n e s s p u r p o s e t e s t i n Canada a f t e r t h e Stubart d e c i s i o n . I t i s c l e a r from t h e i n t e r p r e t a t i v e g u i d e l i n e s l a i d down by E s t e y , J . t h a t t h e t e s t would be r e l e v a n t i n d e t e r m i n i n g t h e a p p l i c a t i o n o f t h e fo r m e r s e c t i o n 245. Other uses o f t h e b u s i n e s s purpose t e s t have a l s o been mooted. F o r example, i t s a p p l i c a t i o n t o o t h e r p u r p o s e - r e l a t e d s e c t i o n s ( i n a d d i t i o n t o s e c t i o n 245) has been a d v o c a t e d and a l s o i t s a p p l i c a t i o n i n a s e r i e s o f t r a n s a c t i o n s o c c u r r i n g i n t h e c o u r s e o f complex c o r p o r a t e r e o r g a n i z a t i o n s : D.Y. T i m b r e l l , " P l a n n i n g A f t e r t h e S t u b a r t D e c i s i o n : t h e B u s i n e s s Purpose T e s t " i n Report of Proceedings of the Thirty- Sixth Conference, 1984 C o n f e r e n c e R e p o r t ( T o r o n t o : Canadian Tax F o u n d a t i o n , 1987) 89 a t 102-5. Governmental r e c o g n i t i o n o f t h e p o s s i b l e c o n t i n u e d e x i s t e n c e o f t h e b u s i n e s s purpose t e s t i s e v i d e n c e d by s t a t e m e n t s made by one Department o f F i n a n c e o f f i c i a l : Dodge, supra, n o t e 1 a t 13. The p e r c e i v e d s i g n i f i c a n c e o f t h e Stubart c a s e and t h e b u s i n e s s p u r p o s e t e s t was e v i d e n c e d by t h e a t t e n t i o n w h i c h t h e i s s u e a t t r a c t e d a t t h e 1984 A n n u a l C o n f e r e n c e o f t h e Canadian Tax F o u n d a t i o n : f o r example, S.E. Edwards, Q.C., " P l a n n i n g A f t e r t h e Stubart D e c i s i o n " , i n Report of Proceedings of the T h i r t y - S i x t h Conference, 1984 C o n f e r e n c e R e p o r t , i b i d , a t 78; W.J.A. Hobson, "New G u i d e l i n e s from t h e Supreme C o u r t o f Canada and Other C a n a d i a n C o u r t s " i b i d , a t 14 8; R.C. S t r o t h e r , " A v o i dance and E v a s i o n : t h e World Beyond Stubart", i b i d , a t 105 and T i m b r e l l , i b i d . p e r i o d s t i l l seems e x c e s s i v e F u r t h e r m o r e , i t may be q u e s t i o n e d whether t h e b u s i n e s s purpose t e s t i s t h e most a p p r o p r i a t e a n t i - a v o i d a n c e mechanism t o be i n c o r p o r a t e d i n t h e GAAR J ' O v e r a l l , t h e s e f a c t o r s c a s t doubts on t h e p r o p o s i t i o n t h a t t h e r e j e c t i o n o f a b u s i n e s s purpose t e s t i n Stubart and t h e consequent i n c o r p o r a t i o n o f such a t e s t w i t h i n t h e GAAR was a v a l i d j u s t i f i c a t i o n f o r t h e i n t r o d u c t i o n o f t h e r u l e . However, one may argue t h a t i t was n o t t h e Stubart c a s e i t s e l f t h a t t h e government o b j e c t e d t o , b u t t h e p r o l i f e r a t i o n o f t a x a v o i d a n c e t h a t o c c u r r e d as a d i r e c t r e s u l t o f t h e judgment. T h i s l a t t e r p r o p o s i t i o n may e x p l a i n t h e d e l a y between Stubart and t h e GAAR as i t i n v o l v e s a g r e a t e r p e r i o d o f t i m e t o d e t e r m i n e t h e e f f e c t s o f t h e c a s e , r a t h e r t h a n j u s t t h e case i t s e l f . See, f o r example, D.A. Ward & M.C. C u l l i t y , "Abuse o f R i g h t s and t h e B u s i n e s s Purpose T e s t " (1981) 29 Canadian Tax Journal 451 a t 473: The i n t r o d u c t i o n o f t h e b u s i n e s s p u r p o s e t e s t would i n e v i t a b l y c r e a t e a s i g n i f i c a n t degree o f u n c e r t a i n t y and u n p r e d i c t a b i l i t y i n t h e a p p l i c a t i o n o f t h e Canadian income t a x law .... As a l m o s t 50 y e a r s o f l i t i g a t i o n i n t h e U n i t e d S t a t e s have demo n s t r a t e d , i t i s u n l i k e l y t h a t t h i s s t a t e o f u n c e r t a i n t y would be one o f s h o r t d u r a t i o n . As a l e g a l p r i n c i p l e , t h e b u s i n e s s purpose t e s t has n o t h i n g t o commend i t . [ T h i s a r t i c l e was r e f e r r e d t o i n t h e Stubart d e c i s i o n by E s t e y , J . a t 6316.] However, f o r a c o n t r a r y v i e w p o i n t , see, B . J . A r n o l d , " I n P r a i s e o f t h e B u s i n e s s Purpose T e s t " i n Report of Proceedings of the Thirty-Ninth Tax Conference, 1987 Co n f e r e n c e R e p o r t ( T o r o n t o : C a n a d i a n Tax F o u n d a t i o n , 1988) 10:1 and J.R. H e l l e r s t e i n , " J u d i c i a l Approaches t o Tax A v o i d a n c e " i n Report of Proceedings of the Seventeenth and Eighteenth Tax Conferences, 1963-4 C o n f e r e n c e R e p o r t ( T o r o n t o : Canadian Tax F o u n d a t i o n , 1964-5) 62 a t 66. H e l l e r s t e i n was r e f e r r e d t o by E s t e y , J . i n Stubart a t 6324 i n r e l a t i o n t o I n t e r p r e t a t i v e G u i d e l i n e 3 ( b ) . To c o n c l u d e , i t i s s u b m i t t e d t h a t t h e p r i m a r y i n f l u e n c e o f t h e h i s t o r i c a l c o n t e x t o f s e c t i o n 245 i s t h e f a c t t h a t t h e s e s t a t u t o r y and j u d i c i a l a n t i - a v o i d a n c e measures paved t h e way f o r t h e i n t r o d u c t i o n o f t h e r u l e . I t was t h u s p o l i t i c a l l y f e a s i b l e f o r t h e government t o e n a c t t h e GAAR as o b v i o u s l y t h e e x i s t e n c e o f f o r m e r s e c t i o n 245 and o t h e r g e n e r a l r u l e s meant t h a t i t was n o t such a g r e a t s t e p f o r w a r d f o r t h e government t o p r o p o s e t h e r u l e , compared w i t h t h e p o s i t i o n , f o r example, had i t countenanced t a x a v o i d a n c e b e f o r e , and t h e n s u d d e n l y , t r i e d t o i n t r o d u c e s e c t i o n 245. Moreover, t h e p r e v i o u s l y e n u n c i a t e d a n t i - a v o i d a n c e measures i n f l u e n c e d t h e f o r m a t o f t h e r u l e p r o p o s e d by t h e government: a g a i n s t such a b a c k d r o p , t h e government was a b l e t o d e c i d e w h i c h c o n c e p t s and t e r m i n o l o g y would be most a p p r o p r i a t e i n t h e achievement o f i t s d e s i r e d aims. F i n a l l y , t h e government c i t e d t h e r e j e c t i o n o f t h e b u s i n e s s purpose case i n t h e Stubart c a s e as p r o v i d i n g an impetus f o r t h e i n t r o d u c t i o n o f t h e r u l e . However, doubts have been c a s t on t h i s p r o p o s i t i o n , p r i m a r i l y f o r t h e f o l l o w i n g r e a s o n s : i t i s n o t c l e a r t h a t such a t e s t d i d n o t e x i s t i n some sense pre-GAAR; t h e d e l a y between t h e c a s e and t h e i n t r o d u c t i o n o f t h e p r o v i s i o n and t h e a p p r o p r i a t e n e s s o f t h e b u s i n e s s purpose t e s t as an a n t i - a v o i d a n c e mechanism. C. SOCIAL AND POLITICAL HISTORICAL BACKGROUND The most r e c e n t t a x r e f o r m e x p e r i e n c e s w h i c h i n f l u e n c e d t h e 1987 e x e r c i s e were t h e t a x r e f o r m l e g i s l a t i o n o f 1971 (which c u l m i n a t e d n i n e y e a r s o f debate and was based on t h e C a r t e r Commission R e p o r t ) and t h e changes p r o p o s e d by A l l a n MacEachen, fo r m e r F i n a n c e M i n i s t e r , i n 1981. Bo t h t h e s e t a x r e f o r m e x e r c i s e s i n v o l v e d s i g n i f i c a n t d i l u t i o n o f t h e o r i g i n a l measures when compared w i t h t h e form a t w h i c h was f i n a l l y e n a c t e d . T h i s d i l u t i o n has g e n e r a l l y been r e c o g n i s e d as a d i r e c t r e s u l t o f t h e p o l i t i c a l p r e s s u r e e x e r t e d on t h e government by p o w e r f u l s p e c i a l i n t e r e s t g r o u p s . C o n s e q u e n t l y , t a x r e f o r m has l o n g been r e g a r d e d as a p o l i t i c a l l y dangerous i s s u e — one t h a t governments t a k e on a t t h e i r p e r i l . ' " ^ I t i s s u b m i t t e d t h a t t h e government i n 1987 was i n f l u e n c e d by t h e s e t a x r e f o r m e x p e r i e n c e s , p a r t i c u l a r l y i n r e l a t i o n t o t h e s t r a t e g y i t adopted and, u l t i m a t e l y , t o some e x t e n t , t h e s t r u c t u r e o f t h e package. J . G i l l i e s , " F e d e r a l Tax Reform i n a P l u r a l i s t i c S t a t e : Can i t Be Done?", i n The Quest for Tax Reform, ed. W.N. Brooks ( T o r o n t o : C a r s w e l l , 1988) 343 a t 343. 5̂ F o r example, M i c h a e l W i l s o n r e f e r r e d t o t h e t a x r e f o r m a t t e m p t s o f A l l a n MacEachen: G. P i t t s , "'We Need A l l Tax Elements on Same T r a c k ' : I n t e r v i e w w i t h M i c h a e l W i l s o n " Financial Post (2 August 1986) 4. I n p a r t i c u l a r , he i d e n t i f i e d MacEachen's problems as b e i n g s u r p r i s e and t h e in a d e q u a c y o f t r a n s i t i o n a l e l e m e n t s . He committed h i m s e l f t o n o t r e p e a t i n g t h e s e m i s t a k e s : i b i d . The f i r s t major t a x r e f o r m e x e r c i s e t h a t s h o u l d be d i s c u s s e d i s t h e C a r t e r Commission R e p o r t and i t s i m p l e m e n t i n g l e g i s l a t i o n / ' A s y n o p s i s o f t h e e v e n t s w h i c h s u r r o u n d e d t h i s p r o c e s s i s b r i e f l y g i v e n . The C o n s e r v a t i v e government a p p o i n t e d t h e R o y a l Commission on T a x a t i o n under t h e c h a i r m a n s h i p o f Kenneth Le M. C a r t e r i n August 1962. The impetus f o r t h e e s t a b l i s h m e n t o f t h e Commission was m o s t l y p o l i t i c a l and n a r r o w l y based. N o t a b l y , i n t h e run-up t o t h e June 1962 e l e c t i o n , a p r o m i s e t o s e t up a r e v i e w body was e x t r a c t e d from t h e P r o g r e s s i v e C o n s e r v a t i v e s by a p r o m i n e n t businessman, t h e l a t e S e n a t o r W a l l a c e McCutcheon, who t h e p a r t y w i s h e d t o have on t h e i r C a b i n e t . McCutcheon's r e a s o n f o r s e e k i n g t h i s p r o m i s e was t h e p r e s s u r e e x e r t e d on him by t h e t a x p r o f e s s i o n a l and b u s i n e s s community. T h i s p r e s s u r e r e l a t e d t o v a r i o u s i s s u e s , f o r example, h i g h r a t e s o f t a x and t h e " s u r p l u s - s t r i p p i n g " schemes t h e n b e i n g t o u t e d ( i n p a r t i c u l a r , t a x p r o f e s s i o n a l s f e l t t h e i r p e r s o n a l r e p u t a t i o n s and t h e i r f u t u r e incomes were b e i n g j e o p a r d i s e d as a r e s u l t o f such schemes). 1^ The b u s i n e s s and p r o f e s s i o n a l communities 1' M a t e r i a l r e l e v a n t t o t h i s s e c t i o n i n c l u d e W.I. G i l l e s p i e , "Tax Reform: The B a t t l e f i e l d , t h e S t r a t e g i e s , t h e S p o i l s " (1986) 26 Canadian Public Administration 182 a t 195-7; G i l l i e s , supra, n o t e 14; D.G. H a r t l e , "Some A n a l y t i c a l , P o l i t i c a l and N o r m a t i v e L e s s o n s From C a r t e r " , i n The Quest for Tax Reform, i b i d , a t 397; J.G. Head, "The C a r t e r Legacy: An I n t e r n a t i o n a l P e r s p e c t i v e " , i b i d , a t 367; D.K. Huggett, "An A p o c r y p h a l A p o c a l y p s e ? " , i b i d . a t 381; L. MacDonald, "Why t h e C a r t e r Commission Had t o be Stopped", i b i d , a t 351; P.R. M c D a n i e l , "The Impact o f t h e Tax E x p e n d i t u r e Concept on Tax Reform", i b i d , a t 387; L. McQuaig, Behind Closed Doors: How The Rich Won Control of Canada's Tax System ... And Ended Up Richer (Markham, Ont.: V i k i n g , 1987) c h s . 5-7. H a r t l e , i b i d , a t 401 and McQuaig, i b i d , a t 131. f a v o u r e d an i n d e p e n d e n t , t e c h n i c a l l y q u a l i f i e d i n s t r u m e n t t o r e f o r m t h e t a x system, a d d r e s s i n g t h e above i s s u e s i n p a r t i c u l a r . A R o y a l Commission appeared t o be t h e answer. The c o m p o s i t i o n o f t h e Commission r e a s s u r e d t h e s e communities as a l l t h e members were c o n n e c t e d w i t h b u s i n e s s one way o r another.''^ However, d e s p i t e t h i s , t h e Commission d i d n o t come up w i t h t h e r e s u l t s i t was e x p e c t e d t o . I n s t e a d , i t s r e p o r t , r e l e a s e d i n F e b r u a r y 1967, a d v o c a t e d a system w h i c h would work d i r e c t l y against t h e i n t e r e s t s o f b u s i n e s s . I n p a r t i c u l a r , i t adopted t h e g u i d i n g p r i n c i p l e o f a comprehensive income base. I t s t a t e d t h a t t h e p r i m a r y o b j e c t i v e o f t h e t a x system was t o " s h a r e t h e burden o f t h e s t a t e f a i r l y among a l l i n d i v i d u a l s and f a m i l i e s " . ^ ' T h i s would have e n t a i l e d e l i m i n a t i n g s p e c i a l p r i v i l e g e s t h a t permeated t h e t a x system. F o r example, s p e c i a l t a x r a t e s t h a t had a p p l i e d t o d i f f e r e n t forms o f income - from c a p i t a l g a i n s t o d i v i d e n d s t o i n h e r i t a n c e s - were t o be removed. F u r t h e r m o r e , by e l i m i n a t i n g key d e d u c t i o n s , t h e Commission sought t o make t h e t a x burden more c o n s i s t e n t t h r o u g h - o u t i n d u s t r y . ( P r e v i o u s l y , g r e a t d i s p a r i t i e s i n t h e l e v e l o f t a x burdens between d i f f e r e n t s e c t o r s p r e v a i l e d . ) O v e r a l l , t h e recommendations would have a c h i e v e d g r e a t e r v e r t i c a l e q u i t y making t h e system f a i r e r i n i t s t r e a t m e n t o f d i f f e r e n t l e v e l s o f 1° MacDonald, supra, note 16 a t 353 and McQuaig, i b i d , a t '̂ C a r t e r Commission R e p o r t , supra, n o t e 1 a t 4. income and d i f f e r e n t s o c i a l c l a s s e s . T h e r e f o r e , i t would have r e d u c e d t a x e s (by a t l e a s t 5 p e r c e n t ) f o r about 64 p e r c e n t o f Canadian t a x p a y e r s . However, t h o s e a d v e r s e l y a f f e c t e d would m o s t l y have been w e a l t h y Canadian r e s i d e n t s ^ " and t h e c o r p o r a t e s e c t o r ^ ^ - two p o w e r f u l groups o f t a x p a y e r s . I n i t i a l l y t h e r e s p o n s e t o t h e R e p o r t was m o s t l y b o t h e x t e n s i v e and f a v o u r a b l e - The Globe and Mail b e i n g t h e p r o m i n e n t e x c e p t i o n . T h e r e a f t e r , c o verage s h i f t e d t o t h e b u s i n e s s pages where i t remained f o r y e a r s . However, t h e r e a c t i o n soon t u r n e d t o anger - newspapers d a i l y r a n a r t i c l e s about how t h e C a r t e r recommendations would l e a d t o r u i n a t i o n , a l b e i t from a b u s i n e s s p e r s p e c t i v e . ^ ^ Harvey P e r r y (Commission member) was quoted as s a y i n g , " I t wasn't so much t h e r e a c t i o n [ t h a t s u r p r i s e d me]. I t was t h e v i o l e n c e and v i r u l e n c e o f i t . " ^ ^ 2" F o r example, f o r t h e e s t i m a t e d 633 i n d i v i d u a l s r e c e i v i n g 1964 comprehensive income i n e x c e s s o f $300,000 t h e recommendations would have r e s u l t e d i n them p a y i n g , on a v e r a g e , an a d d i t i o n a l $67,000 a y e a r i n t a x e s . MacDonald, supra, n o t e 16 a t 360. The b u s i n e s s community would have p a i d about 28 p e r c e n t more t a x as a r e s u l t o f t h e C a r t e r recommendations. MacDonald, i b i d , a t 3 39. H a r t l e , supra, n o t e 16 a t 412 and McQuaig, supra, n o t e 16 a t 150. 2' H a r t l e , i b i d . McQuaig, supra, n o t e 16 a t 151. Quoted i n McQuaig, i b i d . T h i s p u t t h e government^' i n a d i f f i c u l t p o s i t i o n - t h e i s s u e o f t a x r e f o r m was c l e a r l y a v o l a t i l e one. I t c a u t i o u s l y responded by a s k i n g f o r s u b m i s s i o n s from i n t e r e s t e d groups and i n d i v i d u a l s . 27 i t r e c e i v e d some n i n e hundred b r i e f s . ^ ^ U l t i m a t e l y , t h i s r e s u l t e d i n a w h i t e paper b e i n g produced w h i c h g r e a t l y d i l u t e d t h e C a r t e r recommendations.2 ' However, r a t h e r t h a n p a c i f y i n g t h e s p e c i a l i n t e r e s t g r o u p s , t h e w h i t e paper was met w i t h screams o f a n g u i s h and dismay.'° The C a r t e r r e p o r t c o u l d be d i s m i s s e d on t h e b a s i s t h a t i t was o n l y w i l d s u g g e s t i o n s o f Commissioners who were u n r e a l i s t i c and u n r e p r e s e n t a t i v e . However, t h e same c o u l d n o t be s a i d o f t h e government. P a r l i a m e n t a r y h e a r i n g s were h e l d on t h e w h i t e paper w h i c h were u t i l i s e d as forums f o r s p e c i a l i n t e r e s t g r o u p s . I n June 1971, F i n a n c e M i n i s t e r Edgar Benson t a b l e d , as an a p p e n d i x t o t h i s budget s t a t e m e n t , a d r a f t o f t h e pr o p o s e d l e g i s l a t i o n w h i c h had 2° D u r i n g t h e p e r i o d o f r e s e a r c h and f o r m u l a t i o n o f t h e R e p o r t , t h e government changed: t h e P r o g r e s s i v e C o n s e r v a t i v e s l o s t o f f i c e and t h e L i b e r a l s t o o k o v e r . 27 G i l l e s p i e , supra, n o t e 16 a t 195. 2° McQuaig, supra, n o t e 16 a t 157-8. 2' F o r example, i t d i d pr o p o s e t h a t c a p i t a l g a i n s be t a x e d and t h a t f o r r e s i d e n t s h a r e h o l d e r s t h e r e s h o u l d be f u l l c r e d i t g i v e n f o r c o r p o r a t e t a x e s p a i d . However, a m u l t i t u d e o f o t h e r recommendations were n o t implemented, f o r example t h e t r e a t m e n t o f t h e f a m i l y as a t a x a b l e u n i t and t h a t t r a n s f e r s w i t h i n t h e u n i t n o t be t a x a b l e . H a r t l e , supra, n o t e 16 a t 412. See, a l s o , McQuaig, ibid, a t 159-63. H a r t l e , ibid, a t 413. i n c o r p o r a t e d t h e Department's r e s p o n s e t o t h e s u b m i s s i o n s r e c e i v e d i n r e s p e c t o f t h e w h i t e paper. T h i s l e g i s l a t i o n c o n s t i t u t e d a major r e t r e a t from t h e w h i t e p a p e r , w h i c h i n t u r n , had been a m a s s i v e r e t r e a t from t h e C a r t e r Report.'^ I n a l l , t h e f a i l e d i m p l e m e n t a t i o n o f t h e C a r t e r recommendations was g e n e r a l l y a t t r i b u t e d t o t h e power o f t h e s p e c i a l i n t e r e s t groups who p r e s s u r i z e d t h e government i n t o r e p e a t e d l y r e t r e a t i n g on b o t h t h e C a r t e r R e p o r t and t h e w h i t e paper p r o p o s a l s . ' ^ The government a g a i n a t t e m p t e d t o r e f o r m t h e t a x system i n 1981. A t t h a t t i m e t h e r e was a g e n e r a l f e e l i n g w i t h i n t h e L i b e r a l government t h a t t a x e x p e n d i t u r e s had t o be curbed.'' T h i s p e r c e p t i o n o r i g i n a t e d i n a document, "Tax E x p e n d i t u r e A c c o u n t " , p r o d u c e d by t h e C o n s e r v a t i v e government i n 1979 w h i c h d e t a i l e d t h e amount o f revenue b e i n g l o s t t h r o u g h v a r i o u s t a x b r e a k s - some $32 b i l l i o n . ' ^ R e s t r i c t i n g t a x e x p e n d i t u r e s seemed l i k e an a t t r a c t i v e o p t i o n t o r a i s i n g revenues - t h i s was p r e f e r a b l e t o c u t t i n g back on s p e n d i n g p l a n s . Moreover, t h e government d i d '̂  H a r t l e , i b i d , a t 413. '̂  G i l l i e s , supra, note 14 a t 343. However, t h e l i m i t a t i o n s o f t h e R e p o r t i t s e l f have a l s o been i d e n t i f i e d as c o n t r i b u t i n g t o i t s l a c k of i m p l e m e n t a t i o n . F o r example, t h e Commission i g n o r e d t h e i s s u e o f t h e o v e r a l l l e v e l o f t a x a t i o n i n Canada and t h e p r o b l e m o f i n f l a t i o n and i t proceeded on t h e a s s u m p t i o n t h a t t h e Canadian economy was a c l o s e d economy i n c o n s i d e r i n g p e r s o n a l - c o r p o r a t e t a x i n t e g r a t i o n : H a r t l e , i J b i d . a t 4 05-12. " McQuaig, supra, note 16 a t 217. '̂  McQuaig, i b i d , a t 216. n o t t h i n k t h a t t h e r e a c t i o n from b u s i n e s s would be t h a t i n t e n s e . ' 5 C o n s e q u e n t l y , A l l a n MacEachen, t h e n F i n a n c e M i n i s t e r , i n t r o d u c e d , as p a r t o f t h e f e d e r a l budget, a number o f p r o p o s a l s d e s i g n e d t o e l i m i n a t e t a x b r e a k s t h a t were u t i l i s e d by h i g h - e a r n i n g i n d i v i d u a l s and c o r p o r a t i o n s . ' ' However, t h e p r o p o s a l s were n o t w e l l r e c e i v e d . I n f a c t , t h e a s s a u l t by a f u r i o u s b u s i n e s s community, an a g g r e s s i v e p r e s s and a r e i n v i g o r a t e d T o r y o p p o s i t i o n began a l m o s t immediately.'^ F u r t h e r m o r e , t h e s i t u a t i o n was e x a c e r b a t e d by t h e d e t e r i o r a t i o n o f economic c o n d i t i o n s w h i c h was c l a i m e d t o be a d i r e c t r e s u l t o f t h e 1981 p r o p o s a l s . ' 2 The e x t e n t o f t h e b a c k l a s h f i n a l l y c aused t h e government t o r e t r e a t somewhat and t o r e t a i n many o f t h e c r u c i a l t a x i n c e n t i v e s w h i c h i t had sought t o remove. A g a i n , a t a x r e f o r m a t t e m p t had been t h w a r t e d by s p e c i a l i n t e r e s t g r o u p s . '5 McQuaig, ibid, a t 217. " McQuaig, ibid, a t 221-3. F o r example, i t was p r o p o s e d t h a t t h e d e d u c t i b i l i t y o f i n t e r e s t on money borrowed t o make i n v e s t m e n t s be r e s t r i c t e d ; i m p o r t a n t " c o r p o r a t e r e o r g a n i z a t i o n " t a x b r e a k s be e l i m i n a t e d and r e s t r i c t i o n s on c h a r i t a b l e f o u n d a t i o n s be t i g h t e n e d . '̂  Mcquaig, ibid, a t 22 3. McQuaig, ibid, a t 231-2. I t i s s u b m i t t e d t h a t b o t h t h e s e t a x r e f o r m e x e r c i s e s i n f l u e n c e d t h e 1987 t a x r e f o r m p r o p o s a l s . " I n p a r t i c u l a r , t h e y had an impact on t h e s t r a t e g y t h e government adopted w h i c h u l t i m a t e l y d e t e r m i n e d t h e s t r u c t u r e o f t h e t a x r e f o r m package t o a c e r t a i n e x t e n t . One major i n f l u e n c e o f t h e s e two e x p e r i e n c e s was t h e e x t e n t t o wh i c h t h e government o b t a i n e d t h e i n p u t o f s p e c i a l i n t e r e s t g roups i n p r e p a r i n g t h e i n i t i a l documents. T h i s i s r e f l e c t e d i n t h e s t r u c t u r e o f t h e v a r i o u s documents. F o r example, t h e C a r t e r Commission, a l t h o u g h i t d i d r e c e i v e b u s i n e s s b r i e f s , was n o t so s u s c e p t i b l e t o e x t e r n a l p r e s s u r e as governments, b e i n g i s o l a t e d from t h e p o l i t i c a l p r o c e s s . T h e r e f o r e , t h e R e p o r t d i d n o t p e r se t a k e t h e i n t e r e s t s o f b u s i n e s s i n t o a c c o u n t , i n d e e d , i t p o s i t i v e l y went a g a i n s t them.^° The same i s t r u e o f t h e 1981 F o r example, n o t e t h e f o l l o w i n g comments: "The 1981 f i a s c o was v e r y much on t h e minds o f s t r a t e g i s t s when t h e y s a t down t o p l o t t h e c o u r s e o f Tax Reform 1987." H. Solomon, " W i l s o n L e a r n e d from MacEachen's F i a s c o " Financial Post (22 June 1987) 9. °̂ F o r a d i s c u s s i o n o f o t h e r f a c t o r s c o n t r i b u t i n g t o t h e n o n - i m p l e m e n t a t i o n o f C a r t e r compared w i t h t h e 1987 r e f o r m s , see G i l l i e s , supra, n o t e 14 a t 345-9. F o r example, he i d e n t i f i e s t h e p o l i t i c a l base f o r r e f o r m ( a t t h e t i m e o f C a r t e r t h e r e was no w i d e s p r e a d p o p u l a r demand f o r t a x r e f o r m ) ; t h e changes made t o t h e way i n w h i c h p u b l i c p o l i c y i s made (b o t h a d m i n i s t r a t i v e l y and l e g i s l a t i v e l y ) ; t h e need o f t h e government f o r a d d i t i o n a l r evenue ( i t was c l a i m e d t h a t t h e government r e q u i r e d more revenue i n 1987 compared w i t h i n t h e 1970s. T h i s i s r e f l e c t e d i n t h e 1987 t a x r e f o r m package ( a t l e a s t Stage One) w h i c h a l t h o u g h was c l a i m e d t o be f i s c a l l y n e u t r a l , d i d i n c r e a s e t o t a l r e v e n u e s somewhat i n t h e f i r s t y e a r . T h e r e a f t e r , t h e revenues d e c r e a s e d b e f o r e l e v e l l i n g out t o a n e u t r a l p o s i t i o n a few y e a r s l a t e r . O v e r a l l , t h e government p e r c e i v e d t h a t t h e p o l i t i c a l c o s t s o f s i g n i f i c a n t l y i n c r e a s i n g t o t a l r e v enues would ou t w e i g h budget p r o p o s a l s . A l t h o u g h presumably t h e government l i s t e n e d t o s p e c i a l i n t e r e s t g r o u p s , i t o b v i o u s l y d i d n o t succumb t o p r e s s u r e as i t produced a package w h i c h was n o t w e i g h t e d i n t h e i r f a v o u r . Compare t h i s w i t h t h e 1987 r e f o r m p r o p o s a l s . The government c o n s u l t e d w i d e l y b e f o r e - h a n d and i n c o r p o r a t e d t h e i n t e r e s t s o f t h e b u s i n e s s s e c t o r and h i g h - i n c o m e e a r n e r s . I n e s s e n c e , t h e w h i t e p a p e r s c o n s t i t u t e d a compromise package. C o n s e q u e n t l y , t h e l i k e l i h o o d o f b u s i n e s s n o t a c c e p t i n g t h e i n i t i a l p r o p o s a l s was g r e a t l y r e d u c e d . The p r e v i o u s t a x r e f o r m e x e r c i s e s , and i n p a r t i c u l a r , t h e 1981 p r o p o s a l s , had an impact on t h e p r e s e n t a t i o n o f t h e 1987 t a x r e f o r m s . I n p a r t i c u l a r , t h e y prompted t h e government t o p r e s e n t i t s p r o p o s a l s as w h i t e paper documents. F o r example, as r e g a r d s t h e C a r t e r R e p o r t , t h e government's r e s p o n s e was t o i n t r o d u c e a w h i t e paper as a means of c o n t i n u i n g d i s c u s s i o n . I n c o n t r a s t , t h e 1981 p r o p o s a l s were i n t r o d u c e d as p a r t o f t h e f e d e r a l budget measures. A c c o r d i n g t o G i l l e s p i e ' s t h e o r y , t h i s i n d i c a t e d t h a t t h e c o s t s o f n o t r e d u c i n g ( o r even a d d i n g t o ) t h e d e f i c i t ) ; t h e g rowth i n u n d e r s t a n d i n g t h a t t h e economic f u t u r e c o u l d be d i f f i c u l t ( t h e r e was g r e a t e r u n d e r s t a n d i n g a t t h e t i m e o f t h e 1987 r e f o r m s compared w i t h C a r t e r ) and t h e U.S. r e f o r m s w h i c h had t a k e n p l a c e by t h e t i m e o f t h e 1987 r e f o r m s . 1̂ Solomon, supra, note 39. These p r o p o s i t i o n s a r e s u p p o r t e d by McQuaig who c l a i m s t h e p r i m a r y r e a s o n why t h e 1987 t a x r e f o r m s were n o t changed d r a m a t i c a l l y was t h a t t h e o t h e r t a x r e f o r m e x e r c i s e s ( C a r t e r and MacEachen i n p a r t i c u l a r ) had been g e n u i n e l y p r o g r e s s i v e . The 1987 t a x r e f o r m s were s t r u c t u r e d t o be f a v o u r a b l e t o t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . McQuaig, supra, n o t e 16 a t x x x v i . t h e government w i s h e d t o keep d i s c u s s i o n t o a minimum.^' Bo t h documents were s u b s t a n t i a l l y r e v i s e d b e f o r e i m p l e m e n t i n g l e g i s l a t i o n was i n t r o d u c e d . However, t h e a l t e r a t i o n o f t h e 1981 p r o p o s a l s was more p o l i t i c a l l y e m b a r r a s s i n g f o r t h e government. The r e t r e a t from d e f i n i t e l e g i s l a t i v e p r o p o s a l s i n v o l v e s g r e a t e r p o l i t i c a l c o s t s f o r t h e government ( f o r example, i n terms o f p e r c e i v e d s t r e n g t h o f t h e government t o s t a n d up t o s p e c i a l i n t e r e s t groups) compared w i t h changes t o w h i t e paper p r o p o s a l s , w h i c h a r e t h e o r e t i c a l l y o n l y d i s c u s s i o n p o i n t s i n t h e f i r s t p l a c e . C o n s e q u e n t l y , t h e government i n 1987 was encouraged t o i n t r o d u c e i t s t a x r e f o r m p r o p o s a l s i n t h e form o f w h i t e p a p e r s . I t d i d so d e s p i t e t h e e x t e n s i v e c o n s u l t a t i o n t h a t had a l r e a d y t a k e n p l a c e and t h e d e f i n i t e and p r e c i s e n a t u r e o f t h e p r o p o s a l s i n S t a g e One. These p r e v i o u s t a x r e f o r m a t t e m p t s a l s o i n f l u e n c e d t h e method o f i n t r o d u c t i o n o f t h e 1987 package. B o t h t h e i n i t i a l documents o f t h e p r e v i o u s t a x r e f o r m e x p e r i e n c e s were f o r m u l a t e d and p r e s e n t e d i n s e c r e c y . T h e r e f o r e , t a x p a y e r s ( i n c l u d i n g s p e c i a l i n t e r e s t groups) were not g i v e n any o p p o r t u n i t y t o g r a d u a l l y g e t accustomed t o t h e new p r o p o s a l s . Moreover, t h i s p r e c l u d e d any r e c e i p t o f advance feedback on t h e p r o p o s a l s . I n c o n t r a s t , t h e G i l l e s p i e , supra, n o t e 16 a t 194. government i n 1987 was c a r e f u l n o t t o a v o i d c r e a t i n g any s u r p r i s e s i n t h e 1987 e x e r c i s e / ^ F o r example, i t l e t d e t a i l s o f t h e p r o p o s a l s d r i b b l e o u t i n advance A f i n a l i n f l u e n c e s p e c i f i c t o t h e 1981 p r o p o s a l s r e l a t e s t o t h e t r a n s i t i o n a l measures f o r t h e i n t r o d u c t i o n o f t h e measures. I t was c l a i m e d t h a t t h e t r a n s i t i o n a l e l e m e n t s r e l a t i n g t o MacEachen's p r o p o s a l s were n o t s u f f i c i e n t l y t h o u g h t o u t and e q u i t a b l e . ^ ' C o n s e q u e n t l y , t h e 1987 measures c o n t a i n e d a g r e a t many t r a n s i t i o n a l p r o v i s i o n s . F o r example, r e d u c t i o n s i n t h e p e r s o n a l income t a x r a t e s were n o t e f f e c t i v e u n t i l J u l y 1988 t o e n a b l e employers t o g e t used t o them and many c o r p o r a t e base- b r o a d e n i n g measures were p h a s e d - i n g r a d u a l l y o v e r a p e r i o d o f months, i f n o t y e a r s . I n summary, i t i s s u b m i t t e d t h a t t h e two most r e c e n t a t t e m p t s a t t a x refo^rm, t h e C a r t e r Commission R e p o r t and i t s subsequent l e g i s l a t i o n and t h e measures proposed by A l l a n MacEachen as p a r t o f t h e 1981 f e d e r a l budget, i n f l u e n c e d t h e 1987 t a x r e f o r m e x e r c i s e . I n p a r t i c u l a r , t h e s e e x p e r i e n c e s had an impact on t h e s t r a t e g y adopted by t h e government, and u l t i m a t e l y , on t h e s t r u c t u r e o f t h e t a x r e f o r m package. These p a s t r e f o r m M i c h a e l W i l s o n quoted i n P i t t s , supra, n o t e 15. '̂ 5 J . Ruimy, " W i l s o n Faces B i g S e l l i n g J o b on Tax Reform" Toronto Star (20 June 1987) B l & B4 a t B l . M i c h a e l W i l s o n q u o t e d i n P i t t s , supra, n o t e 15. e x e r c i s e s prompted t h e government t o c o n s u l t w i d e l y w i t h i n t e r e s t e d groups and t o i n c l u d e t h e i r c o n c e r n s , t o a c e r t a i n e x t e n t , i n t h e p r e p a r a t i o n and f o r m u l a t i o n o f t h e 1987 package. T h i s i n f l u e n c e d t h e e v e n t u a l s t r u c t u r e o f t h e t a x r e f o r m s as such c o n s u l t a t i o n and i n c o r p o r a t i o n r e s u l t e d i n t h e 1987 p r o p o s a l s b e i n g w e i g h t e d i n f a v o u r o f t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . F u r t h e r m o r e , t h e s e t a x r e f o r m e x p e r i e n c e s may have i n d u c e d t h e government t o i n t r o d u c e t h e r e f o r m s as w h i t e paper documents. Even though t h e government had c o n s u l t e d w i d e l y b e f o r e h a n d (so presumably had some i d e a about t h e p o l i t i c a l c o s t s i n v o l v e d ) and i n c o r p o r a t e d some o f t h e s e c o n c e r n s , i t s t i l l o p t e d f o r t h e p r e s e n t a t i o n o f t h e p r o p o s a l s as w h i t e p a p e r s . I t i s f e l t t h a t t h e government was p r o c e e d i n g as c a u t i o u s l y as p o s s i b l e . I t was perhaps d i s c o u r a g e d by t h e p a s t t a x r e f o r m a t t e m p t s w h i c h had r e s u l t e d i n major r e v i s i o n o f t h e i n i t i a l (and even subsequent, i n t h e case o f t h e C a r t e r R e p o r t , namely, t h e w h i t e paper r e l e a s e d i n November 1969) documents. S u b s t a n t i a l a l t e r a t i o n o f w h i t e p a p e r s i s p o l i t i c a l l y l e s s c o s t l y t h a n s i g n i f i c a n t changes t o d e f i n i t e l e g i s l a t i v e d r a f t s such as budget measures. T h e r e f o r e , t h e government d e c i d e d t o p r o c e e d w i t h t h e most p o l i t i c a l l y s a f e method and c o n s e q u e n t l y o p t e d f o r t h e w h i t e p a p e r mechanism. F i n a l l y , t h e 1981 budget p r o p o s a l i n f l u e n c e d t h e 1987 t a x r e f o r m s by e n c o u r a g i n g t h e government t o i n t r o d u c e adequate t r a n s i t i o n a l p r o v i s i o n s . O v e r a l l , i t i s f a i r t o say t h a t t h e s e two r e c e n t t a x r e f o r m e x p e r i e n c e s e x e r t e d a degree o f i n f l u e n c e o v e r t h e 1987 t a x r e f o r m e x e r c i s e . T h i s m a n i f e s t e d i t s e l f i n t h e s t r a t e g y t h e government adopted i n f o r m u l a t i n g t h e package and, u l t i m a t e l y , t o some e x t e n t , t h e s t r u c t u r i n g o f t h e s e measures. CHAPTER VI CONCLUSION The c e n t r a l theme o f t h i s paper has been t h e a n a l y s i s o f s e c t i o n 245 o f t h e Income Tax A c t . T h i s p r o v i s i o n i n t r o d u c e d an extend e d g e n e r a l a n t i - a v o i d a n c e r u l e i n t o C a n a d i a n t a x law. E x c l u s i v e f o c u s on t h i s s e c t i o n i s j u s t i f i e d when one c o n s i d e r s t h a t i t has been c l a i m e d t o be t h e most s i g n i f i c a n t change t o t h e A c t s i n c e income t a x was f i r s t imposed i n 1917.^ I t was f e l t t h a t t h e methodology adopted i n t h e a n a l y s i s o f t h i s r u l e s h o u l d go beyond t h e t r a d i t i o n a l means employed i n c o n s i d e r i n g t e c h n i c a l t a x p o l i c y p r o v i s i o n s . T h i s approach u s u a l l y c o n s i s t s o f a p p l y i n g one o f t h e n o r m a t i v e s t a n d a r d s - e q u i t y , e f f i c i e n c y and s i m p l i c i t y . However, such t o o l s have been d i s c r e d i t e d i n r e c e n t t i m e s , p r i m a r i l y on t h e b a s i s t h a t t h e y do n o t t a k e a c c o u n t o f t h e p o l i t i c a l a s p e c t o f t a x a t i o n . C o n s e q u e n t l y , t h e methodology employed i n t h i s t h e s i s i s grounded i n t h e p o l i t i c i z a t i o n o f t a x . S u p p o r t f o r a d o p t i n g such an approach can be found i n e x i s t i n g l i t e r a t u r e . I n p a r t i c u l a r , a body o f l i t e r a t u r e has d e v e l o p e d w i t h i n t h e d i s c i p l i n e o f economics, g e n e r a l l y known as t h e p o l i t i c a l economy o f t a x a t i o n . I t i s f e l t t h a t t h i s t h e o r y i s r e l e v a n t t o t h i s paper due t o i t i n c l u s i o n o f t h e p o l i t i c a l e lement. More F o r example, E. Roseman, " A n t i - A v o i d a n c e Law I r k s Tax P l a n n e r s [ c i t i n g J . B e r n s t e i n , t a x l a w y e r , L a v e n t h o l & Horwath, C h a r t e r e d A c c o u n t a n t s , T o r o n t o ] " The Globe and Mail (28 November 1988). s p e c i f i c a l l y , r e l i a n c e i s p l a c e d on a model d e v e l o p e d by H e t t i c h and Winer. T h i s model was c o n s i d e r e d t o be t h e most u s e f u l because o f i t s i n c o r p o r a t i o n o f t h e p o l i t i c a l ' v o i c e ' and i t s a s s u m p t i o n t h a t t h e t a x system i s a n a t u r a l outcome o f s e l f - i n t e r e s t e d d e c i s i o n making. The model i n t e g r a t e s a number o f f a c t o r s , i n c l u d i n g t h i s s e l f - i n t e r e s t b e h a v i o u r i a l element, w h i c h g i v e r i s e t o an e q u i l i b r i u m o f p o l i t i c a l c o s t s and b e n e f i t s . The s t r u c t u r e o f t h e t a x system, a t any g i v e n t i m e , r e f l e c t s t h i s e q u i l i b r i u m . Moreover, t h e model can a s s i s t i n e x p l a i n i n g t h e i n c i d e n c e o f t a x r e f o r m . I n p a r t i c u l a r , t a x r e f o r m i s t h e r e s u l t o f shocks t o t h e system w h i c h n e c e s s i t a t e r e - e s t a b l i s h i n g t h e e q u i l i b r i u m by t h e a d j u s t m e n t o f revenue i n s t r u m e n t s . T h e r e f o r e , i t i s f a i r t o say t h a t government's u t i l i s e t a x r e f o r m as a means o f a t t e m p t i n g t o r e t a i n o f f i c e . T h i s model and i t s a p p l i c a t i o n t o t a x r e f o r m c o n s t i t u t e t h e f o u n d a t i o n o f t h e methodology adopted i n t h i s p a p e r . I n p a r t i c u l a r , i t s f u n d a m e n t a l c o n c e p t s t h a t t a x a t i o n i s a p o l i t i c a l p r o c e s s and i t i s t h e e q u i l i b r i u m outcome o f s e l f - i n t e r e s t e d b e h a v i o u r o f t h e government a r e f o l l o w e d . I t i s a g a i n s t t h i s background t h a t t h e 1987 t a x r e f o r m package, o f w h i c h s e c t i o n 245 was an i n t e g r a l p a r t , i s a n a l y z e d . I n p a r t i c u l a r , t h e f a c t o r s c a u s i n g i t s i n t r o d u c t i o n a r e i d e n t i f i e d and e x p l a i n e d . F u r t h e r m o r e , an a t t e m p t has been made t o i s o l a t e t h o s e f a c t o r s w h i c h were s p e c i f i c t o s e c t i o n 245. I n summary, t h e t a x r e f o r m package, and t h e r u l e i n p a r t i c u l a r , were a n a l y z e d w i t h i n t h e i r r e l e v a n t c o n t e x t s t o i d e n t i f y t h e f a c t o r s w h i c h were most i n f l u e n t i a l i n p r o m p t i n g t h e i r i n t r o d u c t i o n and d e t e r m i n i n g t h e i r p r e s e n t a t i o n and s t r u c t u r e . However, b e f o r e g o i n g on t o o u t l i n e t h e s e f a c t o r s , i t i s p r o p o s e d t h a t t h e a s s u m p t i o n s u n d e r l y i n g t h i s paper f i r s t be d i s c u s s e d . The two main a s s u m p t i o n s a r e f i r s t , t h a t t a x i s a p o l i t i c a l p r o c e s s and second, t h a t governments a r e a c t i n g i n t h e i r own s e l f - i n t e r e s t - n o t a c c o r d i n g t o g e n e r a l and s o c i a l c r i t e r i a s u ch as e f f i c i e n c y and e q u i t y . The f o r m e r i s f a i r l y s e l f - e x p l a n a t o r y . I n d e m o c r a t i c s t a t e s s t a t u t e s a r e t h e c r e a t i o n o f l e g i s l a t i v e b o d i e s . Tax i s p u r e l y a c r e a t u r e o f s t a t u t e and t h e r e f o r e i s a p r o d u c t o f t h i s p o l i t i c a l p r o c e s s . As r e g a r d s t h e l a t t e r p r e m i s e , i t s b a s i c t h r u s t i s t h a t governments a r e s e e k i n g t o r e t a i n o f f i c e . T h i s i n v o l v e s two s t r a n d s : m a x i m i z i n g i t s s u p p o r t w i t h t h e e l e c t o r a t e and p l a c a t i n g s p e c i a l i n t e r e s t groups. Governments u s u a l l y a t t empt t o promote t h e s e two components s i m u l t a n e o u s l y . The w e i g h t a c c o r d e d t o each depends on t h e e x t e r n a l c o n d i t i o n s , f o r example, t h e s o c i o - p o l i t i c a l and economic e n v i r o n m e n t . The t a x r e f o r m package and t h e GAAR i n p a r t i c u l a r a r e good i l l u s t r a t i o n s o f t h e s e two competing components. F o r example, t h e t a x r e f o r m package was p r e s e n t e d as b e i n g f a i r t o be e l e c t o r a l l y a p p e a l i n g , y e t was s t r u c t u r e d i n a way t o f a v o u r s p e c i a l i n t e r e s t g r o u p s , e s p e c i a l l y t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . I t i s now pro p o s e d t h a t t h e d i f f e r e n t c o n t e x t s be b r i e f l y d i s c u s s e d t o i l l u s t r a t e t h e i r i n f l u e n c e on t h e t a x r e f o r m e x e r c i s e , and t h e i n t r o d u c t i o n o f t h e GAAR i n p a r t i c u l a r . The s o c i o - p o l i t i c a l environment p l a y e d an i m p o r t a n t r o l e i n t h e i n t r o d u c t i o n , f o r m u l a t i o n and p r e s e n t a t i o n o f t h e t a x r e f o r m package and t h e GAAR. I n p a r t i c u l a r , t h e t a x r e f o r m package was e f f e c t e d a t a t i m e when t h e P r o g r e s s i v e C o n s e r v a t i v e Government was f a c i n g a f e d e r a l e l e c t i o n sometime w i t h i n two y e a r s . A l t h o u g h t h i s t i m e frame may seem e x c e s s i v e and t h e r e f o r e t h e i n f l u e n c e o f t h e e l e c t i o n d i m i n u t i v e , i t s impact i s more v i a b l e i f one c o n s i d e r s t h e p e r i o d n e c e s s a r y f o r i m p l e m e n t a t i o n o f t h e p r o p o s a l s and t h e g e n e r a l e x p e c t a t i o n t h a t t h e e l e c t i o n was g o i n g t o be c a l l e d i n 1988. Moreover, t h e government's e l e c t o r a l s u p p o r t was f l a i l i n g a t t h a t t i m e . F o r example, a t t h e b e g i n n i n g o f 1987, i t was t h i r d i n t h e p o l l s w i t h o n l y twenty-two p e r c e n t s u p p o r t . T h e r e f o r e , t h e t a x r e f o r m e x e r c i s e was r e g a r d e d by t h e government as a means o f b o l s t e r i n g i t s p u b l i c s u p p o r t . C o n s e q u e n t l y , t h e government produce d and p r e s e n t e d t h e package as p r o m o t i n g a f a i r e r system. A l t h o u g h t h i s c o n c e p t was s t a t e d as c o m p r i s i n g a number o f f a c e t s , t h e one most h e a v i l y r e l i e d upon was t h e p r e m i s e t h a t t h e t a x burden would be s h i f t e d from low and m i d d l e - c l a s s i n d i v i d u a l s t o t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . T h i s image was p r o j e c t e d t h r o u g h v a r i o u s means. The f i r s t method by w h i c h t h e government promoted t h e image o f s h i f t i n g t h e t a x burden was i n t h e s t r u c t u r e o f t h e t a x r e f o r m p r o p o s a l s . P r i m a r i l y , i t l o w e r e d t h e t a x r a t e s f o r t h e m a j o r i t y o f t a x p a y e r s . These s a v i n g s were d e s i g n e d t o i n d u c e f e e l i n g s o f b e n e v o l e n c e towards t h e government. Moreover, t h e y were s t r u c t u r e d t o maximize p o l i t i c a l a p p e a l . F o r example, t h e t a x s a v i n g s were s p r e a d t h i n l y o v e r a l a r g e volume o f t a x p a y e r s , namely e i g h t y - f i v e p e r c e n t o f a l l t a x p a y e r s . F u r t h e r m o r e , t h e r e d u c t i o n o f t h e r a t e s was t i m e d so t h a t , a l t h o u g h t h e y were e f f e c t i v e from t h e b e g i n n i n g o f 1988, t h e s a v i n g s would n o t be f e l t u n t i l J u l y o f t h a t y e a r - around t h e t i m e t h a t t h e f e d e r a l e l e c t i o n was e x p e c t e d . A l s o , a t a x r e b a t e was t o be g i v e n t h e f o l l o w i n g s p r i n g , a r g u a b l y t o encourage t h e v o t e r s t o r e - e l e c t t h e government t o e n s u r e t h a t t h e r e b a t e would n o t be l o s t . The government a l s o sought t o promote an image o f f a i r n e s s by s u p p o s e d l y complementing t h e s e t a x c u t s w i t h a c o r r e l a t i n g i n c r e a s e i n t h e t a x burden o f t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . I n o t h e r words, i t p r e s e n t e d t h e t a x r e f o r m p r o p o s a l s i n such a way t o f o s t e r t h e i m p r e s s i o n t h a t t h e p e r s o n a l income t a x s a v i n g s were b e i n g funded by c o r p o r a t e t a x i n c r e a s e s . F o r example, t h e p r o p o s a l s on t h e r e d u c t i o n i n t h e t a x r a t e s f o r low and m i d d l e - c l a s s i n d i v i d u a l s were p r e s e n t e d p a r a l l e l t o t h e c o r p o r a t e measures and t h e c o r p o r a t e b ase- b r o a d e n i n g measures were c o n s t a n t l y h i g h l i g h t e d i n t h e t a x r e f o r m documents. However, i n economic terms t h e f a l l a c i o u s n e s s o f t h i s image i s exposed. The t a x r e f o r m s d i d i n v o l v e some i n c r e a s e i n c o r p o r a t e r e venues - t h e y r o s e from 15.6% t o 17.2%. However, t h i s was n o t n e a r l y s u f f i c i e n t t o f i n a n c e t h e t a x s a v i n g s t o o r d i n a r y t a x p a y e r s . The i n c r e a s e i n c o r p o r a t e r e v enues o n l y amounted t o about t w e n t y t o t w e n t y - f i v e p e r c e n t o f t h e p e r s o n a l income t a x r e d u c t i o n s . I n s t e a d , t h e s e r e d u c t i o n s were p r i m a r i l y funded by i n c r e a s e s t o t h e f e d e r a l s a l e s t a x and a c c e l e r a t i o n o f t a x payments. T h i s s t a t e o f a f f a i r s r e i n f o r c e s t h e p r o p o s i t i o n s t a t e d above t h a t t h e government was s i m u l t a n e o u s l y p r o m o t i n g two o b j e c t i v e s w i t h t h e t a x r e f o r m package - m a x i m i z i n g e l e c t o r a l s u p p o r t and p l a c a t i n g s p e c i a l i n t e r e s t g roups. By p r e s e n t i n g t h e r e f o r m s as p r o m o t i n g a f a i r e r system, i t was a t t e m p t i n g t o maximize i t s v o t e s . However, t h e u n d e r l y i n g s t r u c t u r e was e s s e n t i a l l y u n f a i r and f a v o u r e d t h e c o r p o r a t e s e c t o r t o a g r e a t e x t e n t . T h e r e f o r e , w i t h what appears t o be some a s t u t e p o l i t i c a l e n g i n e e r i n g , t h e t a x r e f o r m package accommodates b o t h o f t h e s e c o n t r a d i c t o r y e l e m e n t s . Where does t h e GAAR f i t i n t o a l l o f t h i s ? The p r o v i s i o n p l a y e d an i m p o r t a n t r o l e i n t h e c r e a t i o n o f t h i s image o f f a i r n e s s t h a t was p r o j e c t e d by t h e government. I n p a r t i c u l a r , i t g r e a t l y c o n t r i b u t e d t o t h e i l l u s i o n t h a t t h e c o r p o r a t e t a x burden was g o i n g t o be s i g n i f i c a n t l y i n c r e a s e d . I t a c h i e v e d t h i s i n i t s own r i g h t , as p a r t o f t h e p l e t h o r a o f b a s e - b r o a d e n i n g measures and a s s i s t i n g i n t h e economic v a l i d a t i o n o f t h e c l a i m o f t h e i n c r e a s e d r e v e n u e s . S e c t i o n 245 a s s i s t e d i n t h e c r e a t i o n o f t h e image o f f a i r n e s s w i t h i n i t s own r i g h t . T h i s i s i n h e r e n t i n t h e n a t u r e o f t h e r u l e - namely, t h o s e t a x p a y e r s a g a i n s t who i t i s d i r e c t e d . The t a x p a y e r s who use a r t i f i c i a l t a x a v o i d a n c e schemes t o re d u c e t h e i r t a x l i a b i l i t i e s a r e t h o s e f o r whom i t i s f i n a n c i a l l y v i a b l e , t a k i n g a c c o u n t , f o r example, o f t h e f e e s o f p r o f e s s i o n a l a d v i s o r s . C o n s e q u e n t l y , t h e p r o v i s i o n w i l l m o s t l y a d v e r s e l y a f f e c t t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . T h i s i s s u p p o r t e d by t h e f a c t t h a t t h e s e t a x p a y e r s were i d e n t i f i e d by t h e government as n o t p a y i n g t h e i r f a i r s h a r e o f t a x e s . The p r o v i s i o n a l s o h e l p e d t o promote a f a i r e r system due t o i t s i n c l u s i o n w i t h i n a whole a r r a y o f c o r p o r a t e b a s e - b r o a d e n i n g measures. The r u l e was an i n t e g r a l p a r t o f t h e s e measures, b o t h c o n c e p t u a l l y and f i n a n c i a l l y . As r e g a r d s t h e f o r m e r , t h e GAAR a s s i s t e d c o n s i d e r a b l y i n c r e a t i n g t h e image t h a t t h e t a x burden was b e i n g s h i f t e d o n t o t h e c o r p o r a t e s e c t o r . C o n s e q u e n t l y , t h e measure was c o n t i n u o u s l y r e f e r r e d t o i n t h e t a x r e f o r m documents. As r e g a r d s t h e f i n a n c i a l i m p l i c a t i o n s , t h e GAAR a i d e d t h e economic v a l i d a t i o n o f t h e c l a i m t h a t t h e t a x burden o f t h e c o r p o r a t e s e c t o r was b e i n g i n c r e a s e d . I n o t h e r words, t o v e r i f y t h i s p r o p o s i t i o n , t h e government had t o p r o v i d e f a c t s and f i g u r e s t h a t t h e burden was i n f a c t b e i n g i n c r e a s e d , a l t h o u g h , as p r e v i o u s l y d i s c u s s e d , i t was n o t s i g n i f i c a n t . The s e c t i o n g r e a t l y c o n t r i b u t e d i n t h e achievement o f t h i s o b j e c t i v e . As r e g a r d s t h e p r o j e c t e d revenue i n c r e a s e s g e n e r a t e d by t h e base- b r o a d e n i n g measures, i t was t h e most f i n a n c i a l l y l u c r a t i v e . W i t h o u t i t , t h e f i g u r e s would n o t have appeared n e a r l y as i m p r e s s i v e . F o r example, i n 1989, a b s e n t t h e GAAR, and t h e p r o j e c t e d revenue would have been i n t h e n e g a t i v e - t h e r e would have been a decrease i n c o r p o r a t e t a x e s o f $30 m i l l i o n . The use o f t h e p r o v i s i o n i n t h e above way t o p r e s e n t t h e image o f f a i r n e s s had, i n t u r n , an i n f l u e n c e on t h e r u l e . F i r s t , i t p r o v i d e d an impetus f o r t h e i n t r o d u c t i o n o f t h e p r o p o s a l and i t s i n c l u s i o n w i t h i n t h e t a x r e f o r m package. Second, i t a r g u a b l y a f f e c t e d t h e c a l c u l a t i o n o f t h e i n c r e a s e d revenue t h a t t h e p r o v i s i o n was c a l c u l a t e d t o g e n e r a t e . T h i r d , i t i n f l u e n c e d t h e r e s p o n s e o f t h e government t o t h e h e a t e d c r i t i c i s m w h i c h t h e p r o p o s a l was s u b j e c t e d t o . To a m p l i f y , t h e whole s o c i a l and p o l i t i c a l background p r o v i d e d an impetus f o r t h e i n t r o d u c t i o n o f t h e r u l e and i t s i n c l u s i o n w i t h i n t h e t a x r e f o r m s . I t was an i n t e g r a l p a r t o f t h e t a x r e f o r m package. I t a s s i s t e d g r e a t l y , b o t h c o n c e p t u a l l y and f i n a n c i a l l y , i n t h e government's o b j e c t i v e o f c r e a t i n g t h e image o f p r o m o t i n g a f a i r e r system. The government sought t o g i v e t h i s i m p r e s s i o n w i t h t h e i n t e n t i o n o f b o l s t e r i n g i t s s u p p o r t w i t h t h e e l e c t o r a t e . These f a c t o r s h e l p e x p l a i n t h e i n t r o d u c t i o n o f t h e s e c t i o n i n 1987 as p a r t o f t h e t a x r e f o r m package. F o r example, i f t h e government had been t h a t c o n c e r n e d about a b u s i v e t a x a v o i d a n c e w h i c h was s u p p o s e d l y o c c u r r i n g , t h e n why d i d n o t i t n o t i n t r o d u c e t h e r u l e a t an e a r l i e r d a t e ? C u r b i n g t a x a v o i d a n c e t h r o u g h "newspaper r e l e a s e " had been p r e v a l e n t f o r some t i m e and moreover, t h e c o u r t s had r e v e a l e d t h e i r h e s i t a n c y t o s e t down extended l i m i t s i n t h i s a r e a some y e a r s e a r l i e r . ^ Y e t , t h e government s t i l l h e l d o f f i n t r o d u c i n g t h e r u l e u n t i l i t i n i t i a t e d i t s t a x r e f o r m measures. C o n s e q u e n t l y , i t i s f a i r t o say t h a t s o c i o - p o l i t i c a l f a c t o r s prompted t h e i n t r o d u c t i o n o f t h e GAAR and i t s i n c l u s i o n w i t h i n t h e t a x r e f o r m package. 2 F o r example, t h e Supreme C o u r t o f Canada r e j e c t e d a g e n e r a l b u s i n e s s p u r p o s e t e s t i n t h e Stubart c a s e [ S t u b a r t I n v e s t m e n t s v. The Queen [1984] C.T.C. 294, 84 D.T.C. 6305 (S.C.C.)] i n 1984. The second i n f l u e n c e o f t h e s e f a c t o r s on t h e r u l e was a r g u a b l y i n r e l a t i o n t o t h e c a l c u l a t i o n o f t h e e s t i m a t e d revenue i n c r e a s e s . The c a l c u l a t i o n o f p r o j e c t e d i n c r e a s e s has been l i k e n e d t o " w i t c h c r a f t " , ' w h i c h does n o t i n s p i r e c o n f i d e n c e i n t h e a c c u r a c y o f t h e e s t i m a t e d i n c r e a s e s . Moreover, i n r e l a t i o n t o t h e G7VAR, t h e t a s k was a g g r a v a t e d due t o v a r i o u s f a c t o r s . F o r example, a t l e a s t w i t h o t h e r b a s e - b r o a d e n i n g measures t h e r e was a s t a r t i n g p o i n t - some s p e c i a l i n c e n t i v e w i t h a v a l u e w h i c h was b e i n g removed o r trimmed. W i t h s e c t i o n 245, no such a s s i s t a n c e was a v a i l a b l e . F u r t h e r m o r e , t h e c a l c u l a t i o n o f t h e i n c r e a s e s i n r e l a t i o n t o t h e r u l e was based on f o r t u i t o u s c i r c u m s t a n c e s , f o r example, t h e e x t e n t o f f u t u r e abuses and t h e f r e q u e n c y o f a p p l i c a t i o n o f t h e r u l e . I n l i g h t o f t h e s e d i f f i c u l t i e s , i t i s a r g u a b l e t h a t e x t e r n a l f a c t o r s i n f l u e n c e d t h e c a l c u l a t i o n o f t h e i n c r e a s e s r e l a t i n g t o t h e GAAR. For example, i t i s f o r e s e e a b l e t h a t t h e s o c i o - p o l i t i c a l backdrop p e r s u a d e d t h e government t o shape t h e c a l c u l a t i o n s t o maximize ( w i t h i n r e a s o n a b l e l i m i t s ) t h e p r o j e c t e d i n c r e a s e s t o s u b s t a n t i a t e i t s c l a i m o f f a i r n e s s . The problem i s t h a t t h e r e i s no way o f p r o v i n g o r d i s p r o v i n g t h e s e f i g u r e s , and c o n s e q u e n t l y , t h i s p r o p o s i t i o n . ' P. DeMont, "Tax Break P r o p o s a l s C r e a t e D e f i c i t Headaches: Economy C o u l d be S a v i o r " Financial Times (23 November 1987) 3. The f i n a l i n f l u e n c e o f t h e s o c i o - p o l i t i c a l c o n t e x t on s e c t i o n 245 i s i n r e l a t i o n t o i t s amendment d u r i n g t h e p a r l i a m e n t a r y p r o c e s s . I n p a r t i c u l a r , t h e r u l e o r i g i n a t e d as a w h i t e paper p r o p o s a l and was t h u s more s u s c e p t i b l e t o change.^ F u r t h e r m o r e , t h e p r o v i s i o n was s u b j e c t e d t o p r o l o n g e d and h e a t e d c r i t i c i s m , p r i m a r i l y from t h e p r o f e s s i o n a l community. However, d e s p i t e t h i s , t h e government d i d n o t s u b s t a n t i a l l y a l t e r t h e p r o p o s a l w i t h i n i t s passage t h r o u g h P a r l i a m e n t . The changes made d i d n o t a f f e c t t h e s u b s t a n c e o f t h e r u l e . I t i s s u b m i t t e d t h a t exogenous f a c t o r s i n f l u e n c e d t h i s outcome. I n p a r t i c u l a r , t h e government c o u l d n o t a f f o r d , p o l i t i c a l l y o r f i n a n c i a l l y , t o have t h e t a x r e f o r m package u n r a v e l l e d . P o l i t i c a l l y , t o m a i n t a i n t h e image o f f a i r n e s s , t h e government c o u l d n o t be seen t o be c a v i n g i n t o s p e c i a l i n t e r e s t g roups. E c o n o m i c a l l y , due t o a d v e r s e economic c o n d i t i o n s (and c o n s e q u e n t l y , p o l i t i c a l p r e s s u r e ) , i t had t o e n s u r e t h a t t h e package remained more o r l e s s f i n a n c i a l l y n e u t r a l . T h e r e f o r e , t h e government s t a t e d t h a t no changes were t o be made u n l e s s t h e f i n a n c i a l l o s s e s were made up elsewhere.^ T h i s r e l a t e s back t o t h e s o c i o - p o l i t i c a l e n v ironment as t h e government c o u l d n o t a f f o r d p o l i t i c a l l y t o i n c r e a s e t h e a l r e a d y b u l g i n g d e f i c i t . W.I. G i l l e s p i e , "Tax Reform: The B a t t l e f i e l d , t h e S t r a t e g i e s , t h e S p o i l s " (1983) 26 Canadian Public Administration 182 a t 193-4. 5 "'I'm L i s t e n i n g ' : Thoughts o f M i c h a e l W i l s o n [ q u o t i n g M i c h a e l W i l s o n ] " Financial Times (7 September 1987) 14. The i n f l u e n c e o f t h e p o l i t i c a l f a c t o r s i s f u r t h e r h e i g h t e n e d when one c o n s i d e r s t h a t t h e changes w h i c h were made t o t h e t a x r e f o r m package were i n d i r e c t r e s p o n s e t o t h e recommendations o f th e House o f Commons Committee on F i n a n c e and Economic A f f a i r s . * I n p a r t i c u l a r , t h e s e recommendations were o f a p o p u l i s t n a t u r e . I n l i g h t o f t h e p u b l i c i t y o f t h e B l e n k a r n R e p o r t and i t s p o l i t i c a l i n f l u e n c e , i t i s o f no s u r p r i s e t h a t t h e government f e l t c o m p e l l e d t o implement some o f t h e recommendations, a l b e i t , i n a d i l u t e d form. T h i s p r o p o s i t i o n was r e f l e c t e d i n t h e GAAR. D e s p i t e t h e a d v e r s e r e a c t i o n o f t h e b u s i n e s s and p r o f e s s i o n a l communities and t h e extreme p r e s s u r e e x e r t e d t o w i t h d r a w / s u b s t a n t i a l l y a l t e r t h e r u l e , t h e government s t o o d f i r m . I t o n l y made minor a l t e r a t i o n s t o t h e p r o v i s i o n , and even t h e n , some were i n r e s p o n s e t o t h e B l e n k a r n R e p o r t and n o t as a r e s u l t o f p r e s s u r e from t h e s e c o m m u n i t i e s . I t i s s u b m i t t e d t h a t t h e government's r e s p o n s e was r e l a t e d t o t h e p o l i t i c a l and s o c i a l e nvironment d i s c u s s e d above. I n p a r t i c u l a r , i t c o u l d n o t a f f o r d p o l i t i c a l l y t o w i t h d r a w / a l t e r t h e r u l e as i t would have been r e g a r d e d as pampering t h e c o r p o r a t e s e c t o r - i n d i r e c t c o n t r a d i c t i o n t o i t s image o f f a i r n e s s w h i c h i t sought t o promote. Canada, House o f Commons, Tax Reform '87: Report of the Standing Committee on Finance and Economic A f f a i r s tabled in the House of Commons on November 16, 1987 (Don M i l l s : R i c h a r d De Boo, 1987) ["Bl e n k a r n R e p o r t " ] . The h y p o t h e s i s t h a t t h e t a x r e f o r m package was " d r e s s e d - u p " t o be e l e c t o r a l l y a p p e a l i n g i s s u p p o r t e d by o t h e r t a c t i c s t h a t were adopted w h i c h were n o t r e l a t e d t o t h e s h i f t i n g o f t h e t a x burden from i n d i v i d u a l s t o t h e c o r p o r a t e s e c t o r . F o r example, t h e t a x r e f o r m s were d i v i d e d i n t o two d i s t i n c t p a r t s : Stage One d e a l t w i t h income t a x r e f o r m . Stage Two f l o a t e d t h e i d e a o f t h e i n t r o d u c t i o n o f a new extended s a l e s t a x . I t i s g e n e r a l l y a c c e p t e d t h a t t h i s d i v i s i o n was implemented f o r p o l i t i c a l r e a s o n s . I n p a r t i c u l a r , t h e i n t r o d u c t i o n o f a new extended s a l e s t a x was a v o l a t i l e i s s u e and n o t s u p p o r t e d by t h e e l e c t o r a t e . The government t h e r e f o r e p o s t p o n e d t h i s new t a x i n d e f i n i t e l y . However, i n t h e meantime, i t p r o c e e d e d w i t h Stage One t o b e n e f i t from t h e p o l i t i c a l g a i n s o f t h e t a x s a v i n g s . Moreover, c o n c e r n was e x p r e s s e d r e g a r d i n g t h e d i v i s i o n o f t h e package i n t h i s way, n o t a b l y by t h e House o f Commons Committee on F i n a n c e and Economic A f f a i r s . However, t h e government p e r c e i v e d t h a t t h e p o l i t i c a l c o s t s o f p r o c e e d i n g w i t h t h e s a l e s t a x would exceed t h e b e n e f i t s o f a c t i n g i n a c c o r d a n c e w i t h t h e s e c o n c e r n s . The above r e i n f o r c e s t h e p o l i t i c a l a s p e c t o f t h e t a x r e f o r m . I n p a r t i c u l a r , t h e government was a c t i n g i n i t s own s e l f - i n t e r e s t t o promote i t s chances o f r e - e l e c t i o n . C o n s e q u e n t l y , i t p r e s e n t e d and s t r u c t u r e d t h e t a x r e f o r m package t o be p o l i t i c a l l y a p p e a l i n g t o t h e e l e c t o r a t e . N o t a b l y , i t sought t o p r e s e n t t h e t a x r e f o r m s as p r o m o t i n g a f a i r e r t a x system. I n p a r t i c u l a r , i t a t t e m p t e d t o c r e a t e t h e i m p r e s s i o n t h a t t h e t a x burden was b e i n g s h i f t e d from low and m i d d l e - c l a s s i n d i v i d u a l s t o t h e c o r p o r a t e s e c t o r . The GAAR was an i n t e g r a l p a r t o f t h e t a x r e f o r m package. I t p l a y e d a major r o l e i n t h e c r e a t i o n o f t h i s image o f f a i r n e s s . I n p a r t i c u l a r , i t g r e a t l y a s s i s t e d t h e p r o m o t i o n o f t h e i m p r e s s i o n t h a t t h e t a x burden o f t h e c o r p o r a t e s e c t o r had been s i g n i f i c a n t l y i n c r e a s e d . The u t i l i s a t i o n o f t h e r u l e i n t h i s way p r o v i d e d an impetus f o r i t s i n t r o d u c t i o n and i n c l u s i o n w i t h i n t h e t a x r e f o r m package, a r g u a b l y i n f l u e n c e d t h e c a l c u l a t i o n o f t h e revenues i t was e s t i m a t e d t o g e n e r a t e and had an impact on t h e a t t i t u d e w h i c h t h e government adopted when t h e p r o p o s a l was a t t a c k e d by t h e b u s i n e s s and p r o f e s s i o n a l c ommunities. However, t h e above i s p r i m a r i l y c o n c e r n e d w i t h o n l y one o f t h e o b j e c t i v e s w h i c h t h e government was w i s h i n g t o promote i n s e e k i n g r e - e l e c t i o n . I n a d d i t i o n t o m a x i m i z i n g v o t e s w i t h t h e e l e c t o r a t e , i t was a l s o p l a c a t i n g t h e s p e c i a l i n t e r e s t groups, n o t a b l y , t h e c o r p o r a t e s e c t o r and h i g h - e a r n i n g i n d i v i d u a l s . One means by w h i c h t h i s was a c h i e v e d has been d i s c u s s e d p r e v i o u s l y . N o t a b l y , i n f i n a n c i a l t e rms, t h e c o r p o r a t e s e c t o r was n o t g r e a t l y a d v e r s e l y a f f e c t e d by t h e t a x r e f o r m s . I n p a r t i c u l a r , i t s t a x burden was n o t s i g n i f i c a n t l y i n c r e a s e d . Moreover, t h i s s i t u a t i o n i s e x a c e r b a t e d when one c o n s i d e r s t h a t t h e c o r p o r a t e t a x burden was not r e s t o r e d , by t h e r e f o r m s , t o t h e l e v e l i t had been when t h e government had t a k e n o f f i c e i n 1984. The government adopted o t h e r s t r a t e g i e s and measures w h i c h t r e a t e d t h e c o r p o r a t e s e c t o r f a v o u r a b l y and a c c o r d i n g l y a r e examples o f t h e p l a c a t i o n o f t h e b u s i n e s s community. F o r example, t h e t a x p r o f e s s i o n a l and c o r p o r a t e s e c t o r were e x t e n s i v e l y i n v o l v e d i n t h e p r e p a r a t o r y s t a g e s o f t h e t a x r e f o r m package. C o n s e q u e n t l y , t h e t a x r e f o r m p r o p o s a l s were w e i g h t e d i n f a v o u r o f b u s i n e s s . S t r u c t u r a l l y , i n a d d i t i o n t o t h e f i n a n c i a l i m p l i c a t i o n s , o t h e r p r o p o s a l s r e i n f o r c e t h i s p r o p o s i t i o n . F o r example, t h e t o p income t a x r a t e was r e d u c e d ; n o t a l l t a x b r e a k s were removed; r a t e s were r e d u c e d i n 1988, b u t many t a x b r e a k s s l a t e d f o r remo v a l were n o t phased o ut u n t i l 1991 and t h o s e b r e a k s t h a t were removed were n o t ones i m p o r t a n t t o t h e c o r p o r a t e s e c t o r . These examples c l e a r l y s u p p o r t t h e c l a i m t h a t t h e b u s i n e s s community was p l a c a t e d by t h e government i n s t r u c t u r i n g t h e t a x r e f o r m p r o p o s a l s . A t f i r s t g l a n c e , i t may be d i f f i c u l t t o d i s c e r n comparable arguments i n r e l a t i o n t o t h e GAAR as t h e l a t t e r o b v i o u s l y d i s a d v a n t a g e d t h e c o r p o r a t e s e c t o r . T h i s may be s o , b u t n e v e r t h e l e s s , t h e government s t i l l d i d a l l i t c o u l d , d e s p i t e t h i s l i m i t a t i o n , t o p l a c a t e t h e b u s i n e s s and t a x p r o f e s s i o n a l c ommunities. F o r example, i t i n v o l v e d t h e l a t t e r i n t h e p r e p a r a t i o n o f t h e r u l e ; i t m o d i f i e d t h e r u l e i n r e s p o n s e t o c r i t i c i s m and produced i n t e r p r e t a t i v e a i d s . T h i s a l l p o i n t s t o t h e government a t t e m p t i n g t o p a c i f y t h e c o r p o r a t e s e c t o r . I n suitmiary t h e r e f o r e , i t i s s u b m i t t e d t h a t t h e l o o m i n g f e d e r a l e l e c t i o n had an i m p o r t a n t impact on t h e t a x r e f o r m package. I n p a r t i c u l a r , t h e government sought t o u t i l i s e t h e e x e r c i s e as a means of b o l s t e r i n g i t s a p p e a l w i t h t h e e l e c t o r a t e . C o n s e q u e n t l y , i t produced and p r e s e n t e d a package w h i c h was d e s i g n e d t o appear t o be p r o m o t i n g a f a i r e r t a x system. However, as shown, any c l a i m s t o f a i r n e s s were somewhat i l l u s o r y . T h i s was p r i m a r i l y due t o t h e o t h e r o b j e c t i v e o f t h e government i n s e e k i n g r e - e l e c t i o n - t o p l a c a t e t h e b u s i n e s s community. T h i s aim was r e f l e c t e d p r i m a r i l y i n t h e s t r u c t u r e o f t h e t a x r e f o r m package. I n b a s i c terms, t h e t a x r e f o r m s were w e i g h t e d i n f a v o u r o f t h e c o r p o r a t e s e c t o r . The accommodation o f t h e s e two c o n t r a d i c t o r y s t r a n d s i s e v i d e n c e o f some c l e v e r p o l i t i c a l manoeuvring by t h e government. Other e l e m e n t s o f t h e s o c i o - p o l i t i c a l environment i n f l u e n c e d t h e t a x r e f o r m package and t h e GAAR i n p a r t i c u l a r . F o r example, f o r r e a s o n s g i v e n above, t h e p r o v i s i o n was i n c l u d e d i n t h e t a x r e f o r m s w h i c h had an impact on i t s development. C o n s e q u e n t l y , t h e r u l e was s u b j e c t e d t o t h e t r a d e - o f f s and compromises w h i c h a r e i n h e r e n t i n s t r u c t u r i n g any t a x r e f o r m s . F u r t h e r m o r e , t h e i n c l u s i o n o f t h e s e c t i o n w i t h i n t h e t a x r e f o r m measures meant t h a t i t was p r e s e n t e d as a w h i t e paper p r o p o s a l . T h e o r e t i c a l l y , t h i s exposed t h e r u l e t o i n c r e a s e d p r e s s u r e and u l t i m a t e l y , change. However, i f t h i s i s t r u e , t h e n i t i s s u r p r i s i n g t h a t t h e p r o p o s a l was not withdrawn o r s i g n i f i c a n t l y a l t e r e d i n l i g h t o f t h e h e a t e d c r i t i c i s m i t g e n e r a t e d . I t i s s u b m i t t e d t h a t t h e government conveyed i t s d e t e r m i n a t i o n r e g a r d i n g , a t t h e v e r y l e a s t , t h e c o n c e p t o f t h e p r o v i s i o n by i n c l u d i n g d r a f t l e g i s l a t i o n w i t h i n t h e w h i t e paper documents. The f i n a l major s o c i o - p o l i t i c a l f a c t o r w h i c h g r e a t l y i n f l u e n c e d t h e 1987 t a x r e f o r m e x e r c i s e was t h e t a x r e f o r m t h a t had o c c u r r e d i n t h e U n i t e d S t a t e s . F o r p o l i t i c a l and economic r e a s o n s , t h i s r e f o r m p r o v i d e d an impetus f o r t h e Canadian r e f o r m s and d i c t a t e d , t o a l a r g e e x t e n t , t h e i r d i r e c t i o n . The impact o f t h e U.S. r e f o r m s on t h e Canadian GAAR may n o t be d i s c e r n e d a t f i r s t g l a n c e c o n s i d e r i n g t h e U.S. package d i d n o t c o n t a i n a p a r a l l e l p r o v i s i o n . However, t h e e x i s t e n c e o f l i m i t a t i o n s c o n c e r n i n g t h e Canadian t a x r e f o r m i n f l u e n c e d t h e p r o v i s i o n . To e x p l a i n , t h e Canadian e x e r c i s e was hampered by a number o f f a c t o r s ( f o r example, l e s s s p e c i a l i n c e n t i v e s t o be removed/trimmed) w h i c h meant t h a t i t c o u l d n o t be as wi d e - r a n g i n g as t h e U.S. e x e r c i s e . T h e r e f o r e , t h e GAAR was perhaps i n t r o d u c e d t o make-up t h i s s h o r t f a l l . F o r example, i t s u b s t a n t i a t e d t h e c l a i m o f f a i r n e s s w h i c h t h e government was s e e k i n g t o promote. O v e r a l l , i t i s c l e a r t h a t t h e s o c i o - p o l i t i c a l c o n t e x t had a major i n f l u e n c e on t h e t a x r e f o r m package and t h e GAAR i n p a r t i c u l a r . The main elements i n c l u d e d t h e l o o m i n g e l e c t i o n , t h e i n c l u s i o n o f s e c t i o n 245 i n t h e t a x r e f o r m package and t h e U.S. t a x r e f o r m s . These f a c t o r s p l a y e d an i m p o r t a n t r o l e i n p r o v i d i n g an impetus f o r t h e i n t r o d u c t i o n o f t h e t a x r e f o r m s (and t h e GAAR) and f o r d e t e r m i n i n g t h e i r s t r u c t u r e and p r e s e n t a t i o n . However, o t h e r c o n t e x t s a l s o s h o u l d be c o n s i d e r e d i n t h e a n a l y s i s o f s e c t i o n 245. F o r example, t h e economic c o n d i t i o n s p r e v a l e n t a t t h e t i m e c o n t r i b u t e d t o t h e c r e a t i o n o f an environment c o n d u c i v e t o t h e i n t r o d u c t i o n o f t h e p r o v i s i o n . The economy a t t h e t i m e o f t h e t a x r e f o r m was n o t i n a h e a l t h y s t a t e . B a s i c a l l y , t h e c o u n t r y was "mortgaged t o t h e h i l t " ^ and had a d e f i c i t t h a t was s u b s t a n t i a l l y l a r g e r t h a n t h e U.S. d e f i c i t . These a d v e r s e c o n d i t i o n s a r g u a b l y g a r n e r e d p u b l i c a n i m o s i t y a g a i n s t t a x a v o i d e r s w h i c h was perha p s due t o an i n c r e a s e i n t h e i n c i d e n c e o f t a x a v o i d a n c e . Media a t t e n t i o n r e g a r d i n g t h e s e t a x a v o i d e r s p r e c i p i t a t e d a g e n e r a l a t t i t u d e t h a t t h e t a x system was u n f a i r . T h i s e x e r t e d p o l i t i c a l p r e s s u r e on t h e government t o r e c t i f y t h e s i t u a t i o n . The government a t t h a t t i m e was p a r t i c u l a r l y v u l n e r a b l e t o p u b l i c p r e s s u r e due t o s o c i a l and p o l i t i c a l f a c t o r s . F o r example, as d i s c u s s e d above, ^ Sti k e m a n , E l l i o t , Tax Reform '87: an Analysis, Canada Tax S e r v i c e , S p e c i a l R e l e a s e , J u l y 17, 1987 (Don M i l l s : R i c h a r d De Boo, 1987) a t 1. i t was s e e k i n g t o i n c r e a s e i t s e l e c t o r a l s u p p o r t i n t h e f a c e o f a l o o m i n g f e d e r a l e l e c t i o n . T h e r e f o r e , a c o m b i n a t i o n o f t h e economic and t h e s o c i o - p o l i t i c a l c o n t e x t s c u l m i n a t e d i n p r o v i d i n g an impetus f o r t a x r e f o r m . The GAAR was an i n t e g r a l p a r t o f t h i s t a x r e f o r m package, e s p e c i a l l y i n r e l a t i o n t o t h e c r e a t i o n o f an image o f f a i r n e s s w h i c h t h e government sought t o promote. The a d v e r s e economic c o n d i t i o n s a l s o had an impact on t h e t a x r e f o r m package i n a f f e c t i n g t h e scope o f t h e government t o use t h e e x e r c i s e t o i n c r e a s e r e v e n u e s . These c o n d i t i o n s r e s u l t e d i n p o l i t i c a l p r e s s u r e b e i n g p u t on t h e government n o t t o use t h e t a x r e f o r m p r o p o s a l s as a means o f c o l l e c t i n g e x t r a revenues w h i c h would have added t o t h e a l r e a d y b u l g i n g d e f i c i t . Due t o t h e s o c i a l and p o l i t i c a l e nvironment t h e government was s u s c e p t i b l e t o such p r e s s u r e s and t h u s pro d u c e d a t a x r e f o r m package w h i c h i t c l a i m e d was f i s c a l l y n e u t r a l . The GAAR p l a y e d an i m p o r t a n t r o l e i n a s s i s t i n g t h e government t o f u l f i l t h i s o b j e c t i v e . As r e g a r d s Stage One, t h e p r o v i s i o n was t h e most l u c r a t i v e o f t h e c o r p o r a t e b a s e - b r o a d e n i n g measures.^ A l t h o u g h t h e i n c r e a s e d revenue i t was p r o j e c t e d t o g e n e r a t e does n o t seem q u i t e so s i g n i f i c a n t i n l i g h t o f t h e i n c r e a s e s t h a t t h e changes t o t h e f e d e r a l s a l e s t a x and a c c e l e r a t i o n o f t a x payments were I t was e s t i m a t e d t o g e n e r a t e $2,240 m i l l i o n o v e r t h e p e r i o d 1988-92: Canada, Department o f F i a n c e , Tax Reform 1987: Income Tax Reform (Ottawa: t h e Department, June 18, 1987) a t 67. e s t i m a t e d t o r e s u l t i n , ' i t i s s u b m i t t e d t h a t t h e GAAR's c o n t r i b u t i o n was s t i l l i m p o r t a n t - an e x t r a $2 b i l l i o n c annot be e a s i l y d i s m i s s e d . However, i t s h o u l d be n o t e d t h a t t h e impact o f t h e economic c o n t e x t was m o s t l y i n d i r e c t . I t s p r i m a r y i n f l u e n c e was i n a f f e c t i n g p u b l i c a t t i t u d e s - b o t h t o w a r d s t a x a v o i d e r s and t h e s i z e o f t h e d e f i c i t . However, i t was s o c i a l and p o l i t i c a l f a c t o r s w h i c h caused t h e government t o be v u l n e r a b l e t o p o l i t i c a l p r e s s u r e m a n i f e s t e d by such p u b l i c a t t i t u d e s . T h i s p r e s s u r e p r o v i d e d an impetus f o r t h e i n t r o d u c t i o n o f t h e t a x r e f o r m package and d e t e r m i n e d t o a c e r t a i n e x t e n t t h e s t r u c t u r e and p r e s e n t a t i o n o f t h e r e f o r m s . C o n s e q u e n t l y , i t s h o u l d be r e i t e r a t e d t h a t t h e economic c o n t e x t p l a y e d an i m p o r t a n t r o l e i n c r e a t i n g a p o l i t i c a l c l i m a t e w h i c h was f a v o u r a b l e t o t h e i n t r o d u c t i o n o f t h e t a x r e f o r m package and t h e enactment o f t h e GAAR. The economic c o n t e x t a l s o r e i n f o r c e s t h e e x t e n t o f t h e i n f l u e n c e o f t h e s o c i a l and p o l i t i c a l c o n d i t i o n s . I t i s s u b m i t t e d t h a t t h e l a t t e r were more promine n t i n d e t e r m i n i n g t h e i n t r o d u c t i o n , s t r u c t u r e and p r e s e n t a t i o n o f t h e t a x r e f o r m p r o p o s a l s , and t h e GAAR i n p a r t i c u l a r . F o r example, i f t h e government had been more c o n c e r n e d w i t h t h e economic e n v i r o n m e n t , t h e n t h e t a x ' T o t a l l i n g $2,705 m i l l i o n i n 1988-89 a l o n e and $7,485 m i l l i o n o v e r t h e p e r i o d 1988-92: Canada, Department o f F i n a n c e , Tax Reform 198 7 (Ottawa: t h e Department, June 18, 1987) a t 75. r e f o r m p r o p o s a l s would p r o b a b l y have a d d r e s s e d t h e d e f i c i t p r o b l e m s . I n s t e a d , t h e government produced a package t h a t was i n t e n d e d t o be e l e c t o r a l l y a p p e a l i n g , y e t w h i c h c i r c u m v e n t e d economic i s s u e s . 1° T h i s p r o p o s i t i o n i s v e r i f i e d by t h e o v e r a l l revenue impact o f t h e t a x r e f o r m s . I n p a r t i c u l a r , t h e r e f o r m s were s t r u c t u r e d t o i n c r e a s e t h e t o t a l r evenues by o v e r $1 b i l l i o n i n 1988-89." An e x t r a $1 b i l l i o n b o o s t t o t h e economy b e f o r e t h e e l e c t i o n would h e l p t h e government c r e a t e t h e image t h a t i t was making p r o g r e s s i n i m p r o v i n g t h e economic d i f f i c u l t i e s . Moreover, by l i m i t i n g t h e i n c r e a s e t o $1 b i l l i o n , t h e government was s t i l l a b l e t o m a i n t a i n t h a t Stage One was f i s c a l l y n e u t r a l , t h u s a c t i n g i n a c c o r d a n c e w i t h p u b l i c s e n t i m e n t . T h e r e f o r e , i t i s a r g u a b l e t h a t t h e government i n t e n t i o n a l l y s t r u c t u r e d t h e t a x r e f o r m package t o g e n e r a t e t h e s e revenue e f f e c t s i n t h e f i r s t y e a r p o s t - r e f o r m . T h i s h y p o t h e s i s may seem a t r i f l e c y n i c a l , b u t i f one c o n s i d e r s t h e f i s c a l i m p l i c a t i o n s i n t h e f o l l o w i n g y e a r s , i t r e i n f o r c e s t h i s p o l i t i c a l manoeuvring o f t h e government. 1" " ' I t i s a l l p o l i t i c a l . T h i s i s n o t a d e f i c i t - c o n t r o l l i n g package. I t i s a l e t ' s - w i n - t h e - n e x t - e l e c t i o n p o l i c y ' [ q u o t i n g an unnamed s e n i o r e c o n o m i s t a t a T o r o n t o b r o k e r a g e f i r m ] . " M. J a n i g a n , " C a u t i o u s Reform" (29 June 1987) 100 Maclean's 34 a t 38. " Tax Reform 1987, supra, n o t e 9 a t 75. 12 F o r example, i n 1989-90, t h e r e was a s h o r t - f a l l o f o v e r $1 b i l l i o n . T h e r e a f t e r , t h e o v e r a l l n e t p o s i t i o n was r e l a t i v e l y n e u t r a l . F u r t h e r e v i d e n c e o f t h e government's d e s i r e t o produce a p o l i t i c a l l y sound package i s p r o v i d e d by o b s e r v a t i o n s made by t h e S t a n d i n g Committee on F i n a n c e and Economic A f f a i r s t o t h e e f f e c t t h a t Stage One may d r a g on t h e economy i n t h e l o n g e r t e r m because t h e i n c r e a s e i n t a x a t i o n o f i n v e s t m e n t c o u l d s l o w economic g r o w t h . I f t h e government had been c o n c e r n e d w i t h r e c t i f y i n g t h e economic s i t u a t i o n i t would n o t have s t r u c t u r e d a t a x r e f o r m package t o have t h i s e f f e c t . O v e r a l l , from t h e above, i t i s c l e a r t h a t t h e government was u t i l i s i n g t h e t a x r e f o r m package t o enhance i t s chances o f b e i n g r e - e l e c t e d . I t c o u l d have implemented t h i s o b j e c t i v e i n a number o f ways, f o r example, i m p r o v i n g t h e economic s i t u a t i o n . T h i s would have r e f l e c t e d f a v o u r a b l y on i t s a b i l i t y t o manage t h e c o u n t r y and perhaps b o l s t e r e d i t s e l e c t o r a l s u p p o r t . However, t h e government p e r c e i v e d t h a t t h e measures n e c e s s a r y t o a l l e v i a t e t h e economic problems ( f o r example, t a x i n c r e a s e s , e x p e n d i t u r e c u t s ) would have e n t a i l e d i n c u r r i n g p o l i t i c a l c o s t s e x c e e d i n g t h e b e n e f i t s o f an improved economy. T h e r e f o r e , i t o p t e d t o c i r c u m v e n t t h e economic i s s u e s and i n s t e a d produce a t a x r e f o r m package t h a t was more d i r e c t l y a p p e a l i n g t o t h e e l e c t o r a t e (eg. by i m p l e m e n t i n g t a x s a v i n g s ) . I t p e r c e i v e d t h a t t h e b e n e f i t s o f e f f e c t i n g t h e s e p r o p o s a l s would o u t w e i g h t h e c o s t s o f not d e a l i n g w i t h t h e economic s i t u a t i o n . B l e n k a r n R e p o r t , supra, n o t e 6 a t 31. However, i t s h o u l d a l s o be n o t e d t h a t t h e t a x r e f o r m p r o p o s a l s d i d n o t m a t e r i a l l y worsen t h e economic c o n d i t i o n s . F o r example, t h e government c o u l d have e f f e c t e d g r e a t e r r e d u c t i o n s i n p e r s o n a l income t a x e s . I t p e r c e i v e d t h a t t h i s would be p o l i t i c a l l y dangerous, as t h e b e n e f i t s o f i m p l e m e n t i n g such measures would o u t w e i g h t h e p o l i t i c a l c o s t s o f s i g n i f i c a n t l y a d d i n g t o t h e d e f i c i t . I t t h e r e f o r e chose a b a l a n c e whereby t h e o v e r a l l i m p a ct would n o t be t h a t n o t i c e a b l e - what i s a b i l l i o n d o l l a r s h e r e and t h e r e when t h e r e i s a d e f i c i t o f o v e r $38 b i l l i o n ? I n summary, i t would appear t h a t t h e economic c o n t e x t d i d n o t have a d i r e c t b e a r i n g on t h e t a x r e f o r m e x e r c i s e . The government was more i n t e r e s t e d i n b o l s t e r i n g i t s e l e c t o r a l s u p p o r t t h r o u g h more d i r e c t means t h a n i m p r o v i n g t h e economic s i t u a t i o n . I t t h e r e f o r e produced a t a x r e f o r m package w h i c h was d e s i g n e d t o be p o l i t i c a l l y a p p e a l i n g , f o r example, by i m p l e m e n t i n g t a x s a v i n g s f o r t h e m a j o r i t y o f t a x p a y e r s . The f i n a l c o n t e x t w h i c h i s r e l e v a n t t o t h e t a x r e f o r m package and s e c t i o n 245 i s t h e h i s t o r i c a l c o n t e x t . T h i s encompasses two ele m e n t s - t h e l e g a l background t o t h e GAAR and t h e s o c i a l and p o l i t i c a l h i s t o r y o f Canadian t a x r e f o r m i n g e n e r a l . The former i n f l u e n c e d t h e p r o v i s i o n i n a number o f ways. F i r s t , t h e e x i s t e n c e o f s t a t u t o r y and j u d i c i a l a n t i - a v o i d a n c e r u l e s paved t h e way f o r t h e i n t r o d u c t i o n o f s e c t i o n 245. They h e l p e d t o c r e a t e a f a v o u r a b l e environment f o r t h e enactment o f t h e p r o v i s i o n . F o r example, i t was n o t such a g r e a t s t e p f o r w a r d f o r t h e government t o p r o p o s e t h e GAAR, compared w i t h t h e p o s i t i o n , f o r example, had i t countenanced t a x a v o i d a n c e b e f o r e , and t h e n s u d d e n l y , a t t e m p t e d t o i n i t i a t e s e c t i o n 245. Moreover, t h e s e r u l e s i n f l u e n c e d t h e f o r m a t o f t h e r u l e . The government was a b l e t o d e c i d e w h i c h c o n c e p t s would be most a p p r o p r i a t e i n t h e achievement o f i t s d e s i r e d aims. The s o c i a l and p o l i t i c a l background o f t a x r e f o r m i n g e n e r a l i n f l u e n c e d t h e s t r a t e g y t h e government adopted w i t h i t s 1987 package, w h i c h i n t u r n a f f e c t e d t h e s t r u c t u r e o f t h e p r o p o s a l s . I n p a r t i c u l a r , two r e c e n t a t t e m p t s a t t a x r e f o r m - t h e 1971 t a x r e f o r m l e g i s l a t i o n (which was based on t h e C a r t e r Commission Report^^) and t h e budget p r o p o s a l s o f A l l a n MacEachen i n 1981, were most r e l e v a n t . B o t h t h e s e a t t e m p t s had been t h w a r t e d by p r e s s u r e e x e r t e d on t h e government by s p e c i a l i n t e r e s t g roups. U l t i m a t e l y , t h e l e g i s l a t i o n t h a t was e n a c t e d d i f f e r e d g r e a t l y from t h e o r i g i n a l p r o p o s a l s . T h i s encouraged t h e government i n t h e 1987 e x e r c i s e t o seek t h e i n p u t o f s p e c i a l i n t e r e s t g r o u p s , i n p a r t i c u l a r , t h e b u s i n e s s community. T h e r e f o r e , i t c o n s u l t e d w i d e l y w i t h t h e c o r p o r a t e s e c t o r i n t h e p r e p a r a t o r y s t a g e s o f Canada, "Report o f t h e R o y a l Commission on T a x a t i o n " (Ottawa: Queen's P r i n t e r , 1966). t h e t a x r e f o r m p r o p o s a l s . T h i s i n p u t was r e f l e c t e d i n t h e s t r u c t u r e o f t h e t a x r e f o r m package, w h i c h as p r e v i o u s l y d i s c u s s e d , was w e i g h t e d i n f a v o u r o f b u s i n e s s . The two t a x r e f o r m e x p e r i e n c e s a l s o encouraged t h e government t o p r e s e n t t h e 1987 t a x r e f o r m p r o p o s a l s as w h i t e paper documents. The p r i o r t a x r e f o r m e x e r c i s e s had r e s u l t e d i n d i l u t i o n o f t h e o r i g i n a l documents. Changes t o l e g i s l a t i v e p r o p o s a l s a r e more e m b a r r a s s i n g f o r t h e government t h a n a l t e r a t i o n s t o w h i t e paper p r o p o s a l s . T h e r e f o r e , t h e government i n 1987 was prompted t o i n t r o d u c e i t s p r o p o s a l s as w h i t e p a p e r s . I n summary, i t i s s u g g e s t e d t h a t t h e h i s t o r i c a l c o n t e x t had an impact on 1987 t a x r e f o r m e x e r c i s e , and t h e GAAR i n p a r t i c u l a r . I n p a r t i c u l a r , t h e l e g a l background paved t h e way f o r t h e i n t r o d u c t i o n o f t h e p r o v i s i o n and d e t e r m i n e d t o a c e r t a i n e x t e n t , t h e f o r m a t o f t h e r u l e . As r e g a r d s t h e p o l i t i c a l and s o c i a l h i s t o r y , r e c e n t t a x r e f o r m a t t e m p t s i n f l u e n c e d t h e s t r a t e g y t h e government adopted i n p r e p a r i n g i t s t a x r e f o r m p r o p o s a l s i n 1987 and t h e p r e s e n t a t i o n o f t h e r e f o r m s as w h i t e paper documents. To c o n c l u d e , i t i s a p p a r e n t from t h e above t h a t t h e whole e n v i r o n m e n t a l b a c k d r o p , from t h e s o c i o - p o l i t i c a l background t o t h e economic c o n d i t i o n s t o t h e h i s t o r i c a l c o n t e x t , i n f l u e n c e d t h e enactment o f s e c t i o n 245. By a n a l y z i n g t h e c o n t e x t o f t h e p r o v i s i o n , we can f u r t h e r our u n d e r s t a n d i n g o f t h e r u l e . I n p a r t i c u l a r , t h e f a c t o r s t h a t l e d t o i t s i n t r o d u c t i o n and i t s s t r u c t u r e can be i d e n t i f i e d . From t h i s p e r s p e c t i v e , we can a p p r e c i a t e why t h e government i n t r o d u c e d t h e r u l e and why i t was a b l e t o r e m a i n committed t o t h e p r o v i s i o n d e s p i t e t h e s e v e r e c r i t i c i s m w h i c h i t a t t r a c t e d . F u r t h e r m o r e , t h e v a l u e o f f o c u s i n g on s e c t i o n 245 i s v a l i d a t e d when one c o n s i d e r s t h a t a p a r a l l e l p r o v i s i o n was e n a c t e d i n r e s p e c t o f t h e new Goods and S e r v i c e s Tax w h i c h t h e government i n t r o d u c e d i n 1989.'"^ S e c t i o n 245 o b v i o u s l y emboldened t h e government t o i n t r o d u c e t h i s p a r a l l e l p r o v i s i o n . I t a l s o f o r e w a r n e d t h e s p e c i a l i n t e r e s t groups o f t h e f u t i l i t y o f t h e i r o b j e c t i o n s . Quaere whether t h i s r e f l e c t e d a t r e n d i n Canadian p o l i c y making. T h i s r a i s e s w i d e r i s s u e s c o n c e r n i n g t h e e r a o f democracy - q u e s t i o n s w h i c h cannot be answered h e r e . S e c t i o n 274 o f The E x c i s e A c t , RSC 1985, c. E-15, as amended by SC 1990, c. 45. F o r Revenue Canada's i n t e r p r e t a t i o n , see Technical Information B u l l e t i n B-045, " G e n e r a l A n t i - A v o i d a n c e R u l e (GAAR)" ( F e b r u a r y 5, 1991). I n a d d i t i o n , t h i s p a per exposes t h e p o l i t i c a l element o f t a x l e g i s l a t i o n . Tax laws cannot be d i v o r c e d from t h e p o l i t i c a l p r o c e s s . C o n s e q u e n t l y , t h e a n a l y s i s o f t a x p r o v i s i o n s s h o u l d not be l i m i t e d t o n o r m a t i v e t r a d i t i o n s s u c h as e q u i t y , e f f i c i e n c y o r s i m p l i c i t y . A d o p t i n g such t o o l s i g n o r e s t h e p o l i t i c a l r e a l i t y o f t a x law. I t i s o n l y by l o o k i n g a t t h i s w i d e r c o n t e x t t h a t we can t r u l y u n d e r s t a n d what goes i n t o t h e f o r m u l a t i o n o f t a x p r o v i s i o n s . We can a p p r e c i a t e t h e p o l i t i c a l b a l a n c i n g between c o s t s and b e n e f i t s , t h e compromises and t r a d e - o f f s t h a t o c c u r and t h e accommodation o f c o n f l i c t i n g i n t e r e s t s . The 1987 t a x r e f o r m package t r u l y r e p r e s e n t s t h e outcome o f t h e s e f a c t o r s . F i n a l l y , t h i s paper r a i s e s w i d e r i s s u e s r e l a t i n g t o t h e r o l e o f governments i n d e m o c r a t i c s t a t e s . I n p a r t i c u l a r , i t i l l u s t r a t e s t h a t governments a r e n o t a c t i n g i n t h e p u b l i c i n t e r e s t o r a c c o r d i n g t o some g e n e r a l and s o c i a l c r i t e r i a . They a r e a c t i n g i n t h e i r own s e l f - i n t e r e s t , d o i n g whatever i s n e c e s s a r y t o en s u r e t h e i r c o n t i n u e d s t a y i n o f f i c e . However, t h e t a x r e f o r m e x e r c i s e a l s o exposes t h e f a l l i b i l i t y o f t h e e l e c t o r a t e . The government went t o g r e a t l e n g t h s t o produce and promote"" a 1' The government went a l l o u t t o s e l l t h e t a x r e f o r m s t o t h e p u b l i c . F o r example, t h e F i n a n c e M i n i s t e r h i m s e l f t r a v e l l e d t h e b r e a d t h o f Canada g i v i n g i n n u m e r a b l e speeches and i n t e r v i e w s : J . Fer g u s o n , " W i l s o n Faces Bay S t . Crowd on Tax Reform" Toronto Star (25 June 1987) E l ) . He even r e s o r t e d t o w r i t i n g t o The Globe and Mail ("Tax Reform Lowers Burden f o r 85%" ( L e t t e r t o E d i t o r ) The Globe and Mail (24 August 1988) A7) t o e n s u r e maximum exposure o f t h e government's image o f f a i r n e s s . package w h i c h i t t h o u g h t would be a p p e a l i n g t o t h e e l e c t o r a t e and t h e r e f o r e b o l s t e r i t s s u p p o r t . However, d e s p i t e t h e s e e f f o r t s , t h e C a n a d i a n p u b l i c s t i l l seemed ignorant^'^ and u n i n t e r e s t e d ^ ^ i n t h e whole a f f a i r . P e rhaps i t i s n o t t h e a c t i v i t i e s o f government w h i c h we s h o u l d c o n c e n t r a t e on, b u t t h e u n p r e d i c t a b l e n a t u r e o f t h e e l e c t o r a t e . I t seems t h a t i n t h e s e days o f advanced t e c h n o l o g y , we s t i l l do n o t know how t o a p p e a l t o human n a t u r e ! F o r example, d e s p i t e t h e s e l l i n g e f f o r t s , t h e Canadian p u b l i c d i d n o t p i c k up on t h e government's message o f f a i r n e s s t h a t i t sought t o promote: a p o l l by Angus R e i d A s s o c i a t e s f o r Southam News r e v e a l e d t h a t s i x out o f t e n o f t h o s e s u r v e y e d d i d n o t b e l i e v e t h e government's c l a i m t h a t t a x r e f o r m would make t h e system f a i r e r . Only one i n t e n e x p e c t e d t o b e n e f i t p e r s o n a l l y from t a x r e f o r m : J . O ' N e i l l , "Canadians S k e p t i c a l o f Tax Reform" Calgary Herald (2 F e b r u a r y 1988) A3. I t i s s u b m i t t e d t h a t t h e s e r e s u l t s were due t o l a c k o f p u b l i c knowledge o f t h e i s s u e r a t h e r t h a n i n f o r m e d d e c i s i o n s . F o r example, a p r i m a r y means o f p u b l i c d i s s e m a t i o n o f knowledge i s t h r o u g h t h e media. But, i n t h e case o f t h e 1987 t a x r e f o r m e x e r c i s e , g e n e r a l media a t t e n t i o n o n l y l a s t e d f o r about two weeks. T h e r e a f t e r , i t was r e l e g a t e d t o t h e b u s i n e s s pages: L. McQuaig, Behind Closed Doors: How The Rich Won Control of Canada's Tax System ... And Ended Up Richer (Markham, Ont.: V i k i n g , 1987) a t x x x v i . A n e c d o t a l e v i d e n c e i n c l u d e s one C o n s e r v a t i v e MP (and member of t h e S t a n d i n g Committee on F i n a n c e and Economic A f f a i r s ) , P a u l McCrossan who s t a t e d t h a t he was n o t been asked a s i n g l e q u e s t i o n from any c o n s t i t u e n t on t a x a t i o n : J . Kohut, " T o r i e s F i n d Tax T a b l e s Turned as Reform Becomes I s s u e i n V o t e " The Globe and Mail (24 October 1988) B l . To c o n c l u d e , t h i s paper r a i s e s many i s s u e s , some o f w h i c h have been l e f t unanswered. I n a l l , i t shows t h a t t a x a n a l y s i s does no t have t o be l i m i t e d t o t h e t e c h n i c a l o r t h e s p e c i f i c . I n f a c t , i t s h o u l d encompass w i d e r t o p i c s , f o r example, t h e p o l i t i c a l p r o c e s s and democracy i n g e n e r a l . I t i s hoped t h a t t h i s a n a l y s i s o f s e c t i o n 245 has v e r i f i e d t h e v a l i d i t y o f a d o p t i n g a p o l i t i c a l a p proach i n c o n s i d e r i n g t a x la w s . By v i e w i n g t h e p r o v i s i o n w i t h i n t h e c o n t e x t s p r e v a l e n t a t t h a t t i m e , an a t t e m p t has been made t o i d e n t i f y t h e exogenous f a c t o r s w h i c h i n f l u e n c e d i t s i n t r o d u c t i o n and development. T h i s p r o v i d e s a b e t t e r u n d e r s t a n d i n g o f t h e r u l e , p a r t i c u l a r l y s i n c e i t i s s t i l l i n a s t a t e o f l i m b o , n o t b e i n g c o n s i d e r e d by t h e c o u r t s . O v e r a l l , t h i s t h e s i s r e i n f o r c e s t h e c l a i m t h a t t a x laws s h o u l d be a n a l y z e d i n t h e w i d e r c o n t e x t - t h e y a r e a f t e r a l l a p r o d u c t o f t h e i r e nvironment. BIBLIOGRAPHY LEGISLATION AND ASSOCIATED DOCUMENTS; S e c t i o n 245 Income Tax A c t , RSC 1952, c.148 as amended by SC 1970-71-72, C . 6 3 , and as s u b s e q u e n t l y amended Information C i r c u l a r 88-2, " G e n e r a l A n t i - A v o i d a n c e R u l e : S e c t i o n 245 o f t h e Income Tax A c t " , O c t o b e r 21, 1988 Advance Tax Ruling No.ATR-42, " T r a n s f e r o f s h a r e s " ( d a t e d December 13, 1991) Advance Tax Ruling No.ATR-44, " U t i l i z a t i o n o f d e d u c t i o n s and c r e d i t s w i t h i n a r e l a t e d c o r p o r a t e group" ( d a t e d F e b r u a r y 17, 1992) Advance Tax Ruling No.ATR-47, " T r a n s f e r o f a s s e t s t o R e a l t y c o " ( d a t e d F e b r u a r y 24, 1992) BOOKS AND ARTICLES Adams, L.D., "Craven v. White: U.K. S t e p - t r a n s a c t i o n D o c t r i n e E v o l v e s - Canadian P l a n n e r s Beware" (1988) 2 Canadian Current Tax C57 Adams, M. & D. Dasko, " T o r i e s R a l l y t o Second P l a c e as NDP Drops t o T h i r d " The Globe and Mail (29 December 1987) A l & A9 Ad o l p h , C., "'Tax Reform That Wasn't i s C o n s u l t a n t s ' Consensus" Calgary Herald (20 June 1987) F l Andrew, B., "Tax Reform on Agenda" Financial Post (11 May 1985) 10 A n g e l l , M.B., "Tax E v a s i o n and Tax A v o i d a n c e " (1938) 38 Columbia Law Review 80 " A n t i - A v o i d a n c e P r o p o s a l Goes Too F a r " (1987) 9 Canadian Taxpayer 121 A r n o l d , B . J . , " I n P r a i s e o f t h e B u s i n e s s Purpose T e s t " i n Report of Proceedings of the Thirty-Ninth Tax Conference, 1987 Con f e r e n c e R e p o r t ( T o r o n t o : Canadian Tax F o u n d a t i o n , 1988) 10.1 A r n o l d , B . J . , "The Proposed G e n e r a l A n t i - A v o i d a n c e R u l e " (1988) 2 Review of International Business Law 225 A r n o l d , B . J . & J.R. W i l s o n , "The G e n e r a l A n t i - A v o i d a n c e R u l e - P a r t 1" (1988) 3 6 Canadian Tax Journal 829 A r n o l d , B . J . & J.R. W i l s o n , "The G e n e r a l A n t i - A v o i d a n c e R u l e - P a r t 2" (1988) 36 Canadian Tax Journal 1123 A r n o l d , B .J. & J.R. W i l s o n , "The G e n e r a l A n t i - A v o i d a n c e R u l e - P a r t 3" (1988) 36 Canadian Tax Journal 1369 Beach, D., " A n t i - a v o i d a n c e R u l e a r e an End Run Around t h e C o u r t s " Financial Times (29 June 1987) 25 Beach, D. , " A r t o f Tax A v o i d a n c e S h o u l d n ' t be Confused w i t h E v a s i o n " Financial Times (6 A p r i l 1987) 29 Beach, D., " F i n a n c e Department Book Answers Tax Reform Q u e s t i o n s " Financial Times (19 October 1987) 26 Beach, D., " W i l s o n has O p p o r t u n i t y t o Open Doors on Tax P o l i c y " Financial Times (16 November 1987) 25 Beach, D., " W i l s o n S t r i k e s a t Tax A v o i d a n c e " Calgary Herald (13 O c t o b e r 1987) F6 Beach, W., " G e n e r a l A n t i - A v o i d a n c e R u l e " (1989) 6 Business & Law 46 Beauchesne, E. , " B u s i n e s s Groups H o l d D i v e r s e Views on Tax Reform" Halifax Chronicle Herald (8 November 1986) 30 Beauchesne, E., " B u s i n e s s e s A l l Want Tax Reform - But Not i n T h e i r Own S e c t o r " Halifax Chronicle Herald (16 May 1987) 40 Beauchesne, E. , " P r e s s u r e s C o n f l i c t on Tax Reforms" Calgary Herald (12 September 1987) F6 Beauchesne, E., "Review F r a c a s : O p p o s i t i o n Says W i l s o n Breached P r i v i l e g e s " Halifax Chronicle Herald (18 June 1987) 1 & 24 B e i t h , R.M., e t a l , "Revenue Canada Round T a b l e " i n Report of the Proceedings of the Forty-Second Tax Conference, 1990 Co n f e r e n c e R e p o r t ( T o r o n t o : Canadian Tax F o u n d a t i o n , 1991) 50:1 a t 50:11-3 Bergh, C.S., E f f e c t i v e Tax Avoidance ( T o r o n t o : C a r s w e l l , 1965) B i r d , R.M., "The Tax K a l e i d o s c o p e : P e r s p e c t i v e s on Tax Reform i n Canada" (1970) 18 Canadian Tax Journal 444 B i r n i e , D.A.G., " L i v i n g w i t h GAAR: The E f f e c t on Tax P r a c t i c e " i n Income Tax, Enforcement, Compliance and Administration, 1988 C o r p o r a t e Management Tax C o n f e r e n c e ( T o r o n t o : Canadian Tax F o u n d a t i o n , 1989) 5:1 B i a i s , A. & F. 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(New A n t i - A v o i d a n c e Income Tax P r o v i s i o n ) " (1989) 122 CA Magazine, No. 1/2, 50 " C o n s u l t a t i o n H e l p e d W i l s o n C a r r y t h e Day" Vancouver Sun (18 J u l y 1987) CI Cook, P. , "A F a i r e r Tax System i s No Easy T h i n g t o S e l l " The Globe and Mail (4 September 1987) B2 Cook, P., "A R a s p b e r r y f o r t h e O p p o s i t i o n on Tax Reform" The Globe and Mail (7 J u l y 1987) B4 Corn, G., " J u d i c i a l and S t a t u t o r y Tax Reform" (1987) 2 Canadian Current Tax J44 Corn, G., " R i g h t t o A r r a n g e One's A f f a i r s t o A v o i d T a x a t i o n - Lack o f B u s i n e s s Purpose - Sham T r a n s a c t i o n s " (1984) 1 Canadian Current Tax 131 C o s t e l l o , B., "Watch as ' V u l t u r e s ' Move i n on Tax Reform" Calgary Herald (8 September 1987) D l C o u z i n , R., " S i m p l i f i c a t i o n and Reform" (1988) 26 Osgoode Hall Law Journal 43 3 C r e i g h t o n , G.D., " S t u b a r t I n v e s t m e n t s L i m i t e d v. 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