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UBC Theses and Dissertations

Tax avoidance : the Canadian experience Michie, Jane Heddle 1992

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TAX  AVOIDANCE —  THE CANADIAN EXPERIENCE  by JANE HEDDLE MICHIE L L . B ( H o n s ) , A b e r d e e n U n i v e r s i t y , 1990 D.L.P., A b e r d e e n U n i v e r s i t y , 1 9 9 1 A THESIS SUBMITTED IN PARTIAL FULFILLMENT OP THE  REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS in  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 a s c o n f o r m i n g to the required standard  THE  UNIVERISTY OF B R I T I S H  COLUMBIA  S e p t e m b e r 1992 (c)  J a n e H e d d l e M i c h i e , 1991  In  presenting  this  degree at the  thesis  in  partial  University of  of  department  this or  thesis for by  his  and study. I further  the  requirements  or  her  representatives.  It  financial gain shall not  permission.  Department The University of British Columbia Vancouver, Canada  for  an advanced  Library shall make  it  agree that permission for extensive  scholarly purposes may be  publication of this thesis for  DE-6 (2/88)  of  British Columbia, I agree that the  freely available for reference copying  fulfilment  is  granted  by the  understood  that  head of copying  my or  be allowed without my written  ABSTRACT  Section  245  was  proposed  as  i n i t i a t e d by t h e government  part  of  the  tax  on 18 J u n e , 1987.  reform  package  I t introduced  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. r u l e has been i n e f f e c t s i n c e September be j u d i c i a l l y  general  In particular,  environment  13, 1988, b u t h a s y e t t o  -  the  which incorporates a  the rule  t h a t s u c h an a p p r o a c h was  political  i s analyzed within  socio-political,  economic  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 time.  I t was  necessary t o explain c e r t a i n  For example,  why  t h e Canadian government  section  and  why  245  The  considered.  T h i s paper adopts a methodology perspective.  an  certain  decided to  modifications  were  the and felt  issues.  introduce  made  to  the  hopes t o e x t e n d our u n d e r s t a n d i n g of  the  p r o p o s a l i n i t s passage through the l e g i s l a t i v e p r o c e s s .  Overall, rule  by  political  this  paper  exposing  the  factors  which  environment f o r t h e enactment  created  a  favourable  of the p r o v i s i o n .  TABLE OP CONTENTS Page ABSTRACT TABLE OF CONTENTS  i  i  i  i  i  ACKNOWLEDGEMENTS  V  CHAPTER I - INTRODUCTION  1  A.  General  1  B.  Methodological  Approach  7  CHAPTER I I - 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 u b s t a n c e  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 a n d Application  E.  31  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  CHAPTER I I I - SOCIAL AND POLITICAL CONTEXT Assumptions  34 48  A.  Underlying  38  B.  The Looming E l e c t i o n (i) General Introduction (ii) P o l i t i c a l Appeal ( i i i ) M o d i f i c a t i o n o f t h e P r o p o s e d GAAR (iv) S p e c i a l I n t e r e s t Groups  48 48 50 82 91  C.  S e c t i o n 245 a s P a r t o f t h e T a x R e f o r m P a c k a g e  100  D.  Tax Reform i nt h e U n i t e d  105  E.  Conclusion  States  111  CHAPTER IV - ECONOMIC CONTEXT  116  A.  Economic C o n d i t i o n s  116  B.  Influence  118  C.  Conclusion  125  CHAPTER V - HISTORICAL CONTEXT  129  o n S e c t i o n 245  A.  Introduction  129  B.  Legal  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  Background  137  CHAPTER VI - CONCLUSION  150  BIBLIOGRAPHY  179  ACKNOWLEDGEMENTS T h i s s t u d y was c o m p l e t e d u n d e r 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 Pitman Potter (UBC) whose helpful comments and support 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 s e c o n d r e a d e r . P r o f e s s o r A n t h o n y S h e p p e r d (UBC) f o r h i s invaluable e x p e r t i s e and assistance. Both o f f e r e d t h e i r time 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 w o u l d h a v e b e e n u n a b l e t o p u r s u e my w o r k h e r e . I w o u l d l i k e t o t h a n k t h e L e v e r h u l m e 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 m o n i e s . 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 f r o m t h e C.B. D a v i d s o n Fund a t Aberdeen U n i v e r s i t y a n d 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 C o l u m b i a (UGF). F i n a l l y , I thank encouragement.  my f a m i l y  and f r i e n d s  for their  support and  CHAPTER I INTRODUCTION A. GENERAL Tax In  avoidance fact,  excused  i scertainly  i n light  o f i t sapparent  f o r regarding  i t as a  i m p o s i t i o n o f t a x e s , owing human n a t u r e ! ^  not a recent or novel immortality,  natural  o n e may b e  consequence  of the  i t s existence t o thef a l l i b i l i t y of  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  to,  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  the  incentive  and o p p o r t u n i t y t o a v o i d  regards t h e former,  phenomenonJ  continue as long as taxes  persist.^  i t seems t h a t t h e i n c e n t i v e w i l l  As  always 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 a s s u c h , t h e n t h e l e g a l c o n s e q u e n c e s a r e t h a t t h e t a x l i a b i l i t y i snot reduced (oravoided) i n accordance with the transaction. 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 , then they 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 t e r m e d " t a x a v o i d a n c e " . cf. D.C. N a t h a n s o n , " G e n e r a l A n t i - A v o i d a n c e R u l e a n d T a x R e f o r m - The B u s i n e s s Purpose Test: 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 1 4 , 1988 a t 1 1 . 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 loose, n o n - l e g a l i s t i c sense, 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 ( L o n d o n : P a n o p t i c u m P r e s s , 1979) a t 7 2 . More c o n c r e t e c a u s e s 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 such f a c t o r s as t h e degeneration i n moral standards 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 , e d . , 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 ( L o n d o n : The I n s t i t u t e o f E c o n o m i c 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 , a n d t h a t o t h e r f a c t o r s ( f o r e x a m p l e , t h o s e m e n t i o n e d 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 .  present, that  at least  i n industrialised  t h e revenue  establishment structured latter,  needs  of  of these  sufficiently  t a x avoidance  the  opportunity  n a t i o n s , due t o t h e f a c t  countries low  rates  uneconomic.^ to  do n o t a l l o w t h e  avoid  of  sources uniformly are not  to  In relation tax  will  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 all  tax  make  to the  continue  in  bases which t a x  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 this  comprehensive  differentiations taxpayers due  base made  are accorded  model between  different  t o the existence of special  former,  i tfollows  that  fully  t o avoid taxes  taxable into  types  of  but  As r e g a r d s t h e  o f "income"^ i s n o t t a x e d then t h e p r o p e n s i t y i s t o  by c o n v e r t i n g what o t h e r w i s e would  a non-taxable  also  by t a x l e g i s l a t i o n  incentives.  etc.),  not only are  income,  treatment  i f one f o r m  (or i s taxed a t a lower r a t e , attempt  In practice,  or less  taxed receipt.  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  be For  are differentiated  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. G i d e o n & R.E. K e n t , "Mrs G r e g o r y ' s N o r t h e r n T o u r : 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 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 R e p o r t of Proceedings of the Thirty-Ninth Conference 1987 C o n f e r e n c e Report (Toronto: C a n a d i a n T a x 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 s u c h a model b e i n g t h e C a r t e r C o m m i s s i o n : R o y a l C o m m i s s i o n o n T a x a t i o n Report ( O t t a w a : 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 u s e d l o o s e l y t o c o n n o t e some k i n d o f r e c e i p t , not 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 e n c o u r a g e i n v e s t m e n t ) , and as s u c h 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 e x e m p t i o n and a r e n o t t a x e d in  full,  with  only  three-quarters  of the gain  being  taxable.  T h a t s u c h 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 c a n be s e e n f r o m the  "surplus-stripping"  However,  such  generally  schemes  differential  of  treatment  the  1960s  of  forms  l e s s c o m m o n p l a c e now,° w i t h t h e r e s u l t  and of  1970s.^  income  that  is  would-be  a v o i d e r s m u s t 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 .  This  brings  avoiding reduce  us  taxes: the  tax  to  the  second  general  means  making use of p r e f e r e n t i a l that  would  otherwise  be  available  for  tax provisions, payable.'  to  Such  F o 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 o f t a x a v o i d a n c e scheme i n C a n a d a , s e e R.A. F r i e s e n & D.Y. T i m b r e l l , "Shams a n d 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 1 3 5 ; 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 1 3 7 ( 2 ) a s a C h a r g i n g S e c t i o n " (1968) 16 Canadian Tax Journal 2 8 1 ; G. M c G r e g o r , " 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 P u r p o s e 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 V i e w " (1974) 22 Canadian Tax Journal 430. ^ For example, i n t h e U n i t e d b e e n f u l l y t a x a b l e s i n c e 1972.  Kingdom,  capital  gains  have  ' For evidence t h a t such p r o v i s i o n s remain of recent c o n c e r n , one n e e d 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 the Canadian 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 of t h e s e measures. So, f o r e x a m p l e , i n 1985 t h e D e p a r t m e n t 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 2 1 . M o r e r e c e n t l y , t h e C a n a d i a n 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 p a c k a g e o f 1987 a s t h e means b y 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 : C a n a d a , D e p a r t m e n t o f F i n a n c e , Tax Reform 1987:  provisions  a r e known  colloquially  t e c h n i c a l l y as t a x expendituresJ°  as  "loopholes",  or  more  B r i e f l y , they are provisions  i n t h e t a x l e g i s l a t i o n w h i c h h a v e no r e v e n u e - r a i s i n g f u n c t i o n , whose p u r p o s e policy  instead  objectives.''^  i s t o achieve non-tax I n most  cases  s h o u l d be n o t e d  that,  i n light  o r economic  are  functionally  they  e q u i v a l e n t t o a d i r e c t government spending it  social  program.However,  of their  very  nature, t a x  s y s t e m s c a n n o t 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 u s e 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 taxes. nullify is  these provisions,  t o encourage  certain  Otherwise, t h e e f f e c t i s t o  as t h e purpose types  of their  of behaviour,  introduction  by o f f e r i n g t h e  Income Tax Reform ( O t t a w a : t h e D e p a r t m e n t , J u n e 18 1987) a t 7-8 a n d 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 b y t h e l a t e S t a n l e y S u r r e y , a n A m e r i c a n l e g a l s c h o l a r , w h i l e h e 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 T a x P o l i c y i n t h e U.S. T r e a s u r y D e p a r t m e n t . For a description o f t h e d e v e l o p m e n t o f t h e c o n c e p t s e e S.S. S u r r e y , Pathways to Tax Reform (1973) a s r e f e r r e d t o i n N. B r o o k s , "Future D i r e c t i o n s i n C a n a d i a n T a x Law S c h o l a r s h i p " (1985) 2 3 Osgoode Hall Law Journal 4 4 1 a t 4 5 7 , f o o t n o t e 39. '''' B r o o k s , i b i d , a t 4 6 5 . 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 items 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 a s t a x e x p e n d i t u r e s , s e e S.S. S u r r e y & P.R. M c D a n i e l , Tax Expenditures ( C a m b r i d g e : 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 , a s r e f e r r e d t o b y P.R. M c D a n i e l , "The I m p a c t o f t h e T a x E x p e n d i t u r e C o n c e p t o n T a x R e f o r m " i n W.N. B r o o k s , e d . , The Quest for Tax Reform ( T o r o n t o : C a r s w e l l , 1988) 389 a t 3 8 9 , 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 b e t w e e n 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 e x a m p l e , s t u d e n t s who b e n e f i t f r o m 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 , a n d 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 s o a s 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 shelter. I t i s only i n respect of t h e l a t t e r t h a t concern 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 of reducing (or avoiding) t a x . to  place  limits  successful taxing  on  will  be  ( i n t h e s e n s e 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  the  authorities),  adopted.  which  Thus, i f s t a t e s w i s h  then  Consequently,  tax-minimization  some  basis  of  standards such  "business purpose" are often  schemes  distinction  as  must  "artificiality"  be or  utilised.  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 n o t intended Debate  that has  t h e m e r i t s o f t a x a v o i d a n c e be occurred  in  the  past  over  discussed  whether  here.  any  tax  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 s u c h 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 the  statute".  However,  in  the  present  climate,  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 of the Canadian t a x system i s the " s m e l l t e s t " o r the r e p u g n a n c y i n d e x : D.A. Ward, "Has R e v e n u e C a n a d a 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 C a n a d a ' 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 U p d a t e " 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 T a x 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 e n a c t m e n t o f s e c t i o n 245 o f t h e Income T a x 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 , w h a t was n o t s o c l e a r was whose o l f a c t o r y s e n s e s w e r e 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 C a n a d i a n t a x s y s t e m p r i o r t o (and even a f t e r ) t h e e n a c t m e n t o f s e c t i o n 2 4 5 , 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 e x a m p l e , s u c h d e b a t e 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 K i n g d o m i n t h e 1960s a n d 1 9 7 0 s , s e e A.A. S h e n f i e l d , The Political Economy of Tax Avoidance, The Institute of E c o n o m i c A f f a i r s , O c c a s i o n a l P a p e r 24 ( L o n d o n : The I n s t i t u t e o f E c o n o m i c A f f a i r s , 1 9 6 8 ) , p a r t i c u l a r l y 19 f f . a n d B. B r a c e w e l l M i l n e s , supra, n o t e 2. O t h e r m a t e r i a l i n c l u d e s M.B. Angell, "Tax E v a s i o n a n d Tax A v o i d a n c e " (1938) 38 Columbia Law Review 80. F o r a C a n a d i a n 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 , s e e C a r t e r C o m m i s s i o n R e p o r t , supra, note 5 V o l . 3 at  animosity  towards  tax planning,  i t would  take  a  brave  person  indeed t o countenance openly a l l types of t a x m i n i m i z a t i o n . c u r r e n t d e b a t e t h e r e f o r e i s b a s e d on t h e f u n d a m e n t a l that  some s o r t  from  this,  of  limit  the door  appropriate standard  m u s t be  and  f o r d i s c u s s i o n of  the  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  open m e r e l y  on  assumption  tax planning,  is left  imposed  The  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  standard.  I n c o n s i d e r i n g the Canadian t a x system, p a p e r c o n c e n t r a t e on s e c t i o n 245  i t i s proposed  o f t h e Act,^^ w h i c h  the b a s i s of the d i s t i n c t i o n c u r r e n t l y adopted and  tax  f o r determining  minimization the  ambit  taxpayer's  The  standard  scheme i s " a b u s i v e "  of  section  motive,  p r o v i s i o n i n p l a y and  245,  the  i t s antithesis,  or not,  consists  policy  sets  of  of  the  forth  i n Canada, namely  between "abusive t a x avoidance" planning".  that this  and  "legitimate  whether  a  tax-  therefore within  three  factors:  particular  the  statutory  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 A n t i - A v o i d a n c e R u l e ( o r t h e "GAAR").  as  the  General  T e c h n i c a l N o t e s i s s u e d by t h e M i n i s t e r o f Finance, c o n t a i n e d i n : C a n a d a , D e p a r t m e n t o f F i n a n c e , Tax Reform 1987: Income Tax Reform, supra, n o t e 9 a t 137. Rule  V. K r i s h n a , Tax Avoidance: ( T o r o n t o : C a r s w e l l , 1990) a t  The 40.  General  Anti-Avoidance  B. METHODOLOGICAL APPROACH The  enactment  of section  245, from  t h e time  of i t s i n i t i a l  proposal, received a great deal of attention,  albeit  within  I t consequently  t h e t a x and business  generated entire  a  so  challenging  limited  the rule  from  a  of literature, provision  quality, to  either  itself,  limited,  including  an  a l o n e H o w e v e r ,  and a g r e a t merely  deal  of this  describing  or  or, i f analyzing i t , generally legalistic  any u n d e r l y i n g assumptions.  perspective,  without  I t i s proposed  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  a more i n c i s i v e  The  to this  n o t ensure  was  interpreting  this  devoted  does  literature  doing  s t a g g e r i n g amount  book  quantity  communities.  primarily  that  instead  approach.  c o n v e n t i o n a l approaches  adopted  i n tax policy analysis  turn  on t h e d i s t i n c t i o n b e t w e e n 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 a n d t a x expenditure analysis.^"  Technical tax provisions are described  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 o n s e c t i o n 2 4 5 i n c l u d e : a s e r i e s o f a r t i c l e s b y 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 a n d D.A. Dodge, "A New and M o r e C o h e r e n t A p p r o a c h t o T a x A v o i d a n c e " (1988) 36 Canadian Tax Journal 1. ^' K r i s h n a , supra, B r o o k s , supra,  n o t e 17. n o t e 10 a t 4 5 7 .  tax  expenditures  system,  Methods  distinction:^^ tax  essential  f e a t u r e s of the normal  but 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  programs.  to  are not  technical  criteria;^^  budgetary  of  tax  analyzing tax  policy  tax p r o v i s i o n s are expenditures  are  spending  recognise  analyzed  analyzed  tax  this  according  according  to  criteria.  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 provision,  and  utilised.  However,  automatically discredited t h a t t h e y do  21  Ibid.  22  Ibid.  accordingly, before  normative these  a p p l i e d , i t s h o u l d be  somewhat  i n recent  not adequately  traditions  policy noted  t i m e s , a  take account  ^ The traditional normative 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 .  should  be  analysis  tools  are  t h a t they  have  been  common theme  of p o l i t i c a l  standards  being  being  reality.  equity,  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 n e e d 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 a n s w e r e d 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 p r o g r a m 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 g o v e r n m e n t i n t e r v e n t i o n i n t h e m a r k e t i s p e r s e b a d : M c D a n i e l , supra, n o t e 11 a t 3 9 2 - 3 . A f u r t h e r i d e o l o g i c a l hypothesis which c o u l d r e s u l t i n a negative 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 for e f f e c t i n g non-tax p o l i c i e s . 2^ See B r o o k s , supra, n o t e 10; S.L. W i n e r & 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 S y s t e m s and Tax R e f o r m " (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 P a p e r No.290 f o r t h e E c o n o m i c C o u n c i l o f C a n a d a ( O t t a w a : 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 ] .  In any  explanation,  i t s h o u l d be  given time,  process which  i s the  noted t h a t the t a x s t r u c t u r e ,  result  of  a highly  complex  political  at the very heart involves p o l i t i c i a n s vying f o r  v o t e s of t h e e l e c t o r a t e which w i l l bestow the p r i z e of power:  at  politicians  are  less  concerned  with  what  political  is  in  the  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 . It for  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 the  apparent  inadequacies  (by t h e  standards  can of  account  normative  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 elusiveness  of  the  although  advocated  whatever,  never  reality. has  "good"  system  as  promoting  quite  seem  to  - major  changes  fairness,  match  up  to  or  norms  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  inherent limitations  account the p o l i t i c a l  imposed  by  i t s failure  and s o c i a l r e a l i t y o f  reforms,  simplicity these  the  or in  traditions  to take  into  taxation.  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 c a n be drawn from e x i s t i n g work. matters  Increasingly, the l i t e r a t u r e  i s moving beyond n o r m a t i v e t r a d i t i o n s ,  and  on t a x  i s instead  a d o p t i n g a more p r a g m a t i c a p p r o a c h by h i g h l i g h t i n g t h e  political  2* W.I. Gillespie, "Tax Reform: The Battlefield, the 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 s a y t h a t t h e two a p p r o a c h e s c a n n o t be i n t e g r a t e d , f o r e x a m p l e , W i n e r & H e t t i c h , supra, n o t e 25 a t 41620, 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 political economy m o d e l h a s f o r normative t h e o r i e s i n t a x a t i o n , in particular, equitable taxation.  political to  economy a p p r o a c h i s deemed r e l e v a n t t o t h i s p a p e r due  i t s i n c l u s i o n of the p o l i t i c a l  writings that  of Winer  their  methodology political system  economic political  Hettich  can  make  of t h i s 'voice'  is  m a k i n g . ^2  model  and  a  natural  the  Basically,  with  outcome the  In p a r t i c u l a r , the  are h i g h l i g h t e d . I t  t h e s i s , due  together  element.  greatest to  contribution  to  the  i t s incorporation  of  the  i t s assumption t h a t of  model  response,self-interested  is felt  self-interested integrates political  four  the tax decision strands:  behaviour,the  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 .  ^1 Supra, n o t e 2 5 ; W. H e t t i c h & S.L. W i n e r , "A P o s i t i v e M o d e l 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. W i n e r , " E c o n o m i c a n d 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. W i n e r , " E c o n o m i c a n d 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 [references are t o American Economic R e v i e w ] ; S.L. W i n e r & W. H e t t i c h , "The E v o l u t i o n o f R e v e n u e 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 E c o n o m i c s 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 Foundations of 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 s u c h a s e f f i c i e n c y and equity. T a x p a y e r s ' e c o n o m i c 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 a s t h e ' e x i t ' a n d h a v e b e e n 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 : W i n e r & H e t t i c h , supra, n o t e 25 a t 4 1 2 . 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 ensure t h e i r continued stay i n o f f i c e . I n d i v i d u a l support f o r t h e g o v e r n m e n t d e p e n d s on t h e b e n e f i t s f r o m p u b l i c g o o d s a n d t h e l o s s i n f u l l i n c o m e ; 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 system 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 of v o t i n g f o r the g o v e r n m e n t a n d 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 ( w h i c h i s e f f e c t e d by s u c h f a c t o r s a s m e m b e r s h i p a n d s t r e n g t h o f i n t e r e s t g r o u p s a n d p e r s o n a l w e a l t h ) : H e t t i c h & W i n e r , supra, n o t e 31 ("Economic a n d P o l i t i c a l F o u n d a t i o n s o f T a x S t r u c t u r e " ) a t 702.  component However,  of  taxation,  explicit  albeit,  politicization  sometimes  only  of taxation  implicitly. ^  i s integrated i n  some m o d e l s 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 political  element.  In particular,  a body  of literature  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 e c o n o m i c s , g e n e r a l l y known a s t h e p o l i t i c a l economy o f t a x a t i o n . ^ '  Unfortunately,  integration  o f t h e p o l i t i c a l component i n t h i s manner, n a m e l y i n c o n j u n c t i o n w i t h e c o n o m i c s , o f t e n makes t h e m o d e l s r a t h e r c o m p l e x t o o n e n o t knowledgable latter  i n this  category,  simplification  of  field.  i t i s these  Being hoped  models  one who that  will  falls  the be  within  probable  overlooked.^"  this overThe  For example, R.M. Bird, "The T a x Kaleidoscope: P e r s p e c t i v e s o n T a x R e f o r m i n C a n a d a " (1970) 18 Canadian Tax Journal 4 4 4 ; M. B u c o v e t s k y , "Tax R e f o r m i n C a n a d a : A P r o g r e s s R e p o r t " (1972) 25 National Tax Journal 1 5 ; A. P e a c o c k , " F i s c a l T h e o r y a n d t h e ' M a r k e t ' f o r T a x R e f o r m " , i n K.W. Roskamp & F . F . F o r t e , e d s . . Reforms of Tax Systems Proceedings o f t h e 35th 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 Finance ( 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) 1 1 ; W i n e r & H e t t i c h , supra, n o t e 25 a n d 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 a n d T a x R e f o r m " (1988) 26 Osgoode Hall Law Journal 347. The u s e o f m o d e l s b a s e d o n 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 h a s 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 Y o r k : H a r p e r & Row, 1957) a n d J . A . S c h u m p e t e r , Capitalism, Socialism and Democracy, 3d. (New Y o r k : H a r p e r & Row, 1 9 5 0 ) . L a t e r w o r k s i n c l u d e : G.S. B e c k e r , "A T h e o r y o f C o m p e t i t i o n Among P r e s s u r e G r o u p s 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 3 7 1 ; S. P e l z m a n , "Toward a M o r e G e n e r a l T h e o r y o f R e g u l a t i o n " (1976) 19 Journal of Law and Economics 219 a n d G . J . S t i g l e r , "The E c o n o m i c T h e o r y o f R e g u l a t i o n " (1971) 3 Bell Journal of Economics 3. ^° O t h e r m o d e l s h a v e b e e n 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 s o h e a v i l y o n e c o n o m i c s . F o r e x a m p l e , G i l l e s p i e , supra, n o t e 2 6 , 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 e c o n o m i c 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 & W i n e r i n t h a t he b a s i s i t u p o n t h e c o n c e p t s o f  influence of administration of  economic  and p o l i t i c a l  costs^^ and t h e heterogeneous n a t u r e b e h a v i o u r among  taxpayers.These  f a c t o r s , i t i s contended, generate t h e e s s e n t i a l elements of t h e tax system  ( t a x bases, 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 these  t h r e e elements,  reached  i n terms  r e f l e c t s the equilibrium  of the balancing  that  of p o l i t i c a l  h a s been  costs^^  and  benef i t s . ^ ^  A d m i n i s t r a t i v e costs a f f e c t t h e t a x s t r u c t u r e as savings 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 w h e r e , d e s p i t e interpersonal d i f f e r e n c e s , t h e y p a y 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 c a n be u s e d t o p r o v i d e more p u b l i c g o o d s a n d t h e r e f o r e obtain 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. For 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 the 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 non-taxed a c t i v i t i e s . Politically, variations exist i n wealth, interest group membership, voting and political a c t i v i t y : W i n e r & H e t t i c h , supra, n o t e 25 a t 4 1 2 . See, supra, n o t e 34 a n d a c c o m p a n y i n g t e x t . Political c o s t s t o t h e government a r e determined 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 : W i n e r & H e t t i c h , supra, note 25 a t 4 1 1 . S e e , supra, n o t e 34 a n d a c c o m p a n y i n g t e x t . Political 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 a n d 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 the a p p l i c a t i o n of  this  model  reform,^' which,  been  to  claimed  the  incidence  "...provides a  transformation and  Winer  the  instruments.^^  new  that  shocks  to  equilibrium  outcome  They  of  by  identify  the  i t has  f o r understanding the  the  system  the  adjustment  i n the past,  r e s p o n s e s , changes  of  to  i n labour  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  political  organization,  i n c l u d e changes  relation  i n the cost  in constitutional restrictions,  cost of a c q u i r i n g information  may  as r e g a r d s  i n t h e age d i s t r i b u 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  as  retain  they believe  f o r example,  re-  revenue  regarded  attempt  f a c t o r s which  Hettich  necessitate  c h a n g e c a n be  government's  several  e x p l a i n major t a x changes economic  perspective  Therefore, continual  logical  office.  tax  o f t a x systems"^" t h a t i s most r e l e v a n t .  suggest  establishing  the  of  of  i n the  and i n p o l i t i c a l  T a x r e f o r m h a s b e e n d e f i n e d b y G i l l e s p i e , supra, note 2 6 a t 186, a s "a m a j o r c h a n g e 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 c h a n g e 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 r e v e n u e s o u r c e . . . o r some combination thereof." Winer & Hettich proffer a similar 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 w h a t p u r p o s e i t h a s b e e n i n i t i a t e d " : supra, note 25 a t 412. Winer Ibid. "  Ibid.  & H e t t i c h , supra,  n o t e 25 a t  414.  entrepreneurship/^  As  a  result  e q u i l i b r i u m a d j u s t s and w i l l  i s proposed t h a t the  same  a b o v e m o d e l s be  methodology employed i n t h i s paper. is  not  p r o p o s e d t h a t t h e s e be  inherent First,  these  shocks,  the  foundations  I t should  followed  l i m i t a t i o n s e x i s t so  time.  budget  be  religiously,  as t o r e n d e r t h i s  examined.  complete p i c t u r e could expenditure  process  It  really  also,  as  be  inappropriate.  by  the  that  analyzing  of " b e n e f i t s " ( f o r example, exemptions, d e d u c t i o n s  incorporating contention voter  that  support,  arguably, level not  of  no  sides  is  between  services  and  merits  existence  the in  light  see  and no  their  of t h i s  tax  own  tax  at  i n terms  between  of the of as, the is  controversial proposition  sides:  first  n o t e 25  at  such  414-5.  H e t t i c h & W i n e r , supra,  of  b u r d e n . I t  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 both  of  etc.)  structures  connection  a  and  relevance  e x i s t s anyway,  expenditure  provided  incorporating  Ibid,  However,  questionable  direct linkage  proposed that the  not  system.  i n d i v i d u a l taxpayers  be d i s c u s s e d for  both  tax  a f f e c t s the  the  the  distribution  extent  the  benefits  s i d e of  explained  gained  obviously  the  several  services  through  other  only  be  as  goods,  provided  and  should  of  be n o t e d t h a t i t  i t i s proposed that only the revenue-raising  public  the  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  aspects of the t a x s t r u c t u r e at the  It  of  703.  reasons e x i s t models  are  difficult practice budget  to  construct,and  verifies (the  the  concentration  literature  e x p e n d i t u r e side*^) .  second,  focuses  From t h e  on  generally only  almost  one  accepted  side  of  exclusively  above t h e r e f o r e ,  the  on  the  i t i s submitted  t h a t t h i s p a p e r w i l l n o t 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 b e c a u s e i t concentrates  p r i m a r i l y on  the  tax  s t r u c t u r e s i d e of the  public  budget.  H o w e v e r , 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  to the focus of  this  p a p e r 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 w h o l e tax  structure.  Hettich  and  Winer  emphasize  e s s e n t i a l elements of the tax s t r u c t u r e are that  any  analysis  should  approach the  s y s t e m s o f e s s e n t i a l e l e m e n t s and unrelated  a l l  the  interdependent,  and  s t r u c t u r e as m e r e l y as  integrated  c o l l e c t i o n s of bearing  in  m i n d s p a c e 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  or  not  that  i s s u e and  ill-designed components.However,  analyze i t i n depth, r a t h e r than skate t h i n l y  the whole t a x system. concentrate within  the  obviously omitting  Therefore,  p r i m a r i l y on tax fails  the  structure. to  to study the  fulfil  Tax  the  of  approach, above  n o t e 31  ("A  a on  single the  criteria  i n t e r p l a y of a l l the  H e t t i c h & W i n e r , supra, S t r u c t u r e " ) a t 69. Jjbid. at  i t i s proposed t h a t t h i s paper  enactment  This  over  provision  face by  of i t ,  not  only  elements of the  tax  P o s i t i v e Model of  Tax  68.  Supra, n o t e 31 ("Economic and S t r u c t u r e s " ) a t 709.  Political  Foundations  of  s y s t e m , b u t m o r e o v e r , n o t e v e n f o c u s i n g on any the  first  place.  perspective  However,  i t is  of t h i s paper i s not the  thesis  that  manner.  I t i s proposed t h a t the  economic, h i s t o r i c a l , will  necessitate  structure  as  study  political  considering  the explanation  not  to  for  their  and  implications  245  social  that  the  in  an  analyzed  as  the  government  agents  political work  in  factors,'^^  would  e s s e n t i a l elements of the  tax  to  factors  analysis.  Supra, Ibid.  with  i n such  n o t e 25  self-interested  at  to  they  shifts go  formulation  influence  associated  they cause s h i f t s  of  the  of  on  assist in  Winer  functions.^'  in to  of  due and  explain  behaviour  by  economic  and  posit  hypotheses  nature  d i f f e r e n t tax  414.  tax  i n t r o d u c t i o n of the r u l e .  reform  response  the  This  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  However,  require  exogenous functions  outcome  in its  surroundings.  perhaps i n d i r e c t l y ,  not  isolated  H e t t i c h s u g g e s t t h a t s u c h a n a l y s i s c o u l d be u t i l i s e d t o reforms  narrow  explain, i t i s  p r o v i s i o n be  o f , f o r example, the  L a s t l y , the models w i l l  To  section  the  a whole, a l b e i t  submitted  fatal.  intended  s i n g l e element i n  that about  political  instruments,  and  such how cost how  It  i s p r o p o s e d t h a t a s i m i l a r a p p r o a c h be a d o p t e d i n r e s p e c t o f  section  245, namely  economic  environment.  f a c t o r s which cost  i t s analysis However,  influenced  functions  (thus  suggested above.  within  i t spolitical  i t i s not intended  and  that the  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  r e s u l t i n g i n t a x r e f o r m ) be i d e n t i f i e d a s  The r e a s o n s a n d j u s t i f i c a t i o n s  from t h i s approach a r e as f o l l o w s . ascertaining p o l i t i c a l  costs  f o r deviating  First, difficulties  functions  exist i n  - governments have  only  l i m i t e d k n o w l e d g e o f s u c h functions,^° c o n s e q u e n t l y , someone who does  n o t have  nearly  the extent  of resources  available to  government a t t h e i r d i s p o s a l stands l i t t l e chance. outlined the  Secondly, as  above, due t o s p a c e c o n s t r a i n t s , i t i s p r o p o s e d  that  f o c u s o f t h i s p a p e r be o n s e c t i o n 245 ( o p p o s e d t o t h e w h o l e  tax  reform  package),  albeit,  t h e package  will  receive  some  c o n s i d e r a t i o n as p a r t o f t h e process o f a n a l y z i n g t h e context o f the p r o v i s i o n . either  This therefore renders i t impossible  political  cost  functions,  or  to identify  the p o l i t i c a l  factors  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  conclude thus  this  paper  religiously  draw  f a r , i t i s suggested that on  applying  t h e models them.  themes o f t h e models w i l l the it  discussed  t h e methodology o f above,  In particular, the  be t h e b a s i s  of this  assumptions that t a x a t i o n i s a p o l i t i c a l  rather  than  fundamental  paper,  process,  namely, and t h a 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.  the  governinent.  above,  However,  due t o t h e d i f f i c u l t i e s  outlined  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 b e made t o i d e n t i f y t h e  f a c t o r s which 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 in  t h e t a x r e f o r m i n June 1987.  the  f o c u s be on t h e p r o v i s i o n  package), part  although i t w i l l  of the readjustment  Instead,  itself  i t i s proposed  (and n o t t h e whole reform  be a n a l y z e d w i t h i n of the equilibrium  submitted that t h e perspective  i t s context - as process.  the  I t  i s  a d o p t e d 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 , t h a n t h e o t h e r way a b o u t ,  that  rather  namely, s t a r t i n g o u t by i d e n t i f y i n g  factors resulting i n the rule.  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 a s b o t h m e t h o d s g e n e r a t e t h e same o u t c o m e : e x p o s u r e o f the From  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 b e e n a c t e d . a p r a c t i c a l standpoint,  former factors tax  method,  as t h e l a t t e r  responsible  r e f o r m package,  factors  such  would  be e a s i e r involve  f o rthe disequilibrium, and t h e n , a f u r t h e r  t o determine  Furthermore,  i twill  which  ones  an approach  may  the analysis  s c a l i n g down o f t h o s e t o t h e GAAR.  t o the exclusion  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, relevant  The  t o t h e GAAR, f o r e x a m p l e ,  application  section economic  o f such  245 w i t h i n conditions  historical  context.  the legal  an approach  will  background.  involve  and s o c i a l  I t i s recognised that  of  but which a r e  i t s whole environmental backdrop, to the political  of  and t h e r e s u l t a n t  are specific lead  t o adopt t h e  these  analyzing from t h e  factors  and  factors are  intertwined  and  i n t e r d e p e n d e n t , and  i s a d i f f i c u l t , i f not degree  of  coherence  m u s t be made. that  The  arguments  and  logic  r e a d e r has  study,  such  b e e n f o r e w a r n e d , and  overlap  f r o m one  in  trying  to  adverse economic c o n d i t i o n s  a t t i t u d e s to the  neat  w h i c h i n t u r n may  influenced (for  by  example,  aggressive attitude  validity  enactment of government's  of  of  the  d u r i n g an  of  taxing  era  conditions  a p p l i c a t i o n of  economic c o n d i t i o n s authorities  i n a h a r s h economic  as  of  a l e g i s l a t i v e measure  which  prevalent at may  adopt  to  a  the more  climate).  r u l e at the time of i t s p r o p o s a l . the  To  taxpayers*  r e s u l t i n the p o l i t i c a l  i n t e r p r e t a t i o n and  the  the  adopting such a p o l i t i c a l l y - c o n s c i o u s approach  provision  purpose,  f a i r n e s s or equity  (as  was  raises i t  several  r u l e i n the  t h a t was  promoting  i t c l a i m e d ) o r , was  vented  R e f l e c t i o n on  issues:  s e l f - i n t e r e s t t o e n s u r e i t s r e - e l e c t i o n ; why propose the  other.  less tolerant  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 a g a i n s t the  the  arguably a f f e c t  ( i e . they are  introduction  curb tax avoidance, the  time  thus f i n d  i n t e r r e l a t i o n of these c o n t e x t s i s  avoidance of tax  b e i n g amenable t o the  be  attempt  categories.  i n t i m e s of economic h a r d s h i p t h a n they are  may  may  context to  f i t them w i t h i n  follows:  prosperity)  an  any  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 of  an e x a m p l e o f t h e  The  However, t o a c h i e v e  in this  amplify,  it  a t t e m p t t o s e p a r a t e them  impossible task.  many p r o p o s i t i o n s  However, t h e  any  some  w h a t was norm  i t acting d i d the  the the  such  as  in its  own  government  f i r s t p l a c e when i t m u s t h a v e b e e n 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 w o u l d g e n e r a t e , considering drafting changed  t h e White  Paper;  i n i t s passage  originated and,  t h e wide c o n s u l t a t i o n  a  through  i n a White Paper  reform,  outweighed  i f on  not substantially  Parliament,  especially  and n o t as a l e g i s l a t i v e  as i t  proposal  on t h e government's p a r t t o e n a c t  the face  the benefits?  answer t h e s e  i t embarked upon i n  why was t h e r u l e  i n g e n e r a l , was i t f o l l y  such  process  of i t , the p o l i t i c a l  I t i s submitted  that  costs  attempts  a n d o t h e r q u e s t i o n s c a n o n l y b e made b y  to  looking  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 which 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 c a n s a y t h a t p o l i t i c a l ,  social,  other  i t viable  relevant  factors  government  to  proceed  particular,  section  245.  obviously  made  with  reform  the  economic and f o r the  package,  Not o n l y were t h e i n i t i a l  and  in  proposals  e n a c t e d w i t h o u t t o o many m a j o r c h a n g e s ( a n d s e c t i o n 2 4 5 , w i t h no major changes),  b u t t h e C o n s e r v a t i v e G o v e r n m e n t was s u c c e s s f u l  in  retaining  i t s office  in  t h e year  following  packageExperience the  dilution  a t t h e general e l e c t i o n which the presentation of  t h e t a x reform  h a s shown u s ( t h e c l a s s i c  of the Carter  ^1 A f e d e r a l e l e c t i o n was  Commission  occurred  Report^^j  example that  being  i f  the  h e l o n November 2 1 , 1 9 8 8 .  ^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 S h a r p a s "one o f t h e m o s t far-reaching, explosive, r e v o l u t i o n a r y set of proposals ever put b e f o r e t h e C a n a d i a n p e o p l e " [ a s q u o t e d b y D.K. H u g g e t 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 , e d . , supra, n o t e 11 3 8 1 a t 381]. However, despite these glowing credentials, the 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 i m p l e m e n t e d 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 commissioned, 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. [For a  underlying  political  proposed changes, and  and economic  factors  do n o t s u p p o r t t h e  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 ,  t h e changes a r e n o t l i k e l y  t o be implemented  i n the f i r s t  place, or i f given e f f e c t t o , then notsustained.  To  conclude  therefore,  i t i s proposed  that  adopted which h i g h l i g h t s t h e g e n e r a l environment t h e time o f t h e enactment o f s e c t i o n approach  will  extend  245.  our understanding  e x p l a i n i n g why t h e C a n a d i a n  an approach  be  i nexistenceat  H o p e f u l l y , such an  of the provision i n  government d e c i d e d t o i n t r o d u c e i t  a n d why c e r t a i n m o d i f i c a t i o n s w e r e made t o t h e p r o p o s a l i n i t s passage  In  achieving these  first In  through t h e l e g i s l a t i v e process.  objectives,  be a n a l y z e d i n i s o l a t i o n  particular,  discussed  i t i s suggested  and t h e p r o c e s s  i t i s proposed from  that  i t s external  that  environment.  the salient  o f enactment  the rule  outlined,  p o i n t s be with the  c h a n g e s 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 ,  it  this  i s then  process  intended that  took  t h e environment  i n which  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  p r o d u c t o f t h e s e exogenous  whole  how i t i s a  factors.  f u l l e r d e s c r i p t i o n , s e e 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 f r o m C a r t e r " i n B r o o k s , e d . , 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 g r o u p s who o p p o s e d t h e r e p o r t : J . G i l l i e s , " F e d e r a l T a x R e f o r m i n a P l u r a l i s t i c S t a t e : C a n i t Be D o n e ? " , i n B r o o k s , e d . , i b i d . 343 a t 3 4 3 . 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 I V , 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 bulk  well of  denounced  received, the  i n fact,  commentary  on  quite the  the contrary proposed  i t f o r a v a r i e t y of reasons.  was  provision  true:  the  strongly  The r a n g e o f c r i t i c i s m s  was a p t l y s u m m a r i s e d b y t h e H o u s e o f Commons F i n a n c e C o m m i t t e e , ^ and  was  generally  focused  o f ) ,^ u n c o n s t i t u t i o n a l i t y ^  on and  the  scope,^ n e c e s s i t y  impact^ of t h e r u l e .  (or  lack  The  full  c h a n g e , new d e d u c t i o n s a r e i n t r o d u c e d a n d o l d o n e s a r e cancelled. I n o t h e r words, most o f t h e w h i t e p a p e r 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 s y s t e m . 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 defined rules and i t makes a l l p l a n n i n g subject to g o v e r n m e n t c o n s e n t . I t ... a l l o w s t h e g o v e r n m e n t t o t e l l e a c h a n e v e r y t a x p a y e r how much i n t a x e s h e o r s h e w i l l pay. D r a c h e , supra, n o t e 2. ^ C a n a d a , H o u s e 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 1 9 7 - 2 0 0 . ^ F o r e x a m p l e , t h a t i t was t o o w i d e i n t h a t i t w o u l d 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 w o u l d 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 a n d 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 purpose. Due t o c r i t i c i s m r e g a r d i n g t h e s c o p e , 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 p u r p o s e was s u b s t i t u t e d w i t h a n o n - t a x p u r p o s e t e s t . ^ F o r e x a m p l e , i t was c o n t e n d e d t h a t e x i s t i n g s t a t u t o r y a n d 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 offensive tax avoidance. These arguments were p a r t i c u l a r l y r e l i e d u p o n b y t h e J o i n t C o m m i t t e e o f CBA/CICA: " R e c o m m e n d a t i o n s on t h e F e d e r a l R e f o r m P r o p o s a l s o f J u n e 18, 1987 t o Amend t h e Income T a x A c t " , S u b m i s s i o n t o t h e H o u s e o f Commons S t a n d i n g C o m m i t t e e on F i n a n c e a n d E c o n o m i c 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 AntiAvoidance 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 a n d " P o w e r f u l C o m m i t t e e T a k e s M o r e S h o t s a t T a x R e f o r m " (December 1988) Bottom Line 22.  CHAPTER I I SECTION A. SECTION 245 Section  245  245  - ITS RECEPTION  was  initially  proposed as p a r t  of the tax reform  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.^  It  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 a n d p u b l i c i t y f r o m t h e moment of  i t sinitial  professional  proposal,  and  albeit  business  communities.^  h e r a l d e d b y one c o m m e n t a t o r significant  generally  only within the tax I t s introduction  as b e i n g " p r o b a b l y t h e s i n g l e most  l e g i s l a t i v e development i n t h e h i s t o r y  income t a x a t i o n " . '  However,  was  of Canadian  t h i s i s not t o imply that the r u l e  ^ The m a i n g o v e r n m e n t d o c u m e n t s d e t a i l i n g t h e t a x r e f o r m m e a s u r e s w e r e a s f o l l o w s : C a n a d a , D e p a r t m e n t o f F i n a n c e , Tax Reform 1987 ( O t t a w a : t h e D e p a r t m e n t , J u n e 18, 1 9 8 7 ) ; C a n a d a , D e p a r t m e n t o f F i n a n c e , Tax Reform 1987: Income Tax Reform, ( O t t a w a : t h e D e p a r t m e n t , J u n e 18, 1 9 8 7 ) ; C a n a d a , D e p a r t m e n t o f F i n a n c e , Tax Reform 1987: Economic & F i s c a l Outlook (Ottawa: t h e D e p a r t m e n t , J u n e 18, 1 9 8 7 ) . ^ C o n c e r n 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 m e d i a i n c l u d e : D. B e a c h , " A n t i a v o i d a n c e R u l e s a r e a n End Run A r o u n d t h e C o u r t s " Financial Times (29 J u n e 1987) 2 5 ; 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 T a x R u l e D e a l t B l o w " Financial Times (5 O c t o b e r 1987) 3; A. D r a c h e , " U g l y Weapon L u r k s i n T a x W h i t e P a p e r " 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 N e e d e d on T i g h t e n i n g T a x E s c a p e H a t c h e s " Montreal Gazette (27 J u n e 1987) H3; D. F r a n c i s , " S t r a n d e d on t h e R o a d t o R e f o r m " ( 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 , L a w y e r s Say P l u g Too B i g f o r T a x G a p s " The Globe and Mail (20 J u n e 1987) B l & B4; " O t t a w a 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 T a x 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 T a x A v o i d a n c e Weapon" (1988) 2 Canadian Current T a x C75. Reasons f o r i t s p e r c e i v e d importance are suggested i n the f o l l o w i n g statement: [W]hen f i s c a l a n d e c o n o m i c 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  force  of t h e condemnation  even f o r c e d  a Department  of Finance  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 . ' M o r e o v e r , t h e t i r a d e against the rule  was  b o t h c o n s t a n t ^ " a n d came f r o m  influential  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 b y t h e t a x p r o f e s s i o n a l b u s i n e s s c o m m u n i t i e s , b u t a l s o by an e l e m e n t o f t h e i t s e l f . 11  and  government  I t i s against t h i s backdrop t h a t i t i s proposed t h a t  ^ F o r e x a m p l e , i t was a r g u e d 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 of 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. ° F o r e x a m p l e , 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 w o u l d g e n e r a t e w o u l d s e v e r e l y hamper b u s i n e s s l i f e a n d m o r e o v e r , w o u l d 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 s e e k advance rulings. I t was a l s o a r g u e d t h a t t h e r u l e v e s t e d t o o much p o w e r (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 w o u l d be d e t e r m i n i n g i t s s c o p e a n d a p p l i c a t i o n , a r o l e i t i s not equipped t o undertake. ' See D.A. Dodge, "A New a n d M o r e C o h e r e n t A p p r o a c h t o T a x A v o i d a n c e " (1988) 3 6 Canadian Tax Journal 1 a n d "Tax R e f o r m a n d the Anti-Avoidance Proposals" 1987 British 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 f r o m 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 a n d b e y o n d , i t s f i n a l e n a c t m e n t . In 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 w e r e 2 m a j o r d r a f t s - t h e o r i g i n a l v e r s i o n a n d t h e 18 December 1987 d r a f t ) w e r e a t t a c k e d , e v e n t h o u g h s u c h a l t e r a t i o n s may h a v e b e e n 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 . In a l l , i t i n d i c a t e s t h a t t h e t a x c o m m u n i t y 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 f o r m be a d o p t e d - 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 p u r p o s e test. 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 b y the S t a n d i n g S e n a t e C o m m i t t e e on B a n k i n g T r a d e a n d Commerce: C a n a d a , D e p a r t m e n t 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 5 5 : "... 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 G o v e r n m e n t ' 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 , 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 " .  t h e m e c h a n i c s o f s e c t i o n 245 w i l l b e b r i e f l y  discussed.  B. SECTION 245 - ITS SUBSTANCE S u c c i n c t l y put,  t h e p u r p o s e o f GAAR i s t o p r e v e n t " a b u s i v e " t a x  avoidance 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 purpose t e s t (or t e c h n i c a l l y , a non-tax purpose t e s t ) and a step transaction this  doctrine.  o b j e c t i v e by p r o v i d i n g  given  effect  consequences  will  application:  transaction  i t implements  authorities: instead  determined  as  with  one  exception,  of transactions  any that  i n i t s scope  tax  motivated  result  i n a tax  transactions "butterfly"  t h e A c t i s intended  that  t o apply  t o transactions  a r e p r i m a r i l y tax-motivated,^^  reorganisations  under  Consequently, t h e r u l e w i l l not apply  encourages  f o r example,  paragraph  55(3)(b).  t o deny t a x b e n e f i t s  from t r a n s a c t i o n s which a r e n o t c o n t r a r y  spirit  The  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  w i t h r e a l economic substance, and t h a t t h e A c t i t s e l f  and  i n the  be r e g a r d e d a s an " a v o i d a n c e t r a n s a c t i o n " . ^ '  to the fact that  result  n o t be thetax  i s "reasonable  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  or series  benefit w i l l exception  be  sense,  t h a t such t r a n s a c t i o n s w i l l  t o by t h e t a x i n g  circumstances".^^ of  In the practical  t o the "object  o f t h e p r o v i s i o n s o f t h e A c t read as a whole",  subsection  245(2).  subsection  245(3).  that  even  C a n a d a , D e p a r t m e n t 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 ( O t t a w a : A p r i l 1988) a t 3 4 8 .  though note  t h e y a r e p r i m a r i l y t a x motivated.''^  i n t h e mechanics  provision  of last  provisions  of  One f i n a l  o f t h e GAAR i s t h a t  resort  after  i t i s intended as a  the application  the Act, including  point t o  specific  of the other anti-avoidance  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 2 4 5 , government foresaw t h e problems uncertainty format assuage at  of the rule.  of section  t h a t would  However,  245 i t s e l f ,  i t seems t h a t t h e  be g e n e r a t e d by t h e  rather  than  t h e government  changing t h e attempted  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 notes  t h e time  of introduction  o f t h e proposed  to both  p r o v i s i o n ^ ^ and  Jjbid.  Ibid,  a t 345.  It i s arguable that section 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 , a s 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 b e a d v e n t u r e s o m e : R.D. B r o w n e t a l , "GAAR a n d Tax Practice: More Q u e s t i o n s t h a n A n s w e r s " i n Report of Proceedings of the F o r t y - F i r s t Tax Conference, 1989 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 T a x F o u n d a t i o n , 1990) 1 1 . 1 a t 1 1 : 3 . H o w e v e r , f o r a d i s c u s s i o n o n t h e p r o b l e m s 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 , s e e t h e comments b y Mr J i m W i l s o n ( G e n e r a l Counsel/General D i r e c t o r , Tax Counsel D i v i s i o n , Department o f F i n a n c e ) i n " M i n u t e s t o t h e Commons S t a n d i n g C o m m i t t e e o n F i n a n c e a n d E c o n o m i c A f f a i r s ( C h a i r m a n : Don B l e n k a r n ) f o r J u n e 29, 1987 o n 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 a s p a r t o f t h e J u n e 18 t a x r e f o r m p a c k a g e " a s q u o t e d i n K r i s h n a , supra, n o t e 6, A p p e n d i x A.7 a t 134-6. Tax Reform 1 a t 137.  1987: Income  Tax Reform,  supra,  n o t e 1, A n n e x  later  in April  Furthermore, interpretation it  duly  i t  t o e x p l a i n t h e December 1987  committed  bulletins  did with  "General Act",  1988,  the  21,  to  or c i r c u l a r s  issuance  Anti-Avoidance  October  itself  Rule:  of  publish at a  S e c t i o n 245  one  later  Information  amendments. 1' or  date,2° which  Circular of  more  the  88-2,  Income  Tax  1988^^ and a s u p p l e m e n t s ^ 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: C a n a d a , D e p a r t m e n t 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 ( O t t a w a : 16 December 1987) . 2° Tax  Reform:  Income  Tax  Reform,  supra,  note 1 at  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 a n 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 usually a statement of the a p p l i c a t i o n or administrative 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 connotes 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 a n d i n d e e d , f u n d a m e n t a l s i g n i f i c a n c e o f t h e new provision. J . S . W i l k i e , "The W o r l d A c c o r d i n g t o GAAR" (1988) Canada Tax Letter, No. 368 (De Boo, 1 9 8 8 ) . 22 S u p p l e m e n t 1, J u l y 13, 1990. This Information Circular and Supplement a r e the o n l y p o l i c y statements o f Revenue Canada's p o s i t i o n as regards tax avoidance. A previous 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 b y 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 W h i t e P a p e r ' s Proposed General AntiA v o i d a n c e R u l e " 1987 B r i t i s h Columbia Tax Conference, tab 6 at 14. 2^ The Finance Department also released a booklet, "Questions a n d A n s w e r s on Tax R e f o r m " , 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 W h i t e P a p e r p r o p o s a l s ( i n c l u d i n g t h e GAAR): D. B e a c h , " F i n a n c e D e p a r t m e n t Book A n s w e r s T a x R e f o r m Q u e s t i o n s " Financial Times (19 O c t o b e r 1987) 26. T h e s e e f f o r t s h a v e b e e n p r o m o t e d by t h e g o v e r n m e n t a s 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 u r p o s e , n o t e comments made by one Department of Finance o f f i c i a l : "...much h a s b e e n done t o  However,  none  of  these  publications  e n t h u s i a s m by t h e t a x community, b e i n g of  their  limited  application  of the rule.  outlines various as  t o whether  "abusive" the  value  i n providing  was  met  criticised  with  on t h e b a s i s  guidance  as  o r not.  transactions  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  transactions,^*^ and t h e r e f o r e , w i t h i n t h e examples g i v e n  be  i n classifying unless  treated  statements being  involved  will  merely  as  thought-process  of any s u b s t a n t i v e  to the  In particular, the circular  t r a n s a c t i o n s , a n d t h e n makes t e r s e such  great  these  transactions  different  fall  exactly  i n the c i r c u l a r , taxpayers are bereft  g u i d a n c e a s 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  w o u l d 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  minimize t h e uncertainty surrounding t h e implementation of the 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 c h a n g e s made t o the o r i g i n a l version of the r u l e , t h e extensive t e c h n i c a l notes, and t h e p r o m i s e t h a t Revenue Canada w i l l provide further i n f o r m a t i o n before t h e r u l e i s implemented w i l l h e l p reduce t h e u n c e r t a i n t y t o a n a c c e p t a b l e l e v e l " : Dodge, supra, n o t e 9 ("A New a n d M o r e C o h e r e n t A p p r o a c h t o T a x A v o i d a n c e " ) a t 2 2 . F o r e x a m p l e , 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 R e v e n u e C a n a d a ' s decisions 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 e x a m p l e s ( i n t h i s c a s e , E x a m p l e s 22 a n d 23 i n t h e C i r c u l a r ) a r e b a s e d n o t o n an o b j e c t a n d s p i r i t a p p r o a c h , b u t i n s t e a d o n 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 reasons 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 l a w on t a x a v o i d a n c e t o be u n c h a n g e d a n d t h a t i t was t o o p r e m a t u r e 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 statement of i n t e r p r e t a t i o n . W i l k i e , supra, note 21. As p r e v i o u s l y m e n t i o n e d , 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.  therefore d i f f i c u l t general  approach  t o d i s c e r n w i t h any  to  be  taken  by  degree of accuracy  Revenue  Canada  the  beyond  the  s p e c i f i c transactions discussed.  The  Explanatory  criticism,27 initially  but  Notes  be  had  regarding  to the  in  light  in c o u r t . m  t h a t a p r o v i s i o n be may  not  only  in addition, their  questioned  admissibility  are  of  subjected  practical the  to  merits  Notes.2' of  such  However, a f t e r a  over  government  included expressly directing  these  same  significance  controversy  response the  the  heated  provision,^° t h e  their  proposed  that  an  was  recourse debate  measure  was  2^ N o t e , h o w e v e r comments made t o t h e c o n t r a r y : " [ T ] h e m a i n 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 a b o u t 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 of t h e rule": 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 H o w e v e r , 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 N o t e s 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 b e y o n d m e r e l y p r o v i d i n g e x a m p l e s o f 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 general p u r p o s e do n o t n e c e s s a r i l y a d d 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 O v e r v i e w o f GAAR a n d P a r t s I V . 1 and V I . 1 D i v i d e n d T a x e s " , 1988 P r a i r i e Tax Conference (Toronto: Canadian Tax F o u n d a t i o n , 1 9 8 8 ) , t a b 11 a t 8. 2^ F o r e x a m p l e , K e l l o u g h , 2' S u b s e c t i o n  supra,  n o t e 22  2 4 5 ( 1 0 ) o f t h e December 16,  at  72-5.  1987  amendments.  ^° F o r e x a m p l e , t h a t s u c h a p r o v i s i o n w o u l d a c c o r d t h e N o t e s 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 p r o b l e m s 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 w h a t t h e p o s i t i o n w o u l d be i f R e v e n u e C a n a d a 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 the Notes. For 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 , s e e J o i n t C o m m i t t e e o f CBA/CICA, "Comments on t h e GAAR" a s r e p r i n t e d i n K r i s h n a , supra, n o t e 6, A p p e n d i x A.5  deleted  and  disappeared  Thus, i t i s s t i l l Notes  i f , or  not  when,  from  the  final  version  c l e a r what s t a t u s w i l l the  legislation  is  be  of  the  rule.  accorded  considered  by  these the  courts.'^  at  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 questions regarding the a d m i s s i b i l i t y of e x t e r n a l aids 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 s h r o u d s s e c t i o n 245, t h e r e w o u l d n o t seem t o be much d o u b t t h a t a m b i g u i t i e s w o u l d e x i s t i n i t s a p p l i c a t i o n before the courts. 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 extrinsic e v i d e n c e i n c o u r t s , s e e 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 h a v e 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 D e p u t y M i n i s t e r o f R e v e n u e o f t h e P r o v i n c e o f Q u e b e c , (1978) 1 S.C.R. 851] "provides considerable scope for the source of 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 a s 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 : C a n a d i a n 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 a b o v e 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 a s r e c o r d e d i n H a n s a r d , i t i s submitted t h a t , i n c o n t i n u a t i o n of t h i s j u d i c i a l trend, e x p l a n a t o r y n o t e s w o u l d m o s t p r o b a b l y be a c c e p t e d a s 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 h a s 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 levels:  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 being  the f i n a l  arbiters  s e c t i o n 245. the  i n d e t e r m i n i n g t h e exact scope and ambit o f  However, t h e r u l e h a s n o t y e t been c o n s i d e r e d by  judiciary,  and  until  a d m i n i s t r a t i v e approach  One  may b e j u s t i f i e d  of j u d i c i a l  that  some  Canada's  i nexpressing surprise regarding t h i s  interpretation,  has been  Revenue  prevails.  lack  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 . there  time.  activity  D u r i n g t h i s p e r i o d however  i n relation  to the provision:  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 letters  obtained^^  and  allegedly,  the  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 1 1 8 0 . See f o r e x a m p l e . 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 1 3 , 1 9 9 1 ) ; 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" (dated F e b r u a r y 1 7 , 1992) a n d 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 2 4 5 ( 2 ) was c o n s i d e r e d t o b e i n a p p l i c a b l e o n the grounds t h a t they 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 premises on which t h i s d e c i s i o n was b a s e d . R e f e r e n c e t o t h e c o n t e n t o f s u c h l e t t e r s i s made b y C l a u d e D e s y , e d . , Access to Canadian Income Tax (Don M i l l s : CCH Canadian) (looseleaf), paragraph 87,130, "Application to T r a n s a c t i o n " : s e e J . A . S t a c e y , "Revenue C a n a d a ' 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 : A n U p d a t e " 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 T a x F o u n d a t i o n , 1991) 4:2 a t 4:3.  threatened,'^  cited  been issued.'^ any  i n proposal  and reassessments  have  However, a s o f y e t , t h e w r i t e r i s n o t aware o f  case pending before  GAAR i s a n i s s u e . ' ^ perspective,  letters  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  Suggestions,  for this  lack  notably from a p u r e l y  of  judicial  academic  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 2 4 5 , p a r t i c u l a r l y when t h e same r e s u l t c a n b e by  arguing  judicial) ,  the applicability or i f the rule  of other  measures  i s being  invoked  (statutory or t o defeat 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 Canada t o have t h e m a t t e r s e t t l e d  Of  t h e two o p t i o n s ,  mentioned indicative  above  (for  o r Revenue  i n court.  i t i s suggested example,  achieved  that  advance  t h e correspondence  tax rulings  somewhat o f R e v e n u e C a n a d a ' s p r o p e n s i t y  etc.)  to rely  i s on  t h e GAAR a s 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 transactions.  T h i s w o u l d b e c o n s i s t e n t w i t h t h e more  aggressive  a t t i t u d e t h a t Revenue Canada h a s a d o p t e d 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 b e a f f e c t e d b y 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 p h o n e c a l l s a n d l e t t e r s t o O t t a w a . " E. Roseman, " A n t i A v o i d a n c e Law I r k s T a x P l a n n e r s " The Globe and Mail (28 November 1988) B l a t B4. 1991  '^ "Revenue C a n a d a Round T a b l e " B r i t i s h Columbia Tax Conference  i n Report of Proceedings ( u n p u b l i s h e d ) a t 7.  '^ 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 t h i s s t a t e m e n t s h o u l d 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 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 w i d e l y known w i t h i n t h e t a x c o m m u n i t y , y e t n o t c o m m u n i c a t e d the p u b l i c a t large.  of be of i s to  tax planning.  I f t h i s i s t h e case, then t h e i s s u e remains 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 h a s n o t y e t b e e n c h a l l e n g e d in  court.  One  viable  reason  has n o t been a s u f f i c i e n t the  rule  o f Revenue  that  at present there  l a p s e of time s i n c e t h e enactment of  f o r reassessments  procedure  i s perhaps  t o be  issued,  the internal  C a n a d a t o be e x h a u s t e d  appeal  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 .  Alternatively,  p e r h a p s 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 to  the  costs  particularly  of  litigation,  t h e payment  uncertainty  o f t a x and  interest  of  success  -  i f unsuccessful  e t c . ) and Revenue Canada ( i n c a s e t h e c o u r t s l i m i t t h e s c o p e o f the rule) reason,  t o have t h e matter debated  i n the interim  taxpayers are l e f t  period  before  i n court.^® judicial  Whatever t h e consideration,  a t t h e m e r c y o f R e v e n u e 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, s e e R.D. Brown e t al supra, n o t e 17 a t 11:5 a n d 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 1 4 0 9 - 1 4 1 0 . 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 a b s e n c e 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 involvement of p o l i t i c i a n s . Arguably, i t i s possible that taxpayers could appeal t o p o l i t i c i a n s regarding the application of the provision. 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 favour of the taxpayer. 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 the involvement of Cabinet M i n i s t e r s i n the a d m i n i s t r a t i o n of t h e Income T a x 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 o f 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 b y t h e R e i c h m a n n s 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 ) w e r e 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. M c Q u a i g , Behind Closed Doors: How the Rich Won Control of the Tax System ... And Ended Up Richer (Markam, O n t . : 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 T a x B r e a k s " Montreal Gazette (31 O c t o b e r 1985) B l .  E. SECTION 245 The  - ITS  LEGISLATIVE HISTORY  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  anti-avoidance Consequently, package  as  a  rule  in  its  t h e GAAR was means  of  1987  budget/°  i n c l u d e d w i t h i n t h e 1987  tax reform  assisting  February,  in  the  achievement  overall  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 b a s e and  rates.  D r a f t l e g i s l a t i o n was  of  the  reducing tax  d u l y included i n the White  Paper,  revised during the l e g i s l a t i v e process (with the revised version set  out  in Bill  C-139) , a n d  b e i n g S e p t e m b e r 13, 1988.  enacted,  with the  However, t h i s v e r y b r i e f and  s y n o p s i s does not r e v e a l the t u r m o i l which during  surrounded  date  clinical the  rule  through the parliamentary process.  Neither  c a n t h e c h a n g e s t h a t w e r e made t o t h e o r i g i n a l d r a f t be  regarded  as  i t s passage  effective  indicative,  being of such a l i m i t e d nature.  However,  these  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 , a s s u c h , s h o u l d a t l e a s t be  and  highlighted.  ^° C a n a d a , D e p a r t m e n t o f F i n a n c e , B u d g e t 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 a s 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 at 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 explain i t s introduction, including, inter alia: avoidance a r r a n g e m e n t s e r o d e t h e t a x b a s e and u n d e r m i n e t h e f a i r n e s s o f t h e Canadian t a x system; the e x i s t i n g r u l e s were inadequate t o prevent such avoidance 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 s y s t e m more c o m p l e x , t h e y s o m e t i m e s 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 a n d 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 c o m p l e t e d b e f o r e t h e amendments become e f f e c t i v e ; Canadian 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 also. Dodge, ("Tax Reform and the Anti-Avoidance P r o p o s a l s " ) , supra, n o t e 9 a t 2-4.  In  a l l , there  v e r s i o n and  w e r e two  main  a December 1987  drafts  d r a f t , the  two  f u r t h e r r e v i s i o n s , before the  was  enacted.^1  Briefly,  the  main d i f f e r e n c e s  contained  in  version  enacted are  as  the  June  - the  original version  other  provision  of  18, as  the  rule:  the  initial  l a t t e r being modified  final  version  between the  1987  White  of  section  original  Paper^^  by 245  version  ^^d  the  as  final  follows:  of the  the  of  Act.  rule applied notwithstanding  any  This  was  notwithstanding  clause  deleted. -  the  business  purpose  t e s t was  changed  to  a  non-tax  purpose  test - 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 be -  altered to  non-exclusive the  purpose  clause  was  replaced  excludes transactions  t h a t do  the  Act  p r o v i s i o n s of the  - the - an  not  by  subsection  245(4)  i n v o l v e a misuse or  which  abuse  of  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 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 H o u s e o f Commons S t a n d i n g C o m m i t t e e on F i n a n c e and E c o n o m i c 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,  note 1 at  143-  the  provision  added  by  the  December  16,  1987  version  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 notes 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 -  the  provisions  reassessment or for  regarding  additional  an a d j u s t m e n t were  Initially, radically  one  may  altered  the  overall  is  rule.^^  On  the  this  initial  extensive  proposal.  i t is fair  to  say  and  enactment  of  rejection  by  purpose  face of  General at 36.  s e c t i o n 245  test.^^  Supreme  request  of  changes  However,  the  rule  substance.^' changes  i t , t h e most n o t a b l e  because i n the Court  However,  H.J. K e l l o u g h , Anti-Avoidance  a  were  - they d i d not s t r i k e a t the s t r u c t u r e  arguably  the  of  list  that these  perhaps the replacement of the business  rule,  assessment,  i t s i m p a c t and  non-tax purpose t e s t , p a r t i c u l a r l y as the  an  assessment i n r e s p e c t  think that  the  of  altered.  only of a l i m i t e d nature of the  deleted  issuance  r e m a i n e d l a r g e l y t h e same a s r e g a r d s Therefore,  as  i t  scope  a of  main  impetus  for  place  was  the  apparent  Canada^^  of  the  business  first  is  purpose t e s t w i t h  i t a f f e c t e d the  the  of  alteration  debatable  whether  the  the  "A R e v i e w a n d A n a l y s i s o f t h e R e d r a f t e d R u l e " (1988) 3 6 Canadian Tax Journal 23  One c o m m e n t a t o r o b s e r v e d : " [ t h e c h a n g e s a m o u n t e d 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 . " Kellough, ibid. 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, S.C.R. 536, [ 1 9 8 4 ] C.T.C. 294, 84 D.T.C. 6 3 0 5 , 53 N.R. V. K r i s h n a , "GAAR: The U l t i m a t e (1988) 2 Canadian Current Tax C43.  Tax  Avoidance  [1984] 241.  1  Weapon"  substitution  really  restrictively  narrowed  the test  non-tax  purpose  amounted  to  the ambit  test  much  in  that  i t  of r u l e / ^ so t h a t  only  i n effect  i s e s s e n t i a l l y the b u s i n e s s purpose  i n a l l other respects,  except  for this  small  technical  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 a n d h i s t o r y o f s e c t i o n 245. turn  t o the  economic provision  analysis  context to and  the  of  legislative  From t h i s s o l i d g r o u n d i n g , we the r u l e  enhance  influence  our of  can  now  in i t s socio-political  and  understanding of  the  the  exogenous  both  factors  which  surrounded 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 w e r e p r e v i o u s l y c a u g h t 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 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 , 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 t o Tax A v o i d a n c e " ) a t 18-19.  New  and More C o h e r e n t  Approach  CHAPTER I I I POLITICAL AND SOCIAL CONTEXT  A. UNDERLYING ASSUMPTIONS In  analyzing  section  the political  245 was e n a c t e d  and s o c i a l  i t i s proposed  context within that  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 . primary the in  assumptions  which  t h e assumptions  I nparticular, the  a r e t h a t t h e t a x system  i s t h e outcome o f  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 a i m o f t h e government 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 .  premise  involves  simultaneously: with  first,  theelectorate  wanted the  two  t o placate  business  propositions enactment  strands  which  were  This  being  latter  promoted  t h e government wanted t o maximize  t o ensure  the special  sector  and  are discussed  votes  i t s re-election,  and second, i t  interest  i n particular,  high-income i n greater  groups,  individuals. detail  These  below.  o f t h e GAAR i s a g o o d i l l u s t r a t i o n o f t h e s e  The  competing  factors.  The  first  assumption  outlined  above  f o l l o w i n g b a s i c terms: t h e whole  c a n be e x p l a i n e d  concept o f t a x a t i o n  i n the  i s purely  a creature of statute.  I n democratic states, statutes are t h e  creation  bodies.  like  of legislative  a l l other  process.  legislation,  Therefore, t a x l e g i s l a t i o n ,  i s a product  of this  political  T h i s b r i n g s i n the second assumption political states  process  lies  the  government.  i t i s t h e government which  legislative  agenda.  In  as a t t h e v e r y h e a r t of t h e In  predominantly  particular,  proposals.  In  doing  so,  governments  democratic  determines  i t controls,  e x t e n t , t h e f o r m u l a t i o n and e n a c t m e n t (by way of  most  to  a  the large  of party loyalty)  are  susceptible  to  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 l a w s w h i c h t h e y t h i n k will  be  i n the i n t e r e s t s of society.^  The  v e r y essence  of  d e m o c r a t i c s t a t e means t h a t t h e y h a v e t o be v o t e d i n t o o f f i c e the electorate.  Therefore, p o l i t i c i a n s are vying f o r votes  g o v e r n m e n t s a r e s e e k i n g t o be r e - e l e c t e d . follow  that politicians  appeal t o the electorate. the  powerful  special  members  interest  of  groups.^  are  only doing  the by and  However, i t does n o t what w i l l  most  likely  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 society,  in  This helps  particular, to  explain  the why  strong the  tax  1 H o w e v e r , t h i s i s n o t t o s a y t h a t g o v e r n m e n t s do n o t p a s s laws which are i n the i n t e r e s t s of s o c i e t y . Rather, they enact l a w s 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 t h e m r e - e l e c t e d - s u c h l a w s may o r may n o t be i n i n t e r e s t s of the 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 ) . Relating t h i s h y p o t h e s i s t o t h i s p a p e r w o u l d 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 p a c k a g e was p r e s e n t e d i n t h e way t h a t i t was. For example, i t emphasized the supposed f a i r n e s s of the reforms 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 . For a f u l l e r d i s c u s s i o n , s e e , f o r e x a m p l e , i n f r a , n o t e s 77-80 and accompanying t e x t . 2 L. M c Q u a i g , Behind Closed Doors: How the Rich Won Control of Canada's Tax System ... And Ended Up Richer (Markam, Ont.: Viking, 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 e x a m p l e ( 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 follows :  system i s f u l l  o f loopholes as such t a x breaks  are, i n effect,  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 costly.^  Furthermore,  politically  t h e s e b r e a k s c a n be t a i l o r e d , s o 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-income  Behind those doors [ i e . o f t h e t a x world] 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 w h e r e r i c h i n d i v i d u a l s a n d l a r g e c o r p o r a t i o n s have f o u n d ways t o s h i f t t h e b u r d e n o f b i l l i o n s o f t a x e s f r o m t h e i r own b a c k s - o n t o t h e b a c k s o f other Canadians. T h e y h a v e b e e n a b l e t o do t h i s b y 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 a s i t does n o t t a k e i n t o account 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 groups. 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 g r o u p s a r e more l i k e l y t o be powerful i f they comprise of rich individuals or c o r p o r a t i o n s , such as t h e Business C o u n c i l on N a t i o n a l I s s u e s , a s 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 c a n b e more e f f e c t i v e . However, power and wealth are not mutually exclusive. 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 average perceived value o f t h e i s s u e a t stake t o t h e i n d i v i d u a l s who h a v e a common i n t e r e s t ; t h e number a n d g e o g r a p h i c d i s p e r s i o n of these 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 provide some b e n e f i t o v e r a n d a b o v e 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 , a s 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 w o u l d 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 b u t w o u l d 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, C a n a d i a n T a x P a p e r No. 81 (Toronto: C a n a d i a n T a x F o u n d a t i o n , 1988) a t 6 2 . ' Supra,  chapter  1, n o t e s  10-1 a n d a c c o m p a n y i n g  text.  ^ M c Q u a i g , 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 d u e t o the hidden nature of t a xexpenditures. I n o t h e r words, they a r e n o t 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 a s g r a n t s a r e , b e i n g w r a p p e d up i n t h e t e c h n i c a l l a n g u a g e o f t h e Income T a x A c t . S e e a l s o , N. B r o o k s , " C o n f u s i n g T a x R e f o r m w i t h G o v e r n m e n t S p e n d i n g " Financial Post (26 O c t o b e r 1987) 18.  earning  individuals  and  corporations.^  Therefore,  tax  breaks  c a n be a g o o d 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 g r o u p s q u i e t in a politically costless  q u e s t i o n why  way.'  One  may  t h e r i c h and  and  influence i f i t i s votes  powerful  that  are  e l e c t i o n s t o keep governments i n o f f i c e . a d v a n c e d f o r t h i s phenomenon. greater resources effective  are afforded weight  important  at  times  S e v e r a l reasons can  F i r s t , t h e b u s i n e s s community  of be has  a t i t s d i s p o s a l w i t h w h i c h i t c a n mount more  opposition.^  The  public at  l a r g e , on t h e o t h e r  hand  ^ [A]lthough tax breaks are t e c h n i c a l l y available to everyone, only the well-to-do are r e a l l y able t o take a d v a n t a g e 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 c a n a f f o r d t o make i n v e s t m e n t s . Therefore, m i l l i o n s of Canadians are excluded. B u t e v e n some t a x b r e a k s t h a t a r e w i d e l y u s e d by o r d i n a r y C a n a d i a n s 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 . M c Q u a i g , 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 o u t 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 of 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 , concluded 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 a b o u t one h u n d r e d 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 of t h e decade [1970s], 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 c o m m u n i t y ' s o u t r a g e o v e r w h a t i t saw a s t h e T r u d e a u g o v e r n m e n t ' 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 R e f o r m " (1988) 26 Osgoode Hall Law Journal 347 a t 364. ^ F o r e x a m p l e , a c c o r d i n g t o a s t u d y i n 1981 by t h e E c o n o m i c Council of Canada, an estimated three hundred business, 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 s p e n d 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 not even include the s i g n i f i c a n t resources a l l o c a t e d t o lobbying 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 g r o u p s whose r e s o u r c e s , i n t o t a l , amount t o a b o u t $2 m i l l i o n p e r annum: M c Q u a i g , supra, n o t e 2 a t 195. Evidence t h a t t h i s d i s p a r i t y i n resources a f f e c t s the a b i l i t y of special  is  and  will  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  gets  its  generally  way.^  monopolize  confused, disorganized  Furthermore,  these  t h e media t o ensure  and  ill-informed  resources full  can  exposure  be  used  to  of the business  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 the  matter.'  However, i t i s f e l t  that this  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 publishers  are  Therefore,  newspaper  reporting  b u s i n e s s men  news w h i c h  striving  operators are  to  maximize  primarily  profits.^"  concerned  with  i s appealing to 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 favour of p u b l i c i n t e r e s t groups which  stems  b o t h f r o m 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 a n d t h e "human  i n t e r e s t g r o u p s t o mount e f f e c t i v e o p p o s i t i o n c a n be g l e a n e d f r o m 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 advantages; p u b l i c i n t e r e s t groups are u s u a l l y not c l o s e l y k n i t , are p o o r l y informed i n r e l a t i v e t e r m s , a n d a r e f i n a n c i a l l y weak. Protracted proceedings 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 a n d N o r m a t i v e L e s s o n s f r o m C a r t e r " i n W.N. B r o o k s , e d . . The Quest for Tax Reform (Toronto: C a r s w e l l , 1988) 397 a t 413. ® M c Q u a i g , supra,  note 2 a t  300.  ' "The e n o r m o u s 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 interest g r o u p s 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 b y i n f l u e n c i n g the decisions of marginal voters through, f o r e x a m p l e , m e d i a 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, "  Ibid.  n o t e 2 a t 65.  interest" stories  aspect  that  listeners  sell  of  such  stories  newspapers  and t e l e v i s i o n  i t i s human  and magazines  viewers.  interest  and a t t r a c t  Therefore,  there  radio 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 c a n s e c u r e news c o v e r a g e , i f such  articles  are  not  regarded  as  being  of  newsworthy  c h a r a c t e r . 1^  H a r t l e , supra, 1^  n o t e 7 a t 414.  Ibid.  H o w e v e r , 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 statement i s necessary. N o t e 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 g r o u p s t o " b u y " f a v o u r a b l e news coverage: 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 g r o u p s t o i n f l u e n c e t h e mass m e d i a 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 highly respected journalist to write a story that 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 f u n d e d b y t h e i n t e r e s t g r o u p a n d , i n d e e d , was v e t t e d b y t h e g r o u p . 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 T a x R e f o r m e r " Winnepeg Free Press (14 O c t o b e r 1986) 6. One e x a m p l e 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 to t h e American t a x reforms. 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 . Furthermore, without supporting evidence, i t i s hypothesised t h a t b u s i n e s s e s may be a b l e t o " b u y " news c o v e r a g e b y p r o m i s i n g to purchase ( 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 through t h e s a l e o f a d v e r t i s i n g t h a t revenues 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 s o much c l o u t w i t h g o v e r n m e n t i s t h r o u g h t h e p r o v i s i o n of 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 the promise, o r t h r e a t of removal, of financial assistance. 1988  election  illustrate  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  campaign,  how  other  dependent  election  political  experiences  parties  are  on  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,  serve  to  receiving i n the run-  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  Conservative  funds  corporations this  to  the  Conservatives position  due  or  were  supplied  directly  corporations controlled 1987  were t o an  tax  reform  at that election  time  by  package, in a  looming  by  dominant  them.^*  Relating  the  Progressive  particularly vulnerable sometime w i t h i n  the  near  future.  M c Q u a i g , supra,  note 2 a t  196.  L. M a c D o n a l d , "Why t h e C a r t e r C o m m i s s i o n Had t o Be S t o p p e d , 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 cash o r i n k i n d , a r e u s e d t o s e c u r e t h e s p o t a n n o u n c e m e n t s on r a d i o a n d TV, t h e p o s t e r s , t h e p a m p h l e t s , 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 a n d t h e b u s e s a n d 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 across. H a r t l e , supra, n o t e 7 a t 416.  A  f u r t h e r reason  governinent  lies  d i s p o s a l . 1^  f o r the in  the  business sector's resources  Consequently,  government  with  threats  which  business  that  can  i t will  influence over  business easily  has  point  to  "call  i s the  bargaining  F i n a l l y , on  rather because  withdraw  cannot  moot  their  issue.  e a s i l y take  the  and  than  government  The  important  risk,  so  quite  Street  the  sector l i e s merely i n t h e i r  action.  identify  with  a  i n v e s t m e n t . 1®  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  b u s i n e s s and "Bay  government  is a  s t r e n g t h of the corporate  t h r e a t s , not  understand  i t s bluff"  its  intimidate  Whether i n f a c t i t would withdraw i n v e s t m e n t i f the decided  at  the  with  welfare  often  or  public  cabinet  were p a r t set".2°  members o f  At  of, the  the  business  previously  what i s c o l l o q u i a l l y very  sector,  i n t e r e s t g r o u p s . 1' T h i s  members  l e a s t , cabinet  to  worked  is in  known a s ,  the  ministers  are  F o r e x a m p l e , t h e one h u n d r e d and f i f t y C h i e f Executive 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 Issues o v e r s e e 1.5 m i l l i o n e m p l o y e e s and $700 b i l l i o n i n assets: M c Q u a i g , supra, n o t e 2 a t 192. See, a l s o , L. M a c D o n a l d , "Why C a r t e r Had t o Be S t o p p e d " , i n The Quest for Tax Reform, supra, n o t e 7, 351 a t 362: " T h r o u g h 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 , the 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 C a n a d a ' s m o s t p o w e r f u l e c o n o m i c and s o c i a l p l a n n e r s . " 1° M c Q u a i g , supra, 1'  note 2 at  196.  JJbid.  2° F o r e x a m p l e , M i c h a e l W i l s o n had "Bay Street i n his blood". He had been e x e c u t i v e vice-president of 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 h a d " a b s o r b e d t h e v a l u e s  intent  on  sector^^  nurturing  due  campaign  donations.  total,  corporate over  special slant,  contains  This  given,  with  the  f o r example,  a l l a d d s up t o g i v e  corporate to  the  receive corporate  i n f l u e n c e and c l o u t w i t h t h e government.  interest  are able  t h e government.  which  affiliation  t o t h e reasons  sector greater  In  their  groups,  notably  to exercise  This  those  considerable  with  a  influence  i s reflected i n the tax structure  many p r o v i s i o n s  which  are of benefit  t o these  groups.  It This  i s from  this  perspective  section  provision i s ideal f o r illustrating  t h e two d i f f e r e n t s t r a n d s namely,  pleasing  1987  t a x reform  245 b e  approached.  the conflict  o f government a c t i o n d i s c u s s e d  the general  g r o u p s a t t h e same t i m e . the  that  electorate  In total,  package  was  between above,  and s p e c i a l i n t e r e s t  i t may b e f a i r t o s a y t h a t weighted  i n favour  of the  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 h i m 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 M a c k n e s s , r i g h t - w i n g B a y S t r e e t i n s i d e r ( h e was v i c e p r e s i d e n t a n d c h i e f e c o n o m i s t o f t h e Bank o f N o v a S c o t i a ) a s h i s special advisor. 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 p r o m o t e some n o b l e s o c i o economic g o a l , f o r example, t h e promotion o f t h e Canadian f i l m industry? The r e s p o n s e i s t o q u e s t i o n w h e t h e r 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 reveal that t a x expenditures are not successful i n stimulating t h e economy: M c Q u a i g , 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 t h e m a s much a s i t c o u l d have.^^ of  i t , s e c t i o n 245  affairs.  represents  It clearly  was  H o w e v e r , on t h e  a departure  from t h i s  face  s t a t e of  a p r o v i s i o n which adversely a f f e c t e d  the corporate s e c t o r t o a great 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  i t s tax representatives. white  ferociously  by  business  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  p a p e r s r e c e i v e d a s much a t t e n t i o n . G r e a t p r e s s u r e  exerted  on  the  least,  to  greatly  opposition,  the  government t o amend  government  either  i t . still  withdraw the  Yet,  in  enacted  the the  moreover, i n a form which d i d not g r e a t l y d i f f e r  "  and  For a f u l l e r d i s c u s s i o n , i n f r a ,  notes  rule,  face  or  of  provision, from  was at such and  the  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 i m p a c t 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 f r o m t h e e s t i m a t e d amount o f e x t r a r e v e n u e w h i c h t h e p r o v i s i o n was s u p p o s e d t o g e n e r a t e - n a m e l y $2240 m i l l i o n o v e r t h e p e r i o d 1 9 8 8 - 9 2 . 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 the o t h e r c o r p o r a t e basebroadening proposals i n the white papers. Canada, Department of Finance, Tax Reform 1987: Income Tax Reform (Ottawa: the D e p a r t m e n t , J u n e 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 h a v e r e s e r v e d t h e i r heaviest f i r e f o r the white paper's proposed general antia v o i d a n c e r u l e " : S. P o d d a r & A. C o y n e , " C r u n c h i s N e a r f o r Tax R e f o r m R e v i e w " 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 o u t by the Department of Finance as i n need of justification and e x p l a n a t i o n . N o t e t h e w r i t i n g s o f one D e p a r t m e n t o f Finance o f f i c i a l : D.A. Dodge, "A New and M o r e C o h e r e n t A p p r o a c h t o Tax A v o i d a n c e " (1988) 36 Canadian Tax Journal 1 and "Tax R e f o r m and the Anti-Avoidance Proposals" 1987 British Columbia Tax Conference, t a b 4.  initial of  proposal.  factors,  T h i s i s perhaps  one  of  which,  was  i n d i c a t i v e of a the  wish  to  e l e c t o r a t e under the t h r e a t of a forthcoming  From  here  background is  i t  is  proposed  that  the  w i t h i n w h i c h s e c t i o n 245 was  h o p e d t h a t some i n d i c a t i o n s  will  enactment  surrounded  B.  THE  of  the  provision,  appeal  to  the  election.  social  and  political  e n a c t e d be a n a l y z e d .  be  exposed  g o v e r n m e n t 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 the  combination  a s t o why  i n any  despite  the  the  m a j o r way furore  It  in  which  i t s introduction.  LOOMING ELECTION  (i) General I n t r o d u c t i o n At  the  time  J u n e 1987 fall  of  election  of the  introduction  t h e government had 1989.^^ would  Moreover, be  called  of  the  tax reform  package i n  t o c a l l a g e n e r a l e l e c t i o n by i t was  earlier,  generally sometime  expected in  that  1988.^^  the an The  threat of t h i s forthcoming federal e l e c t i o n g r e a t l y affected the tax  reform  package.  very i n i t i a t i o n  In p a r t i c u l a r ,  i t influenced  perhaps  the  of the reform package, the s t r u c t u r e or content  ^ 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 w e r e v o t e d i n t o o f f i c e i n S e p t e m b e r 1984. A g e n e r a l e l e c t i o n h a s 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 S e p t e m b e r 1989 f o r the r u l i n g party. F o r e x a m p l e , C. G o a r , "Tax R e f o r m A i m s t o B o o s t T o r y C h a n c e s " Montreal Gazette (29 O c t o b e r 1986) B3; "Election U n l i k e l y B e f o r e T a x R e f o r m , MacKay S a y s " Toronto Star (18 M a r c h 1988) A l O & "MP U r g e s Tax R e f o r m P a s s a g e 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 A u g u s t 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  obvious,  the  reason  election  was  the desire  was  f o r the  criticised.  influence  To  of  o f t h e government  the  state the forthcoming  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 w o u l d be v o t e d back i n t o  office.  At t h e time  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  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 position. majority  Having  reform  third  place  support.'°  office  i n Canadian h i s t o r y  doing very badly tax  entered  i n 1984  with  (211 s e a t s ) t h e  package  vulnerable  the largest  g o v e r n m e n t was  i n t h e p u b l i c opinion p o l l s i n t h e year of t h e  package.  At the beginning  i n the polls, Matters  with  d i d improve  of the year,  i t was i n  a low o f twenty-two p e r towards  cent  t h e end o f t h e year.  Note t h e statements b y one c o m m e n t a t o r t h a t " [ t ] h e f e d e r a l T o r i e s ' main (only?) g o a l i s t o w i n t h e next 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 R e f o r m ' " Financial Post (2 A u g u s t 1986) 9. M c Q u a i g , supra,  n o t e a t 307.  '° D. M c G i l l v r a y , " G r i m W a r n i n g 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 D r o p t o L a s t P l a c e i n New P o l l G a l l u p S a y s " Toronto Star (15 J a n u a r y 1987) A l & M. S c o t t , " G o v e r n m e n t ' s R a t i n g i s 4 5 - y e a r L o w : P o l l " Montreal Gazette (19 F e b r u a r y 1987) A l . T h e s e l o w 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 federal administration i n a t least f o r t y - f i v e years: Scott, ibid. T h i s p o o r s u p p o r t may h a v e b e e n p a r t l y d u e t o a t r e n d t h a t h a s 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 there i s a d e c l i n e i n support f o rt h e governing 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 a n d D. D a s k o , " T o r i e s R a l l y t o S e c o n d P l a c e a s NDP D r o p s t o T h i r d " The Globe and Mail (29  with  the  r a t i n g s pushing  the  place  with  of decided v o t e r s . H o w e v e r ,  this  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 g o v e r n m e n t , p a r t i c u l a r l y  with  t h i r t y - t w o per cent support  a g e n e r a l e l e c t i o n due  (ii) It  Political  party  by t h e f a l l  of  into  second  1989.  Appeal  i s submitted t h a t t h i s s t a t e of a f f a i r s g r e a t l y a f f e c t e d the  a t t i t u d e of the government towards t h e i r t a x r e f o r m  proposals.  It  reform  wanted  to  utilise  the  political  increase i t s s u p p o r t . T h i s embarked upon s o l e l y the  electorate.  December 1987)  A l & A9  of  tax  i s not t o say t h a t t a x reform  to bolster  Indeed,  appeal  tax  at A l &  the  reform  government's support had  been an  issue i n  to was with the  A9.  ^1 Adams & D a s k o , i b i d . ^2 B u t t o a n y o n e 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 , his [ H o n o u r a b l e M i c h a e l H. W i l s o n , M i n i s t e r o f Finance] t i m i n g makes p e r f e c t s e n s e . 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 b u d g e t , W i l s o n w i l l be i n a p o s i t i o n t o i m p l e m e n t t h e m i n 1988, the year Prime M i n i s t e r B r i a n Mulroney i s expected t o c a l l a general 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 tough, austerity-minded m e a s u r e s and r e p l a c e t h e m w i t h p o p u l a r , consumer-oriented policies. And t h i s i s e x a c t l y w h a t W i l s o n a p p e a r s t o be doing.  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 h e a d o u t on t h e c a m p a i g n 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 f o r m s and h i g h e r t a k e - h o m e p a y f o r m o s t w o r k e r s a s 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 w o u l d 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 C a n a d a ' s 17 m i l l i o n v o t e r s . G o a r , s u p r a , n o t e 27.  1984 e l e c t i o n c a m p a i g n a n d t h e g o v e r n m e n t h a d b e e n s e r i o u s a b o u t it  since  early  on i n i t s m a n d a t e . H o w e v e r ,  recognition that the p o l i t i c a l  there  i s general  a p p e a l o f t a x r e f o r m was a m a j o r  impetus.  " G. P i t t s , '"We N e e d A l l T a x E l e m e n t s o n 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 A u g u s t 1986) 4. For example, J . F e r g u s o n , "Tax R e f o r m I s s u e More C o m p l i c a t e d Than I t S o u n d s " Calgary Herald (24 A u g u s t 1986) B 2 ; G o a r , supra, n o t e 2 7 ; "The C o n t e x t o f T a x R e f o r m " Halifax Chronicle Herald (23 J u n e 1987) 6 & W.A. W i l s o n , " T o r i e s P i n H o p e s o n T a x R e f o r m " Winnepeg Free Press (23 M a r c h 1987) 6. However, t h e government h a d changed t h e p a c e 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 favoured a g r a d u a l i s t approach to p r e v e n t " u n c e r t a i n t y t h a t m i g h t harm C a n a d a ' s economic p e r f o r m a n c e " : C a n a d a , D e p a r t m e n t o f F i n a n c e , Tax Reform 1987 ( O t t a w a : t h e D e p a r t m e n t , J u n e 1 8 , 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 o u r m a j o r t r a d i n g p a r t n e r s h a d 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.  In  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  on  the  o b j e c t i v e of fairness.'^  its  own  self-interest  the  tax  reform  was  perfectly  In doing  i n attempting  proposals  to the  a w a r e t h a t t h i s was  so,  i t was  t o maximize the  electorate.'^ the  criterion  The  focused  acting in appeal  of  government  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 u s e d t o s e l l t h e p a c k a g e w h i c h i s e m b l a z o n e d on t h e f r o n t o f a l l t h e w h i t e p a p e r d o c u m e n t s : "Lower R a t e s , F a i r e r S y s t e m " . T h i s b e g s t h e q u e s t i o n - w h a t d o e s 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 d e p e n d s on w h i c h s i d e o f t h e f e n c e y o u a r e s i t t i n g on. So, f o r e x a m p l e , f o r t h e g o v e r n m e n t , 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 A b o u t F a i r n e s s : T a x R e f o r m Has Revived P o l i t i c i a n s ' Preoccupation w i t h the Notion of Fairness" ( O c t o b e r 1987) 4 Report on Business Magazine 19 a t 19. However, unless i n d i c a t e d otherwise, f a i r n e s s i n t h i s paper i s taken t o be t h e g o v e r n m e n t ' 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 c o n n o t e d 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 b u r d e n ; i n d i v i d u a l s i n s i m i l a r e c o n o m i c 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 i n c o m e t a x s y s t e m be b e t t e r i n t e g r a t e d w i t h the 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 e x e m p t i o n s 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 i n c o m e t a x and t h e s a l e s t a x be i m p r o v e d : Tax Reform 1987, supra, n o t e 34 a t 3. In particular, 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 p e r be t a k e n a s being the i n c r e a s e i n the 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 o f t h e t a x r e f o r m e x e r c i s e w e r e i d e n t i f i e d as being competitiveness, simplicity, consistency 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 s o , c a n n o t 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. It is simpler, and more r e w a r d i n g politically, to toss 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, the p o l i t i c i a n s sense, are l i k e l y t o view t a x reform o n l y from t h e n a r r o w 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, n o t e 35 a t 19.  palatable  t o the electorate.  governinent p o l l ,  This  i s corroborated  by  a  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 cent o f t h o s e surveyed wanted t h e f a i r n e s s o f the t a x system at It  improved.Therefore,  t h e government  emphasised  every 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 white paper p r o p o s a l s . would  even  be  accurate  t o say that  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, in  i t s efforts to sell  t h e package as promoting  fairness.''  ' There a r e reasons o t h e r than f a i r n e s s t o r e f o r m a t a x system, b u t they f a i l t h e p o l i t i c a l sex appeal t e s t . One r e a s o n i s t o make C a n a d i a n 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 f e w p e o p l e c a n g r a s p t h i s . Another 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 . Beside a handful of p u b l i c p o l i c y a n a l y s t s , who k n o w s , l e t a l o n e c a r e s , w h e t h e r 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 p a p e r o n t a x a t i o n p u t s i t ? A n d who, o u t s i d e t h e g o v e r n m e n t 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 generates 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 , those a r e major reasons f o r r e f o r m i n g t h e t a x system. But t h e greatest reason - 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 T a x - R e f o r m P l a n s " Montreal Gazette (25 J u l y 1987) A7. T h e s e c o n c l u s i o n s w e r e s u p p o r t e d b y another survey conducted f o r Southam News b y A n g u s R e i d A s s o c i a t e s which r e v e a l e d t h a t Canadians overwhelmingly b e l i e v e d t h a t t h e t a x s y s t e m was u n f a i r : J . F e r g u s o n , " M o s t C a n a d i a n s O p p o s e T a x R e f o r m P r o p o s a l s " Calgary Herald ( 2 1 M a r c h 1987) A 3 . 3' F o r e x a m p l e , b y e m p h a s i s i n g t h e i n c r e a s e d b u r d e n o n t h e c o r p o r a t e s e c t o r t h e g o v e r n m e n t 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 i n c o m e t a x r a t e s w e r e 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. For a f u l l e r discussion, infra, note 79 a n d accompanying t e x t .  For  the cynics  justify  amongst  the claim  that  u s , some  explanation  t h e g o v e r n m e n t was  i s necessary  acting  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 . persuasive itself.  evidence  that  i s available  I f t h e t a x system  was  then  i t would  n o t be i n t h e f o r m  earlier,^° t h e c u r r e n t t a x s y s t e m breaks,  inserted with  sector  and high-income  continued process  to exist  solely  i n the  ( i e . the general  public)  i t i s today. i s littered  As  with  discussed  special tax  the i n t e n t i o n of pleasing the corporate earning  after  of so-called  The m o s t  i s the tax structure  constructed  i n t e r e s t s of the majority of taxpayers  to  individuals.  t h e t a x system  "reform"  i n 1987.  Moreover,  h a d gone  these  through  Although,  a  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 reform  exercise,  cows  special  respected,for was o n l y r e d u c e d  Canadian  s i t u a t i o n s and  example, t h e l i f e t i m e  sacred  capital  gains  were  exemption  ( t o $100,000 f r o m $500,000) f o r m o s t s e c t o r s ,  r a t h e r t h a n r e m o v e d a l t o g e t h e r .^^  Supra, Financial  H.  n o t e s 3-6 a n d a c c o m p a n y i n g  Solomon, " W i l s o n L e a r n e d Post (22 J u n e 1987) 9.  From  text. MacEachen's  Fiasco"  F o 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 , s e e i n f r a n o t e 145 a n d a c c o m p a n y i n g t e x t .  The  GAAR was  an  i n t e g r a l p a r t of the t a x reform package.  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 in  the  achievement  of  i t s objectives,  important  in  The  element  particular,  the  c r i t e r i o n of 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 to produce a t a x r e f o r m package t o pass o f f t o the e l e c t o r a t e  as  achieving  In  particular,  a  fairer  system  influenced  i t i s s u b m i t t e d t h a t i t was  t h e i n t r o d u c t i o n o f t h e GAAR and tax  reform  package.The  also  section  impetus  for  i t s inclusion within  the  introduction  perhaps  and  an  245.  inclusion  of  the  p r o v i s i o n a s s i s t e d t h e g o v e r n m e n t t o o s t e n s i b l y p r e s e n t an i m a g e of  fairness - i n particular,  of e a s i n g the t a x burden from  s h o u l d e r s o f t h e l o w 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  Dodge, supra, P r o p o s a l s " ) a t 2.  n o t e 25 ("Tax  the  rich  Reform and t h e A n t i - A v o i d a n c e  '''' The g o v e r n m e n t c o u l d h a v e 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 e x a m p l e , i n i t s F e b r u a r y , 1987 B u d g e t . This w o u l d h a v e b e e n more l o g i c a l . For example, i f t h e government was a s c o n c e r n e d a s i t c l a i m e d a b o u t 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 w o u l d h a v e made more s e n s e 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 . Instead, the 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 a d o p t e d i n t h e i n t e r i m p e r i o d - f o r e x a m p l e , two a b u s i v e t r a n s a c t i o n s w e r e 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. B e a c h , " W i l s o n S t r i k e s a t T a x Avoidance" Calgary Herald (13 O c t o b e r 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 T a x R u l e D e a l t B l o w " Financial Times (5 O c t o b e r 1987) 3.  and  corporate  references  sector.  t o section  This  i s evidenced  245 w h i c h  by  are scattered  t h e numerous throughout t h e  w h i t e paper documents.  It  i s also  influenced generated  submitted  that  t h e looming  election  the calculation of the projected  could  revenue  b y t h e a p p l i c a t i o n o f t h e GAAR.  have  increases  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 m o s t p l i a b l e a n d unprincipled  o f a l l t h e base-broadening  measures.  With the  o t h e r m e a s u r e s , t h e g o v e r n m e n t was a t l e a s t r e m o v i n g o r l i m i t i n g something t h a t a l r e a d y had a value t o i t .  W i t h t h e GAAR, o n t h e  o t h e r h a n d , i t i s d i f f i c u l t t o s e e how t h e g o v e r n m e n t c o u l d h a v e calculated the figure for i t s future application. on  what b a s i s c o u l d  the  rule  i t p r e d i c t t h e frequency of a p p l i c a t i o n of  ( e s p e c i a l l y as  Department  of  F o r example,  Finance  i t i s Revenue which  i s  Canada  and n o t t h e  responsible  f o r the  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  occur  taxpayers affected  as a r e s u l t o f t h e t a x reform would  discontinue  by t h e w h i t e  papers  using  the  and r e l y  ( f o r example, special  instead  s h e l t e r s n o t so affected)  and t h e e x t e n t  the  up when a l o o p h o l e  future  these  (abuses  cannot  be  flair  predicted)?  A  incentives  on o t h e r t a x  and v a l u e  possible  that  o f abuse i n  i s discovered  -  indication of the  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, 2 5 , 4 2 , 129-33 a n d 137-44 (Annex 1: E x p l a n a t o r y N o t e s t o t h e G e n e r a l Anti-Avoidance Rule).  difficulties generated  encountered  by s e c t i o n  i n estimating  245 i s t h e l a c k  t h e revenue  of information  methodology used i n t h e c a l c u l a t i o n s / ' Therefore, government  was p r o n e  circumstances. government fairer  t o shape  For  t o present  system.  example,  the  election  t h e t a x reform  These  perhaps t h e  package  prompted  figures  the  as achieving  B u t t o do s o , i t h a d t o s u p p o r t  and f i g u r e s .  on t h e  t h e c a l c u l a t i o n s t o meet t h e  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 facts  increases  a  i t s claims of  sector with  had t o look  economic  impressive,  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 significantly Therefore, benefit  o f f s e t by r e d u c t i o n s  i n the corporate  tax rates.  t h i s may h a v e e n c o u r a g e d t h e g o v e r n m e n t t o g i v e t h e  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  p r e d i c t t h a t i t w o u l d be u s e d e x t e n s i v e l y t o c u r b t a x thereby  generating  a s u b s t a n t i a l increase i n revenue.  and t o  avoidance, This i s  not t o suggest 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 that  the calculation  application that  o f something  as u n c e r t a i n  o f s e c t i o n 245 i s s o u n p r e d i c t a b l e  t h e government  w i t h i n some l i m i t s  could  really  give  as t h e future and f o r t u i t o u s  any f i g u r e ,  obviously  ( f o r e x a m p l e , i f i t h a d s t a t e d t h a t t h e GAAR  w o u l d 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 . of  proving,  Infra,  or f o r that  n o t e 75.  The p r o b l e m i s t h a t t h e r e i s no way  matter,  disproving,  the figures the  government gave.  I t should  be  noted that t h i s  proposition  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 . it  i s hoped t h a t i t has  the  However,  a t l e a s t b e e n 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  Before discussing  is  foreseeable.  other  influences  of  the  looming  federal  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 i m p o s e d on  the  government a t t h a t  time should  first  be  r e i t e r a t e , the government, i n p u r s u i n g  i t s own  re-election,  present  package  so  sought as  electorate.^'' as so  to  prevalent  the  the  and  appeal  time^^  To  self-interest  of  the  i t would  primarily and  the  the  concerns  tax  hold  i t sought t o pass o f f the  o b j e c t i v e of f a i r n e s s .  constraints, at  structure  maximize  Therefore,  promoting the within  to  mentioned.  reform for  tax  However, i t had economic of  the  reforms to  do  conditions  special interest  ^' 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 c a n be g l e a n e d f r o m t h e following: "In fact, finance department officials flatly a c k n o w l e d g e d 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 the s e l f i s h i n t e r e s t s of 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 R e f o r m " (29 J u n e 1987) 100 Maclean's 34 a t 35. The g o v e r n m e n t 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 h a d 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 r e v e n u e c o l l e c t e d by t a x a t i o n , thus adding to the d e f i c i t . The g o v e r n m e n t p e r c e i v e d t h a t t h i s would 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 costs t h a t would exceed the p o l i t i c a l b e n e f i t s of reducing tax r a t e s . This conclusion was b o r n e by t h e r e s u l t s o f a g o v e r n m e n t p o l l , D e c i m a R e s e a r c h L t d . , which revealed t h a t s e v e n t y - f i v e per cent of Canadians surveyed 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 u n d e r c o n t r o l s h o u l d be the government's top 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 T a x - R e f o r m P l a n s " supra, n o t e 38. This i s i n d i c a t i v e of a p o l i t i c a l e q u i l i b r i u m w h e r e b y 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 w e i g h e d up a g a i n s t e a c h 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 maximizes the b e n e f i t s while minimizing the p o l i t i c a l c o s t s .  groups/' still  However,  attempted  despite these  limitations,  t o p r o d u c e a p a c k a g e t h a t was  the  government  palatable to  the  electorate.  As  outlined  above,  the  election  provided  an  impetus  for  the  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  reform  package.  played  by  This p r o p o s i t i o n r e l a t e s to the important r o l e  the p r o v i s i o n i n the  which  the  p r e s e n t a t i o n of the  government wished  to  c r e a t i o n of t h i s image, f i r s t of  the  corporate  economic  The  first  means  i n i t s own  base-broadening  by  which  o f f a i r n e s s , and  r e f o r m s , was the  The  rule  right,  measures,  fairness  added t o  the  second, as p a r t and  third,  in  terms.  promotion  of  give.  image o f  individuals  provision contributed  thus the p o l i t i c a l  appeal  i t s very i n c l u s i o n i n these proposals.  provision  privileged  the  position -  and of  greatly  what the  i t  stood  corporate  assisted  the  for sector  and  c r e a t i o n of  to  of the The  the tax  concept  attacking  the  high-earning an  image  of  The g o v e r n m e n t c o u l d h a v e f u r t h e r r e d u c e d p e r s o n a l i n c o m e tax r a t e s by, f o r e x a m p l e , i n c r e a s i n g t h e t a x b u r d e n on t h e corporate sector. Again, 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 . This i s supported by the 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 b u r d e n w h i c h i t had t o e n d u r e u n d e r 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 e x a m p l e , t h e a l l e g a t i o n s b y t h e C a n a d i a n Chamber o f Commerce, C a n a d a ' s b i g g e s t b u s i n e s s l o b b y g r o u p , t h a t t h e r e f o r m s " a s k t o o much f r o m t h e c o r p o r a t e c o m m u n i t y " : 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 L o b b y S l a m s W i l s o n ' s Tax R e f o r m P l a n s " The Globe and Mail (20 A u g u s t 1987) B5.  fairness.  Evidence  o f t h e government's  recognition i s the  references t o t h e r u l e which are s c a t t e r e d throughout  the white  p a p e r documents.^°  The  provision also contributed to the p o l i t i c a l  tax  reform  that  by b e i n g  an i n t e g r a l  t h e government attempted  component  to sell.  appeal  of the  i n the total  In particular,  image 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 supposedly sector. levels  designed  t o i n c r e a s e t h e t a x burden o f t h e corporate  F o r example, t h e government drew a t t e n t i o n t o t h e low of  tax paid  by  businesses  before  t h e reforms  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 by w h i c h t a x l i a b i l i t i e s were  going  those  were reduced  t o be r e s t r i c t e d  incentives that  were  i t  - t h e means  (ie. special incentives)  or eliminated i n vast r e t a i n e d were  justified  numbers on  what  seemed v i a b l e g r o u n d s ; " a n d 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,  Tax  note 45.  Tax i n c e n t i v e d e d u c t i o n s a n d c r e d i t s ... u n d e r m i n e t a x f a i r n e s s , as they 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 paying 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 a s 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 o u t 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. Reform 1987: Income Tax Reform, supra, n o t e 24 a t 1 3 .  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 p a p e r w i l l ... c u t b a c k s i g n i f i c a n t l y o n 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 W h i t e P a p e r 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 a n a d i a n p r i o r i t i e s a n d n e e d s , " Ibid, a t 4.  rates  were  give the  legitimated/^  impression  the corporate corporate burden part being  s e c t o r , and  this  in  government  the  made t o  245  done a l l t h a t  individuals  To to  increase  GAAR was  i t prevented  i t could  to  i n the corporate  obviously  an  to  hurt and tax  integral  remaining  incentives  moreover, a l s o precluded  abuses of  incentives  future.  In  a rosy  extent  a l l , i t  greatly  p i c t u r e of  of the  helping  corporate  a l s o important i n terms of the  s u b s t a n t i a t i n g the  figures.  managed  the  in painting  was  government  t h a t although i n c e n t i v e s remained  The  v i s i o n as  middle c l a s s e s at the  Section  i t had  sufficient/^  a b u s e d , and  enacted  a l l , the  r a t e s were lowered, t h e  was  of  that  In  verify the  claims  that  corporate  i t was  of  the  the  low  the and  sector.^'  contribution i t  fairness with  shifting  sector,  assisted  the  facts  burden  government  and from  required  some s o r t o f e c o n o m i c v a l i d a t i o n .  F o r e x a m p l e , i t w o u l d make t h e C a n a d i a n s y s t e m 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 b e c a u s e n o b o d y p a y s t h e m 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. M c Q u a i g , " M i c h a e l W i l s o n ' s G r e a t R e f o r m s : 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 [the corporate tax increase] t h i n k s s o .... 'We've gone a s f a r a s we c a n W i l s o n s a i d . " S o l o m o n , supra, n o t e 41.  enough? Wilson a t t h e moment,'  M o r e o v e r , t h e g o v e r n m e n t seemed t o h a v e s u c c e e d e d . 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 got p a s t the initial impression created. The media in general concentrated 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 corporate s e c t o r t h a t t h e i n c r e a s e s w e r e 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 current federal sales tax).  The  f i r s t p a r t of the equation - the s h i f t i n g of the burden  individuals  - was  implemented  i n the white  paper proposals  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 For  example, the alone  i n 1988,  billion  f o r the period 1 9 8 8 - 1 9 9 2 . T h i s  quite substantial  to  were  alleged  to  total  nearly  r e d u c t i o n may  i f considered i n i s o l a t i o n .  $2 $11  appear  H o w e v e r , i f one  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 b u r d e n p r i o r  the  pales  and  by  individuals.  c u t s i n p e r s o n a l income t a x e s amounted t o  billion  views  from  tax reform somewhat  - approximately  into  $38  insignificance.  billion  per  However,  annum^^ - i t  this  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  did  not  electorate  were g e t t i n g a g r e a t s a v i n g b e s t o w e d upon them - s o m e t h i n g  to  be  grateful f o r . "  ^' Tax  Reform  1987:  Income  Tax  Reform,  supra,  n o t e 24 a t 3 1 .  5° C a n a d a , H o u s e 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 Blenkarn Report"] a t 19, T a b l e 2 " T o t a l G o v e r n m e n t R e v e n u e , 1986" [ b a s e d on d a t a f r o m S t a t i s t i c s C a n a d a , CANSIM D i v i s i o n ] .  Tax  " Tax r e f o r m m e a s u r e s w i l l . . . r e d u c e p e r s o n a l i n c o m e t a x f o r e i g h t o u t o f t e n C a n a d i a n 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 C a n a d i a n s 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 a v e r a g e 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 o u t o f t e n t a x p a y e r s w i t h i n c o m e s b e t w e e n $30,000 and $50,000. Reform 1987: Income Tax Reform, supra, n o t e 24 a t 17.  Moreover, a  way  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  to  maximize  electoral  appeal.'°  So  for  example,  in  r e l a t i o n to the vast majority of taxpayers, rather than reducing just  a  few  of  their  tax b i l l s ,  the  government  lopped  off at  l e a s t a s m a l l amount f r o m 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 cent  ( o r 8.9  million  households)  of Canadian  taxpayers.By  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 over a l a r g e volume o f t a x p a y e r s , the  government  e l e c t o r a t e which the  was  able  would  be  to  maximize  feeling  the  proportion  somewhat b e n e v o l e n t  of  the  towards  government as a r e s u l t of t h e s e t a x cuts.'^  60 II [• The J i n c o m e 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 pre-election t a x break f o r lower-income and m i d d l e - c l a s s Canadians." P. C o o k , "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 R e f o r m " The Globe and Mail (7 J u l y 1987) B4. Also, "[t]he Conservatives' political salesmanship will naturally take advantage of the p r e - e l e c t i o n t i m i n g of the i n i t i a l t a x c u t . " "The C o n t e x t o f T a x R e f o r m " , 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 h a s r e d u c e d i n c o m e - t a x r a t e s i n t h e f i r s t s t a g e o f 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 m o d e s t 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 , " D o n ' t Be Duped by T a x R e f o r m s ' s F l u s h e r P a y c h e q u e s " 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 constantly h i g h l i g h t i n g the increases i n tax l i a b i l i t i e s that 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 T u r n e d a s R e f o r m 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 , which r e v e a l e d the f u l l extent of the t a x i n c r e a s e s s i n c e t h e g o v e r n m e n t t o o k o f f i c e [C. G o a r , "Tax R e f o r m i s L e s s Than i t Seems: C a n a d i a n s S t i l l A r e n ' t C o m p e n s a t e d f o r T o r y T a x H i k e s S i n c e 1984" Montreal Gazette (1 J u l y 1988) B3] was a g o d s e n d 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 h a v e e x p e c t e d t h e g o v e r n m e n t t o d o w n - p l a y i t s t a x r e f o r m a s an e l e c t i o n p l o y . H o w e v e r , t h i s was n o t t h e c a s e a s t h e g o v e r n m e n t 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  It  may be a r g u e d t h a t t h e g o v e r n m e n t was p r o m o t i n g  objectives  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 i n c o m e t a x rates.  F o r example,  personal  income  p e r h a p s t h e g o v e r n m e n t was b r i n g i n g t h e  tax rates  i n line  with  those  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 w o u l d n o t be an important  factor f o r the vast  majority  of taxpayers  as  they  w o u l d 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 c a u s e r e l o c a t i o n t o take  advantage  o f t h e lower  rates  i n t h e U.S.^'  arguments a r e v a l i d a t a l l , then i t i s o n l y  i n relation t o the  c o r p o r a t e s e c t o r and h i g h income-earning i n d i v i d u a l s . taxpayers,  the  furthermore,  have  as a p r a c t i c a l matter,  relocate their  Moreover,  disparities  a  greater  For these  impact,  and  they would f i n d i t e a s i e r t o  i n c o m e t o t h e U.S.  t h e government  orchestrated  the timing  s a v i n g s s o a s t o maximum t h e p o l i t i c a l a p p e a l . r a t e r e d u c t i o n s were s c h e d u l e d 1988.^  I f such  of the tax  F o r example, t h e  t o come i n t o e f f e c t o n 1 J a n u a r y  However, s u p p o s e d l y t o g i v e e m p l o y e r s t i m e t o a d j u s t ,  e l e c t o r a t e w o u l d e n j o y b y v i r t u e o f t a x r e f o r m : K o h u t , i b i d . It may b e t h a t t h e g o v e r n m e n t was r e l y i n g o n 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 s o 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 w o u l d 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 . M c Q u a i g , supra, ^ & 72. 65  Gazette  Tax Reform  note 2 a t 73.  1987: Income  Tax Reform,  C o u l d Use Tax B i l l (18 J u l y 1988) B6.  MTories  to  supra,  n o t e 24 a t 19  'Buy' V o t e s "  Montreal  the t a x cuts d i d not just  in  time  election. rebate 1989  show up  for  the  i n pay  expected  scheduling  1 J u l y 1988,''  of  the  federal  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  f o r t h i s p e r i o d , w h i c h was  when t a x r e t u r n s f o r 1988  Subject  cheques u n t i l  tax  n o t t o be p a i d o u t u n t i l e a r l y  were  filed.'^  t o t h e economic argument advanced below, t h e r e does  seem t o be any  v i a b l e r e a s o n f o r the government t o s t r u c t u r e the  tax  savings  in this  For  e x a m p l e , why  way,  not  other  bulging  from  deficit  an  at  than to please  j u s t introduce  e f f e c t i v e f r o m 1 J u l y 1988? particularly  not  tax  cuts  electorate. so  as  to  be  T h a t w o u l d seem t o be more l o g i c a l ,  economic  that  the  the  time.  perspective  in  light  of  the  Furthermore,  by  arranging  the  t i m i n g s o t h a t a r e b a t e w o u l d be p a i d , t h e g o v e r n m e n t a p p e a r s t o have  achieved  two  favourable  economically  by  f u n d s by  having  and  not  able  frequent g i v i n g the  "  Tax  f o r taxpayers payments  of  impression  Reform  to  t o pay  a l s o , i t enhanced the  arranging  &  being  results: receive  them o u t political  first,  until  the  appeal of  amounts,  of a g r e a t e r  1987:  Income  Tax  benefitted  i n t e r e s t on  t o r e c e i v e a lump sum smaller  i t  the  the  rebate  following the  tax  year,  cuts  by  r a t h e r t h a n more former  obviously  saving.  Reform,  supra,  n o t e 24  at  19  72. 67 i i T o r i e s C o u l d Use  Tax  Bill  to  'Buy'  V o t e s " , supra,  note  In  summary,  effected  i t has  been  reductions  shown t h a t  i n personal  the t a x reform  income  proposals  tax l i a b i l i t i e s .  In  d o i n g s o , t h e g o v e r n m e n 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 t o enhance  i t s support  orchestrated means  of  to  with  maximize  distributing  reductions.  However,  the  electorate.  political  the  savings  the overall  appeal, and  The  cuts  were  f o r example,  the  o b j e c t i v e was  timing  the  of  the  to present  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 b u r d e n f r o m i n d i v i d u a l s t o the  corporate  first  sector.  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  part of the equation.  equation  -  the  increase  s e c t o r - t h a t we now  I t i s t o the second p a r t of the  i n the t a x burden  b u r d e n o f t h e c o r p o r a t e sector.^® to verify  this  the  corporate  turn.  The g o v e r n m e n t c l a i m e d t o h a v e s u b s t a n t i a l l y  had  of  claim  with  increased the tax  H o w e v e r , t o be p e r s u a s i v e , i t facts  and  figures.  The  GAAR  played a s i g n i f i c a n t r o l e i n the achievement of t h i s o b j e c t i v e .  68 "Tax r e f o r m will result 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 higher c o n t r i b u t i o n t o the 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  net  corporate  tax  i n c r e a s e was  estimated  t o be  over the f i v e years f o l l o w i n g the t a x reforms.''  $5  billion  This gives  the  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 a s a t o t a l figure.  However,  i n c r e a s e s do 1988,  the  Overall,  increased  from  when t h e  promoting imposing  to  corporate  still  a  due  tax  GAAR to  yearly  and  only  tax burden t o the  level  show o f  $410  modestly  increase did  i n 1984.^2  presenting  the  i n 1989,  this  office  basis,  For example, i n  17.2%.Moreover,  burden  played  the  supposed t o generate  i t had  been  However,  these  the  figures  on  an  increased  them.^  In  important revenue  achieving  role.  as  which  the  supra, supra,  n o t e 34 a t 43 n o t e 24 a t 24.  and  by  this  This  was  rule  was  - some $2,240 m i l l i o n o v e r t h e p e r i o d  Tax Reform 1987, Income Tax Reform,  1987:  a  system - of harming the c o r p o r a t e s e c t o r  greater the  to  $470 m i l l i o n ,  taken  made a  a fairer  objective, primarily  only  government had  government  down  t h e c o r p o r a t e t a x b u r d e n was  15.6%  r e t u r n the  broken  appear q u i t e so s i g n i f i c a n t .  i n c r e a s e was  million.^°  not  not  when  Tax  1988-  Reform  ''° Tax Reform 1987: Income Tax Reform, supra, n o t e 24 a t 3 1 . T h i s w o u l d 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. ^1 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 d a m a g i n g on t h e c o r p o r a t e s e c t o r was the t h a t the baseb 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 . ^2 I n 1 9 8 4 - 5 , c o r p o r a t e i n c o m e t a x e s a c c o u n t e d f o r 20.3 p e r cent of the f e d e r a l major t a x revenues - c l o s e t o a h i s t o r i c low. ( F o r e x a m p l e , i n 1975-6 t h e y made up 26.3 p e r c e n t o f revenues.) B r o o k s & M c Q u a i g , supra, n o t e 54 a t 19. ^  Supra,  note  68.  92.^*  This  increase, i n relation  broadening  measures,  t o the other  was u n d o u b t e d l y  the highest  markedly 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 was  estimated  that  t h e revenue  C a p i t a l Cost Allowance gains  under  generated the  Without i t , such  t h e GAAR).  lucrative  This  of  i n the reduction of  i n terms  o f revenue  increases  the proposals  i n the white  papers.  a t t h e expense o f t h e  by t h e f o l l o w i n g  figures:  absent t h e  t h e c o r p o r a t e income t a x i n c r e a s e w o u l d have been  a mere $60 m i l l i o n  ( n o t q u i t e s o i m p r e s s i v e a s $470 m i l l i o n ! ) ;  1989, t h e i n c r e a s e would  have  been  zero  - i n fact,  w o u l d h a v e b e e n a decrease  i n corporate taxes  (Thereafter,  the  of  pronounced.)  Therefore,  provision  overtake the  m e a s u r e s , s e c t i o n 245 was o b v i o u s l y  of h e l p i n g t h e poor  i s evidenced  GAAR, i n 1988,  in  Thus,  o v e r a l l and  t h e government would n o t have been a b l e t o p r e s e n t  an i m p r e s s i o n  rich.  gained  base-  (thereafter, i t  would i n c r e a s e and f i n a l l y  by b a s e - b r o a d e n i n g  most  corporate  played  impact  the  rule  i t i s accurate  an i m p o r t a n t  role  was  o f $3 0 not  t o conclude  i n t h e image  there  million. quite  so  that the  of  fairness  be  blithely  which t h e government sought t o p r o j e c t .  However, accepted  these  revenue-generating  figures  cannot  - 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 .  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.  First,  t h e y do n o t  T h e 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  Tax  Reform  1987: Income  Tax Reform,  supra,  i s s u e s by  n o t e 24 a t 67.  non-taxable 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 revenues. indication  was  given  i n t h e document  as  No  t o the basis of  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 anti-avoidance  measures.  The  decision  p r o v i s i o n s may h a v e b e e n a s h r e w d p o l i t i c a l  to  combine  these  move o n t h e p a r t o f  t h e g o v e r n m e n t a s t h e f i g u r e s w o u l d h a v e b e e n 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 o n t h e i r own.  S e c o n d , 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 figures,thus  further  c o u l d be a t t a c k e d . be  restricting  t h e grounds  on which  I n d e e d , 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  more d o u b t f u l when o n e 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  estimation  has been  witchcraft"!^'  described  as being  "just  this  side  bolstering  fairness.  of  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 p a c k a g e made a s u b s t a n t i a l in  they  t h e government•s  In particular,  impact  p r e s e n t a t i o n o f t h e image o f  t h e estimated revenue funds  enabled  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 A n n e x 3, " N o t e s t o t h e T a b l e s and Methodology". ^' P. Demont, "Tax B r e a k P r o p o s a l s C a u s e D e f i c i t H e a d a c h e s " Financial Times (23 November 1987) 3. M o r e o v e r , 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 basebroadening measures. In particular, i ncalculating the figures r e l a t i n g t o the removal/curtailment of special incentives, the g o v e r n m e n t a s s u m e d 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 w o u l d be e l i m i n a t e d i n 1988 a l t h o u g h m o s t o f them w e r e 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 t r i m m e d 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 account o f b e h a v i o u r i a l changes, namely t h a t high-income 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 tax r e f o r m s i n t o new s h e l t e r s n o t s o a f f e c t e d . Brooks & M c Q u a i g , supra, n o t e 54 a t 2 1 .  the  government t o p r e s e n t  claim  t h a t t h e burden on t h e c o r p o r a t e  substantially  From  an image t h a t  i t was v e r i f y i n g i t s  s e c t o r was g o i n g  t o be  increased.  the presentation  of the t a x reform  package,  o n e may  be  e x c u s e d f o r a s s u m i n g 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 for  by e q u i v a l e n t  In the f i r s t  increases  two y e a r s  amounted t o o n l y personal  income  i n the corporate  i n particular,  about twenty  the corporate  t o twenty-five  tax reductions.  burden.^  Moreover,  Not so. increases  per cent not only  of the d i d the  i n c o m e t a x i n c r e a s e s h a v e t o b e met, b u t i n 1988-89 t h e r e was a n net  overall  increase  $1,190 million.^® with  an  extra  ( 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 Therefore,  $2895  i n 1 9 8 8 - 8 9 , t h e g o v e r n m e n t came up  million  ( t o pay  f o r the  income  tax  B r o o k s & M c Q u a i g , supra, n o t e 54 a t 1 9 : "The w h i t e p a p e r t r i e s hard t o leave t h e impression 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 corporate taxes." The means by w h i c h t h e g o v e r n m e n t f o s t e r e d t h i s i m a g e 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 a n d a c c e l e r a t i o n o f t a x p a y m e n t s ( 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, w e r e 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 e x a m p l e , Tax Reform 1987, supra, n o t e 34 a t 5 8 - 9 . M o r e o v e r , 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 c a n be i m p l i e d f r o m t h e s p a c e t h a t was a s s i g n e d t o e a c h s e t o f m e a s u r e s . So, for e x a m p l e , i n t h e w h i t e p a p e r d o c u m e n t . 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 spread over n e a r l y s i x t e e n p a g e s . Compare t h a t w i t h t h e p a g e a n d 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 7 5 .  reductions  and  which  $530 m i l l i o n  only  the  $1,190  million  was  due  net  to  overall  the  increase),  corporate  income  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 b u r d e n on t h e  two  per-cent  federal  sales tax  payments of  the  drew  come f r o m ?  attention  79  i t came f r o m  ( o f $1,600 m i l l i o n ) . ^ '  to  the  the  overall  So, w h e r e d i d t h e o t h e r  ( o f $1,105 m i l l i o n )  package which  corporate  Well,  increases  the  a c c e l e r a t i o n of  tax  i s not  emphasised.  i t was  t a x r e v e n u e s - t h u s p r o m o t i n g an  seventyto  However, t h i s  government measures  and  tax  corporate  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 of t h e i n c r e a s e s t h a t were generated.  of  taking  the  Instead, to  part i t  increase  i m a g e o f fairness.°°  Ibid.  °° Supra, n o t e s 51-5 and a c c o m p a n y i n g t e x t . A strong 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 p a c k a g e b a s e d on s i m i l a r r e a s o n i n g i s L i n d a M c Q u a i g , supra, n o t e 54 ( w i t h B r o o k s ) & 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 p a c k a g e 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 b o o n t o t h e l o w e r and m i d d l e c l a s s e s : P e r h a p s more t h a n a n y t h i n g , t h e J u n e 87 t a x r e f o r m was an exercise i n clever public relations. The g o v e r n m e n t h a d g o n e 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 s o u n d f a i r , h o l d i n g b a c k r e l e v a n t i n f o r m a t i o n and e v e n p r e s e n t i n g t h e n u m b e r s i n w a y s 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 h a d r a n k e d b e l o w 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 c h a n g e s , had b e e n 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 white paper. Supra, note 2 at x v i i i - x i x . H o w e v e r , s h e 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 e m p h a s i s on i n c o m e t a x e s and i n c r e a s e t h e e m p h a s i s on s a l e s t a x , thus c o n t i n u i n g the t r e n d of s h i f t i n g the t a x burden from the r i c h t o t h e m i d d l e c l a s s : supra, note 2 at x i x . I t i s submitted 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 the cause of her undoing. In 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 e x a m p l e t h e e l e c t i o n itself ( a c c o r d i n g t o M c Q u a i g , t h i s was the motive f o r the 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  role  i n t h e achievement  of this  purpose.  To s u m m a r i s e t h u s f a r , i t i s a p p a r e n t that  t h e looming  reform that  package,  federal  election  from t h e above d i s c u s s i o n had an impact  a n d t h e GAAR i n p a r t i c u l a r .  I t i s suggested  t h e e l e c t i o n was a m a j o r i m p e t u s 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 viewed 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 support. s t r u c t u r e d and p r e s e n t e d appeal. of  on t h e t a x  In particular,  i t a s a means o f  Thus, t h e government  t h e package t o maximize i t s p o l i t i c a l i t f o c u s e d on t h e concept  of fairness -  r e d u c i n g t h e t a x burden o f lower and middle c l a s s  while  increasing  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 -  earning individuals. within  the reform  promotion  individuals  of this  The i n t r o d u c t i o n a n d i n c l u s i o n o f t h e GAAR package  was  objective,  economic v e r i f i c a t i o n  of t h i s  an both  important  element  i n the  i n t h e p r e s e n t a t i o n and  criterion.  However, i t i s a l s o  o b j e c t i v e f o r e m b a r k i n g 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 ( w h i c h o n e n o t a b l e c o m m e n t a t o r h a s a l l e g e d was t h e m a i n i m p e t u s f o r t h e C a n a d i a n 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 occur i n t h e t a x reform p a c k a g e . H o w e v e r , 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 to t a x r e f o r m than an a c t u a l cause. In particular, the g o v e r n m e n t h a d t o make u p t h e s h o r t f a l l r e s u l t i n g f r o m 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 4 9 , t h e g o v e r n m e n t o b v i o u s l y p e r c e i v e d i t t o b e more p o l i t i c a l l y c o s t l y t o make u p t h i s d i f f e r e n c e b y , f o r e x a m p l e , i n c r e a s i n g t h e t a x b u r d e n o n 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 s a y 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 than 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 b u r d e n o f  individuals  - but they d i d not r a i s e t h e corporate  c o m p a r a b l e amount. ways,  notably,  acceleration  Instead,  increases  level  by a  t h e s h o r t f a l l was made u p i n o t h e r i n the federal  sales  t a x and t h e  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 a s e x p o s i n g the f a l l a c i o u s nature of t h e f a i r n e s s o f t h e t a x reforms. However, due t o space c o n s t r a i n t s and t h e n a r r o w p e r s p e c t i v e o f t h i s t h e s i s , i t i s n o t p r 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 h a v e b e e n 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 p a p e r w h e r e t h e c o n t e x t deems t h e m 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 the f a i r n e s s o f t h e o v e r a l l t a x reform package, see g e n e r a l l y B r o o k s , supra, n o t e 4; B r o o k s & M c Q u a i g , supra, n o t e 54 a n d M c Q u a i g , supra, n o t e 2.  However,  i n addition  which  were  other  measures were  t o proposals  i n c l u d e d and/or  i n the t a x reform  presented  as promoting  o r c h e s t r a t e d which  although  package  fairness,  d i d not  fall  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 A n i m p o r t a n t m e a s u r e 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 p r o m o t e t h e c o n c e p t o f f a i r n e s s a n d 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 . Although t h i s m a n o e u v r e d i d n o t h a v e a n y i m p a c t o n t h e GAAR ( s o 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 a c k n o w l e d g e m e n t o f t h e s e m e a s u r e s s h o u l d b e made d u e 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 i m a g e o f f a i r n e s s . T h e r e c a n be l i t t l e d o u b t t h a t t h e y w e r e i n c l u d e d t o m a x i m i z e e l e c t o r a t e s u p p o r t a s 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: B r o o k s & M c Q u a i g , supra, n o t e 54 a t 16 a n d M c Q u a i g , 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 r o o k s & M c Q u a i g , i b i d , a t 18. This reinforces the " 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 addressed. Moreover, i n keeping w i t h i t s promotion o f s e l f - i n t e r e s t , t h e g o v e r n m e n t 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 l o w income e a r n e r s and t h e elderly. 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 g o v e r n m e n t 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 ) s o t h a t 850,000 l o w e r - i n c o m e C a n a d i a n s were removed from t h e t a x r o l l s . T h i s may s o u n d a t r i f l e c y n i c a l , b u t s u c h 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 b e l o w t h e p o v e r t y l i n e w o u l d 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 . Secondly, t h e t a x reforms w e r e j u s t r e m o v i n g some o f t h e one m i l l i o n t a x p a y e r s who h a d 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 S e p t e m b e r 1 9 8 4 . 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 w o u l d b e b a c k o n 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 : B r o o k s & M c Q u a i g , i b i d , a n d 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 J u n e 1987) A 2 1 .  e l e c t o r a l support. albeit,  Moreover,  sometimes o n l y m a r g i n a l .  One means b y w h i c h appeal the  t h e government sought  t o promote  electoral  ( n o t r e l y i n g o n t h e f a i r n e s s c o n c e p t ) was i n r e l a t i o n t o  economic  government However, first  t h e y h a d some b e a r i n g o n t h e GAAR,  outcome o f t h e t a x r e f o r m s .  claimed  that  i n reality,  t h e package  i t structured  year o f reforms would  was  In particular, the "fiscally  neutral".  t h e p r o p o s a l s so t h a t t h e  generate an e x t r a  $1,190  million.  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 g o v e r n m e n t w i s h e d t o u s e this to the  e x t r a revenue  i n t h e run-up  to the election,  f o r example,  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 deficit  programs.  problem^^  However i t u t i l i s e d  have been a b o o s t year. year)  or to assist  i n the funding of  t h e revenue  t o t h e government  i n i t s expected  Furthermore, a f t e r t h e f i r s t year t h e revenues  actually  decreased  i tcertainly  (the expected  social would  election election  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 b y 1 9 9 1 - 2 .  Tax  Reform  1987, supra,  n o t e 34 a t 7 5 .  ^ 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 g o v e r n m e n t 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 J o h n B u l l o c h , p r e s i d e n t o f t h e C a n a d i a n F e d e r a t i o n o f I n d e p e n d e n t B u s i n e s s ] " Winnepeg Free Press (19 F e b r u a r y 1987) 8. F o r e x a m p l e , 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 7 5 .  Political  considerations aside,  this  not  was  economically  economic c o n d i t i o n s a t the  i t would  prudent  be  fair  to  considering the  say  that  country's  time.^  A n o t h e r i m p o r t a n t m e a s u r e w h i c h c a n be s a i d t o p r o m o t e e l e c t o r a l appeal,  y e t was  not geared  towards f a i r n e s s ,  o f t h e t a x r e f o r m p a c k a g e i n t o two recognised  as  being  a  "shrewd  was  the  stages.This  political  move"^  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  splitting  division due  to  the  s a l e s tax.°'  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 p a c k a g e i n t h i s way  was  was  To  designed  to appeal to the e l e c t o r a t e w i t h the o b j e c t i v e of i n c r e a s i n g the support a f t e r an  of the  government.  By  postponing  e l e c t i o n t h e g o v e r n m e n t was  ^° F o r conditions,  the  sales tax  able to avoid  until  undertaking  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 see Chapter IV "Economic C o n t e x t " .  economic  S t a g e One d e a l t w i t h p e r s o n a l i n c o m e 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. S t a g e Two, on the other hand, f l o a t e d the idea of the i n t r o d u c t i o n o f a new s a l e s t a x : C a n a d a , D e p a r t m e n t o f F i n a n c e , Tax Reform 1987: Sales Tax Reform (Ottawa: t h e Department, June 18, 1 9 8 7 ) . A l t h o u g h b o t h w e r e p r e s e n t e d a s w h i t e p a p e r s . S t a g e One p r o p o s a l s w e r e a g o o d 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 S t a g e Two. The latter consisted of three options being o u t l i n e d , w i t h no commitment made t o e i t h e r . " T w o - S t a g e Tax R e f o r m May Become a P o l i t i c a l W i l s o n " Montreal Gazette (6 J u l y 1987) CIO.  Coup f o r  ®' The g o v e r n m e n t was forewarned about the e l e c t o r a t e ' s animosity towards the s a l e s tax reforms. The g o v e r n m e n t knew f r o m i t s own p o l l i n g , done i n M a r c h 1987, t h a t t h e r e w o u l d be w i d e s p r e a d o p p o s i t i o n t o an e x p a n d e d 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 of 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 T a x - R e f o r m 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 t e r m s of l o s i n g e l e c t o r a t e support.'" duck still  questions  regarding  studying the  three  papers.'1  Verification  electorate  support  splitting Commons general."  of  the  Finance  tax  i t s plans  on  proposals  outlined  that  i s the  Moreover, t h e government c o u l d  this  concern  reform  Committee'^  basis that i n the  move was t h a t was  package and  the  -  the  expressed by  business  was  i t s white  designed  both  i t  the  to  gain  over  the  House  of  sector  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  in the  '" The e x p l a n a t i o n [ a s t o why t h e t a x r e f o r m p a c k a g e 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 . With the 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 g o v e r n m e n t c a n ' t afford to introduce a new sales tax system. The C o n s e r v a t i v e s m i g h t p r e f e r t o a p p r o a c h t h e e l e c t o r a t e on the s t r e n g t h of personal tax cuts r a t h e r than 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 R e f o r m : The H e a t i s On: O v e r 400 B r i e f s S e e k Change t o W i l s o n ' s P l a n " Financial Times (7 S e p t e m b e r 1987) 1 & 14 a t 14. 91 "Two-Stage Tax R e f o r m May Become a P o l i t i c a l Coup f o r W i l s o n " , supra, n o t e 88. Finance M i n i s t e r , Michael Wilson, 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 p a c k a g e 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 a m e n t a l c h a n g e 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 the provinces and interested parties. Wilson stressed the 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 i m p a c t o f t h e new t a x before proceeding. J . F e r g u s o n , " W i l s o n F a c e s Bay S t . Crowd on Tax R e f o r m " Toronto Star (25 J u n e 1987) E l & E8 a t E8. '2 Supra,  note  58 a t  182.  " M. D r o h a n , " S t a n d i n g F i r m on Tax R e f o r m " (14 S e p t e m b e r 1987) 100 Macleans' s 28. M i n d y o u , one p o s s i b l e e x p l a n a t i o n a d v a n c e d 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 of the t a x reform 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 S t a g e Two, reduced t h e i r scope f o r b a r g a i n i n g w i t h the Finance M i n i s t e r f o r changes t o h i s proposed t a x r e g i m e : F i f e , supra, n o t e 90.  tax  r e f o r m package  t o c o n s i s t o f t w o 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 or  i m p r o v i n g t h e economic  The s p l i t t i n g  conditions prevalent a t the time.  o f t h e t a x r e f o r m package  m a r g i n a l e f f e c t o n t h e GAAR. that  I n p a r t i c u l a r , t h e d i v i s i o n meant  both p a r t s o f t h e package  "fiscally  neutral"  h a d t o make some a t t e m p t t o b e  i n t h e i r own r i g h t . T h i s  One o f t h e r e f o r m p a c k a g e meet t h i s  i n t o two s t a g e s h a d a  objective.'^  meant t h a t  Stage  c o u l d n o t r e l y o n a new s a l e s t a x t o  T h e r e f o r e , revenue  h a d t o be f o u n d 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  F o r a more d e t a i l e d d i s c u s s i o n o n t h e " f i s c a l n e u t r a l i t y " o f S t a g e One, s e e C h a p t e r I V " E c o n o m i c C o n t e x t " , n o t e 17 a n d accompanying t e x t . A s r e g a r d s S t a g e 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 . K o h u t , " T o r i e s F i n d T a x T a b l e s T u r n e d a s R e f o r m 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 & B5 a t B 5 ] d u e t o the s t i r r i n g o f p o l i t i c a l waters 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 g o v e r n m e n t was i n t e n d i n g t o u s e S t a g e Two a s a t a x g r a b : "The C o n t e x t o f T a x R e f o r m " supra, n o t e 34. '5 I f t h e t w o s t a g e s h a d b e e n 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 . Evidence of t h i s p r o p o s i t i o n i s t h e promise t h a t Finance 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 i n c o m e t a x r a t e c u t s w o u l d be made o n i m p l e m e n t a t i o n o f S t a g e Two: A. D r a c h e , "Two O p p o s i n g V i e w s : C o m m i t t e e ' s R e p o r t O n l y T i n k e r s ..." Financial Post (23 November 1987) 6 a n d 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 J u n e 1987) A 3 . The i m p l i c a t i o n i s t h a t i f t h e t w o s t a g e s h a d b e e n c o m b i n e d t h e i n c r e a s e s f r o m S t a g e Two w o u l d h a v e 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 S t a g e One. T h e g o v e r n m e n t 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 of 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 introducing a new e x t e n d e d sales t a x before the federal election.  level). revenue  T h i s i s w h e r e t h e GAAR e n t e r s t h e s c e n e . which  t h e GAAR was e s t i m a t e d t o g e n e r a t e ' ' a s s i s t e d i n  meeting t h e " f i s c a l  Further  The i n c r e a s e d  n e u t r a l i t y " o f S t a g e One.'''  e v i d e n c e o f t h e government's  electioneering  (although  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 g o v e r n m e n t did  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  was  t h u s a b l e t o f o s t e r t h e v i e w t h a t u n l e s s i t was r e - e l e c t e d ,  taxpayers would the  lose their  list.'° I t  t a x s a v i n g s (and t h e rebate)  which  t a x reforms had g e n e r a t e d . "  " $2240 m i l l i o n accompanying t e x t .  i n t h e p e r i o d 1 9 8 8 - 9 2 : supra,  n o t e 74 a n d  '^ I t s h o u l d b e n o t e d t h a t t h e i n c r e a s e d r e v e n u e 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 c o m p a r e d 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 p a y m e n t s : s e e supra, n o t e 79 a n d a c c o m p a n y i n g t e x t . H o w e v e r , i t i s s u b m i t t e d t h a t e v e r y amount ( h o w e v e r 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". T h e 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 S t a g e One, particularly c o n s i d e r i n g t h a t i t was t h e m o s t financially lucrative proposal of a l l the corporate base-broadening 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 b y t h e GAAR: supra, n o t e 46 a n d a c c o m p a n y i n g text. 98 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 " , supra,  note  65. " " [ I ] t [ t h e g o v e r n m e n t ] may b e h o l d i n g b a c k s o i t c a n dangle t h e c a r r o t o f 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 election [citing Allan Maslove, Professor of Public Administration, Carleton University]": ibid.  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 time a f t e r i t s i n i t i a l that  further  introduced  specific  introduction.  anti-avoidance  i n the interim  T h e r e s u l t was  measures  p e r i o d . I t  had  to  was c l a i m e d ,  be  rather  h o p e f u l l y , t h a t t h e s e m e a s u r e s d e a l t a b l o w t o t h e GAAR: i f many more s h a d y b u s i n e s s t a x t r a n s a c t i o n s provision  was  introduced,  then  were outlawed b e f o r e t h e  i t could  have  reduced  the  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  it  harming t h e  i n the f i r s t  place.However,  rather  than  a r g u m e n t f o r t h e GAAR, i t w o u l d a p p e a r t h a t t h e p r e s s corroborated  the allegations of i t s necessity.  abusive transactions  before  releases  By d i s a l l o w i n g  the introduction of the provision,  t h e D e p a r t m e n t 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 transactions  continued  t o e x i s t a f t e r the t a x reform  t h e r e b y d i s p u t i n g any c l a i m s  that there  such  exercise,  were no l o o p h o l e s  left  to exploit.  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 t w o 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 " f r o m 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 t h e m 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 h a n d " : B e a c h , 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 the 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 h a v e now e i t h e r b e e n 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 u n d e r t h e W h i t e P a p e r , why i s a g e n e r a l a n t i avoidance [ s i c ] necessary a t t h i s time - has not t h e barn 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 o n t h e W h i t e P a p e r 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, tab 6 a t 2.  To  conclude,  the  i t i s submitted  t a x reform  bolstering looming  exercise  i t s support  with  with  federal election.  t h a t t h e government embarked upon the desire,  inter  alia,  the electorate i n the face  of of a  In furtherance of t h i s objective, 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. p a r t i c u l a r , i t attempted burden  o f t h e lower  corporate pursuing The  sector this  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  and m i d d l e - c l a s s e s  and  In  high  a t t h e expense  income-earning  a i m , t h e GAAR g r e a t l y  of the  individuals.  assisted  In  t h e government.  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  reform  package  conceptually  helped  create  ( i e . t h e GAAR,  corporate base-broadening  this by  image  itself  of fairness,  and as p a r t  both  of the  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  of 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 aided  increased)  the verification  corporate  t a x burden  supposed t o generate). way  was i n f l u e n t i a l .  introduction reform  of the "significant" by  the increases  ( i e . s e c t i o n 245 increase  i n revenues  i nthe i t was  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 In particular,  of the proposal  package.  and f i n a n c i a l l y  i t was a n i m p e t u s f o r t h 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  Furthermore,  i t arguably  affected  the  c a l c u l a t i o n o f t h e r e v e n u e i n c r e a s e s w h i c h t h e r u l e was s u p p o s e d to  generate.  Finally,  i t i s  submitted  that  political  considerations influenced the alteration of the proposal i n i t s passage through t h e parliamentary process. p r o p o s i t i o n t h a t we now t u r n .  I tis to this  latter  (iii) The  M o d i f i c a t i o n o f t h e Proposed GAAR, a s i n i t i a l l y  package,  proposed  GAAR i n t h e June  u n d e r w e n t some a l t e r a t i o n  the parliamentary process.  1987 t a x r e f o r m  d u r i n g i t s passage  However, a s 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 modify t h e b a s i c and s u b s t a n c e o f t h e r u l e . in  light  of the furore  such  political  the proposal generated  communities.  pressure  to  One may h a v e  result  in  the  government  took  inconclusively"^"^  a  with  firm  stance  the provision.  and  i nthe expected  significant  modification of the proposal, i f not i t s withdrawal. the  structure  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  which  b u s i n e s s and p r o f e s s i o n a l  through  only  However, "tinkered  I t i s suggested  that  t h i s was p r e d o m i n a n t l y d u e t o t w o f a c t o r s - p o l i t i c a l a p p e a l a n d e c o n o m i c 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 this  The  later i n  thesis.  prevailing  reform  political  exercise  politically  meant  t o have  conditions  that  a t t h e time  t h e government  t h e package  could  unravelled.  of thetax not afford  Traditionally,  d i s c r e p a n c i e s between w h i t e papers and r e s u l t a n t l e g i s l a t i o n a r e  Chapter  I I , n o t e s 41-8 a n d a c c o m p a n y i n g  text.  P. DeMont, " P o l i t i c a l T u r n s i n T a x R e f o r m s : S m o o t h e r R i d e f o r D r i v e r s , b u t B a n k s H i t " Financial Times ( 2 1 December 1987) 1 & 18 a t 1. Infra,  c h a p t e r I V , "Economic C o n t e x t " .  supposedly  embarrassing  pronounced  f o r t h e government  reforms.  To e x p l a i n ,  about t h e proposed tax  f o r t h e government  seen  placating  individuals.  persons  who w e r e  I f t h e government under t h e i r the  pressure  corporate  T h i s was t h e v e r y  had  and  be t r a c e d b a c k t o t h e a t t e m p t package  and t h e i r  substantially have  been  high-earning  i m p r e s s i o n t h e g o v e r n m e n t was  t r y i n g not t o give i n r e l a t i o n t o i t s t a x reform.  reform  complaining  i t would  sector  was more  o f t h e 1987 t a x  s e c t i o n 245 w e r e b u s i n e s s p e r s o n s  the proposal  as  a t t h e time  the only  representatives.  altered  This  This can a l l  b y t h e g o v e r n m e n t t o make t h e t a x  as p o l i t i c a l l y  appealing  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 looming  federal  election.  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 b y t h e c h a n g e s made t o t h e tax  reform  proposals,  including  t h e GAAR, i n r e s p o n s e  to the  R e p o r t o f t h e H o u s e o f Commons C o m m i t t e e o n F i n a n c e a n d E c o n o m i c Affairs,  This  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 p a c k a g e a n d t a b l e d i t s r e p o r t i n t h e H o u s e o f Commons o n the  16 November,  '  1987.  B e a c h , supra, Supra,  Overall,  i t agreed  with  the "stated  n o t e 44.  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 s y s t e m i n g e n e r a l , a n d t h e w h i t e p a p e r 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. Briefly, in r e l a t i o n t o the l a t t e r , i t consisted of b r i e f s being received ( o v e r 5 5 0 ) , 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 ) a n d n u m e r o u s i n camera w o r k i n g meetings.  objective  and  thrust  o f t a x reform".''"'  In t o t a l ,  made e i g h t y - o n e r e c o m m e n d a t i o n s . " "  In p a r t i c u l a r ,  recommendations  most  which  received  the  media  the  report  the s e t of  coverage  were  t h o s e t h a t a d v o c a t e d a n e x t r a $225 m i l l i o n be g i v e n t o C a n a d i a n families."^  These  (and o t h e r  recommendations)  were g o i n g t o  be f u n d e d p r i m a r i l y b y a minimum t a x b e i n g i m p o s e d on institutions."^  The  government  was  a b o u t t h e i d e a o f t h i s minimum t a x . " ' altered  the  tax  reform  proposals  initially  financial  unenthusiastic  However, i t n e v e r t h e l e s s to  incorporate  these  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 r t e e n - m e m b e r c o m m i t t e e h a d a T o r y m a j o r i t y : W. J o h n s o n , " 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 the r e p o r t o n l y " t i n k e r s w i t h t h e proposed t a x system, p r o v i d i n g t e c h n i c a l responses t o the o r i g i n a l proposals...": Drache, supra, n o t e 95. H o w e v e r , n o t e c o m m e n t a r y 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 proposals, 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 groups. 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 e a c h p r o p o s a l and makes r e c o m m e n d a t i o n s O t t a w a may n o t be a b l e t o i g n o r e . " S. P o d d a r , "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.  "^ F o r e x a m p l e , J . D o u g l a s , "MPs P r o p o s e $225 M i l l i o n i n Tax B r e a k s " Winnepeg Free Press (17 November 1987) 1. T h e s e s a v i n g s w e r e t o be i n t h e f o r m o f e n h a n c e d 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' net 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 F o r a l i s t o f t h e revenue i m p a c t o f t h e recommendations, s e e 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 applied the p r i n c i p l e of revenue n e u t r a l i t y so t h a t i t s recommendations would not d i f f e r from the 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 p a p e r documents: i b i d , a t 13-5. "' D. H a t t e r , " B u t R e j e c t i n g P r o p o s a l s C o u l d Be C o s t l y " Financial Post (23 November 1987) 7.  Politically  recommendations, accepted  that  factors.  albeit  i n a diluted  form.^^^  I t i s generally  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  political  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,  in  t r y i n g t o b o l s t e r i t s support with the e l e c t o r a t e , f e l t that i t had  to  make  especially  some  attempt  in light  of  their  money t o C a n a d i a n f a m i l i e s . have been p o l i t i c a l l y the  recommendations,  to  populist  the  recommendations,  nature  i n giving  more  R e j e c t i n g the B l e n k a r n Report would  costly. i t may  implement  F o r example,  i f i t had i g n o r e d  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 p a p e r 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 the  expense  Minister  had  interpreted i t was  of the corporate sector."^ merely  shelved the  Report,  as i g n o r i n g t h e committee  Also,  i f the  i t could  process."'  Finance  have  been  Furthermore,  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 C o m m i t t e e 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 promised 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 C h a n g e s S t r i k e R i g h t P o l i t i c a l N o t e " Financial Post (21 December 1987) 3. T h i s was t o be f i n a n c e d b y "what a m o u n t s t o , i n e v e r y t h i n g b u t name, a minimum t a x [ o n 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 e a c h y e a r , t h e a v e r a g e 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 g r o u p s 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 Democratic Party's f i n a n c e c r i t i c a n d member o f t h e H o u s e o f Commons F i n a n c e Committee]." "Wilson Risks His C r e d i b i l i t y o v e r Tax Plan, C a s s i d y S a y s " Toronto Star (25 November 1987) F6. See a l s o , DeMont, supra, n o t e 76.  the  Bill  implementing  Parliament  as  i t was  the  tax  t o be  reform  the f i r s t  proposals  body  through  t o analyze the  Bill."^  This hypothesis i s reflected Although,  i n t h e changes  t h e Blenkarn Report endorsed  anti-avoidance  rule,"^  of  section  245 w h i c h  t h e need  i t made s e v e r a l  the format o f t h e p r o p o s a l . " '  Indeed,  reflected  made t o t h e GAAR. f o ra general  recommendations  i t p r o p o s e d a new d r a f t  i t s recommendations.  government i n c o r p o r a t e d a few o f t h e recommendations, it  mostly integrated  than  adopting  government  the draft  was  professional  them i n t o  under  great  communities  modify t h e r u l e .  i t s version  proposed  by  pressure  to either  as t o  The although  of the rule  t h e Committee. from  withdraw  rather The  t h e c o r p o r a t e and or  substantially  I t was a p p a r e n t l y s e t o n 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 0 0 - 1 .  "' J J b i d . a t 2 0 0 - 7 . Ibid,  a t 2 05-7.  For 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 p u r p o s e t e s t ( a n o n - t a x p u r p o s e 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 p h r a s e " n o t w i t h s t a n d i n g a n y 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 c h a n g e d t o b e a p r o v i s i o n o f l a s t resort). Furthermore, t h e Report recommended that the government n o t proceed 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 which i t h a d s u g g e s t e d i n t h e w h i t e p a p e r : Tax Reform 1987, supra, note 34 a t 1 4 3 . 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 a n y 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 o p e n t o c h a n g e t h e e x a c t s h a p e o f t h e ruleJ^'  It  i s felt  that  the  Blenkarn  c o n v e n i e n t compromise f o r t h e government.  Report  offered  The R e p o r t  validated  the  n e c e s s i t y of t h e rule,^^^  and suggested  did  not r e s u l t  modification of the rule.  incorporating relating  i n excessive some  of  t o t h e GAAR,  the  Blenkarn  alterations  Report  a  which By  recommendations  t h e g o v e r n m e n t was s h o w i n g t h e b u s i n e s s  c o m m u n i t y 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  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  a n d make some communities.  H o w e v e r , i t w o u l d a l s o be a b l e t o r e p u d i a t e a n y c l a i m s t h a t i t was  furthering  the interests  of the corporate  g o v e r n m e n t c o u l d a r g u e t h a t i t was m e r e l y w i t h t h e wishes  1" Finance  acting  sector.  The  i n accordance  o f t h e Committee.  DeMont, supra, official].  note  44 a t 6  [citing  a Department o f  Ibid. S e e , a l s o . Dodge, supra, n o t e 25 ("Tax R e f o r m a n d 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 w e l c o m e a l l t h o u g h t f u l s u g g e s t i o n s designed t o improve t h e proposed r u l e . " C o n t r a , C a n a d a , S e n a t e , 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 B o o , 1987) a t 5 5 , p a r a g r a p h 6.106-8. H o w e v e r , t h e g o v e r n m e n t 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 n o t 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 notes. 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  conclusions  environment Committee GAAR,  are  regarding verified  Report.  and  concluded that  However, t o s t a t e implemented.  First,  Report  of  treatment  the of  scathingly  i t s h o u l d n o t be  the  can  be  government  Second,  h a v e a s much p o l i t i c a l  note  the  reasons  reached,  Supra,  by  influence  political  the  proceeded  this  suggested  did  not  Senate  attacked  t h e o b v i o u s , t h e s e recommendations  Various  phenomenon. conclusions  This  the  the  with.^^^ were  not  for  this  support  Committee Report  the  d i d not  c l o u t as t h e B l e n k a r n R e p o r t .  Third,  124.  127 " W i t h g o o d 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 support of t h i s proposal." J j b l d . a t 44, p a r a g r a p h 6.106. 122 Ibid, 12'  I t was  a t 55-6,  in  p a r a g r a p h 6.108.  committed  t o t h e c o n c e p t o f a GAAR, supra,  note  129. 130 T h i s i s p e r h a p s due to the underlying political s t r u c t u r e . F o r e x a m p l e , t h e members o f t h e H o u s e o f Commons a r e e l e c t e d w h e r e a s t h e members o f t h e S e n a t e a r e n o t . Quaere w h e t h e r 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 the T r i p l e - E Senate p r o p o s a l s . This disparity i n the political influence of the two institutions i s reflected i n t h e v a r y i n g amount o f m e d i a coverage each committee a t t r a c t e d : t h e B l e n k a r n Report 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. B e a c h , " W i l s o n Has O p p o r t u n i t y t o Open D o o r s on Tax P o l i c y " Financial Times (16 November 1987) 25) a n d r e c e i v e d e x t e n s i v e m e d i a c o v e r a g e [ f o r e x a m p l e , E. B e a u c h e s n e , " P r e s s u r e C o n f l i c t on Tax R e f o r m s " Calgary Herald (12 S e p t e m b e r 1987) F 6 ; 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 O v e r T a x P l a n , C a s s i d y S a y s " Toronto Star (25 November 1987) F 6 ; "Bugs N o t e d i n T a x P a c k a g e " Halifax Chronicle Herald (1 J u l y 1987) 4; P. C o o k , "A F a i r e r Tax S y s t e m i s No E a s y T h i n g t o S e l l " The Globe and Mail (4 S e p t e m b e r 1987) B2; B. C o s t e l l o , "Watch a s ' V u l t u r e s ' Move i n on Tax R e f o r m " Calgary Herald (8 A u g u s t 1987) D l ; DeMont, supra, n o t e 7 6; D o u g l a s , supra, n o t e 1 1 1 ; D r a c h e , supra, n o t e 95;  doubts  have  been  expressed  as  to  the  neutrality  of  Senate  C o m m i t t e e members^'^ w h i c h t h e g o v e r n m e n t c o u l d h a v e e x p o s e d justifying  its  lack  of  implementation  of  the  as  Report's  recommendations.  To  conclude,  changes  i t i s submitted that  made t o t h e p r o p o s e d  parliamentary economic political  process  can  be  the  limited  GAAR i n i t s p a s s a g e traced  to  conditions prevalent at the time. conditions  nature of  ( f o r example,  the  the  through  political  In particular,  looming  election,  the the and the the  D r o h a n , supra, n o t e 9 3 ; F i f e , supra, n o t e 90; H a t t e r , supra, n o t e 1 1 3 ; J o h n s o n , 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 G e t P a s t W i l s o n " Financial Post (23 November 1987) 7; W.A. M a c d o n a l d , " B l e n k a r n R e p o r t M i s s e s t h e M a r k " Financial Post (23 November 1987) 19; P o d d a r , supra, n o t e 109; P o d d a r & C o y n e , supra, n o t e 2 5 ; H. S o l o m o n , " C r i t i c s Have Day a t T a x R e f o r m H e a r i n g s " Financial Post (7 A u g u s t 1987) 4 ] , t h e S e n a t e R e p o r t , on t h e o t h e r h a n d , 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 e x a m p l e , " O t t a w a t o P r o c e e d w i t h G e n e r a l T a x - A v o i d a n c e R u l e " The Globe and Mail (17 December 1987) B 8 ] . For 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 . Furthermore, 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 m i g h t a p p e a r 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 c o m m i t t e e 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 c o m m i t t e e 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 . At that time, 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 c o m m i t t e e 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 a n d many o f t h e m s a t on numerous c o r p o r a t e b o a r d s . Between them they held 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 C a n a d i a n companies. M c Q u a i g , supra, note 2 a t 169. However, whether t h e government w o u l d 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 a d d s 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 c o m m i t t e e c a n e x e r t on t h e g o v e r n m e n t t o c h a n g e t h e l a w i n l i n e w i t h t h e i r recommendations.  g o v e r n m e n t ' s p o o r e l e c t o r a l s u p p o r t ) meant t h a t t h e g o v e r n m e n t was  trying  Therefore,  bolster  a fairer  against  Further,  wished  t a x system.  the pressure  with  the  t o promote  Consequently,  exerted  electorate.  t h e image i theld  by t h e b u s i n e s s  a  of firm  sector.  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  F i n a n c e and Economic  These  i t s ratings  t h e government  creating stance  to  political  modifications remained  by  t h e House  Commons  Committee  on  Affairs.  influences  t o t h e GAAR.  committed  of  were  also  reflected  i n the  I n p a r t i c u l a r , t h e government  t o t h e concept  of the rule,  despite  the  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 communities. I t did  make  some m o d i f i c a t i o n s  substance  of the rule.  - but nothing  Furthermore,  i n response  that  changed t h e  the majority  were  Report.  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 g o v e r n m e n t was  wishing  to  to  be  acting  electorate  and n o t t h e b u s i n e s s  motivation  was  the desire  of  these  changes  appear  t o t h e recommendations  of  i n the interests community.  o f t h e government  The  Blenkarn  of the  underlying  to bolsteri t s  support with t h e e l e c t o r a t e i n t h e face o f a looming e l e c t i o n .  (iv) Two  S p e c i a l I n t e r e s t Groups strands comprise  the assumption t h a t u n d e r l i e s t h i s  t h a t governments want t o r e t a i n o f f i c e .  The  thesis  f i r s t part consists  of governments w i s h i n g t o maximize v o t e s w i t h the e l e c t o r a t e t o ensure  i t s re-election.  above  in  r e l a t i o n t o t h e t a x r e f o r m p a c k a g e i n g e n e r a l a n d s e c t i o n 245  in  particular.  to  placate factor  The  special played  second  an  important  sell  role  specifically,  sight. the  tax  T h i s i s due reform  Consequently,  for  c r i t i c i s m by  business  too  burden  great  reality,  a the  professional  been  governments  I t i s submitted  i n the  as  this tax  not  be  evident  at  of t h e government t o  promoting  a  fairer  system.  media  concentrated  on  of the tax reforms  i n allegedly  imposing  on  the  government communities  the  that  t h e GAAR.  c o m m u n i t y may  package  wish  formulation of the  t o the attempts  example,  discussed  i s that  groups.^''  p l a c a t i o n of the business  first  has  element  interest  r e f o r m p a c k a g e , and  The  This  corporate  tried i n two  to  sector.However,  pacify  ways:  these  the  the  in  business  and  communities  were  In 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 are 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 high-earning individuals. Although s p e c i a l i n t e r e s t groups are not 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 g r o u p s a r e t h e m o s t r e l e v a n t . To a m p l i f y , i t was t h e s e g r o u p s t h a t t h e g o v e r n m e n t 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 . Furthermore, 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 the e f f e c t s of the t a x reforms. Supra,  note  56.  involved q u i t e h e a v i l y i n t h e preparatory stages o f t h e reforms 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 w e r e weighted  i n favour of the corporate sector,  or at least,  were  not a s 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 former, 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 c o m m u n i t i e s  quite extensively i n the preparation of the  t a x r e f o r m proposals.'''^ all  year  round,  These communities  particularly  budget.  However, t h i s  increased  f o r the t a x reform  l o b b y t h e government  i n t h e run-up  to the  federal  l o b b y i n g a n d c o n s u l t a t i o n p r o c e s s was  f o r m a l and i n f o r m a l meetings  exercise.  with special  The u s u a l  round  of  i n t e r e s t g r o u p s were  T h e r e a r e a number o f a d v a n t a g e s f o r adopting a consultative process. First, i t actively builds 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 views 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 c a n u t i l i s e t h e process 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 proposed changes. Furthermore, extensive consultation carries with i t thepotential for benefit a s t h o s e who s t a n d t o g a i n a r e made a w a r e o f t h e f a c t a n d p o l i t i c a l o p p o s i t i o n i s consequently reduced. W.I. G i l l e s p i e , "Tax R e f o r m : 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 1 9 3 . C h r i s t m a s may be o v e r b u t 35 o r s o m a j o r o r g a n i z a t i o n s are s t i l l c l i n g i n g t o t h e i r annual wish 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 s e e i n c l u d e d i n t h e next f e d e r a l budget. The groups have whispered t h e i r wishes t o Finance 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 of c o n s u l t a t i o n s which f i n i s h e d r e c e n t l y . D. O x t o b y , " 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 R a r e O p p o r t u n i t y : D o o r 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 T a x R e f o r m " Financial Times (12 J a n u a r y 1987) 8.  h e l d J'''  Furthermore,  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 proposals.  T h i s i n v i t a t i o n - o n l y ^ " g r o u p was f o r m e d  1986^*^° a n d met m o n t h l y Department  of  professional media members  Finance.  i n this  focused  t o a c t as a  on  The  sounding  involvement  way h a s b e e n  the invaluable  strongly insider's  o f t h e g r o u p w o u l d h a v e gained.''^^  i n November  board of  for  the  the  legal  criticised.  The  perspective  the  More f u n d a m e n t a l l y ,  t h e i n p u t o f s u c h p r o f e s s i o n a l s was a t t a c k e d o n t h e b a s i s  that  their  the  biases  consultation  "Tax  towards  the corporate  process.  This  was  sector aptly  influenced captured  by  one  M c Q u a i g , supra, n o t e 2 a t 9 4 ; S o l o m o n , supra, n o t e 41 & T a l k s K e p t S e c r e t " Calgary Herald (27 May 1987) F 6 .  The e x a c t number o f t h i s g r o u p v a r i e s d e p e n d i n g o n t h e source. T h e r e f o r e , i t h a s 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 J u n e 1987) 1 & 24 a n d J . Wong, " E l i t e G r o u p o f 20 G e t s E a r l y P e a k a t T a x P a p e r " The Globe and Mail (17 J u n e 1987) B l & B2] o r t h i r t y - s i x [ M c Q u a i g , supra, note 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 picked. T h e y ' r e u s u a l l y t h e g u y s 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 former 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. '"'^ B e a u c h e s n e ,  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 O t t a w a h a s 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 business communities], t r e a t i n g tax practitioners as i n d e p e n d e n t e x p e r t s r a t h e r t h a n a s t h e t e c h n i c a l arm o f t h e  c o m m e n t a t o r who  stated  " [ l ] e t t i n g t h e t a x community  shape  tax  i s a b i t l i k e getting the fox to build a  safer  legislation  henhouse".  that  Therefore,  consultation  process  in  with  light  the  of  business  this  extensive  and  professional  c o m m u n i t i e s , 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  proposals  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  sector.  The  i s reflected  placation  structure  of  business  of the tax reform  business sector the  the  and h i g h  of fairness  classes  was  to  expense  of  the  discussed,  in  which  d i d not h i t the as  The g o v e r n m e n t o s t e n s i b l y  an  whereby  be  proposals  t h e t a x b u r d e n on  significantly  corporate  reduced,  sector.  financial  terms,  lower  and  seemingly  However, this  created  image  addition  other  t o t h e measures  proposals  reinforced  corporate sector  and h i g h  rate  tax  of  income  r e m o v e d ;1^^  rates  were  was  already the  mentioned  favourable  income-earners. reduced;  reduced  not  i n 1988,  middle at  the  as  previously  was  illusory.  M o r e o v e r , t h e t a x r e f o r m p a c k a g e was u n f a i r i n o t h e r In  i n the  income-earning i n d i v i d u a l s as h a r d  government c l a i m e d .  image  sector  respects.  i n this  treatment  paper, of  the  F o r example, t h e t o p a l l tax but  many  breaks tax  were breaks  b u s i n e s s and i n v e s t m e n t community. M c Q u a i g , supra, n o t e 2 a t 102. 1^"^ M c Q u a i g , 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 which, i n t h e o r y , d i d n o t have t o r e m a i n a n d c o u l d be c a l l e d u n f a i r . B u t o n b a l a n c e we w o r k e d  slated  f o r removal  breaks  that  corporate class  sector  (eg.  dividend  were  were n o t removed  and  high  employment  phased were  out  not  until  ones  income-earners,  expense  1991;  those  important but  deduction  and  deduction); the deductions u t i l i s e d  by  to  to  the  tax the  middle  interest  and  the corporate  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 merely This  trimmed  list  (eg.  the  lifetime  capital  o f f a v o u r a b l e m e a s u r e s was  p l a c a t i o n of the business sector.  gains  exemption) .  p r i m a r i l y a r e s u l t of the I t has been s u g g e s t e d  that  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 m e a s u r e s .  t o r e a c h a p o i n t w h i c h w o u l d s a t i s f y business' own fairness' [quoting a senior corporate tax o f f i c i a l ] added]." S o l o m o n , supra, n o t e 41. See, g e n e r a l l y B r o o k s & M c Q u a i g , M c Q u a i g , supra, n o t e 2 a t c h a p t e r 12.  supra,  sense of [emphasis  note  54  and  147 iirphe m o s t i m p o r t a n t o b j e c t i v e was to avoid a general 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 u n d e r m i n e 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.  For a discussion as to the lack of reasonable justification 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 & M c Q u a i g , supra, n o t e 54 a n d M c Q u a i g , supra, n o t e 2, c h a p t e r 12.  However, t h i s reforms  i s not  entirely true J*'  In particular,  the  U.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 the Canadian corporate  tax  rates.  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 b y t h e key  r e a c t i o n which  response the  was  quite  tax  reforms  b u r d e n had  favourable,at  been  expected  complaints  least  In  outlined  i n any  great  at tax  from b u s i n e s s  reform  proposals.  detail.  This  has  the  lost been  with  reform.  that i t s tax sales tax  However,  virtually  total,  when c o m p a r e d  b e e n 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  weeks t h e m a j o r newspapers had tax  received.  f u r o r e t h a t accompanied p r e v i o u s attempts  There were t h e  not  the  low-  within  interest  had two  in  the  interpreted  as  r e f l e c t i n g the benign nature of the t a x reform p r o p o s a l s towards the powerful  i n t e r e s t groups,  1^' I t i s a r g u a b l y measures. For example, for the continuance of evidence which questions socio-economic purpose p r o m o t e . See supra, note 150  t h e c o r p o r a t e s e c t o r and t h e  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 t h e r e w o u l d seem t o be no g o o d r e a s o n s p e c i a l i n c e n t i v e s i n l i g h t of the t h e i r e f f e c t i v e n e s s i n achieving the t h a t they are supposedly meant to 22.  is discussed i n greater d e t a i l accompanying t e x t .  rpj^is  170-83 and  high  later: infra,  notes  C. M o t h e r w e l l , " R e f l e c t i n g on P a c k a g e E v o k e s S i g h s o f R e l i e f " , The Globe and Mail (20 J u n e 1987) B l & M c Q u a i g , supra, note 2 at x x x v i . For "Historical Background.  a more d e t a i l e d Context", Social  M c Q u a i g , supra,  note  2 at  d i s c u s s i o n , see and Political xxxvi.  Chapter V, Historical  income-earning  individuals  To e x p l a i n , b e c a u s e 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 m e d i a t o g a i n maximum e x p o s u r e  of their point  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 proposals.  However, i t w o u l d appear a t f i r s t  glance that the s i t u a t i o n of  the  t o t h e one d e s c r i b e d  GAAR  was  slightly  different  above.  A d m i t t e d l y , t h e t a x c o m m u n i t y 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 the  rule.  However,  the rule  d i d not favour  s e c t o r a s i t was d i r e c t e d s p e c i f i c a l l y high-earning  individuals.''^^  the corporate  a g a i n s t t h i s s e c t o r and  Nevertheless,  despite  this  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 g o v e r n m e n t d i d make e f f o r t s to  placate the business  community.  F o r example,  arguably i t  Ibid. "The t a x c o m m u n i t y , 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 c o m m i t t e e o f t h e CICA a n d t h e C a n a d i a n B a r A s s o c i a t i o n , h a s b e e n 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 c o m p r o m i s e o n 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 w e r e 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 a n d a c c o m p a n y i n g t e x t ) i n r e l a t i o n t o t h e involvement 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 legislation. 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 : M c Q u a i g , supra, note 2 a t 100-1. T h e s e 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 u s e 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 r e d u c e t h e i r income. This 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 investment 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 against the fees of the t a x professionals etc.).  initially or  indicated  at least  response  that  i t was n o t c o m m i t t e d  to i t s original  f o r m a t i t  t o c r i t i c i s m ^ ^ ' and produced  example, e x p l a n a t o r y n o t e s , Therefore,  i t would  appear  t o the rule/^^  modified the rule i n  interpretative  aids, f o r  t o assuage f e a r s o f u n c e r t a i n t y . that  t h e government,  although  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 sector,  d i d everything i t could within  the circumstances 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 implementation date i n t h e i n i t i a l format 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 p r o b l e m . ' 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 w o u l d h a v e s a i d i t ' s e f f e c t i v e now' [quoting R. Couzin, Stikeman, Elliot]." B. Little, " A c c o u n t a n t s , L a w y e r s S a y P l u g Too B i g f o r T a x G a p s " The Globe and Mail (20 J u n e 1987) B l & B4. A l s o , M c Q u a i g , supra, note 2 at 342. H o w e v e r , 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 g o v e r n m e n t was c o m m i t t e d t o t h e c o n c e p t o f t h e r u l e , supra, note 122. Little, ibid. N o t e a l s o t h e comments made b y o n e D e p a r t m e n t o f F i n a n c e o f f i c i a l t h a t t h e g o v e r n m e n t was o p e n t o s u g g e s t i o n s a s 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 F o r e x a m p l e , i t a d d e d s u b s e c t i o n ( 1 0 ) 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 . This 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 b y t h e J o i n t C o m m i t t e e o f CBA/CICA: "Comments o n t h e GAAR - Re: R e c o m m e n d a t i o n s o n 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 1 9 8 7 " 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, (Toronto: C a r s w e l l , 1990), Appendix A.5 a t 123-4. 1'° C a n a d a , D e p a r t m e n t 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 ( O t t a w a : t h e D e p a r t m e n t , A p r i l 1988).  To  conclude,  was  i t i s e v i d e n t from  attempting  communities  to  placate  i n relation  t h e above t h a t t h e government  the  business  and  to the introduction  p r o p o s a l s , a n d t h e GAAR i n p a r t i c u l a r .  professional  of the t a x reform  A l t h o u g h t h e government  was r e s t r a i n e d b y o t h e r c o n s i d e r a t i o n s , f o r e x a m p l e , a d e s i r e t o appeal t o the e l e c t o r a t e ,  i t still  t h a t was h e a v i l y w e i g h t e d  managed t o p r o d u c e a p a c k a g e  i n favour of these  communities.  It  r e c o n c i l e d t h e s e t w o c o n f l i c t i n g o b j e c t i v e s b y some v e r y a s t u t e political  manoeuvring.  In particular,  i t produced  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 t o w a r d s t h e c o r p o r a t e sector,  y e t was p r e s e n t e d  system.  The s u c c e s s  by  the fact  without  t o completely  would have been c o s t l y  a  direct  highlights looming  of these  political  antics  unravel  i t .  Such  t o t h e government both  a  fairer  i s evidenced  t h a t t h e g o v e r n m e n t was a b l e t o e n a c t  having  financially.  t o a p p e a r t o be p r o m o t i n g  a  t h e package consequence  p o l i t i c a l l y and  T h i s w h o l e s c e n a r i o e x p o s e s how t h e t a x s y s t e m i s  result  of the p o l i t i c a l  the influence that  election,  process.  external  Furthermore,  factors,  such  as  i t a  c a n have on t h e t a x s t r u c t u r e .  " D r e s s e d 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 long 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 backs 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 o n 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 p r o p o s e d  presented package  i n June that  as an i n t e g r a l  1987.  was  p a r t o f t h e t a x reforms  The o v e r a l l  appealing  to  thrust the  simultaneously, placating the business  was t o p r e s e n t  electorate,  a  whilst  community.  H o w e v e r , t h e i s s u e i s w h e t h e r 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 reform package had any impact it  i s conceded  conclusively  that  such  on i t s development.  questions  cannot  be  Although answered  (due t o t h e a b s e n c e o f a c o m p a r a b l e s t a n d a r d , e g .  the presentation of the r u l e i n i s o l a t i o n ) , i t i s submitted that v i a b l e a r g u m e n t s c a n b e 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  effect  on t h e r u l e .  The  inclusion  of the proposal within  t h e t a x reforms  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 .  perhaps  The government  wished  t o p r e s e n t a n 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 flailing  support.  creation  o f such  T h e GAAR was a n i m p o r t a n t a n image, b o t h  element  i n the  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 p e r h a p s m o t i v a t e d t h e g o v e r n m e n t t o i n t r o d u c e t h e GAAR.  Furthermore, rule  t h e g o v e r n m e n t maybe w o u l d n o t h a v e i n t r o d u c e d t h e  i f i t h a d n o t been  Introducing business  t h e GAAR  community's  part  of t h e t a x reform  i n isolation venom b e i n g  may h a v e  directed  resulted  exclusively  package. i n  the  at the  rule.  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 p a c k a g e , t h e g o v e r n m e n t  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 f r o m t h e r u l e , as  obviously  other  measures  w i t h i n t h e package would  attract  some d e g r e e o f a t t e n t i o n .  The  inclusion  subjected inherent  o f t h e GAAR w i t h i n t h e t a x r e f o r m  i t to the trade-offs i n structuring  rule  perhaps  may h a v e  measures  without  proffering  i t i s suggested  only  introduced  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 other  which a r e  that the inclusion of  i n f l u e n c e d i t s development.  t h e government  t h a t were  stronger,  t h e government  because i t  s a f e t o do s o i n l i g h t o f t h e  favourable  t o the corporate  Perhaps i f t h e  sector t o t h e t a x reforms may h a v e  sector.  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 . of the corporate  F o r example,  the rule  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  response  also  compromises  any t a x reforms.  any s u b s t a n t i v e e v i d e n c e , the  and  package  withdrawn o r  had been  substantially  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 b y o n e c o m m e n t a t o r i n h i s submissions t o t h e S t a n d i n g Senate Committee on Banking, Trade a n d Commerce: "The t a x r e f o r m p a c k a g e 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 , b e t w e e n t h e c o m p e t i t i v e n e e d t o b r i n g down p e r s o n a l a n d c o r p o r a t e t a x r a t e s and t h e obscene revenue requirements o f t h e b u l g i n g government d e f i c i t a n d b e t w e e n d i f f e r e n t means o f numerous p r e s s u r e g r o u p s . O v e r a l l , t h e p a c k a g e s t a n d s a s an e x c e l l e n t e x a m p l e o f t h e p o s s i b l e " [ R o b e r t D. B r o w n , "The E f f e c t s o f T a x R e f o r m o n B u s i n e s s " , i n Tax Reform: Perspectives on the White Paper, Submission b y 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 b e t h u s " : Report, supra, n o t e 124 a t 14.  altered Although  t h e proposed this  compromises  GAAR t o p a c i f y  i s a l l hypothetical,  and t r a d e - o f f s t h a t  package o f t a x reforms. tax  reform  t h e b u s i n e s s coirununity  i t serves t o i l l u s t r a t e the exist  i n putting  together  a  B y i n c l u d i n g t h e GAAR w i t h i n t h e 1987  p r o p o s a l s , t h e g o v e r n m e n t was e x p o s i n g  i tt o this  process.  A f i n a l m a j o r 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 p a c k a g e 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 a s p a r t of  white  paper  documents, r a t h e r t h a n  a Bill.  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 which t h e government adopts be the  t h e consultative^^^ information  o r budget process^^^  i t has  regarding  - whether i t  - i s determined  the p o l i t i c a l  costs  by 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 w o u l d h a v e b e e n a g o o d 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 c o m m u n i t y a t t h e same t i m e a s 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 a n y o n e sector. 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 m i g h t be a s 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 a s a w h i t e p a p e r d i s c u s s i o n . I t then c a l l s f o r b r i e f s a n d r e p r e s e n t a t i o n s a n d may c o n d u c t 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 which i s submitted 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 b e c h a n n e l l e d t o s p e c i a l c o m m i t t e e s 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 a n d 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 time a v a i l a b l e t o p o t e n t i a l losers t o marshall t h e i r resources 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 a n d s t r i v e s to translate the proposals into legislation with minimal alteration. T h i s p r o c e s s may e n t a i l t h e g o v e r n m e n t i n t r o d u c i n g the p r o p o s a l s as p a r t o f t h e budget speech. Legislation will follow shortly thereafter. I t c l o s e l y resembles t h e i n i t i a l p r o p o s a l s , except perhaps f o r a few t e c h n i c a l adjustments. Ibid, a t 194.  benefits/''  In particular,  i t depends on whether  i t i s certain  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 winners  political are  are clearly  support, outweigh  identified  the losers  and, i n terms o f  and whether  the losers  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 a n d h a v e few, i f  a n y , p r i o r l i n k s t o t h e p r o p o s a l s ( a n d a r e t h u s u n a b l e t o mount a unified  The  attack)/'^  1987 t a x r e f o r m p r o p o s a l s w e r e  documents^'^ - t h u s r e f l e c t i n g is  further  adopted  c o r r o b o r a t e d by  introduced  as white  paper  the consultative  process.  This  other  i n f o r m u l a t i n g t h e package  strategies  t h e government  - the pre-consultation  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  with  t o t h e House o f  Commons F i n a n c e C o m m i t t e e a n d t h e S e n a t e C o m m i t t e e o n B a n k i n g , Trade  a n d Commerce  provided  a  forum  ( t h e former h o l d i n g  f o r special  interest  public  hearings which  groups^"); the f a i r l y  significant  amendments made t o t h e w h i t e p a p e r  particular,  t o i n c o r p o r a t e t h e recommendations  Commons F i n a n c e C o m m i t t e e .  1"  Jjbld.  1'^  JJbid.  proposals, i n  o f t h e House o f  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'^ A t o n e p o i n t i n t i m e , i t was m o o t e d t h a t t h e p r o p o s a l s may b e i n t r o d u c e d a s a g r e e n p a p e r d u e 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 P a p e r May T u r n G r e e n " Calgary Herald (28 A p r i l 1987) A 3 . 1 " Cook, supra,  n o t e 130 a n d F i f e , supra,  n o t e 90.  t h a t t h e g o v e r n m e n t was  adopting  a c o n s u l t a t i v e p r o c e s s and  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 format of the  was  s u g g e s t i o n s as  to  the  final  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 p a c k a g e r e s u l t e d  in i t s presentation its  development  proposals.  as a w h i t e paper p r o p o s a l . by  indicating  to  c o m m u n i t i e s t h a t t h e g o v e r n m e n t was of the r u l e . change. only  However, b e a r i n g  this  i s mind,  t h e g o v e r n m e n t was  although the  GAAR was  g o v e r n m e n t was moreover,  substantiated  tax  tax format  ultimately,  i t i s surprising that considers  put under t o withdraw or  possible explanation  i s that,  p r e s e n t e d as a w h i t e p a p e r p r o p o s a l ,  the  nonetheless committed t o the concept of the r u l e , to by  the the  basic fact that  l e g i s l a t i o n of the r u l e . sales  One  and  not committed t o the  l i m i t e d c h a n g e s w e r e made, p a r t i c u l a r l y when one  s u b s t a n t i a l l y amend t h e r u l e .  the  influenced  business  T h i s e x p o s e d t h e r u l e t o c r i t i c i s m and  the extreme pressure  and  the  This  which  format. the  This  government  proposition included  is  draft  Compare t h i s w i t h t h e p r e s e n t a t i o n  only  consisted  of  three  options  of  being  o u t l i n e d , w i t h no commitment made t o e i t h e r n o r t h e i n c l u s i o n o f a  timetable.  This  hesitant  politically  proposals  w i t h i n the  suggests about  the  package.  that  the  GAAR t h a n  government i t was  was  less  about  other  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 p a c k a g e was i n f l u e n t i a l , b o t h a s 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, a s p r e v i o u s l y m e n t i o n e d , t h i s i s  h y p o t h e t i c a l a s no c o m p a r a b l e s t a n d a r d judge t h e proposal. advanced reform  Nevertheless,  illustrating  proposals  t h e impact  e x i s t s against which t o  v i a b l e arguments have  been  of the inclusion i n the tax  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 trend  spreading  across  industrialised  generally  resulted  i n t a x reform  nations.  i n the reduction  which  This  of top rates  was  trend  of tax 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 the  elimination or cutting-back  shifting  of  corporations.  the  burden This  of  trend  o f numerous b e n e f i t s taxation  towards  i n t e r v e n t i o n i s t t a x systems w i t h changes  i n attitudes regarding  from more  and t h e  individuals to  neutral  and  less  l o w e r r a t e s was t h e r e s u l t o f taxation  theory  and p r a c t i c e .  F o r e x a m p l e , 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 l i m i t e d than p r e v i o u s l y thought, t h i s philosophy increased  and  i s more  r e s u l t i n g i n an  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. B r o w n & V. M o r g a n , " 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 a x a t i o n " (1989) 37 Canadian Tax Journal 745 a t 7 4 5 .  Brown & M o r g a n , i b i d , a n d C. M o t h e r w e l l , "U.S. T a x R e f o r m L e a d s W o r l d w i d e R e v o l u t i o n " The Globe and Mail (17 S e p t e m b e r 1986) B l .  performance existing domestic  motivated  the  t a x s y s t e m s and tax  competitiveness industrialised  reduction  t h e r e was  policies  must  to  examine  the  a growing  not  This worldwide nations  in  perverseness realisation  obstruct  reform and  put  reform  of that  international pressure their  on a l l own  tax  systems.  B r o w n & M o r g a n , supra, n o t e a t 747-8 and R.D. B r o w n , "The P a i n f u l R e a l i t i e s o f Tax R e f o r m " ( J u n e 1987) 120 CA Magazine 26 a t 26-8. The C a n a d i a n g o v e r n m e n t ' 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 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 o u r m a j o r t r a d i n g p a r t n e r s , whose t a x s y s t e m s s u f f e r e d many o f t h e same deficiencies as Canada's, were moving forward 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 with actions to 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 their tax rates. 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 traders, businesses, investors and highly skilled individuals at a competitive disadvantage with other countries. Tax Reform 1987, supra, n o t e 34 a t 2 1 . is  However,  i t i s submitted that  particular, both  was  influential  political  Canadian  and  the United States r e f o r m , i n  i n Canada/^  financial.  g o v e r n m e n t was  As  seduced  by  This  regards  the  the p o l i t i c a l  influence  was  former,  the  appeal  which  t a x r e f o r m s had f o r A m e r i c a n 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 Congress  was  relation  t o the l a t t e r ,  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.^^^  economies  meant  pertinent  to  study  done  threat  American  that  Canada.  by  u n l e s s t h e U.S. a  U.S.  the  t h e c l o s e c o n n e c t i o n s between t h e the  U.S.  tax  Verification  CD.  Howe  they  would  corporations less  of  reform this  Institute  t a x r e f o r m s w e r e met  because  jn  was  was  which  two  financially  p r o v i d e d by concluded  a  that  i n Canada, t h e y c o u l d pose  make m o s t  foreign  investment  by  attractive.  Tax Reform Act of 1986, P u b l i c Law 9 9 - 5 1 4 , s i g n e d by P r e s i d e n t R e a g a n on O c t o b e r 22, 1986. For d e t a i l s of the p r o m i n e n t f e a t u r e s o f U.S. t a x reform, see B l e n k a r n Report, supra, n o t e 58 a t 2 2 - 3 . F o r a more i n - d e p t h d i s c u s s i o n , s e e H.D. R o s e n b l o o m , " R e c e n t US T a x D e v e l o p m e n t s 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 Conference Report (Toronto: Canadian Tax F o u n d a t i o n , 1991) 4 0 : 1 . The g o v e r n m e n t ' 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 : " B u t we h a v e t o be m i n d f u l o f w h a t 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 b e c a u s e o f t h e p r o x i m i t y a n d i n t e g r a t i o n b e t w e e n t h e two c o u n t r i e s a n d t h e r e f o r e t h e n e e d 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. F e r g u s o n , supra,  note  34.  177 M^gjj Reform D i l e m m a : S t u d y Warns We M u s t M a t c h U.S." Vancouver Sun (22 J a n u a r y 1987) F 6 . ' W i t h C a n a d a ' s o p e n economy a n d w i t h m u l t i n a t i o n a l s m a k i n g up s u c h a l a r g e p a r t o f t h e C a n a d i a n b u s i n e s s c o m m u n i t y , i f c o r p o r a t e t a x r a t e s i n Canada r e m a i 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, U.S. could  although  exercise, not  Canadian tax  i t was  reform  accepted from the  r e p l i c a t e the  latter.  In  needed outset  to  parallel  that the  p a r t i c u l a r , the  former  Canadian  s y s t e m d i d n o t h a v e 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 c h o o s e f r o m and  Ibid.  ultimately, eliminate,  as  the  U.S.  the  system  to had  e r o s i o n o f t h e C a n a d i a n t a x b a s e and C a n a d i a n t a x r e v e n u e ' [quoting R. Brown, v i c e - c h a i r m a n o f P r i c e Waterhouse, Toronto, author of study].  See, a l s o , t h e S t a n d i n g S e n a t e C o m m i t t e e on B a n k i n g , T r a d e 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 of 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 , lower 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 i n c o m e t o t h e U.S. and e x p e n s e s t o C a n a d a . One c o m m e n t a t o r who d o e s n o t s u p p o r t t h e r e d u c t i o n i n C a n a d i a n c o r p o r a t e t a x r a t e s t o make o u r t a x s y s t e m 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 b e t w e e n C a n a d a and o t h e r nations are s i g n i f i c a n t considerations to corporations i n choosing t h e i r location. She c l a i m s t h a t s t u d i e s h a v e f o u n d 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 l o w 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 corporations locate themselves. 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 markets, 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. Furthermore, 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 profits/expenses to low/highly taxed 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 not l i e i n r e d u c i n g r a t e s , but 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 problem, f o r e x a m p l e , s t r e n g t h e n i n g o u r l a w s on t a x h a v e n s i n g e n e r a l : i b i d , a t 79. I t i s f e l t that t h i s view i s s i m p l i s t i c . In p a r t i c u l a r , i t i g n o r e s the c l o s e t r a d i n g c o n n e c t i o n s between the U.S. and C a n a d a . Canada c a n n o t a f f o r d t o impose s t r i c t l a w s , especially against the U.S., regarding the operations of 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 of the present ideology of 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 d o e s n o t t a k e a c c o u n t of the p o l i t i c a l aspect of the d i s p a r i t i e s . In the current 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, the Canadian 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 s e e n a s 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 o p p o s e d t o t h e i r d i r e c t i o n .  pre-reform. political  Also,  some  reasons, could  of  not  the  be  Canadian  removed/^'  incentives,  for  Furthermore,  the  C a n a d i a n s y s t e m 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 , publicly  financed  health  and  hospital  care;  greater  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 a n d more p u b l i c of  the  stress  arts. that  Politically,  the Canadian  e x e r c i s e . 121  T h i s was  the  reforms would  a c c e p t e d by  However, d e s p i t e t h e s e d i f f e r e n c e s , 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  system.  In fact,  i t has  government  the  such as  was  public  financing  careful  not d u p l i c a t e the Canadian  to U.S.  electorate, i^^  t h e r e i s no d o u b t  that  the  i m p a c t on t h e C a n a d i a n t a x  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 the 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: " B e c a u s e t h e o l d U.S. s y s t e m was s o r i f e w i t h l o o p h o l e s a n d s p e c i a l c o n c e s s i o n s , e v e n 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 rates. T h i s e a s y o p t i o n was n o t a v a i l a b l e i n C a n a d a . " 1^' F o r e x a m p l e , 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 e x e m p t i o n . C. M o t h e r w e l l , " P o l i t i c s May H o b b l e C a n a d i a n T a x R e f o r m " The Globe and Mail (16 S e p t e m b e r 1986) B l & B8. 120 Brown & M o r g a n , supra, n o t e 170 a t 747. Brooks & M c Q u a i g , supra, n o t e 54 a t 17. Although the United States s p e n d s 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 h a s h i g h e r p e r capita income and accordingly can absorb these higher 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 b u r d e n s : 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 agreed w i t h M i c h a e l Wilson's a s s e r t i o n t h a t t a x r a t e s m u s t 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 g o v e r n m e n t benefits. F e r g u s o n , supra, n o t e 38. supra,  H a r t l e , supra n o t e 28.  n o t e 7 a t 401-2.  See, a l s o ,  Worthington,  H o w e v e r , t h e i m p a c t o f t h e U.S. q u i t e be include  discerned a  at f i r s t glance,  general  anti-avoidance  Canadian package. tax  Nevertheless,  reforms d i d indeed exert  regards  political  r e l a t i o n to the tried  appeal  limitations existed.  reform,  and  many  g o v e r n m e n t may to the  For  special  Therefore,  financial  example, the incentives some o f  justification future  in  the  the  U.S.  i n f l u e n c e , both  considerations. the  government system.  corporate  sector,  Canadian system d i d  as  the  U.S.  special  introduce  abuses of  for their  incentives  the  the  not  system  pre-  incentives  were the  GAAR t o e n a b l e i t  fairness. remaining  continuance)  as In  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 ,  have d e c i d e d t o  r u l e would prevent  abuses of  present  not  i t i s submitted t h a t the  p r e s e n t a more c o m p l e t e p i c t u r e o f  added  was  image of h a r m i n g t h e  furthermore,  untouchable.  as  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  H o w e v e r , i n c r e a t i n g an  as  rule  some d e g r e e o f  and  cannot  considering that i t did  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 ,  to present the  contain  t a x r e f o r m on s e c t i o n 245  and  For  example,  incentives would  introduces.Overall,  (an  preclude  therefore,  the 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 to the c r e a t i o n of t h i s  image.  In r e l a t i o n to the  stated  financial considerations,  a b o v e , t h e C a n a d i a n g o v e r n m e n t was many s p e c i a l i n c e n t i v e s a s t h e U.S.  f o r reasons  unable to eliminate/reduce system.  T h i s meant t h a t  as to  The C a n a d i a n s y s t e m d o e s n o t h a v e a j u d i c i a l b u s i n e s s p u r p o s e t e s t a s t h e U.S. does. Therefore, existing antia v o i d a n c e m e a s u r e s w e r e a d v o c a t e d by t h e g o v e r n m e n t a s being inadequate. Tax Reform 1987: Income Tax Reform, supra, n o t e 24 a t 130.  substantiate  i t s image  of fairness  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 revenues o f i t s base-broadening measures u s i n g measures.  To  Enter  conclude  experience  other  t h e GAAR.  therefore,  i t i s clear that  t h e U.S. t a x r e f o r m  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.  In p a r t i c u l a r ,  i t provided  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 large extent, t h e d i r e c t i o n o f these reforms - t h e l o w e r i n g o f r a t e s , t h e broadening o f t h e base and t h e s h i f t i n g of 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 . to  t h e GAAR,  t h e U.S.  reforms  provided  an impetus  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 reforms. U.S.  In relation for  i t s  Although t h e  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  reforms  were h i n d e r e d  by l i m i t a t i o n s  regarding  the extent  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 . the  rule  contributed  i n making  up  the  of  Therefore,  short-fall,  both  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  conclude,  i t h a s been  shown t h a t  the 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  presentation  particular. time  of t h e t a x reform  package,  F o r example, t h e looming f e d e r a l e l e c t i o n  o f t h e 1987 t a x r e f o r m s ,  together  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 interest  a n d t h e GAAR i n  i n seeking  re-election.  with  atthe  t h e government's  i n t h e government's s e l f -  This  involved  two elements  being  promoted  maximize  votes  simultaneously with  -  the  the electorate  government  trying  and t h e p l a c a t i o n  s p e c i a l i n t e r e s t groups, i np a r t i c u l a r , t h e corporate high-earning alia,  t h e government  give  presenting  the impression  that  from low and m i d d l e - c l a s s high-earning the  creation  of the  s e c t o r and  i n d i v i d u a l s . The f o r m e r p r e m i s e r e s u l t e d i n , i n t e r the t a x reform  o s t e n s i b l y promoting a f a i r e r system. to  to  proposals  as  I n p a r t i c u l a r , i t sought  t h e t a x b u r d e n was b e i n g  taxpayers t o the corporate  shifted  s e c t o r and  i n d i v i d u a l s . The GAAR was a n i n t e g r a l c o m p o n e n t i n of t h i s  image.  I t greatly  contributed  t o the  c o 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 , a s p a r t o f a p l e t h o r a o f other  base-broadening  economically  the claim  influenced the rule. the  measures of fairness.  in  These  substantiating factors  F o r example, t h e y p r o v i d e d  introduction of section  i n turn  an impetus f o r  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 , the  and  r e v e n u e t h e r u l e was e s t i m a t e d  influenced the calculation of t o generate.  H o w e v e r , i t h a s a l s o b e e n shown t h a t t h i s i m a g e o f f a i r n e s s was illusory. financed  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 by an  increase  i n the corporate  g o v e r n m e n t t r i e d t o make o u t . p r i m a r i l y by i n c r e a s e s of  t a x payments.  other rates  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  The c o r p o r a t e  reduced;  as t h e  I n s t e a d t h i s r e d u c t i o n was f u n d e d  ways b y t h e t a x p r o p o s a l s . were  t a x burden  not  sector  was a l s o  F o r example,  a l l special  pacified i n  corporate t a x  incentives  were  eliminated/trimmed important  and  those  ones p r i m a r i l y  that  relied  were  removed  upon by  the  were  not  the  corporate sector.  T h e s e f a v o u r a b l e m e a s u r e s a r e p e r h a p s n o t t h a t s u r p r i s i n g when one  considers the extensive involvement  and  t h e i r tax r e p r e s e n t a t i v e s i n the preparatory stages of  tax reform proposals.  of the corporate s e c t o r  This i s i n d i c a t i v e of the d e s i r e of  government  to  placate  particular,  the corporate sector.  In r e l a t i o n  t o t h e GAAR, i t w o u l d a p p e a r a t f i r s t  t h e g o v e r n m e n t was rule  was  this  attempted it  t o minimise  proposal,  and  special  directed  i s true  involved the  the  interest  groups,  the  and  glance  in  that  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  effectively  although  the  to  against  some  this  extent,  group.  the  tax  professional  furthermore,  i n the  amended  However,  government  t h e harm t h a t i t w o u l d do.  the  For  still  example,  preparation of  i t in  response  to  the their  criticism.  Overall, GAAR  i t i s f a i r t o s a y t h a t t h e t a x r e f o r m p a c k a g e , and  in particular,  government's objective  was  e x e r c i s e due the  fall  of  sometime i n  reflects  the  self-interest  in  pertinent at  the  t o a looming 1989 1988.  and  conflicting  seeking  re-election.  time  the  of  e l e c t i o n which  was  strands  generally  was  1987 due  expected  tax  the  of  the This  reform  t o be h e l d to  be  by  called  Other aspects an  impact  on  particular. the  of the p o l i t i c a l t h e t a x reform  introduction government  -  costs  trade-offs  involved  that  and  t h e GAAR  in  was  for  i t s  of fairness the  o r , t o reduce  subjected  the  excessive  This  t o t h e compromises and  i n the formulation i t s inclusion  the presentation  in  o f any t a x the  o f s e c t i o n 245 a s p a r t  arguably  regarding  i t had been  impetus  i n introducing the rule i n isolation.  Finally,  pressure  an  t o t h e image  are inherent  documents.  example,  perhaps  t o present  package.  increased  exercise,  was  t o contribute  the rule  necessitated paper  package  sought  Furthermore,  reform  environment a l s o had  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 a x reform  political  and s o c i a l  exposed  as p a r t  of white  the proposal  i t salteration,  introduced  package  than  to  i f ,f o r  o f a s e t o f budget  measures.  The  last  major  influenced  political  t h e t a x reform  occurred  i n the United  reasons,  this  and  to a  was  exercise  States.  extent,  was t h e r e f o r m and  political  incentives  which  reform reform  no p a r a l l e l p r o v i s i o n  package, t h e l a t t e r s t i l l had an  F o r e x a m p l e , i t was a m o t i v a t i o n  of the proposal  which  t h a t had  t h e d i r e c t i o n such  A s r e g a r d s t h e GAAR, a l t h o u g h  impact on t h e r u l e .  special  consideration  For financial  determined  i n c l u d e d i n t h e U.S. r e f o r m  introduction  social  e x e r c i s e was a n i m p e t u s f o r t h e C a n a d i a n  large  would take.  and  due t o t h e d e c r e a s e d  could  f o r the  number o f  be e l i m i n a t e d / r e d u c e d  i nthe  Canadian t a x system. present  an image  T h e r e f o r e , t o make u p t h i s  of fairness  and economic  short-fall to  verification,  the  government i n t r o d u c e d t h e proposed s e c t i o n 245.  I n summary, i t c a n b e s e e n t h a t t h e p o l i t i c a l a n d s o c i a l within  which  t h e t a x reform  GAAR, was f o r m u l a t e d introduction,  measures,  was v e r y  context  and i n p a r t i c u l a r ,  influential  the  i n determining the  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  At  t h e time  of the introduction  of section  economy was i n a p r e c a r i o u s p o s i t i o n . of r e c o v e r y from the r e c e s s i o n  245 t h e C a n a d i a n  I t was s t i l l  i na state  o f t h e e a r l y 1980s w h i c h h a d been  caused by t h e western-world o i l c r i s i s and t h e p o l i c y responses thereto. reached ratio)  B y 1987 t h e economy h a d i m p r o v e d somewhat f r o m t h e l o w i n 1984/5  peaked  when  the deficit  a t $38.3 b i l l i o n . ^  (measured  by  debt-to-GDP  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 a n y w h e r e n e a r t o b e i n g r e g a r d e d a s h e a l t h y by t h e time o f t h e t a x r e f o r m package  i n J u n e 1987 - a s  evidenced 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  deficit  ($29.3  federal  debt  b i l l i o n ) , public  charges  ($28.5  debt  ($293.8  billion)  a n d GDP  b i l l i o n ) , annual ($537.8  billion).'  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 c a n 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  terms,  namely,  that  p o s i t i o n o f b e i n g "mortgaged  the state  was b a s i c a l l y i n t h e  t o the h i l t " ^  (with the 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 r e v e n u e s ) a n d h a d a d e f i c i t t h a t was  ' C a n a d a , D e p a r t m e n t o f F i n a n c e , Tax Reform 1987: & F i s c a l Outlook ( O t t a w a : t h e D e p a r t m e n t , J u n e 18, 1987) (Chart 5.2). 2 S t i k e m a n , E l l i o t , Tax Reform '87: an Analysis, 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 1 7 , 1987 (Don M i l l s : Boo, 1987) a t 1. ' Figures F i s c a l Outlook,  contained within supra, n o t e 1.  S t i k e m a n , supra,  Tax Reform  n o t e 2 a t 1.  Economic a t 40-1  Canada Tax R i c h a r d De  1987: Economic  and  substantially  larger  t h a n t h e U.S.  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 comparison.5 still  However,  despite  deficit,  i n fact,  probably  s t a t e s were t a k e n i n t o  such  factors,  the  the  government  attempted t o p a i n t a b r i g h t overview of the s t a t e of the  C a n a d i a n economy, w i t h e v e n 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 advocated  regarding  b u s i n e s s w o r l d was instead and  its  future  performance.^  However,  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 ,  i t received  t h e g o v e r n m e n t ' s comments w i t h  the as  scepticism  reservation.^  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 S e n a t e C o m m i t t e e on B a n k i n g , T r a d e a n d Commerce: C a n a d a , S e n a t e , 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 3 1 . ^ 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 h a d s l o w e d down b y 1 9 8 6 / 7 , a l t h o u g h , o f course, i t a t t r i b u t e d t h i s to external, i n t e r n a t i o n a l factors: 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 b y t h e S t a n d i n g C o m m i t t e e on F i n a n c e a n d E c o n o m i c A f f a i r s : C a n a d a , H o u s e 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 e c o n o m i c r e s e a r c h g r o u p s ] w e r e 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 , a n d 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 w o r s e 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 f r o m b a s e - b r o a d e n i n g m e a s u r e s i s u n c e r t a i n , a n d 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 a b o u t 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 o f 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 S e n a t e C o m m i t t e e B a n k i n g , T r a d e a n d 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 e c o n o m i c b a c k g r o u n d , D. H a r t l e , The Expenditure Budget Process of the Government Canada: a Public-Choice Rent-Seeking Perspective, Canadian  on see of Tax  Against  this  background,  i t i s proposed  considered  t o determine  the influence,  prevailing  conditions  may h a v e  that  section  245 b e  i f any, t h a t  had on t h e enactment  such  of the  provision.  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 adverse economic  been t h e g a r n e r i n g o f p u b l i c schemes.  At times of large  c o n d i t i o n s may h a v e  animosity against deficits  t a x avoidance  and h i g h i n t e r e s t  there i s an i n c r e a s i n g s o c i a l view t h a t a r t i f i c i a l imposes  undeserved  c o s t s on o t h e r Canadians.^  tax planning  T h i s i s perhaps  r e l a t e d t o t h e increase i nt a x avoidance which adverse c o n d i t i o n s may c a u s e . corporations  Obviously taxpayers (notably  and h i g h - e a r n i n g i n d i v i d u a l s  fees of t a x professionals their  tax bills  exercise  caution  economic  profitable  who c a n a f f o r d t h e  a n d whose a t t e m p t s a t m i t i g a t i o n o f  are financially over  rates  their  viable)  a r e more  likely  to  e x p e n d i t u r e ( e g . s e e k i n g ways t o  minimize 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 .  H o w e v e r , i t m u s t b e s t a t e d t h a t t h e r e i s n o means a v a i l a b l e t o prove 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  P a p e r No.81 ( T o r o n t o : C a n a d i a n T a x F o u n d a t i o n , 1988) c h . 1. 2 R.D. B r o w n e t a i , "GAAR a n d T a x P r a c t i c e : M o r e Q u e s t i o n s Than A n s w e r s " i n Report of Proceedings of F o r t y - F i r s t Tax Conference, 1989 C o n f e r e n c e R e p o r t (Toronto: Canadian Tax F o u n d a t i o n , 1990) 11:1 a t 1 1 : 5 .  terms,  of t a x avoidance  cannot  be e s t i m a t e d w i t h a n y d e g r e e o f  a c c u r a c y , n o r c a n i t be p r o v e n  w h e t h e r i t i s more p r e v a l e n t a t  any t i m e c o m p a r e d w i t h t h e p a s t . '  However,  in  proposition  respect  of  section  c a n be g l e a n e d  from  245, several  support  years  prior  t o 1987.''°  a  comments made b y t h e  government t o t h e e f f e c t t h a t t a x avoidance immediate  f o r such  was r a m p a n t i n t h e  In other  words,  i t would  a p p e a r 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 . was  t o accept  t h e government's  (arguably,  unlikely,  bearing  government  i n alleging  such  H o w e v e r , e v e n i f one  statements i n mind  abuse,  as b e i n g  the  motives  namely  to  accurate of  the  justify  the  e n a c t m e n t o f s e c t i o n 2 4 5 ) , 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 drawing  any  fortuitous, determining  conclusions, with  other  as  such  factors  linkage being  i s perhaps  more  important  only in  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. Furthermore, 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 conclusions": ibid. ^° See f o r e x a m p l e , comments made b y 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 C o m m i t t e e on F i n a n c e a n d E c o n o m i c A f f a i r s , supra, n o t e 7 a t 1 2 8 : " . . . 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 b e c o m i n g a b i t more a g g r e s s i v e t h a n they have been h i s t o r i c a l l y " a n d D.A. Dodge, "Tax R e f o r m a n d 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 c o m m e r c i a l community t h e r e h a s d e v e l o p e d a profusion of sophisticated tax-motivated strategies involving various technical provisions that yield unintended and s i g n i f i c a n t t a x advantages."  supports tax  the theory 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  avoidance  e x p l a i n i n g why 245.  and  the  economy,  then  this  prevailing  socio-political  environment,  g o v e r n m e n t t o t a k e c o r r e c t i v e a c t i o n and  To  reiterate,  avoidance  was  one a  result  growing  m i t i g a t i o n schemes. times  taxpayers  of  of  this  increased,  public  economic  resentment  against  they  do  not  like  manner  look and  liabilities,  favourably  If  who  thus  instead  adding  Evidence  that  these  economic  conditions  which tax avoiders  the  of  the  who  ways tax  a t t i t u d e s were  do  to  the  media r e p e a t e d l y  who  avoided  h i g h l i g h t e d the  tax."  This  vast  culminated  tax tax-  prevalent  higher taxes  in  to not  assume  of  that  suffer in a their  everyone  fostered during  1 9 8 0 s was  in  of  minimize  burden  245.  majority  increased  attracted during t h i s period.  the  paying  to  find  the  i t is fair  upon t h o s e  the  such  is particularly  conditions.  economy,  forced  increase  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 improve the  with  introduce section  possible  Generally, this  harsh  attempt to  in  the government f e l t the need t o i n t r o d u c e s e c t i o n  perhaps t o adverse economic c o n d i t i o n s , which t o g e t h e r  the  an  assist  I n o t h e r words, the i n c i d e n c e of t a x avoidance  due  in  may  between  For  number o f  the  tax  else. harsh  publicity example, taxpayers  i n a general  public  F o r e x a m p l e , J . M c A r t h u r , "Tax R e f o r m i s E a s i e r S a i d T h a n Done" Toronto Star (19 A u g u s t 1984) B l ; " W i l s o n May Opt For 'Limit on Tax Preferences'" Halifax Chronicle Herald (14 November 1985) 58 and "5,978 P a i d No '85 Tax on I n c o m e " The Globe and Mail (23 December 1987) A9.  v i e w t h a t t h e t a x s y s t e m was  u n f a i r C o n s e q u e n t l y ,this  pressure  to  on  the  government  perceived unfairness. tax  reform  politically  package  take  I t prompted  which  was  appealing to the  action  to  rectify  put this  t h e government t o produce  p r e s e n t e d and electorate.  government sought t o p r e s e n t t h e package  structured  to  In particular, as promoting a  a be  the  fairer  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 individuals.  Section  was  an  important  achievement  of  conceptually  ( i e . t h e p r o v i s i o n i n i t s own  the  plethora  these  245  of  objectives.  corporate  It  element  in  contributed  the both  r i g h t and as p a r t o f  base-broadening  measures)  and  economically ( i e .a s s i s t i n g i n the f i n a n c i a l v e r i f i c a t i o n of the 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) o f t h i s image o f f a i r n e s s . way  formulation  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  contributed to a favourable p o l i t i c a l climate being created  f o r t h e enactment and  i n the  political  introduction  of  o f s e c t i o n 245. environment the  rule.  Thus, t h e p r e v a i l i n g  provided  an  Furthermore,  impetus they  economic for  the  encouraged  the  g o v e r n m e n t 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 conducted concluded t h a t Canadians b e l i e v e d t h a t t h e t a x s y s t e m 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 s y s t e m 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 T a x - R e f o r m P l a n s " Montreal Gazette (25 J u l y 1 9 8 7 ) . Another survey revealed that seventy per cent of those 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 . F e r g u s o n , "Most C a n a d i a n s Oppose Tax Reform P r o p o s a l s " Calgary Herald (21 M a r c h 1987) A3.  was  exerted  by  the  tax  withdraw/substantially legislative  i m p a c t on  the  influence  of the  of  section  245.  business  community  r u l e during the  to  Parliamentary  To  of  the  the  may  be  provision,  adverse  economic  apparent  aggressive  reliance  on  the  regards the  public  amplify.  r u l e , and affected  of tax  attitude to  latter,  Revenue  the by  conditions  rule  mitigation  may to  defeat  Canada,  tax  in  its  interpreting  economic s e t t i n g .  explain  Revenue  planning  has  that  Thus,  Canada's  and  tax-minimization provision  is  interpretation  judiciary, in  the  although the  considered,  surroundings w i l l  attitudes  e c o n o m i c e n v i r o n m e n t on t h e  administration  judicially  a l t e r the  and  process.  R e l a t e d t o the  As  profession  consequent transactions. not  i t  is  foreseeable  the  influence  the  interpretation given to  yet  been  economic section  245.  Another p o t e n t i a l impact of the  adverse economic c o n d i t i o n s  the  had  influence  available  for  incentives.  they  may  effecting  have "legal"  in  determining  avoidance through  However, i t i s s u b m i t t e d t h a t  adverse conditions a b e s t a t e n u o u s one  and  the  prevalence of tax  the  the  means  special  linkage  was  tax  between  expenditures i s at  a s 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,  incentives  i t would appear t h a t t h e p r o l i f e r a t i o n of t a x  i n the early  notably p o l i t i c a l  1 9 7 0 s was  and s o c i a l  The  final  possible  and  i n particular,  traceable to other  factors,  considerations/'  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 , section  245,  was  the  political  pressure  e x e r t e d on t h e g o v e r n m e n t n o t t o u s e t h e e x e r c i s e a s a means o f i n c r e a s i n g t o t a l revenues. its  concern  taxpayers  over  the  level  believing  g o v e r n m e n t was  put  the  flailing objective However,  to  be  due  to  the  deficit  be the  A to  deficit,  should  and  be  position.  Canadian  reduced, In l i g h t  the of  the  i t wished t o s t r u c t u r e the t a x reform  appealing to  s u p p o r t . 1' would  of  in a difficult  looming f e d e r a l e l e c t i o n , proposals  With business repeatedly expressing  the  relatively give  electorate easy  way  of  tax-savings to  pressure discussed  to  bolster i t s  achieving the  above,  this  electorate.  i t could  not  1' F o r e x a m p l e , a r g u a b l y i t was a n 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 T r u d e a u g o v e r n m e n t ' 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 a n d T a x R e f o r m " (1988) 26 Osgoode Hall Law Journal 347 a t 364. 1'* F o r e x a m p l e , W.A. W i l s o n , " T o r i e s P i n H o p e s on T a x R e f o r m " Winnepeg Free Press (23 M a r c h 1987) 6. cf. C. H a r r i s , "How F o u r E c o n o m i s t s R a t e Tax P r o p o s a l s " Financial Post (22 J u n e 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 g o v e r n m e n t ' s t o p e c o n o m i c 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 Plans" supra, n o t e 12. See generally. Chapter I I I , " P o l i t i c a l and Social C o n t e x t " a n d i n p a r t i c u l a r , s e c t i o n ( i i ) The L o o m i n g E l e c t i o n .  implement bulging  this  aim  deficit.  in a The  way  t h a t would  government p e r c e i v e d  political  c o s t s which would outweigh the  savings.  Therefore,  neutral  tax  p a c k a g e was  reform  package.  divided into  two  n e u t r a l w i t h i n i t s own  One,  GAAR p l a y e d  an  t h i s would  the  stages,  right.  important  tax  reform  e a c h one  i n the  tax-  fiscally  In r e l a t i o n  part  involve  t o produce a  Furthermore, distinct  already  b e n e f i t s o f any  i t committed i t s e l f  fiscally the  increase the  being  to  Stage  achievement  of  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 r e v e n u e t h e p r o v i s i o n was period  estimated to generate:  1988-92.''°  overall  and  (thereafter,  This  markedly i t was  i n c r e a s e was  the  $2,240 m i l l i o n o v e r undoubtedly  greatest during  estimated  t h a t the  r e d u c t i o n of C a p i t a l Cost Allowance  the  first  revenue  However,  somewhat when one  these  figures  considers the  pale  into  highest  two  years  gained  w o u l d i n c r e a s e and  o v e r t a k e t h e g a i n s u n d e r GAAR) o f t h e c o r p o r a t e measures.^'  the  the  in  the  finally  base-broadening significance  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 p a p e r p r o p o s a l s w e r e 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 i m p a c t o f t h e t a x r e f o r m a n d r e l a t e d m e a s u r e s 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 a n d 199192 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 ( O t t a w a : t h e D e p a r t m e n t , J u n e 18, 1987) a t 73. H o w e v e r , i n r e a l i t y , t h e o v e r a l l p a c k a g e was n o t n e u t r a l ( o r t h e i m p a c t n e g l i g i b l e ) : i n 1 9 8 8 - 8 9 , 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 deficit. Tax  C a n a d a , D e p a r t m e n t o f F i n a n c e , Tax Reform 1987: Reform ( O t t a w a : t h e D e p a r t m e n t , J u n e , 18, 1987) a t  notes  For q u a l i f i c a t i o n of these 75-6 and a c c o m p a n y i n g t e x t .  figures,  see  Income 67.  Chapter  III,  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 an  However, i t i s s u b m i t t e d  important  c o n t r i b u t i o n a s $2 b i l l i o n  insignificant a  result  changes  t h a t t h e GAAR s t i l l  amount t o b e p a s s e d o v e r  of these  measures  to the federal  i s certainly  lightly.  made  n o t an  Therefore,  as  ( 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  sales  t a x and  p a y m e n t s ) t h e g o v e r n m e n t was a b l e  acceleration of tax  t o finance the reduction 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  position.  C. CONCLUSION To  conclude  influential  therefore,  t h e economic  environment  played  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 p a c k a g e , a n d t h e GAAR i n p a r t i c u l a r . n o t a b l e e x a m p l e was t h e a f f e c t o f a d v e r s e public  attitudes.  perhaps  caused  Enhanced  an  media  In particular,  the incidence coverage  economic c o n d i t i o n s on  t h e economic  o f t a x avoidance  regarding  The most  this  environment t o increase.  increase  arguably  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 general 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  unfair  individuals  and, i n p a r t i c u l a r ,  the belief  and l a r g e c o r p o r a t i o n s s h o u l d  that  high-earning  p a y more t a x .  This  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 a n d $7,485 m i l l i o n o v e r t h e p e r i o d 1 9 8 8 - 9 2 : Tax Reform 1987, supra, n o t e 17 at 75. tax  21 F o r e x a m p l e , i n 1 9 8 8 - 8 9 , t h e n e t o v e r a l l i m p a c t o f t h e r e f o r m s was a n a d d e d $1 b i l l i o n r a i s e d : supra, n o t e 17.  exerted  pressure  on t h e government  to rectify  The g o v e r n m e n t was v u l n e r a b l e t o s u c h p o l i t i c a l  the situation. pressure a t the  t i m e o f t h e 1987 t a x r e f o r m s d u e t o i t s d e s i r e t o b o l s t e r i t s appeal Thus,  with  the electorate  t h e government  package  which  fairer  system.  was  i n light prompted  i tpresented  presentation  of  of a  looming  t o produce  t o the electorate  The  GAAR  such  an  was  an  image,  a  t a x reform  as promoting a  integral both  election.  part  i n the  conceptually  and  financially.  However,  i t should  economic  context  The  adverse  be e x e m p l i f i e d  i n t h e above  economic  that  the influence  scenario  conditions  was l a r g e l y  alone  d i d not  of the  indirect. cause  the  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 a c k a g e , i n c l u d i n g t h e GAAR. explain,  the  perceptions,  which  socio-political government's the  need  context  i n turn  context  flailing  had  affected  (eg.  the  an  impact  public looming  s u p p o r t ) meant t h a t  t o respond t o t h e p o l i t i c a l  electorate. for  economic  on  t h e government  was  the  t h e government  felt  exerted  elected  vulnerable  to public  pressure.  by t h e  different, and/or  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 so  The  election,  pressure  newly  public  attitudes.  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 h a d been  example,  To  was quite  Consequently, i n these  c i r c u m s t a n c e s , i t may n o t h a v e f e l t t h e n e e d t o i n t r o d u c e a t a x r e f o r m p a c k a g e w h i c h was g e a r e d t o b e e l e c t o r a l l y  appealing.  Therefore, indirectly  i t can  be  said  an  impetus  provided  that  the  environment.  Other  economic  of  the  conditions  f o r the t a x reform  through the s o c i o - p o l i t i c a l  influences  economic  conditions  package  include  the  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 reasons 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 reform package - i t could  not  finance the rate reductions  a  move  would  have  incurred  by a d d i n g t o t h e d e f i c i t . political  b e n e f i t s from t h e t a x savings.  costs  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 .  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 . t h e GAAR p l a y e d  the  Moreover, t h e government d i v i d e d  the  One,  exceeding  Such  an i m p o r t a n t  role  Both o f these  I n r e l a t i o n t o Stage 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 regards t h e i n c r e a s e d revenue i t was  estimated  t o generate.  Again  i n f l u e n c e o f t h e economic context  i t should  be n o t e d t h a t t h e  a p p e a r s t o be i n d i r e c t .  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 deficit  i n t h e p r a c t i c a l sense.  socio-political  vulnerable political  reaction  option  e n v i r o n m e n t meant t h a t  to political  pressure.  to increasing  chose t o implement d i m i n i s h e d  and added t o t h e  H o w e v e r , i t was b e c a u s e o f t h e  environment t h a t t h i s  In p a r t i c u l a r , t h i s  The  was u n a t t r a c t i v e . t h e g o v e r n m e n t was  C o n s e q u e n t l y , due t o a d v e r s e the deficit,  t a x savings  t h e government  and n o t add t o t h e  deficit.  This  balancing  of  political  costs  and  benefits  is  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 g o v e r n m e n t s t o m a x i m i z e their political  Overall,  i t  influenced economic  support.  is  the  submitted  proposed  environment  that  these  s e c t i o n 245.  indirectly  As  provided  i n t r o d u c t i o n of the  t a x r e f o r m p a c k a g e and  promoting  system.  a  fairer  The  GAAR was  economic discussed an  o b j e c t i v e s of the tax reform  exercise.  above,  impetus  for  i t s presentation an  integral part  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 the the  conditions the the as of  f u l f i l m e n t of  CHAPTER V HISTORICAL CONTEXT A. INTRODUCTION I t i s proposed 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. this to  In particular,  c o n t e x t should be d i s c u s s e d .  two a s p e c t s o f  First, the legal  t h e e n a c t m e n t o f s e c t i o n 245 s h o u l d  background  be h i g h l i g h t e d .  This  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 attempts legislative "abusive"  h a v e b e e n made i n C a n a d a , b o t h a t t h e  and j u d i c i a l  avoidance.  level,  t o curb  termed  factors i nr 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 format  of the rule.  s e c o n d component i s t h e s o c i a l a n d p o l i t i c a l b a c k g r o u n d .  particular, in  i s now  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  should r e v e a l t h e i n f l u e n c e o f such  The  what  Canada  influenced strategy  i t i s proposed t h a t previous attempts be d i s c u s s e d .  I t i s felt  t h e 1987 t a x r e f o r m adopted  by  the  s t r u c t u r i n g t h e t a x reform  that  exercise,  government package.  i n  these  In  a t t a x reform experiences  particularly the formulating  and  B. LEGAL BACKGROUND The  Income  provisions,  Tax A c t c o n t a i n s o f both  a wide  array  of  anti-avoidance  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 the  ^ For a f u l l l i s t i n g of the specific anti-avoidance rules 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 , s e e H.J. K e l l o u g h , "A D i s c u s s i o n o n t h e W h i t e P a p e r ' s P r o p o s e d General Anti-Avoidance Rule" 1987 British Columbia Tax Conference, t a b 6 a t 18-22. The g o v e r n m e n t c i t e d m i n i m i z i n g t h e n e e d f o r t h e e n a c t m e n t o f specific anti-avoidance r u l e s as a f a c t o r supporting t h e i n t r o d u c t i o n o f t h e GAAR. I t claimed that the o b j e c t i v e of 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 legislative responses was practically unattainable. Furthermore, 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 complexity; increase detail; diminish flexibility; create additional 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 m p l e t e d b e f o r e amendments become e f f e c t i v e ; u n d e r m i n e t a x p a y e r m o r a l e 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 : C a n a d a , Department o f Finance, Tax Reform 1987: Income Tax Reform ( O t t a w a : t h e D e p a r t m e n t , J u n e 1 8 , 1987) a t 129 a n d 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. For a general d i s c u s s i o n o f s p e c i f i c anti-avoidance 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 ( O t t a w a : Queen's P r i n t e r , 1966) [ " C a r t e r C o m m i s s i o n 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 b y t h e C a r t e r C o m m i s s i o n R e p o r t a r e mirrored i n t h e government's reasoning outlined above. Consequently, 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 p e r h a p s be added a s i t w o u l d a p p e a r t h a t an a d d i t i o n a l reason 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 governmental 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 e x a m p l e i s t h e S c i e n t i f i c and R e s e a r c h T a x 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 p r o g r a m managed t o d r a i n $2.8 b i l l i o n f r o m t h e f e d e r a l t r e a s u r y : L. M c Q u a i g , 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 2 6 5 . M o r e o v e r , t h e L i b e r a l G o v e r n m e n t knew a b o u t t h e s e a b u s e s w i t h i n t h r e e t o f o u r m o n t h s o f t h e p r o g r a m 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 c h o s e t o do n o t h i n g a b o u t 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 . In 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 that f a l l , the  latter  that are  of 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 the  GAAR, f o r r e a s o n s g i v e n  below.  section  a  245  subsection  repealed  55(1)  I t should  number  of  be  noted t h a t the  general  dealing with a r t i f i c i a l  rules,  245(1.1) 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  247(1) d e a l i n g w i t h it  dividend  t r a n s a c t i o n s and  stripping.  Despite  new  namely  c a p i t a l gains or a d d i t i o n s t o c a p i t a l l o s s e s ; subsections and  new  in  245(1)  subsection  their  repeal,  i s s u b m i t t e d t h a t s u c h p r o v i s i o n s c a n 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 of the  new  obtained  their  from  s e c t i o n 245. substance  c o n c e p t s a r e u s e d i n t h e new interpretation  and  For  process  e x a m p l e , g u i d a n c e may  (particularly  i f  be  analogous  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 , of  development.  But  a  word  of  caution i n using these p r o v i s i o n s f o r the purposes of f u r t h e r i n g o u r u n d e r s t a n d i n g o f t h e new i n f l u e n c e d by,  and  therefore should  the  external conditions  not  proposed  that  s e c t i o n 245  these  prevalent general  p a r t i c u l a r , t h e i r relevance  be  - t h e s e r u l e s were a l s o interpreted in light  at the  relevant  anti-avoidance  t o t h e new  time. rules,  s e c t i o n 245,  be  of,  It is and  in  discussed  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 business c o m m u n i t y 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 p r o g r a m , e s p e c i a l l y s i n c e i t had o n l y b e e n i n t r o d u c e d a few m o n t h s e a r l i e r : i b i d , a t 269. Consequently, the government's arguments r e g a r d i n g the i n a d e q u a c y o f s p e c i f i c r u l e s a r e n o t a s c l e a r - c u t a s i t makes out. 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 c h a s 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 . the  2 The m o s t n o t a b l e b e i n g s e c t i o n 245, s u b j e c t matter of t h i s paper.  the p r o v i s i o n forming  in  this  thesis  literature  due t o s p a c e  h a s been  written  constraints. on t h e s e  A  great  sections,  deal  of  and i t i s t o  these that t h e reader i s directed.'  In a d d i t i o n , various  j u d i c i a l doctrines  have developed over 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 m o s t 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 substance over form d o c t r i n e , t h e step doctrine, Stuhart"* unless  the business  purpose  test  interpretive guidelines.^  a n d , more  Moreover,  transaction  recently, the  these  doctrines,  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 h a v e n o t b e e n s u p p l a n t e d b y s e c t i o n 245.  I tis  therefore  f e a s i b l e t h a t t h e y may b e a r g u e d i n t a n d e m w i t h t h e p r o v i s i o n i f a case regarding  i t s a p p l i c a t i o n ever reaches t h e courts.  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 aforementioned general provisions, see B.J. Arnold & 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 8 4 2 - 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 ) , s e e , K e l l o u g h , supra, note 1 a t 2339; s u b s e c t i o n 2 4 5 ( 1 . 1 ) , s e e W. T e m p l e t o n , " A n t i - A v o i d a n c e a n d t h e C a p i t a l G a i n s E x e m p t i o n : P a r t Two" (1986) 34 Canadian Tax Journal 446 a t 447-450 a n d s e c t i o n 2 4 7 , s e e T e m p l e t o n , i b i d , a t 450-4. 294,  ^ 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 84 D.T.C. 6305 (S.C.C.) [ c i t e d t o D.T.C.]  [ 1 9 8 4 ] C.T.C.  5 For a general discussion of these various doctrines, 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 a n d 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 business purpose t e s t i n t h e Stubart case, see i n f r a , note 7 and accompanying t e x t . The s u b s t a n c e o v e r f o r m d o c t r i n e was o m i t t e d f r o m 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 (notwithstanding t h e s u b s e q u e n t d e c i s i o n o f R. v . B r o n f m a n T r u s t [ 1 9 8 7 ] 1 S.C.R. 32) .  main  value of  these doctrines  in relation  to  section  245  is  t h e i r r e f l e c t i o n of the t r e n d of j u d i c i a l a t t i t u d e s towards t a x avoidance.  However, detail,  although these i t i s proposed  analysis justified widely  i n greater on  the  judicial that  a p p l i c a t i o n ' ' ) was  The  that  accepted, rejected  are  not  discussed  the business purpose  depth.  basis  tests  the  a  singling Stubart  out  of t h i s  case  business purpose  test  (which,  test  is  i t is  of general  Accordingly, i t incorporated the  b u s i n e s s p u r p o s e t e s t w i t h i n s e c t i o n 245,' a l b e i t , form as a bona f i d e p u r p o s e  test.^°  validity  verification  this  merits  i d e n t i f i e d by t h e g o v e r n m e n t a s a n i m p e t u s f o r  t h e i n t r o d u c t i o n o f t h e GAAR.°  of  test  in  apparent  in a  However, d o u b t s of  the  diluted  as t o the  necessity  of  ' " I would therefore reject the proposition that 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 o n 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, S e e , a l s o . Dodge, supra, n o t e 1 a t 4.  supra,  n o t e 1 a t 129.  ' Paragraph 245(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 c h a n g e d t o a n o n - t a x p u r p o s e 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 w e r e n o t c a r r i e d out 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 tax 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: the D e p a r t m e n t , 16 December, 1 9 8 7 ) . H o w e v e r , t h e b o n a 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 the business purpose t e s t i n a l l other 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 M o r e C o h e r e n t A p p r o a c h 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 . test the  d i d not exist  F i r s t , i t i su n c l e a r t h a t a business purpose i n some s e n s e p r e - G A A R . "  g o v e r n m e n t was t h a t  concerned  about  Furthermore, i f  the rejection  of the  b u s i n e s s p u r p o s e t e s t , why d i d i t w a i t s o l o n g t o i n t r o d u c e o n e 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  was r e l e a s e d  b y t h e Supreme C o u r t  o f Canada  decision  on 7 June 1984.  H o w e v e r , t h e g o v e r n m e n t d i d n o t i n t r o d u c e t h e GAAR u n t i l three  years  later  as p a r t  o f t h e 1987 t a x r e f o r m  some  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 C a n a d a a f t e r t h e Stubart decision. I t i s clear f r o m 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 b y E s t e y , J . t h a t t h e t e s t w o u l d 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 f o 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) h a s b e e n 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. Timbrell, "Planning After the Stubart Decision: the B u s i n e s s P u r p o s e T e s t " i n Report of Proceedings of the ThirtySixth 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 : C a n a d i a n T a x F o u n d a t i o n , 1987) 89 a t 1 0 2 - 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 p u r p o s e t e s t i s e v i d e n c e d b y s t a t e m e n t s made b y o n e D e p a r t m e n t 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 case 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 b y 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 C a n a d i a n T a x F o u n d a t i o n : f o r e x a m p l e , S.E. E d w a r d s , 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 7 8 ; W.J.A. H o b s o n , "New G u i d e l i n e s f r o m t h e Supreme C o u r t o f C a n a d a a n d O t h e r 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 d a n c e a n d E v a s i o n : t h e W o r l d B e y o n d Stubart", i b i d , a t 105 a n d T i m b r e l l , ibid.  period  still  questioned  seems  whether  excessive  Furthermore,  the business  purpose  test  i t may  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 GAAR J '  Overall,  these factors  c a s t doubts  valid  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  justification  i n the  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 p u r p o s e t e s t i n Stubart consequent  be  and t h e  t h e GAAR was a  for the introduction of the rule.  H o w e v e r , o n e may a r g u e t h a t i t was n o t t h e Stubart case 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 tax 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 b e t w e e n Stubart a n d t h e GAAR a s 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 determine t h e e f f e c t s o f t h e case, r a t h e r than j u s t t h e case itself. S e e , f o r e x a m p l e , D.A. Ward & M.C. C u l l i t y , "Abuse o f R i g h t s a n d t h e B u s i n e s s P u r p o s e T e s t " (1981) 29 Canadian Tax Journal 451 a t 4 7 3 : The introduction o f t h e business purpose test 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 C a n a d i a n income t a x l a w .... A s 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 demonstrated, 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 w o u l d be o n e 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 p u r p o s e t e s t h a s n o t h i n g t o commend it. [ 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 Estey, 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 , s e e , 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 P u r p o s e T e s t " i n Report of Proceedings of the Thirty-Ninth Tax Conference, 1987 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 T a x F o u n d a t i o n , 1988) 1 0 : 1 a n d J.R. H e l l e r s t e i n , " J u d i c i a l A p p r o a c h e s t o T a x 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 : C a n a d i a n T a x F o u n d a t i o n , 1964-5) 62 a t 6 6 . H e l l e r s t e i n was r e f e r r e d t o b y E s t e y , J . i n Stubart at 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  conclude,  historical  i t i s submitted context  of  that the primary  section  245  is  i n f l u e n c e of  the  fact  that  the  these  s t a t u t o r y a n d j u d i c i a l a n t i - a v o i d a n c e m e a s u r e s p a v e d t h e way the i n t r o d u c t i o n of the r u l e .  I t was  thus p o l i t i c a l l y  for  feasible  f o r t h e g o v e r n m e n t t o e n a c t t h e GAAR a s o b v i o u s l y t h e e x i s t e n c e of former  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 m e a n t t h a t i t was  not such a g r e a t s t e p forward f o r t h e government t o propose rule,  compared  with  the  countenanced t a x avoidance introduce  section  anti-avoidance proposed  by  g o v e r n m e n t was would  be  aims.  most  Moreover,  measures  to  decide  appropriate the  purpose  case  which  i n the  the  example,  then  suddenly,  the  against  government in  for  the  influenced  government:  able  Finally,  business  b e f o r e , and  245.  the  position,  previously format such  concepts  Stubart  the  impetus f o r the i n t r o d u c t i o n of the r u l e . been  cast  reasons:  on  this  proposition, primarily  tried  to  the  rule the  and  terminology  of  i t s desired  rejection  case  i t  backdrop,  achievement cited  had  enunciated  of  a  the  as  of  providing  the an  However, d o u b t s have for  the  following  i t i s n o t c l e a r t h a t s u c h a t e s t d i d n o t e x i s t i n some  s e n s e pre-GAAR; t h e d e l a y b e t w e e n t h e c a s e and  the 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 p u r p o s e t e s t a s an a n t i - a v o i d a n c e m e c h a n i s m .  C. SOCIAL AND POLITICAL HISTORICAL BACKGROUND The m o s t 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 exercise  were  culminated  t h e t a x reform  nine  years  Commission Report) former  Finance  o f debate  legislation  a n d was b a s e d  and t h e changes proposed  Minister,  of  i n 1981.  Both  1971  (which  on t h e C a r t e r  by A l l a n MacEachen, these  t a x reform  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 c o m p a r e d w i t h t h e f o r m a t w h i c h was f i n a l l y  enacted.  This  d i l u t i o n h a s g e n e r a l l y been r e c o g n i s e d a 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 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 interest  groups.  regarded  as  a  Consequently, politically  t a x reform  dangerous  governments t a k e on a t t h e i r p e r i l . ' " ^ government  in  1987  was  influenced  has  long  been  —  one  that  issue  I t i s submitted that the by  these  tax  reform  experiences, 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 a n d , 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 p a c k a g e .  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 Can i t Be D o n e ? " , i n The Quest for Tax Reform, e d . W.N. ( T o r o n t o : C a r s w e l l , 1988) 343 a t 3 4 3 .  State: Brooks  ^5 F o r e x a m p l e , 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 M a c E a c h e n : G. P i t t s , "'We N e e d A l l T a x Elements o n Same T r a c k ' : Interview with Michael Wilson" Financial Post (2 A u g u s t 1986) 4. I n p a r t i c u l a r , h e 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 inadequacy o f t r a n s i t i o n a l e l e m e n t s . He c o m m i t t e d h i m s e l f t o n o t r e p e a t i n g these mistakes: ibid.  The  f i r s t m a j o r 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 A  synopsis  of  the  b r i e f l y given.  The  events  which  surrounded  C a r t e r i n A u g u s t 1962.  The  to  the  r e v i e w b o d y was a  prominent  who  the  June  1962  and  election,  by  businessman, the  late  t o h a v e on  "surplus-stripping"  such  a promise  Notably, i n  e x t r a c t e d from 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  to various issues,  their  Senator their  was  to  Wallace  Cabinet.  McCutcheon, McCutcheon's  t h e p r e s s u r e e x e r t e d on  b u s i n e s s community.  This  then  tax professionals f e l t  their  being  touted  business  and  and (in  personal reputations  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 The  him  pressure  f o r example, h i g h r a t e s of t a x schemes  s c h e m e s ) . 1^  M.  a  p a r t y wished  particular,  Royal  s e t up  by t h e t a x p r o f e s s i o n a l and  the  is  o f K e n n e t h Le  and n a r r o w l y b a s e d .  reason f o r seeking t h i s promise  related  process  impetus f o r the establishment of the  C o m m i s s i o n was m o s t l y p o l i t i c a l run-up  this  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  C o m m i s s i o n on T a x a t i o n u n d e r t h e c h a i r m a n s h i p  the  legislation/'  professional  of  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 R e f o r m : 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 1 9 5 - 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 a n d 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. H e a d , "The C a r t e r L e g a c y : 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. H u g g e t t , "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 3 8 1 ; L. M a c D o n a l d , "Why t h e C a r t e r C o m m i s s i o n Had t o be S t o p p e d " , i b i d , a t 3 5 1 ; P.R. M c D a n i e l , "The I m p a c t o f t h e Tax E x p e n d i t u r e C o n c e p t on Tax R e f o r m " , i b i d , a t 3 8 7 ; L. M c Q u a i g , Behind Closed Doors: How The Rich Won Control of Canada's Tax System ... And Ended Up Richer (Markham, O n t . : V i k i n g , 1987) c h s . 5-7. Hartle, ibid,  a t 401  and M c Q u a i g , i b i d ,  at  131.  favoured reform  an  independent,  the  particular.  tax  technically  system,  qualified  addressing  A R o y a l Commission  c o m p o s i t i o n o f t h e Commission  the  instrument t o  above  issues  appeared t o be t h e answer.  in The  r e a s s u r e d these communities as a l l  t h e members w e r e c o n n e c t e d w i t h b u s i n e s s o n e way o r another.''^  However, d e s p i t e t h i s , results  i t was e x p e c t e d t o .  February against  t h e Commission  1967, a d v o c a t e d the interests  a  d i d n o t come up w i t h t h e  Instead, system  i t s report,  which  of business.  would  released i n  work  In particular,  the g u i d i n g p r i n c i p l e o f a comprehensive  directly  i t adopted  income base.  I t stated  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 s y s t e m was t o " s h a r e t h e burden  of  the  families".^'  state  This  fairly  would  have  p r i v i l e g e s t h a t permeated  among  a l l individuals  entailed  t h e t a x system.  and  eliminating  special  F o r example,  special  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. Furthermore, sought  t o make  industry. burdens  by  eliminating  t h e t a x burden  (Previously,  between  recommendations  key  more  have  sectors  Commission through-out  i n the level  prevailed.)  achieved  the  consistent  great d i s p a r i t i e s  different would  deductions,  greater  of tax  Overall, vertical  the  equity  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° M a c D o n a l d ,  supra,  ^' C a r t e r C o m m i s s i o n  n o t e 16 a t 353 a n d M c Q u a i g , i b i d , a t 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  classes.  Therefore,  i t would  have  r e d u c e d t a x e s ( b y a t l e a s t 5 p e r c e n t ) f o r a b o u t 64 p e r c e n t o f Canadian  taxpayers.  However,  those adversely  affected  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 g r o u p s o f t a x p a y e r s .  Initially and  t h e r e s p o n s e t o t h e R e p o r t was  favourable  -  The  Globe  and  mostly both extensive  Mail  being  the  prominent  e x c e p t i o n . T h e r e a f t e r , coverage 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  turned  t o anger  Carter  recommendations  business quoted  f o r years.  - newspapers would  perspective.^^ as  surprised  saying, me].  daily lead  Harvey  " I t wasn't  I t was  the  However,  the  ran a r t i c l e s to ruination,  Perry so  and  the  soon  a b o u t how albeit  (Commission  much  violence  reaction  the  from  member)  reaction  virulence  a  was [that  of  it."^^  2" F o r e x a m p l e , 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 in excess of $300,000 the r e c o m m e n d a t i o n s w o u l d h a v e r e s u l t e d i n t h e m 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 . M a c D o n a l d , supra, note 16 a t 360. The b u s i n e s s c o m m u n i t y w o u l d h a v e p a i d a b o u t 28 p e r c e n t more t a x a s a r e s u l t o f t h e C a r t e r r e c o m m e n d a t i o n s . MacDonald, i b i d , a t 3 39. H a r t l e , supra, at  n o t e 16 a t 412 and M c Q u a i g , supra,  150. 2' H a r t l e ,  ibid.  M c Q u a i g , supra, n o t e 16 a t 1 5 1 . Quoted i n McQuaig, i b i d .  n o t e 16  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 o n e . by  asking  for  submissions  i n d i v i d u a l s . 27  i t received  I t cautiously  from  interested  some  nine  responded  groups  hundred  and  briefs.^^  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 white paper b e i n g produced which greatly  diluted  the Carter  recommendations.2'  However,  rather  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 p a p e r was met  with  could  screams  be  o f a n g u i s h a n d dismay.'°  dismissed  suggestions  of  on  the  Commissioners  unrepresentative.  basis who  that were  H o w e v e r , t h e same c o u l d  The C a r t e r i t was  report  only  wild  unrealistic  and  n o t be s a i d  of the  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 p a p e r w h i c h were utilised Finance  as forums Minister  f o rspecial  Edgar  Benson  i n t e r e s t groups. tabled,  I n June 1971,  as an appendix t o t h i s  budget statement, a d r a f t o f t h e proposed l e g i s l a t i o n which 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 a n d 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 , 2° M c Q u a i g ,  supra,  supra,  n o t e 16 a t 1 9 5 . n o t e 16 a t 157-8.  2' F o r e x a m p l e , i t d i d p r o p o s e t h a t c a p i t a l g a i n s b e t a x e d a n d 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 given f o r corporate taxes paid. 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 of 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 4 1 2 . S e e , a l s o , M c Q u a i g , ibid, a t 159-63. H a r t l e , ibid,  a t 413.  incorporated received  the  in  Department's  respect of  the  response  white  to  paper.  the  submissions  This  legislation  c o n s t i t u t e d a major r e t r e a t from the w h i t e paper, which i n t u r n , had  been a massive  the  failed  retreat  from t h e C a r t e r Report.'^  implementation of  the  Carter  In  all,  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 who  pressurized  the  government  into  repeatedly  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 p a p e r  groups  retreating  on  proposals.'^  The g o v e r n m e n t 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 s y s t e m i n 1981. At  that  time  government  t h e r e was  that  tax  a  general feeling  e x p e n d i t u r e s had  to  within be  the  Liberal  curbed.''  This  p e r c e p t i o n o r i g i n a t e d i n a d o c u m e n t , "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 b y t h e C o n s e r v a t i v e g o v e r n m e n t i n 1979 t h e amount o f r e v e n u e some $32 b i l l i o n . ' ^  back  on  detailed  being l o s t through various t a x breaks  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  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 r e v e n u e s - t h i s was cutting  which  spending plans.  '^ H a r t l e , i b i d ,  at  Moreover,  preferable  an to  t h e government d i d  413.  '^ G i l l i e s , supra, n o t e 14 a t 343. H o w e v e r , 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 implementation. For 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 p r o c e e d e d on t h e a s s u m p t i o n t h a t the 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. "  M c Q u a i g , supra,  '^ M c Q u a i g , i b i d ,  n o t e 16 a t at  216.  217.  not  think  that  intense.'5  the  Consequently,  Minister, introduced, proposals  reaction  business  Allan  MacEachen,  However,  proposals  the  reinvigorated  Furthermore, the  Tory  the  c o m m u n i t y , an a g g r e s s i v e  press  and  well  opposition  s i t u a t i o n was  the  proposals.'2  received.  began  almost  The  claimed  extent  of  t o be the  c a u s e d t h e g o v e r n m e n t t o r e t r e a t somewhat a n d crucial tax  tax  incentives  reform  immediately.'^  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  of  1981  by  fact,  e c o n o m i c c o n d i t i o n s w h i c h was  interest  Finance  In  of  a  then  that  corporations.''  were not  a s s a u l t by a f u r i o u s b u s i n e s s  Again,  be  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 i n d i v i d u a l s and  the  would  a s p a r t o f t h e f e d e r a l b u d g e t , a number o f  high-earning  a  from  which  attempt  had  i t had been  a direct result backlash  finally  t o r e t a i n many o f sought  to  remove.  thwarted  by  special  groups.  '5 M c Q u a i g , ibid,  at  217.  " M c Q u a i g , ibid, a t 221-3. F o r e x a m p l e , 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 b o r r o w e d 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 " tax breaks be eliminated and restrictions on charitable f o u n d a t i o n s be t i g h t e n e d . '^ M c q u a i g , ibid, M c Q u a i g , ibid,  a t 22 3. at  231-2.  I t i s submitted t h a t both these t a x reform e x e r c i s e s i n f l u e n c e d the  1987 t a x r e f o r m  impact  proposals."  In particular,  on t h e s t r a t e g y t h e government adopted  determined  they  which  had an  ultimately  t h e s t r u c t u r e o f t h e t a x reform package t o a c e r t a i n  extent.  One m a j o r i n f l u e n c e o f t h e s e t w o e x p e r i e n c e s was t h e e x t e n t t o which  t h e government  obtained  the input  groups i n p r e p a r i n g t h e i n i t i a l documents. 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.  of special  interest  This i sreflected i n  F o r example, t h e C a r t e r  C o m m i s s i o n , 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 s o 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 from se  the p o l i t i c a l  take  process.  the interests  positively  Therefore, t h e Report  of business  w e n t a g a i n s t them.^°  into  account,  isolated  d i d not per indeed, i t  The same i s t r u e o f t h e 1981  F o r e x a m p l e , 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 o n t h e m i n d s 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 T a x R e f o r m 1 9 8 7 . " H. S o l o m o n , " W i l s o n L e a r n e d f r o m M a c E a c h e n ' s F i a s c o " Financial Post (22 J u n e 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 c o m p a r e d w i t h t h e 1987 r e f o r m s , s e e G i l l i e s , supra, n o t e 14 a t 3 4 5 - 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 b a s e 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 c h a n g e s 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 n e e d o f t h e g o v e r n m e n t f o r a d d i t i o n a l revenue ( i t was c l a i m e d t h a t t h e g o v e r n m e n t r e q u i r e d more r e v e n u e i n 1987 c o m p a r e d w i t h i n t h e 1 9 7 0 s . This i s reflected i n t h e 1987 t a x r e f o r m p a c k a g e ( a t l e a s t S t a g e 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 o u t 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 later. 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 revenues would outweigh  budget p r o p o s a l s . to  special  pressure  interest  as  interests  essence, the  the  The  previous  proposals, reforms.  likelihood was  an  not  of  and  p a p e r as  measures.  weighted  in The  incorporated  the  high-income earners.  In  business  not  package.  accepting  e x e r c i s e s , and  i m p a c t on  the  in particular,  presentation  of  as w h i t e p a p e r documents.  the  F o r example, as  t h e C a r t e r R e p o r t , t h e g o v e r n m e n t ' s r e s p o n s e was  t h e 1981  to  In p a r t i c u l a r , they prompted the government t o  i t s proposals  white  succumb  the  g r e a t l y reduced.  tax reform  had  was  listened  reform proposals.  before-hand  s e c t o r and  not  papers c o n s t i t u t e d a compromise  the  proposals  did  package which  widely  business  white  Consequently, initial  a  i t obviously  Compare t h i s w i t h t h e 1987  consulted of  presumably the government  groups,  i t produced  t h e i r favour. government  Although  a means o f c o n t i n u i n g d i s c u s s i o n .  the  1981  1987  tax  present regards  to introduce  a  In contrast,  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 According  to G i l l e s p i e ' s theory,  this indicated that  the c o s t s of not r e d u c i n g (or even a d d i n g to) t h e d e f i c i t ) ; t h e growth i n understanding t h a t the 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 c o m p a r e d w i t h C a r t e r ) and t h e U.S. reforms which h a d t a k e n p l a c e by t h e t i m e o f t h e 1987 reforms. ^1 S o l o m o n , supra,  note  39.  T h e s e 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 M c Q u a i g who claims 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 w e r e n o t c h a n g e d 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 a n d 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 w e r e s t r u c t u r e d t o be favourable to the 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 .  the  government wished  documents  were  l e g i s l a t i o n was p r o p o s a l s was  t o k e e p d i s c u s s i o n t o a minimum.^'  substantially introduced.  revised  before  Both  implementing  However, t h e a l t e r a t i o n o f t h e  more p o l i t i c a l l y  embarrassing  1981  f o r t h e government.  The r e t r e a t f r o m 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 political  costs  f o r the  perceived  strength  of  government  the  ( f o r example,  government  to  stand  i n terms  up  to  of  special  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 , which  are  place.  theoretically  Consequently,  only  discussion points  t h e g o v e r n m e n t i n 1987  was  i n the  first  encouraged  to  i n t r o d u c e i t s t a x reform proposals i n the form of white  papers.  It  already  d i d so  despite the  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  t a k e n p l a c e and t h e d e f i n i t e a n d p r e c i s e n a t u r e o f t h e i n Stage  proposals  One.  These p r e v i o u s t a x reform attempts  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  Both t h e i n i t i a l documents of  the  previous  presented  tax  package.  reform  i n secrecy.  experiences  Therefore,  were  taxpayers  formulated  (including  and  special  i n t e r e s t g r o u p s ) w e r e n o t 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 a c c u s t o m e d t o t h e new  proposals.  r e c e i p t of advance feedback  Gillespie,  supra,  Moreover, t h i s precluded  on t h e p r o p o s a l s .  note  16 a t  194.  any  In c o n t r a s t , the  government surprises  i n 1987  was  careful  i n t h e 1987 e x e r c i s e / ^  not t o  avoid  F o r example,  creating  any  i tl e t details  of 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 final  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.  It  was  to  claimed  MacEachen's  that  the  proposals  equitable.^'  transitional  were  Consequently,  many t r a n s i t i o n a l  elements  not s u f f i c i e n t l y  relating  thought  o u t and  t h e 1987 m e a s u r e s c o n t a i n e d a g r e a t  provisions.  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 i n c o m e t a x r a t e s w e r e n o t e f f e c t i v e u n t i l J u l y 1988 t o enable  employers  broadening  t o g e t used  t o them a n d many c o r p o r a t e  measures were p h a s e d - i n  g r a d u a l l y over  base-  a period of  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 t w o m o s t r e c e n t a t t e m p t s a t tax  refo^rm,  the Carter  Commission  Report  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 a s p a r t of  t h e 1981 f e d e r a l  exercise. strategy structure  budget,  influenced  t h e 1987 t a x r e f o r m  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 h a d a n i m p a c t on t h e adopted of  by  t h e government,  the t a x reform  M i c h a e l Wilson quoted  and u l t i m a t e l y ,  package.  i nPitts,  supra,  '^5 J . R u i m y , " W i l s o n F a c e s B i g S e l l i n g Toronto Star (20 J u n e 1987) B l & B4 a t B l . Michael Wilson quoted  i nPitts,  supra,  These  past  on t h e reform  n o t e 15. J o b on Tax Reform" n o t e 15.  exercises  prompted  interested  groups  the  government  to  and t o i n c l u d e t h e i r  consult  widely  concerns,  to a  e x t e n t , i n t h e p r e p a r a t i o n a n d f o r m u l a t i o n o f t h e 1987 This  influenced  such  the eventual structure  consultation  and  incorporation  proposals being weighted high-earning experiences reforms had  have  the p o l i t i c a l  these  concerns,  resulted  i n the  as  1987  these  tax  reform  t h e government t o i n t r o d u c e t h e  documents.  consulted w i d e l y beforehand  about  package.  of t h e t a x reforms  Furthermore,  induced  as white paper  certain  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  individuals. may  with  Even though  t h e government  (so presumably  h a d some  idea  c o s t s i n v o l v e d ) a n d i n c o r p o r a t e d some o f  i t still  opted  f o r the presentation of the  p r o p o s a l s as white papers.  I t i s f e l t t h a t t h e g o v e r n m e n t was  proceeding  as  as  cautiously  possible.  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 h a d r e s u l t e d in  major  revision  of the i n i t i a l  (and even subsequent,  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 November papers  1969) d o c u m e n t s .  i s politically  less  Substantial costly  than  i nthe  released i n  alteration  of  white  significant  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.  Therefore,  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 method  and c o n s e q u e n t l y  Finally, reforms  t h e 1981 by  transitional  opted  budget  encouraging provisions.  f o r the white  proposal  paper  influenced  t h e government  safe  mechanism.  t h e 1987 t a x  t o introduce  adequate  Overall,  i t is fair  experiences reform  exerted  exercise.  government adopted to  to a  say  that these  degree  of  This manifested  two  recent  i n f l u e n c e over itself  the  i n the  i n f o r m u l a t i n g t h e package and,  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  tax  measures.  reform  1987  strategy  tax the  ultimately,  CHAPTER VI CONCLUSION The 245  c e n t r a l theme o f t h i s p a p e r h a s b e e n t h e a n a l y s i s o f s e c t i o n o f t h e Income  extended  general  Tax A c t .  This  anti-avoidance  provision  rule  into  introduced  Canadian  tax  an law.  E x c l u s i v e f o c u s o n t h i s s e c t i o n i s j u s t i f i e d when o n e c o n s i d e r s that  i t h a s 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  t h e A c t s i n c e i n c o m e t a x was f i r s t  change t o  i m p o s e d i n 1917.^  I t was f e l t t h a t t h e m e t h o d o l o g y a d o p t e d i n t h e a n a l y s i s o f t h i s rule  should  go  considering  beyond  technical  the traditional  tax policy  means  provisions.  employed This  usually  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  equity,  efficiency  and s i m p l i c i t y .  been d i s c r e d i t e d  i n recent times,  they  account  do n o t t a k e  Consequently, grounded such  i n the politicization  particular, discipline  a  c a n be found  body  employed of tax.  generally  tools  -  have  on t h e b a s i s t h a t oftaxation.  i n this Support  thesis for  i s  adopting  literature.  has developed known  approach  standards  such  aspect  i n existing  of literature  o f economics,  economy o f t a x a t i o n .  primarily  of thepolitical  t h e methodology  an approach  However,  i n  In  within the  as t h e p o l i t i c a l  I t i s f e l t that t h i s theory i s relevant 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  element.  More  F o r e x a m p l e , E. Roseman, " A n t i - A v o i d a n c e Law I r k s T a x 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 lawyer, 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 m o d e l d e v e l o p e d b y H e t t i c h and  Winer.  because  T h i s m o d e l was  of i t s incorporation  assumption  that  interested  d e c i s i o n making.  factors, which  give  rise The  to  'voice'  i s a natural  The  outcome o f  model i n t e g r a t e s  equilibrium  of  self-  a number o f  political  element, costs  and  equilibrium.  t h e model can a s s i s t i n e x p l a i n i n g  reform.  and i t s  self-interest behaviourial  an  useful  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 ,  reflects this  Moreover,  this  t h e most  of the p o l i t i c a l  the t a x system  including  benefits.  tax  c o n s i d e r e d t o be  the  incidence  In p a r t i c u l a r , tax reform i s the r e s u l t of  t o the system which n e c e s s i t a t e  of  shocks  re-establishing the equilibrium  by t h e a d j u s t m e n t o f r e v e n u e 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 to  say  that  government's  utilise  attempting to r e t a i n o f f i c e .  tax  reform  as  a  means  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 the f o u n d a t i o n of the methodology in  this  paper.  taxation outcome  is of  followed.  a  I t i s against  analyzed.  of which  this section  and  the  background 245  concepts  i t i s the of  was  an  adopted that  equilibrium  government  that  the  are  1987  tax  integral part,  is  In p a r t i c u l a r , the factors causing i t s introduction  i d e n t i f i e d and e x p l a i n e d .  made t o 245.  process  s e l f - i n t e r e s t e d behaviour  r e f o r m package,  are  In p a r t i c u l a r , i t s fundamental political  of  i s o l a t e those  In  summary,  the  F u r t h e r m o r e , an a t t e m p t has  f a c t o r s which were s p e c i f i c t o tax  reform  package,  and  the  been  section rule  in  particular, identify their  were  the  analyzed  within  their  relevant  contexts  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  introduction  and  determining  their  to  prompting  presentation  and  factors,  i t  is  first  be  structure.  However,  before  proposed  that  discussed.  going  the  The  two  their  self-interest s u c h as  and  of  s t a t u t e and  As  In  legislative therefore  the  latter  governments  are  seeking  - not  maximizing  promote  accorded  to  these each  two  that  according  and  o f t h e s e two  to  that are  The  and  former  a  to  its  retain support groups.  components  depends  on  the  basic  office. with  the  the  creature  of  process.  is  that  involves  electorate  two and  Governments u s u a l l y attempt simultaneously. external  The  t h e GAAR i n p a r t i c u l a r  weight  conditions,  economic environment.  competing components.  in  fairly  are  thrust This  is a  social  is  statutes  i s purely  its  tax  acting  general  states  Tax  premise,  e x a m p l e , t h e s o c i o - p o l i t i c a l and r e f o r m p a c k a g e and  first,  equity.  bodies.  paper  governments  democratic  placating special interest to  this  i s a product of t h i s p o l i t i c a l  regards  strands:  these  underlying  second,  efficiency  self-explanatory. creation  outline  main assumptions are  process  criteria  to  assumptions  political own  on  The  for tax  a r e good i l l u s t r a t i o n s  For example, the t a x  reform  p a c k a g e was p r e s e n t e d a s b e i n g f a i r t o b e 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  interest  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  It  i s now  proposed  discussed  that  to illustrate  the different their  individuals.  contexts  i n f l u e n c e on  groups,  be  briefly  t h e t a x reform  e x e r c i s e , a n d 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  introduction,  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 reform  p a c k a g e a n d 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 p a c k a g e 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 G o v e r n m e n t was  facing  Although  a  this  federal time  election  sometime  within  i s more v i a b l e  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  proposals going  electoral the  and t h e g e n e r a l  t o be  called  support  beginning  regarded  public  was f l a i l i n g  this  Moreover,  was  government's  F o r example, a t  i n the polls  with  only  Therefore, thetax reform exercise  by t h e government Consequently,  a s a means o f b o l s t e r i n g i t s t h e government  t h e package as promoting  concept  of the  the election the  a t t h a t time.  o f 1 9 8 7 , i t was t h i r d  support.  presented  expectation that  i n 1988.  twenty-two p e r cent support. was  years.  f r a m e may seem e x c e s s i v e a n d 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 if  two  a fairer  produced  system.  and  Although  was s t a t e d a s c o m p r i s i n g a number o f f a c e t s , t h e  one m o s t h e a v i l y r e l i e d u p o n was t h e p r e m i s e  t h a t t h e t a x burden  w o u l d be  shifted  from  c o r p o r a t e s e c t o r and projected through  The  low  and  middle-class individuals  high-earning individuals.  to  the  T h i s image  was  v a r i o u s means.  f i r s t method by w h i c h t h e government promoted t h e  s h i f t i n g t h e t a x b u r d e n was proposals.  image o f  i n the s t r u c t u r e of the tax  P r i m a r i l y , i t lowered the t a x r a t e s f o r the m a j o r i t y  of taxpayers. benevolence  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 towards  the  government.  Moreover,  s t r u c t u r e d t o maximize p o l i t i c a l  appeal.  savings  a  were  spread  thinly  over  reduction  of  the  r a t e s was  timed  l a r g e volume  effective  from the beginning  so  they  of  Furthermore,  expected.  t o encourage the v o t e r s t o  g o v e r n m e n t a l s o s o u g h t t o p r o m o t e an  supposedly increase earning  complementing i n the  tax  individuals.  these  burden In  of  tax the  other  r e f o r m p r o p o s a l s i n s u c h a way  cuts  with  corporate  words,  a  the  re-elect lost.  fairness  by  correlating  s e c t o r and  i t presented  high-  the  tax  to f o s t e r the impression t h a t the  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 increases.  image o f  be  federal  t o be g i v e n  t h e g o v e r n m e n t t o e n s u r e t h a t t h e r e b a t e w o u l d n o t be  The  were  the savings would not  A l s o , a t a x r e b a t e was  spring, arguably  the  they  f e l t u n t i l J u l y of t h a t year - around the time t h a t the e l e c t i o n was  tax  taxpayers,  that, although  o f 1988,  were  For example, t h e  namely e i g h t y - f i v e p e r cent of a l l t a x p a y e r s .  following  reform  f u n d e d by  corporate  tax  F o r e x a m p l e , 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  tax  r a t e s f o r low and m i d d l e - c l a s s  parallel  t o the corporate  broadening  measures  r e f o r m documents. of  this  image  were  i n d i v i d u a l s were  measures  presented  and t h e c o r p o r a t e  constantly  base-  highlighted i n the tax  However, i n economic t e r m s t h e f a l l a c i o u s n e s s  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 v e n u e s - t h e y r o s e f r o m 15.6% t o 17.2%. However, savings  this to  was  not nearly  ordinary  sufficient  taxpayers.  The  t o finance  increase  in  the tax corporate  r e v e n u e s o n l y amounted t o a b o u t 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 of  the  personal  reductions sales  income  tax  were p r i m a r i l y  reductions.  funded  reinforces  the  proposition  g o v e r n m e n t was s i m u l t a n e o u s l y p r o m o t i n g t a x reform package - maximizing s p e c i a l i n t e r e s t groups. fairer  system,  the underlying  favoured  the corporate  stated  reform  elements.  package  above  state of that  the  two o b j e c t i v e s w i t h t h e  e l e c t o r a l support and p l a c a t i n g  attempting  t o maximize  s t r u c t u r e was e s s e n t i a l l y sector t o a great  extent.  w i t h w h a t a p p e a r s t o be some a s t u t e p o l i t i c a l tax  This  By p r e s e n t i n g t h e r e f o r m s a s p r o m o t i n g  i t was  However,  these  by i n c r e a s e s t o t h e f e d e r a l  t a x and a c c e l e r a t i o n o f t a x payments.  affairs  a  Instead,  accommodates  both  i t s votes. unfair  and  Therefore,  engineering, the  of these  contradictory  Where d o e s 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  played  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 i m a g e o f f a i r n e s s t h a t was  projected  contributed  by t h e government.  to the illusion  g o i n g t o be s i g n i f i c a n t l y  that  the corporate  increased.  I t achieved t h i s  right,  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  Section within  of the plethora  t a x b u r d e n was  own  increased  as part  In particular, i t greatly  i nits  o f b a s e - b r o a d e n i n g measures of the  revenues.  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 i m a g e o f f a i r n e s s i t s own r i g h t .  This  i s inherent  i n the nature of the  r u l e - n a m e l y , 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 . taxpayers their  who u s e a r t i f i c i a l  tax liabilities  t a x avoidance  are those  f o r whom  The  schemes t o r e d u c e i t i s financially  v i a b l e , t a k i n g account, 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 advisors.  Consequently,  a f f e c t the corporate  the provision  will  s e c t o r and high-earning  mostly  adversely  individuals.  This  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 the  government as n o t p a y i n g t h e i r f a i r  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  inclusion  within  measures.  T h e r u l e was a n i n t e g r a l p a r t o f t h e s e m e a s u r e s , b o t h  conceptually  a whole  array  share o f taxes.  and f i n a n c i a l l y .  assisted considerably  of corporate  base-broadening  A s r e g a r d s t h e f o r m e r , t h e GAAR  i n c r e a t i n g t h e image t h a t t h e t a x b u r d e n  was  being  measure  s h i f t e d onto t h e corporate was  continuously  sector.  referred  to  Consequently, t h e  i n the  tax  reform  documents.  As  regards  economic  implications,  validation of the claim  corporate this  the financial  s e c t o r was b e i n g  proposition,  that  increased.  t h e government  previously  greatly  discussed,  contributed  aided  t h e t a x burden  the  of the  I n other words, t o v e r i f y had t o provide  f i g u r e s t h a t t h e b u r d e n was i n f a c t b e i n g as  t h e GAAR  facts  increased,  i t was n o t s i g n i f i c a n t .  i n t h e achievement o f t h i s  and  although,  The s e c t i o n  objective.  As  regards the projected  revenue increases  g e n e r a t e d by t h e base-  broadening  i t was t h e m o s t  financially  Without  measures,  i t , the figures  impressive. projected  F o r example,  of  n o t have  appeared  i n 1989, a b s e n t  i n corporate  nearly  as  t h e GAAR, a n d t h e  revenue would have been i n t h e n e g a t i v e  h a v e b e e n a decrease  The  would  lucrative.  - there  would  t a x e s o f $30 m i l l i o n .  u s e o f t h e p r o v i s i o n i n t h e a b o v e way t o p r e s e n t t h e image 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 .  provided  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  i n c l u s i o n w i t h i n t h e t a x reform package. affected  First, i t  Second,  the c a l c u l a t i o n of the increased  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 .  and i t s  i t arguably  revenue  that the  Third, i t influenced the  response  o f t h e government t o t h e h e a t e d  proposal  was s u b j e c t e d t o .  criticism  which t h e  To  amplify,  t h e whole s o c i a l  an  impetus f o r t h e i n t r o d u c t i o n  within  the t a x reforms.  reform  package.  financially, of  the  greatly,  with  system.  both  of the t a x  conceptually  The government s o u g h t t o  the intention  electorate.  introduction package.  provided  o f t h e r u l e and i t s i n c l u s i o n  I t was a n i n t e g r a l p a r t  I t assisted  a fairer  impression  with  background  These  of the section  of bolstering  factors  help  i n 1987 a s p a r t  explain  the  of the t a x reform  F o r example, i f t h e government had been t h a t  d i d not i t not introduce  Curbing  t a x avoidance  prevalent their  hesitancy  rule  "newspaper  t o s e t down e x t e n d e d  concerned  i t  initiated  i t i s fair  prompted t h e i n t r o d u c t i o n  then date?  had  had  i n this  held  i t s tax  t o say that  earlier  release"  limits  Y e t , t h e government s t i l l  until  Consequently,  the  a t an  f o r some t i m e a n d m o r e o v e r , t h e c o u r t s  years e a r l i e r . ^ the  through  the rule  give  i t s support  a b o u t 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 , why  and  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  promoting  this  and p o l i t i c a l  been  revealed  area  some  o f f introducing  reform  measures.  socio-political  o f t h e GAAR a n d i t s i n c l u s i o n  factors within  t a x reform package.  2 F o r e x a m p l e , t h e Supreme C o u r t o f C a n a d a 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 case [Stubart I n v e s t m e n t s v . T h e Queen [ 1 9 8 4 ] C.T.C. 2 9 4 , 84 D.T.C. 6305 ( S . C . C . ) ] i n 1984.  The  s e c o n d i n f l u e n c e o f t h e s e f a c t o r s o n t h e r u l e was a r g u a b l y  in  relation  increases. likened  to  the  calculation  was  t h e G7VAR, t h e t a s k  increases.  was a g g r a v a t e d  increases  revenue has been in  Moreover, i n r e l a t i o n  due t o v a r i o u s  factors.  base-broadening measures  there  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  which  being  removed  o r trimmed.  assistance  was a v a i l a b l e .  increases  i n relation  circumstances, frequency  With  to the rule  f o r example, t h e e x t e n t  was  based  2 4 5 , no  such  i t i s arguable  that  i t i s foreseeable  that  on  fortuitous  o f f u t u r e abuses and t h e  of the rule.  c a l c u l a t i o n of the increases  example,  section  Furthermore, t h e c a l c u l a t i o n o f t h e  of application  difficulties, the  estimated  t o " w i t c h c r a f t " , ' which does n o t i n s p i r e c o n f i d e n c e  For example, a t l e a s t w i t h other was  the  The c a l c u l a t i o n o f p r o j e c t e d  the accuracy of t h e estimated to  of  In light  of  external  factors  relating  t o t h e GAAR.  the socio-political  these  influenced For  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 (within  reasonable  limits)  the  substantiate  i t s claim of fairness.  is  of  no  way  proving  consequently, t h i s  or  projected  increases  The p r o b l e m i s t h a t  disproving  these  figures,  to there and  proposition.  ' P. DeMont, " T a x B r e a k P r o p o s a l s C r e a t e D e f i c i t H e a d a c h e s : Economy C o u l d b e S a v i o r " Financial Times (23 November 1987) 3.  The  final  245  i s i n relation  process.  influence of the socio-political t o i t s amendment d u r i n g  In particular,  context  the parliamentary  t h e r u l e o r i g i n a t e d as a white  p r o p o s a l a n d was t h u s more s u s c e p t i b l e t o c h a n g e . ^ t h e p r o v i s i o n was s u b j e c t e d primarily this,  from  t o prolonged  t h e p r o f e s s i o n a l community.  w i t h i n i t s passage through Parliament. t h e substance  of  the rule.  exogenous f a c t o r s i n f l u e n c e d t h i s  criticism,  However, alter  paper  Furthermore,  and heated  t h e government d i d n o t s u b s t a n t i a l l y  affect  on s e c t i o n  despite  the proposal  T h e c h a n g e s made d i d n o t I t i s submitted  outcome.  that  In particular, the  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 the t a xreform package u n r a v e l l e d .  Politically,  t o maintain the  image o f f a i r n e s s , t h e government c o u l d n o t be s e e n t o be c a v i n g in  to special interest  economic c o n d i t i o n s  groups.  Economically,  (and consequently,  political  due t o a d v e r s e pressure), i t  h a d t o e n s u r e t h a t t h e p a c k a g e r e m a i n e d more o r l e s s f i n a n c i a l l y neutral. to  Therefore,  t h e g o v e r n m e n t s t a t e d t h a t no c h a n g e s w e r e  b e made u n l e s s t h e f i n a n c i a l  This  r e l a t e s back  l o s s e s w e r e made u p e l s e w h e r e . ^  to the socio-political  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 bulging  environment  as t h e  t o increase the already  deficit.  W.I. G i l l e s p i e , "Tax R e f o r m : 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 ' : T h o u g h t s o f M i c h a e l W i l s o n [quoting M i c h a e l W i l s o n ] " Financial Times (7 S e p t e m b e r 1987) 14.  The  influence  of the p o l i t i c a l  factors  i s further  heightened  when o n e c o n s i d e r s t h a t t h e c h a n g e s w h i c h w e r e 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 the  H o u s e o f Commons C o m m i t t e e o n F i n a n c e a n d E c o n o m i c A f f a i r s . *  In 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 In  light  of the publicity  political  influence,  of the Blenkarn  Report  nature. and  i t s  i t i s o f no s u r p r i s e t h a t t h e g o v e r n m e n t  f e l t c o m p e l l e d t o i m p l e m e n t some o f t h e r e c o m m e n d a t i o n s , a l b e i t , in a diluted  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. reaction extreme  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 pressure  exerted  the provision,  Blenkarn  alter the  I t o n l y made m i n o r a l t e r a t i o n s  and even t h e n ,  some w e r e  R e p o r t and n o t as a r e s u l t  communities.  communities and t h e  t o withdraw/substantially  r u l e , t h e government s t o o d f i r m . to  Despite t h e adverse  i n response t o the  of pressure  from  these  I t i s s u b m i t t e d t h a t t h e g o v e r n m e n t ' 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 environment d i s c u s s e d above. In 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 the  rule  corporate  as  i t would  sector  -  have  i n direct  been  regarded  contradiction  as  pampering t h e  t o i t s image  of  f a i r n e s s which i t sought t o promote.  C a n a d a , H o u s e 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) [ " B l 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  "dressed-up" 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 b y o t h e r t a c t i c s t h a t w e r e adopted w h i c h were not 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 the c o r p o r a t e s e c t o r . r e f o r m s were d i v i d e d with  income  tax  introduction accepted reasons. sales  tax  was  on  a  The  Stage  division the  parts:  was  S t a g e One  floated  sales  the  tax.  introduction and  government t h e r e f o r e  of  from  i n t h i s way, and  the p o l i t i c a l  for  political  a  new  extended  supported  postponed  gains of  the  generally  of  not  idea  dealt  It is  implemented  issue  this  the  tax  expressed regarding the d i v i s i o n  by  the  new  tax Stage  savings. of  the  n o t a b l y by t h e H o u s e o f Commons C o m m i t t e e  Economic  Affairs.  perceived that the p o l i t i c a l tax  Two  extended  volatile  c o n c e r n was  Finance  distinct  the tax  However, i n t h e meantime, i t p r o c e e d e d w i t h  benefit  Moreover, package  new  this  indefinitely. to  a  two  In p a r t i c u l a r ,  electorate.  One  reform.  of  that  into  F o r example,  However,  the  government  costs of proceeding with the sales  would exceed the b e n e f i t s of a c t i n g i n accordance w i t h these  concerns.  The a b o v e 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 . particular, to  promote  presented politically  t h e g o v e r n m e n t was i t s chances and  structured  of  acting  i n i t s own  re-election. the  tax  appealing to the electorate.  self-interest  Consequently,  reform  In  package  to  i t be  Notably, 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.  In  particular,  i tattempted  b u r d e n was b e i n g  t o create the impression that thet a x  shifted  from low and m i d d l e - c l a s s  to the corporate sector. t a x reform package.  The GAAR was a n i n t e g r a l p a r t o f t h e  I t played 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 . promotion  In particular,  i t greatly assisted the  o f t h e impression t h a t t h e t a x burden o f t h e corporate  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 . rule  individuals  i n this  way p r o v i d e d  The u t i l i s a t i o n o f t h e  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 reform package, arguably 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 r e v e n u e s 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 i m p a c t  o n t h e a t t i t u d e w h i c h t h e g o v e r n m e n t a d o p t e d when t h e  proposal  was  attacked  by  the  business  and  professional  communities.  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 objectives  which  t h e government  seeking re-election. electorate,  was  w i t h o n l y one o f t h e  wishing  I n a d d i t i o n t o maximizing  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  t o promote  in  votes with the interest  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 b y w h i c h t h i s was a c h i e v e d h a s b e e n d i s c u s s e d p r e v i o u s l y . Notably,  i n financial  terms,  the corporate  sector  was  not  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 .  In particular,  i t s t a x b u r d e n 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,  situation  i s exacerbated  this  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 b u r d e n was n o t r e s t o r e d , b y t h e r e f o r m s , t o t h e l e v e l i t h a d b e e n when t h e g o v e r n m e n t h a d t a k e n o f f i c e  i n 1984.  The  government  treated  adopted  the corporate  other  strategies  sector  favourably  and measures  and a c c o r d i n g l y a r e  examples  of the p l a c a t i o n of the business  example,  the  tax  professional  and  which  community.  corporate  sector  For were  extensively involved i n the preparatory stages of t h e t a x reform package. in  Consequently,  favour  of  financial  t h e t a x r e f o r m p r o p o s a l s were  business.  Structurally,  implications,  proposition.  other  i n addition  proposals  F o r e x a m p l e , t h e t o p i n c o m e t a x r a t e was  many t a x b r e a k s  to  slated  and those breaks the corporate  reduced;  out u n t i l  t h a t were removed were n o t ones These examples  this  i n 1988, b u t  f o r removal were n o t phased  sector.  to the  reinforce  not a l l t a x b r e a k s were removed; r a t e s were reduced  1991  weighted  clearly  important  support t h e  c l a i m t h a t t h e b u s i n e s s c o m m u n i t y was p l a c a t e d b y t h e g o v e r n m e n t i n s t r u c t u r i n g the t a x reform  At  first  glance,  arguments  i t may  i n relation  be d i f f i c u l t  t o t h e GAAR  disadvantaged  the corporate  nevertheless,  t h e government  this  limitation,  communities. preparation  proposals.  to discern  comparable  as t h e l a t t e r  obviously  sector. still  This  of the rule;  be  d i d a l l i t could,  t o placate the business  F o r example,  may  despite  and t a x p r o f e s s i o n a l  i t involved  i tmodified  so, but  the latter  the rule  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 .  i n the  i n response  to  This a l lpoints 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  federal  e l e c t i o n h a d a n i m p o r t a n t i m p a c t on t h e t a x r e f o r m p a c k a g e . particular,  t h e government sought  means  bolstering  of  Consequently,  its  i t produced  designed  to  appear  to  However,  as  shown,  any  illusory.  T h i s was  be  t o u t i l i s e t h e e x e r c i s e as  appeal  and  with  presented  promoting  claims  In  to  a  a  the  electorate.  package  fairer  fairness  a  which  tax were  was  system. somewhat  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  in  seeking  re-election  community.  T h i s a i m 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  the t a x reform package. weighted  -  to  I n b a s i c terms,  p l a c a t e the  the tax reforms  i n favour of the c o r p o r a t e s e c t o r .  o f t h e s e two  contradictory  business  The  strands i s evidence  were  accommodation o f some  clever  p o l i t i c a l m a n o e u v r i n g by t h e g o v e r n m e n t .  Other elements of the s o c i o - p o l i t i c a l environment t a x r e f o r m p a c k a g e a n d t h e GAAR i n p a r t i c u l a r . reasons  given  reforms which t h e r u l e was  above, had  an  the  provision  impact  on  included i n the  s u b j e c t e d t o t h e t r a d e - o f f s and  of the  For example, f o r  i t s development.  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 inclusion  was  section within  tax reforms.  exposed  change.  the  However,  t h e p r o p o s a l was  rule  to  i f this  Furthermore,  which the  t h e t a x r e f o r m m e a s u r e s meant  increased pressure i s true,  not withdrawn  tax  Consequently,  compromises  t h a t i t was p r e s e n t e d a s a w h i t e p a p e r p r o p o s a l . this  influenced the  then  Theoretically, and  ultimately,  i t i s surprising  that  or 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  of t h e heated c r i t i c i s m government least,  conveyed  the  i t generated.  I t i s submitted that the  i t s determination  concept  of  regarding,  the provision  by  a t the very  including  draft  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 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 which g r e a t l y 1987 t a x r e f o r m  exercise  occurred  i n the United  reasons,  this  reform  was  States. provided  the t a x reform  For p o l i t i c a l an  impetus  reforms and d i c t a t e d , t o a l a r g e e x t e n t , impact  o f t h e U.S.  discerned contain  at first a  reforms  parallel  provision.  that  had  and economic  f o r t h e Canadian  their direction.  on t h e Canadian  glance considering  influenced  GAAR may  The  n o t be  t h e U.S. p a c k a g e d i d n o t  However,  the existence  limitations  concerning  provision.  To e x p l a i n , t h e C a n a d i a n e x e r c i s e was h a m p e r e d b y a  number o f f a c t o r s removed/trimmed) ranging  ( f o r example, which  meant  a s t h e U.S. e x e r c i s e .  introduced  to  substantiated seeking  t h e Canadian t a x reform  of  make-up  the claim  t o promote.  this  influenced the  l e s s s p e c i a l i n c e n t i v e s t o be  that  i t could  Therefore, shortfall.  of f a i r n e s s which  n o t be as  wide-  t h e GAAR was p e r h a p s For  example, i t  t h e g o v e r n m e n t was  Overall, major  i t i s clear  U.S.  the socio-political  i n f l u e n c e on t h e t a x r e f o r m  particular. the  that  The m a i n e l e m e n t s  package  context  had a  a n d t h e GAAR i n  i n c l u d e d t h e looming  election,  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 p a c k a g e a n d t h e t a x reforms.  providing (and  These f a c t o r s  an impetus  the  GAAR)  played  an important  role i n  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 reforms  and  f o r determining  their  structure  and  presentation.  However,  other  contexts  a n a l y s i s o f s e c t i o n 245. prevalent  at  t h e time  also  should  be  considered  i n the  F o r example, t h e economic c o n d i t i o n s contributed  to the creation  o f an  environment conducive  t o the introductionof theprovision.  economy  a t t h e time  of t h e t a x reform  state.  Basically,  had  a  deficit  deficit. animosity increase regarding  was  adverse  against  substantially  larger  conditions arguably  t a x avoiders  which  t a x avoiders  precipitated  t h a t t h e t a x s y s t e m was u n f a i r . on t h e g o v e r n m e n t t o r e c t i f y  than  t h e U.S.  garnered  was p e r h a p s  i n t h e incidence o f t a x avoidance. these  healthy  t h e c o u n t r y was " m o r t g a g e d t o t h e h i l t " ^ a n d  that  These  was n o t i n a  The  public  due t o an  Media a t t e n t i o n  a general  attitude  This exerted p o l i t i c a l  pressure  the situation.  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 d u e 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,  ^ S t i k e m a n , E l l i o t , Tax Reform '87: an Analysis, 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 : Boo, 1987) a t 1.  Canada Tax R i c h a r d De  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  looming  economic  federal and  election.  the  Therefore,  socio-political  p r o v i d i n g an impetus f o r t a x reform.  a combination  contexts  of the  culminated  in  T h e GAAR was a n i n t e g r a l  p a r t o f t h i s t a x reform package, e s p e c i a l l y  i n relation t o the  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 s o u g h t t o promote.  The  adverse  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 the e x e r c i s e t o i n c r e a s e revenues. political tax  the  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 u s e t h e  reform  which  proposals  a s a means o f c o l l e c t i n g  extra  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 . social  susceptible  and  important  objective.  political  t o such  package which an  These c o n d i t i o n s r e s u l t e d i n  environment  pressures  and t h u s  the  role  i n assisting  As r e g a r d s  Stage  Due t o  government  produced  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 .  revenues  a t a x reform  T h e GAAR p l a y e d  t h e government t o f u l f i l  One, t h e p r o v i s i o n  l u c r a t i v e o f t h e corporate base-broadening  was  this  was t h e m o s t  measures.^  Although  t h e i n c r e a s e d r e v e n u e i t was p r o j e c t e d t o g e n e r a t e d o e s 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 1 9 8 8 - 9 2 : C a n a d a , D e p a r t m e n t o f F i a n c e , Tax Reform 1987: Income Tax Reform ( O t t a w a : t h e D e p a r t m e n t , J u n e 1 8 , 1987) a t 67.  estimated  to  result  i n , ' i t i s submitted  c o n t r i b u t i o n was s t i l l easily  that  t h e GAAR's  i m p o r t a n t - a n e x t r a $2 b i l l i o n c a n n o t b e  dismissed.  However, context  i t should  be n o t e d  was m o s t l y  t h a t t h e impact  indirect.  I t s primary  o f t h e economic 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 - both towards t a x a v o i d e r s and t h e size  of the deficit.  factors political pressure  which  However,  caused  pressure provided  the  reform package and determined and  government  manifested an impetus  i t was  by such  social to  be  and  political  vulnerable  public attitudes.  to This  f o r the introduction of thetax t o a certain extent the structure  p r e s e n t a t i o n o f t h e reforms.  Consequently,  i t should  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 creating  a  political  climate  which  was  favourable  to the  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  of t h e s o c i a l  and p o l i t i c a l  conditions.  I t i s submitted  that  t h e l a t t e r w e r e more p r o m i n e 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 reform 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  t h e economic  environment,  concerned  with  then  the tax  ' 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 a n d $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 ( O t t a w a : t h e D e p a r t m e n t , J u n e 1 8 , 1987) a t 7 5 .  reform  proposals  problems. intended  would  probably  have  addressed  the  deficit  I n s t e a d , t h e government produced a package t h a t to  be  electorally  appealing,  yet  which  was  circumvented  e c o n o m i c i s s u e s . 1°  This proposition i s v e r i f i e d the tax reforms.  by  the  overall  In p a r t i c u l a r , the reforms  revenue impact  of  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 e v e n u e s 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 w o u l d h e l p t h e g o v e r n m e n t c r e a t e t h e i m a g e t h a t i t was in  improving  the  the economic d i f f i c u l t i e s .  increase to  maintain  that  the  package  generate  post-reform. one it  the  was  fiscally  revenue  T h i s h y p o t h e s i s may  considers the f i s c a l  M o r e o v e r , by  limiting  neutral,  Therefore,  intentionally these  progress  g o v e r n m e n t was  p u b l i c sentiment.  government to  billion,  S t a g e One  accordance with that  $1  making  still thus i t is  arguable  structured the  tax  effects  first  i n the  seem a t r i f l e  manoeuvring of the  to  acting in  reform year  c y n i c a l , but i f  i m p l i c a t i o n s i n the following  reinforces this political  able  years,  government.  1" " ' I t i s a l l p o l i t i c a l . This i s not 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 let's-win-the-next-election p o l i c y ' [quoting 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 R e f o r m " (29 J u n e 1987) 100 Maclean's 34 a t 38. "  Tax  Reform  1987,  supra,  note  9 at  75.  12 F o r e x a m p l e , i n 1 9 8 9 - 9 0 , 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 neutral.  Further  evidence  politically the  of  the  sound package  S t a n d i n g Committee  government's  desire  to  produce  a  i s p r o v i d e d b y o b s e r v a t i o n s made b y  on F i n a n c e and Economic A f f a i r s  t o the  e f f e c t t h a t S t a g e One may d r a g o n t h e economy i n t h e l o n g e r t e r m because  the  economic  increase  g r o w t h . I f  rectifying  i n taxation  t h e government  t h e economic s i t u a t i o n  from t h e above,  investment could had been  slow  concerned with  i t would n o t have  a t a x r e f o r m package t o have t h i s  Overall,  of  structured  effect.  i t i s clear  that  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 re-elected.  I t could  number o f w a y s ,  have  country  this  objective  f o r example, i m p r o v i n g t h e economic  T h i s would have r e f l e c t e d the  implemented  and  perhaps  f a v o u r a b l y on i t s a b i l i t y bolstered  in a  situation. t o manage  i t s electoral  support.  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 alleviate  t h e economic  problems  ( f o r example,  tax increases,  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 exceeding the benefits  o f a n i m p r o v e d economy.  opted t o c i r c u m v e n t t h e economic tax  reform  electorate the  package  that  was  directly  of effecting  these  proposals  c o s t s o f n o t d e a l i n g w i t h t h e economic  B l e n k a r n R e p o r t , supra,  produce a  appealing  ( e g . by i m p l e m e n t i n g t a x s a v i n g s ) .  benefits  Therefore, i t  i s s u e s and i n s t e a d  more  costs  t o the  I t perceived that would  situation.  n o t e 6 a t 31.  outweigh the  H o w e v e r , i t s h o u l d a l s o be n o t e d  that the t a x reform  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 . the  government  personal  could  income  politically  have  taxes.  that  as t h e b e n e f i t s of  outweigh  adding t o t h e d e f i c i t .  greater  I t perceived  dangerous,  measures would  effected  the p o l i t i c a l  proposals  F o r example,  reductions this  would  implementing  costs  of  in be such  significantly  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 c t w o u l d n o t be t h a t n o t i c e a b l e - w h a t i s a b i l l i o n dollars  here  and t h e r e  when  there  i s a deficit  o f over  $38  billion?  In  summary,  have  a  direct  government support  was  through  situation. designed  to  final  bearing more  on  the  interested  more d i r e c t  t a x reform  exercise.  i n bolstering  means t h a n  The  i t s electoral  improving  t h e economic  I t t h e r e f o r e p r o d u c e d a t a x r e f o r m p a c k a g e w h i c h was  implementing  The  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  be  politically  appealing,  for  example,  by  t a x savings f o r the majority of taxpayers.  context which  i s relevant t o the t a x reform  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 .  package  T h i s encompasses two  e l e m e n t s - t h e l e g a l b a c k g r o u n d t o t h e GAAR a n d t h e s o c i a l a n d p o l i t i c a l h i s t o r y of Canadian t a x reform i n g e n e r a l . influenced  the provision i n a  number  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 the  way  o f ways.  The  First,  anti-avoidance rules  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.  former the paved  They h e l p e d  to  create  a  favourable  provision. for  the  For  environment  example,  government  to  for  i t was  not  propose  the  the  such  enactment  a great  GAAR,  of  step  compared  these was  rules  attempted  t o i n i t i a t e s e c t i o n 245.  i n f l u e n c e d the format  of the r u l e .  able t o decide which concepts  forward  with  p o s i t i o n , f o r example, had i t c o u n t e n a n c e d t a x a v o i d a n c e and t h e n s u d d e n l y ,  the  the  before,  Moreover,  The  government  w o u l d be m o s t a p p r o p r i a t e i n  the achievement of i t s d e s i r e d aims.  The  social  and  political  background  influenced  the  s t r a t e g y the  of  tax  government  reform  adopted  in  with  package, which i n t u r n a f f e c t e d the s t r u c t u r e of the In  particular,  reform  two  recent attempts  legislation  Report^^)  and  the  e x e r t e d on  Ultimately,  the  was  Both  these  from the o r i g i n a l p r o p o s a l s . t h e 1987  on  the  attempts  t h a t was  Carter  had  tax  Commission 1981,  been t h w a r t e d  by  special  interest  groups.  enacted  differed  greatly  T h i s encouraged t h e government i n  e x e r c i s e t o seek the i n p u t of s p e c i a l i n t e r e s t  i n p a r t i c u l a r , t h e b u s i n e s s community.  Therefore,  groups,  i t consulted  widely with the corporate sector i n the preparatory stages  (Ottawa:  1987  proposals.  of A l l a n MacEachen i n  t h e g o v e r n m e n t by  legislation  its  a t t a x r e f o r m - t h e 1971  based  budget p r o p o s a l s  were most r e l e v a n t . pressure  (which  general  Canada, "Report o f t h e R o y a l Queen's P r i n t e r , 1 9 6 6 ) .  Commission  on  of  Taxation"  the  t a x reform  structure  of  proposals. the  tax  This  reform  d i s c u s s e d , was w e i g h t e d  input  package,  was  reflected  which  i n the  as p r e v i o u s l y  i n favour of business.  The t w o t a x r e f o r m e x p e r i e n c e s a l s o e n c o u r a g e d t h e g o v e r n m e n t 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 a s w h i t e p a p e r d o c u m e n t s . 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  o r i g i n a l documents. embarrassing proposals.  f o r t h e government than a l t e r a t i o n s t o w h i t e paper Therefore,  t h e g o v e r n m e n t i n 1987 was p r o m p t e d t o  I n summary, i t i s s u g g e s t e d  In  of the  C h a n g e s 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  i n t r o d u c e i t s p r o p o s a l s as white  impact  i n dilution  papers.  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  o n 1987 t a x r e f o r m e x e r c i s e , a n d t h e GAAR i n p a r t i c u l a r .  particular,  introduction  of  the legal  the provision  extent,  the format  social  history,  strategy  background  of the rule.  recent  t h e government  and  t h e way  determined  As r e g a r d s  t a x reform adopted  paved  to  certain  the p o l i t i c a l  attempts  i n preparing  and  influenced the i t s t a x reform  p r o p o s a l s i n 1987 a n d 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 paper documents.  a  f o r the  as white  To  conclude,  i t  is  apparent  from  environmental backdrop, from the the  economic c o n d i t i o n s  the  e n a c t m e n t o f s e c t i o n 245.  provision,  we  particular, structure  can  the  can  able  to  the  historical By  f u r t h e r our  above  that  socio-political  understanding led to  identified.  From  the  whole  background  context,  analyzing the  factors that  be  a p p r e c i a t e why  to  the  influenced  context the  of  In  i t s i n t r o d u c t i o n and  its  perspective,  we  t h e g o v e r n m e n t i n t r o d u c e d t h e r u l e and why  remain  committed  to  the  the  rule.  this  of  to  provision despite  can  i t was  the  severe  c r i t i c i s m which i t a t t r a c t e d .  Furthermore, the value when  one  respect  considers of the  new  of  that  f o c u s i n g on  s e c t i o n 245  parallel  p r o v i s i o n was  a  Goods and  introduced  in  1989.'"^  government  to  introduce  S e r v i c e s Tax  Section this  245  enacted  which the  obviously  parallel  i s validated  government  emboldened  provision.  It  forewarned the s p e c i a l i n t e r e s t groups of the f u t i l i t y of objections.  Quaere whether t h i s r e f l e c t e d a t r e n d  p o l i c y making.  w h i c h c a n n o t be  the also their  i n Canadian  This r a i s e s wider issues concerning  democracy - q u e s t i o n s  in  the  era  of  answered here.  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. For 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, "General AntiA v o i d a n c e R u l e (GAAR)" ( F e b r u a r y 5, 1 9 9 1 ) .  In  addition,  this  legislation. process. not  be  Tax l a w s c a n n o t be d i v o r c e d  Consequently, the analysis limited  efficiency political wider  paper exposes t h e p o l i t i c a l  to  normative  or simplicity. reality  of t a x provisions  Adopting  c o n t e x t t h a t we c a n t r u l y  formulation of tax provisions.  from t h e p o l i t i c a l  traditions  o f t a x law.  element o f t a x  such  such tools  as  should equity,  ignores the  I t i s o n l y by l o o k i n g  at this  u n d e r s t a n d what goes  into the  We c a n 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 The  1987 t a x r e f o r m  these  package  truly  t h e outcome  t h i s paper r a i s e s wider 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 . governments  In particular, i t illustrates  are not acting  i n the public  a c c o r d i n g t o some g e n e r a l a n d s o c i a l c r i t e r i a . in  of  factors.  Finally,  that  represents  interests.  their  own  self-interest,  doing  whatever  ensure t h e i r continued stay i n o f f i c e . exercise  also  government  exposes t h e f a l l i b i l i t y  went  t o great  lengths  interest  They a r e a c t i n g i s necessary  However,  to  the t a x reform  of the electorate.  t o produce  or  The  a n d promote""  a  1' The g o v e r n m e n t w e n t 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 the p u b l i c . F o r example, t h e Finance M i n i s t e r h i m s e l f t r a v e l l e d the breadth o f Canada giving i n n u m e r a b l e speeches and i n t e r v i e w s : J . F e r g u s o n , " W i l s o n F a c e s B a y S t . Crowd o n T a x R e f o r m " Toronto Star (25 J u n e 1987) E l ) . He e v e n r e s o r t e d t o w r i t i n g t o The Globe and Mail ("Tax R e f o r m L o w e r s B u r d e n f o r 8 5 % " ( L e t t e r t o E d i t o r ) The Globe and Mail (24 A u g u s t 1988) A7) to e n s u r e maximum exposure o f t h e government's image o f fairness.  package which and  therefore  efforts,  the  uninterested^^  i t thought bolster  appealing to the  i t s support.  Canadian i n the  w o u l d be  public  whole  However,  still  affair.  electorate  despite  these  seemed  ignorant^'^  and  Perhaps  i t i s not  the  a c t i v i t i e s o f g o v e r n m e n t w h i c h we s h o u l d c o n c e n t r a t e o n , b u t u n p r e d i c t a b l e nature of the e l e c t o r a t e . d a y s o f a d v a n c e d t e c h n o l o g y , we to  still  the  I t seems t h a t i n t h e s e  do n o t know how  to  appeal  human n a t u r e !  For 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 g o v e r n m e n t ' s m e s s a g e o f f a i r n e s s t h a t i t s o u g h t t o p r o m o t e : a p o l l by A n g u s R e i d A s s o c i a t e s f o r S o u t h a m News r e v e a l e d t h a t s i x o u t 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 g o v e r n m e n t ' s c l a i m t h a t t a x r e f o r m w o u l d make the system fairer. O n l y one i n ten expected to benefit p e r s o n a l l y from t a x reform: J . O ' N e i l l , "Canadians S k e p t i c a l of Tax R e f o r m " Calgary Herald (2 F e b r u a r y 1988) A3. It is 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 w e r e due t o lack of public knowledge of the i s s u e r a t h e r than informed d e c i s i o n s . For e x a m p l e , 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 k n o w l e d g e i s through the media. B u t , i n t h e c a s e 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 m e d i a a t t e n t i o n o n l y l a s t e d f o r a b o u t 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 p a g e s : L. M c Q u a i g , Behind Closed Doors: How The Rich Won Control of Canada's Tax System ... And Ended Up Richer (Markham, O n t . : 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 o f t h e S t a n d i n g C o m m i t t e e on F i n a n c e and Economic A f f a i r s ) , P a u l M c C r o s s a n who s t a t e d t h a t he was n o t b e e n a s k e d a s i n g l e q u e s t i o n f r o m any c o n s t i t u e n t on t a x a t i o n : J . K o h u t , " T o r i e s F i n d Tax T a b l e s T u r n e d a s R e f o r m 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 .  To  c o n c l u d e , t h i s p a p e r r a i s e s many i s s u e s ,  been l e f t not  unanswered.  i t should  political  It  I n a l l , i t shows t h a t t a x a n a l y s i s  have t o be l i m i t e d  fact,  laws. that  to the technical or the specific.  encompass  wider  topics,  f o r example,  of adopting  a n a l y s i s o f s e c t i o n 245 h a s v e r i f i e d t h e a political  approach  i n considering t a x  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 time,  a n a t t e m p t h a s b e e n made t o i d e n t i f y  provides a better understanding of the rule, i s still  courts.  In the  prevalent at t h e exogenous  f a c t o r s which 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.  it  does  p r o c e s s and democracy i n g e n e r a l .  i s hoped t h a t t h i s  validity  some o f w h i c h h a v e  i n a state  of limbo,  not being  particularly considered  This since  by t h e  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 product of t h e i r  environment.  BIBLIOGRAPHY LEGISLATION AND ASSOCIATED DOCUMENTS; S e c t i o n 2 4 5 Income T a x A c t , RSC 1 9 5 2 , c . 1 4 8 a s amended b y SC 1 9 7 0 - 7 1 - 7 2 , C . 6 3 , a n d a s 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 T a x A c t " , O c t o b e r 2 1 , 1988 Advance Tax Ruling No.ATR-42, December 1 3 , 1 9 9 1 ) Advance credits 1992)  "Transfer  o f shares"  (dated  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 a n d w i t h i n a r e l a t e d c o r p o r a t e group" (dated February 17,  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., " C r a v e n v . 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