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Flawed Questions Inevitably Yielded A Flawed Survey At CRA

When we cut through the biased language what is being asked and answered?
Canada Revenue Agency national headquarters in Ottawa, Ontario.
Canada Revenue Agency national headquarters in Ottawa, Ontario.

The recently released survey of all employees at the Canada Revenue Agency (CRA) conducted by The Professional Institute of the Public Service of Canada (PSC), the largest union in Canada representing federal government professionals, has as much bona fides as the 1949 advertising campaign that boasted "more doctors smoke Camels than any other cigarette."

Most headlines reported that 90 per cent of respondents agreed that "It is easier for corporations and wealthy individuals to evade and/or avoid tax responsibilities than it is for average Canadians."

Equally important, is this question relevant? And, what can we learn from answers to the question?

In my more than 25 years of practicing tax law in Canada, nothing could be further from the truth. The survey questions were flawed, giving us flawed survey results. Short answer: Garbage in, garbage out (GI-GO).

To start, this question conflates two distinctly different concepts: that of criminal tax evasion and legal tax avoidance.

Assuming "average Canadian" means a salaried employee with taxes withheld at source, yes, it is easier for corporations and wealthy individuals to evade taxes by not reporting their income than it is for an employee, with the exception of restaurant wait staff who may not report their tips.

What about the second half of the question, avoiding tax responsibilities? Sounds sinister when framed that way, doesn't it? However, the precedent for this goes back to 1936, to the famous Duke of Westminster tax case, and it is perfectly legal to reduce your taxes through tax avoidance, which is essentially proper tax planning.

So, when we cut through the biased language what is being asked and answered in the affirmative is, whether corporations and wealthy individuals have more tax planning opportunities than average Canadians.

While RRSPs and RESPs are the most important tax planning measures available to all Canadians, corporations and wealthy individuals do have more tax planning opportunities. They also bear more risks than salaried employees do and small businesses create many new Canadian jobs.

The second survey question was "Do tax credits, tax exemptions and tax loopholes disproportionately benefit corporations and wealthy Canadians compared to average Canadians?" A question that conflates three different tax concepts. Let's start with tax exemptions.

The only tax exemption of which I am aware is the principal residence exemption that permits Canadians to sell their homes at a gain and not pay tax. This exemption is unavailable to corporations. Wealthy individuals will probably have larger gains on sale of their homes, but I don't think it is correct to say that this exemption disproportionately benefits them. Homes are the single biggest source of wealth for average Canadians and the exemption is the most important tax benefit available to home owners, most of whom are not wealthy.

Tax loopholes are unintended gaps in the Income Tax Act.

Tax credits are available to individuals, but not to corporations and are deductions from taxes that the government chooses to allow to certain Canadians. Some are universal, such as the basic personal amount, while others are geared to specific subsets of taxpayers such as the age amount for individuals older than 65.

Others are based on expenditures such as for charitable donations. While a 53 per cent marginal tax credit is worth more than a 30 per cent marginal tax bracket credit, it's incongruous to say that this is a disproportionate benefit. The reason for this so-called disproportionate benefit is: progressive tax rates. Not only does the amount of tax increase as income increases, the rate of taxation also goes up. So, of course, paying tax at a higher marginal tax bracket means more benefit from tax credits.

Tax loopholes are unintended gaps in the Income Tax Act. Loopholes are shut as soon as the Department of Finance becomes aware of them. The Income Tax Act also has a general anti-avoidance rule used to assess taxpayers who abuse tax provisions. While loopholes do only benefit the wealthy, they are rare and they quickly get plugged.

Another survey question, agreed to by 79 per cent of respondents, was: "Training and technology advancements within the CRA have not kept pace with the complexity of tax avoidance schemes."

As a tax lawyer dealing with CRA daily, I can testify that its training has not kept pace with not only the complexity of the Income Tax Act, but also basic tax concepts.

Auditors often are unaware of tax law concepts relevant to their files. This requires detailed submissions by us, paid for by our clients, to educate CRA staff. CRA needs to increase training, but in general, not just with respect to tax avoidance planning.

CORRECTION: An earlier version of this blog's headline implied that the aforementioned survey was conducted by Canada Revenue Agency. It was a union-sponsored survey of CRA auditors.

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