Tax proposals announced by the federal Depart-ment of Finance that languish in draft form for months or years continue to be the source of great frustration for tax planners, making advising clients a tricky and difficult proposition. And there is no clear remedy to the problem.

“It’s always hard to plan for tax, even when there’s certainty in the legislation,” says Peter Weissman, partner and tax lawyer with Toronto-based tax consulting firm Cadesky and Associates. “It makes it harder when things are proposed and they’re sitting out there and you don’t know what will happen with them.”

A number of long-standing tax issues — notably, the rules concerning interest deductibility and offshore trusts — have languished for years in a kind of limbo between draft proposal and law, giving tax advisors headaches as they try to figure out how best to advise clients. Some of the proposals from the March 2007 budget, including lifting the cap on the lifetime capital gains exemption, have also not yet been passed into law.

Tax proposals that are later enacted into law are usually retroactive to the date on which they were first announced, but that still makes giving advice difficult.

“It puts you into a situation in which you have to give parallel advice,” says Heather Evans, partner and tax lawyer at Deloitte & Touche LLP in Toronto. “You tell the client, ‘Here’s the current law and here’s how the rules apply to your situation. But there’s a proposal to amend the rules and here’s the impact for your situation’.”

This leaves tax advisors trying to gauge the probability of a proposal eventually becoming law, knowing that if a client makes the wrong decision, it might end up being very expensive. While advi-sors say they usually can get a sense of which proposals eventually will be passed into law, nothing is guaranteed. A proposal can be amended and re-introduced in a different form, or a new government may decide to kill the proposal altogether.

“The best thing a tax advisor can do is make tax understandable for clients,” Evans says. “Clients are not necessarily looking for a tax advantage; they just want certainty. [Outstanding proposals] make it challenging.”

There is a sense among some tax experts that the government is releasing proposals too hastily, often to deal with problems that Finance has identified, and then having to revise and amend as the proposals face tax industry reaction.

“A lot of it seems to be reacting to things — reacting to court decisions the government doesn’t like or reacting to tax behaviour the government thinks is abusive,” Evans says. “The end result is a chilling effect on taxpayer behaviour.”

Jamie Golombek, vice president of tax and estate planning at AIM Funds Management Inc. in Toronto, agrees: “It really puts tax professionals, such as myself, and financial advisors in a very cautious position.”

One of the most egregious examples of this phenomenon, tax advisors say, involves the rules around foreign investment entities (FIE) and non-resident trusts (NRT), collectively known as the offshore trust rules. Finance first introduced FIE and NRT legislation in 1999, essentially as anti-avoidance provisions intended to stop offshore investment tax-planning activities that Ottawa considered abusive.

The problem, experts say, is the rules are maddeningly complex and were drawn up in such an over-reaching way that all kinds of legitimate transactions were caught in their net. In the subsequent years, the rules have been amended to address some of these concerns, and the proposals have been reintroduced several times. Yet problematic issues still remain and, eight years later, the draft proposals are still just proposals.

“The fact that the FIE and NRT legislation continues to evolve makes life even more complicated,” Evans says, “because it depends on what point in time you’re at whether or not you’re dealing with one version [of the proposed legislation] or another.”

Another issue involves draft rules governing deductibility of interest on investment loans, first released in October 2003. These rules purport to limit the deduction of interest expenses unless there exists what the government regards as a “reasonable expectation” of profit over the life of the ownership of the assets.

The rules faced opposition from the tax, business and investment communities from the get-go. Again, it was thought that the government was over-reaching, reacting to individual cases of abusive tax planning by introducing legislation that drew in legitimate transactions.

@page_break@The government invited responses from interested parties and has delayed the implementation of the rules ever since, although the trust rules continue to hang over the tax community like a cloud.

“It’s an odd way to make legislation,” Evans says. “You float something, and then you say, ‘Oh, well, maybe we won’t bring this forward just now. Maybe we’ll change it. And we’d like some input from the business community’.”

Another area of contention is draft legislation on eligible dividends, introduced in June 2006 in part to address the issue of “double taxation” of high-rate corporate income. (Corporate after-tax income is paid to shareholders in the form of dividends, which is then taxed again in shareholders’ hands.) The new rules would see a higher gross-up of “eligible” dividends — not all corporate income would be considered eligible — and a more favourable dividend tax-credit regime from Ottawa and the provinces.

But tax experts and business leaders are left shaking their heads over the complexity of the draft legislation. And companies have the headache of keeping track of income that could result in eligible dividends and notifying investors. Finance provided some relief last December by simplifying rules for notification of eligible dividends. But draft legislation on eligible dividends has yet to be passed.

“We’re getting clarity [on eligible dividends] legislation,” Evans says. “But there are still issues of interpretation.”

While tax experts agree that advising clients on tax law affected by draft legislation is challenging, there doesn’t seem to be a consensus on possible solutions.

Some say the Department of Finance could do more consultation with interested parties before introducing proposals rather than consulting with stakeholders after draft legislation is released.

“Afterward, consultation becomes more adversarial,” Evans says. “You have various constituencies — whether an industry group or academics or an association — writing submissions to the government, saying these proposals are flawed and why, instead of consulting the groups in the beginning to try to come to a more nuanced understanding.”

To get around the problem of confidentiality — all tax experts agree preventing leaks is paramount — the government could have interested parties sign strict confidentiality agreements as part of the consultation process. “They could be consulted on a private basis before the legislation is tabled,” Golombek says. “It would be wonderful to have more widespread consultation.”

Other tax experts believe the cost of a possible leak is too high and the present system, for all its flaws, may be the best one we have.

“It would be nice to have discussion before, but it’s impractical,” Weissman says. “The government is accountable for everything it does, and rightly so. Giving notice of thoughts to a select group of people always has potential for problems.”

Insiders say the problem of lingering tax proposals is exacerbated by the fact that Parliament is slow to pass legislation. “It takes forever and a day for legislation to be passed,” says Robin MacKnight, partner and tax lawyer at Wilson Vukelich LLP in Markham, Ont. “Tax legislation isn’t sexy, but it’s important if you want the economy to grow.”

Finance is committed to consulting a variety of stakeholders and making sure the process is fair, a department official wrote in an e-mail: “This process can add time to the legislative process, particularly with complex measures and changes in government. [But] the process is viewed as valuable, striking a balance between desire for consultation and need to move legislation forward.”

Whatever the cause, no one believes the problem of outstanding draft legislation will go away soon. “There’s a history of legislation that drags on and on and doesn’t go anywhere,” Golombek says.

“It’s the 80/20 rule,” Weissman says. “The 80% of proposals that go through are not the problem; it’s the 20% that don’t that cause anxiety. They usually deal with the most difficult issues, such as investing offshore, that involve a lot of dollars.” IE