When international tax expert Michael Cadesky leafs through Canada’s labyrinthine Income Tax Act, he often feels as if he is on a scavenger hunt, tracking down cross-references to rules, amendments, exceptions and exceptions to exceptions.
Sometimes, there are no cross-references. “One needs to read the entire Income Tax Act to be sure that there are no ticking time bombs in other places, lying in wait for the unwary,” says Cadesky, managing partner of Toronto-based tax consultancy Cadesky and Associates.
Concerned about the increasing complexity and “trickiness” of tax laws, as well as the explanations and interpretations that go along with them, Cadesky is spearheading a move to persuade the federal Department of Finance and the Canada Revenue Agency to simplify the tax laws.
Cadesky — who is past chairman of the Society for Trust and Estate Practitioners, an organization representing 12,000 advi-sors around the world — presented his concerns about Canadian tax laws at a STEP Canada conference held in Toronto this past June. In providing the conference with a “wish list” of proposals for reforming the Income Tax Act, he recalled that STEP Canada was “discouraged” by the response it received from Finance representatives when the organization raised some of its concerns several years ago.
Nevertheless, Cadesky says, he plans to work with STEP to make a renewed effort to follow through with the CRA and Finance on a series of suggestions designed to improve tax policy and administration without making any fundamental policy changes or having any major fiscal impact.
For example, the proposals suggest replacing cross-references from one section of the act to another by simply stating “what is intended in plain English, so it is readily understandable.”
Similarly, the wish list proposes that communications or marketing professionals be enlisted to work with federal government tax experts in drafting explanatory notes to the legislation. “By doing this, the drafters of the legislation would be forced to explain it in layman’s terms to the persons charged with writing the explanations,” he says. “And this might go a long way to simplifying the legislation itself.”
Another suggestion relates to the use of negatives and double negatives in the legislation. As Cadesky puts it: “There are rules, and then exceptions to the rules. The exceptions to the rules have exceptions, and these exceptions themselves have exceptions. Then, there are overriding rules on top of this.”
So, he proposes the following: “If one were to say that there can be rules, exceptions to the rules and exceptions to the exceptions, but nothing further, this would limit the amount of complexity and trickiness in the drafting.”
Nevertheless, Cadesky and other tax advisors agree that it may be hard for anyone to implement changes, given the complicated process in which tax laws are drafted, expanded and amended to respond to government policies, market trends and practical problems that emerge as various provisions are enforced.
As Heather Evans, tax lawyer and partner with Deloitte & Touche LLP in Toronto, points out, the problems arise “not just from the complexity of the tax regime, which seems to grow exponentially year after year, but also the process by which legislation is enacted.
“It seems that there’s a trend on the part of legislators to release draft legislation and then consult with the tax and business community afterward,” she says, “as opposed to being more engaged in consultation at the time of drafting.”
It’s a process that Evans characterizes as “legislation by press release,” in which the government announces new tax measures and, at the same time, releases draft legislation that will typically become effective retroactively once it is enacted into law. However, it may remain in draft form, subject to comments and possible revision, for several years.
For example, when the new tax treatment of dividends was introduced last year, the announcements were made and then the details left to be filled in later. “Meanwhile, companies are left scrambling in real time to understand the implications — and it affects every company in Canada,” she says. “The details as to how [firms] are meant to comply with the legislation and notify their shareholders were late in coming and incomplete. The impression one is left with is that things are cobbled together.”
Evans says she understands the reason why the government makes tax changes effective immediately, which is to minimize the opportunity for people to take advantage of the changes in the capital markets or to restructure their affairs. “But it’s very difficult to advise clients in a practical and intelligent fashion,” she adds, noting that it is also “very frustrating” for clients, who may be in a “never-never land in which we have draft legislation, with which taxpayers are expected to comply, that sits on the books for years.”
@page_break@The CRA is well aware of this issue, Evans says: “I know they hear the frustration from the tax community loud and clear. Ultimately, it’s Finance that’s responsible for drafting legislation that works and then the legislative process is responsible for getting it through.”
“The government does a good job of consulting, in terms of formulating its approach,” Cadesky adds. “What it doesn’t do is a good job of listening to the recommendations. It will consult widely, but it doesn’t do a good job of taking other people’s recommendations and implementing them.”
But there are no easy answers, says Jamie Golombek, vice president of tax and estate planning at AIM Funds Management Inc. in Toronto. “I’m all in favour of simplification. The tax law is completely incomprehensible to the average person,” he says. “It’s almost impossible to simplify, because business itself is complex, and every time someone comes up with a new product or a new loophole, the tax act has to come in and try to fix it.”
The CRA is doing a much better job than it ever has in trying to explain tax issues, Golombek says. The agency has a user-friendly Web site and is proactive in providing the public with advice and warnings about questionable tax practices. “But I don’t think there is an easy solution,” he says, “because business is complex, tax law is complex, and I don’t think it’s getting any easier. The CRA is doing a pretty good job so far in trying to help taxpayers comply with the act’s ever-increasing complexity.”
However, he adds, there is an important message for advisors in all this: tax laws have become so complicated that few advisors can be expected to understand everything. Instead, advisors should have a general understanding of the rules and keep up to date on key developments and emerging issues, as well as be able to recognize issues that may have an impact on their clients and know what expertise there is out there. “Then, if an issue gets too complex,” Golombek says, “it’s time to bring in a specialist.” IE
Expert leads effort to simplify Canada’s tax regime
Tax laws are highly confusing because there are rules, exceptions to the rules, exceptions to the exceptions, followed by overriding rules
- By: Kevin Marron
- October 15, 2007 October 15, 2007
- 14:07