NEIL REYNOLDS
reynolds.gl...@gmail.com

Auditor-General Sheila Fraser wasted no words last week in her
incisive review of the Canada Revenue Agency and various directorates
in the Finance Department - other, perhaps, than the quaintly styled
declaration that this year's report comprised "Matters of Special
Importance." As indeed it did, with or without upper-case emphasis.
This country's Income Tax Act, she noted, is "one of the longest and
most complex pieces of Canadian legislation." All the more reason, she
observed, to explain promptly and properly its manifold mysteries to
its clients, the taxpayers of the country. The problem is that the
relevant bureaucracies have fallen eight years, and in some instances
18 years, behind in the most basic task they have to do.

How complex is Canadian tax law? Too complex. The Finance Department
is obliged perpetually to amend it, clause by clause, rendering it
slightly more comprehensible here, making it conform to another law
there, revising an earlier interpretation here, putting an end to an
unintended consequence there. These fixes number in the thousands. In
theory, they get packaged together from time to time and submitted to
Parliament. After all, bureaucracies don't legislate. Or do they? In
the most recent package, the bill submitted to Parliament (in
November, 2006) consisted of 282 pages with 155 clauses of legal
repair work. These fixes haven't yet been approved - but all of them
masquerade as law until they are.

When will Parliament approve these so-called technical amendments to
the country's tax law? That's anyone's guess. The 2006 package, now
presumably lodged in Finance Minister Jim Flaherty's choked in-box,
contains fixes going back to 2001 - with some number going back to
1991. It presumably contains, in other words, tax-law fixes from the
finance ministries of Michael Wilson (1984-91), Donald Mazankowski
(1991-93), Gilles Loiselle (1993, during Kim Campbell's brief stop at
the top), Paul Martin (1993-2002), Ralph Goodale (2003-06) and now Jim
Flaherty.

Here it gets odder and funnier, too, in a pathetic sort of way.
Canadian tax law is so complex that corporations frequently need the
Finance Department to tell them what particular laws or regulations
actually say. For this assistance, the department levies a fee. In any
other circumstance, this practice would be recognized by everyone as
inherently preposterous. You must pay the government to tell you what
the law permits and what it prohibits? In giving this counsel, of
course, the department does not guarantee that what advice it gives is
correct - or, for that matter, legal.

In some cases, the department doesn't have the foggiest idea what the
correct advice might be. As Ms. Fraser describes in her report,
various Finance directorates swap e-mails with each other, taking as
long as four years to formulate a tentative answer for a perplexed
taxpayer. In the past four years, Ms. Fraser says, departmental
experts traded 26,000 such e-mail messages. Because no one bothered to
catalogue them, she couldn't assess their worth.

Whatever they are worth, the Finance Department keeps cranking out
"interpretations." Ms. Fraser estimates that it produces, on average,
250 "advance rulings" every year (roughly one every working day), plus
1,200 "interpretations" for taxpayer clients and 1,000
"interpretations" for its own auditors. It also produces 30 "comfort
letters" a year - documents that promise taxpayers that the department
will recommend a particular interpretation but warns them not to count
on it. (Ms. Fraser says the department keeps a copy of its comfort
letters in a three-ring binder.) As many as 250 such letters, dating
back to 1998, await legislative confirmation.

Ms. Fraser makes it clear that this legal treadmill extracts a heavy
cost - in money, yes, but in uncertainty and inefficiency, in cynicism
and in aggressive tax avoidance as well. These costs undermine the
legitimacy of the country's tax regime, which relies on voluntary
compliance. Significantly, the Supreme Court has ruled that tax law
must be "certain, predictable and fair." On this basis, large parts of
the Income Tax Act must be presumed unconstitutional.

PricewaterhouseCoopers Canada, by the way, reported last year in its
annual analysis of taxes paid by corporations in major countries of
the world ("Canada's Tax Regime: complexity and competitiveness in
difficult times") that the longest time required by a single Canadian
company to do its tax return was 6,672 days, based on an eight-hour
workday. The minimum was 10 days. The national average was 1,696 days
- making Canada the second most complex tax jurisdiction in the world,
after the United States.

This mess is, of course, entirely optional. Instructed to design a
simpler corporate tax regime and given five working days, the Finance
Department could probably produce a rational alternative with two or
three days to spare. It's a shame they're too busy catching up to 2001
to do it.

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