Tax Law

Two commonly invoked reasons for the new tax on income trust distributions are: (1) to ensure fairness (indeed, the government introduced the new tax as the centrepiece of a "Tax Fairness Plan"); and (2) to prevent impairment of the "competitiveness and productivity" of the Canadian economy that would result from greater recourse to the income trust structure by Canadian companies.

In this online opinion article, I take issue with these justifications for the new tax.

This commentary was first published in the Financial Post on November 9, 2006.

With the surprise announcement last week by the Conservative government that distributions by income trusts would no longer be exempt from corporate-level taxation, investors in income trusts have suffered material losses to those investments.

Interestingly, investors with diversified portfolios of Canadian equities would have hardly noticed a difference in their wealth and are probably wondering what all the fuss is about.

While the TSX composite index suffered a substantial loss on the day immediately following the government's announcement, it has already made up most, if not all, of those losses. Since the announcement, then, the TSX Income Trust Index has underperformed the broader TSX Composite Index by approximately 10%. Even taking into account the current yield disparity in the two indexes (approximately 9% for the Income Trust Index and 2% for the TSX Composite Index), the TSX Composite Index still comes out ahead of the Income Trust Index by approximately 3%.

I've posted a new paper on SSRN that analyzes the new "tax-free savings accounts" that are soon to be available in Canada (they will be coming to a financial institution near you in January).  You may recall having seen one (or more) of the now ubiquitous advertisements for the accounts.  Here's the abstract of the paper:

The Supreme Court of Canada will hear an appeal tomorrow in a case called Lipson v. Canada.  The appeal may prove to be a significant test of the efficacy of the so-called "general anti-avoidance rule" (the "GAAR") in combatting what is perceived to be abusive tax avoidance.

The Lipsons engaged in a series of transactions over two days in 1994 in which they made use of various rules, including the spousal rollover rule (section 73), the spousal attribution rule (section 74.1), and the back-to-back loans rule (subsection 20(3)), to transform what would otherwise have been non-deductible mortgage interest under paragraph 20(1)(c) into, they argue, deductible interest under paragraph 20(1)(c). 

The Lipsons have lost previously at the Tax Court of Canada and at the Federal Court of Appeal.  It is not at all obvious, however, that the Lipsons will lose at the Supreme Court of Canada.

NB: from the Globe and Mail

More and more Canadians are earning tidy sums playing poker on off-shore poker websites. They often practise incessantly, refine their skills using coaches and software programs, and participate in online forums dedicated to strategy. Many of these players spend 30 hours a week online playing against opponents from around the world.

At this time of year, winning poker players are reminded of a confounding tax position. Most Canadians believe, incorrectly, that lottery and gambling winnings are not subject to income tax. The conventional view is correct in that every budding poker player starts out playing casually and with “after tax” dollars. If a casual player wins, he wins without tax consequences; if he loses, he loses without tax consequences. At some point, however, under Canadian law, the tax consequences change for winning players.

The Supreme Court of Canada will be hearing Copthorne Holdings Ltd. v. Her Majesty the Queen this coming Friday, January 21 at 9:30 a.m.  The appeal is concerned with interpreting various elements of the "general anti-avoidance rule" ("GAAR") of section 245 of the Income Tax Act.  

To seize the moment presented by the Copthorne Holdings appeal, the Tax Law Society at the Faculty of Law has arranged for an expert panel discussion of the issues raised by the appeal and the implications of the case for the GAAR more generally. The panel discussion will be held on Thursday, January 27 at 6:00 p.m. in the Bennett Lecture Hall at the University of Toronto Faculty of Law, which is located at 78 Queen's Park.

I will introduce the panel and provide some introductory background about the transactions and the judgment at the Federal Court of Appeal giving rise to the appeal to the Supreme Court of Canada.  Following this backgrounder, the discussion will be turned over to the panel members, each of whom will be given 10 minutes to speak, after which there will be an opportunity for questions from the floor. The distinguished panelists include: