Tax law ultimately about policy
Statute is more than a mere laundry list of provisions
There
are two classes of people who dislike taxes: men and women. Since income tax is the involuntary expropriation of property without direct compensation — compulsory contributions that the government levies on transactions in goods, services and intellectual property to finance public expenditures — one can understand the antipathy toward taxation.
Income tax law has a reputation of being a difficult and dry subject. Yes, tax law is replete with technical detail, circular, and obtuse language. Ultimately, however, all law is behavioural and tax law more so than any other. At the top end of the rate scale, governments take nearly 46% of one’s earned income. It is, therefore, understandable that taxpayers will try to minimize the government’s tax bite. Legislators respond to tax planning by drafting provisions that are ever more complex and longer. The income tax statute and related rules now takes up 2,500 printed pages and it is growing at the rate of 100to- 150 pages every year. Despite all the empirical evidence to the contrary, the bureaucrats in the Finance Department actually believe that long statutory provisions plug the escape hatches.
To be sure, the raising of revenue is an important, if not imperative, justification of tax law. But governments increasingly use tax law for implementing social policies and redistributing income. We see this even in the title of the individual tax return form — Income Tax and Benefit Return — and the fact that nearly onethird of Canadians who file tax returns do not pay any income tax at all and file primarily to receive benefits from the government. Hence, tax law balances varied needs: funding public expenditures, economic and regional incentives and redistribution of income. Any statute that serves so many diverse and, often, conflicting purposes is necessarily more complex than a single purpose statute.
To be sure, the Income Tax Act is badly drafted. The statute violates almost every basic rule of grammatical construction. The Canadian drafting tradition that each section, no matter its length, should be in a single self-contained sentence does not help. One of the definitions in the Act is 2,580 words in a single sentence! Thus, the comments of a member of the British Parliament speaking about the Irish Home Rule bill in 1889 could just as easily describe the Canadian tax statute:
“…it sweats difficulties at every paragraph; every provision breeds a dilemma; every clause ends in a cul- de-sac; dangers lurk in every line; mischiefs abound in every sentence and an air of evil hangs over it all.”
Shorn of its technical language, however, tax law is ultimately about policy. The Act is a living document, a mirror that reflects the social, political, economic, and moral values of society at any particular time. Thus, . A reason underlies every provision. Although the policy of a particular provision may not be obvious on first reading, its rationale is there for those who search for it.
Thus, the focus of any policy analysis should be on reconciling the language of the statute with the purpose of the provisions. This creates tension in statutory interpretation between applying the plain meaning of words and the purpose of the underlying provision. The courts tell us that they apply the plain meaning of words where the language is clear and unambiguous and look to the purpose of the provision where the language is not clear. But what if the purpose is not clear? Then judges act as policymakers and determine what the law is.
The meaning of words in tax law is rarely as plain as its authors anticipated they would be when they drafted the legislation and judges must look at legislative history and engage in purposive analysis when the words are capable of different meanings. This allows judges to bring their own policy views to bear in interpreting the statute. Thus, in interpreting law, judges will apply their own normative beliefs of the appropriate tax policy. Hence, it is important in litigation to “know your judge.”
In one case, for example, the taxpayer claimed private elementary school fees as “child care” expenses — which are deductible — and not as education expenses — which are not. The Tax Court looked at the so-called “object and spirit” of the childcare provisions and allowed the deduction saying that any education from the school was merely an incidental benefit.
Courts must often grope in the statutory language searching for the purpose of the legislation. In a recent decision of the Tax Court, for example, the judge had to determine whether the word " lodge" included luxury hotels. If it did, the taxpayer could not deduct expenses to entertain its employees in the particular hotels. The purpose of the rule prohibiting deduction of lodge expenses is to prevent expense account living on the public purse. Although dictionaries sometimes use the word " hotel" to describe " lodge", the court did not think that most Canadians would describe large resort hotels with a range of modern amenities as " lodges." Hence, the court allowed the taxpayer to deduct its substantial expenses and sideswiped the underlying policy of the provision against the deduction of such expenses.
Of course, the selection of one method of interpretation over another becomes clear only retrospectively. Bureaucrats will always write complex laws. Nowhere is this truer than in tax law. Taxpayers must live with the complexity of the statute and pay professional advisors to comply with it. Ultimately, tax advisors must anticipate whether a court will interpret the “ unambiguous words” in the same manner as the advisor. Resolving tax disputes, however, is a slow, arduous and expensive process. Hence, men and women try to avoid the unpleasant subject of taxes.