Is the Fat Lady Clearing Her Throat?

In opera circles, they say the performance isn’t over until the fat lady sings. When she does rev up for the final aria, we know the show is coming to a close. I was reminded of this in an odd sort of way when reading a piece in the June 25, 2012 issue of Tax Notes International, “U.K. Investigating Jersey-Based Tax Avoidance Scheme.”

The note reports on a scheme designed to allow high income taxpayers to substitute tax-free loans from a wholly owned Jersey-based company for fully taxable salary from a U.K. based employer. Depending on your point of view, the scheme is either legal tax avoidance or illegal tax evasion. Assuming the elements of the scheme are technically sound, the planning should pass muster as legal tax avoidance. Most tax professionals (I include myself in this group) would reach this conclusion. If the result is unacceptable, we would say, amend the statute to counter it. What caught my attention, though, was the nature of the reaction to the scheme from the Chancellor of the Exchequer (George Osborne) and certain tax activist groups.

The Chancellor is quoted as calling the scheme “morally repugnant,” even if technically legal. One activist group (UK Uncut) accused wealthy individuals of “…using these cheap scams to pay as little as 1 percent income tax and rob the public purse at a time when the rest of us are faced with recession, austerity, and the deepest cuts to our vital public services in a generation.” Another group (Tax Justice Network) claims that Jersey is a “key component in the international tax avoidance industry” that deprives governments of the revenues needed “to provide a stable economy in which people can live, work, and thrive.”

The TNI note says that the UK government intends to challenge the scheme “in every way.” I presume this means court challenges as well as legislative amendments. In view of the wide publicity that has been given to the scheme, both approaches seem likely. At the same time, as the reactions noted above indicate, the debate about the appropriate level of taxation for the wealthy is heating up. And this is not just in the UK. To cite just a few recent examples from other places: Ontario moved this year to add a new tax bracket for incomes over $500,000; president Obama proposes to increase taxes on the rich in the US; the newly elected president of France proposes to increase taxes on banks, oil companies and the rich; the OECD has stepped up its efforts to get tax havens to become more transparent; and the occupy movements in both Canada and the US would have significantly higher taxes for the “one percenters.”

In the midst of all this, is legal tax avoidance in danger of becoming politically incorrect in Canada? The Supreme Court of Canada doesn’t seem to think so. In the course of his reasons in the Copthorne appeal late last year, Justice Rothstein made the following observation on the meaning of the terms “abuse or misuse” in section 245 of our Act. “(These terms) …might be viewed as implying moral opprobrium regarding the actions of a taxpayer to minimize tax liability utilizing the provisions of the Income Tax Act in a creative way. That would be inappropriate. Taxpayers are entitled to select courses of action or enter into transactions that will minimize their tax liability (see Duke of Westminster).” So in this country at least, the fat lady hasn’t yet started to sing an aria to the end of legal tax avoidance. But might a careful listener detect the sound of her clearing her throat?