Canadian Tax Journal: The Fourth Decade—
1983-1992
Neil Brooks*
THE JOURNAL AND ITS FEATURE S
Douglas Sherbaniuk, who was the director of the Canadian Tax Foundation for
almost 25 years, from 1969 to 1994, always emphasized the importance for the journal
and for the Foundation more generally of publishing the very best of Canadian tax
scholarship. In his report to the 39th annual meeting of the Foundation, near the
beginning of the journal’s fourth decade, he explained:
Research in taxation and public expenditures, like research in other areas, is an effort
to break new ground, to advance the frontiers of knowledge, and to gain new understanding of the ways in which our tax laws and spending programs work or do not
work. . . . The objective of the research program is to seek out and support able tax
practitioners and practical scholars who will focus attention on topical as well as
fundamental issues in taxation and government spending. . . . The publications that
result from their studies are intended to offer reliable, illuminating, and lasting contributions that will foster understanding of our tax system and spending programs
within the professions, government, and the academic and business communities.1
He repeated this message the next year:
[S]ince its establishment forty years ago, the Foundation has defined its mission
clearly—to contribute to the improvement of the tax laws and the process of citizen
education in the fields of taxation and public expenditure primarily through its
research and publications. This is the Foundation’s raison d’être, the test it must pass
if it is to justify the labours of its staff and the substantial sums of money it spends.2
Under the able editorship of Laurel Amalia, the journal continued to serve this
objective throughout its fourth decade. Laurel was the Foundation’s general editor
throughout this period, responsible for all of the Foundation’s publications, as well
as the journal. Douglas Sherbaniuk extolled her virtues in his annual reports. For
example, he noted in his 1983 annual report that “[c]ontributors have come to know
how helpful she can be in making a mediocre manuscript acceptable and a good
* Editor, Canadian Tax Journal, and of Osgoode Hall Law School, York University, Toronto.
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manuscript even better.”3 In annual reports later in this decade, he also regularly
acknowledged how fortunate Laurel was to have the administrative assistance of
Leesa Armstrong.
In the early 1980s, as I mentioned in my review of the third decade, the journal
established a formal process for reviewing submitted manuscripts. Douglas Sherbaniuk
explained the purpose of this review process in his annual report for 1983:
To ensure our publication standards are met, articles submitted for the Journal and
manuscripts for books are reviewed by staff members or one or more outside referees
in private practice, the universities or the business community. Almost invariably the
product is better for their efforts. Unsolved problems are uncovered, articulation is
improved, and erroneous judgement is corrected. Quality control for us is more than
a slogan.4
Over the fourth decade, the journal continued to grow in size as well as improve
in quality. In 1976, it ran to about 700 pages; in 1981, to nearly 1,000 pages; in 1986,
to more than 1,600 pages; and in 1991, to more than 1,800 pages.
The eight features in the journal had become, by the fourth decade, indispensable
sources of information for analysts and practitioners who wanted to stay informed
about the subjects with which they dealt. Two of the features had been edited by
Foundation staff members since 1968: Fiscal Figures by David Perry and Checklist
by Millie Goodman. Near the end of 1983, Current Cases editor Tom McDonnell of
McMillan Binch was joined by Richard Thomas, also of McMillan Binch. In 1987,
after seven years of service, Paul Gratias of Clarkson Gordon withdrew as coeditor (with W.E. Crawford) of Personal Tax Planning. He was succeeded by Alan
Dewling, also of Clarkson Gordon. With the first issue of 1989, David Timbrell
relinquished his position as co-editor (with Douglas Ewens) of The Taxation of
Corporate Reorganizations. His successor, Kevin Dancey of Coopers & Lybrand,
served as co-editor until 1992, when he was succeeded by Robert Spindler, also of
Coopers & Lybrand. International Tax Planning, one of the first features to appear
in the journal, made its debut in the first issue of 1976 under the editorship of
Robert Brown of Price Waterhouse. In 1989, he passed this role on to Robert Dart
and David Broadhurst, both also of Price Waterhouse. In 1987, Sanford H. Goldberg
replaced Sidney Roberts, both of Roberts & Holland, as editor of Selected US Tax
Developments.
One feature started at the beginning of the fourth decade, another ended at its
close. In the fall of 1983, Current Tax Reading was introduced. Throughout the
decade it was edited by Brian Arnold of the Faculty of Law at the University of
Western Ontario. As explained in a note preceding its first appearance, the feature
found its justification in the rapid proliferation of tax materials:
In the last 10 years, we have witnessed an explosion in the amount of literature on all
aspects of taxation. At one time, a person could reasonably expect to acquire everything
published dealing with Canadian taxation. Now it is difficult to read or even be aware
of the tax books, articles and other material being published. Moreover, Canadians
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who are trying to keep up with significant developments in other tax systems, especially in countries with which Canadians have significant business transactions and
investments such as the United States and the United Kingdom, find the proliferation of tax literature on a worldwide basis truly intimidating. . . .
This feature is not intended to be a traditional book review column. Rather, it will
provide a wide-ranging review of selected pieces of all forms of tax literature—
government reports, books, articles, and conference proceedings, for example. Some
publications will be reviewed in depth; others may simply be noted.5
Brian Arnold wrote most of the notes and reviews for the feature, although
from time to time one of his colleagues or students at the Faculty of Law would
contribute a piece. In each issue he would review a dozen or more books, reports of
government departments and international agencies, and articles that had appeared
in leading US, Australian, and British law journals. Current Tax Reading quickly
became an invaluable source of tax information, and for many it was the feature
they turned to first when they received a new issue of the journal.
As most readers are undoubtedly aware, Brian Arnold’s contribution to the
journal throughout this decade, and indeed over the past 30 years, extends well
beyond his editorship of Current Tax Reading. He was the author or co-author of
11 leading articles that appeared in the journal over the fourth decade. Numerous
authors of leading articles graciously acknowledged his assistance in the preparation
of their work. And, of course, over this period he published three substantial monographs with the Foundation.6
The longstanding feature Checklist was published without interruption from
1968 under the editorship of Millie Goodman. It provided updates of information
relating to federal and provincial budgets, amendments to regulations, and nonbudgetary tax changes. The final Checklist appeared in the last issue of 1991. Douglas
Sherbaniuk explained that there were a number of reasons for discontinuing it:
For one thing, Millie Goodman retired from the staff at the end of January, after
nearly 26 years of devoted service. For another, the feature has been overtaken by
events. Advanced technology and on-line services have made electronic access to tax
developments available on a daily basis. Checklist was thus serving more as a historical
record of tax events than a vehicle for informing readers of current developments. 7
Although Checklist was discontinued, the Foundation’s annual survey of provincial
budgets carried on.
In 1985, volume 33, issue 3, a significant change was made in the content of the
journal. Until this time, most of the articles in the journal were published in English.
Although the journal sought articles written in French, few were submitted. In
order to make the journal of more interest to those who preferred to read material
in French, authors were asked to prepare a two- or three-page summary of their
work. This summary was then translated into the other official language and placed
at the beginning of the article.
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In the first issue of 1987, further changes were made in the journal to reflect its
bilingual character. The cover was redesigned and a French title adopted (Revue
fiscale canadienne), and information about the journal and the Foundation and other
incidental material were presented in both French and English. Moreover, the
journal set the objective of publishing at least one original French-language article
in each issue. Every issue in 1987 contained a substantial article in French, as did
most of the issues for the remainder of the fourth decade. Furthermore, commencing with the first issue in 1989, the popular feature Personal Tax Planning was
published in both official languages (in French as Planification fiscale personnelle).
At the end of this decade the appearance of the journal changed once again.
The front cover was redesigned to provide more details with respect to the content
of the features, and administrative material concerning submissions to the journal
was moved to the preliminary pages. And in the last issue of 1991, the journal began
carrying advertising.
SHIFTING TA X POLICY PARADIGMS
One of the many joys of reading through a decade of journal issues is discovering
trends in the subject matter, methodologies, and perspectives of the articles published in the journal. Although this observation is based on only a casual empiricism,
it does seem that the articles published in the 1980s reflected a profound shift in
the tax policy paradigm—the complex set of shared beliefs and assumptions upon
which practitioners and commentators rely in analyzing the tax world.
The publication of the report of the Royal Commission on Taxation (the Carter
report)8 in 1967 was the high-water mark of the tax reform movement during the
heady days of Keynesian liberalism. There was wide agreement that income was the
fairest tax base and that the tax system could and should be used as an instrument
for achieving a more socially acceptable distribution of income than that which
results solely from market forces. It was believed that the tax system should be
judged primarily—almost solely—on how equitably it distributed the tax burden.
There was also confidence in the government’s ability to use tax revenues to
engage in social engineering to increase both people’s material standard of living
and the quality of their lives.
In the 1970s, as productivity growth declined, inflation accelerated, and unemployment remained high, this consensus about the role of government and, therefore, tax
policy came unglued. The focus of political debate shifted dramatically, from social
policies and their efficacy in achieving equality, to the increasing size of the public
sector and its harmful effect on economic efficiency. The perception of the relationship between the welfare state and social crises was summed up in the opening
address of the secretary general of the Organisation for Economic Co-operation
and Development (OECD) at a conference convened in 1981 to discuss the welfare
state in crisis. He suggested that it had become clear
that the real social progress we can achieve is limited by economic means; the method
of achieving social objectives should not be allowed to undermine the economic
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system which produces the means; and that we live in societies based on the principle
that individual citizens and consumers are, in the main, the ultimate arbiters for
allocating means to ends.9
This changing political perspective, which has been characterized as a shift
from welfare liberalism to neoliberalism, was reflected in the changing approach to
tax analysis. In general terms, equity concerns gave way to efficiency concerns.
This shift in the focus of tax policy has been noted by many commentators and is
illustrated in the work of Canadian commissions in the mid-1980s. In 1985, the
Royal Commission on the Economic Union and Development Prospects for Canada
(the Macdonald commission) observed:
When the Royal Commission on Taxation (the Carter Commission) reported in 1966,
one of the foremost goals of policy analysis was the establishment of a tax system that
was equitable in its treatment of different groups. While equity remains an important
goal, tax specialists now stress the need for a [tax] system that is calculated to encourage
economic efficiency.10
This shift was also clearly reflected in the terms of reference the Economic Council of Canada set for itself in 1984 when it decided to examine the possibilities of
tax reform. It deliberately put aside questions relating to the distribution of the tax
burden and concentrated instead on the question, “How does the tax system affect
the efficiency of the Canadian economy and our standard of living?” 11
The profound nature of this shift in paradigms can be seen in the reinterpretation
by tax analysts in the late 1970s and 1980s of every traditional goal of, and every
criterion for evaluating, the tax system. Under the Carter paradigm, the tax system
was seen as an important policy instrument for achieving all of the broad objectives
of government: (1) providing a wide range of goods and services that the market
cannot provide efficiently, (2) redistributing income in a way that is more socially
acceptable than that which results solely from market forces, and (3) stabilizing the
economy near full employment and a low rate of inflation.
With respect to the goal of financing a broad array of public goods and services,
tax analysts were much more likely to argue, beginning in the late 1970s, that taxes
could be reduced substantially. These analysts believed, contrary to the assumptions
of the welfare liberals, that properly constituted markets could provide most of the
goods and services that individuals desired. Moreover, they argued, government
intervention often leads to greater inefficiencies than those created by the so-called
market failures identified by welfare liberals. The case for smaller government and
reduced taxes was buttressed by research showing that the structure of democratic
politics is likely to lead to uncontrolled government expenditures.
The case for a less redistributive tax system was supported by economic research
that tended to show that (1) resources were much more equally distributed than
previously supposed, (2) the tax system was more redistributive than previously
believed, (3) increased government intervention in the economy over the last 30 years
did not contribute significantly to greater equality in the distribution of income,
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and (4) any small increase in equality that had been achieved was won at a much
greater cost to lost output and efficiency than had been anticipated.
Following John Maynard Keynes’s prescription, welfare liberals believed that in
the absence of public policy guidance, market economies tended to be subject to
substantial fluctuations and could suffer from sustained periods of unemployment,
inflation, or both. Government fiscal instruments—spending and tax policies—were
regarded as the most effective tools for demand management and thus for stabilizing the economy. In the late 1970s and 1980s, however, the economic doctrine of
monetarism almost completely replaced Keynesianism as the prevailing orthodoxy.
Following the period of stagflation and the productivity slowdown beginning in
the 1970s, public policy analysts became greatly concerned with the need to increase
economic output. For neoliberals, the straightforward prescription for increasing economic output was to reduce the amount of government involvement in the
economy. In Canada, this model for economic growth was set out in considerable
detail in the policy paper released by the newly elected federal Conservative government in 1984, entitled A New Direction for Canada: An Agenda for Economic
Renewal.12 Its basic premise was that the private decisions of consumers and producers should provide the dominant means of determining what was valued in
Canadian society and of allocating resources. Thus, it emphasized the absence of
state-imposed restrictions on the free flow of labour, investment, and financial capital.
The paper formed the philosophical basis, if not the blueprint, for most of the government’s economic initiatives for the rest of the decade: privatization, deregulation,
deficit reduction, trade liberalization, labour market restructuring, and tax reform.
The tax prescriptions that followed from this change in the role of government
were (1) to ensure that the allocation of resources is left up to market forces, the tax
system should not influence personal or business decisions; and (2) to ensure that
Canadian businesses are competitive, the tax system should not impose a greater cost
on corporations than that imposed by Canada’s competitors, particularly the United
States.
In addition to changes in thinking about the role of the government in allocating
resources, distributing income, stabilizing the economy, and achieving economic
growth, this period brought changes in the conventional understanding of the
three traditional tax policy evaluative criteria of equity, efficiency, and simplicity.
One of the fundamental axioms of social justice is that people in similar circumstances should be treated the same. In tax policy analysis, this evaluative criterion is
referred to as horizontal equity: people in the same circumstances should pay the
same amount of tax. Traditionally, income was the measure used in determining
whether two individuals are in similar circumstances for tax justice purposes—two
individuals with the same annual income should pay the same amount of tax. The
result of this thinking was a heavy emphasis on the role of the income tax in a fair
tax system. During the late 1970s and 1980s, however, the concept of horizontal
equity was often reinterpreted to refer to two taxpayers who consume goods and
services of the same value, not two taxpayers who have the same income. This
notion—that consumption, not income, was the preferred tax base—was consistent
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with the dictates of neoliberalism, which held that consumption taxes increase personal choice and economic efficiency. Most people think of a sales tax such as the
goods and services tax when they think of consumption taxes. During the 1980s,
the idea of a personal consumption taxed gained currency in Canada. The idea was
not new; it goes back at least to Hobbes. Its popularization, however, owes much to
the writing of Nicholas Kaldor13 in the 1950s, as well as to two well-known reports
in the late 1970s advocating such a tax, one published in the United States14 and
the other in the United Kingdom.15 In Canada, a personal consumption tax was
endorsed in the mid-1980s by both the Royal Commission on the Economic Union
and Development Prospects for Canada16 and the Economic Council of Canada.17
The second traditional criterion by which taxes are evaluated is neutrality: taxes
should avoid distorting the workings of market mechanisms. Until the mid-1970s,
the conventional economic wisdom, based on countless empirical studies (some
published in the journal and referred to in earlier reviews), was that taxes had little
effect on taxpayers’ decisions, such as the decision to substitute leisure for work or
consumption for savings. The possible effects of taxes were therefore given little
weight in tax reform exercises. However, a series of empirical studies in the late
1970s stood this conventional wisdom on its head. These studies concluded that
taxes, particularly those that fell on high-income taxpayers, seriously affected their
supply of labour and their savings behaviour. Tax policy analysts thus began emphasizing the need to reduce marginal tax rates on high incomes. Moreover, during
this period, much more work was done on the effect of taxes on a broad range of
other household and firm decisions such as portfolio allocation, investment, the
financial behaviour of firms, and risk taking and on macroeconomic variables such
as employment, growth, inflation, and international trade and capital flows.
Increasing concern over the complexity of the tax system also led tax policy analysts
in the 1980s to emphasize the need for greater simplicity in the system. Although
this concern was not at the centre of the tax reform exercises, it was one of the
arguments used to justify reducing the number of tax brackets in the rate structure.
In the 1980s, in a further reflection of the new tax policy paradigm, a new evaluative
criterion was added to the traditional criteria of equity, neutrality, and simplicity. It
became widely accepted that in an age of globalization the most important consideration in designing a country’s tax system should be to ensure that the system does
not differ greatly from those in other countries, particularly in terms of its effects on
income from capital and high-income individuals. Competitiveness, in the sense of
not imposing a higher burden than that imposed in the United States, became one
of the most significant objectives of tax policy.
These fundamental reinterpretations of the objectives of government, and therefore of the tax system, and of the criteria that should be used to evaluate the tax
system, were reflected in the articles published in the journal. A preponderance of
tax policy articles in the journal dealt with the need to reduce the tax burden and
lower marginal tax rates; the futility of using the tax system to achieve stabilization
policies; the virtues of placing less emphasis on income taxes and more emphasis
on consumption taxes; concerns over the wide variety of economic margins at
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which taxes might distort decisions; the need to simplify the tax system; and the
need to make the Canadian tax system more competitive. Although it may be
debatable whether these reinterpretations truly add up to a paradigm shift in tax
policy analysis, there is no doubt that a blueprint for tax reform drawn from these
reinterpretations would look very different from the Carter report.
R E D U C I N G T A X E S A N D T A X R AT E S
The most obvious cost of taxation to taxpayers is the amount of taxes they have to
pay the government. However, the government uses this revenue to provide goods
and services that benefit all members of society. This cost of taxation is thus offset,
to some extent, by the benefits derived from expenditures financed by tax revenues.
Whether one thinks this cost is too high or too low depends on whether one thinks
the government is spending the tax revenue wisely. However, in addition to the
cost to taxpayers of actually paying taxes, taxation imposes an additional cost from
which no one benefits. This cost is variously described as the deadweight loss or
the excess burden of taxation (that is, the burden in excess of the amounts actually
paid). When a tax is imposed on a particular good or activity, the tax increases the
price of that good or activity and therefore causes some people to avoid the tax by
substituting a less valued but untaxed good or activity for the taxed good or
activity. For example, a tax imposed on income reduces the return on earning
income, so some people will work less and enjoy more free leisure time, even
though in the absence of the tax they would have preferred to work more in order
to earn more income. Even though these individuals do not pay the tax, their
welfare will be reduced because the tax induces them to substitute less-valued
leisure for more-valued work. Since no one benefits from this effect, it is called a
deadweight loss of the tax. The concept of deadweight loss is usually explained in
microeconomic textbooks with the aid of diagrams and algebraic formulas. However, the idea behind the concept is straightforward: taxes, like all forms of legal
regulation, can reduce the welfare of individuals by inducing them to change their
behaviour and can thus prevent them from achieving some of the gains to be
realized by voluntary exchanges. Taxes should be designed, most economists argue,
to minimize deadweight loss.
The total amount of deadweight loss, or reduction in social welfare, caused by
taxes is determined by a number of factors. The most important factors are the
level of marginal rates of tax and the influence of after-tax prices on the actions of
individual consumers and producers. Everyone agrees that lower marginal tax rates
produce a lower deadweight loss. The contentious question is, how much lower.
Empirical studies in the 1960s, around the time of the Carter commission, suggested that the deadweight loss created by the tax system was relatively small, on
the order of 1 percent of gross domestic product (GDP). In the late 1970s and early
1980s, a number of studies estimated that the welfare cost of taxes was substantially
higher. Some studies suggested that the welfare loss created by taxes was anywhere
from 5 to 10 percent of GDP. To make the welfare losses caused by tax distortions
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appear to be even more imposing, researchers began expressing them with respect
to the last tax dollar collected, instead of the average tax dollar collected, and as a
percentage of revenue collected, instead of the much larger GDP number. Thus,
some studies suggested that the cost of raising $1 of additional revenue was on the
order of $3—the actual $1 in revenue raised plus $2 in lost welfare to affected
taxpayers because of changes in their behaviour caused by the tax. If these findings
were correct, one would have to believe strongly—if not blindly—in the efficacy of
government spending programs in order to support any increase in taxes.
A number of articles in the journal over the decade reflected the rising concern
over the deadweight loss of taxes. Most directly, Wayne Thirsk and Jeff Moore
undertook a study in which they estimated the social cost (the marginal welfare
cost) of Canadian taxes on labour income.18 They found that raising an additional
dollar of taxes from labour income under the existing Canadian tax system could
result in a welfare loss of as little as 18 cents and as much as $1.97. They suggested
that a conservative estimate would be around 40 cents. In other words, a government program financed by raising an additional $1 of revenue would have to be
worth at least $1.40. Conversely, if a government program were simply worth what
the government paid for it, then cutting the program and lowering taxes on labour
income by $1 would increase the welfare of Canadian taxpayers by 40 cents. In their
conclusion, Thirsk and Moore refer to their highest estimate:
Our estimates for 1987 indicate that the marginal welfare cost of raising an additional
dollar of revenue may be as high as $1.97. In this case, a program financed by the
additional dollar must have a marginal benefit to society of nearly $3.00 if it is to
make a positive contribution to Canada’s collective welfare.19
This estimate of the distortionary cost of taxation seems remarkably high—and
obviously rests upon a whole series of contentious empirical and value judgments.
Nevertheless, if one accepts the estimate, or even a figure close to it, the case for
reducing marginal tax rates is quite compelling, unless one attaches a very high
value to the negative distortionary costs or distributional gains on the government
spending side.
These kinds of studies gave impetus to the movement for flat (or flatter) tax
rates. Although the case for flat-rate taxes was to become more prominent in
Canada in the 1990s, when their adoption was advocated by a couple of economic
think tanks and political parties, Roger Smith wrote a series of three scholarly articles
in the journal in the mid-1980s dealing specifically with the case for flat-rate taxes.
In his first article on this subject, “Base Broadening and Rate Changes: A Look at
the Canadian Federal Income Tax,”20 he showed that if rates were flattened and the
tax base were broadened at the same time, tax reform could be undertaken in a way that
was almost distributionally neutral. Since high-income individuals benefited disproportionately from many of the tax expenditures in the Income Tax Act at that time,
the tax base could be broadened by the removal of these expenditures and tax rates
could be substantially reduced, and yet the percentage of income paid by taxpayers
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in each income class would not change significantly. Indeed, he showed that if the
tax base had been significantly broadened in 1980 and $4,500 of everyone’s income
were exempt from tax, a flat 20 percent rate of income tax would have been almost
revenue and distributionally neutral. Although Smith itemized all of the traditional
reasons given by flat taxers for preferring a flat tax rate—reduced incentive effects,
an increase in reported income, simplified administration, reduced tax-avoidance
opportunities, the elimination of bracket creep due to inflation—he suggested that
the main advantage of a flatter tax rate might be that it would make broadening the
tax base more politically acceptable. This is a lesson that the government had apparently learned by the time of the 1987 tax reforms.
In another article, published two years later, Roger Smith applied his methodology to the United States, the Netherlands, and Canada and compared the results.21
He found that a 20 percent flat tax imposed in 1980 with a broadened tax base
would have raised about the same amount of revenue as the existing progressive
rates and would have resulted in about the same distribution of the tax burden in
Canada. However, a similar tax reform exercise in the United States and the
Netherlands would have resulted in a substantial shift in the tax burden from highto middle-income taxpayers. He explained these results on the basis that, in the years
studied, the US and Dutch rate structures were more progressive, high-income
taxpayers benefited less from tax expenditures in those countries, and the Canadian
tax system provided greater relief for low-income taxpayers. From his results, he
concluded that it would be much easier for Canada than for either of the other
countries to move to a flat-rate tax.
In these first two studies, Roger Smith found that the distribution of the tax
burden resulting from Canada’s progressive income tax rates in the early 1980s was
not much different from the distribution resulting from a tax with a substantially
broader base and a flat rate of 20 percent. On the basis of these results, he
suggested that Canada should adopt a flat-rate tax. But he might have drawn the
opposite conclusion—namely, that high-income taxpayers were not paying their
fair share of tax and that a progressive tax schedule should be applied to a more
comprehensive tax base in order to achieve a greater redistribution of income. In
his third article on flat taxes, he dealt more directly with this argument. In “Rates
of Personal Income Tax: The Carter Commission Revisited,”22 Smith noted that
the tax reform movement in the 1980s put much less emphasis on progressive tax
rates than had the tax reform movement in the 1960s. He catalogued a number of
reasons why this might be so and why the Carter commission’s proposed progressive rate structure might not be considered appropriate 20 years later. First, recent
studies suggested that property, sales, and corporate taxes are not as regressive as the
Carter commission had assumed and might even be progressive. Therefore, contrary
to Carter’s assumption, the income tax may not need to be progressive to compensate for the regressivity of these taxes. Second, the Carter commission had assumed
that progressive tax rates created much less deadweight loss than was suggested by
more recent studies. In addition to these two important considerations, Smith listed
a number of other factors that would likely lead to recommendations for lower and
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less progressive tax rates than those put forth by Carter: the increased amount of
revenue raised through the income tax relative to other taxes; the effect of inflation
on a tax rate structure with many brackets; the reduced rates of income tax in the
United States; the increased awareness of tax expenditures and the fact that a lower
rate structure can achieve the same degree of progressivity if these expenditures are
removed from the Income Tax Act; the fact that reduced rates will lead to reduced
political pressures for more tax expenditures; the growing concern over the size of
the underground economy and the effect of high rates on non-compliance; and
increasing concern over the size of government.
As a further illustration of how the movement for lower tax rates was reflected
in and gained impetus from articles published in the journal, John Strick wrote an
article in 1992 suggesting that Canada had reached its critical limit to taxation.23
He noted that direct personal taxes as a percentage of personal income had increased from 6 percent in 1950 to 22 percent in 1990 and that total revenues as a
percentage of GDP had increased from 24 percent in 1950 to 43 percent in 1990. As
evidence that Canadians were approaching a critical limit of tolerance for taxation,
he discussed each of the following trends: “(1) social discontent and tax revolts, (2)
continuous deficit financing, (3) legislative attempts to control government spending,
(4) funding ceilings and cutbacks in essential social services, (5) increasing reliance
on non-tax revenue sources, and (6) pressure for international tax harmonization.”24
BROADENING AND PERFECTING THE TA X BASE
The other major goal of tax reforms in the 1980s, besides lowering marginal tax
rates, was broadening the income tax base. This aim was variously described as making
the tax system more neutral or levelling the playing field. In the 1960s, broadening
the tax base was urged on the grounds of horizontal equity: two taxpayers with the
same amount of income should pay the same amount of tax, regardless of the sources
of their income. In the 1980s, reflecting the paradigm shift in tax policy analysis,
this objective was more frequently justified on the grounds of economic efficiency: the
tax base should be as comprehensive as possible so that the tax system does not
distort the decisions of households or firms. A number of base-broadening issues are
unique to the income tax and have been and still are perennial issues, such as
eliminating the double taxation of corporate income, inflation indexing, capital gains,
and saving incentives. During the 1980s, a number of other base-broadening and
refinement issues came to the fore and were dealt with in articles in the journal.
It was always understood that almost all life insurance policies combine pure
insurance and savings features. During the 1960s, tax policy analysts pointed that
the tax law unfairly and inefficiently discriminated in favour of saving through life
insurance policies since income earned in such form generally escaped tax. The
government made some changes to the taxation of life insurance companies and
policies in 1969 and again in the late 1970s, but major changes were proposed in
the November 1981 budget. The government’s newly introduced provisions for
taxing accruing investment income every three years were to apply to life insurance
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policies and deferred annuities. This proposal sparked one of the most vigorous
lobby efforts from the life insurance industry in Canadian tax history. The government soon backed down from its proposal and exempted qualifying policies (which
included most policies) from the new accrual rules. In part because they involved
actuarial calculations, the new rules were stunningly complex. Alan Macnaughton,
who was with the Department of Finance at the time, wrote a clear and comprehensive survey of the details of the rules for the journal.25 Later, Jim Welkoff wrote
a masterful article on the policy and history of taxing the investment component of
a life insurance policy.26 He explained that there were three basic ways of taxing such
investment income: (1) when the taxpayer disposes of the policy, the accumulated
interest could be taxed; (2) each year the investment income could be attributed to the
policyholder as it is credited to the policy reserve in respect of the policy; or (3) as a
proxy for taxing policyholders directly, a flat tax could be imposed on the investment income that is earned on policy reserves and that accumulates for the benefit
of policyholders. Each method of taxing such income had been attempted or proposed in Canada over the previous 20 years. Welkoff carefully reviewed the equity,
efficiency, and administrative considerations with respect to each method of taxation. Although he did not advocate a particular solution, he concluded that “[t]he
complexity of the current system is due in part to changes in policy objectives, in part
to the technical deficiencies of prior amendments, and in part to the failure of successive governments to enact into the law the proposals they originally introduced.” 27
The familiar Haig-Simons-Carter concept of income requires that, in an equitable tax system, an individual’s income for a given period (usually a year), upon
which he or she should be taxed, equal (1) any increase in net wealth and (2) the
market value of personal consumption. Although an increase in net wealth might
be measured directly, the market value of the goods and services that a taxpayer has
personally consumed in the year can only be measured indirectly. Under the Act, a
taxpayer is required to aggregate all of the sources of his or her income; deductions
are then allowed for all expenses other than those that provided the taxpayer with
personal consumption benefits. The resulting number is the value of the goods and
services the taxpayer personally consumed in the year. The definition of what
should count as personal consumption, and therefore not be deductible from gross
income, is the source of endless tax policy debates. Equally difficult is the question
of how “dual-purpose” expenses should be treated for tax purposes. How much
should be deductible if a taxpayer incurs an expense, such as a business meal, that
serves both a personal and a business purpose? In theory, the fair market value of
that part of the expense from which the taxpayer derives a personal benefit should
not be deductible. But how can that amount be determined? As a result of a series
of articles, largely in US law journals, tax policy analysis became much more
sophisticated at answering this question in the 1980s. Some of the conceptual
clarity that resulted was reflected in the tax reform proposals in Canada in the late
1980s. For example, restrictions were placed on the deductibility of business meals
and home office expenses in an attempt to ensure, to some extent at least, that
business taxpayers were not able to deduct personal expenses. In a 1989 article,
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Claire Young dealt exhaustively and analytically with the present Canadian law and
the proposed changes.28 Drawing on the policy frameworks developed by American scholars for thinking about the issue of dual-purpose expenses, she analyzed
five options for dealing with such expenses. With respect to entertainment expenses,
she concluded that
the 80 percent limitation on the deduction of entertainment expenses should be
repealed and replaced by rules that prohibit any deduction for specific entertainment
expenses, including the cost of the taxpayer’s own entertainment, the cost of luxury
items, and the cost of entertainment in surroundings not conducive to business.
Further, deductible expenses should be deductible only to the extent that they are not
lavish or extravagant. The requirements for substantiation of expenses should be
strengthened and more detailed returns required in order to assist Revenue Canada
in verifying the expenditures.29
Although she thought that the recently enacted amendments for home office expenses were more defensible than those for entertainment expenses, she concluded
that it was unfortunate that the government had dealt with only two of the mixed
business and personal expenses instead of reviewing and evaluating the deduction
of all such expenses.
One of the most elusive and puzzling problems in technical tax policy analysis,
one that has bedevilled lawyers and economists since the inception of the income
tax, is how to treat the interest expense for tax purposes. In the review of the third
decade of the journal, we reproduced Gordon Bale’s wonderful 1972 article on this
subject. He suggested that the interest expense on money borrowed for investment
purposes should generally be deductible only from investment income. Interestingly, a proposal very similar to his was made in the November 1981 budget. As
with a number of other proposals in that budget, however, the government hastily
retreated from the proposal and promised to study the issue more carefully. Two
decades later, tax analysts are still awaiting the results of the study.
In an ideal tax system, the deductibility of interest poses two familiar problems.
First, when should an interest expense be treated as a personal expense, and hence
non-deductible, and when should it be treated as a deductible business expense?
Second, when should interest that is deductible as a business expense be treated as
a current expense, and when should it be required to be capitalized? The answers
to both of these questions are contentious, and the issue is complicated even
further by the fact that the income tax is far from ideal. Many forms of investment
income are not taxed until they are realized. Thus, allowing a current interest expense
for money borrowed to purchase such investments gives rise to tax-arbitrage opportunities—most obviously, the opportunity to acquire a loan, on which interest is
deductible, to produce income that is not fully and currently taxable. On its face,
tax arbitrage seems objectionable for a simple reason. If the income from an
investment is not fully taxable, why should a deduction be allowed for the full costs
of generating that income? However, many believe that tax arbitrage is not really a
problem, and even if it is, there is no administrative way of preventing it that is less
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harmful than the problem itself. Moreover, should it matter whether the arbitrage
opportunity arises from a provision deliberately enacted by Parliament in order to
pursue a particular policy objective, rather than from legislation that Parliament
accepts as being less than ideal in order to make it administratively feasible?
In the late 1980s, after the dust-up over the proposal in the November 1981
budget to restrict the deductibility of interest on money borrowed to purchase an
investment, and after the Supreme Court of Canada decision in Bronfman Trust,30
in which the court suggested that a tax-avoidance test might be grafted on to the
direct tracing rule for determining the purpose of borrowed money, the journal
published a series of articles on the interest expense. In a wide-ranging article,
Keith McNair recommended that the interest expense be restricted where amounts
are borrowed to purchase investments that are taxed preferentially.31 He reached
this conclusion after carefully reviewing the many provisions in the Act in which
the deductibility of interest is restricted, the substantial and unjustified advantages
that investors could gain under the present rules, and the corresponding restrictions
on the deductibility of interest in the United Kingdom and the United States. He
also showed that the present rules can have the effect of converting an unprofitable
before-tax investment into a profitable after-tax investment.
In 1989, the government announced that it was again studying the deductibility
of interest and would publish a discussion paper or introduce draft legislation. The
Joint Committee on Taxation of the Canadian Bar Association and the Canadian
Institute of Chartered Accountants prepared an extensive submission to the minister of finance on the issue. In 1990, Tim Edgar and Brian Arnold published an
equally extensive article in the journal, which they modestly entitled “Reflections”
on the joint committee’s submission.32 They reviewed all of the recommendations
in the joint committee’s brief, but they also faulted the committee for not dealing
with the equally important problem of the mismatch of the deduction of interest
expense and the inclusion in income of related revenue. They noted that this mismatch may arise when an individual borrows to purchase an investment in which
the investment income is not fully taxed or not taxed currently. Moreover, they argued
that the mismatching problem arises when a Canadian corporation borrows funds
to finance a foreign affiliate. This has been a tax policy debate that has been going
on in Canada since the November 1981 budget.
Eventually, in December 1991, the government released draft legislation dealing
with the deduction of interest. Brian Arnold and Tim Edgar once again jumped
into the fray with a long critique of the proposed legislation.33 The legislation did
not deal with the difficult question of the appropriate restrictions on the deductibility
of interest on money borrowed to earn investment income. Instead, it largely
codified the law as it was understood by tax practitioners before the Supreme
Court’s obiter remarks in Bronfman Trust.34 After an extensive analysis, the authors
concluded by questioning the need for the legislation. They said:
What we have, then, after nearly five years is over 10 pages of complicated legislation
to restore the law to its pre-Bronfman Trust state. The responsibility for this sorry
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situation rests squarely with the Supreme Court of Canada. It could have restricted
its reasons for judgment to the narrow issue involved in the case; or, if the court
wanted to make general comments about interest deductibility, it should have done so
in a careful and comprehensive analysis of the issues. That analysis is missing in the
reasons for judgment. The court did not appreciate the repercussions of its comments.
Our highest court should not make statements in obiter dicta that render well-established
practices uncertain.35
Around this time, Brian Arnold dealt with an equally vexing issue relating to
interest in his article “Is Interest a Capital Expense?”36 Purporting to rely on early
UK cases, Canadian courts have frequently asserted that in the absence of a specific
statutory provision allowing current deductibility, interest incurred for a business
purpose would be a capital expenditure. Arnold carefully reviewed the early English cases and showed that in reaching this result the Canadian courts have misread
some of these cases and ignored others. He concluded that judges could, on the
basis of the jurisprudence, hold interest to be a current expense in some cases.
Furthermore, from a tax policy perspective, “interest is sometimes a current expense and sometimes a capital expense, depending on the use of the borrowed
funds.” 37 He suggested that “perhaps at some point the courts may be persuaded to
re-examine the traditional law and permit exceptions in limited circumstances.” 38
Another issue relating to interest that was dealt with in an exhaustive analysis by
Brian Arnold and Gordon Dixon was whether, for example, interest on a loan used
to purchase an investment that had become worthless should continue to be
deductible.39 They concluded that there is no justification for what appeared to
be the Canadian law at the time that would deny the deductibility of interest when
the source of income that was purchased with the borrowed money is disposed of,
even though the taxpayer did not use the borrowed funds for personal consumption. Shortly after this article was published, the tax law was changed to conform to
their conclusion.
In a tour de force, Tim Edgar analyzed the Canadian rules relating to thin
capitalization, which are designed to prevent foreign corporations from avoiding
tax on their Canadian profits by disguising their distribution as an interest expense.40
He examined every detail of the Canadian rules, reviewed similar but more comprehensive rules that had recently been enacted in Australia and the United States,
explored a number of fundamental changes that might be made to the Canadian
tax system to render the rules unnecessary, and then examined the costs and benefits
of a number of amendments that he suggested should be made to the Canadian
rules to preserve their integrity in the light of changing global economic conditions
and tax laws in other countries.
THE CORPORATE INCOME TA X AND
MARGINAL EFFECTIVE TA X RATE S
During the 1980s, the direction of corporate income tax reforms underwent a
reversal. In the 1970s, numerous incentive measures were introduced into the
corporate tax base. They took the form of fast writeoffs, tax credits, tax exemptions
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and holidays, and reduced rates of tax. It is unclear whether their introduction
reflected a legitimate attempt by the government to deal with the productivity
slowdown of the early 1970s and other national economic priorities or whether, as
some commentators have suggested, the measures were simply an attempt by the
governing Liberal party to win back the support of the business community, which
it had alienated to some extent with the expansion of the welfare state in the late
1960s and early 1970s. In any event, by the early 1980s the corporate tax base was
so riddled with concessions that a large number of companies paid no tax; indeed,
many had huge tax losses that they were carrying forward to offset against future
profits. Tax analysts repeatedly pointed out that these corporate tax incentives
distorted the allocation of capital in the economy, diverted resources from productive
activities to tax-planning activities, and rendered the tax system excessively complex.
In their efforts to warn of the seriousness of the problems that these corporate tax
incentives were creating for the tax system, analysts in the early 1980s were greatly
assisted by one of the most important developments in tax policy analysis over this
period: the concept of marginal effective tax rates. In part because of the clarity
with which analysts could study the problem using the concept, by the mid-1980s
the Canadian government was removing and reducing corporate tax incentives and
broadening the corporate tax base.
The concept of marginal effective tax rates was developed in the late 1970s by
two American economists, Alan Auerbach and Dale Jorgenson, and the literature
on the concept grew at an exponential rate in the 1980s. By the early 1980s, the
concept was being applied and refined by Canadian economists; in the mid-1980s,
it was applied in a series of articles in the journal. The concept also played an
important role in the reform of the corporate tax in 1987. The concept is so useful
in part because it summarizes in a single number the interplay of many complex tax
provisions and their incentive (or disincentive) effect on the decision to invest in
particular assets. It allows analysts to make simple comparisons of tax consequences
across the full range of investment opportunities.
Although refinements of the concept are complex, the intuition underlying it is
straightforward. The neoclassical model of investment behaviour assumes, among
other things, that a firm will seek to maximize its profits over time. This implies
that a firm will invest in capital up to the point where its marginal product of
capital (the amount of extra output the firm gets from an extra unit of capital)
exactly equals the cost of using that capital. The cost of using one unit of capital for
one time period, or, as it sometimes referred to, the user cost of capital or the rental
rate of capital, is its opportunity cost—basically, the interest cost of borrowing to
finance the investment and, if the asset declines in value over the period, the
investment’s loss in value due to depreciation. In this model of investment behaviour,
taxes affect investment decisions by changing the user cost of capital to the firm.
Because the revenue earned by the additional capital in the firm is taxed, the user
cost is generally increased by taxes and thus investments are reduced. In the phrase
“the marginal effective rate of tax,” the term “marginal” refers to the fact that the
concept is a measure not of the total or average taxes paid by the firm but of the taxes
paid on the firm’s marginal investment, expressed as a percentage of the investment’s
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pre-tax rate of return. The term “effective” refers to the fact that the concept takes
into account not only the statutory rate of tax but also all of the major design
features of the tax base that might affect the taxes to be paid, such as the availability
of investment tax credits or accelerated capital cost allowances. The concept thus
offers an easy-to-understand measure of the incentive (or disincentive) that the tax
system provides to undertake a particular project. Since taxes inevitably vary depending
on the type of asset purchased, the industry in which the investment is made, the
method of financing the investment, and the nature of the investor supplying
the funds, all of these variables will affect the marginal effective rate of tax.
The major finding of the studies published in the journal on marginal effective
tax rates, and the finding that drove much of the corporate tax reforms in the
1980s, was that the widespread use of corporate tax incentives had resulted in
effective tax rates that varied widely from industry to industry and from asset to asset.
The variation in rates was seen as a major source of non-neutrality in the tax system,
and economic efficiency considerations dictated the removal of the features of the
tax system that caused these variations.
The first study of marginal effective tax rates published in the journal, in 1985,
was “A Comparison of Effective Marginal Tax Rates on Income from Capital in
Canadian Manufacturing” by Michael Daly, Jack Jung, Pierre Mercier, and Thomas
Schweitzer.41 They computed the marginal effective tax rates on income from
capital for a large series of hypothetical marginal investment projects, with four
distinct characteristics: (1) the type of asset that was purchased—machinery, buildings,
or inventories; (2) the industry in which the investment was made—manufacturing,
commerce, and so on; (3) the manner in which the investment was financed—debt,
new share issues, or retained earnings; and (4) the category of investor that supplied the funds—a household, a tax-exempt institution, or a life insurance company.
Their findings included the following: effective marginal tax rates on income from
capital in Canada varied from a high of 73 percent on building investments in
knitting mills to a low of −77 percent (an effective subsidy) on investments by
insurance companies in paper and allied industries42; “the corporate tax system
contributes little to overall tax rates—indeed, in almost half the manufacturing
industries examined as well as in the manufacturing sector as a whole, it has the net
effect of a subsidy and thus actually reduces the total tax rate”43; “the personal
income tax system accounts for a large part of the overall tax rate but little of the
interindustry or interasset variation”44; and “the wide interindustry dispersion of
effective marginal corporate tax rates is largely attributable to three features of the
corporate tax system: the ITC, accelerated CCAs for machinery, and high statutory
rates.”45 It was in part the result of findings such as these that the government in
1985 and subsequent years reformed the corporate tax system in order to broaden
the tax base and reduce the rates.
A year later, some of the same authors published a similar study in which they
examined various reforms that might be made in order to increase the degree of
neutrality in the tax system.46 They first calculated the marginal effective tax rates
for various projects that might be undertaken under the 1985 tax system. Consistent
with their earlier study, they found that marginal effective tax rates varied considerably,
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from 102 percent on income from investments in buildings in the construction industry
financed with retained earnings owned by domestic households, to −78 percent (that
is, an effective subsidy) on investment in machinery in the manufacturing sector
financed with debt held by tax-exempt institutions.47
In considering various reforms to reduce the effect of the tax system on the
allocation of investment resources, they noted that the combination of a personal
expenditure tax (under which savings would be deductible) and a cash flow corporate tax (under which all investment outlays would be immediately expensed and
interest payments would not be deductible) would reduce the marginal effective tax
rate of these taxes on income from capital to zero and thus remove all distortions.
Considerable revenue might still be raised from such a tax, even though no tax
would be raised from marginal investments, because the tax would continue to fall
on pure profits or economic rents. This is the type of tax that the Macdonald
commission and the Economic Council of Canada concluded that Canada should
consider. However, the authors listed several objections to such a radical tax reform. They found that the corporate tax changes announced in both the 1985 and
1986 federal budgets reduced the dispersion in marginal effective tax rates somewhat, but that an even more neutral income tax system could be achieved by “(1)
ensuring that capital cost allowances correspond more closely to economic depreciation at replacement cost, (2) repealing the investment tax credit, (3) restricting
the interest deduction for corporate tax purposes to real rather than nominal
interest payments, and (4) cutting statutory corporate tax rates.”48
The following year, the same authors published another study comparing the
marginal effective tax rate on investments in Canada with that on similar investments made in other countries.49 In 1984, Mervyn King, a UK economist, and Don
Fullerton, a US economist, published a widely cited study in which they compared
the marginal effective tax rates for 1980 in Germany, Sweden, the United Kingdom,
and the United States.50 They estimated the overall effective tax rate in each of these
countries to be, from lowest to highest, the United Kingdom (3.7 percent), Sweden
(35.6 percent), the United States (37.2 percent), and West Germany (48.1 percent).51
Incidentally, one of their surprising findings was that these countries fell into the
very same order when they were ranked according to their average annual growth
in GDP. For example, while the United Kingdom had the lowest tax rates, it also
had the lowest rates of economic growth; and while West Germany had the highest
tax rates, it also had the highest rates of economic growth.52 Michael Daly and his
colleagues followed the same methodology as King and Fullerton. They estimated
that the overall marginal effective tax rate in Canada in 1980 was 34.6 percent.53
This placed Canada’s rate below that of the United States, Germany, and Sweden.
In their final study on marginal effective tax rates in the journal during this
period, Michael Daly and Pierre Mercer found that the tax reforms of 1986 and
1987 reduced the dispersion of marginal effective tax rates somewhat, but they
suggested that more should be done to reduce the effect of the tax system on
investment decisions.54 Patrick Grady also published two articles in the journal in
the late 1980s using marginal effective tax rate analysis to compare the tax reform
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proposals and outcomes in Canada and the United States. In his first study, his
major finding was that the average effective tax rate on investment in machinery
and equipment in manufacturing was several percentage points lower in Canada
than it was in the United States. However, if both countries implemented their
proposed reforms, the Canadian rate would be considerably higher than that in the
United States.55 He questioned whether this reflected sensible Canadian tax policy.
In his followup study three years later, he found that Canada retained a slightly
lower marginal effective tax rate on investment in machinery and equipment in the
manufacturing industry after the tax reforms in both countries had actually been
implemented, but only because Ontario and Quebec had introduced investment
incentives for the industry.
The concept of marginal effective tax rates, for all its usefulness in measuring
the possible incentive or disincentive that the tax system might have on a firm’s
investment decisions, does not measure the firm’s actual response to these incentives.
And while the concept is based on the neoclassical model of investment behaviour,
according to which profit-maximizing firms are assumed to respond to changes in
the user cost of capital, there are other theories of investment behaviour. Consequently, the debate over the likely effect of tax changes on investment behaviour
can only be resolved by examining the empirical evidence. Many economists have
tried to measure the effect of taxes on business investment. Unfortunately, they
have reached conflicting conclusions. In 1980, the Foundation published a monograph by Richard Bird, Tax Incentives for Investment: The State of the Art,56 in which
he analyzed and summarized the empirical studies up to that time. He reached
three “rather disconcerting” conclusions:
(1) we know amazingly little about the efficiency and effectiveness of the investment
incentives we employ so profligately; (2) what little we do know suggests that these
incentives are neither efficient nor effective in achieving most of the objectives for
which they were supposedly introduced; and (3) the available research techniques are
incapable of improving this sad state of affairs very much.57
In 1992, Michael Rushton reviewed the studies published since Bird’s monograph in an attempt to see what had been learned in the intervening dozen years.58
His conclusion: not much. He summarized his results this way:
We do not know very much about tax policy and business investment, at least at the
aggregate level. Models of investment based on a theory of a profit-maximizing firm
give very different estimates of elasticities of demand for capital with respect to its
user cost, and frequently these models do not fit the data well anyway. Less methodologically pure models . . . also give conflicting results.59
I M P L E M E N TA T I O N O F T H E G S T
On January 1, 1991, Canada adopted a 7 percent goods and services tax (GST).
Implementation of the tax followed 15 years of various government discussion
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papers, 6 years of study and planning within the government, and 3 years of
acrimonious public debate. The GST was one of the most unpopular policies
implemented by the federal government in Canada’s history. Yet to most tax analysts its enactment seemed inevitable, particularly given the paradigm shift in tax
policy analysis during the 1980s. The GST was replacing a badly flawed and highly
distortionary sales tax, the manufacturers’ sales tax (MST), and it would set the
stage for increased reliance on consumption as opposed to income taxes.
As early as 1985, the journal carried many articles dealing with aspects of the
GST. In a thorough review of the major proposals for sales tax reform in Canada
between 1950 and 1984, Malcolm Gillis suggested that the only worthwhile reform
of the federal sales tax would be the adoption of a value-added tax (VAT) such as the
GST.60 John Due published an article in 1988 urging the government to adopt a
New Zealand-style goods and services tax.61 Sijbren Cnossen contributed two
articles: in one he compared the design features of a VAT with a retail sales tax62; in
the other, relying on the European experience with VATs, he reviewed the considerations to take into account in setting the rate structure for a GST.63 In illustrating the
many non-neutralities of the old MST, Chun-Yan Kuo, Thomas McGirr, and Satya
Poddar published a study in 1988 showing that nearly one-half of the tax was
collected on items purchased for business use and that the portion of the tax borne
by exports was as much as 1.3 percent of their sales value.64 A number of technical
articles published in the journal dealt with such issues as how a VAT should apply to
the insurance industry65 and to financial services.66
When the government was considering the GST, several commentators put
forward alternatives to the tax. One suggestion was that the government should
simply abolish the MST, leaving the sales tax field to the provinces, and recoup the
lost revenue by repealing certain income tax expenditures and imposing an income
tax surcharge. In an article published in the journal in 1990, three economists who
generally favour consumption taxes over income taxes—Peter Dungan, Jack Mintz,
and Thomas Wilson—expressed a number of reservations about such an alternative.
Among other things, they argued that it would discourage saving and investment,
lead to more emigration of skilled labour, and result in increased tax evasion.67
They proposed another form of consumption tax as an alternative to the GST.
Instead of the MST being replaced with a strengthened income tax, they argued
that it should be replaced with a modified income tax, one with higher rates of tax
on labour income but with lower or no tax on income from capital. They argued
that this could be done simply by increasing the RRSP/RPP deduction limits for
current savings and by reintroducing some form of tax exemption for income from
savings held outside pension plans. Essentially, they argued that the government
should impose a direct tax on consumption through a modified income tax instead
of an indirect tax on consumption.
The journal contained an interesting exchange of views on both the distributional and the efficiency effects of the GST. On the distributional effects, Patrick
Grady published a study, completed before the GST replaced the MST, that estimated the distributional impact of the proposed reform across income classes.68 He
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concluded that the GST would be fairly progressive in its impact on family incomes
up to $35,000 and roughly proportional in its impact on income above $40,000.
However, he also found that, contrary to the government’s claim, many families
earning less than $30,000 would be worse off as a result of the reforms.
His study was the subject to a somewhat sharply worded critique by Irwin
Gillespie.69 Grady replied to the critique.70 One of the most contentious differences between the two authors was that, according to Gillespie, Grady’s analysis
did not account for the roughly $4 billion of the MST that fell on investment goods.
As those who took part in the debate over the GST will recall, although the
substitution of one form of sales tax for another was supposed to be revenueneutral, there was in fact a $4 billion shift in the tax burden from corporations to
households, since that amount of the former sales tax was estimated to fall on
business profits and all of the GST fell on households. Because Grady assumed that
this $4 billion in tax savings to business did not make any family better off, his
analysis showed that most families would face an increased tax burden—a strange
result for a tax reform that was intended to be revenue-neutral, as Gillespie pointed
out. In defence of Grady’s analysis, it was not common at the time for this kind of
distributional analysis to allocate corporate tax increases or decreases to households.
Certainly neither the Canadian nor the US government did so in showing the
distributional effects of tax reforms. If the reduction in corporate taxes had been
taken into account, it would likely have made the tax reforms even more regressive
than Grady had concluded. Gillespie also complained that Grady’s study did not
account for all the changes implemented when the GST was enacted; that it did not take
any account of the long-range equilibrium effects of the tax changes; that it did not
contain a sensitivity analysis of the effects of alternative assumptions about the incidence of the sales tax; and that it did not contain a sufficiently broad definition of
income.
One of the most significant tools for tax policy analysis that was developed
during the 1980s was Statistics Canada’s microcomputer-based database and model,
the Social Policy Simulation Database/Model (SPSD/M). The database, which
merges a number of statistical sources of information, contains a wide range of
demographic and socioeconomic characteristics of a sample of statistically representative Canadian families. The model simulates the entire personal income tax
system and over 20 separate money transfer programs. In a 1990 journal article,
some of the developers of the SPSD/M explained the creation of the database and
the construction of the model algorithm.71 It was this microsimulation model that
Patrick Grady used in calculating the distributional effects of the GST reforms.
Many of Gillespie’s critiques would have required substantial modifications to the
model. In fact, Statistics Canada has continued to develop the model and it is now
widely used by tax policy analysts. When the history of the development of tax
policy analysis in Canada is written, this microdatabase and simulation model will
be recognized as a milestone. It has been used in several journal articles—indeed,
Patrick Grady used it in another article in this decade to assess the distributional
effects of all tax changes introduced by the Conservative government from 1984 to
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1989.72 He found that in 1990 Canadian households paid about $11.1 billion more
in taxes net of transfers because of the tax changes over the previous six years. He
also found that changes were very progressive for families earning less than $35,000
per year, roughly proportional for families earning between $35,000 and $75,000,
and increasingly regressive for families with incomes over $75,000.
One of the most frequently expressed justifications for enacting the GST was
that it would increase the efficiency with which resources were allocated in the
economy. Since it would not fall on investment goods, and most consumer services
and goods would bear the same tax rate, the GST would increase the size of the
economic pie available to Canadians. In the 1970s, economists began using empirically based, computable general equilibrium models to determine the effects of
policy changes on resource allocation and to identify the winners and losers as a
result of such changes. These models can take into account all of the interactions
that occur throughout the economy when specific variables change. Indeed, it was
the results of applied general equilibrium tax models that, by and large, led analysts
to reassess the importance of the efficiency costs of taxes relative to their equity
consequences. The models tended to show, when all of the effects of taxes were
considered, that the resource misallocation costs from distortions in the economy
were much larger, and that the tax system was more redistributive, than had
previously been supposed.
Calculating the impacts of the GST on resource allocation and aggregate real
output by using general equilibrium models of the Canadian economy became a
small cottage industry. Two economists from the Department of Finance, Bob
Hamilton and Chun-Yan Kuo, published an article in the journal in which they
estimated that replacing the MST with the GST would increase economic output in
the long run by about 1.4 percent.73 If true, this would constitute a significant
economic benefit of sales tax reform. Their finding was immediately disputed by
two economists from the Alberta Treasury.74 G.C. Ruggeri and D. Van Wart pointed
out that, among other things, estimates of efficiency gain derived from general
equilibrium studies are subject to numerous qualifications. The studies rely on
highly stylized versions of the economy, and the results are entirely dependent on the
elasticities assumed at different margins. Moreover, Hamilton and Kuo’s study took
no account of such things as the increased administrative and compliance costs of
the GST, the adverse short-term macroeconomic effect, or the economic distortions arising from concessions that are made in the law and its administration.
Ruggeri and Van Wart concluded that “[i]f alternative simulations were performed
taking into consideration the factors we have identified . . . it is unlikely that the
estimated efficiency gains from the sales tax reform would be significantly greater
than zero.”75
The effects of the GST were also evaluated with large-scale macroeconomic models.
While general equilibrium models provide estimates of the effects of proposed
changes on economic welfare and real output in the economy, macroeconomic
models can be used to estimate the likely effects on the overall macroeconomy,
such as the flow of funds and changes in interest rates, employment, and inflation.
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In a study published in the journal in 1989, D.P. Dungan and T.A. Wilson concluded
that, in the long term, the proposed sales tax reforms would stimulate capital
production and thus potentially increase labour productivity by about 0.4 percent.76
In the short and medium term, however, implementation of the GST would worsen
macroeconomic performance. They suggested that the government might avoid
these transition problems by phasing in the sales tax increases on households.
G E N E R A L A N T I - A VO I D A N C E R U L E
The appropriate legislative and judicial response to the possibilities of tax avoidance
raises one of the most contentious issues in tax law. In every decade the journal has
carried a number of leading articles about it, and the fourth is no exception.
The decade began with the decision of the Supreme Court in Stubart.77 As
noted in the review of the third decade, Justice Estey, in holding that there was no
business purpose test in Canadian tax jurisprudence, relied in part upon a leading
journal article by David Ward and Maurice Cullity which suggested that the
adoption of a business purpose test might reduce capital investment. In his judgment in Stubart, Justice Estey laid down a series of guidelines to be used by the
courts in interpreting tax legislation, characterizing the parties’ transaction for tax
purposes, and dealing with tax-avoidance transactions. Many practitioners found
these guidelines to be somewhat vague and to raise more questions than they
answered about the appropriate role of the courts in tax cases. One of the most
insightful analyses of the guidelines was written by Tom McDonnell and Richard
Thomas.78 They concluded that, given the vagueness of the rules and the uncertainty over their application, “the issue will be before the Court again.”79 Legislative
events overcame the courts’ need to seriously reconsider judicial anti-avoidance
doctrine. In its June 1987 white paper on tax reform, the federal government
proposed a statutory general anti-avoidance rule (GAAR). The rule was enacted the
following year.
GAAR has been the subject of more tax writing in the last 15 years than any other
tax provision, and the best of it has appeared in the journal. Shortly after its
introduction, David Dodge, then the senior assistant deputy minister in the Department of Finance, wrote a frequently cited article justifying its introduction, “A
New and More Coherent Approach to Tax Avoidance.”80 His article was followed
in the same issue by Howard Kellough’s blistering critique of the rule.81 He argued
that the rule was unnecessary and undesirable. He methodically canvassed and
rebutted each rationale that the government offered for the rule. He also concluded that the rule might be “susceptible to challenge on any or all of the
following bases: it fails to conform to the rule of law; it leads to discriminatory
application; it constitutes an unconstitutional abdication of power by Parliament;
or it is so vague as to be void.”82
In a series of well-known articles, Brian Arnold and James R. Wilson published
a history and justification of GAAR and speculated on the way that it would, and
should, be interpreted and applied. In the first article they described the development
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of the legislation; the historical treatment of tax avoidance in the Act, by Revenue
Canada, and by the courts; and the legislative and judicial approaches to tax
avoidance that had been developed in a number of other countries.83 In the second
article they examined the arguments for and against GAAR and the various forms
that a general anti-avoidance rule might take.84 In the third article they discussed
Revenue Canada’s approach to the rule and the types of transactions to which the
rule might apply.85 These definitive articles have been extensively relied upon by all
subsequent authors and judges who have had to deal with GAAR. It seems fair to say,
though, that practitioners generally were much less enamoured with the value of
GAAR than were the senior Finance official at the time, Brian Arnold, who was then an
academic, and James Wilson, who had been general tax counsel to the Department
of Finance. Aside from Howard Kellough, Joel Nitikman was one of the first
practitioners to respond to the otherwise favourable reviews of GAAR published in
the journal. He wrote an article arguing that GAAR was so deficient that a court
could hold it to be void for vagueness.86 His article explored every facet of such an
argument. He concluded by noting that, with the enactment of GAAR, “[w]e appear
to have moved from the right to order our transactions, if we can, so as to minimize
taxes, to simply ordering our transactions and hoping for the best.”87
One of the many ongoing disputes about the application of anti-avoidance
doctrine in tax cases is whether the taxpayer’s motive for entering into a potential
tax-avoidance transaction should matter. On the one hand, those who argue that it
should point out that regard to an individual’s state of mind is often a determinative fact in most areas of law, and that if a major purpose of anti-avoidance doctrine
is to minimize economic distortions, then logically the taxpayer’s motive for entering into a transaction should matter. On the other hand, those who argue that
motive should not matter assert that tax should be based on the legal or economic
position that the taxpayer takes and that therefore motive should be irrelevant. In a
thoroughly researched, clearly written, logically structured, and imaginative article,
Geoffrey Walker argued that GAAR should not apply to commodity straddles.88 He
reviewed all aspects of commodity futures contracts and trading, including the
types of traders, trading strategy, mechanics of trading, and a financial and accounting analysis of commodity trading. He concluded that “the minister has attempted
to move the debate away from general income computation principles into the realm
of tax avoidance.”89 He argued that this move is unfortunate since the taxpayer’s
motive for entering into a transaction should be irrelevant:
From a policy perspective, the minister’s reliance on GAAR is somewhat disappointing.
Tax policy should reflect the fact that the economic results of straddle transactions
are no different from those of spread transactions undertaken solely for business purposes. A tax avoidance motive has no significance in this respect. Thus, it is submitted,
if the minister has concluded that, as a policy matter, profit from straddles should be
determined by netting gains and losses, this should be applied consistently to all
taxpayers engaged in spread trading. This can only be achieved through specific detailed legislation, and not by applying general anti-avoidance measures such as GAAR.90
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Without meaning to become embroiled in the debate over GAAR, it seems to me
worth noting that the enactment of GAAR was perfectly consistent with the other
base-broadening measures that were enacted during the 1980s and reflected the
generally increased concern over the efficient allocation of resources. Reducing taxavoidance transactions is much like broadening the tax base. The most important
justification for broadening the tax base in the 1980s reforms was to reduce the
deadweight loss caused by the tax system. This was done by making it more
difficult for taxpayers to substitute untaxed goods and activities for taxed goods and
activities and thus reduce their welfare and at the same time deprive the government of revenues and impose additional costs on other taxpayers. If one is concerned about this kind of welfare loss due to taxes, one has to be concerned about
tax-avoidance activities. If the tax system allows taxpayers to shift from taxed to
non-taxed transactions through the use of complex structures that are designed
solely to avoid tax, there will be a social welfare loss. Such tax-induced activity
results in taxpayers engaging in less valued transactions and generates additional
costs such as the cost of designing and implementing the tax-avoidance transactions.
All of these costs are a deadweight loss to the economy. To be consistent, those who
believe strongly in the efficiency of free markets have to concede that not only is
tax-avoidance activity (or tax planning more generally) of no social value, or even
benign, it is unproductive and a wasteful drain on the economy. Therefore, it is not
hard to see that if an efficiency norm were driving tax reform, GAAR would be on
the agenda.
EMPIRICAL STUDIES
Throughout its fourth decade, the journal continued to publish articles that made
original and important contributions to knowledge. Many have been mentioned
above; a somewhat random selection of further articles are noted below.
One of the traditional justifications for the progressivity of the income tax was
that most other taxes were highly regressive, and therefore an important role of the
income tax was to counteract the distributional consequences of other taxes. One
tax that was commonly assumed to be highly regressive was the property tax. The
main component of the property tax base is residential property. Housing expenditures make up a much larger percentage of the income of low-income families than
they do of the income of high-income families. Therefore, assuming that the property
tax levied on structures was paid by the occupier of the housing unit, the tax was
likely regressive. During the 1970s, however, the view that the property tax fell not
on the occupiers of housing units but squarely on property owners became more
widely held among economists. Under this “new view,” the property tax was likely to
be progressive, because property owners tend to have greater incomes than tenants.
Although they did not assess the changing theory or empirical evidence relating
to the property tax, Ronald Meng and W. Irwin Gillespie published the first study
in Canada to use individual household data to determine the distributional implications of these different assumptions about the incidence of the property tax.91
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They also examined the different effective property tax rates paid by households
with the same income under each shifting assumption. Under the traditional view
of the incidence of property taxes, they found that the property tax was highly
regressive over the lowest income groups but more or less proportional over the
middle and high income groups. Under the new view, they found that the tax was
mildly progressive over the lowest income groups, more or less proportional over
the middle income groups, and progressive over the highest income groups. They
also found large variations in the rate of property tax payments for each income
group, suggesting that the tax is horizontally inequitable.
Although the property tax might be regressive in relation to the income of the
families paying it, some commentators have suggested that the tax can be justified
on the grounds that the value of residential property is an indicator of families’
ability to pay as measured by their wealth. Harry Kitchen investigated this claim in
an article in the journal and found that, indeed, whether measured against the
families’ equity in their home or the fair market value of the home, the property
tax paid was roughly proportional across most income classes.92
Other studies published in the journal over this decade also dealt with the
economic incidence of taxes. François Vaillancourt and Marie-France Poulaert
made the surprising finding that provincial retail sales taxes appeared to be somewhat progressive in 1978 but regressive in 1982.93 For a number of reasons explained in their study, they were more confident that their finding for 1982 was
likely the more correct one, and therefore, consistent with a number of early studies,
concluded that sales taxes are regressive. In another study, François Vaillancourt
and Julie Grignon found that the implicit tax on lotteries, in the form of monopoly
profits retained by governments on the sale of lottery tickets, is one of the most
regressive taxes levied by Canadian governments.94 The only tax that appears to be
more regressive is the tax on tobacco products.
One of the many objections that are raised about using the tax system to deliver
corporate tax incentives is that the incentives, unless they are made refundable, will
be available only to taxable corporations. The government has attempted to overcome this problem in some cases by allowing corporations to flow the benefits of
tax incentives through to individual investors by means of flowthrough shares and
limited partnerships. A difficulty with this approach is that the transaction and
other costs of structuring these tax shelter vehicles might consume most of the tax
savings. This is exactly what Glenn Jenkins found in a study of the efficiency of
Canadian tax shelter finance.95 In the tax shelters he studied, the Canadian government lost about $2.50 in tax revenues for every $1.00 gained by the developer in
limited partnership arrangements, and between $1.83 and $2.68 for every $1 of net
benefit received by a resource company in flowthrough share arrangements.
Between 1960 and 1985, the share of federal tax revenues paid by non-financial
corporations fell from 16 percent to 9 percent. One of the objectives of the 1987
tax reforms was to increase the tax burden on corporations in order to reverse that
trend. This change in the tax mix might have made sense if corporate tax revenues
had been falling because corporate taxes had also been falling over the years. But
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when Alan Douglas examined the reasons for the declining share of corporate tax
revenues, he found, somewhat surprisingly, that the most important factor explaining the declining importance of corporate taxes in the federal budget from 1960 to
1985 was the falling profitability of corporations.96
In an empirical study of tax tribunal and court decisions, Elizabeth Shultis and
Stephen Smith attempted to determine whether, as widely believed by tax practitioners, the tax courts in valuation cases tended to reach a compromise value
between the alternatives presented by the litigants.97 In 130 reported cases between
1971 and 1991, they were surprised to find, the courts reached a compromise value
in only 17 percent of the cases. In 55 percent of the cases the court favoured the
minister’s valuation, and in 28 percent of the cases the court favoured the taxpayer’s
valuation. From their conversations with practitioners, the authors hypothesized
that taxpayers were less successful because they tended to make unskilful selfpresentations, or that Revenue Canada was more successful because it tended to
litigate cases only when it thought it could win.
In November 1981, Allan MacEachen tabled one of the most unpopular budgets in Canadian history. Among other things, the budget attempted to broaden the
tax base by closing tax loopholes and repealing tax expenditures. It was viciously
attacked by almost every interest group in the country. Within days the budget
began to unravel, and within a few months the government had withdrawn numerous
measures proposed in the budget. A somewhat interesting empirical question is,
what was the government thinking when it introduced such a budget? Many allege
that the government had badly misjudged the strength of the affected interest
groups; others blame incompetence. In a fascinating article, “The 1981 Federal Budget:
Muddling Through or Purposeful Tax Reform?” Irwin Gillespie hypothesized that
the government knew exactly what it was doing.98 On the basis of an in-depth and
careful parsing of the legislative record, he claims that it was all a diversionary
tactic, a clever and politically shrewd strategy to introduce a major tax reform that
otherwise would never have passed—the deindexation of the personal income tax.
DOCTRINAL SCHOLARSHIP
In this decade, as in previous decades, the journal was replete with the best descriptive, prescriptive, and interpretive tax scholarship being written in Canada. An
especially notable trend was the increase in writing on international tax issues. The
journal carried a number of articles dealing with cross-border financial flows,
particularly the problems posed by the explosive development of new financial
instruments.99 One of the most thorough examinations was Scott Wilkie’s review of
the law and practice involved when Canadian issuers raise debt capital in foreign
markets, “Structuring International Debt Issues: A Canadian Perspective.”100 He
examined the law, practice, and policy of every detail and nuance of the withholding
tax exemption for medium- to long-term debt obligations. He also reviewed the
various financing techniques used by Canadian corporations to access foreign debt
capital at short-term rates. He concluded by reiterating
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the need for a relaxation of Canadian withholding tax rules and a broader interpretation
of the existing rules. . . . The purpose of the medium- to long-term debt exemption in
particular is to encourage and facilitate flexible foreign borrowings by Canadian
corporations. Too often, however, there has been an administrative preoccupation
with applying these rules in isolation from the relevant policy.101
During the first half of the 1980s, Brian Arnold was working on his treatise on
controlled foreign corporations,102 and he published a number of articles in the
journal on issues related to this topic.103 Although it did not deal with doctrinal
issues, R.M. Bird and D.J.S. Brean’s “The Interjurisdictional Allocation of Income
and the Unitary Taxation Debate” should be noted here.104 It was one of the first
Canadian articles to deal comprehensively with the relative merits of the separateaccounting and the formulary apportionment approaches to allocating the income
of multinationals to the appropriate national jurisdiction. It also remains a useful
overview of the issues. Although the authors felt that the formulary apportionment
approach was preferable, they were not sanguine about countries abandoning the
separate-accounting approach in the near future. Nevertheless, they concluded:
The almost Pavlovian reaction of most tax professionals and multinational firms in
defence of the accepted separate-accounting approach is perhaps understandable. But
it is also obviously unsatisfactory, as is suggested by the observed fact that no country
appears to use this approach in allocating income among separate internal jurisdictions.105
Whatever the future may hold, Canadian attitudes to the process should presumably be shaped by our long-term interest in a stable, fair division of the international
tax base and not solely by the perceived increased taxes that might be suffered by this
or that Canadian-based multinational as a result of a particular change in the international rules of the fiscal game. In this, as in other areas, Canada’s interests are best
served by fostering cooperative rather than confrontational policies whenever possible, even at the expense of some short-run economic pain.106
John Durnford continued his tradition of producing, every two years or so, an
absolutely definitive review of the cases and secondary literature in some troubling
area of tax law. His encyclopedic articles in this decade dealt with shareholder
benefits, the characterization of profits on the sale of shares, loans to shareholders,
and the distinction between income from business and income from property.107
Although any one of a large number of articles might be highlighted to further
illustrate the nature of the doctrinal writing in the journal over this period, I will
refer to just three more. In “Acting in Concert: Fact or Fiction?” John Owen
thoroughly reviewed the courts’ application of the concept of factual arm’s length
(which, he noted, is used 191 times throughout the Act).108 He concluded his
analysis as follows:
the approach of the courts has been to focus almost exclusively on the behaviour of
the taxpayer(s), with little or no consideration for the intent or purpose of the
provision in which the arm’s-length concept is used. This has led to the creation of
the somewhat nebulous concepts of acting in concert, acting in the same interest,
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and/or acting in a highly interdependent manner. . . . Unfortunately, these concepts
have not been well thought out and in many respects their origins are of dubious
validity. The result is both confusion and a tremendous degree of uncertainty as to the
scope of the factual arm’s-length concept and its application in any given circumstance.109
A similar type of open-ended interpretive problem arises in the application of the
many anti-avoidance rules in the Act, such as subsection 256(2.1). That subsection
provides that “where, in the case of two or more corporations, it may reasonably be
considered that one of the main reasons for the separate existence of those corporations . . . is to reduce the amount of taxes . . . payable . . . , the two or more
corporations shall be deemed to be associated.” Allister Young and Maureen
Donnelly tried to make sense out of the cases interpreting this provision in
“Deemed Association Cases: Probative Factors in a Predictive Model.”110 First,
they read and thoroughly analyzed all 72 reported cases on this provision between
1967 and 1991. They then identified five factors that recurred in those cases. Next,
they used discriminant analysis to test the statistical significance of the five factors
in predicting a win or loss outcome, rank the factors in terms of relative significance, and determine what correlation, if any, exists among them. They concluded
that the three most important factors in predicting a successful outcome for taxpayers
were whether the taxpayers were unaware of the tax advantages of non-association,
whether the taxpayers had non-tax objectives that were best achieved by the corporate structure, and whether the controlling shareholder of the original corporation
continued to be the directing mind of the second corporation.
In reviewing some of the articles published in the journal’s third decade, I
mentioned that one of the most difficult problems of tax policy making, including
doctrinal analysis, is having to draw lines between economically similar contracts
or transactions that are taxed in very different ways. The distinction between debt
and equity is a paradigmatic example. Of course, these types of lines should be
eliminated where possible, and enormous amounts of ingenuity have gone into
trying to eliminate this particular line, but it remains with us. In an imaginative and
thoroughly argued article, “The Classification of Corporate Securities for Income
Tax Purposes,” published in 1990, Tim Edgar dealt with the difficulty of drawing a
line between these two legal concepts.111 In the absence of any normative basis for
distinguishing between the concepts for tax purposes, he argued that the linedrawing exercise should be guided by the need to reduce tax-planning opportunities,
should be relatively easy to administer, and should treat all hybrid instruments the
same. He identified a number of provisions of the Act where the distinction is
important and argued that, on the basis of the policy underlying each such provision, a debt instrument should be treated as including only a classic debt instrument,
an equity interest should be treated as including only a classic equity interest, and
any form of hybrid instrument should be treated as neither. That is to say, he
argued that the boundary between debt and equity should be pushed to either end
of the investment continuum, depending on the policy underlying the provision in
which the instruments are distinguished. His analysis drew upon the design of the
Canadian taxable preferred share rules, regulations for distinguishing between
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debt and equity that had been promulgated in the United States, and recent
scholarly writing by American academics. The article itself demonstrated exemplary
scholarship. In spite of that, Edgar has changed his mind about its conclusion. In
his recently published monograph, he argues that in the second-best tax world in
which we live, it is preferable to distinguish between debt and equity through the
use of a necessarily indeterminate factors approach.112 Does the financial instrument have more of the characteristics of debt or of equity? Tim has generously
conceded to me that he changed his mind in part because of a criticism of his
conclusions in a footnote in a subsequent article by Glenn May.113
As illustrated by the exchange between Tim Edgar and Glenn May, the advancement of knowledge depends upon an active community of scholars and practitioners
working together in cooperation and competition. Learning about the world is
necessarily a communal or social enterprise. An important role of the journal is to
act as a repository for the accumulation of knowledge about the tax system and
fiscal policy. In concluding this review, my greatest regret, once again, is that I was
not able to refer to more of the many fine articles that appeared in the journal over
this decade.
NOTE S
1 D.J. Sherbaniuk, “Report of the Director,” in Canadian Tax Foundation, Thirty-Ninth Annual
Report, for the year ending December 31, 1984 (Toronto: Canadian Tax Foundation, 1985),
15-23, at 15.
2 D.J. Sherbaniuk, “Report of the Director,” in Canadian Tax Foundation, Fortieth Annual
Report, for the year ending December 31, 1985 (Toronto: Canadian Tax Foundation, 1986),
15-22, at 15.
3 Douglas J. Sherbaniuk, “Report of the Director,” in Canadian Tax Foundation, Thirty-Eighth
Annual Report, for the year ending December 31, 1983 (Toronto: Canadian Tax Foundation, 1984),
15-22, at 22.
4 Ibid., at 15.
5 “An Introduction to a New Journal Feature . . . Current Tax Reading” (1983) vol. 31, no. 5
Canadian Tax Journal 891.
6 B.J. Arnold, Timing and Income Taxation: The Principles of Income Measurement for Tax Purposes,
Canadian Tax Paper no. 71 (Toronto: Canadian Tax Foundation, 1983); Brian J. Arnold, The
Taxation of Controlled Foreign Corporations: An International Comparison, Canadian Tax Paper no.
78 (Toronto: Canadian Tax Foundation, 1986); and Brian J. Arnold, Tax Discrimination Against
Aliens, Non-Residents, and Foreign Affiliates: Canada, Australia, New Zealand, the United Kingdom,
and the United States, Canadian Tax Paper no. 90 (Toronto: Canadian Tax Foundation, 1991).
7 D.J. Sherbaniuk, “Report of the Director,” in Canadian Tax Foundation, Forty-Sixth Annual
Report, for the year ending December 31, 1991 (Toronto: Canadian Tax Foundation, 1992),
23-32, at 25.
8 Canada, Report of the Royal Commission on Taxation (Ottawa: Queen’s Printer, 1966).
9 Emile van Lennep, “Opening Address,” in The Welfare State in Crisis: An Account of the
Conference on Social Policies in the 1980s (Paris: Organisation for Economic Co-operation and
Development, 1981), 9-12, at 9.
10 Canada, Royal Commission on the Economic Union and Development Prospects for Canada,
Report, vol. 2 (Ottawa: Supply and Services, 1985), 206.
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11 Economic Council of Canada, Road Map for Tax Reform: The Taxation of Savings and Investment
(Ottawa: Supply and Services, 1987), ix.
12 Canada, Department of Finance, A New Direction for Canada: An Agenda for Economic Renewal
(Ottawa: Department of Finance, 1984) (released with the November 8, 1984 federal budget).
13 Nicholas Kaldor, An Expenditure Tax (London: Allen & Unwin, 1955).
14 David F. Bradford and the United States Treasury Department Tax Policy Staff, Blueprints for
Basic Tax Reform, 2d ed. rev. (Arlington, VA: Tax Analysts, 1984).
15 Institute for Fiscal Studies, The Structure and Reform of Direct Taxation, report of a committee
chaired by Professor J.E. Meade (London: Allen & Unwin, 1978).
16 Supra note 10, at 207.
17 Supra note 11.
18 Wayne Thirsk and Jeff Moore, “The Social Cost of Canadian Labour Taxes” (1991) vol. 39,
no. 3 Canadian Tax Journal 554-66.
19 Ibid., at 565.
20 Roger S. Smith, “Base Broadening and Rate Changes: A Look at the Canadian Federal Income
Tax” (1984) vol. 32, no. 2 Canadian Tax Journal 277-93.
21 Roger S. Smith, “Flat Rate Tax Potential: A Preliminary Comparison of Three Countries”
(1986) vol. 34, no. 4 Canadian Tax Journal 835-52.
22 Roger S. Smith, “Rates of Personal Income Tax: The Carter Commission Revisited” (1987)
vol. 35, no. 5 Canadian Tax Journal 1226-48.
23 John C. Strick, “Critical Limits to Taxation” (1992) vol. 40, no. 6 Canadian Tax Journal 1315-31.
24 Ibid., at 1320.
25 Alan Macnaughton, “New Income Tax Rules for Holders of Life Insurance Policies and
Annuities” (1983) vol. 31, no. 6 Canadian Tax Journal 921-41.
26 J.W. Welkoff, “The Taxation of the Investment Component of a Life Insurance Policy” (1989)
vol. 37, no. 1 Canadian Tax Journal 1-36.
27 Ibid., at 36.
28 Claire F.L. Young, “Deductibility of Entertainment and Home Office Expenses: New
Restrictions To Deal with Old Problems” (1989) vol. 37, no. 2 Canadian Tax Journal 227-66.
29 Ibid., at 265.
30 The Queen v. P.B. Bronfman Trust, [1987] 1 CTC 117 (SCC).
31 D. Keith McNair, “Restricted Interest Expense” (1987) vol. 35, no. 3 Canadian Tax Journal
616-49.
32 Tim Edgar and Brian J. Arnold, “Reflections on the Submission of the CBA-CICA Joint
Committee on Taxation Concerning the Deductibility of Interest” (1990) vol. 38, no. 4
Canadian Tax Journal 847-85.
33 Brian J. Arnold and Tim Edgar, “The Draft Legislation on Interest Deductibility: A Technical
and Policy Analysis” (1992) vol. 40, no. 2 Canadian Tax Journal 267-303.
34 Supra note 30.
35 Supra note 33, at 303.
36 Brian J. Arnold, “Is Interest a Capital Expense?” (1992) vol. 40, no. 3 Canadian Tax Journal
533-53.
37 Ibid., at 553.
38 Ibid.
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39 Gordon D. Dixon and Brian J. Arnold, “Rubbing Salt into the Wound: The Denial of the
Interest Deduction After the Loss of a Source of Income” (1991) vol. 39, no. 6 Canadian Tax
Journal 1473-96.
40 Tim Edgar, “The Thin Capitalization Rules: Role and Reform” (1991) vol. 40, no. 1 Canadian
Tax Journal 1-54.
41 Michael Daly, Jack Jung, Pierre Mercier, and Thomas Schweitzer, “A Comparison of Effective
Marginal Tax Rates on Income from Capital in Canadian Manufacturing” (1985) vol. 33, no. 6
Canadian Tax Journal 1154-92.
42 Ibid., at 1172-73.
43 Ibid., at 1174.
44 Ibid., at 1176.
45 Ibid.
46 Michael J. Daly, Jack Jung, and Thomas Schweitzer, “Toward a Neutral Capital Income Tax
System” (1986) vol. 34, no. 6 Canadian Tax Journal 1331-76.
47 Ibid., at 1349.
48 Ibid., at 1333.
49 Michael J. Daly, Jack Jung, Pierre Mercier, and Thomas Schweitzer, “The Taxation of Income
from Capital in Canada: An International Comparison” (1987) vol. 35, no. 1 Canadian Tax
Journal 88-117.
50 Mervyn A. King and Don Fullerton, eds., The Taxation of Income from Capital: A Comparative
Study of the United States, the United Kingdom, Sweden, and West Germany (Chicago: University
of Chicago Press for the National Bureau of Economic Research, 1984).
51 Ibid., at 300.
52 Ibid., at 301.
53 Supra note 49, at 101.
54 Michael J. Daly and Pierre Mercier, “The Impact of Tax Reform on the Taxation of Income
from Investment in the Corporate Sector” (1988) vol. 36, no. 2 Canadian Tax Journal 345-68.
55 Patrick Grady, “The Recent Corporate Income Tax Reform Proposals in Canada and the
United States” (1986) vol. 34, no. 1 Canadian Tax Journal 111-28.
56 Richard M. Bird, Tax Incentives for Investment: The State of the Art, Canadian Tax Paper no. 64
(Toronto: Canadian Tax Foundation, 1980).
57 Ibid., at 2.
58 Michael Rushton, “Tax Policy and Business Investment: What Have We Learned in the Past
Dozen Years?” (1992) vol. 40, no. 3 Canadian Tax Journal 639-65.
59 Ibid., at 664.
60 Malcolm Gillis, “Federal Sales Taxation: A Survey of Six Decades of Experience, Critiques, and
Reform Proposals” (1985) vol. 33, no. 1 Canadian Tax Journal 68-98.
61 John F. Due, “The New Zealand Goods and Services (Value-Added) Tax—A Model for Other
Countries” (1988) vol. 36, no. 1 Canadian Tax Journal 125-44.
62 Sijbren Cnossen, “VAT and RST: A Comparison” (1987) vol. 35, no. 3 Canadian Tax Journal
559-615.
63 Sijbren Cnossen, “What Rate Structure for a Goods and Services Tax? The European
Experience” (1989) vol. 37, no. 5 Canadian Tax Journal 1167-81.
64 Chun-Yan Kuo, Thomas C. McGirr, and Satya N. Poddar, “Measuring the Non-Neutralities
of Sales and Excise Taxes in Canada” (1988) vol. 36, no. 3 Canadian Tax Journal 655-70.
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65 A.E.J. Thompson, “The Canadian Proposal for a Value-Added Tax on Financial Institutions
and Its Application to the Insurance Industries” (1988) vol. 36, no. 5 Canadian Tax Journal
1186-1203.
66 Lorey Arthur Hoffman, “The Application of a Value-Added Tax to Financial Services” (1988)
vol. 36, no. 5 Canadian Tax Journal 1204-24.
67 Peter Dungan, Jack M. Mintz, and Thomas A. Wilson, “Alternatives to the Goods and Services
Tax” (1990) vol. 38, no. 3 Canadian Tax Journal 644-65.
68 Patrick Grady, “An Analysis of the Distributional Impact of the Goods and Services Tax”
(1990) vol. 38, no. 3 Canadian Tax Journal 632-43.
69 W. Irwin Gillespie, “How To Create a Tax Burden Where No Tax Burden Exists: A Critical
Examination of Grady’s ‘An Analysis of the Distributional Impact of the Goods and Services
Tax’ ” (1991) vol. 39, no. 4 Canadian Tax Journal 925-36.
70 Patrick Grady, “The Distributional Impact of the Goods and Services Tax: A Reply to
Gillespie” (1991) vol. 39, no. 4 Canadian Tax Journal 937-46.
71 Michael Bordt, Grant J. Cameron, Stephen F. Gribble, Brian B. Murphy, Geoff T. Rowe, and
Michael C. Wolfson, “The Social Policy Simulation Database and Model: An Integrated Tool
for Tax/Transfer Policy Analysis” (1990) vol. 38, no. 1 Canadian Tax Journal 48-65.
72 Patrick Grady, “The Distributional Impact of the Federal Tax and Transfer Changes
Introduced Since 1984” (1990) vol. 38, no. 2 Canadian Tax Journal 286-97.
73 Bob Hamilton and Chun-Yan Kuo, “Reforming the Canadian Sales Tax System: A Regional
General Equilibrium Analysis” (1991) vol. 39, no. 1 Canadian Tax Journal 113-30.
74 G.C. Ruggeri and D. Van Wart, “Overoptimism and the GST: A Critical Comment on the
Hamilton and Kuo General Equilibrium Analysis” (1992) vol. 40, no. 1 Canadian Tax Journal
148-61.
75 Ibid., at 161.
76 D.P. Dungan and T.A. Wilson, “The Proposed Federal Goods and Services Tax: Its Economic
Effects Under Alternative Labour Market and Monetary Policy Conditions” (1989) vol. 37,
no. 2 Canadian Tax Journal 341-67.
77 Stubart Investments Ltd. v. The Queen, [1984] CTC 294 (SCC).
78 T.E. McDonnell and R.B. Thomas, “The Supreme Court and Business Purpose: Is There Life
After Stubart?” (1984) vol. 32, no. 5 Canadian Tax Journal 853-69.
79 Ibid., at 869.
80 David A. Dodge, “A New and More Coherent Approach to Tax Avoidance” (1988) vol. 36,
no. 1 Canadian Tax Journal 1-22.
81 Howard J. Kellough, “A Review and Analysis of the Redrafted General Anti-Avoidance Rule”
(1988) vol. 36, no. 1 Canadian Tax Journal 23-78.
82 Ibid., at 60.
83 Brian J. Arnold and James R. Wilson, “The General Anti-Avoidance Rule—Part 1” (1988)
vol. 36, no. 4 Canadian Tax Journal 820-87.
84 Brian J. Arnold and James R. Wilson, “The General Anti-Avoidance Rule—Part 2” (1988)
vol. 36, no. 5 Canadian Tax Journal 1123-85.
85 Brian J. Arnold and James R. Wilson, “The General Anti-Avoidance Rule—Part 3” (1988)
vol. 36, no. 6 Canadian Tax Journal 1369-1410.
86 Joel Nitikman, “Is GAAR Void for Vagueness?” (1989) vol. 37, no. 6 Canadian Tax Journal
1409-47.
87 Ibid., at 1447 (footnote omitted).
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88 Geoffrey Walker, “Speculative Commodity Futures: The Computation of Income” (1989)
vol. 37, no. 4 Canadian Tax Journal 917-68.
89 Ibid., at 968.
90 Ibid.
91 Ronald Meng and W. Irwin Gillespie, “The Regressivity of Property Taxes in Canada:
Another Look” (1986) vol. 34, no. 6 Canadian Tax Journal 1417-30.
92 Harry M. Kitchen, “Property Taxation as a Tax on Wealth: Some New Evidence” (1987) vol. 35,
no. 4 Canadian Tax Journal 953-63.
93 François Vaillancourt and Marie-France Poulaert, “The Incidence of Provincial Sales Taxes in
Canada, 1978 and 1982” (1985) vol. 33, no. 3 Canadian Tax Journal 490-507.
94 François Vaillancourt and Julie Grignon, “Canadian Lotteries as Taxes: Revenues and
Incidence” (1988) vol. 36, no. 2 Canadian Tax Journal 369-88.
95 Glenn P. Jenkins, “Tax Shelter Finance: How Efficient Is It?” (1990) vol. 38, no. 2 Canadian
Tax Journal 270-85.
96 Alan V. Douglas, “Changes in Corporate Tax Revenue” (1990) vol. 38, no. 1 Canadian Tax
Journal 66-81.
97 Elizabeth Shultis and Stephen Smith, “Valuation by Compromise in the Tax Courts: Myth or
Reality?” (1992) vol. 40, no. 6 Canadian Tax Journal 1253-60. Though their methodology was
different, their results were interestingly similar to those of Richard D. Rennie, George J.
Murphy, and Jack G. Vicq, “The Judicial Approach to Private Business Valuation: An
Empirical Inquiry into Canadian Tax Cases” (1982) vol. 30, no. 3 Canadian Tax Journal 389-95,
mentioned in the review of the third decade of the journal.
98 W. Irwin Gillespie, “The 1981 Federal Budget: Muddling Through or Purposeful Tax
Reform?” (1983) vol. 31, no. 6 Canadian Tax Journal 975-1002.
99 See, for example, Arthur R.A. Scace and Michael G. Quigley, “Zero Coupon Obligations,
Stripped Bonds, and Defeasance—An Update” (1984) vol. 32, no. 4 Canadian Tax Journal
689-705 and George Burger, “International Aspects of the Taxation of Discounted Securities”
(1987) vol. 35, no. 5 Canadian Tax Journal 1131-60.
100 J. Scott Wilkie, “Structuring International Debt Issues: A Canadian Perspective” (1987) vol. 35,
no. 1 Canadian Tax Journal 1-49.
101 Ibid., at 48.
102 The Taxation of Controlled Foreign Corporations, supra note 6.
103 See, for example, Brian J. Arnold, “An Analysis of the Amendments to the FAPI and Foreign
Affiliate Rules” (1983) vol. 31, no. 2 Canadian Tax Journal 183-206; Brian J. Arnold,
“Partnerships and the Foreign Affiliate Rules” (1983) vol. 31, no. 3 Canadian Tax Journal 353-82;
Brian J. Arnold, “The Taxation of Controlled Foreign Corporations: A Comparison of
Information-Gathering Mechanisms in Canada, France, the United Kingdom, the United States,
and West Germany” (1983) vol. 31, no. 6 Canadian Tax Journal 942-74; and Brian J. Arnold,
“The Taxation of Controlled Foreign Corporations: Defining and Designating Tax Havens”
(1985) vol. 33, no. 3 Canadian Tax Journal 445-89.
104 R.M. Bird and D.J.S. Brean, “The Interjurisdictional Allocation of Income and the Unitary
Taxation Debate” (1986) vol. 34, no. 6 Canadian Tax Journal 1377-1416.
105 Ibid., at 1413.
106 Ibid., at 1415 (footnote omitted).
107 John W. Durnford, “Benefits and Advantages Conferred on Shareholders” (1984) vol. 32, no. 3
Canadian Tax Journal 445-86; John W. Durnford, “Profits on the Sale of Shares: Capital Gains or
Business Income? A Fresh Look at Irrigation Industries” (1987) vol. 35, no. 4 Canadian Tax
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Journal 837-92; John W. Durnford, “Loans to Shareholders” (1988) vol. 36, no. 6 Canadian
Tax Journal 1411-48; and John Durnford, “The Distinction Between Income from Business
and Income from Property, and the Concept of Carrying On Business” (1991) vol. 39, no. 5
Canadian Tax Journal 1131-1205.
108 John R. Owen, “Acting in Concert: Fact or Fiction?” (1992) vol. 40, no. 4 Canadian Tax Journal
829-58.
109 Ibid., at 858 (footnote omitted).
110 Maureen Donnelly and Allister Young, “Deemed Association Cases: Probative Factors in a
Predictive Model” (1992) vol. 40, no. 2 Canadian Tax Journal 363-83.
111 Tim Edgar, “The Classification of Corporate Securities for Income Tax Purposes” (1990) vol. 38,
no. 5 Canadian Tax Journal 1141-88.
112 Tim Edgar, The Income Tax Treatment of Financial Instruments: Theory and Practice, Canadian
Tax Paper no. 105 (Toronto: Canadian Tax Foundation, 2000).
113 Glenn L.E. May, “Further Reflections on Derivative Taxation” (1999) vol. 47, no. 3 Canadian
Tax Journal 534-43, at 542, note 39.