Tax-Free Savings Accounts: Expanding, Restricting, or Refining?

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Tax-Free Savings Accounts: Expanding, Restricting, or Refining?
canadian tax journal / revue fiscale canadienne (2015) 63:4, 905 - 45
Tax-Free Savings Accounts: Expanding,
Restricting, or Refining?
Jonathan Rhys Kesselman*
Editors’ note: This article was written before the 2015 federal election. During the election
campaign, the Liberal Party indicated that, if elected, it would reverse the expansion of the taxfree savings account (TFSA) contribution limit introduced by the Conservative government in
the 2015 budget. However, at the time the article went to press, the new government had made
no formal announcement about the specific changes it proposes to make to the TFSA regime.
PRÉCIS
Le fait que le plafond de cotisation au compte d’épargne libre d’impôt (CELI) ait doublé en
2015 soulève des questions fondamentales sur les avantages potentiels de ce compte
pour les particuliers et l’économie; il représente également une occasion d’examiner les
lacunes du régime initial du CELI. Cette étude fournit la première analyse critique et en
profondeur de la politique sous-jacente au CELI, en s’appuyant sur les principales
statistiques disponibles. Il est constaté que le plafond de cotisation au CELI préexistant
était plus qu’adéquat pour presque tous les particuliers, à l’exception des particuliers
gagnant un revenu très élevé ainsi que certains travailleurs âgés et retraités. Une
proportion relativement faible et décroissante des personnes admissibles cotisait le
maximum, même avant la hausse de plafond. Le taux de maximisation relativement élevé
du CELI par les personnes âgées qui ont un revenu moyen ou intermédiaire s’est révélé
être transitoire et découler de la brève existence du régime. À long terme, la hausse
marquée du plafond du CELI avantagera de façon disproportionnée les particuliers qui
gagnent les revenus les plus élevés et les détenteurs de patrimoine, mais peu la grande
majorité des travailleurs et des aînés. Les niveaux préexistants d’accès aux régimes
d’épargne comme les CELI, les REER, et les régimes de retraite d’entreprise étaient plus
qu’adéquats pour la majorité des particuliers. Il est constaté que les plus avantagés par
le plafond de cotisation plus élevé recourent plus au transfert d’actifs imposables dans
* Canada Research Chair in Public Finance, School of Public Policy, Simon Fraser University,
Vancouver (e-mail: [email protected]). I thank, without implicating in any way, the following
for helpful comments on earlier drafts: Kevin Milligan, Andrew Jackson, Jonathan Sas, Adam
Lavecchia, Richard Shillington, Gordon Pape, and several anonymous reviewers. I also thank
Carlos Cardone, Andrew Dranfield, and Travis Young of Investor Economics, Toronto, for
providing proprietary TFSA data.
 905
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(2015) 63:4
leur CELI et au fractionnement du revenu avec le conjoint au moyen d’un CELI qu’à
l’ouverture de nouveaux régimes d’épargne. Ainsi, la hausse du plafond de cotisation au
CELI aura aussi peu ou pas du tout d’avantages pour l’économie dans son ensemble.
L’étude examine aussi les preuves du coût à long terme du CELI sur les recettes
fiscales des gouvernements fédéral et provinciaux et sur les programmes de la Sécurité
de la vieillesse et le Supplément du revenu garanti; bien qu’il soit impossible de les
établir avec certitude, les chiffres sont très élevés. La perception du public voulant que la
hausse du plafond du CELI bénéficiera au plus grand nombre et aura peu de conséquences
sur ceux qui ne l’utilisent pas est donc erronée. Ni l’économie ni le principe d’équité ne
peuvent justifier l’augmentation inconditionnelle du plafond de cotisation au CELI. Ce
régime comporte également d’autres lacunes qui nécessitent des réformes politiques.
L’étude explore diverses solutions de rechange, comme procurer aux particuliers qui ont
des droits de cotisation excédentaires à un REER l’option d’augmenter leur plafond de
cotisation au CELI; imposer des limites au plafond cumulatif des cotisations au CELI ou
aux soldes cumulés; limiter l’admissibilité au CELI aux particuliers dont le revenu est
inférieur à un certain seuil; limiter l’immunité illimitée actuelle du CELI pour les
programmes de prestations fondées sur un examen du revenu; et permettre aux régimes
de pension agréés collectifs d’offrir le CELI. En bref, il est plus que temps de réformer le
régime du CELI de manière à étendre et à restreindre certains de ses aspects tout en
l’améliorant afin d’obtenir de meilleurs résultats.
ABSTRACT
The 2015 near-doubling of the contribution limit for tax-free savings accounts (TFSAs)
raises fundamental questions about the potential benefits for individuals and the
economy; it also presents an occasion for examining deficiencies of the original TFSA
scheme. This study provides the first in-depth critical policy analysis of TFSAs based on an
assembly and synthesis of key available statistics on the provision. The pre-existing TFSA
contribution limit is found to be more than adequate for almost all individuals, except for
very high earners along with some older workers and retirees. Relatively low and
declining proportions of eligible persons were utilizing the maximum limit even prior to
the hike. Fairly high TFSA maximization rates by seniors at moderate and middle incomes
are found to be transitory phenomena resulting from the scheme’s short existence. The
sharp increase in the TFSA limit will, over the long run, be of highly disproportionate
benefit to top earners and wealth holders and of little benefit to the great majority of
workers and seniors. The pre-existing levels of access to tax-sheltered saving via TFSAs,
registered retirement savings plans (RRSPs), and workplace pensions were more than
adequate for most. Those most able to exploit the higher limit are found to be engaged
more in shifting taxable assets into their TFSAs and income splitting with their spouses
via TFSAs than undertaking new saving. Thus, the higher TFSA limit will also yield minimal,
if any, benefits for the economy at large.
The study further assesses evidence on the long-run cost of the TFSA provision for
federal and provincial income tax revenues and the old age security and guaranteed
income supplement programs; the resulting figures, though subject to considerable
uncertainty, are very large. Public perceptions that enlarged TFSAs will be of widespread
benefit to many individuals and of little consequence for others not utilizing TFSAs are
thus incorrect. The unconditional increase in the TFSA limit cannot be justified on economic
or equity grounds, but the scheme has additional deficiencies that also require policy
reforms. The study explores a range of possible remedies for TFSAs that would provide
tax-free savings accounts: expanding, restricting, or refining?  n  907
individuals who have excess RRSP contribution room with the option of increasing their
TFSA limit; place bounds on lifetime TFSA contributions or accumulated balances; limit TFSA
eligibility to individuals below a specified income level; constrain the currently unlimited
immunity of TFSAs from income-tested benefit programs; and/or allow pooled registered
pension plans to offer TFSAs. In short, the TFSA provision is overdue for reforms that could
expand or restrict it in various ways while refining the scheme for more effective outcomes.
KEYWORDS: TAX-FREE SAVINGS ACCOUNT n REGISTERED RETIREMENT SAVINGS PLAN n
CONSUMPTION TAXES n PROGRESSIVE TAXES n SAVINGS PLANS
CONTENTS
Introduction
Basic Features and Operation of the TFSA
Original TFSA Objectives and Emerging Issues
Statistical Sources for TFSAs
Aggregate TFSA Statistics
TFSA Participation Rates
TFSA Maximization Patterns
Aggregate Maximization Patterns
TFSA Maximization Rates by Age
TFSA Maximization Rates by Income
Family Versus Individual TFSA Usage Patterns
TFSA Usage by Older Workers and Seniors
Unused TFSA Contribution Room
Economic Impacts of TFSAs
Long-Run Costs of TFSAs
Impacts on Income Tax Revenues
Impacts on Cost of Old Age Security
Who Would Gain from the Higher TFSA Limit?
Performance and Deficiencies of TFSAs
Potential Reforms for TFSAs
Integrating TFSA Limits with RRSP Limits
Setting Limits on TFSA Lifetime Contributions, Balances, or Eligibility
Limiting TFSA Immunity from Benefit Clawbacks
Permitting Workplace Pooled TFSAs
Revenue Impacts of the Reform Options
Discussion and Conclusion
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INTRODUC TION
The tax-free savings account (TFSA) has proved highly popular since its launch in
2009. As of 2013, nearly 11 million Canadians had opened a TFSA. In 2012, annual
contributions to TFSAs already surpassed deduction claims for contributions to
registered retirement savings plans (RRSPs), a scheme that had existed for 55 years.
It is projected that by 2017 total unused TFSA room would exceed total unused RRSP
room even with an annual TFSA contribution limit of $5,500. The near-doubling of
908  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
the TFSA contribution limit to $10,000 in the 2015 budget1 presents an opportunity
to evaluate that initiative as well as to assess carefully the features and structure of the
TFSA relative to its original goals. As the 2015 federal election approached, both
major opposition parties had committed to reversing the TFSA hike and restoring the
previous $5,500 annual contribution limit. However, neither party had proposed
any restrictions on or refinements of the TFSA’s essential structure.
The attractions of TFSAs to both the public and federal policy makers might be
ascribed to the low initial revenue costs and the perception that the scheme is
broadly beneficial to savers of all kinds and at all income levels. Yet these notions are
belied by projections of very large long-run revenue costs, which will burden both
federal and provincial governments several administrations into the future. And
despite the relatively widespread takeup of TFSAs in the early years, the benefit patterns are already showing a tilt toward high-income and wealthy individuals as well
as some seniors. This pro-rich tilt is projected to become steeper in the years ahead
and to be accelerated and exacerbated by the hike in the TFSA limit. Moreover, despite initial hopes that TFSAs would increase total personal saving, evidence to date
suggests that the scheme is mainly diverting savings from RRSPs and assets held in
taxable accounts, as well as facilitating interspousal income splitting.
This study describes the key features and operation of the tax-prepaid TFSA and
assesses similarities and differences with the major tax-deferred schemes, RRSPs
and registered pension plans (RPPs). The original goals motivating the institution of
TFSAs are reviewed to provide a benchmark for evaluating the scheme’s performance,
and several emerging issues are identified. My study then examines the distribution of
TFSA usage in several dimensions with a focus on the numbers and characteristics
of individuals who have maximized their contribution limit. Despite the scheme’s
popularity, fewer than two out of five eligible persons had even opened a TFSA by the
end of 2013. Key findings are that the TFSA’s previous $5,500 limit was more than
adequate for the great majority of eligible Canadians and that a shrinking minority
were able to maximize even that limit. The scheme’s likely impact on household
savings and the economy and its projected long-run revenue costs are assessed.
These findings demonstrate the deficiencies of the recent TFSA hike as well as flaws
in the original scheme. I then canvass potential remedies for these problems, including a version that would render the TFSA limit more accessible and flexible for
many while moderating the adverse effects on revenues and distribution. Varied
options are available to expand, restrict, and refine the TFSA scheme, with the
choices hinging upon the assumed policy goals and preferences.
1 Canada, Department of Finance, 2015 Budget, Budget Plan, April 21, 2015, at 232-36. The
Conservative Party’s 2011 campaign pledge was to double the TFSA annual contribution limit
from its then-current figure of $5,000 to $10,000: Conservative Party of Canada, Here for
Canada: Stephen Harper’s Low-Tax Plan for Jobs and Economic Growth (Ottawa: CPC, 2011), at
28-29. After the contribution limit was raised to $5,500 in 2013, there was widespread
speculation that it would be doubled effective in 2014.
tax-free savings accounts: expanding, restricting, or refining?  n  909
B A S I C F E AT U R E S A N D O P E R AT I O N O F T H E T F S A
Since 2009, individuals have been able to establish and make non-tax-deductible
contributions to TFSAs. These accounts permit contributions up to an annual limit—
initially set at $5,000—unrelated to the individual’s current earnings or income, and
any unused part of the annual limit can be carried forward for future contribution.
The annual limit was originally indexed to inflation but increased only in $500 increments, rising to $5,500 for 2013 and 2014 before the 2015 increase to $10,000
along with abolition of the indexation feature. Funds in each TFSA accumulate free
of tax on the investment earnings, and withdrawals are also tax-free. Moreover, at
the time of the TFSA’s introduction, the government pledged that account withdrawals and accruals would not be counted in any federal income-tested tax or
transfer programs.2 For provincial cash and in-kind benefit programs, TFSA balances
are typically counted in asset tests, but no income is attributed to TFSAs. Various
features of the TFSA make it well suited for individuals to draw on for unexpected
needs and to be a part of retirement saving strategies for particular groups.
Several other similarities and differences of the TFSA relative to the RPP and RRSP
are worth noting. All three schemes are forms of a consumption-based tax, but with
an important difference in the time of payment. The tax on TFSA contributions has
been “prepaid” since those contributions are made out of taxable funds and no tax
deduction is allowed for them. The tax on RPPs and RRSPs is “deferred” because an
upfront tax deduction can be claimed for contributions and withdrawals are taxable.
The TFSA exempts the investment returns to saving, since the interest, dividends,
and capital gains accruing in the account are never taxed. The tax-deferred accounts
exempt the saving itself from tax on account of the deductibility of contributions.
Both are equivalent to not taxing investment income in the respective accounts, and
both remove the bias implicit in an income-based tax system against saving for future consumption.3 The two genres do differ in their sensitivity to changes in the
individual’s marginal tax rate between the time of saving and consumption. TFSA
contributions are after-tax earnings and taxable assets, so they hinge only on the tax
rate at the point of contribution. In contrast, the individual’s net benefit to saving in
a tax-deferred scheme hinges on differences in his or her marginal tax rate at the
time of contributing and the time of withdrawing funds; if these tax rates are equal,
the two types of scheme are equivalent.4
2 Provisions immunized against TFSAs include guaranteed income supplement (GIS) and old
age security (OAS) benefits, the Canada child tax benefit, the goods and services tax/harmonized
sales tax (GST/HST) credit, and the age credit in the income tax.
3 Even though withdrawals of funds from a tax-deferred account are taxable, the account holder
has had the benefit of earning investment returns on funds that would otherwise have been
paid in tax up front and of deferring income tax on annual accruals in the account for the entire
holding period. That explains the equivalence of the two types of plans.
4 For further explanation, see Jonathan Kesselman and Finn Poschmann, A New Option for
Retirement Savings: Tax-Prepaid Savings Plans, C.D. Howe Institute Commentary no. 149
(Toronto: C.D. Howe Institute, February 2001), and Jonathan R. Kesselman and Finn
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(2015) 63:4
Both tax-prepaid and tax-deferred saving schemes allow for carryforward of any
unused contribution allowance from a given year to future years. Additionally, withdrawals from a TFSA can later be “recontributed” to the account via a provision that
allows the contribution limit to increase by the amount of any withdrawals;5 the
tax-deferred plans offer no comparable feature. Allowable contributions to the taxdeferred schemes are linked to and limited by the individual’s earned income—
wages and salaries, net self-employment income, commissions, and bonuses—whereas
the ability to make TFSA contributions does not require earned income or income
of any kind or amount. Contributions to the tax-deferred schemes are subject to a
ceiling that is the lesser of 18 percent of the individual’s earned income and a specified dollar limit (nearly $25,000 in 2015) indexed to wage inflation. Allowable total
contributions to RPPs and RRSPs are integrated by a “pension adjustment,” so that
each extra dollar going into an RPP reduces the individual’s allowable RRSP contribution by one dollar.
Other differences between the TFSA and tax-deferred saving plans further increase the attractions of the former for short-term savings and, for some groups, for
retirement savings. Unlike the workplace RPPs and individual RRSPs, the TFSA imposes no age limit on making contributions and no mandatory withdrawals after
age 71. The only requirement for eligibility to open a TFSA is that the individual be
a Canadian resident aged 18 years or more. Funds for TFSA contributions can come
from the contributor’s own savings or be a transfer from anyone, including a spouse,
parent, or other person, yielding attractive income-splitting and asset-shifting opportunities for those with the financial resources.
The immunity of TFSA incomes and withdrawals from federal tax and benefit
clawbacks is helpful for savers with lower lifetime earnings who expect to be beneficiaries of the income-tested guaranteed income supplement (GIS) in retirement.
Individuals who exhaust their RPP/RRSP contribution limits can use the additional
contribution room afforded by TFSAs to enhance their scope for tax-favoured saving. Workers at moderate incomes approaching retirement can withdraw their RRSP
funds early, facing their current marginal tax rate rather than the higher GIS clawback
Poschmann, “Expanding the Recognition of Personal Savings in the Canadian Tax System”
(2001) 49:1 Canadian Tax Journal 40-99. For an assessment of the role of supernormal returns
in tax-prepaid versus tax-deferred plans, see Benjamin Alarie, “Policy Forum: Assessing
Tax-Free Savings Accounts—Promises and Pressures” (2009) 57:3 Canadian Tax Journal
504-32; and Jonathan R. Kesselman, “Policy Forum: Tax-Free Savings Accounts in a
Consumption-Based Personal Tax” (2009) 57:3 Canadian Tax Journal 533-62.
5 Recontribution to a TFSA in the same year as the withdrawal can result in a penalty tax if the total
amount contributed in that year exceeds the individual’s contribution limit (with carryforward);
waiting until the following year to recontribute can avoid this penalty. Excess TFSA contributions
are subject to a penalty tax of 1 percent per month of excess. In 2014, a Bank of Montreal survey
reported that 1 in 10 TFSA holders had overcontributed in the past, incurring an average of
$412 in penalties. See Bank of Montreal, “BMO Annual TFSA Report: Contributions Expected
To Rise 34 Per Cent,” November 6, 2014 (http://newsroom.bmo.com/press-releases/
bmo-annual-tfsa-report-contributions-expected-to—tsx-bmo-201411060977357001).
tax-free savings accounts: expanding, restricting, or refining?  n  911
rate, and contribute the proceeds to a TFSA. Moreover, individuals over age 71 can use
TFSAs to extend the tax shelter on their mandatory withdrawals from tax-deferred
retirement funds that exceed their current consumption needs.
ORIGINAL TFSA OBJEC TIVES
AND EMERGING ISSUES
Factors motivating a tax-prepaid saving plan (TPSP) were articulated in 2001 research
studies by Kesselman and Poschmann.6 These goals provide useful benchmarks for
assessing the structure and performance of TPSPs, including the scheme subsequently
implemented as the TFSA. Kesselman and Poschmann envisaged four main benefits
of introducing a Canadian TPSP:7
1. Persons with low to moderate lifetime earnings are penalized on their saving
through RRSPs and RPPs, since any GIS benefits received in retirement are
reduced by 50 percent of the disbursements from those schemes (including
both the initial saving and cumulative investment returns). Incentives for
lifetime saving could be restored by offering a tax-prepaid option in which
disbursements would not affect GIS benefits.8
2. Governments had repeatedly resisted raising the dollar limit for RRSP/RPP
contributions out of concern for the revenue cost and the public perception
of undue tax relief for high earners.9 In 2001, the RRSP dollar limit was a comparatively low $13,500, which corresponded to annual earnings of $75,000 at
the allowable contribution of 18 percent of earnings. A TPSP offered the
potential to break this political deadlock with a format that did not entail an
upfront revenue cost for government or immediate tax relief for individuals,
thus restoring saving incentives for upper-middle income earners.
3. Providing both lower and higher earners with a greater incentive to save
could yield long-run gains for economic growth through increased funds
available for business investment. Even if aggregate savings were not greatly
increased (a prospect that Kesselman and Poschmann entertained), economic
6 The full statement and analysis were provided in Kesselman and Poschmann, “Expanding the
Recognition of Personal Savings,” supra note 4, preceded by a shorter version (Kesselman and
Poschmann, A New Option for Retirement Savings, ibid.).
7 One might also add as a policy goal eliminating the taxation on the pure inflation component
of investment incomes, particularly on interest income given the extremely low rates of recent
years. However, this goal would be more effectively met by a system of tax indexation or
possibly a limited tax exclusion for interest income.
8 Richard Shillington, The Dark Side of Targeting: Retirement Saving for Low-Income Canadians,
C.D. Howe Institute Commentary no. 130 (Toronto: C.D. Howe Institute, September 1999)
referenced the US tax-prepaid saving scheme (the Roth individual retirement account or Roth
IRA) as a potential remedy for this problem facing low earners.
9 See the policy chronology leading up to 2001 in Kesselman and Poschmann, “Expanding the
Recognition of Personal Savings,” supra note 4, at 45.
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(2015) 63:4
performance could be improved by affording a more efficient allocation of
resources over time and between sectors such as business and housing.10
4. At the level of individuals, both efficiency and equity could be augmented
through TPSPs. As recognized in the economic literature, efficient lifetime allocation of resources requires that individuals have access to both tax-deferred
and tax-prepaid saving options; this combination further facilitates lifetime
averaging of individual tax burdens for greater equity.11 A partial shift of the
tax base toward consumption also improves the equitable taxation of high
savers versus high spenders at any given level of lifetime earnings.12
One of the early motivations for introducing a TPSP is no longer salient, as a
result of subsequent sharp increases in the dollar limit for RRSP contributions. As
noted above, in 2015 that limit is nearly $25,000, far outstripping the increase in
average earnings since 2001. The current RRSP dollar ceiling combined with the
previous $5,500 TFSA limit corresponds to annual labour earnings of nearly $170,000
for a person saving as much as 18 percent of gross income (or nearly one-quarter of
net income).13 Many of the highest earners have further access to exceptional limits
for tax-favoured saving through individual pension plans and retirement compensation arrangements.14 Thus, with respect to the saving needs of most high earners
apart from the wealthy, little basis exists for raising the TFSA limit beyond $5,500.
Furthermore, with the low interest rates of recent years and increasing longevity,
there has been growing concern about the high mandatory distribution rates for
registered retirement income funds (RRIFs). TFSAs have assisted seniors facing what
some feel to be excessive RRIF distributions in sheltering part of those excess sums
from further tax on their returns. Ironically, the 2015 budget significantly reduced
10 For more general economic analysis, see Alan J. Auerbach, Laurence J. Kotlikoff, and Jonathan
Skinner, “The Efficiency Gains from Dynamic Tax Reforms” (1983) 24:1 International Economic
Review 81-100.
11 This finding was recognized in 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)
and many subsequent economic analyses.
12 The tax-rate structure can still be adjusted to the desired degree of progressivity, but the equity
goal will be more closely related to individuals’ total lifetime financial resources than their
varying annual incomes.
13 The earlier $13,500 limit for RRSP/RPP contributions was intended to cap access to taxfavoured savings for those with earned income that is more than twice the amount of average
full-time earnings; in contrast, the $30,500 total RRSP/RPP/TFSA limit (prior to the TFSA
hike) capped access only for those with earned income of more than four times the average.
14 For description and analysis of these schemes, see Marie-Eve Gosselin and Jean-Pierre Laporte,
“A Review of Individual Pension Plans,” Personal Tax Planning feature (2013) 61:1 Canadian
Tax Journal 257-78; and Jim Kahane, Uros Karadzic, and Simon Létourneau-Laroche, “A Fresh
Look at Retirement Compensation Arrangements: A Flexible Vehicle for Retirement
Planning,” Personal Tax Planning feature (2013) 61:2 Canadian Tax Journal 479-502.
tax-free savings accounts: expanding, restricting, or refining?  n  913
the mandatory RRIF withdrawal rates, thus relieving the need for a higher TFSA limit
to shelter RRIF income at the same time as it raised that limit.
In addition to the retirement saving goal stressed by Kesselman and Posch­
mann, when the federal government introduced the TFSA, it also cited short- and
intermediate-term saving objectives for individuals. The 2008 federal budget stated,
“Many Canadians may prefer to use a TFSA to save for pre-retirement needs given
the absence of tax consequences on withdrawals and the ability to avoid the use of
RRSP room for non-retirement savings needs.”15 Related to this point, the inclusion
of the recontribution feature clearly enhances the options for individuals to use
TFSAs for shorter-term saving and consumption spending goals without losing any
of their cumulative contribution limits. Evidence in this study validates the expectation that many TFSA holders would use their accounts for frequent withdrawals to
cover episodic spending needs. The 2008 budget further anticipated that, on the
basis of observed saving patterns, seniors would receive one-half of the total benefits
of TFSAs.
Reviewing the initial objectives for instituting tax-prepaid savings, the third and
fourth items identified by Kesselman and Poschmann remain compelling reasons to
retain some form of TFSA. However, several emerging issues suggest the need for
reforms of the TFSA policy:
n
n
The government is apparently committed to unlimited immunity of TFSA holdings from the income tests of public pension programs such as the GIS and the
tax recovery on payments to higher-income old age security (OAS) recipients.
Yet large TFSA balances already accumulated by some individuals raise concerns
over whether such unlimited immunity will prove to be fiscally sustainable or
publicly acceptable. Kesselman and Poschmann had noted that “the use of
TPSPs to avoid the high taxback rates of public retirement benefit programs
might not be acceptable if carried too far.”16 They suggested, as solutions, the
deregistration of TPSPs at age 69 or mandatory TPSP disbursements after age
69 (then the age for conversion of RRSPs to RRIFs), although other approaches
are possible.
Evidence of the sharp and growing tilt of TFSA benefits favouring high-income
and high-wealth individuals suggests failure to meet some of the original policy objectives. Kesselman and Poschmann had suggested a program format
integrating the TPSP contribution limit with the limits for RRSP/RPP contributions, so that higher earners would still be able to access TFSAs but would not
gain outsized benefits in total tax-favoured savings. This approach would
also give individuals who had excess RRSP/RPP room the flexibility to contribute more to TFSAs, and thus further assist seniors who have had few years to
15 Canada, Department of Finance, 2008 Budget, Budget Plan, February 26, 2008, at 78.
16 Kesselman and Poschmann, A New Option for Retirement Savings, supra note 4, at 26.
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n
(2015) 63:4
cumulate their limits since the TFSA’s 2009 implementation. Other policy
reforms, such as setting an income limit on individuals accessing TFSAs, are
also worthy of consideration.
Individuals amassing large sums in their TFSAs, exceeding half a million dollars,
and attempts by the Canada Revenue Agency (CRA) to constrain particular
TFSA investing practices have been reported.17 The CRA relies on legislation
with criteria to assess whether a TFSA holder is deemed to “carry on a securities trading business,” in which case the income in the TFSA can be deemed
taxable.18 However, some non-professional TFSA investors will—through
skill, leverage, and/or luck—accumulate multimillion-dollar tax-free balances
over the years, and one might question the acceptability of this in terms of
equity and revenue. Mooted policy reforms such as setting limits on lifetime
TFSA contributions or on cumulative TFSA balances warrant consideration.
S TAT I S T I C A L S O U R C E S F O R T F S A s
A Department of Finance study provides statistics on various aspects of TFSA usage
patterns through 2011.19 The CRA has released detailed online statistics on TFSA
usage through 2013.20 Official estimates of the revenue cost, or tax expenditure, of
TFSAs through 2014 are also available from the Department of Finance.21 This study
draws on those three sources and for 2014 uses limited data from a proprietary
source. Institutions administering the TFSAs (such as banks and trust companies) are
required to file CRA annual year-end information reports on each account’s contributions, withdrawals, and fair market value—but not on the incomes generated
within each account. This gap in the institutional reporting requirements, combined with the tax-free nature of investment earnings inside TFSAs, means that these
incomes do not appear in the CRA’s reporting of income tax statistics. However,
17 For examples, see Garry Marr, “Here’s How One Man Got His TFSA Balance up to More
Than $275,000,” Financial Post, November 6, 2014; Garry Marr, “Here’s What Will Get Your
TFSA Audited by the Canada Revenue Agency,” Financial Post, December 2, 2014; and Garry
Marr, “New Stats Show TFSAs Not Just for the Rich as Canadians Max Out Savings,”
Financial Post, May 9, 2015. One TFSA holder had amassed nearly $1.25 million.
18 Lauchlin MacEachern and Tim Clarke, “Taxing TFSAs That Carry On a Securities Trading
Business” (2015) 5:1 Canadian Tax Focus 1-2.
19 Canada, Department of Finance, Tax Expenditures and Evaluations 2012 (Ottawa: Department
of Finance, 2013), at 31-45.
20 The CRA website added statistics on TFSA activities disaggregated by income of account holders
in May 2015 only in response to my access to information request. Also see PressProgress, “Are
Conservatives Withholding Data Showing New TFSA Changes Are a Goldmine for the Rich?”
May 4, 2015 (www.pressprogress.ca/en/post/are-conservatives-withholding-data-showing-new
-tfsa-changes-are-goldmine-rich).
21 Canada, Department of Finance, Tax Expenditures and Evaluations 2014 (Ottawa: Department
of Finance, 2015).
tax-free savings accounts: expanding, restricting, or refining?  n  915
aggregate TFSA incomes by year can be computed from the aggregate figures on
annual balances, contributions, and withdrawals.22
I begin my analysis of TFSA statistics by reviewing aggregate patterns of contributions, withdrawals, and account balances from 2009 through 2014. I next examine
TFSA participation rates over time and by various characteristics of individuals.
Most discussion of the adequacy of TFSA contribution limits has focused on the patterns among Canadians who hold such accounts. The TFSA has often been described
as a provision that can benefit “all Canadians” regardless of age, income, or situation.23 The untold story relates to the patterns among all persons eligible to have
TFSAs including those who have chosen not to open an account. My discussion thus
refers to TFSA “eligibles,” a term that includes both “holders” (who have a TFSA) and
“eligible non-holders” (who could, but do not, have a TFSA). I then investigate in
detail the rates and patterns of maximizing cumulative TFSA limits over time and by
age and income of both holders and eligibles. These findings provide the most important insights into the adequacy of TFSA limits prior to the 2015 increase. Note
that all official statistics on TFSAs relate to individual account holders; I later present
some calculations on TFSA usage patterns among families in various income groups.
A G G R E G AT E T F S A S TAT I S T I C S
Table 1 presents key aggregate and average figures for measures of TFSA holders’
contributions, withdrawals, and year-end balances from 2009 through 2013 and more
limited measures for 2014. TFSA enrolment in the first year was a robust 4.8 million
and rose to 10.7 million separate individuals holding accounts (many with multiple
accounts) by year-end 2013. Total annual TFSA contributions have risen each year,
surpassing total RRSP deductions in 201224 and hitting $40.2 billion in 2013.25 Total
withdrawals from TFSAs have also risen over time but have been outpaced by the
mounting contributions. In 2013, aggregate TFSA withdrawals were $14.6 billion or
36 percent of the year’s total TFSA contributions. The aggregate market value of all
22 My estimates of aggregate annual incomes generated in TFSAs have been computed using the
method applied by the Department of Finance in Tax Expenditures and Evaluations 2012, supra
note 19, at 34, note 3: for the relevant year take the year-end balance, subtract the previous
year-end balance, subtract contributions, and add withdrawals.
23 In the words of the Toronto Star personal finance editor, “[p]art of the TFSA appeal is that they
benefit all income groups”: Adam Mayers, “A Bad Idea To Increase TFSA Limit? Maybe Not,”
Toronto Star, March 16, 2015. A similar view was reflected in a headline in the Vancouver Sun:
Andrew Coyne, “Everyone Can Benefit from TFSAs,” Vancouver Sun, March 3, 2015. Also see
Marr, “New Stats Show TFSAs Not Just for the Rich,” supra note 17; and Gordon Pape,
“TFSAs Benefit More Than the Rich,” Globe and Mail, April 15, 2015.
24 Canada Revenue Agency, Preliminary Statistics—2014 Edition (2012 Tax Year) (Ottawa: CRA,
2014), table 2.
25 The aggregate value of TFSA contributions exceeds that for RRSPs by a large margin if one
considers that, unlike TFSAs, RRSP contributions have deferred tax embedded in them.
916  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
TABLE 1 Aggregate Statistics on Tax-Free Savings Account (TFSA)
Holders (Individuals), 2009-2014
2009
Number of accountsa
(millions) . . . . . . . . . . . . . . . . . .
Number of individuals with
a TFSA (millions) . . . . . . . . . . .
Total annual contributions
($ millions) . . . . . . . . . . . . . . . . .
Average contribution per
TFSA holder ($)b . . . . . . . . . . . .
TFSA holders who made
contributions (%) . . . . . . . . . . . .
Total annual withdrawals
($ millions) . . . . . . . . . . . . . . . . .
Average withdrawal per
TFSA holder ($)b . . . . . . . . . . . .
TFSA holders who made
withdrawals (%) . . . . . . . . . . . . .
Total year-end fair market
value ($ millions) . . . . . . . . . . . .
Average fair market value
per TFSA holder ($) . . . . . . . . .
Estimated investment
income/lossc ($ millions) . . . . . .
Federal tax expenditure on
TFSA ($ millions) . . . . . . . . . . .
Share of TFSA funds in
mutual funds, equities (%) . . . . .
Share of TFSA funds in
fixed-term securities and
savings deposits (%) . . . . . . . . . .
a An
2010
2011
2012
2013
2014
5.3
7.9
10.1
11.9
13.9
na
4.8
6.9
8.4
9.6
10.7
na
18,963
25,399
31,105
33,503
40,164
na
3,918
3,701
3,718
3,491
3,749
na
93.4
74.2
69.4
64.3
63.1
na
1,937
4,912
8,129
11,175
14,603
na
400
716
972
1,165
1,363
na
14.5
20.7
24.2
26.1
27.6
na
18,156
40,701
62,584
3,751
5,931
7,481
9,118
11,037
na
1,130
2,058
-1,093
2,591
5,195
na
65
165
160
305
435
520
37.3
44.4
45.7
48.0
52.4
56.9
62.7
55.6
54.3
52.0
47.6
43.1
87,503 118,259 135,660
individual may hold more than one TFSA, similar to other tax-assisted savings vehicles;
figures are full-year or year-end.
bCalculated for all TFSA holders in that year (not just those making contributions or
withdrawals).
c Although TFSA holders sustained a net investment loss at the aggregate level in 2011, about
three-quarters of TFSA holders had positive investment income in the year; TFSA investment
income is estimated by the author using CRA data and the method described in Canada,
Department of Finance, Tax Expenditures and Evaluations 2012 (Ottawa: Department of Finance,
2013), at 34, note 3.
Sources: Canada Revenue Agency, Tax-Free Savings Account Statistics, tables, miscellaneous years
(www.cra-arc.gc.ca/gncy/stts/tfsa-celi/menu-eng.html); tax expenditure figures from Canada,
Department of Finance, Tax Expenditures and Evaluations 2014 (Ottawa: Department of Finance,
2015), at 18; estimated 2014 year-end market value and all figures for share of TFSA funds by
asset type were provided by Investor Economics from a proprietary source.
tax-free savings accounts: expanding, restricting, or refining?  n  917
TFSAs
grew from $18 billion at year-end 2009 to an estimated $136 billion at yearend 2014, representing a compound annual growth rate of 50 percent.
Estimated aggregate incomes realized in TFSAs have been substantial, although
the figures dipped into negative territory in 2011 because of equity market downturns. Still, even for that year about three-quarters of TFSA holders had positive
investment income because they were heavily invested in more stable fixed-income
and dividend-yielding assets.26 In the initial year, TFSA holders had their account
portfolios weighted most heavily in relatively secure fixed-term investments and
savings deposits, at nearly 63 percent. The succeeding years have exhibited a continuing shift of TFSA balances toward greater holding of more risk-oriented equities
and mutual funds, with that proportion rising to nearly 57 percent by 2014.27 This
shift may reflect, in part, the fact that as time progresses more lower-income, lowerwealth TFSA holders will have depleted their previous cash savings for transfer into
the account, so that incremental TFSA contributions will come proportionately more
from higher-wealth individuals who are more risk-tolerant and investment-savvy.28
T F S A PA R T I C I PAT I O N R AT E S
Statistics on TFSA participation rates are computed relative to the total number of
persons aged at least 18 years—the minimum age for TFSA eligibility.29 The first
column of table 2 shows aggregate participation rates over the first five years of the
TFSA’s operation. While the proportion of eligibles with TFSAs has grown from
18.1 percent in 2009 to 38.0 percent in 2013, it is rising ever more slowly and will
likely top out in the lower 40 percent range. The data thus show that by the end of
2013, when the scheme had been operational for five years, more than three out
26 Note that eligible dividends on Canadian shares held in TFSAs are excluded from the dividend
tax credit, as are such holdings in tax-deferred accounts.
27 Contrasting figures on the composition of TFSAs come from a Bank of Montreal survey, supra
note 5: “cash” at 60 percent, mutual funds at 25 percent, and guaranteed investment certificates
(GICs) at 20 percent (total exceeding 100 percent).
28 A much stronger preference for holding equities versus cash among higher-income account
holders compared to lower-income account holders is confirmed by a report on the United
Kingdom’s tax-prepaid saving scheme (the individual savings account, or ISA): United Kingdom,
HM Revenue & Customs, Individual Savings Account (ISA) Statistics (London: HM Revenue &
Customs, 2014), at 13.
29 TFSA participation rates reported later in this section for 2011 (taken from Tax Expenditures and
Evaluations 2012, supra note 19) are based on the numbers of taxfilers aged 18 and over rather
than all individuals in that age group. My computations of participation rates and maximization
rates relating to income for eligibles reported throughout this study are based on CRA data on
numbers of individuals who filed returns and thus do not compensate for filers under age 18
(who are ineligible to open a TFSA) or individuals not filing returns. My computations of rates
for 2013 are based on the CRA preliminary data for 2012, with numbers filing returns scaled
up to reflect the data set’s 95 percent sample size and increased by the average annual rate of
growth in all returns filed between 2009 and 2011 (1.1 percent).
918  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
TABLE 2 Aggregate Rates of Tax-Free Savings Account (TFSA)
Participation and Maximization, 2009-2013
Maximization rateb
Year
Participation ratea
Holders
Eligiblesc
Number maxing
their TFSA limit
11.6
10.0
9.2
8.1
6.7
3,099,830
2,716,940
2,522,750
2,254,030
1,897,220
percent
2009 . . . . . . . . . . . . . . . .
2010 . . . . . . . . . . . . . . . .
2011 . . . . . . . . . . . . . . . .
2012 . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . .
18.1
25.4
30.5
34.5
38.0
64.0
39.6
30.2
23.5
17.7
Note: Computations by author.
a Participation rate is the percentage of eligibles who are holders.
bMaximization rate is the percentage among the relevant group who have fully utilized their
cumulative TFSA limit in the respective year.
c Eligibles in a given year are the total Canadian population aged 18 years and older.
Sources: Canada Revenue Agency, Tax-Free Savings Account Statistics, tables, miscellaneous years
(www.cra-arc.gc.ca/gncy/stts/tfsa-celi/menu-eng.html); Statistics Canada, CANSIM table
051-0001, “Estimates of Population, by Age Group and Sex for July 1, Canada, Provinces and
Territories,” for population estimates by year and age group.
of five eligible Canadians did not have a TFSA. Many individuals will never choose
to open a TFSA, for various reasons: for example, they may lack the need, means, or
ability to save; belong to an adequate workplace pension plan; or meet all of their
saving needs through Quebec and Canada Pension Plan contributions, investment
in their home or family business, and/or RRSP contributions.30 These 17 million eligible persons without a TFSA are an essential part of any understanding of who does
and who does not benefit from the scheme or from a hike in its contribution limit.
Another pertinent fact in understanding TFSA participation is that many of the
accounts have very small balances, making the official count of TFSA holders somewhat deceptive. This situation can be attributed in part to the common use of TFSAs
for short-term saving, with many account holders making frequent withdrawals. In
2013, for example, 2.9 million TFSA holders (28 percent of the total) made a total of
12 million withdrawals from their accounts (averaging 4 per person), and the total
withdrawals for each averaged $4,940. Clearly, many Canadians are using their TFSAs
as a short-term saving vehicle rather than for their retirement saving; they will
never be constrained by the contribution limits. CRA data do not provide any direct
handle on the distribution of account sizes. However, analysis of Statistics Canada’s
2012 data set from the Survey of Financial Security reveals that nearly 900,000
families had TFSAs with total balances under $1,000 each, and the average of those
30 For most middle- and higher-earning workers, contributing to an RRSP is financially more
attractive than contributing to a TFSA because of the upfront tax deduction on the former.
Mainly those constrained by the RRSP contribution limits might additionally find TFSA
contributions attractive; others might hold TFSAs for short-term saving purposes.
tax-free savings accounts: expanding, restricting, or refining?  n  919
holdings was just $215.31 Thus, the rising figures on TFSA participation rates overstate the extent to which TFSAs are substantively held.
Distinct patterns of TFSA participation arise with respect to province, age, and
sex.32 Geographically, TFSA participation rates in 2013 were highest in Ontario,
Alberta, and British Columbia, lying in the low- to mid-40 percent range. Participation rates were lowest in the Atlantic provinces, in the mid-20 percents, other than
Nova Scotia at about 30 percent. Participation rates in the remaining provinces
ranged between the two extremes. Participation rates in 2013 with respect to age
were lowest at 29.5 percent for the 18-29 age group, rising to 33.9 percent for ages
30-49, rising further to 40.9 percent for ages 50-64, and topping out at 50.2 percent
for ages 65 and higher. For all ages between 18 and 59 years, the rate was just above
one-third. In 2011, individuals older than 71 years—who cannot make further contributions to RRSPs and must begin depleting those funds—constituted 15 percent
of TFSA holders and made nearly 20 percent of all contributions. Females accounted
for 55 percent of TFSA holders and total contributions in 2011, and their participation rate was 33 percent versus 29 percent for males.33
The profiles of TFSA participation and holdings by income are of particular interest for the purposes of assessing the scheme and the recent hike in the contribution
limit. Unfortunately, the TFSA provision allowing an individual to contribute to his
or her spouse’s account makes the official statistics suspect for those reporting low
individual incomes.34 Interspousal TFSA contributions are an attractive means for
income splitting in cases where incomes of the spouses are divergent; interspousal
TFSA contributions do not trigger the income attribution rules for tax that apply to
most other interspousal asset transfers. One index of how these interspousal TFSA
transfers obscure the true income distribution of account holders is that in 2011
31 Statistics Canada, Survey of Financial Security for 2012; tabulations of the survey data for this
purpose and for table 5 below were undertaken by Richard Shillington of Tristat Resources
(www.shillington.ca).
32 TFSA participation rates by province and age are my computations from Canada Revenue
Agency, Tax-Free Savings Account Statistics, 2013 tax year, table 1B, “TFSA Holders by Province,”
and table 1A, “TFSA Holders by Age Group” (www.cra-arc.gc.ca/gncy/stts/tfsa-celi/2013/
menu-eng.html), and from Statistics Canada, CANSIM table 051-0001, “Estimates of
Population, by Age Group and Sex for July 1, Canada, Provinces and Territories” for 2013.
33 The results reported for 2011 are drawn from Tax Expenditures and Evaluations 2012, supra note
19, at 35 (for age over 71), and at 38 (for gender). This gender differential might be explained
in part by the income splitting by couples explained next in the text.
34 Tax Expenditures and Evaluations 2012, supra note 19, at 41, asserts that most married and
common-law TFSA contributors whose individual income was below $20,000 came from
households with total income below $80,000, but insufficient detail is presented to dismiss the
notion that reported participation and contribution rates for the lowest income brackets are
skewed by interspousal transfers. Maureen Donnelly and Allister Young, “Policy Forum:
Tax-Free Savings Accounts—A Cautionary Tale from the UK Experience” (2012) 60:2
Canadian Tax Journal 361-74, discuss a comparable bias in reporting of participation in the
United Kingdom’s tax-prepaid ISA program.
920  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
about 162,000 spouses and common-law partners—of whom almost 80 percent
were female—made TFSA contributions that exceeded their individual income.35
With the cited caveat in mind, I present results for the distribution of TFSA participation and contributions by individual income. In 2013, the approximate TFSA
participation rates were 26 percent for incomes between $10,000 and $20,000;
45 percent for incomes from $45,000 to $55,000; 65 percent for incomes from
$150,000 to $250,000; and 71 percent for incomes above $250,000.36 Individuals
reporting incomes above $200,000 in 2011 accounted for about 2.5 percent of all
account holders and 3 percent of total TFSA contributions while constituting just
1.3 percent of all taxfilers.37 Many top earners were constrained by the TFSA’s $5,000
limit that year and would have taken up an even more disproportionate share of
total contributions had a higher limit been in place.38 These patterns reflect individuals’ varying ability to undertake new saving, their holdings of taxable financial
assets for shifting to TFSAs, and incentives to use TFSAs for income splitting—all
factors correlated with age and income.
T F S A M A X I M I Z AT I O N PAT T E R N S
Aggregate Maximization Patterns
The second column of table 2 shows the percentages of all TFSA holders maxing out
their cumulative contribution limits in each year. The rate of TFSA maximizing
among holders has declined sharply from 64.0 percent in 2009 to just 17.7 percent
in 2013. This steep decline could be explained by two alternative hypotheses. First,
since TFSA holders enjoy a cumulatively growing limit each year, many exhaust their
taxable assets by shifting them into their TFSAs over time; that is, the main source
of TFSA contributions may be existing taxable assets that are transferred into TFSAs
rather than new saving. If an individual’s TFSA contributions came mainly out of
saving from current income, it is improbable that his or her saving rate would decline
sharply from one year to the next. In the aggregate, it would similarly be unlikely
that overall TFSA maximization rates among holders would be declining over the
years if contributions came predominantly from new saving.
An alternative hypothesis that may account for declining maximization rates
among TFSA holders is that individuals who open their accounts in successive years
possess a smaller amount of taxable assets to shift or have less ability to save than
earlier account holders. The last column of table 2 shows that the actual numbers
of TFSA holders who maximized their limits each year fell sharply—by nearly
35 Tax Expenditures and Evaluations 2012, supra note 19, at 35.
36 See supra note 29 for the source of these computations.
37 Tax Expenditures and Evaluations 2012, supra note 19, at 37.
38 A similar steep income gradient of participation and average balances has been observed in the
tax-deferred saving program of the United States (David Joulfaian and David Richardson,
“Who Takes Advantage of Tax-Deferred Saving Programs? Evidence from Federal Income Tax
Data” (2001) 54:3 National Tax Journal 669-88) and the tax-prepaid saving program (the ISA)
of the United Kingdom (HM Revenue & Customs, supra note 28).
tax-free savings accounts: expanding, restricting, or refining?  n  921
40 percent—between 2009 and 2013. Although the number of TFSA holders over
this period more than doubled, the number who were actually able to maximize the
TFSA limit was in virtual free-fall. This evidence strongly supports the first hypothesis of asset shifting, which finds further validation in the results disaggregated by
age and income reported in the sections that follow.
The third column of table 2 shows the pattern of TFSA maximization rates computed for all eligible persons, including those who do not have a TFSA. These figures
are weighted averages of maximization rates for holders and non-holders, with zeros
for the latter group.39 Clearly, maximization rates for all TFSA eligibles are much
lower than for TFSA holders alone, falling from 11.6 percent in 2009 to just 6.7 percent in 2013. That is, barely 1 out of 15 Canadians eligible to have a TFSA utilized
the maximum available contribution limit in 2013, and the rate has undoubtedly
declined further by 2015. Note that the rising proportion of holders partly offsets
the decline in maximization rates among the eligibles. Nevertheless, despite the
continuing rise in eligibles starting TFSAs over time, few of these later starters will
ever max out their cumulative TFSA limit, which was $36,500 at the start of 2015—
before the subsequent hike to $41,000—and continues to grow over time.
TFSA Maximization Rates by Age
I next examine the data on rates of TFSA maximization disaggregated by age of the
account holder or eligible. Table 3 presents the results for 2009, 2011, and 2013 for
TFSA holders and TFSA eligibles in the following age groups: 18-29, 30-49, 50-64,
and 65 and over (65+), with a supplementary group aged 18-59. For TFSA holders
(shown in the left-hand panel), in 2009, the TFSA’s first year, the percentage of those
opening an account who contributed the $5,000 maximum in that year was relatively
high across all age groups, albeit displaying a significant upward tilt with increasing
age. For the group aged 18-29, the maximization rate was 39.3 percent or nearly
half the 82.1 percent rate of the oldest group, aged 65 and over. By the fifth year,
2013, when it would take cumulative contributions of $25,500 for an individual to
max out the TFSA limit, the maximization rates for all age groups of holders had
fallen substantially. However, in relative terms, the rates fell most sharply for the
youngest age groups; by 2013, the rate for holders aged 18-29 (5.4 percent) was now
only about one-sixth the rate for those aged 65 and over (31.7 percent). Even for the
more inclusive group of holders aged 18-59, the maximization rate fell from
55.2 percent to just 11.3 percent over this period.
Table 3’s results display vividly the much lower and faster declining maxing out
rates for all TFSA holders who are not at or near retirement age relative to those who
are 65 and over. The decline is particularly steep for the youngest group of TFSA
holders, aged 18-29. This pattern reinforces the hypothesis that TFSA contributions
are heavily sourced from asset shifting rather than new saving. Older cohorts have
39 Mathematically inclined readers will understand that the maximization rates for eligibles in
table 2 are the product of the maximization rates for holders and the participation rate. For
example, for 2009, 11.6 percent = 64.0 percent × 18.1 percent.
922  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
TABLE 3 Tax-Free Savings Account (TFSA) Maximization Rates by Age of
TFSA Holders and TFSA Eligibles (Percent), 2009, 2011, and 2013
TFSA holders
TFSA eligibles
Age ( years)
2009
2011
2013
2009
2011
2013
18-29 . . . . . . . . . . . . . . . . . . . . . . . 30-49 . . . . . . . . . . . . . . . . . . . . . . . 50-64 . . . . . . . . . . . . . . . . . . . . . . . 65+ . . . . . . . . . . . . . . . . . . . . . . . . All ages . . . . . . . . . . . . . . . . . . . . . 18-59 . . . . . . . . . . . . . . . . . . . . . . . 39.3
53.9
69.5
82.1
64.0
55.2
11.5
19.5
35.1
48.6
30.2
21.7
5.4
9.3
21.3
31.7
17.7
11.3
4.6
8.0
15.4
22.1
11.6
8.5
2.6
5.1
12.0
20.7
9.2
5.8
1.6
3.2
8.7
15.9
6.7
3.8
Note: Computations by author.
Sources: Canada Revenue Agency, Tax-Free Savings Account Statistics, tables, miscellaneous years
(www.cra-arc.gc.ca/gncy/stts/tfsa-celi/menu-eng.html); Statistics Canada, CANSIM table
051-0001, “Estimates of Population, by Age Group and Sex for July 1, Canada, Provinces and
Territories,” for population estimates by year and age group.
accumulated far more taxable financial assets that can be shifted into TFSAs purely
to reduce their taxes, whereas younger cohorts generally have more modest asset
holdings. As each individual’s cumulative TFSA limit rises each year, account holders
in the younger groups will run out of assets for transfer to their TFSAs more quickly
than account holders in the older groups, resulting in a sharp divergence in their
respective maximization rates.
The analogous results for TFSA eligibles are shown in the right-hand panel of
table 3. The rates for eligibles in all age groups are much lower than those for their
counterparts in the holder category, because the non-holders now included have, by
definition, zero rates of maxing out. However, in relative terms, the maximization
rates for each age group of eligibles fell less sharply than those for holders alone,
because the rates for eligibles are computed relative to much more stable population
figures, given the growing numbers of holders. Nevertheless, the absolute rates of
maxing out TFSAs among all persons eligible to have an account had fallen to very low
levels by the program’s fifth year. For those aged 18-29, the 1.6 percent rate meant
that just 1 out of 60 had maxed out; for those aged 18-59, the 3.8 percent rate corresponds to just 1 out of 25; and even for those aged 65 and over, the 15.9 percent
rate corresponds to fewer than 1 out of 6. The maximization rates held up relatively
more strongly for eligibles aged 65 and over than for those in the other age groups.
Figure 1 provides a graphic picture of the findings in table 3, showing clearly how
TFSA maximization rates by age diverge sharply for eligible persons versus those
holding accounts, with the largest differences arising for younger age groups.
TFSA Maximization Rates by Income
An independent analysis of TFSA maximization disaggregated by the incomes of
account holders and all eligibles became feasible only recently, when the CRA released the TFSA data by income in early May 2015. Table 4 displays my computed
tax-free savings accounts: expanding, restricting, or refining?  n  923
FIGURE 1 Tax-Free Savings Account (TFSA) Maximization Rates by
Age of TFSA Holders and TFSA Eligibles, 2009, 2011, and 2013
Top bar, holders: roman numbers.
Bottom bar, eligibles: italicized numbers.
82
22
Percentage maximizing
70
15
54
8
18-29
21
9
20
5
55
9
32
16
35
12
39
5
12
3 5
2
64
12
49
21
30
9
18
7
9
3
30-49
50-64
65+
All ages
22
6
11
4
18-59
Age group ( years)
2009 holders
2009 eligibles
2011 holders
2011 eligibles
2013 holders
2013 eligibles
Note: Computations by author; see table 3.
Sources: Canada Revenue Agency, Tax-Free Savings Account Statistics, tables, miscellaneous
years (www.cra-arc.gc.ca/gncy/stts/tfsa-celi/menu-eng.html); and Statistics Canada, CANSIM
table 051-0001, “Estimates of Population, by Age Group and Sex for July 1, Canada,
Provinces and Territories,” for population estimates by year and age group.
maximization rates for TFSA holders and TFSA eligibles for the years 2009, 2011,
and 2013 relative to the individual’s total income assessed. As seen in the left-hand
panel, in a pattern somewhat like that with respect to age, the maximization rates
for TFSA holders in 2009 all began relatively high (above 50 percent) and rose with
income. The rates for that year peaked at nearly 80 percent for account holders
with income of $250,000 or more. Surprisingly high maximization rates in 2009,
even at incomes below $20,000, might be explained in part by the transfer of funds
from higher- to lower-income family members.40
Despite the high initial values, for almost all income groups the TFSA maximization rates of holders declined sharply over the period from 2009 to 2013. They fell
40 Apart from the fact that most individuals with income below $20,000 would not have
substantial savings or taxable assets to contribute to a TFSA, the large majority would pay no
tax or only a small amount of tax on taxable assets. Another explanation relates to seniors
seeking to maximize their GIS benefits; I return to this issue later.
924  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
TABLE 4 Tax-Free Savings Account (TFSA) Maximization Rates by Income of
TFSA Holders and TFSA Eligibles (Percent), 2009, 2011, and 2013
TFSA holders
TFSA eligibles
Income ($)
2009
2011
2013
2009
2011
2013
<5,000 . . . . . . . . . . . . . . . . . .
5,000-9,999 . . . . . . . . . . . . . . .
10,000-14,999 . . . . . . . . . . . . .
15,000-19,999 . . . . . . . . . . . . .
20,000-24,999 . . . . . . . . . . . . .
25,000-29,999 . . . . . . . . . . . . .
30,000-34,999 . . . . . . . . . . . . .
35,000-39,999 . . . . . . . . . . . . .
40,000-44,999 . . . . . . . . . . . . .
45,000-49,999 . . . . . . . . . . . . .
50,000-54,999 . . . . . . . . . . . . .
55,000-59,999 . . . . . . . . . . . . .
60,000-69,999 . . . . . . . . . . . . .
70,000-79,999 . . . . . . . . . . . . .
80,000-89,999 . . . . . . . . . . . . .
90,000-99,999 . . . . . . . . . . . . .
100,000-149,999 . . . . . . . . . . .
150,000-249,999 . . . . . . . . . . .
250,000+ . . . . . . . . . . . . . . . .
55.6
53.8
58.6
65.1
66.0
64.8
64.9
64.5
65.1
63.9
63.8
63.7
64.6
64.9
65.4
66.8
69.8
74.4
79.3
20.5
20.0
23.0
28.4
30.2
29.6
30.6
30.5
31.7
30.8
30.6
31.0
31.9
31.9
32.8
33.7
38.2
46.0
57.0
10.3
10.1
11.6
14.8
16.9
16.6
17.4
17.8
19.0
18.5
18.5
18.8
19.3
20.5
20.4
20.9
24.2
31.7
43.6
4.1
4.6
6.0
8.7
11.2
11.8
12.9
13.6
15.0
14.8
15.2
15.8
16.9
17.7
18.7
20.2
23.4
29.2
35.5
2.9
3.3
4.5
6.9
9.0
9.3
10.2
10.6
11.7
11.5
11.6
12.0
12.9
13.2
14.0
14.9
18.2
25.2
35.2
1.9
2.1
2.8
4.2
6.1
6.3
6.9
7.3
8.3
8.2
8.3
8.6
9.1
10.3
10.4
11.1
13.9
20.7
31.1
Note: Computations by author; also see notes 29 and 41.
Sources: Populations in various income groups are taken from number of all returns filed, as
reported in Canada Revenue Agency, Final Statistics—2011 Edition ( for the 2009 Tax Year)
(Ottawa: CRA, 2011), Final Statistics—2013 Edition ( for the 2011 Tax Year) (Ottawa: CRA, 2013),
and Preliminary Statistics—2014 Edition ( for the 2012 Tax Year) (Ottawa: CRA, 2014). Numbers
of persons maximizing their TFSA limits by income group are taken from Canada Revenue
Agency, Tax-Free Savings Account Statistics, tables, miscellaneous years (www.cra-arc.gc.ca/gncy/
stts/tfsa-celi/menu-eng.html).
most steeply for the lower-income groups, such as account holders with income
between $20,000 and $25,000, who experienced a decline from 66 percent to just
under 17 percent. For all income groups under $100,000, the maximization rates
fell by two-thirds or more. Only for account holders with income exceeding $250,000
did the rates fall by less than half—from approximately 79 percent in 2009 to a still
robust 44 percent in 2013. Thus, the highest-income TFSA holders are the ones with
the most to gain from increasing the contribution limit. Once again, the behavioural patterns support the hypothesis that TFSA contributions come largely from
shifting of taxable assets rather than new saving.
The right-hand panel of table 4 displays the patterns of TFSA maximization by
income for all eligibles, not just those who held an account.41 As with the TFSA
41 Caution is in order with respect to the rates shown in table 4 for eligibles with income under
$10,000. Those rates are likely underestimates on account of my using CRA data on the
tax-free savings accounts: expanding, restricting, or refining?  n  925
maximization rates by age, the rates for any given income level are substantially
lower for eligibles than for holders. For example, in 2009 the rate at incomes between $25,000 and $30,000 was just 12 percent for all eligibles versus 65 percent for
holders. The positive relationship between higher incomes and higher maximization rates is notable for eligibles in all years. The rates for eligibles fell over time,
but they fell the least for eligibles at the highest incomes. The rate for eligibles with
income of $250,000 or more remained steady at about 35 percent between 2009 and
2011, and then slipped to just 31 percent in 2013. This pattern again illustrates that
individuals with the largest initial stocks of taxable assets have the ability to continue
contributing at the TFSA limit over successive years. Figure 2 depicts the results in
table 4, showing the sharply lower TFSA maximization rates by income for all eligible
persons versus account holders, with the largest gaps at low and middle incomes.
In a much-publicized statement, the government claimed that in 2013 “59.4 per
cent of TFSA max contributors make less than $60,000 . . . [P]eople of all ages and
income levels max out their TFSA contribution limits—in fact the vast majority are
low to middle income earners.”42 If the maximization rate in 2013 is computed for
all eligibles with income below $60,000, the result is that just about 5 percent of that
income group maxed out their TFSA limits in 2013. The large divergence between
this result and the government’s version is explained by the fact that the overall maxing rate was only 6.7 percent for all eligible persons in 2013, and the government
focused on those with TFSAs rather than the entire eligible population. Moreover,
the government relies on official statistics that cover only individuals and neglect
family patterns of TFSA usage.
FA M I LY V E R S U S I N D I V I D U A L
T F S A U S A G E PAT T E R N S
The CRA statistics report surprisingly high proportions of all TFSA holders with very
low levels of assessed income. For example, 20.6 percent of all holders had income
below $20,000 in 2013. This figure might be explained in part by individuals who
had higher incomes in preceding years but suffered an income decline in 2013.
Since individuals with income below $20,000 would pay little or no income tax, this
raises the question of why individuals who normally earned such low income would
value the tax-free advantage of TFSAs. Additionally, the average fair market value for
distribution of incomes assessed for all returns without an ability to omit filers under age 18,
who are not TFSA-eligible. The CRA public data do not provide a cross-tabulation of filers by
age and income. Still, it was felt best to use consistent data from the CRA on the distribution of
incomes assessed for all returns rather than resort to a survey using a different income measure
and limited sample size. Any bias in the results reported for incomes above $10,000 should be
minimal, since few youth under 18 years earn above that level.
42 Then minister of finance Joe Oliver, “Re: Tax Free Savings Accounts (TFSAs),” memorandum
to the Conservative caucus, April 7, 2015 (http://ipolitics.ca/wp-content/uploads/2015/04/
Minister-Oliver-Memo-to-CPC-Caucus_EN.pdf ); these figures were reconfirmed in the 2015
federal budget, supra note 1, at 235.
926  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
FIGURE 2 Tax-Free Savings Account (TFSA) Maximization Rates by
Income of TFSA Holders and TFSA Eligibles, 2009, 2011, and 2013
80
Percentage maximizing
70
60
50
40
30
20
60
70 80 90
15
10
0
50
0+
40
25
30
25
20
15
10
0-
0
0-
0
0
10
Income ($ thousands)
2009 holders
2011 holders
2013 holders
2009 eligibles
2011 eligibles
2013 eligibles
Note: Computations by author; see table 4.
Sources: Populations in various income groups are taken from number of all returns filed, as
reported in Canada Revenue Agency, Final Statistics—2011 Edition ( for the 2009 Tax Year)
(Ottawa: CRA, 2011), Final Statistics—2013 Edition ( for the 2011 Tax Year) (Ottawa: CRA,
2013), and Preliminary Statistics—2014 Edition ( for the 2012 Tax Year) (Ottawa: CRA, 2014).
Numbers of persons maximizing their TFSA limits by income group are taken from Canada
Revenue Agency, Tax-Free Savings Account Statistics, tables, miscellaneous years (www.cra-arc
.gc.ca/gncy/stts/tfsa-celi/menu-eng.html).
account holders with income below $20,000 was $8,462—not radically below the
average of $11,037 for all account holders in 2013. Thus, the high takeup and
significant balances by many individuals with a very low income appears puzzling.
One possible explanation is that assets are shifted within higher-income families to
lower-income members (spouse, children aged 18 and over living at home, and
other relatives) so as to exploit larger total TFSA contributions.43
To cast light on this phenomenon, I draw on data from Statistics Canada’s Survey
of Financial Security reporting TFSA asset holdings on a family basis and compare
43 The income attribution on most interspousal transfers is waived on transfers made for the
purpose of TFSA contributions, thus creating a new avenue for income splitting by couples
with spouses having discrepant incomes and/or wealth.
tax-free savings accounts: expanding, restricting, or refining?  n  927
them with the CRA data on TFSA assets on an individual basis.44 The last two columns of table 5 present the results using 2012 data from both sources, and they
yield a radically different picture. Whereas for income below $20,000 the individual
data show 16.9 percent of all TFSA assets held, the family data show less than onequarter of that share (3.9 percent). For individual TFSA holders with income below
$60,000, the share is 63.4 percent, but on a family basis the share for that income
range is less than half that figure (31.2 percent). In contrast, at incomes of $150,000
and higher, TFSA holdings are 6.5 percent of the total for individuals but nearly four
times that share (24.0 percent) at the family level. These results show clearly that
many TFSA holders recorded with low individual income are members of families with
a significantly higher total income. The results are also suggestive of intrafamilial
income splitting and asset shifting via TFSAs.
Table 5 provides further insights into TFSA usage patterns at the family level. The
participation rate in 2012 for families with incomes above $200,000 (at 59.0 percent) was nearly four times the rate for families below $20,000 (at 15.6 percent).
Average TFSA balances held by all family members in 2012 show a sharp gradient
with respect to family income. For families in which one or more members hold
TFSAs, the $25,000 average balance at incomes above $200,000 was more than
three-and-a-half times the average balance of $7,026 at incomes below $20,000.
The TFSA income gradient is even steeper among all eligible families; the $14,757
average balance for those with income above $200,000 was more than 13 times
the average balance of $1,098 at incomes below $20,000. The 2012 average balance
for families holding any TFSAs was $13,386, which exceeded the corresponding
average for individual holders at $9,118 because some families included more than
one person with a TFSA.
TFSA USAGE BY OLDER WORKERS AND SENIORS
Another possible, and parallel, explanation for substantial participation in TFSAs by
individuals at low and moderate incomes relates to the behaviour of older workers
and seniors. In 2013, TFSA holders aged 55 and over with an individual income below
$40,000 accounted for 28.3 percent of all persons maximizing the TFSA limits.45
Holders aged 65 and over with income below $60,000 accounted for 32.4 percent
of all maximizers. These figures suggest that TFSAs are particularly attractive to
many older individuals not only as a means of reducing their income tax, but also as
a way to increase their entitlements to GIS and OAS benefits (dodging the tax recovery
44 See supra note 31. Note that the concept of families for the purposes of the survey includes
unattached individuals. Almost all families contain at least one TFSA-eligible person aged 18
or over.
45 These figures are derived from a table accompanying the memorandum referred to above
(Oliver, supra note 42); apart from the information in this memorandum, which covers only the
distribution of maximizers, figures on TFSA activity cross-tabulated by age and income of the
account holder are not publicly available.
928  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
TABLE 5 Tax-Free Savings Account (TFSA) Statistics for Families
and Individuals, 2012
Individual
statistics
Family statistics
Income group—family
or individual ($)
TFSA
participation
rate (%)
Average
Average
TFSA
TFSA
balance:
balance:
holders ($) eligibles ($)
Share of
all TFSA
assets
(%)
Share of
all TFSA
assets
(%)
<20,000 . . . . . . . . . . . . .
20,000-39,999 . . . . . . . . .
40,000-59,999 . . . . . . . . .
<60,000 . . . . . . . . . . . . .
60,000-79,999 . . . . . . . . .
80,000-99,999 . . . . . . . . .
100,000-149,999 . . . . . . .
>150,000 . . . . . . . . . . . .
>200,000 . . . . . . . . . . . .
15.6
28.0
31.8
25.4
38.5
38.4
43.1
52.8
59.0
7,026
10,828
12,051
10,601
12,459
13,882
13,659
20,730
25,000
1,098
3,032
3,837
2,695
4,792
5,324
5,880
10,951
14,757
3.9
13.0
14.3
31.2
14.6
12.0
18.1
24.0
14.3
17.2
26.1
21.0
64.3
13.0
7.9
8.0
6.7
na
Total or average . . . . . . .
33.7
13,386
4,511
100.0
100.0
Note: Computations by author.
Sources: TFSA assets for individuals by individual incomes: Canada Revenue Agency, Tax-Free
Savings Account Statistics, tables, miscellaneous years (www.cra-arc.gc.ca/gncy/stts/tfsa-celi/
menu-eng.html), total fair market value by TFSA holders by income at end of 2012. TFSA
statistics for families (including unattached individuals) by family income: Statistics Canada,
Survey of Financial Security for 2012, special tabulations by Tristat Resources
(www.shillington.ca).
on higher-income recipients). Financial advisers have begun devising various strategies for retirees and those approaching retirement to game the TFSA.46
An ironic aspect of the comparatively heavy use of TFSAs by retirees is that the
provision was intended to encourage saving.47 Most persons aged 65 and over have
stopped working, and most are no longer at the saving stage of their lives, with
many being at the dissaving stage. Thus, for this group the TFSA serves mainly as
a tax minimization and benefit maximization device with minimal impact on net
savings. Significant additional saving is an unlikely outcome of the scheme for this
age group; rather, shifting of taxable asset holdings into TFSAs is the more likely
46 For examples, see Fred Vettese, “Even the Rich Can Qualify for Guaranteed Income
Supplement—Here’s How,” Financial Post, November 11, 2014; Rob Carrick, “Retirees Can
Save Money by Trimming RRIFs and RRSPs, Adding to TFSAs,” Globe and Mail, April 24,
2015; Tim Cestnick, “Maximize Your Estate: Make TFSA Contributions from Your RRIF,”
Globe and Mail, May 17, 2015; and Gordon Pape, “How To Take Advantage of the Higher
TFSA Limit,” Globe and Mail, May 4, 2015.
47 In 2013, holders aged 65 and over constituted 45.1 percent of all TFSA maximizers, and
holders aged 75 and over constituted 22.6 percent of all TFSA maximizers.
tax-free savings accounts: expanding, restricting, or refining?  n  929
outcome.48 Moreover, the relatively high rates of TFSA maximization by middleincome seniors observed in the early years of the scheme’s existence are unlikely to
persist long into the future; over time, maxing out will become much more concentrated among high-income and high-wealth individuals. The reason is that younger
cohorts will have had many years to contribute to TFSAs such that they will reach
retirement with far less or even nil taxable asset holdings.
U N U S E D T F S A CO N T R I B U T I O N R O O M
Another measure of the adequacy of the TFSA contribution limit prior to the recent
increase is the extent to which aggregate contribution room has gone unused. In
2013, among TFSA holders, the average fair market value of holdings was $11,037,
and the average unused contribution room was $13,550.49 That is, on average, TFSA
holders had actually utilized less than half of their allowable contribution room by
2013.50 Total unused TFSA contribution room among all eligibles—holders and
non-holders—was an estimated $592 billion in 2013.51 This unused contribution
room accumulated after only five years of TFSA operation, while for RRSPs $790 billion of unused contribution room had accumulated by 2013, a little more than two
decades after the introduction of the RRSP carryforward provision in 1991. With
unused RRSP contribution room rising by about $50 billion per year and unused TFSA
contribution room rising at more than twice that rate, total unused room for TFSAs
could be projected to exceed that for RRSPs by 2017 even with a $5,500 TFSA contribution limit.52
48 One cannot rule out the possibility that some seniors are induced by the higher net rates of
return afforded by TFSAs to reduce their rates of dissaving (equivalent to an increase in saving),
but the low sensitivity of saving rates to net returns suggests that this would be a minor factor.
49 On account of investment earnings on TFSA balances, one would expect that the two figures
added together would exceed the year’s cumulative limit of $25,500 in 2013. Instead the total
falls short of that figure, likely on account of TFSA withdrawals in 2013 not yet credited to the
TFSA holder’s limit.
50 Viewing the average unused TFSA contribution room by income of the holder, the figures are
remarkably stable near the aggregate average for incomes between $15,000 and $100,000, then
decline with higher incomes and drop sharply to $7,000 for incomes of $250,000 and over.
51 The aggregate amount of unused TFSA contribution room in a given year was computed by
taking the amount for holders (the number of holders multiplied by their reported average
unused room) and adding the amount for eligible non-holders (the total population of eligible
age minus the number of holders, with that number being multiplied by the full cumulative
limit in the respective year).
52 Figures on aggregate unused RRSP contributions by year are taken from Statistics Canada,
CANSIM table 111-0040, “Registered Retirement Savings Plan (RRSP) Room.” Year-to-year
changes in aggregate amounts of unused contribution room for RRSPs (with comparative figures
for TFSAs) were as follows: 2010-2011, $51 billion ($113 billion); 2011-2012, $52 billion
($119 billion); and 2012-2013, $54 billion ($132 billion). If substantial future TFSA contributions
are diverted funds that would otherwise have been contributed to RRSPs, it could take longer
for the crossover in unused room to arise.
930  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
E CO N O M I C I M PA C T S O F T F S A s
A principal argument for TFSAs—and one that is advanced by proponents of higher
TFSA limits—is to encourage personal saving. This goal relates to both enhancing
individual financial security and augmenting aggregate savings to benefit the economy.53 Whether TFSAs actually increase the net new saving of individual account
holders hinges on the specific source of their account contributions. Possible sources
other than net new saving fall into two broad categories:
1.Asset shifting. Financial assets already held by the individual are used to fund
the TFSA; these include
a. taxable assets 54 and
b. tax-deferred assets such as RRSPs and registered education savings plans.55
2.Savings diversion. Saving that would have been undertaken in the absence of
TFSAs is diverted
a. from tax-deferred accounts,56
b. from taxable financial accounts, and
c. from other uses such as home equity or family business.
Note that any of these asset-shifting and savings-diversion sources for funding TFSAs
can be combined with the use of TFSAs for income splitting with a spouse.57
Only incremental saving that would not have been undertaken in the absence of
TFSAs will generate net new saving. For higher-income and higher-wealth individuals with large amounts of taxable asset holdings, both asset shifting and savings
diversion are likely to fund most contributions to TFSAs. In that group, couples and
53 Jonathan Rhys Kesselman and Peter S. Spiro, “Challenges in Shifting Canadian Taxation
Toward Consumption” (2014) 62:1 Canadian Tax Journal 1-41, cite reasons why even increased
net saving by the household sector might fail to provide significant stimulus to real business
investment in Canada. Also see Kesselman’s application of this analysis to the economic impacts
of the TFSA in Jonathan Rhys Kesselman, Double Trouble: The Case Against Expanding Tax-Free
Savings Accounts (Ottawa: Broadbent Institute, 2015), at 10-12.
54 Financial assets can be shifted directly into TFSAs, but any accrued capital gains on the assets
become taxable; alternatively, the assets can be sold and proceeds contributed to the TFSA.
55 Withdrawals are taxable, and the net-of-tax sums can then be contributed to a TFSA.
56 If individuals divert retirement saving from RRSPs to TFSAs and have specified net-of-tax
retirement income targets, their current savings will actually decline since they will no longer
need to save amounts that will later need to be paid in tax on RRSP disbursements. This
conclusion is well known in the economic analyses comparing a “wage tax” with an “expenditure
tax.” See Lawrence H. Summers, “Capital Taxation and Accumulation in a Life Cycle Growth
Model” (1981) 71:4 American Economic Review 533-44.
57 Usually an individual’s motivation for income splitting is to shift income to a spouse who has a
lower income and is taxed at a lower rate, but with TFSAs, the dollar ceiling on contributions
can also induce splitting for the donor spouse to access the additional limit afforded the donee
spouse, even in the absence of discrepant earnings.
tax-free savings accounts: expanding, restricting, or refining?  n  931
particularly single-earner couples are additionally likely to use TFSAs for income
splitting. While higher-income and higher-wealth individuals are observed to make
the largest per capita TFSA contributions, little is likely to constitute net new saving
since those individuals’ marginal incentives to save are unaffected when constrained
by the contribution limit. On the other hand, the groups whose TFSA contributions
are more likely to constitute net new saving are earners at low to moderate income
levels, anticipating high benefit clawback rates in retirement. But those groups are
able to make only the smallest amounts of TFSA contributions, and for many of
them the funding source will be diversion from RRSP contributions or shifting via
RRSP withdrawals.
This study’s findings on TFSA maximization patterns by age and income—as well
as my comparative analysis of individual versus family TFSA statistics—strongly suggest the presence of substantial asset-shifting and income-splitting responses. Even
the Department of Finance study noted the potential for asset-shifting behaviour by
individuals who “redirect their stock of existing savings to tax-assisted accounts such
as the TFSA.”58 It concluded cautiously, “An empirical assessment of the long-term
impact of TFSAs on savings behaviour would require much longer time series on
individual savings and other economic variables.”59 The parliamentary budget officer
(PBO) was less reserved in asserting, “TFSA contributions are expected to mostly
originate from the reallocation of existing savings in taxable accounts. . . . [The] PBO
therefore expects a comparatively small proportion of TFSAs will be the result of
new savings.”60
L O N G - R U N CO S T S O F T F S A s
The impacts of the TFSA provision on income tax revenues and on the costs of income-tested benefit programs present challenges for forecasting. These impacts
hinge on individuals’ behavioural responses to the TFSA and the sources they use to
fund their TFSA contributions. As suggested by the discussion above, our understanding of the extent to which each of the various possible sources of TFSA funding
is being used, and by which groups, is very imperfect. Some types of behavioural
responses would increase tax revenues in the short run; individuals who divert their
savings from RRSPs to TFSAs will pay more tax currently, albeit less tax in future
years, and will generate higher future benefit costs. However, because much remains
unknown, forecasts of the revenue and cost impacts many years into the future will
vary widely, depending on the exact assumptions. With these cautionary notes in
mind, I proceed to review the available forecasts.
58 Tax Expenditures and Evaluations 2012, supra note 19, at 36.
59 Ibid., at 31.
60 B.J. Siekierski, “Small Proportion of TFSA Contributions Are ‘New Savings,’ PBO Says,”
iPolitics, May 26, 2015 (http://ipolitics.ca/2015/05/26/small-proportion-of-tfsa-contributions
-are-new-savings-pbo-says/).
932  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
Impacts on Income Tax Revenues
A tax-prepaid scheme like the TFSA has an interesting feature in terms of its forgone
revenue cost, or its so-called tax expenditure. Because the funds that an individual
contributes to such an account are not tax-deductible, they have fully borne tax and
thus impose no immediate revenue cost. The revenue cost of the TFSA stems from
the tax exemption for the investment earnings on those funds, which presumably
would otherwise have borne tax at the account holders’ ordinary rates. The forgone
revenue is initially very small since little investment income arises in the year of
contribution; it then grows over time with the compounding of investment returns
in the account plus the return on additional contributions made in future years. Accordingly, the aggregate tax expenditure of the TFSA begins very small but grows
over time to be much larger. Table 1 shows the official estimate of the TFSA’s federal
revenue cost at a meagre $65 million in the first year, 2009; by 2014, just five years
later, that amount had increased to $520 million.61 Steep growth in the revenue cost
is bound to continue, reflecting the subsequent and ongoing growth of TFSA contributions and compounding tax-free investment earnings, not to mention the 2015
hike in the TFSA limit.
One way to measure the loss of tax revenues attributable to the TFSA is to examine
taxfiler data on taxable investment income. The Department of Finance reported
that the share of taxfilers reporting any taxable interest and dividend income declined
from 37 percent in the two years preceding the TFSA’s introduction to 33 percent,
30 percent, and 29 percent, respectively, in years 2009 through 2011.62 But these
were just the first three years of a tax-deferred scheme that is far from mature; it will
take 50 years or longer to observe the full effects on individuals who have been able
to access the TFSA from age 18 onward. Milligan has simulated the potential impact
of a mature TFSA system on the proportion of families with taxable assets exceeding
their cumulative TFSA contribution room.63 With cumulative room of $200,000 (say,
36 years at $5,500 per year in real terms), only 3.3 percent of families would have
any taxable assets; with cumulative room of $300,000 for a couple (less than 28 years
61 The methodology used in computing these tax expenditure figures is described in Tax
Expenditures and Evaluations 2012, supra note 19, at 44. Some key assumptions were that there
were no behavioural changes (hence, no substitution of RRSP contributions for TFSAs and no
impact on GIS costs) and that only one-fifth of capital gains accruing within TFSAs would be
realized in the relevant year.
62 Ibid., at 42.
63 Kevin Milligan, “Policy Forum: The Tax-Free Savings Account—Introduction and Simulations
of Potential Revenue Costs” (2012) 60:2 Canadian Tax Journal 355-60. Milligan’s method
assumes that the individual will hold all financial assets within the TFSA, subject to the
contribution limit, though this assumption somewhat overstates the situation for individuals
wishing to hold some readily available balances to cover cash flow needs. However, even as a
limiting bound, the results are striking. For more complex methodologies, see Pablo Antolín,
Alain de Serres, and Christine de la Maisonneuve, “Long-Term Budgetary Implications of
Tax-Favoured Retirement Saving Plans” (2004) 39:2 OECD Economic Studies 25-72.
tax-free savings accounts: expanding, restricting, or refining?  n  933
at $5,500 per year for each spouse), the figure would fall further to 1.8 percent.
Even the Department of Finance has projected that by 2030 the TFSA along with
other tax-preferred accounts will allow over 90 percent of Canadians to hold all
their financial assets in “tax-efficient savings vehicles.”64
Milligan’s simulation exercise next estimates the revenue loss for a mature TFSA
with the indexed $5,000 contribution limit. Subject to several assumptions, Milligan
reports a potential decline in the total federal tax base of 5.4 to 6.0 percent. Because
the lost taxable income would have been taxed at a higher than average rate, this
yields an estimated 10.6 percent loss of federal personal income tax revenues.65
Translated into contemporary dollar figures, this would constitute a federal revenue
cost of $15 billion based on forecasted income tax revenues of $143 billion in 201516.66 On top of the federal revenue cost, one must also reckon the related revenue
loss to provincial income taxes; at about 60 percent of the federal cost, this amounts
to another $9 billion annually for a mature TFSA. Using different assumptions, the
PBO has produced long-run fiscal cost estimates for TFSAs that are about half that
magnitude: by 2060, a cost to federal revenues of 0.4 percent of gross domestic product (GDP) plus another 0.2 percent of GDP cost to provincial revenues.67 In terms of
today’s economy, these figures translate to annual revenue costs of $8 billion for the
federal government and $4 billion for the provinces.
The preceding estimates do not consider the 82 percent increase in the TFSA
contribution limit from $5,500 to $10,000 implemented in 2015. If sustained, this
hike would clearly raise the revenue costs for both levels of government, but those
cost increases would be proportionately less than the increase in the limit for two
reasons. First, indexation would no longer be applied to the contribution limit, but
if the prior limit of $5,500 remained in place, it would take another 30 years for it
to reach $10,000 with indexing at a 2 percent annual inflation rate. The more important factor explaining the less than proportionate increase in revenue costs is
that few individuals would be able to make annual contributions above $5,500. My
earlier finding that only a small and declining share of holders could maximize even
the lower limit supports this conclusion. The PBO forecasted that the increase to
$10,000 would raise the TFSA’s total costs for both levels of government by 27 percent
64 Tax Expenditures and Evaluations 2012, supra note 19, at 42.
65 Alternative and more complex computation methods could consider behavioural effects such as
the extent to which the provision or expansion of TFSAs results in the creation of new savings
versus the diversion of existing savings, but the empirical factors are unresolved; see Organisation
for Economic Co-operation and Development, Encouraging Savings Through Tax-Preferred
Accounts, OECD Tax Policy Studies no. 15 (Paris: OECD, 2007). Milligan, supra note 63, at
356, note 4, notes that his methodology understates the potential revenue loss because it ignores
the tax sheltering of investment returns accumulating within the TFSAs. Also see Kevin Milligan,
“How TFSA Expansion Will Hit Future Tax Revenues,” Globe and Mail, April 7, 2011.
66 See the 2015 Budget Plan, supra note 1, at 364.
67 Office of the Parliamentary Budget Officer, The Tax-Free Savings Account (Ottawa: PBO,
February 2015), at 10.
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by 2030, a figure that would gradually decline to 14 percent by 2080.68 The 2015
budget forecast of the federal revenue cost of the higher contribution limit was
$1.1 billion for the 2015-16 to 2019-20 period.69
Impacts on Cost of Old Age Security
The government’s commitment to disregard TFSAs in all federal program income
tests will impose significant costs for seniors’ income support programs over the
long run.70 This immunity will affect both the income-tested GIS and the universally
paid OAS. GIS benefits are based on income of the claimant, but incomes generated
within TFSAs and account withdrawals are disregarded in this income test. In contrast, all RRSP and RRIF disbursements, annuity payments, non-sheltered investment
incomes, and private and public pension receipts constitute taxable income and thus
affect GIS eligibility and benefits. OAS benefits are phased out at higher incomes via
a recovery tax,71 but TFSA incomes and withdrawals are disregarded for the purposes
of this provision. TFSA holdings could thus pose increasing costs for governments
as their balances rise over time. Already by 2011, about 440,000 GIS recipients held
$4.3 billion in their TFSAs, accounting for 7 percent of total TFSA assets. They constituted 6 percent of TFSA holders and had a 23 percent participation rate (3 percentage
points higher than those in the same age cohort with income under $20,000).72
Accumulations in TFSAs could over time significantly increase the total number
of GIS beneficiaries, benefits paid, and program costs. The Office of the Superintendent of Financial Institutions (OSFI) is required to undertake detailed actuarial
projections of the OAS program’s finances every three years. Using ad hoc assumptions about future TFSA saving behaviour, the OSFI’s 12th actuarial report on the OAS
program offers long-range forecasts of these impacts.73 It projects the proportion
of the cohort attaining age 67 in 2050 receiving full or partial GIS benefits at
68 Office of the Parliamentary Budget Officer, Update of PBO’s Tax-Free Savings Account Analysis
(Ottawa: PBO, April 2015) (herein referred to as “the PBO update”), at 2. The PBO’s estimated
revenue impacts of the TFSA hike are $50 million for the federal government and $30 million
for the provinces in 2015-16, rising to $370 million and $180 million, respectively, for 2019-20
(ibid., at 1).
69 See the 2015 Budget Plan, supra note 1, at 236.
70 For commentary on this looming problem, see, for example, Jonathan Chevreau, “How the
Guaranteed Income Supplement Is on a Collision Course with TFSAs,” Financial Post,
November 29, 2014.
71 In 2015, the recovery tax reduces benefits at 15 percent of net income between $71,592 and
$116,103, above which the benefit is fully clawed back.
72 Tax Expenditures and Evaluations 2012, supra note 19, at 41.
73 Office of the Superintendent of Financial Institutions, Office of the Chief Actuary, Actuarial
Report (12th) on the Old Age Security Program at December 31, 2012 (Ottawa: OSFI, 2014). The
report states that its estimated TFSA impacts “should be interpreted with caution” (ibid., at 75
and 79) because of the lack of long historical data on TFSAs. The report itself does not explain
its assumptions about future TFSA saving behaviour, but the OSFI provided a detailed
description in private correspondence.
tax-free savings accounts: expanding, restricting, or refining?  n  935
30.9 percent—5 percentage points higher than would arise without TFSAs.74 A background document to the report projects that TFSAs will boost GIS expenditures in
2050 by $2.8 billion to $35.6 billion, an increase of 8.6 percent relative to the absence of TFSAs.75 The report also forecasts that TFSAs will reduce the amount of OAS
recovery tax collected in 2050 by $1.2 billion to $5.4 billion.76 Based on these figures, the projected future annual fiscal cost of the TFSA with respect to the total OAS
program including the GIS could exceed $4 billion.77
A study by Horner uses economic modelling to predict long-run impacts of the
TFSA on GIS participation rates and program costs far larger than the OSFI projections.78 Horner’s study found that of the three-quarters of households who need to
undertake saving beyond public pension provisions in order to maintain their accustomed living standard at retirement, almost 60 percent would be better off saving
solely through TFSAs.79 This group includes all those with family earnings up to
about $80,000, very few of whom were found to be constrained by the TFSA’s contribution limit of $5,000. Instead of the current 32 percent of seniors receiving GIS
benefits, the shift of saving toward clawback-immune TFSAs could raise this figure
74 Ibid., at 78-79. The report also presents “low-cost” and “high-cost” projections for alternative
assumptions about the growth of TFSA balances, yielding GIS recipient rates ranging between
27.4 percent and 37.2 percent (ibid., at 92).
75 In contrast, the OSFI’s previous triennial report had projected a TFSA impact on GIS
expenditures in 2050 of $4.2 billion or 12 percent: Office of the Superintendent of Financial
Institutions, Office of the Chief Actuary, Actuarial Report (9th) on the Old Age Security Program at
December 31, 2009 (Ottawa: Office of the Chief Actuary, 2011), at 10. In private correspondence,
the OSFI attributed the decrease in projected TFSA impacts on GIS expenditures between the
9th and 12th actuarial reports to changed assumptions and the then-anticipated increase in the
OAS eligibility age to 67.
76 Supra note 73, at 77. Also in 2050, the TFSA is projected to reduce the numbers subject to
OAS recovery tax by 132,000 (from 850,000 to 718,000), with 63,000 relieved of full
repayment and 69,000 relieved of partial repayment (ibid., at 76).
77 The 12th actuarial report presents detailed projections of the TFSA impact in 2050 on the
distributions of GIS by benefit levels of recipients, but no dollar figure for the impact on
aggregate GIS program cost. It also offers “low-cost” and “high-cost” figures for alternative
assumptions about TFSA behaviour that would alter GIS benefits by a reduction of 5.6 percent
or an increase of 17 percent relative to the best-estimate scenario for 2050 (ibid., at 97); thus,
the high-cost estimate of the TFSA impact on GIS expenditures amounts to $8.8 billion
($2.8 billion + 0.17 × $35.6 billion).
78 Keith Horner, A New Pension Plan for Canadians: Assessing the Options, IRPP Policy Study no. 18
(Montreal: Institute for Research on Public Policy, July 2011). Horner’s study implements an
economic model of saving behaviour over the life cycle with several simplifying assumptions.
It assumes that current holdings in tax-deferred forms would eventually be supplanted with
TFSA saving by later cohorts for whom it would be more beneficial and that all households
would save solely through TFSAs if that were to their benefit. Thus, the study’s projections
represent a long-run, upper bound on potential impacts.
79 Alexandre Laurin and Finn Poschmann, “Saver’s Choice: Comparing the Marginal Effective
Tax Burdens on RRSPs and TFSAs,” C.D. Howe e-brief, January 27, 2010, 1-9, reach a roughly
similar conclusion.
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to more than 50 percent. The GIS program’s total cost could rise by as much as
84 percent relative to its cost in the absence of the TFSA. And the number of seniors
subject to income tax could decline by 54 percent, from more than half to just onequarter—though most would have paid more income tax while working, on account
of lower RRSP contributions.
WHO WOULD GAIN FROM THE
HIGHER TFSA LIMIT ?
My preceding analysis of the patterns of TFSA participation, maximization, and balances provides insight into who would gain from the increased TFSA limit. Equally
salient is who would not gain anything from the higher limit.80 The overall participation rate of less than 40 percent by the end of 2013 means that 3 out of 5 Canadians
had chosen not to open an account after five years of the scheme’s operation. Each of
these 17 million non-holder eligibles thus entered 2014 with a cumulative contribution limit of $31,000, which few would fully utilize even if they chose to open TFSAs.
Over the 2009-2013 period, rates of maximizing the TFSA limits were low and rapidly
declining every year as each individual’s cumulative limit increased. The notable
exception to this pattern arose for TFSA-eligible individuals with income of $250,000
or more; their maximization rates held fairly steady in the 30 percent range. By 2013,
just 1 out of 15 of all eligible persons was still maximizing his or her TFSA limit.
In short, very few Canadians had any use for a higher TFSA contribution limit by
2013, and even fewer could have exploited a limit higher than $5,500 by 2015. As
the PBO observed, “[w]ith time, an increasing share of eligible participants will likely
exhaust the financial means to continue TFSA contributions and will not benefit from
higher cumulative contribution room.”81 Seniors exhibited above-average maximization rates, but these too were declining over time. By 2013, nearly one-third of
seniors holding TFSAs had maxed out their limit, but for all eligible seniors the rate
80 Critics of the TFSA limit hike have included analysts, columnists, and politicians: see, for
example, David Macdonald, The Number Games: Are the TFSA Odds Ever in Your Favour?
(Ottawa: Canadian Centre for Policy Alternatives, May 2015); Don Cayo, “Higher TFSA
Limits a Lame Idea That Enriches the Wealthy,” Vancouver Sun, February 27, 2015; and (Liberal
member of Parliament and former finance minister) Ralph Goodale, “93 Per Cent of Canadians
Get Nothing from Doubling TFSA Limits,” Huffington Post Canada, May 15, 2015—all of
whom argue mainly against the distributional tilt. Also see Rhys Kesselman, “The Forgotten
Tax Break for the Rich That Will Cost Ottawa Billions,” Globe and Mail, March 4, 2014;
Kesselman, Double Trouble, supra note 53; and Jonathan Rhys Kesselman, Behind the Headlines:
Who’s Really Benefiting from Higher TFSA Limits? (Ottawa: Broadbent Institute, 2015). Yalnizyan
was an early critic of TFSAs on similar grounds: Armine Yalnizyan, “Who Benefits from the
TFSA?” Progressive Economics Forum, April 8, 2011. Supporters of the hike have included many
financial advisers and columnists (cited elsewhere); in arguing for expansion of the TFSA,
Poschmann commented, “[T]he fact that an economically beneficial tax policy choice offers
benefits to high-income households, as opposed to low, does not disqualify it”: Finn
Poschmann, “Policy Forum: Why We Should Not Fear Expansion of Tax-Free Savings
Accounts” (2012) 60:2 Canadian Tax Journal 391-99, at 396.
81 PBO update, supra note 68, at 2.
tax-free savings accounts: expanding, restricting, or refining?  n  937
was just 1 out of 6. Two factors imply that the maximization rates for seniors will
decline significantly in the future. The first factor is the 2015-16 budget’s reduction
in mandatory distribution rates from RRIFs, which will reduce some seniors’ use of
TFSAs for their excess funds. The second factor is the transitory nature of current
seniors’ high demand for TFSAs; as future cohorts reach retirement, they will have
accessed cumulative TFSA contribution limits for many more years.
Increasingly over future years, the disproportionate gainers from a higher TFSA
limit would be those with high incomes and high wealth holdings.82 This conclusion
is clear from the maximization patterns over time and the much larger TFSA balances of account holders at high income levels. Even the figures on relative TFSA
balances at lower income levels understate the degree to which higher-income account holders are the big gainers. They tend to be more investment-savvy and thus
reap higher returns on their TFSA portfolios than more cautious TFSA investors in
fixed-income assets. Additionally, the investment returns generated in TFSAs by
higher-income holders escape personal tax at higher rates than the rates that moderate-income TFSA holders bear on their taxable income. As the PBO observed,
“[t]he contribution limit increases proposed in Budget 2015 would accentuate these
distributional disparities [already existing in the TFSA].”83
The statistical evidence provides strong support for both income shifting between
spouses via TFSA transfers and shifting of taxable assets into TFSAs; these phenomena
further suggest that a relatively small share of TFSA contributions originates from
new savings. Individuals with very high incomes, most of whom have exhausted their
RRSP/RPP limits, face the strongest incentive to shift taxable assets into TFSAs. This
group holds very substantial investment assets, a large portion of the income from
which is not sheltered from income tax. Of all returns filed for the 2011 tax year, the
0.8 of 1 percent with incomes above $250,000 reported 10.6 percent of all income
assessed but 19.5 percent of taxable interest income, 38.1 percent of taxable dividends,
and 52.8 percent of taxable capital gains—all of which are types of income that escape
tax when held in TFSAs.84 The higher TFSA limit would allow high-wealth individuals
to shift increasing amounts over many years into their tax-free accounts. Not surprisingly, TFSAs have become an important part of tax planning for higher-income
individuals.85
82 Over the intermediate term, seniors will garner a disproportionate share of gains from the
boosted TFSA limits—about 60 percent of the total in 2019, according to the 2015 Budget
Plan, supra note 1, at 237. However, this age skew is transitory and an artifact of the relatively
short period since the TFSA’s launch.
83 PBO update, supra note 68, at 3.
84 Figures are my computations based on data from Canada Revenue Agency, Final Statistics—2013
Edition ( for the 2011 Tax Year) (Ottawa: CRA, 2013).
85 For examples, see Gordon Pape, Tax-Free Savings Accounts: How TFSAs Can Make You Rich, rev.
ed. (Toronto: Penguin, 2013); Jessica Bruno, “$10,000 TFSA Limit: What It Means for Clients,”
Advisor.CA, April 21, 2015; and Jonathan Chevreau, “How To Make an Extra TFSA Contribution
Even if You Don’t Have $4,500 Lying Around,” Financial Post, November 29, 2015.
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Another significant implication of these findings is that TFSAs will increasingly
reduce the progressivity of both federal and provincial tax systems. As noted above,
the types of income that TFSAs shield from personal tax include interest, dividends,
and capital gains. Taxable income from these sources is concentrated among higherincome individuals, and for all three, the share of total income assessed for tax purposes
rises with income. Again taking all returns filed for the 2011 tax year, these types of
investment income together constituted just 2.8 percent of incomes below $25,000,
rising to 3.6 percent of incomes between $25,000 and $50,000, 5.0 percent between
$50,000 and $100,000, 8.6 percent between $100,000 and $150,000, 14.6 percent
between $150,000 and $250,000, and 28.7 percent of incomes over $250,000.86 This
pattern, along with my evidence on the patterns of TFSA participation and maximization across various income levels, implies that tax progressivity will be increasingly
compromised over time—and particularly so with an increased TFSA limit that everfewer non-wealthy individuals will be able to access.
PERFORM ANCE AND DEFICIENCIES OF TFSA s
TFSAs have served a useful purpose for many savers, as evidenced by the large numbers who have opened accounts since 2009. They serve well some of the initial
motivations for the scheme, such as facilitating efficient and equitable saving for
both short- and long-term goals. They also provide low earners with a rewarding
way to save for retirement that will not cut into their income-tested public pensions,
although takeup by this group has not been high. Evidence to date suggests that
TFSAs have not significantly increased aggregate net saving, but this result was anticipated as a possibility and does not undercut the cited benefits. However, TFSAs
have suffered deficiencies from their inception that would be exacerbated by the
near-doubling of the contribution limit. Here I summarize these deficiencies, which
the next section addresses with potential remedies.
n
n
Although intended in part as a saving vehicle for low to moderate earners,
TFSA takeup rates and contribution levels have been significantly tilted toward
higher earners.
Generally low and rapidly declining TFSA maximization rates for both holders
and eligibles, even at the $5,500 contribution limit, demonstrate the adequacy
of that limit—except for the highest-income and older age groups.87
86 CRA, Final Statistics—2013 Edition, supra note 84. These figures understate the extent to which
the tax saving from shifting taxable funds into TFSAs undermines effective tax progressivity,
since 63 percent of the cited types of investment income were taxable dividends from Canadian
corporations; these apply a dividend tax credit formula that makes the effective personal tax
progressivity higher than for other income types.
87 As explained earlier, the relatively high TFSA maximization rates for older age groups are a
transitory phenomenon reflecting the newness of the program; since younger cohorts will have
much longer periods to contribute to TFSAs, they will approach retirement with significantly
lower rates.
tax-free savings accounts: expanding, restricting, or refining?  n  939
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n
n
n
The tilt of gains toward individuals at high income and wealth levels is even
sharper than suggested by my findings, which do not take into account the
greater propensity of those individuals to hold higher-yielding assets and
the higher tax rates that their TFSA incomes avoid.
If sustained, the hike in the TFSA contribution limit would in the long run be
of even more lopsided benefit to the wealthy and of limited or no benefit for
the great majority of moderate- to upper-middle income earners, who already
have adequate tax-favoured contribution room.
The lack of immunity from federal program income tests or clawbacks on
TFSA holdings regardless of their size raises issues with respect to future beneficiaries’ expectations and the potential for high-wealth individuals to draw
benefits intended for low-income individuals.
Both the creation of the TFSA and the increased limit exert drains on provincial revenues that the individual provinces have not consciously chosen; they
also reduce the progressivity of provincial income taxes in ways that the provinces have not chosen.
Revelations that some individuals have accumulated extremely large TFSA
balances via speculative holdings will challenge the CRA in assessing improper
trading activities. The scheme was never intended to provide a tax shelter
for the multimillion-dollar balances that some accounts will accumulate over
time.88
The exclusion of a TFSA option within pooled registered pension plans (PRPPs)
works to the disadvantage of lower-paid earners, who might erroneously be
guided to enrol in RRSP-type accounts.89
POTENTIAL REFORMS FOR TFSA s
Various policy reform options can be considered to address the TFSA’s identified
deficiencies. The essential first step would be to reverse the unconditional hike in
the annual contribution limit and restore the $5,500 figure with indexation. Some
of the options outlined here would expand access to TFSAs for most individuals,
while others would be restrictive in various ways. In general, these options seek to
refine the TFSA for maximum effectiveness and interpersonal and intergenerational
equity, with due regard for the revenue costs and distributional impacts. I explore
the options individually, but many of them would operate best if undertaken as a
joint, comprehensive reform package for the TFSA.
88 As a forewarning of what might emerge over the longer term, the US Government
Accountability Office reported an estimated 300 IRAs with balances exceeding US $25 million
each: United States, General Accountability Office, Individual Retirement Accounts: IRS Could
Bolster Enforcement on Multimillion Dollar Accounts, but More Direction from Congress Is Needed,
GAO 15-16 (Washington, DC: GAO, October 2014).
89 This point was noted by James Pierlot and Alexandre Laurin, Pooled Registered Pension Plans:
Pension Saviour—Or a New Tax on the Poor? C.D. Howe Institute Commentary no. 359
(Toronto: C.D. Howe Institute, August 2012).
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Integrating TFSA Limits with RRSP Limits
The original and current provision for TFSA contributions allows a fixed dollar
amount independent of the individual’s income. In contrast Kesselman and Posch­
mann, in their 2001 proposal for a TPSP, suggested a variant that would integrate
the individual’s contribution limit for the TPSP with the RRSP/RPP limit.90 Access to
TPSPs would then be tied to the individual’s level of earned income, thus linking
access to tax-prepaid saving to lifetime earnings, similar to the structure of the taxdeferred accounts. Along these lines, an integrated TFSA /RRSP approach would
constrain the ability of individuals who had fully exhausted their RSPP/RPP limits—
typically higher earners and workers with generous pension plans91—to exploit
TFSAs for undue access to tax-favoured saving. In this way, it would limit the transfer of substantial taxable assets held by higher earners into tax-free status, and it
would similarly impede access to tax-free savings on underreported or tax-evaded
labour and self-employed earnings. Another feature of this scheme is that it would
enable workers who have unused RRSP contribution room to trade it for additional
access to TFSAs.
In the context of the current TFSA, this scheme of integrated access to tax-deferred
and tax-prepaid savings with a tradeoff option could be designed in the following
way. Assume first that all eligible persons would still access a restored $5,500 annual
TFSA limit independent of any income. Each person with cumulative unused RRSP
contribution room could then trade off part of that room for additional access to their
TFSA beyond the annual $5,500; this additional access might be limited to $4,500
per year, thus bringing the maximum TFSA contribution to $10,000 per year. Only
individuals who had made liberal lifetime use of RPPs and/or RRSPs, exhausting their
cumulative contribution room, would be unable to gain increased access to TFSAs.
The statistics indicate that nearly 80 percent of TFSA-eligible Canadians had unused
RRSP room (averaging more than $35,000 each) in 2013, so that relatively few persons would be excluded from the TFSA tradeoff option.92
The operation of an integrated TFSA/RRSP limit would be fairly straightforward.
An individual wishing to tap unused RRSP room for additional TFSA room would
90 Similarly, Laurin and Poschmann, supra note 79, at 5, suggest “allow[ing] taxpayers more
freedom in allocating saving room between RRSP/RPP accounts and TFSAs.”
91 James Pierlot and Faisal Siddiqi, Legal for Life: Why Canadians Need a Lifetime Retirement Saving
Limit, C.D. Howe Institute Commentary no. 336 (Toronto: C.D. Howe Institute, October
2011), at 17, note 10, state that no reliable data are available on this point but express their
expectation that primarily “older, higher-income Canadians without pension coverage [will]
use all their RRSP room.”
92 A reported 22.3 million Canadians had unused RRSP contribution room in 2013 (Statistics
Canada, CANSIM table 111-0040, “Registered Retirement Savings Plan (RRSP) Room”) and
the number of Canadians aged 18 and over that year was 28.2 million (Statistics Canada,
CANSIM table 051-0001, “Estimates of Population, by Age Group and Sex for July 1, Canada,
Provinces and Territories”). A small proportion of those with unused RRSP room were under
age 18 and thus not eligible to have a TFSA.
tax-free savings accounts: expanding, restricting, or refining?  n  941
notify the CRA of the desired amount, which would be added to the individual’s
pension adjustment used to compute his or her RRSP room. The tradeoff rate would
be about $1.50 of RRSP room to purchase one additional dollar of TFSA room, reflecting the fact that TFSA dollars are tax-prepaid whereas RRSP contributions are
tax-deferred.93 To keep the operation simple, an individual’s choice to convert a
specified number of dollars from RRSP room to TFSA room would be irrevocable.
Even individuals past age 71, who are not allowed to make further RRSP contributions,
could use cumulative unused RRSP room to expand their TFSA contribution room.
Compared to the TFSA limit hike to $10,000, an integrated TFSA /RRSP tradeoff
provision along with a restored inflation-indexed unconditional TFSA limit of
$5,500 offers several advantages. It prevents the windfalls that would otherwise go
to high earners who have already exhausted their cumulative contribution room for
RRSPs. It also reduces the scope for income splitting by couples who have divergent
earnings. Both of those effects curtail the extent of pure asset shifting to avoid taxes
where no new saving arises. At the same time, the scheme provides greater flexibility
for moderate earners who do not wish to use all their RRSP room but seek additional
TFSA room. It gives a second chance to those who have mistakenly been contributing to RRSPs despite clawbacks that they will be facing in retirement; they will have
greater scope to shift those funds into TFSAs.94 And it gives more options to many
seniors who are otherwise prevented from adding to their RRSP or are compelled to
draw down their tax-deferred savings.
Setting Limits on TFSA Lifetime Contributions,
Balances, or Eligibility
Various options could be pursued to constrain access to, or balances in, TFSAs if that
is deemed to be a policy concern. Any of the following approaches could be combined with the tradeoff proposal, so that many individuals would still have increased
scope for TFSA contributions:
n
Impose a lifetime limit on an individual’s total contributions to TFSAs,95 with
that limit being less than the annual limit multiplied by the number of years
of an individual’s life expectancy beyond age 18. A drawback of this approach
is that those with large holdings of taxable assets could deposit them all at
once and thereby extend the period of investment income compounding.
93 If we assume that the typical total marginal tax rate (combined federal and provincial taxes) on
RRSP withdrawals is one-third, each $1.50 contributed to an RRSP will yield the same net
value as $1 contributed to a TFSA.
94 Additionally, individuals who temporarily experience low-income years may utilize the option
to shift funds from their RRSP to their TFSA, since their RRSP withdrawals are taxed at low
rates in such periods.
95 Pierlot and Siddiqi, supra note 91, discuss the mechanics of implementing lifetime limits, albeit
in a different context.
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(2015) 63:4
This method also would fail to prevent some account holders from accumulating extremely large balances in their TFSAs.
Maintain an annual contribution limit but impose a ceiling on the balance that
any TFSA can attain, with that figure being indexed over time for inflation.96
After an account attained this ceiling, a TFSA holder would be barred from
making further contributions, and any subsequent investment income in the
account breaching the limit would be disgorged and thus become taxable outside the account.
In a more restrictive approach, income limits would be imposed on individuals
eligible to participate in TFSAs so as to exclude those with very high incomes
(who are most likely to use TFSAs for asset shifting and income splitting).97
While this approach would complicate the practical operation and public
understanding of TFSAs, it could be an effective way to contain the revenue
cost and reduce the pro-rich distributional tilt.
Limiting TFSA Immunity from Benefit Clawbacks
The fact that individuals can accumulate very large balances in their TFSAs suggests
that the immunity of such wealth holdings from the income tests of various tax
provisions and benefit programs should be limited. Moreover, rather than waiting
until a future time when this problem becomes inescapable, the rules for such limits
should be established now to avoid giving savers false expectations. So long as the
CRA does not require institutions that offer TFSAs to report the annual income on
each account (including a breakdown among interest, dividends, and capital gains),
several policy options are available.
n
n
A program could simply apply an asset threshold that counts the claimant’s
total liquid financial holdings, including his or her TFSA balance. Any amounts
below that figure would not disqualify the individual or reduce his or her
benefits, and any amount above that figure would lead to disqualification. The
threshold should be sufficiently high, such as $100,000 or more, so as not to
undermine the TFSA’s goal of encouraging saving by lower earners.
An income could be imputed on the basis of the individual’s total TFSA balances at year-end, a figure already recorded and reported by the CRA. The
imputation rate could be the recent interest rate on term deposits or some
other figure. Imputed TFSA income could then be added, possibly allowing an
96 One analyst recommends limiting both the lifetime contribution to $150,000 and the account
balance to $300,000 (see Macdonald, supra note 80). These figures would constrain the scope
for long-term investment accumulation in the TFSA.
97 This approach would follow the US tax-prepaid scheme (the Roth IRA), which allows maximum
annual contributions of US $5,500 and limits participation to individuals with incomes below
specified (albeit fairly high) levels. See United States, Internal Revenue Service, Amount of Roth
IRA Contributions That You Can Make for 2015 (Washington, DC: IRS, 2015); the limit is annual
and does not permit carryover of unused contribution room.
tax-free savings accounts: expanding, restricting, or refining?  n  943
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n
exempt amount, to other income sources in applying an income test or clawback to determine a claimant’s net benefits.
The income actually accruing within each TFSA every year could be computed
even if it is not deemed taxable or reported by the CRA.98 This figure could be
used in any tax or benefit program’s income test, with a specified exempt
amount of TFSA income. One drawback of this method is that the figure could
be highly volatile for TFSAs holding equities, since the accrued capital gains
or losses would be fully counted each year.99
A program could simply exempt a specified amount of TFSA withdrawals each
year before applying its income test100 following the example of the GIS,
which currently exempts $3,500 of labour earnings from its benefit clawback.
Amounts of both TFSA and RRSP withdrawals could be subject to clawback
only for amounts exceeding the exemption.101
The most suitable option could vary across jurisdictions and programs, with each
jurisdiction choosing how to treat TFSAs in its income-tested tax and benefit programs. For example, the federal GIS and OAS might implement an income attribution
for TFSAs, while a province might apply a TFSA balance threshold for eligibility in
its housing subsidy program.
Permitting Workplace Pooled TFSAs
Federal enabling legislation for PRPPs permits plans of the tax-deferred format but
not of the tax-prepaid format such as the TFSA.102 This omission is curious in that
employers are allowed to offer group TFSAs outside the pooled plan umbrella. Moreover, for many lower-paid workers, any contributions to tax-deferred schemes could
run against their long-run personal financial interests if they are likely to draw GIS
benefits when retired.103 A simple amendment to the PRPP legislation would extend
the option for employers to offer TFSA-type plans on a pooled basis, thus allowing
their employees to choose a saving vehicle that could better serve their interests.
98 For the method of calculation, see supra note 22.
99 Moreover, this method cannot distinguish among interest income, capital gains, and dividends,
each of which is treated differently and taxed at different rates in the normal income tax.
100 John Stapleton and Richard Shillington, “No Strings Attached: How the Tax-Free Savings
Account Can Help Lower-Income Canadians Get Ahead,” C.D. Howe e-brief, September 30,
2008, 1-5, assess the role of TFSAs in encouraging saving by low-income earners and discuss
methods of exempting limited amounts of TFSA savings from provincial asset-tested and
income-tested programs.
101 Treating TFSAs and RRSPs the same might be deemed fair to individuals who had “mistakenly”
saved in tax-deferred rather than tax-prepaid forms. However, the initial saving in TFSAs
would already have been taxed, and amounts above the threshold would be further “taxed” by
clawback upon withdrawal; RRSP deposits would not have been taxed initially.
102 Pooled Registered Pension Plans Act, SC 2012, c. 16.
103 See Pierlot and Laurin, supra note 89.
944  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
Revenue Impacts of the Reform Options
The revenue impacts of the various reform options canvassed here can be described
in very rough qualitative terms. The base reform proposal is simply to reverse the
recent TFSA limit hike and restore the $5,500 annual level with indexation. The
estimated revenue cost saving of this reform would be the figures cited earlier from
the PBO for the revenue cost of the reverse policy change. Adding the option for
individuals to trade off excess RRSP room for additional TFSA access up to $10,000
per year would add much less to the tax revenue cost than the unconditional limit
hike to $10,000, since it would exclude those who have exhausted their RRSP room
and would be most likely to utilize additional TFSA room. Limits on an individual’s
lifetime TFSA contributions, ceilings on TFSA balances, or income limits on TFSA eligibility could sharply reduce the scheme’s revenue cost, depending on the specifics.
Those types of reforms would also reduce the cost impact on GIS and OAS programs,
but more targeted reforms to limit the immunity of benefit program income tests
from TFSAs would be more effective for that purpose. Permitting PRPPs to offer
TFSAs should have a small revenue impact because of these plans’ immaturity and
the potential diversion of PRPP contributions from the tax-deferred option.
D I S C U S S I O N A N D CO N C L U S I O N
The TFSA scheme has proved highly popular and has served some of the key objectives initially identified for a TPSP, such as enabling individuals to engage in efficient
and lifetime equitable saving and restoring saving incentives for lower earners. At the
same time, significant deficiencies in the original TFSA formulation have emerged,
and these problems will be exacerbated by the 2015 hike to contribution limits. The
present analysis provides strong evidence that the pre-existing $5,500 limit was
more than adequate for the great majority of those eligible to have a TFSA; by 2013,
only 1 out of 15 eligible individuals had maximized his or her cumulative limit. The
rates of maximizing TFSA limits were low and rapidly declining for all groups except
those at the highest income levels and, to a lesser extent, older persons. Individuals
in the lower age and income groups had the lowest TFSA participation and maximization rates. Only 1 out of 60 eligible individuals aged 18-29 had maximized his or
her TFSA limit by 2013. And at that time 3 out of 5 eligible Canadians had not even
opened an account.
Various impacts of TFSAs have already become evident in the data, and all will
become more acute over future years. The gains from TFSAs are already going disproportionately to high earners and large wealth holders, and the near-doubling of TFSA
limits in 2015 would steepen this pro-rich tilt. However, the large share of gains
reaped by moderate-income seniors to date is a transitory effect reflecting the short
time that TFSAs have been operating. The TFSA bias favouring seniors, like that
more generally favouring the wealthy, can be seen from the evidence to be the result
of asset shifting and income splitting more than net new saving. Motivations include both tax minimization and maximization of access to benefits such as public
pensions.
tax-free savings accounts: expanding, restricting, or refining?  n  945
The impacts of TFSAs on public finances are already emerging and will grow
sharply over time. TFSAs are in the process of changing the face of taxation in Canada
by removing increasing amounts of financial income beyond the personal income
tax net. The early impacts on federal and provincial revenues are small but growing
ineluctably, and they will deprive both levels of government of billions of dollars per
year well before mid-century. Personal tax progressivity at both government levels
will also be increasingly compromised by TFSAs. The unfettered immunity of TFSAs
from the income tests of various federal benefit programs and tax provisions will
increase their revenue costs and raise questions about effective benefit targeting.
The TFSA’s deficiencies can be addressed by various reform options, which are
canvassed in this study. The clearest recommendation is that the hike in the TFSA
limit should be reversed and the $5,500 annual limit with indexation restored. This
change would contain both the scheme’s growing revenue cost and the degree of
skew favouring high income earners and high wealth holders, who over the long run
would be the biggest gainers from the higher limits. To give individuals who have
not exhausted their RRSP room greater flexibility, an option to trade off unused RRSP
room for additional TFSA contribution room could be introduced; this option would
also be available for seniors beyond age 71, who are barred from making further
RRSP contributions. With these changes, any additional TFSA access would be confined to those who have not already made maximum use of RRSPs. TFSAs should also
be permitted within PRPPs to give moderate earners an appropriate and efficient
saving option.
Without further restrictions, some TFSAs would still grow to be extremely large.
In less than seven years, some TFSAs have already exceeded $500,000 and even
$1 million, through investor skill, leverage, and luck. To forestall these outcomes—
which will become both larger and more common with the passage of years—limits
could be placed on an individual’s lifetime TFSA contributions, maximum TFSA balances, and/or incomes for TFSA eligibility. In addition, given the substantial sums
that some TFSAs will nevertheless accumulate, rules that limit TFSA immunity from
the income tests of benefit and tax provisions need to be established. If these rules
are not instituted now, many savers will be acting on false expectations about their
future access to public benefits intended for individuals with low and moderate incomes, since some form of restrictions will inevitably be applied at some point.
With appropriate reforms, the TFSA could realize its full potential as a flexible
scheme providing individuals with efficient options for their short-term and retirement saving needs. Along with the tax-deferred schemes, TFSAs enable more equitable
lifetime taxation of high and low savers at any given level of lifetime earnings.
These goals can be achieved without undue bias favouring high earners and wealth
holders and within acceptable revenue costs. Resetting the annual contribution
limit is only the first step in reforming the TFSA; other companion reforms need to
be pursued with equal urgency.
canadian tax journal / revue fiscale canadienne (2015) 63:4, 947 - 89
The US Tax Classification of Canadian
Mutual Fund Trusts
Max Reed and Stephen Albers Chalhoub*
PRÉCIS
On pense généralement que les personnes américaines qui investissent dans
des fiducies de fonds commun de placement canadiennes risquent de subir des
conséquences fiscales américaines dissuasives à la disposition de leur placement, parce
que ces entités pouvaient être traitées comme des sociétés de placement étrangères
passives ( passive foreign investment companies [PFIC]) en application du droit fiscal
américain. Cette impression repose sur une phrase résumant et concluant une circulaire
administrative non exécutoire sur un sujet sans lien avec celui-ci, qui a été publiée
par le Internal Revenue Service en 2009. Bien qu’il ne soit pas du tout sûr que cette
position soit bien celle du fisc américain, de nombreux praticiens ont choisi de pécher
par excès de prudence et de présumer que les fiducies de fonds commun de placement
canadiennes sont des PFIC aux fins de l’impôt américain.
Cet article présente deux ensembles de solutions possibles au problème du statut
de PFIC pour les fiducies de fonds commun de placement canadiennes. Les solutions
varient selon que la fiducie de fonds commun de placement canadienne est considérée
comme une société de personnes ou comme une société par actions aux fins de l’impôt
américain. Une société sera classée dans l’une ou l’autre des catégories selon que la
totalité ou une partie seulement des investisseurs a une responsabilité limitée à l’égard
des dettes et des obligations de la fiducie. Si tous les investisseurs ont une responsabilité
limitée, la fiducie est bien considérée comme une société par actions aux fins de l’impôt
américain et constitue fort probablement une PFIC. Dans ce scénario, il y a trois solutions
possibles au problème du statut de PFIC : 1) détenir le placement dans un fonds commun
de placement dans le cadre d’un régime enregistré d’épargne-retraite; 2) faire le choix
relatif à un fonds électif admissible (qualified electing fund); ou 3) faire le choix
d’évaluation à la valeur du marché (mark-to-market election). Les trois solutions sont
sous-optimales. Il est possible que des fiducies de fonds commun de placement
canadiennes soient en réalité des sociétés de personnes aux fins de l’impôt américain.
* Of SKL Tax, Vancouver (e-mail: [email protected]). We would like to thank Allan McBurney
and Stephen Katz of SKL Tax for several of the ideas discussed in this article and for their
exceptional mentorship. We would also like to thank Allison Christians of McGill University
for her comments and insight in the preparation of this article.
 947
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(2015) 63:4
Si la fiducie est une société de personnes, elle ne peut pas être une PFIC. Les fiducies
sont considérées comme une société de personnes dans les quatre situations suivantes :
1) les fiducies formées avant l’adoption de certaines lois provinciales accordant aux
investisseurs une responsabilité limitée peuvent être des sociétés de personnes aux
fins de l’impôt américain; 2) les fiducies auxquelles ces lois ne s’appliquent pas
peuvent être des sociétés de personnes aux fins de l’impôt américain; 3) une fiducie
nouvellement formée peut choisir d’être classée en tant que société de personnes; et
4) toutes les fiducies de fonds commun de placement canadiennes peuvent être des
sociétés de personnes aux fins de l’impôt américain. Le fait d’être considéré comme une
société de personnes peut être très avantageux pour un investisseur individuel qui est
une personne américaine. L’application potentielle du régime des PFIC disparaît, et le
revenu est imposé comme un revenu tiré de n’importe quel autre placement. La plupart
des investisseurs n’ont aucune déclaration annuelle à produire. Le particulier peut
indiquer dans sa déclaration de revenus des particuliers qu’il choisit d’être traité comme
une société de personnes. Un fonds peut aussi faire le choix d’être considéré comme une
société de personnes. Pour les fonds qui n’investissent pas aux États-Unis, le statut
de société de personnes comporte peut d’inconvénients et de nombreux avantages.
Pour les fonds qui investissent aux États-Unis, il y a quelques inconvénients qu’il est
possible de pallier. Bref, il existe des solutions faciles à gérer au problème du statut de
PFIC dans le contexte des fiducies de fonds commun de placement canadiennes.
ABSTRACT
It is widely believed that US persons who invest in Canadian mutual fund trusts could be
subject to punitive US tax consequences on the disposition of their investment, because
these entities could be treated as passive foreign investment companies (PFICs) under
US tax law. This view is based on a one-sentence summary conclusion in a non-binding
memorandum on an unrelated topic issued by the Internal Revenue Service in 2009.
While the position of the US tax authorities is far from certain, many practitioners have
chosen to err on the side of caution and have acted on the assumption that Canadian
mutual fund trusts are PFICs for US tax purposes.
This article outlines two possible sets of solutions to the PFIC problem as it applies to
Canadian mutual fund trusts. The solutions depend on whether the Canadian mutual
fund trust is classified as a partnership or as a corporation for US tax purposes. The key
determinant between the two classifications is whether or not all investors in the trust
have limited liability for the debts and obligations of the trust. If all of the investors have
limited liability, the trust is properly classified as a corporation for US tax purposes and
thus is very likely a PFIC. In this scenario, there are three potential solutions to the PFIC
problem: (1) holding the investment in a mutual fund inside a registered retirement
savings plan; (2) making the qualified electing fund election; or (3) making the mark-tomarket election. All three solutions are suboptimal. It is possible that Canadian mutual
fund trusts are actually partnerships for US tax purposes. If the trust is a partnership, it
cannot be a PFIC. There are four arguments to support a partnership classification:
(1) trusts formed prior to the enactment of certain provincial statutes granting investors
limited liability may be partnerships for US tax purposes; (2) trusts to which these
statutes do not apply may be partnerships for US tax purposes; (3) a newly formed trust
can elect a partnership classification; and (4) all Canadian mutual fund trusts might be
partnerships for US tax purposes. For an individual investor who is a US person, the
the us tax classification of canadian mutual fund trusts  n  949
benefits of a partnership classification are substantial. The potential application of the
PFIC regime is removed, and the income is taxed like income from any other investment.
There is no annual reporting for the vast majority of investors. The position that
partnership treatment applies can be taken on the individual’s US tax return. A partnership
classification can also be implemented at the fund level. For funds that do not invest in
the United States, there are few drawbacks and many advantages to a partnership
classification. For funds that do invest in the United States, there are a few drawbacks,
but these can be managed. In short, there are manageable solutions to the PFIC problem
as it applies to Canadian mutual fund trusts.
KEYWORDS: US-CANADA n MUTUAL FUNDS n UNITED STATES n CROSS-BORDER n RRSP n IRS
CONTENTS
Introduction
Background and Overview of the PFIC Regime
Existing Authority on Canadian Mutual Funds as PFICs
Solving the PFIC Problem if Canadian Mutual Funds Are Corporations
Holding Canadian Mutual Fund Investments Inside an RRSP
The QEF Election
The Mark-to-Market Election
Conclusion: Inadequate Solutions to the PFIC Problem
Canadian Mutual Fund Trusts Can Be Partnerships for US Tax Purposes
Older Canadian Mutual Fund Trusts Are Likely Partnerships
Is the Entity Separate from Its Owners?
Is the Entity Caught by Special Rules?
Is a Canadian Mutual Fund Trust a Trust for US Tax Purposes?
Does the Entity Have More Than One Member?
Is the Entity Automatically Classified as a Corporation?
Is the Entity Domestic (American)?
Is the Entity an “Eligible Entity”?
Is the Entity a Default Partnership or Corporation?
Do the Beneficiaries of Canadian Mutual Fund Trusts Have Limited Liability?
Classification of Canadian Mutual Funds Prior to 1997
Conclusion: Funds Organized Prior to 2004 Are Likely Not PFICs
Trusts Not Subject to the Limited Liability Statutes May Also Be Partnerships
Newly Formed Trusts Can Elect To Be Partnerships
All Canadian Mutual Fund Trusts May Be Partnerships for US Tax Purposes
The Publicly Traded Partnership Rules Will Not Deny Flowthrough Taxation
Filing Requirements of Individual Investors Under a Partnership Classification
Filing Obligations for Mutual Funds That Are Partnerships
Drawbacks of Partnership Classification
Potentially Increased US Estate Tax Risk
Potentially Higher Canadian Withholding
Article IV(7)(b) of the Treaty Should Not Apply
Even the Application of Article IV(7)(b) Is Not Overly Problematic
Overview of Drawbacks
Conclusion: PFIC Problems Are Solvable
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(2015) 63:4
INTRODUC TION
The mutual fund trust structure is commonly used in Canada for a wide range of
investment vehicles, including consumer-oriented financial products (mutual funds
and exchange-traded funds) as well as income trusts and real estate investment trusts
(REITs). Accordingly, the US tax classification of this structure is of crucial importance to “US person investors” resident in Canada, Canadian financial institutions
seeking US person investors, and investors in Canadian mutual funds who reside in
the United States. For the purposes of this article, a US person investor is defined as
a US person (US citizen, US resident, green-card holder, US partnership, US corporation, or US trust) holding units of a Canadian mutual fund trust. Many Canadians,
including those who are US person investors and those who have moved to the
United States, invest in these funds to save for retirement.
A common view is that Canadian mutual fund trusts are passive foreign investment companies (PFICs) for US tax purposes.1 The US Internal Revenue Service (IRS)
has not taken a clear position on the issue. In a non-binding memorandum concerning the application of US estate tax, the IRS made an unsubstantiated one-sentence
declaration that investments in Canadian mutual fund trusts held in a registered
retirement savings plan (RRSP) are likely corporations for US tax purposes.2 From
this, the common practice of treating Canadian mutual fund trusts as PFICs has
evolved. As discussed in more detail below, if the US PFIC regime applies to such
entities, the US tax on any gain on the sale of the investment may approach or exceed
60 to 80 percent. This figure reflects the imposition of tax on the sale, exchange, or
other disposition of stock of a PFIC at the highest marginal rate (39.6 percent), to
which is added compound interest on that tax stretching back to the time when the
investment was first purchased. This is an adverse result that lacks any tax policy
justification.
This article argues that the PFIC problem is manageable. We present strategies
that both individual investors and fund companies can use to deal with the risk of
PFIC treatment. The solutions we suggest are based on two different approaches.
The first set of solutions assumes that Canadian mutual funds are corporations
for US tax purposes and thus are PFICs. These solutions include
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holding Canadian mutual fund investments inside an RRSP;
making the “qualified electing fund” (QEF) election on an individual investor’s
US tax return; or
making the mark-to-market election on an individual investor’s US tax return.
1 See Max Reed, “Classification of Canadian Mutual Funds for U.S. Tax Purposes” (2014) 40:5
International Tax Journal 31-39, at 33. Some of the content of this article is similar to that found
in the International Tax Journal article. The overlap between the two is indicated in the notes.
2 Internal Revenue Service, Chief Counsel Advice (CCA) 201003013, September 30, 2009.
the us tax classification of canadian mutual fund trusts  n  951
As discussed below, these solutions provide only limited potential PFIC relief. For
the mark-to-market and QEF elections to work, the investor must pay PFIC tax on
any gain realized, before the election takes effect. Further, the QEF election requires
specialized information from the fund that will be expensive for a fund company to
prepare. This severely limits the utility of the elections for long-term investors who
may not have been aware that the mutual funds in which they had invested could
be PFICs.
The second set of solutions assumes that Canadian mutual fund trusts are partnerships for US tax purposes. By definition, partnerships cannot be PFICs. These
solutions include
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taking the position that certain older Canadian mutual fund trusts are partnerships for US tax purposes and thus are not PFICs;
taking the position that certain Canadian mutual fund trusts not covered by
the limitation of liability statutes are not PFICs;
making a check-the-box election at the fund level to classify a Canadian mutual fund trust as a partnership for US tax purposes;3 or
taking the position that all Canadian mutual fund trusts are partnerships for
US tax purposes and thus are not PFICs.
Adopting a partnership classification for a Canadian mutual fund trust has the
advantage of solving the PFIC problem for US person investors and requiring almost
no annual paperwork on the part of those investors. Further, these solutions can apply
retroactively to the time when the fund was created or the investor purchased the
investment. There are a few potential drawbacks with a partnership classification.
First, for fund administrators, formally adopting a partnership classification may
increase the US estate tax risk for non-US investors in the fund. However, a reasonably
persuasive case can be made that an interest in a foreign partnership is an intangible
asset and thus not subject to US estate tax.
Second, a partnership classification imposes a US federal tax compliance obligation
on the fund itself if the fund invests in securities in the United States. However, there
is no such compliance obligation for funds that do not invest in the United States.
Third, a partnership classification may increase Canadian withholding tax on
certain distributions to US-resident investors. But this is not certain, and any extra
Canadian tax can be offset by a US foreign tax credit. Regardless, extra Canadian tax
is a vastly preferable outcome for US-resident investors as compared with the tax payable under the PFIC regime.
3 Reed, supra note 1, at 37.
952  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
B A C KG R O U N D A N D O V E R V I E W
OF THE PFIC REGIME
The PFIC rules were enacted as part of the comprehensive tax reform of 1986. They
were designed to prevent US citizens from achieving tax deferral offshore. As befits
a regime designed to combat offshore tax evasion, the PFIC regime is very punitive.
As noted above, a US person investor in a PFIC may be subject to certain adverse US
federal income tax consequences with respect to the sale, exchange, or other disposition of the stock of a PFIC and with respect to certain distributions made by the PFIC.
In general, a non-US corporation will be treated as a PFIC for US federal income tax
purposes in any taxable year in which either
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at least 75 percent of the corporation’s gross income is “passive income”; or
on average, at least 50 percent of the value of the corporation’s assets is attributable to assets that produce passive income or are held for the production of
passive income.4
Passive income for this purpose generally includes, among other things, dividends,
interest, certain royalties, gains from commodities and securities transactions, and
gains from the sale of capital assets.5
Assuming that Canadian mutual fund trusts are corporations (as discussed in
detail below), they readily meet the PFIC definition because
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they are organized under the laws of a jurisdiction outside the United States;
they realize passive income; and/or
they own a large percentage of assets that produce passive income.
If a non-US corporation is treated as a PFIC in any taxable year, it will generally
be treated as a PFIC in each subsequent year, regardless of the level of passive income and passive assets in such subsequent years (unless certain elections are made
at the investor level).6 IRC section 1291(a) requires a US person investor to pay a
special tax plus an interest charge on the following:
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gain recognized from the disposition of stock of a PFIC (including a pledge of
stock of a PFIC); and
the receipt of an “excess distribution.”
An excess distribution is generally defined as a distribution in any one year to the
extent that it exceeds 125 percent of the average distributions received in the prior
three years.7 In general,
4 Internal Revenue Code of 1986, as amended (herein referred to as “IRC”), section 1297(a).
5 IRC section 1297(b)(1).
6Ibid.
7 IRC section 1291(b).
the us tax classification of canadian mutual fund trusts  n  953
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any gain realized or excess distribution received would be allocated rateably
to each taxable year (or portion of a taxable year) in the US person investor’s
holding period in respect of the shares in the PFIC;
the amount so allocated to the current taxable year will be taxed as ordinary
income (not as a capital gain) earned in the current taxable year;
the amount so allocated to earlier taxable years will be taxed at the highest
marginal rates applicable to ordinary income for those earlier taxable years;
and
an interest charge for the deemed benefit of deferral of US federal income tax
will be imposed with respect to the tax deemed attributable to each such
earlier taxable year.
For example, if a PFIC makes no distributions to shareholders for three years but
then pays a dividend in year four, the entire amount of the dividend will be an excess
distribution.
The gross amount of any distribution in respect of the stock of a PFIC that is not
an excess distribution will be taxable under the rules generally applicable to corporate distributions.8 The dividend, however, will not be eligible for the preferential tax
rate applicable to certain “qualified dividend income” received by individuals.9 US
person investors normally have to file a separate form 8621 annually for each fund
that they own.10 Form 8621 is unwieldy, and it can be costly to have it completed by
a professional tax adviser. US person investors who hold less than US $25,000 worth
of PFIC stock do not have to file form 8621 annually.11
E XISTING AUTHORIT Y ON C ANADIAN
M U T U A L F U N D S A S P F I C s 12
There is no official guidance on whether Canadian mutual funds are PFICs or not.
The worry that Canadian mutual funds might be PFICs for US tax purposes started
with the issuance of the IRS’s Chief Counsel Advice (CCA) 201003013 in September
2009.13 Prior to the release of this document, there appears to have been little or no
awareness of the possibility that Canadian mutual funds might be PFICs.
The reaction to CCA 201003013 is strange, given its status and substance. The
memorandum concerns the assessing of a taxpayer’s US estate tax liability, and not an
entity classification of a Canadian mutual fund trust. The “Facts” section of the CCA
8 Prop. Treas. reg. section 1.1291-2(e).
9 IRC section 1(h)(11)(C)(iii).
10 Temp. Treas. reg. section 1.1298-1T(b)(1). See IRS form 8621, “Information Return by a
Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.”
11 Temp. Treas. reg. section 1.1298-1T(c)(2)(i)(A)(1).
12 The content of this section is based on Reed, supra note 1.
13 Supra note 2.
954  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
does not provide any information regarding the mutual funds at issue. Accordingly,
it is possible that the taxpayer himself made representations regarding the entity
classification of the mutual funds.
The only reference in the CCA to the entity classification of Canadian mutual
funds is a short, unsubstantiated declaration that reads:
You indicated that the RRSP held shares in several mutual funds that are organized as
trusts. However, a mutual fund may have been formed as a “trust” under Canadian law,
but be properly classified as a corporation under U.S. law. Based on the information
provided, it appears that all the Canadian mutual funds held by Decedent’s RRSP would
be classified as corporations for U.S. tax purposes.14
It is important to note that the CCA contains no analysis to justify this conclusion.
Further, the CCA specifically deals only with the mutual funds held inside this particular decedent’s RRSP. It does not deal with all mutual funds, nor does it deal with
all mutual funds held inside all RRSPs. In fact, it is possible (though there is no way
to verify this) that these mutual funds were unique in some respect.
There is another reason to be suspicious of the CCA’s conclusion. By classifying
Canadian mutual funds as corporations, the IRS did not have to address a far thornier
issue. As discussed below, the IRS refuses to take a position as to whether property
owned through a foreign fiscally transparent entity is subject to US estate tax. If, in
CCA 201003013, the IRS had classified the mutual funds at issue as partnerships, it
would have had to take a position on this question. So while the result of the CCA is
friendly to the taxpayer, the IRS avoided having to answer a much bigger question
in taking the position that it did.
Importantly, a CCA does not have the force of law. Indeed, CCA 201003013 specifically states that it “may not be used or cited as precedent.”15 Furthermore, the IRS’s
Internal Revenue Manual states that chief counsel advice “does not set out official
rulings or positions of the Service and may not be attached or referred to in other
advisory products or subsequent Chief Counsel advice as precedent.”16
Effectively, the belief that Canadian mutual funds may be corporations (note that
even the CCA did not call them PFICs) for US tax purposes is based on an unsubstantiated one-line conclusion that does not have the force of law. Understandably, the
common thinking in practice is to err on the side of caution and treat Canadian
mutual funds as PFICs. Nevertheless, in the next section, we examine strategies that
can be used to solve the PFIC problem assuming that Canadian mutual fund trusts
are corporations (and therefore almost certainly PFICs) for US tax purposes.
14 Ibid., at 5.
15 Ibid., at 1.
16 Internal Revenue Service, Internal Revenue Manual (Washington, DC: IRS), section 33.1.2.2.3.4.
the us tax classification of canadian mutual fund trusts  n  955
S O LV I N G T H E P F I C P R O B L E M I F C A N A D I A N
M U T U A L F U N D S A R E CO R P O R AT I O N S
Even operating under the assumption, which is challenged below, that Canadian
mutual fund trusts are corporations for US tax purposes, there are three potential
solutions to the PFIC problem
1. holding mutual fund investments inside an RRSP;
2. making the QEF election; or
3. making the mark-to-market election.
All three have their limitations.
Holding Canadian Mutual Fund Investments Inside an RRSP
Holding PFIC stock inside an RRSP negates the adverse PFIC consequences. The
Canada-US tax treaty applies to income taxes imposed by the IRC.17 The PFIC tax
regime is certainly covered by the treaty. Article XVIII(7) of the treaty, which deals
with the taxation of pensions and annuities, states that “taxation” may be deferred
“with respect to any income accrued in the plan but not distributed by the plan,
until such time as and to the extent that a distribution is made from the plan or any
plan substituted therefor.” This applies to RRSPs.
If Canadian mutual funds are PFICs, and the investment is held inside an RRSP,
the PFIC charge described above may be permanently avoided. According to official
IRS publications, income from an RRSP is considered pension income and is subject
to tax as such. For instance, Rev. proc. 2014-55 describes distributions from an RRSP
as follows:
Distributions received by any beneficiary or annuitant from a Canadian retirement
plan, including the portion thereof that constitutes income that has accrued in the plan
and has not previously been taxed in the United States, must be included in gross income by the beneficiary or annuitant in the manner provided under section 72, subject
to any applicable provision of the Convention.18
IRC section 72 is the section that deems income from an annuity to be taxable.
The IRS’s own view is that income taken out of an RRSP is pension income, and the
PFIC charges may not be applicable. Even if Canadian mutual funds are PFICs, there
is no reporting required if the investment is held inside an RRSP.19 Combined with
17 The Convention Between Canada and the United States of America with Respect to Taxes on
Income and on Capital, signed at Washington, DC on September 26, 1980, as amended by the
protocols signed on June 14, 1983, March 28, 1984, March 17, 1995, July 29, 1997, and
September 21, 2007 (herein referred to as “the Canada-US treaty”), article II(2)(b).
18 Rev. proc. 2014-55, 2014-44 IRB 753.
19 Temp. Treas. reg. section 1.1298-1T(b)(3)(ii).
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the IRS’s understanding of RRSP income as pension income, this lack of reporting
further suggests that a US court would not subject investments in Canadian mutual
funds held inside an RRSP to the PFIC charge.
The limitation with respect to this strategy is the available amount of RRSP
room. Some investors own significant investments outside an RRSP.
The QEF Election
Assuming that Canadian mutual funds are corporations for US tax purposes (and
thus almost certainly PFICs), a US person investor may be able to solve the PFIC
problem by making a timely election to treat the mutual fund in which the investment is made as a “qualified electing fund.”20 If a timely QEF election is made, the
electing US person investor can generally avoid the adverse consequences of PFIC
classification, described above, but is required to include in gross income annually,
n
n
as ordinary income, a pro rata share of the PFIC’s ordinary earnings, and
as long-term capital gain, a pro rata share of the PFIC’s net capital gain.
In either case, the income inclusion is required whether or not cash associated with
such earnings is distributed by the PFIC in the year in which it is earned.21
In addition, the Canadian mutual fund trust is required to provide each electing
shareholder with an annual information statement that includes the following
information:22
1. the dates of the tax year to which the statement applies;
2. the unitholder’s pro rata share of the trust’s ordinary earnings and net capital
gain for the trust’s tax year, or sufficient information to allow the unitholder
to calculate these figures, or a statement that the trust has permitted the
unitholder to examine its books, records, and other documents to calculate
the trust’s ordinary earnings and net capital gain and the unitholder’s pro rata
share of such amounts;
3.the amount of cash and the fair market value of property distributed or
deemed distributed to the unitholder during the trust’s tax year; and
4. a statement that the trust will permit the unitholder to inspect a copy of its
books, records, and other documents.
The timeliness of the QEF election is crucial. If the election is made in the first
year in which the US person investor owns the investment, and the above requirements are met, all PFIC problems will be avoided. Making the election in a later year
is a different story. In order for the QEF election to be effective (and thus avoid PFIC
20 IRC section 1291(d)(2).
21 IRC section 1293(a).
22 Treas. reg. section 1.1295-1(g).
the us tax classification of canadian mutual fund trusts  n  957
problems in subsequent years), the investor must realize in that later year any gain
accruing from the date of purchase of the investment. This gain will be subject to
the excess distribution regime described above.23
Put differently, making an effective QEF election in a year after the first year of
ownership of the investment requires the investor to pay the PFIC tax from the date
on which the investment was purchased until the year in which the QEF election is
made. Therefore, taking in a later year a QEF election that would solve future PFIC
problems could have a high tax cost for a US person investor who has owned the
investment for a long period of time, but could be worthwhile for an investor who
has recently purchased the investment.
A retroactive QEF election is possible, but only with the permission of the IRS,
and only if the QEF information is available (this is not always the case). Even if the
QEF election has been made, form 8621 must still be filed; in other words, while
the QEF election may reduce specific tax exposure related to holding the investment,
it will not reduce the annual compliance costs. The final downside of the QEF election is that dividends received from a QEF are taxed as ordinary income and are not
eligible for the lower rates applicable to qualified dividends.24
The Mark-to-Market Election
Assuming that Canadian mutual funds are corporations for US tax purposes (and
thus almost certainly PFICs), the mark-to-market election can be taken to solve the
PFIC problem. Where this election is made, the US person investor reports the annual gain in the value of the investment as ordinary income (not as a capital gain)—
even if the gain was not realized—on the investor’s US tax return.25 This may result
in double taxation. Canada will not necessarily grant foreign tax credits for the US
tax paid because of the mark-to-market election. Further, when the investment is
actually sold, Canadian tax will apply normally to the sale without regard to previously paid US tax resulting from the mark-to-market election.
The mark-to-market election has a further drawback that is similar to the drawback of the QEF election. An effective mark-to-market election taken in a year
following the first year in which the investor owned the investment requires the
realization of gain accrued to date. This gain is subject to the excess distribution
regime. In other words, in order for the mark-to-market election to be effective, the
US person investor will pay PFIC tax on any gain that has accumulated during the time
the investor has owned the investment.26 Finally, the compliance costs for the markto-market election are significant, given that a form 8621 will have to be filed for
each fund, for each year.
23 IRC section 1291(d)(2)(A).
24 Notice 2004-70, 2004-44 IRB 724.
25 IRC section 1296(a)(1).
26 IRC section 1296( j).
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Conclusion: Inadequate Solutions to the PFIC Problem
The three solutions presented above will likely be inadequate for many investors.
RRSP contribution room is limited, and many investors hold their investments outside an RRSP. The QEF and mark-to-market elections work only if PFIC tax is paid
on the unrealized gain before the election functions properly. This is not only expensive but may eventually result in double taxation, since Canada will impose income tax when the investment is actually sold. A better solution is needed. The next
section outlines the argument that Canadian mutual fund trusts are actually partnerships for US tax purposes and thus cannot be PFICs.
C ANADIAN MUTUAL FUND TRUSTS C AN BE
PA R T N E R S H I P S F O R U S TA X P U R P O S E S
The first three strategies discussed above (funds held inside an RRSP, the QEF election, and the mark-to-market election) all first assume that Canadian mutual fund
trusts are corporations for US tax purposes and thus almost certainly PFICs. There
are grounds for arguing that this assumption is incorrect. We are of the view that
certain, and possibly all, Canadian mutual funds are actually partnerships, and not
corporations, for US tax purposes; therefore, by definition, they are not PFICs. From
the perspective of the individual investor, a partnership classification is very beneficial.
Since the PFIC regime can no longer apply, income distributions from the Canadian
mutual fund trust retain their character, and the annual reporting requirements are
significantly less complex.
As discussed further below, the key factor in determining whether a Canadian
mutual fund trust is a partnership or a corporation for US tax purposes is whether
the investors in the fund have limited liability. If all investors have limited liability, the
trust is classified as a corporation and thus is a PFIC. If any investor does not have
limited liability, the trust is classified as a partnership and thus is not a PFIC.
Four arguments are available to support a partnership classification:
1. Canadian mutual fund trusts formed prior to 2004 are likely partnerships.
2.Canadian mutual fund trusts that are not “reporting issuers” are likely
partnerships.
3. A newly formed Canadian mutual fund trust can elect partnership classification.
4. All Canadian mutual fund trusts may be partnerships.
Each strategy is examined in turn below.
Older Canadian Mutual Fund Trusts Are Likely Partnerships
Responding to concerns from the investment fund industry, various provinces have
enacted legislation to grant beneficiaries of mutual fund trusts limited liability. Canadian mutual fund trusts organized in the common-law provinces and formed prior
to the enactment of these statutes are likely partnerships for US tax purposes. The
the us tax classification of canadian mutual fund trusts  n  959
following common-law provinces enacted limited liability statutes in the following
years:27 Ontario, 2004;28 Manitoba, 2005;29 Alberta, 2004;30 British Columbia,
2006;31 and Saskatchewan, 2006.32
Prior to this legislation being passed, institutional investors were largely unwilling to invest in mutual fund trusts as a result of the liability exposure.33 Although
their caution does not stand as proof of any liability from a legal perspective, it does
at the very least indicate a common understanding in the industry that the risk of
unitholder liability was not merely theoretical.
The determination of the default classification of a Canadian mutual fund trust
comes down to whether all beneficiaries of the trust have limited liability. If the
trust was organized prior to the enactment of the statutes, it was and remains a
partnership for US tax purposes because the beneficiaries of the trust did not have
limited liability at the time the trust was organized.
To fully understand this argument, it is necessary to go through all of the steps
under the US entity classification rules that are applied in classifying a Canadian
mutual fund trust for US tax purposes. For clarity, the multiple steps (contained in
Treas. reg. section 301.7701) are set out sequentially below.34
Is the Entity Separate from Its Owners?
If the entity is not separate from its owners, the entity classification regime does not
apply since the “entity” is then not an entity for US tax purposes. A Canadian mutual
fund trust is separate from its owners because the trust has a structure that is not
tied to its beneficiaries.35
Is the Entity Caught by Special Rules?
If the entity falls into a special category, the general rules for entity classification do
not apply. Canadian mutual fund trusts are not subject to any special regime. An
example of an entity that does fall under special treatment is a real estate investment
conduit, which is subject to a special regime under the IRC.36 Canadian mutual fund
27 Quebec, a civil-law jurisdiction, enacted similar legislation in 1994: Civil Code of Québec,
CQLR c. C-1991, article 1322. The legal status of a trust in Quebec law is different from the
legal status of common-law trusts. In this article, we are concerned exclusively with the US tax
treatment of Canadian mutual fund trusts organized in common-law provinces.
28 Trust Beneficiaries’ Liability Act, 2004, SO 2004, c. 29, schedule A, as amended.
29 Investment Trusts Unitholders’ Protection Act, CCSM c. I105.
30 Income Trusts Liability Act, SA 2004, c. I-1.5, as amended.
31 Income Trust Liability Act, SBC 2006, c. 14, as amended.
32 Income Trust Liability Act, SS 2006, c. I-2.02, as amended.
33 See, for example, Canada, Senate, The Governance Practices of Institutional Investors: Report of the
Standing Senate Committee on Banking, Trade and Commerce (Ottawa: Senate, November 1998).
34 The discussion from this point to the text at note 63 is drawn from Reed, supra note 1, at 34-36.
35 Treas. reg. section 301.7701-1(a).
36 Treas. reg. section 301.7701-1(b).
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trusts do not fall within any special regime, despite the assumption that they might
be caught by the same rules as US mutual funds. US mutual funds are usually “regulated investment companies” (RICs), and therefore governed by IRC sections 851
through 855, and all RICs are required to be registered under the Investment Company Act of 1940.37 Canadian mutual funds do not usually register with the US
Securities and Exchange Commission (SEC). Moreover, in order to register as a RIC,
an entity must be a US “domestic corporation,”38 which, as a Canadian entity, a Canadian mutual fund trust obviously is not.
Is a Canadian Mutual Fund Trust
a Trust for US Tax Purposes?
The Treasury regulations allow for several types of trust, only two of which are relevant here: an “ordinary” trust and an “investment” trust. Each has its own particularities, but neither describes a Canadian mutual fund:
1.An ordinary trust. An ordinary trust is a legal arrangement “whereby trustees
take title to property for the purpose of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery or probate courts.”39
While trustees do indeed take title to the property in Canadian mutual funds,
the goal is not simply to conserve and protect the beneficiary’s property. The
goal is maximize investment returns for the unitholders (beneficiaries). A
mutual fund whose goal was mere conservatorship would likely not remain
commercially viable. There is also case law that offers further insight into the
difference between a business entity and an ordinary trust. In Elm Street Realty
Trust and Bedell Trust,40 the US Tax Court held that two characteristics distinguish business entities from ordinary trusts: (1) whether the trust has
37 Pub. L. no. 76-768; 15 USC section 80a-1 et seq.
38 IRC section 851(a).
39 Treas. reg. section 301.7701-4(a) (emphasis added). The full definition is as follows: “In general,
the term ‘trust’ as used in the Internal Revenue Code refers to an arrangement created either
by a will or by an inter vivos declaration whereby trustees take title to property for the purpose
of protecting or conserving it for the beneficiaries under the ordinary rules applied in chancery
or probate courts. Usually the beneficiaries of such a trust do no more than accept the benefits
thereof and are not the voluntary planners or creators of the trust arrangement. However, the
beneficiaries of such a trust may be the persons who create it and it will be recognized as a trust
under the Internal Revenue Code if it was created for the purpose of protecting or conserving
the trust property for beneficiaries who stand in the same relation to the trust as they would if the
trust had been created by others for them. Generally speaking, an arrangement will be treated as
a trust under the Internal Revenue Code if it can be shown that the purpose of the arrangement is
to vest in trustees responsibility for the protection and conservation of property for beneficiaries
who cannot share in the discharge of this responsibility and, therefore, are not associates in a
joint enterprise for the conduct of business for profit.”
40 Elm Street Realty Trust v. Commissioner, 76 TC 803, at 809 (1981); and Bedell Trust v. Commissioner,
86 TC 1207, at 1218 (1986).
the us tax classification of canadian mutual fund trusts  n  961
associates, and (2) whether the trust has an objective to carry on a business.
Treas. reg. section 301.7701-1(b) uses the same language.41
Finally, the preamble to the regulations that reformed the entity classification rules recognizes the same distinction (and did not alter the regulations
regarding trusts).42 Naturally, a Canadian mutual fund trust has an objective
to carry on a business; this is the raison-d’être of a mutual fund. Additionally,
Canadian mutual fund trusts have “associates,” since the units in the trust are
transferable.43 Therefore, Canadian mutual fund trusts do not meet the definition of an “ordinary” trust.
2.An investment trust. In Elm Street Realty Trust and Bedell Trust,44 an investment trust is defined as a trust created to “facilitate direct investment in the
assets of the trust” through a pooling arrangement that creates the opportunity to diversify investments. This definition is reflected in the Treasury
regulations.45 It seems to describe a Canadian mutual fund trust. However, if
the trustee has the power to vary the investments of the trust, it will be considered a business entity.46 Canadian mutual funds rely on this power on
behalf of the trustee. Indeed, the ability to rely on the expertise of the trustee
in varying the investments of the fund is part of the value proposition of
Canadian mutual fund trusts. As a result, Canadian mutual fund trusts fall
under the “business entity” category rather than the trust category.47
Does the Entity Have More Than One Member?
Provided that the entity is not a trust and is not caught by any special set of rules,
its classification is determined by looking at the number of members the entity has.
If it has only one member, it is indistinguishable from its owner and is disregarded
for entity classification purposes.48 If the entity has two or more members, it can be
41 The full text of Treas. reg. section 301.7701-1(b) reads, “For the classification of organizations
as trusts, see Treas. Reg. section 301.7701-4. That section provides that trusts generally do not
have associates or an objective to carry on business for profit. Sections 301.7701-2 and
301.7701-3 provide rules for classifying organizations that are not classified as trusts.”
42 TD 8697, 1997-1 CB 215 (preamble to Treas. reg. section 301.7701-1): “The regulations
provide that trusts generally do not have associates or an objective to carry on business for
profit. The distinctions between trusts and business entities, although restated, are not changed
by these regulations.”
43 See Carter G. Bishop, “Forgotten Trust: A Check-the-Box Achilles’ Heel” (2010) 43:3 Suffolk
University Law Review 529-64, at 555; Bedell Trust, supra note 41, at 1220-21; and Morrissey v.
Commissioner, 296 US 344, at 360 (1935).
44 Supra note 40.
45 Treas. reg. section 301.7701-4(c)(1).
46 Ibid.
47 Ibid.; see also Reed, supra note 1, at 34 for a discussion of this distinction.
48 Treas. reg. section 301.7701-2(a).
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either a partnership or a corporation.49 While “member” is not defined in the regulations, the term is generally understood to be synonymous with “beneficial owner.”50
As an investment product offered to a wide range of people, a Canadian mutual
fund trust will typically have many beneficial owners (members). It is therefore
either a corporation or a partnership for US tax purposes.
Is the Entity Automatically Classified as a Corporation?
The Treasury regulations define seven different kinds of “automatic” corporations.51
If the entity does not meet any of these definitions, it must be examined under the
default entity classification rules.52 A Canadian mutual fund trust does not meet any
of these definitions.53
Is the Entity Domestic (American)?
The first step of the default classification analysis is to determine whether the entity
is domestic or foreign. An entity is classified as foreign if it is not domestic.54 Domestic entities are only those organized under the laws of the United States or of
any state thereof.55 Since a Canadian mutual fund trust is not organized under the
laws of the United States or of any state thereof, it is a foreign entity.
Is the Entity an “Eligible Entity”?
If an entity is not an “automatic” corporation as described above, it is generally an
“eligible entity.” As an “eligible entity,” it may elect to be classified as a corporation
or a partnership for US tax purposes.56 Since a Canadian mutual fund does not fall
into any of the seven enumerated categories, it is likely an eligible entity and may
elect taxation as either a partnership or a corporation.57
49 Ibid.
50 Reed, supra note 1, at 35.
51 An entity is automatically classified as a corporation if it meets any of the following definitions:
(1) Treas. reg. section 301.7701-2(b)(1)—it is a business entity organized under a federal or state
statute that is referred to as incorporated; (2) Treas. reg. section 301.7701-2(b)(3)—it is a business
entity organized under a state statute that refers to the entity as a “joint stock company or
joint-stock association”; (3) Treas. reg. section 301.7701-2(b)(4)—it is an insurance company;
(4) Treas. reg. section 301.7701-2(b)(5)—it is a state-chartered entity that conducts banking
activities; (5) Treas. reg. section 301.7701-2(b)(6)—it is wholly owned by a foreign government;
(6) Treas. reg. section 301.7701-2(b)(7)—it is taxable as a corporation under a specific section
of the IRC; and (7) Treas. reg. section 301.7701-2(b)(8)—it is on the per se corporations list.
52 Specifically, if an entity is not automatically classified as a corporation under any of the Treas.
reg. sections cited in note 51, supra, it is an “eligible entity that may select its classification.”
53 See supra note 51.
54 IRC section 7701(a)(5).
55 IRC section 7701(a)(4).
56 Treas. reg. section 301.7701-3(a).
57 Ibid.
the us tax classification of canadian mutual fund trusts  n  963
The IRS has issued private letter rulings (PLRs) that seem to agree with this view.
In PLR 200752029,58 the IRS ruled that a mutual fund trust in an unnamed jurisdiction was a foreign eligible entity that could elect its classification under Treas. reg.
section 301.7701-3(a).
The IRS performed an analysis similar to the one conducted above. It first established that the entity was separate from its owners. The entity was not an ordinary
trust, as a result of its profit-making motive. The trustee had the power to vary the
investment, thereby barring classification as an investment trust. The trust did not
meet one of the “automatic” corporation definitions. Accordingly, the mutual fund
trust was a foreign eligible entity and could elect treatment as either a corporation
or a partnership for US tax purposes.59
In this case, the fund had elected to be classified as an association taxable as a
corporation. The fund represented that it was not a PFIC, a position that was accepted by the IRS. The PLR does not address the default classification of a mutual
fund if the fund chooses not to elect either entity option.
Although the PLR follows the analysis outlined above, it does not state the country of origin of the fund, thereby making a direct application of the reasoning to
Canadian mutual funds somewhat difficult. However, the PLR does make it clear
that a mutual fund trust may be a foreign eligible entity.60
In PLR 200024024,61 the IRS followed the same steps as in the PLR discussed
above, but this time for a “fonds commum [sic] de placement” organized under the
laws of a foreign jurisdiction. The IRS concluded that the fund was a “business entity”
within the meaning of Treas. reg. section 301.7701-2(a) and was not an “automatic”
corporation. Accordingly, it was an “eligible entity” and could elect its classification
for federal tax purposes.
As in PLR 200752029, the IRS did not make it clear what the default classification
of the trust would be. Regardless, the PLR confirms that a mutual fund trust may be
a foreign eligible entity.
Is the Entity a Default Partnership or Corporation?
Any foreign eligible entity with more than a single member may elect to be classified as a partnership or a corporation for US tax purposes on form 8832.62 However,
if this election is not made, the entity will have a default classification. Since 1997,
the only benchmark used to distinguish between default classification as a partnership or as a corporation is whether the members have limited liability. By this logic,
a foreign eligible entity with two or more members is by default a partnership if at
58 Internal Revenue Service, PLR 200752029, September 11, 2007.
59 Reed, supra note 1, at 35.
60 Ibid.
61 Internal Revenue Service, PLR 200024024, March 15, 2000.
62 IRS form 8832, “Entity Classification Election.”
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least one member does not have limited liability.63 On the other hand, the entity is
by default a corporation if all of its members have limited liability.64
Do the Beneficiaries of Canadian Mutual
Fund Trusts Have Limited Liability?
The Level of Liability Required Under the IRC
The question as to whether beneficiaries of a mutual fund trust have sufficient limited liability that those trusts are considered corporations under US law involves the
interplay between US tax law and Canadian trust law. To start out, consider what
level of limited liability is required under US tax law for an entity to be classified as
a corporation for US tax purposes. The definition of “limited liability” under Treas.
reg. section 301.7701-3(b)(2)(ii) is whether “the creditors of the entity may seek
satisfaction of all or any portion of the debts or claims against the entity from the
member as such [emphasis added].” It is unclear precisely what level of liability is
required to meet this definition. However, applying the standard approach to the
interpretation of statutes in the United States,65 the plain meaning of the word
“any” suggests that limited liability is a litmus test, meaning that if the members
have even the smallest risk of personal liability, the entity may not have limited liability as defined in the Treasury regulations.66
The US Supreme Court has interpreted the word “any” in a similar manner, albeit in a different context. In United States v. Gonzales et al., the court wrote:
Read naturally, the word “any” has an expansive meaning, that is, “one or some indiscriminately of whatever kind.” . . . Congress did not add any language limiting the
breadth of that word, and so we must read §924(c) as referring to all “term[s] of
imprisonment.” . . . There is no basis in the text for limiting §924(c).67
This suggests a reading of the word “any,” where there is no limiting language, as
being indicative of a litmus test. This interpretation is also iterated in United States
v. Alvarez-Sanchez, where a statute referring to “any” law enforcement is deemed to
include all law enforcement officers.68 Finally, Lewis v. United States 69 notes the importance of a lack of modifying language. In that case, the scope of the term “court”
63 Reed, supra note 1, at 35.
64 Treas. reg. section 301.7701-3(b)(2)(i).
65 Lynch v. Alworth-Stephens Co., 267 US 364, at 370 (1925): “[T]he plain, obvious, and rational
meaning of a statute is always to be preferred to any curious, narrow, hidden sense that nothing
but the exigency of a hard case and the ingenuity and study of an acute and powerful intellect
would discover.”
66 Reed, supra note 1, at 35.
67 United States v. Gonzales et al., 520 US 1, at 5 (1997).
68 United States v. Alvarez-Sanchez, 511 US 350, at 350, 356, and 358 (1994).
69 Lewis v. United States, 445 US 55 (1980).
the us tax classification of canadian mutual fund trusts  n  965
was in question. The US Supreme Court held that where “[n]o modifier is present,
and nothing suggests any restriction,” no restriction ought to be read into the statute.70 There is no restrictive language present in the definition of limited liability in
the Treasury regulations.71
Accordingly, US principles of statutory interpretation and case law demand an
expansive reading of the word “any” in determining the question of liability. Put
differently, the Treasury regulations should be read to mean that the merest possibility of liability is sufficient to qualify an entity as a default partnership under the
entity classification rules.
The rejoinder to this reading is foreseeable. On this logic, even a Canadian corporation would not be classified as a corporation for US tax purposes because its
shareholders have some potential personal liability (owing to the risk that the corporate veil may be pierced). But this rejoinder ignores the fact that entities (such
as a Canadian corporation) that are akin to a US corporation are placed on the per
se corporations list discussed above. Classes of entities that function similarly to a
US corporation are simply put on this list to remove any doubt. Canadian mutual
fund trusts are not on this list. Canadian corporations are. Further, entities subject
to these default rules have the option of electing their classification. This means that
for many entities, their default status is irrelevant—their owners will simply elect
their preferred classification. Consequently, the objection that the Treasury regulations should not be read this way is meritorious but rebuttable.
A purposive reading of the definition of limited liability further suggests that a
Canadian mutual fund trust should be classified as a partnership by default. The intent
of the classification mechanism is straightforward: Entities that resemble corporations should be taxed as corporations; entities that more closely resemble partnerships
should be taxed as partnerships. Setting aside the liability question for the moment,
from a tax perspective a Canadian mutual fund trust functions much more like a
partnership than a corporation. It is a flowthrough entity that normally pays no
entity-level tax. As in a general partnership, most of the decisions made by the trust
are made by the trustee (akin to a general partner) on behalf of many other passive
participants.
From a broader policy perspective, equity favours the position that Canadian
mutual funds are partnerships for US tax purposes. There are strong arguments that
the PFIC regime was not intended to apply to Canadian mutual funds. The regime
was enacted as part of the Tax Reform Act of 1986.72 The Joint Committee on Taxation’s bluebook, which explains the reasons behind the significant tax reform, sets
out the purpose of the PFIC rules as follows:
70 Ibid., at 60.
71 See also Collector v. Hubbard, 79 US 1 (12 Wall) 1, at 15 (1870); Maine v. Thiboutot, 448 US 1, at
4 (1980); Department of Housing and Urban Development v. Rucker, 535 US 125, at 130-31
(2002); and Brogan v. United States, 522 US 398, at 400-1 (1998).
72 Pub. L. no. 99-514, enacted on October 22, 1986.
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Congress did not believe that tax rules should effectively operate to provide U.S. investors tax incentives to make investments outside the United States rather than inside
the United States. Since current taxation generally is required for passive investments
in the United States, Congress did not believe that U.S. persons who invest in passive
assets should avoid the economic equivalent of current taxation merely because they
invest in those assets indirectly through a foreign corporation.73
Canadian mutual funds do not provide any tax deferral to a US person investor.
They distribute all of their income annually for both Canadian and US tax purposes.
Thus, applying the PFIC rules to Canadian mutual fund trusts does not serve the
purpose that the PFIC rules were designed to achieve.
Classification of a Canadian mutual fund trust as a partnership would subject a
US person investor to roughly the same US taxation as if that person had invested in
a US RIC.74 The analogy is fruitful. There is no tax policy justification, compelling
or otherwise, to subject a Canadian-resident US person investor to a significantly
more punitive tax regime than that which would apply to a US-resident US person
investor for investing in common consumer financial products located in the invest­
or’s country of residence. Why should a US citizen who is resident in Canada pay
80 percent tax to a foreign country on the sale of his or her retirement assets? There
is no good answer.
Admittedly, these policy arguments may not prove useful in the interpretation
and application of the default US entity classification rules. But they do lend colour
and context to the analysis. In our view, along with the technical analysis provided
here, they would be helpful in persuading the US Tax Court to find that a Canadian
mutual fund trust is a partnership for US tax purposes, if it were ever asked to address
the question. Furthermore, there is some precedent in support of the argument that
a purposive approach should be used when interpreting statutes. In this case, such a
reference would make sense given the inherent mismatch between a PFIC and a “plain
vanilla” Canadian investment product. Such an approach is set out in King v. Burwell
where the US Supreme Court decided that words must be read “in their context and
with a view to their place in the overall statutory scheme.”75 Reference to the context
73 United States, Staff of the Joint Committee on Taxation, General Explanation of the Tax Reform
Act of 1986, JCS-10-87 (Washington, DC: US Government Printing Office, May 4, 1987), at
1023.
74 Investment Funds Institute of Canada (IFIC), “Re: Senate Finance Committee’s Request for
Input on Improving the U.S. Tax Code—Comments Regarding Territorial Taxation and the
Passive Foreign Investment Corporation Rules,” submission to the United States Senate
Committee on Finance, April 15, 2015 (www.ific.ca/wp-content/uploads/2015/04/IFIC
-Submission-%E2%80%93-U.S.-Senate-Finance-Committee-%E2%80%93-Reforming
-the-U.S.-Tax-Code-April-15-2015.pdf/10437/).
75 King v. Burwell, United States Supreme Court docket no. 14-144 ( June 25, 2015). See also
Graham County Soil and Water Conservation Dist. v. United States ex rel. Wilson, 559 US 280, at
290 (2010); and Hardt v. Reliance Standard Life Ins. Co., 560 US 242, at 251 (2010).
the us tax classification of canadian mutual fund trusts  n  967
and purpose of the Code and Treasury regulations indicates that Canadian mutual
funds are not the intended target of the PFIC rules.
Limited Liability Is a Question of Canadian Law
Ultimately, the analysis turns on local law.76 Thus, if it can be shown that, as a matter of Canadian law, the beneficiaries have any potential liability, a Canadian mutual
fund trust may be classified by default as a partnership for US tax purposes. There is
a persuasive argument that the beneficiaries of certain funds organized in certain
provinces do not have limited liability. As noted earlier, at different times Ontario
(in 2004), Manitoba (in 2005), Alberta (in 2004), British Columbia (in 2006), and
Saskatchewan (in 2006) passed legislation that granted limited liability to the beneficiaries of mutual fund trusts.77 Prior to the enactment of legislation, there were
concerns that the beneficiaries of Canadian mutual fund trusts did not enjoy limited
liability. The Bank of Canada issued a report in 2003 that concluded, “[A]lthough
this [personal liability of unitholders] is legally feasible, a number of Canadian securities firms have given legal opinions that there is little probability of this type of
event occurring.”78 Similarly, the government of Alberta issued a report referring to
potential personal liability of unitholders, concluding that “although the chances
are thought to be remote, such an occurrence could have a potentially devastating
impact on the financial well-being of unit holders.”79 The government of Saskatchewan, in justifying its statute, stated, “[I]n situations where the trust property is
insufficient to cover the liabilities, beneficiaries may be called upon to indemnify
the trustee for amounts in excess of the investor’s initial investment.”80
The Bank of Canada and the governments of Alberta and Saskatchewan identified
a remote, but still real, risk that beneficiaries of Canadian mutual fund trusts faced
liability exposure. Limited liability statutes were enacted by several provinces as a
result of these identified risks. Governments do not legislate without reason, and the
provinces that chose to enact such statutes would not have done so had the risk not
been real. Furthermore, as Robert Flannigan notes, “it was [the] state of the law that
propelled the demand for a statutory immunity for business trust beneficiaries.”81
The next section explores in more detail the type of limited liability faced by Canadian mutual fund trusts.
76 Treas. reg. section 301.7701-3(b)(2)(ii).
77 See supra notes 28-32. Also see supra note 27, with respect to similar legislation enacted in
Quebec.
78 Michael R. King, Income Trusts: Understanding the Issues, Bank of Canada Working Paper
2003-25 (Ottawa: Bank of Canada, September 2003), at 19.
79 Alberta Revenue, Income Trusts: Governance and Legal Status, a Discussion Paper (Edmonton:
Alberta Revenue, July 2004), at 5.
80 Government of Saskatchewan, “Income Trust Liability Act” (www.justice.gov.sk.ca/Income
-Trust-Liability-Act).
81 Robert Flannigan, “The Political Path to Limited Liability in Business Trusts” (2006) 31:3
Advocates Quarterly 257-92, at 275.
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Sources of Liability Under Canadian Law—The Indemnification Risk
Mark Gillen (of the University of Victoria Faculty of Law) has written an excellent
article on the liability exposure of beneficiaries of Canadian mutual fund trusts.82
His article focuses on the issue from a Canadian business-law perspective rather
than a US tax perspective.
Gillen identifies three sources of potential liability for the beneficiaries of mutual
fund trusts. Two are pertinent here. First, beneficiaries of mutual fund trusts could
be liable for the debts of the trustee because the trustee and, more importantly, the
trustee’s creditors have the right to be indemnified out of the assets of the fund. If
there are insufficient assets in the fund, the beneficiaries might be liable to the
creditors. This is known as the indemnification risk. It functions as follows. Under
Canadian law, a trust cannot be liable in contract or tort because it is not a legal
person.83 But the trustees (usually financial institutions in the case of retail mutual
fund trusts) are legal persons. In carrying out their duties as trustees, they may enter
into contracts, and they may commit torts. As a matter of general Canadian trust
law, if trustees incur liability in the course of performing their duties, they are entitled to indemnification out of the assets of the trust.84
This right to indemnity is commonly found in the organizing documents that
govern Canadian mutual fund trusts. For instance, the trust documentation that the
Royal Bank of Canada (RBC) uses for its mutual funds includes a clause under which
the trustee can be indemnified for all liability that it incurs, while acting in good faith,
out of the assets of the fund.85 As Gillen notes, such provisions may expose the beneficiaries of a trust to liability for the trustee’s debts: “If the trust assets and the trustee’s
assets were insufficient to meet the liability, then the trustee’s creditors might seek
82 Mark R. Gillen, “Income Trust Unitholder Liability: Risks and Legislative Response” (2005)
42:3 Canadian Business Law Journal 325-70. This section is largely based on the ideas in Gillen’s
article. We are indebted to him for his work on this issue (albeit in a different context). (Readers
should note that we have relied on Gillen’s citation of source documents and have reproduced a
number of his footnotes verbatim, without editing or verifying the form and content of those
citations. In all cases, we have indicated that such reference notes are taken from Gillen’s article.)
83 Gillen, ibid., at 332, note 21: “See, e.g., Kingsdale Securities Co. Ltd. v. MNR, 74 DTC 6674, at
6681 (FCA). See also Sir Arthur Underhill and David J. Hayton, Law Relating to Trusts and
Trustees, 15th ed. (London: Butterworths, 1995), at 4.”
84 Gillen, supra note 82, at 332, note 23: “See, e.g., Waters’ Law of Trusts in Canada, at 1155: ‘The
trustee is entitled to be indemnified for all the costs, charges and expenses which he has
reasonably incurred.’ See also Trustee Act, RSBC 1996, c. 464, as amended, section 95, which
provides that ‘a trustee [. . .] is answerable and accountable only for the trustee’s own acts,
receipts, neglects or defaults, and not for those of other trustees or a banker, broker or other
person with whom trust money or securities may be deposited, nor for the insufficiency or
deficiency of securities or any other loss, unless it happens through the trustee’s own willful
default, and may reimburse himself or herself, or pay or discharge out of the trust premises, all
expenses incurred in or about the execution of his or her trusts or powers.’ ”
85 Royal Bank of Canada, RBC Funds, “Amended and Restated Master Declaration of Trust,”
June 27, 2014 (http://funds.rbcgam.com/pdf/financial-reports-and-prospectuses/rbc
-declaration-of-trust.pdf ), at article XVIII(3).
the us tax classification of canadian mutual fund trusts  n  969
to enforce the right of indemnification in their favour.”86 Thus, the beneficiaries
may be liable for the debts of the trustee and the fund in their entirety.87
This liability risk to the beneficiaries is often offset by a provision in the trust
agreement that releases the beneficiaries from liability; for instance, the RBC trust agreement releases the unitholders from any liability.88 Nevertheless, it is not clear if—in
bankruptcy, for example—a third-party creditor would be required to respect this
agreement. In sum, an entitlement to indemnification creates a theoretical, though
perhaps remote, risk that the beneficiaries of a mutual fund trust may not have limited liability.
Sources of Liability Under Canadian Law—The Control Risk
The second potential source of liability is referred to as the control risk.89 The control risk arises because the beneficiary-trust relationship may also be classified as a
principal-agent relationship. A principal-agent relationship arises “when the principals
control the agent’s action, both the principal and agent consent to the relationship,
and the agent has legal authority to affect the principal’s legal position.”90
An agency relationship is a question of fact. It does not require a legal agreement
between the parties.91 It can be inferred from the circumstances. If a trustee is found
to be an agent on behalf of one or more beneficiaries, the beneficiaries may be held
directly liable as principals. A trustee may be found to be an agent of the beneficiaries
where the beneficiaries have a significant degree of control over the acts performed
in respect of the trust.
Beneficiaries of Canadian business trusts have been found liable in some cases
because of the existence of a principal-agent relationship. For instance, in Trident
Holdings Ltd. v. Danand Investments Ltd.,92 the Ontario Court of Appeal found that
the parties were in an agency arrangement by virtue of the control that the beneficiaries had over the agent, and therefore the beneficiaries were liable for the debts of
the trustee.
Similarly, in Advanced Glazing v. Multimetro et al., the Supreme Court of British
Columbia found that the beneficiaries had “the general power to control the conduct of MMC such that MMC is their agent” and “the broad power of investor control
enables the investors to be personally liable” for the debts of the trustee.93 There is
86 Gillen, supra note 82, at 333.
87 Ibid., at 332-33.
88 Supra note 85, at article XVIII(2). See Reed, supra note 1, at 36, for an argument that such a
provision effectively shields beneficiaries from liability.
89 Gillen, supra note 82, at 343.
90 Grosvenor Canada Limited v. South Coast British Columbia Transportation Authority, 2015 BCSC
177, at paragraph 58.
91 Ibid., at paragraph 59.
92 (1988), 64 OR (2d) 65 (CA).
93 2000 BCSC 804, at paragraph 73.
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no minimum legal threshold of control at which an agency relationship is created.94
Each set of facts and circumstances must be analyzed. As the court put it in Advanced
Glazing, “where both agent and trust relations exist, the greater the power of control over the agent/trustee the greater the likelihood that the principles of agency,
rather than the principles of trust, are applicable.”95
These principles are applicable to mutual fund trusts. Beneficiaries of mutual fund
trusts have powers over the trustees that, very generally, often include the power to
change the investment objectives of the fund, replace the trustees, and increase or
decrease the amount of funds payable to the trust. The RBC declaration of trust, for
instance, includes a clause that allows the unitholders to vote over “any other matter
in respect of which applicable Securities Legislation would apply.”96
It is true that the organizing documents of mutual funds generally restrict the
amount of control that a beneficiary can exercise. For instance, they often reserve
specific investment decisions to the trustee. This might suggest a level of control
that would not rise to the level of agency. However, there is Canadian case law that
indicates that even explicit contractual language does not ultimately remove power
from the beneficiaries of a business trust. This case law includes the following:
n
n
n
Orange Capital LLC v. Partners Real Estate Investment Trust.97 The court upheld
unitholder voting rights in relation to action by the trustee (or replacement
thereof, as in this case), even in the face of contractual terms to the contrary,
on the basis of achieving a “commercially sensible result.”98
Crown Hill Capital Corp. (Re).99 The fiduciary duty of the trustee in a business
trust was held to include obtaining explicit informed consent of the unitholders where there is reasonable doubt as to whether the trustee can or cannot
enter into a given contract.100 Deferral to the trustee’s judgment by virtue of
the “business judgment rule” was found not to apply.101
Renegade Capital Corporation v. Dominion Citrus Limited.102 The court found
trustees to be obligated to seek explicit approval of action that may be materially adverse to the interests of the unitholders themselves despite the fact
that the powers of the unitholders were severely limited by contract.103
94 Grosvenor, supra note 90, at paragraph 64.
95 Advanced Glazing, supra note 93, at paragraph 67.
96 Supra note 85, at article 16.12.1.4.
97 Orange Capital LLC v. Partners Real Estate Investment Trust, 2014 ONSC 3793.
98 Ibid., at paragraph 49.
99 Crown Hill Capital Corp. (Re), 2013 LNONOSC 656.
100 Ibid., at paragraph 114.
101 Ibid., at paragraph 145.
102 Renegade Capital Corporation v. Dominion Citrus Limited, 2013 ONSC 1590.
103 Ibid., at paragraph 138.
the us tax classification of canadian mutual fund trusts  n  971
The point here is not to draw a firm conclusion as a matter of Canadian law that
the control risk means that beneficiaries have liability for the debts and obligations
of a Canadian mutual fund trust. This remains a contentious point under Canadian
law. Rather, we suggest that this risk is real enough to arguably push the default US
tax classification of Canadian mutual funds to a finding of partnership—especially
in the absence of a statute stating otherwise.
That said, while there is some contention in circumstances where control over
the trustee is not absolute, there is none where the trustee is a “mere” agent, or
“bare” trustee, of the beneficiary (as was the case in Trident). Thus, as Flannigan
notes, there is no reason to assume that the same cannot be true in cases where the
beneficiary has some control over the trustee—for instance, where the unitholders
of a business trust can exercise some control over a trustee with discretion.104
The attractiveness of this argument from a US tax perspective is that the control
risk is widely accepted as a matter of US law regarding US business trusts.105 This
means that a US court adjudicating a dispute over the US tax classification of a Canadian mutual fund trust would be familiar with the grounds on which trust beneficiaries
may be held liable for the debts and obligations of the fund and may be favourably
disposed to such a finding.
How Does the Change in Liability Status Affect the US Tax
Classification of a Canadian Mutual Fund Trust?
Absent a statute to the contrary, the above analysis indicates at least some potential
liability for the beneficiaries of Canadian mutual fund trusts. If the analysis is correct, between 1997 (when the current Treasury regulations were enacted) and 2004
(or the other appropriate date when the statute granting beneficiaries limited liability was enacted), beneficiaries of such trusts did not have limited liability because of
the control risk. Thus, under the entity classification regulations in place since
1997, Canadian mutual fund trusts were classified as partnerships. After the limited
liability statutes were enacted, in cases where the statutes applied, the liability status
of the beneficiaries changed. However, the US tax classification of the mutual fund
trust did not change. Treasury reg. section 301.7701-3(a) reads in part:
104 See supra note 81, at 275.
105 Gillen, supra note 82, at 337, note 36: “See, e.g., Williams v. Milton, 102 N.E. 355 (Mass. S.J.C.
1913); Frost v. Thomson, 106 N.E. 1009 (Mass. S.J.C. 1914); Home Lumber v. Hopkins, 190 P. 601
(1920); Neville v. Gifford, 242 Mass. 124, 136 N.E. 160 (1922); Goldwater v. Altman, 292 P. 624
(1930); Levy v. Nellis, 1 N.E. 2d 251 (1936); State Street Trust Co. v. Hall, 311 Mass. 299, 41
N.E. 2d 30 (1942); Piff v. Berresheim, 92 N.E. 2d 113 (1950), revg 86 N.E. 2d 411 (1949); In re
Medallion Realty Trust, 120 B.R. 245 (1990 D. Mass.); and In Re Eastmare, 150 B.R. 495 (1993
Bankr. D. Mass.); but see contra Lawyer’s Title Guarantee Fund v. Koch, 397 So. 2d 455 (Fla. App.
1981). See also the discussion in Symposium, Closely Held Businesses in Trust: Planning,
Drafting and Administration (1981) 16 Real Prop. Prob. & Trust J. 341.”
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An entity whose classification is determined under the default classification retains that
classification (regardless of any changes in the members’ liability that occurs at any time during the time that the entity’s classification is relevant as defined in paragraph (d) of this section)
until the entity makes an election to change that classification under paragraph (c)(1)
of this section [emphasis added].
In other words, a mutual fund trust retains its initial default classification until it elects
otherwise. A mutual fund trust established prior to the enactment of the statutes was
arguably a partnership for US tax purposes. Because of the above Treasury regulation, it remains a partnership for US tax purposes until it elects otherwise despite the
subsequent change in its liability status. Few, if any, Canadian mutual fund trusts
have made a US entity classification election, even though they are able to do so.106
Partnerships cannot be PFICs. So the case can be made that Canadian mutual fund
trusts established prior to 2004 (or the later date of an applicable statute) are not
PFICs as a function of their retaining their original default entity classification.
Classification of Canadian Mutual Funds Prior to 1997
As noted above, the current rules for entity classification were adopted in 1997.
Thus, for Canadian mutual funds formed after January 1, 1997 but prior to 2004 (or
the date of an applicable statute), the above argument will apply perfectly. More
consideration needs to be given to funds that were organized prior to 1997. In
short, it can still be argued that funds formed prior to 1997 were classified under the
previous set of US entity classification regulations (known as “the Kintner regulations”) and thus were (and remain) classified as partnerships for US tax purposes.
That classification needs to be examined.
Application of the Kintner Regulations
to Canadian Mutual Fund Trusts
It is arguable that under the Kintner regulations, which were in effect between 1960
and 1997, Canadian mutual fund trusts were classified as partnerships for US tax
purposes. The Kintner regulations used a four-factor test to determine entity classification. The four factors were continuity of life, centralized management, limited
liability, and free transferability of interests. An entity that had at least three of these
four factors was considered a corporation. Each of these factors was applied as outlined below:
1.Continuity of life. Continuity of life meant that the entity continued after the
death or exit of one member from the entity.107 This is clearly the case for
Canadian mutual fund trusts.
106 Reed, supra note 1, at 36.
107 Former Treas. reg. section 301.7701-2(a)(1).
the us tax classification of canadian mutual fund trusts  n  973
2.Centralized management. Centralized management meant that an identifiable
group of people, distinct from the entire membership of the entity, had the
power to make management decisions on behalf of the entity.108 As discussed
above, because of the fiduciary relationship between the trustee and the
beneficiaries of a Canadian mutual fund trust, the beneficiaries have a certain
amount of control over the trustee that is inherent in the structure of the
trust and applicable regardless of what the organizing document states. This
level of control by the beneficiaries may rise to the level necessary to constitute a lack of centralized management, especially in light of some of the cases
discussed above. The management structure of a Canadian mutual fund trust
may be another indicator of a lack of central management and control.
Often, the trustee of the mutual fund trust has the power to appoint a manager. Whether this delegation is sufficient to conclude that there is a lack of
centralized management is unclear. Against these two points lies the broad
authority of a trustee of a mutual fund trust to make investment decisions
over which the beneficiaries have little influence. In sum, it is not clear
whether a Canadian mutual fund trust would be considered to have centralized management.
3.Limited liability. Limited liability had the same meaning that it has under the
post-1997 regulations. For the reasons described above, it is arguable that
not all members of a Canadian mutual fund trust have limited liability.
4.Free transferability of interests. Free transferability of interests meant that each
member of an entity had the power to transfer all attributes of ownership of
that member’s interest in the entity to a person that was not currently a
member of the entity without the consent of the other members.109 There is
a reasonable argument that units of the typical Canadian mutual fund are not
freely transferable because, unlike corporate shares, they can only be sold
back to the fund itself or transferred with consent of the fund administrator.
Transition Between the Kintner Regulations
and the Check-the-Box Regulations
To fully understand the current default classification of Canadian mutual fund
trusts, it is necessary to examine the transition between the Kintner regulations and
the “check-the-box” regulations. Generally, unless it elected otherwise, an entity
retained the classification under the check-the-box regulations that it had under the
Kintner regulations.110 Thus, because there is an argument that Canadian mutual
108 Former Treas. reg. section 301.7701-2(c)(1).
109 Former Treas. reg. section 301.7701-2(e)(1).
110 Treas. reg. section 301.7701-3(b)(3) (as amended by TD 8697, supra note 42) (providing that
an entity not making the election will have the same classification as claimed before the 1997
regulations came into effect).
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fund trusts were partnerships under the pre-1997 regulations, that classification can
carry forward to 1997 and after as well. Absent an election, the IRS will respect the
claimed pre-1997 classification of an entity after January 1, 1997 if
1. under the pre-1997 rules, the entity had a “reasonable basis” for its claimed
classification;
2. any change in the entity’s status within 60 months prior to January 1, 1997
was recognized by all of the entity’s members; and
3.the IRS did not notify the entity before May 8, 1996 that the entity’s classification was under review.111
All three criteria can be satisfied. The position described above (that the pre-1997
period classification of a Canadian mutual fund trust was a partnership) is clearly
“reasonable.” That status likely did not change within the 60 months before 1997,
and the IRS likely did not notify Canadian mutual fund trusts of a change in classification. In short, there is an acceptable position to be taken that a Canadian mutual
fund trust was a partnership under the Kintner regulations. If there is a reasonable
basis for the pre-1997 position, the IRS should respect it after January 1, 1997.
Consider the alternative. What if a US court did not accept that under the Kintner regulations a Canadian mutual fund trust was a partnership for US tax purposes?
Two scenarios are possible. First, assume that a court concludes that a Canadian
mutual fund trust was a corporation under the Kintner regulations and also, despite
all of the arguments to the contrary above, under the check-the-box regulations.
The US person investor would then have continuously owned shares in a foreign
corporation since the date of purchase of the shares. If the foreign corporation was
a PFIC, the results could be very expensive. Second, assume that a US court accepts
that a Canadian mutual fund trust was a partnership for US tax purposes under the
check-the-box regulations, but not under the Kintner regulations. Further assume
that if the trust was a corporation, it was also a PFIC. Under this scenario, the Canadian mutual fund trust ceased to be a corporation for US tax purposes on January 1,
1997 when the check-the-box regulations came into effect. This would result in a
deemed liquidation of the fund for US tax purposes and thus liability for PFIC tax
recognizable by all US person investors in the trust in 1997. At first glance, this
might appear to be a bad result. But if US person investors who currently invest in
a Canadian mutual fund trust did not own their investment in 1997, they do not
have to worry about a deemed liquidation. The trust itself is not subject to US tax—
only its US person investors’ interests are. For US person investors who did own an
interest in a fund that underwent a deemed liquidation in 1997, this year is likely
statute-barred, so as a practical matter, the question of liability for tax in respect of
the liquidation is irrelevant.
111 Treas. reg. section 301.7701-3(h)(2).
the us tax classification of canadian mutual fund trusts  n  975
Put simply, for US tax purposes, the conversion of the trust from a corporation
to a partnership is relevant only to those who owned an interest in the fund at that
time, and even then any tax consequence is barred by the statute of limitations. In
short, although the classification is more complicated for funds organized prior to
1997, there remains a reasonable argument that the funds were and remain partnerships for US tax purposes.
Conclusion: Funds Organized Prior
to 2004 Are Likely Not PFICs
There are grounds to argue that certain Canadian mutual fund trusts that were organized before the enactment of the limited liability statutes are partnerships and
not corporations for US tax purposes, and thus not PFICs. This is because the beneficiaries of these funds did not have limited liability. This position is not risk-free.
Even prior to the enactment of the limited liability statutes, the liability exposure of
beneficiaries of Canadian mutual fund trusts was remote. It is thus possible that a
US court would conclude that the liability is so abstract and theoretical that, for the
purposes of US law, it does not count and that all of the members of the mutual fund
do indeed have limited liability.
This possibility is illustrated by analogy to a Canadian corporation. As a matter of
law, Canadian corporations provide limited liability. Accordingly, they are automatically treated as corporations for US tax purposes. Even so, shareholders of Canadian
corporations will occasionally be subject to liability for the debts and obligations of
the corporation. Canadian courts will pierce the corporate veil and subject the
shareholders to liability for the debts and obligations of the corporation if it is just
and equitable to do so.112 US courts, without any reference to Canadian mutual
funds, have drawn a similar analogy. In Yamagata v. United States,113 the US Federal
Court of Claims held that a Japanese kabushiki kaisha was a corporation for US tax
purposes despite the fact that the owners had some theoretical liability for the debts
of the entity.
Nevertheless, the above analysis shows that such liability may be possible, even
if unlikely. In litigation, often the simplest argument wins. The position that Canadian mutual funds formed prior to the enactment of the limited liability statutes
are not PFICs is relatively easy to grasp. Until 2004, there was a problem of potential
liability exposure for beneficiaries of mutual fund trusts. The mutual fund industry
lobbied for a remedy. So governments introduced a new law to solve the problem.114
Under the US rules, the entity classification status of a Canadian mutual fund trust
organized prior to 2004 (or the year of an applicable statute) is frozen until an election
112 Kosmopoulos v. Constitution Insurance Co., [1987] 1 SCR 2.
113 Docket nos. 07-698T and 07-704T (Fed. Ct. Cl. 2014).
114 Supra notes 28-32.
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is made otherwise. Therefore, Canadian mutual fund trusts that were previously
classified as partnerships remain partnerships for US tax purposes.
It is more likely than not that a US court reviewing this position would conclude
that funds formed prior to the enactment of the statutes granting limited liability to
investors in the fund, as of today, are not corporations for US tax purposes and thus
cannot be PFICs.
Trusts Not Subject to the Limited Liability
Statutes May Also Be Partnerships
The second strategy to achieve partnership classification for a Canadian mutual
fund trust is to argue that the limited liability statutes simply do not apply to certain
trusts. These mutual fund trusts are still exposed to the control risk, and thus for the
reasons outlined above they may be, by default, partnerships for US tax purposes.
There are two groups of funds to which this analysis might apply. First, Canadian
mutual fund trusts organized in a jurisdiction where there is no limited liability
statute obviously cannot claim coverage by such a statute. Second, the limited liability statutes only apply to certain Canadian mutual fund trusts. For instance, the
Ontario statute115 only applies to trusts that are “reporting issuers.” Thus, funds
that are not “reporting issuers” under the relevant provincial securities legislation
may not be corporations for US tax purposes, and thus may not be PFICs, by virtue
of the liability exposure of their beneficiaries resulting from the control risk.
Newly Formed Trusts Can Elect To Be Partnerships
The third strategy for a Canadian mutual fund trust to achieve partnership classification is to elect it on formation. As discussed above, Canadian mutual fund trusts are
foreign eligible entities under the US entity classification regime.116 This is confirmed by PLR 200752029 described above.117 The election is made by filing form
8832. It must be made at the fund level. The election would work very well for newly
created funds. From the commencement of the fund, it would indisputably be a
partnership for US tax purposes, regardless of the liability of its beneficiaries. The
election does not work as well for existing funds. It can be used to confirm a fund’s
existing status as a partnership (a protective election), but it only applies retroactively
for the prior 75 days. The risk with this option is that if, before making the election,
the trust was considered a corporation for US tax purposes, the conversion from a
corporation to a partnership would constitute a liquidation and trigger PFIC tax for
the US person investors. Funds should not make this election without being confident that they have always been partnerships for US tax purposes.
115 Supra note 28.
116 Treas. reg. section 301.7701-3(a).
117 See supra note 58 and the related text.
the us tax classification of canadian mutual fund trusts  n  977
All Canadian Mutual Fund Trusts May Be
Partnerships for US Tax Purposes
A fourth possible strategy is to take the position that all Canadian mutual fund
trusts are partnerships for US tax purposes—not just those organized prior to the
enactment of the limited liability statutes or those to which the statutes do not
apply. There is an argument to this effect. It is a “reasonable position” required
under IRC section 6662. But the argument is risky, and it might not hold up in litigation. It runs as follows.
Regardless of any legislation in place, beneficiaries of a Canadian mutual fund
trust are subject to the control risk described earlier. Arguably, the limited liability
statutes protect only against the indemnification risk, and not the control risk. For
example, section 1(1) of the Ontario Trust Beneficiaries’ Liability Act reads in part:
The beneficiaries of a trust are not, as beneficiaries, liable for any act, default, obligation or liability of the trust or any of its trustees if, when the act or default occurs or
the obligation or liability arises. . . .118
On a “plain meaning” reading, this provision protects the beneficiaries from liability
only as beneficiaries, and not as principals for the acts of their agents.119 So the beneficiaries are still subject to the control risk. The text of the Alberta statute is the same.
This argument rests on a theoretical point. There is no case law on its merits.
Given the legislature’s intention to protect beneficiaries of Canadian business trusts,
a Canadian court may be reluctant to hold the beneficiaries personally liable, even
though they may be liable as principals rather than as beneficiaries. Nevertheless,
the liability risk remains, and it may be sufficient to result in classification of the
fund as a partnership for US tax purposes, or to at least support the adoption of such
classification as a filing position, given the requirement of the “limited liability”
definition that no member may be held liable for “any portion” of creditors’ claims
against the entity.
There are other scenarios in which the beneficiaries of a Canadian mutual fund
trust covered by a limited liability statute have liability risks. Assume, for example,
that the mutual fund trust invests in a REIT outside a jurisdiction with such a statute.
The investment generates liability for the mutual fund trust, but there is no statute
to protect the beneficiaries. Accordingly, the creditors of the mutual fund trust may
be able to attempt to collect debts and obligations of the trust from the beneficiaries.
This risk is specifically disclosed in the documentation of many mutual fund trusts.
For instance, RBC’s Simplified Prospectus states:
A fund that invests in trusts faces the risk that, as a holder of units of a trust, the fund
may be held liable and subject to levy or execution for satisfaction of all obligations
and claims of the trust. This risk may arise with income trusts, which include real estate
118 Supra note 28, at section 1.
119 Gillen, supra note 82, at 359-62.
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investment trusts and other forms of business trusts. The risk is considered remote.
Alberta, Ontario, Saskatchewan, British Columbia and Manitoba have legislation to
eliminate this risk in respect of holders of units of trusts that are reporting issuers organized under the laws of such provinces. To the extent that the funds are subject to such
claims and such claims are not satisfied by the fund, there is a risk that a unit holder of the fund
could be held personally liable for the obligations of the trust. The possibility of a unit holder
incurring personal liability of this nature is considered extremely remote.120
Although, as the RBC disclosure statement suggests, the risk may be “extremely
remote,” it is important to recognize that it does exist. Given that the Treasury
regulations state that there is no limited liability where there is the potential for
personal liability for “any” debts of the trust, this liability risk may be sufficient to
support a position that a Canadian mutual fund trust is, by default, not a corporation
for US tax purposes. The acknowledgment of risk indicates at the very least an awareness of the potential exposure of unitholders. As noted in the discussion of statutory
interpretation above, the mere presence of any liability is enough to classify an entity
as a partnership. The fact that Canadian mutual funds continue to disclose this risk
to unitholders indicates that the risk is indeed real. Accordingly, it could be argued
that even mutual funds covered by limited liability legislation are not corporations
under the US entity classification rules in Treas. reg. section 301.7701.
It may be unlikely that a US court would judge the risk sufficient to give rise to
the degree of exposure for beneficiaries of a mutual fund trust required to support
classification of the trust as a partnership for US tax purposes. Regardless, this position may be sufficiently meritorious to be taken on a US tax return, as a result of the
strict meaning of the word “any.” For the beneficiaries of Canadian mutual fund
trusts that are covered by a limited liability statute, there is a position that can be
taken, albeit a less securely grounded one, that despite the statutes, Canadian mutual fund trusts are partnerships for US tax purposes.
T H E P U B L I C LY T R A D E D PA R T N E R S H I P R U L E S
W I L L N O T D E N Y F L O W T H R O U G H TA X AT I O N
We have presented above four strategies that support the position that a Canadian
mutual fund trust can be classified as a partnership for US tax purposes. Certain
large partnerships, however, are at risk of being taxed as corporations if they are
deemed to be “publicly traded partnerships” (PTPs). As long as a Canadian mutual
fund trust is not registered with the US SEC under the 1940 Investment Company
Act (as is generally the case),121 the PTP rules should not prevent it from being taxed
as a flowthrough entity for US tax purposes.
120 Royal Bank of Canada, RBC Funds, Simplified Prospectus (Toronto: RBC Global Asset
Management: June 2011), at 8 (emphasis added).
121 See supra note 37 and the related text. As noted earlier, only funds organized in the United
States as “regulated investment companies” (RICs) must register under the 1940 Act. Many
Canadian mutual funds include language in their prospectuses indicating that they are not
the us tax classification of canadian mutual fund trusts  n  979
The PTP rules were designed to protect the US corporate tax base by preventing
large businesses from reducing their liability for tax by simply operating as partnerships. IRC section 7704 provides that a PTP is treated as a corporation for all federal
tax purposes (including the application of the PFIC rules).122 A partnership is “publicly traded” if interests in it are “traded on an established securities market” or are
“readily tradable on a secondary market or the substantial equivalent thereof.”123
Most Canadian mutual fund trusts available to the public will meet these criteria.124
Thankfully, there is an exception, which is known as the “qualifying income exception.” An entity deemed to be a PTP does not constitute a corporation for a taxable
year if, for that taxable year and each preceding taxable year during which the partnership was in existence, 90 percent of the gross income of the partnership was
“qualifying income.”125 “Qualifying income” includes interest, dividends, rents
from real property, gain from the sale of real property, gain from the sale of stock,
income and gains from commodities, and a few more esoteric items.126 Most Canadian mutual fund trusts earn nothing but dividends, interest, and capital gains, and
so would easily qualify for this exception.
The qualifying income exception is, however, limited. IRC section 7704(c) states
that a PTP will not be taxable as a corporation if 90 percent of its income is passive.
However, IRC section 7704(c)(3) limits the applicability of this exception. The qualifying income exception does not apply to “any partnership, which would be described
in section 851(a) if such partnership were a domestic corporation.” In turn, IRC
section 851(a) reads:
For purposes of this subtitle, the term “regulated investment company” means any
domestic corporation—
(1) which, at all times during the taxable year—
(A) is registered under the Investment Company Act of 1940, as amended (15
USC 80a-1 to 80b-2) as a management company or unit investment trust, or
(B) has in effect an election under such Act to be treated as a business development company, or
(2) which is a common trust fund or similar fund excluded by section 3(c)(3) of
such Act (15 USC 80a-3(c)) from the definition of “investment company” and is not
included in the definition of “common trust fund” by section 584(a) [emphasis added].
registered in the United States. This language is usually very similar to the following: “The
funds and the securities offered under this Simplified Prospectus are not registered with the
United States Securities and Exchange Commission and they are sold in the United States only
in reliance on exemptions from registration.” National Bank Investment, Jarislowsky Fraser
Funds Simplified Prospectus (Montreal: National Bank Investment, September 2014), note on the
title page (www.jflglobal.com/media/uploads/documents/2014-11/Prospectus_EN.pdf ).
122 IRC section 7704(a).
123 IRC section 7704(b).
124 Treas. reg. section 1.7704-1(c)(1); Treas. reg. section 1.7704-1(c)(2).
125 IRC section 7704(c)(2).
126 IRC section 7704(d)(1).
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Thus, the question that must be answered is the following: If a Canadian mutual
fund trust were a US domestic corporation, would it meet the description in IRC
section 851(a)? To answer this question, it is necessary to examine IRC section 851(a)
in detail.
The preamble of section 851(a) is easily dispensed with. If a Canadian mutual
fund trust were hypothetically considered a US domestic corporation, it would obviously be an entity that is described in the preamble.
Next, consider the three operative clauses. Taking the last two first, section
851(a)(1)(B) would not apply, given that no Canadian mutual fund trust has made or
would make such an election. Furthermore, such an election would prima facie establish the entity as registered under the 1940 Act and, as noted, that is normally
not the case. Section 851(a)(2) also would not apply. Section 3(c)(3) of the 1940
Investment Company Act applies only to funds and trusts that “are employed by a
bank solely as an aid to the administration of trusts, estates, or other accounts created
and maintained for a fiduciary purpose” and are also “not advertised or offered for
sale to the general public.”127 Canadian mutual fund trusts are not aids to a fiduciary
product; they are collective investment vehicles. Further, they are advertised to the
general public. Therefore, even if they were domestic corporations, they would not
meet the conditions in section 851(a)(2).
Only section 851(a)(1) might, but ultimately does not, describe a Canadian mutual fund trust, assuming that it could be considered a US domestic corporation.
The plain meaning of the phrase “at all times during the taxable year—is registered”
is that a PTP must actually be registered under the 1940 Investment Company Act
in order to be denied reliance on the qualifying income exception. Accepted rules
of US statutory interpretation, discussed above, suggest that this reading is correct.128 Since Canadian mutual fund trusts do not register under the 1940 Act, they
cannot be described by IRC section 851(a), even with the hypothetical addition of
domestic status.
This view is supported by legislative history. The congressional report enacting
the legislation in 1987 explained IRC section 7704(c)(3) as follows:
As under the House bill, the provision [section 7704(c)] does not apply to any partnership that would be described in sec. 851(a) if it were a domestic corporation. Thus, a
publicly traded partnership that is registered under the Investment Company Act of
1940 generally is treated as a corporation under the provision.129
This statement was repeated verbatim in the Senate Committee Report to the 1997
Taxpayer Relief Act.130 This language makes it clear that the legislative intent in
127 Investment Company Act of 1940, supra note 37.
128 See supra note 65 and the related text.
129 HR rep. no. 100-495, 100th Cong., 1st sess. (1987), at 946.
130 HR rep. no. 105-220, 105th Cong., 1st sess. (1997), at 471.
the us tax classification of canadian mutual fund trusts  n  981
enacting IRC section 7704(c)(3) was to deny the qualifying income exception only to
those PTPs that are actually registered under the 1940 Act. A US law firm reached
the same conclusion in an opinion that it rendered publicly (available on the SEC
website),131 as did the authors of a publication of the Bureau of National Affairs in
a comment on section 7704.132
In short, although Canadian mutual fund trusts will likely be subject to the PTP
rules, as long as they are not registered under the 1940 Investment Company Act
they will be able to benefit from the qualifying income exception, because by far the
largest portion of their revenue is passive income. The PTP rules should not deny a
Canadian mutual fund trust flowthrough taxation for US tax purposes.
FILING REQUIREMENTS OF INDIVIDUAL
I N V E S T O R S U N D E R A PA R T N E R S H I P
C L A S S I F I C AT I O N
Taking the position that a Canadian mutual fund trust is a partnership for US tax
purposes is very beneficial for individual US person investors. Most obviously, the
funds are not PFICs for US tax purposes, and thus the individual investor does not
have to deal with a punitive tax regime designed to combat offshore tax deferral. The
annual compliance burden for the individual investor is also dramatically reduced.
Assuming that the Canadian mutual fund trust is a partnership for US tax purposes, the US person investor owns a small fraction of a foreign partnership. The
income from this partnership will have to be reported on form 1040 (“U.S. Individual Income Tax Return”); however, no additional reporting is required unless the US
person’s investment in a single Canadian mutual fund exceeds a specified threshold
in a given year.133 Form 8865 must be filed if a US person investor’s share of all interests in a foreign partnership is greater than 10 percent or if a US person investor
contributes more than US $100,000 to a foreign partnership in a taxable year. The
vast majority of investors in large mutual funds will not fall into either of these categories. A more cautious taxpayer basing his or her tax filing on the partnership
classification may want to pre-emptively disclose that position to the IRS on form
8275 (“Disclosure Statement”), which is used to disclose unorthodox tax positions.
Filing the form insulates the taxpayer from some penalties and may shorten the
time period under the statute of limitations (the period within which the IRS must
audit a return before a reassessment becomes statute-barred).134
131 Skadden, Arps, Slate, Meagher and Flom LLP, “Re: MacroShares Major Metro Housing Down
Trust,” opinion letter from Skadden, Arps, Slate, Meagher and Flom LLP, 2008 (www.sec.gov/
Archives/edgar/data/1435967/000111650208001226/exhibit81.htm).
132 Matthew W. Lay, Eric Sloan, and Amy Lutton, Publicly Traded Partnerships, Tax Management
Portfolio no. 723 (Arlington, VA: Bureau of National Affairs, 2012), at 45.
133 IRC section 6038.
134 IRC section 6662(d)(2)(B)(ii)(I).
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F I L I N G O B L I G AT I O N S F O R M U T U A L F U N D S
T H AT A R E PA R T N E R S H I P S
The filing obligations that accompany a partnership classification can be onerous
for an investment fund that invests in the United States. For funds that do not invest in the United States, there are no filing obligations. A foreign partnership that
does not have income effectively connected with a US trade or business or US-source
income does not have to file a US tax return or provide a form K-1 to its investors.135
If a Canadian mutual fund trust chooses to invest in the United States, it will likely
have to file a form 1065 annually and issue form K-1 to its US person investors, or
to all investors if the trust is engaged in a US trade or business.136 Most Canadian
mutual fund trusts are not engaged in a US trade or business because they trade only
in securities on their own account and do not act as a broker or dealer that sells US
securities directly to customers.137
D R A W B A C K S O F PA R T N E R S H I P C L A S S I F I C AT I O N
Potentially Increased US Estate Tax Risk
A potential drawback for Canadian mutual fund trusts that adopt a partnership classification is the increased US federal estate tax risk to which such a move may expose
their non-US investors. However, even for funds that invest in the United States,
there is a reasonably strong argument that their investors should not be subject to
US estate tax.
US estate tax applies to decedents, including Canadians who are not US person
investors, who have US-situs assets at their death. Stocks issued by a US corporation
are US-situs assets and thus subject to estate tax.138 The question is whether US
stocks owned through a Canadian mutual fund trust are US-situs assets. If the Canadian mutual fund trust is a corporation for US tax purposes, there is no US estate
tax exposure since the beneficiary owns stock in a foreign corporation. The estate tax
applies only to stock issued by a US domestic corporation.139
However, as noted above, partnerships are flowthrough entities for US tax purposes. Thus, the owners of the partnership may be assumed to own its assets directly.
It is unclear whether owning US-situs assets through a foreign partnership subjects
a non-US person investor to US estate tax. It may be that a foreign partnership interest (such as an interest in a Canadian mutual fund trust that has adopted partnership
135 Schedule K-1 to IRS form 1065, “U.S. Return of Partnership Income.” See Treas. reg. section
1.6031(a)-1(b)(1)(i).
136 Treas. reg. section 1.6031(a)-1(b)(3).
137 IRC section 864(b)(2)(A)(ii).
138 IRC section 2104(a).
139 Ibid.
the us tax classification of canadian mutual fund trusts  n  983
classification for US tax purposes) would be considered foreign intangible property
and therefore not subject to US estate tax.140
Furthermore, there is a view that a beneficiary’s interest in a partnership is characterized as a personal property interest in the partnership itself rather than in the
underlying assets held by the partnership.141 It would follow that in the case of a
partnership like a mutual fund, where the individual investor does not have the
power to vary the investments (despite having some control over the trustee), interests in the fund would be treated as foreign personal intangible property. Equity
would favour this view, since investors in mutual funds do not have investment expertise and, for that reason, buy units in such a fund as assets in and of themselves.
Part of the value proposition of the mutual fund is the particular expertise of the
trustee.
Where this is the case, the interest in the partnership is commonly treated as
being similar to stock in a company for estate tax purposes. Accordingly, the situs of
the investor’s interest is determined on the basis of where the partnership is managed, rather than the situs of the underlying assets. This understanding is set out in
the US-Australia treaty, article III(1)(g) of which provides that “a partnership shall
be deemed to be situated at the place where the business of the partnership is carried on.”142
The IRS refuses to clarify the question of potential estate tax exposure and will
not issue rulings on it.143 However, in the event that US partnership status does expose a non-US person investor in a Canadian mutual fund trust to US estate tax,
Canadian residents benefit from a significant exemption from such tax under the
Canada-US treaty.144 As long as the total value of a Canadian resident’s estate is
US $5.43 million or less (the 2015 credit amount), there will be no liability for US
estate tax if the appropriate forms are filed. This means that very few Canadian residents would have any US estate tax exposure.
The estate tax issue remains an important consideration for Canadian mutual
fund trusts considering the adoption of a partnership structure at the institutional
level. Such trusts should be alert to the potential US estate tax risk to potential investors who are not US person investors. This risk does not matter for individual US
citizen investors in Canada who may be considering adopting the partnership position on a US tax return; those investors will be subject to US estate tax by virtue of
140 Treas. reg. section 20.2014-1(a)(1).
141 Jeffrey A. Schoenblum, Multistate and Multinational Estate Planning, vol. 2, section 20.05[i], at
156.
142 The Convention Between the Government of the United States of America and the Government
of Australia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with
Respect to Taxes on Income, signed at Sydney, on August 6, 1982, as amended by the protocol
signed on September 27, 2001.
143 Treas. reg. section 20.2105-1(e); Rev. proc. 2000-7, 2000-1 CB 227.
144 Canada-US treaty, article XXIX B(2).
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their citizenship. Nor does it matter for Canadian mutual fund trusts that do not
invest in the United States, since only US-situs property is subject to US estate tax.
Where the issue does matter is in contemplating the consequences for Canadian investors who could be exposed if the United States were to rule against the traditional
understanding that such partnership interests are similar to stock in a corporation
from an estate tax perspective.
Potentially Higher Canadian Withholding
There is one further potential drawback of a partnership classification—denial of
benefits to the trust under the Canada-US treaty. This drawback applies only to
Canadian mutual fund trusts that take the position that they are partnerships at an
institutional level. The issue is irrelevant for an individual investor taking a partnership position on his or her US tax return. A denial of treaty benefits would require a
Canadian mutual fund trust to withhold Canadian tax at a rate of 25 percent on
payments to US residents.145 Fortunately, there is a reasonable argument that treaty
benefits should not be denied. Even if treaty benefits are denied, US-resident investors can simply use the extra Canadian tax withheld as a foreign tax credit against
their personal US taxes. If extra Canadian tax is owed, because the US-resident investor has insufficient foreign-source income to make full use of the foreign tax
credit, this is still a preferable result than the application of the PFIC regime.
Article IV(7)(b) of the Treaty Should Not Apply
Article IV(7)(b) of the Canada-US treaty will deny treaty benefits to a US resident
who receives payments from a Canadian mutual fund trust if all of the following
conditions are met:
1. Under the laws of Canada, the US resident is considered to have received the
payments from an entity resident in Canada.
2.Under US law, the mutual fund trust is fiscally transparent.
3.Under US tax law, the treatment of the amount received is not the same as it
would be if the Canadian mutual fund trust were fiscally transparent.
The first two criteria are easily satisfied. For Canadian tax purposes, the mutual
fund trust is a resident of Canada and, if classified as a partnership, it is fiscally
transparent for US tax purposes.
The third criterion is trickier. There is an argument, which is not flawless, that
the US tax treatment of a distribution to a US resident from a Canadian mutual fund
trust electing partnership classification is similar to the US tax treatment that would
apply to the distribution if the fund were a corporation for US tax purposes. To start
out, consider one of the examples offered by the technical explanation to the 2007
145 Part XIII of the Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended.
the us tax classification of canadian mutual fund trusts  n  985
protocol to the treaty.146 The example involves a US corporation that is the sole
shareholder of a Canadian unlimited liability company (ULC), which is a disregarded
entity for US tax purposes. The ULC pays a dividend to the US corporation. For Canadian tax purposes, this payment is a dividend. For US tax purposes, the payment is
disregarded. Had the ULC elected a corporate classification for US tax purposes, the
payments from the ULC to the US corporation would have been a dividend for US tax
purposes. This is quite a different result than that under a scenario where a ULC is
a fiscally transparent entity. Accordingly, article IV(7)(b) applies and treaty benefits
are denied. From this, we can infer that the payment has to take on a substantially
different character in order for article IV(7)(b) to apply.
Fundamentally, this is a Canadian tax question because the matter at issue is
how much Canadian tax a Canadian mutual fund trust would have to withhold on a
payment to a US resident. Thus, it is the views of the Canada Revenue Agency (CRA)
on article IV(7)(b) that need to be considered. The CRA has addressed the “same
treatment” test in a few different rulings. For example, in CRA document no. 20090318491I7, it stated:
The determination of whether the quantum of the amount is not the same under Article
IV(7)(b) is made without reference to losses, deductions or credits available under the
[US Internal Revenue] Code in computing the United States tax liability of the recipient
of the amount, or in the computation of the consolidated taxable income of a group of
corporations which includes the recipient. In other words, the determination of same
treatment will be made by reference to the gross amount of the item of income.147
Importantly, this ruling indicates that it is gross income that is the important
amount, not the amount of US tax paid. The CRA further spells out the three key
factors to be considered in making the determination:
1. the timing and recognition of the amount,
2. the character of the amount, and
3. the quantum of the amount.
The comparison that must be made in order to determine whether the same
treatment would apply under a partnership classification and a corporate classification is straightforward. The timing, character, and quantum of the amount received
by a US resident from a distribution by a Canadian mutual fund trust must be the
same as determined under US tax rules regardless of the classification of the entity.
146 Department of the Treasury Technical Explanation of the Protocol done at Chelsea on
September 21, 2007 amending the Convention between the United States and Canada with
respect to taxes on income and on capital done at Washington on September 26, 1980, as
amended by the Protocols done on June 14, 1983, March 28, 1984, March 17, 1995, and
July 29, 1997.
147 CRA document no. 2009-0318491I7, November 13, 2009.
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Otherwise, Canada will deny treaty benefits and extra tax will have to be withheld
from the payment to the US resident. For the purposes of this discussion, assume
that under both classifications the Canadian mutual fund trust does not engage in a
US trade or business through a US permanent establishment, so that there is no
entity-level US corporate tax.
The quantum of the income to the US resident under US tax principles will be
the same under both classifications. Canadian mutual fund trusts normally distribute all of their income. Under both classifications, the quantum will be the sum of
distributions received by the US resident. A corporate or partnership classification
does not change this. Similarly, the timing of the receipt of the income will be the
same under both a corporate and a partnership classification: the income will be
received in the year in which it is distributed by the fund.
The character of the income may be slightly different. If a Canadian mutual fund
trust is a partnership for US tax purposes, all of the income will retain its character
for US tax purposes when it flows through to the investor. If the fund is a corporation,
and not a PFIC, then all of the income that is distributed will be dividend income for
US tax purposes. Therefore, the character will be different. But the odds are that if
Canadian mutual fund trusts are corporations for US tax purposes, they will be PFICs.
The PFIC regime imposes a special tax regime that is different than the tax regime
applicable if the fund elects classification as a partnership. Nevertheless, if the fund
is a PFIC, a US investor will likely take the QEF election. This will, in spirit, make the
fund a flowthrough entity for US tax purposes—meaning that the tax treatment of
the distribution will be very similar to that of a Canadian mutual fund trust that has
elected partnership classification. So there is a scenario (and one that is likely to
occur)—namely, where a US person investor takes the QEF election—under which
the distributions will maintain essentially the same character regardless of the Canadian mutual fund trust’s classification. The flaw in this argument is obvious: to
achieve similar character of income, an election is necessary under US law. Still, that
election is likely to be made.
A purposive approach to applying article IV(7)(b) buttresses this conclusion. Article IV(7)(b) is an anti-avoidance rule that was designed to deter the creation of
structures whereby interest is deducted twice or an interest deduction is taken
without a corresponding inclusion of income. The US Joint Committee on Taxation
report on the proposals for the 2007 protocol makes it clear that the intended purpose of article IV(7)(b) was to prevent
(1) duplicated interest deductions in the United States and Canada, or (2) a single,
internally generated interest deduction in one country without offsetting interest income in the other country.148
148 United States, Staff of the Joint Committee on Taxation, Explanation of Proposed Protocol to the
Income Tax Treaty Between the United States and Canada, JCX-57-08 (Washington, DC: Joint
Committee on Taxation, July 8, 2008), at 100.
the us tax classification of canadian mutual fund trusts  n  987
A US partnership classification of a Canadian mutual fund trust achieves neither
of these unwanted results. All that it avoids is the application of an extremely punitive tax regime to a mundane consumer financial product that thousands use to save
for retirement. In short, to the extent that it matters to the CRA or to a Canadian tax
court, equity favours the non-application of article IV(7)(b). There is a reasonable
technical argument that article IV(7)(b) should not apply. Given equitable considerations, the CRA may be inclined to agree.
Even the Application of Article IV(7)(b)
Is Not Overly Problematic
If article IV(7)(b) were to apply, Canadian mutual funds would have to withhold
25 percent of payments made to US-resident investors. This would be in excess of
what is currently withheld. There are a number of factors that make this additional
withholding less expensive to the US-resident investor than it might otherwise be.
First, under the Income Tax Act, without regard to the treaty, the withholding
would not apply to US-resident investors who hold the investment in a registered
retirement, education, or disability savings plan, a tax-free savings account, or other
registered plan.149 Many Canadian mutual funds are held inside registered plans.
Second, the Income Tax Act exempts from withholding capital gains allocated to
non-resident beneficiaries and capital distributions from certain mutual fund
trusts.150 The 25 percent withholding would apply only to distributions of dividends
from the fund; it would not apply to dispositions of the units of the fund. Third, a
foreign tax credit would be available under the US tax system for the full amount of
the withholding. Excess credits that cannot be used in one year can be carried forward
for 10 years. Finally, from the perspective of the US-resident investor, increased
Canadian withholding is vastly superior to the application of the PFIC regime, with
its very punitive tax consequences and complex reporting requirements.
Overview of Drawbacks
A partnership classification for a Canadian mutual fund trust removes the onerous
PFIC regime. We have discussed four strategies above. Both individual investors and
fund administrators can use three of them. The fourth, a formal partnership election, can only be made at the fund level. A partnership classification imposes a low
burden on the individual investor. Not only are the punitive PFIC rules eliminated,
but the annual tax reporting is also made much easier.
For fund administrators, a partnership classification is virtually painless for funds
that do not invest in the United States. There is no compliance obligation and no
increased US estate tax risk. Further, administrators do not have to trouble themselves with providing the QEF paperwork and can guarantee that their funds are
149 See supra note 145.
150 Ibid., paragraph 104(21)(b).
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PFIC-free. For funds that do invest in the United States, a partnership classification
makes everything more complex, and the benefits are less clearcut. However, the
prospect of being able to attract US person investors by having a PFIC-free mutual
fund may outweigh the potential compliance costs.
CO N C L U S I O N : P F I C P R O B L E M S A R E S O LVA B L E
The PFIC regime was established in 1986 to combat offshore tax deferral. As befits
such a regime, its rules are complex and punitive. It was never designed to apply to
the retirement savings of US person investors who reside outside the United States.
Indeed, from a tax policy perspective, there is no justification (compelling or otherwise) for its application. A common view is that Canadian mutual fund trusts are
corporations for US tax purposes and thus very likely PFICs. This view emerged in
2010 after the issuance of CCA 201003013. This CCA did not focus on the US tax
classification of Canadian mutual funds, nor did it include any facts or analysis related to the mutual funds at issue. Indeed, it simply stated a conclusion. The CCA
specifically states that it is not binding on taxpayers. Put simply, a single sentence in
a non-binding memorandum led many practitioners to adopt the position that Canadian mutual funds were PFICs, out of a concern for the onerous consequences of
being subject to this regime.
In this article, we have set out to show that the PFIC problems facing US person
investors in Canadian mutual funds are not irresolvable. We have done so by exploring solutions based on two different classifications of Canadian mutual fund trusts.
Canadian mutual fund trusts are either corporations or partnerships for US tax purposes. Assuming that they are corporations, there are three strategies for solving the
PFIC problem: holding the investment in an RRSP, making the QEF election, or
making the mark-to-market election. All three strategies are largely unsatisfactory.
RRSP contribution room is limited. Both the QEF and the mark-to-market elections
require the payment of PFIC tax on any prior accumulated gain before they work
properly. Also, both elections may result in double taxation and require the investor
to undertake complex and expensive annual compliance work.
Alternatively, Canadian mutual fund trusts can be partnerships for US tax purposes.
The key factor in the choice between classification as a partnership and classification
as a corporation is whether the investors have any liability. If the investors have limited liability, the trust is a corporation for US tax purposes. If the investors have any
liability, the trust is a partnership for US tax purposes. US rules of statutory interpretation indicate that this is a litmus test that hinges on the plain meaning of the
word “any.”
Until the early 2000s, this liability exposure was sufficient to discourage institutional investment in Canadian mutual fund trusts, and it was recognized by politicians,
practitioners, and investment advisers that the risk was not merely theoretical. Several
provincial governments responded by enacting statutes granting limited liability to
the unitholders of Canadian mutual fund trusts, starting in 2004.
The investors in Canadian mutual fund trusts formed prior to the enactment of
these statutes had liability for the debts and obligations of the fund. Thus, all funds
the us tax classification of canadian mutual fund trusts  n  989
were likely partnerships for US tax purposes prior to 2004. The enactment of the
statutes may have changed the liability status of the investors, but it did not alter
the US tax classification of the funds already formed under the US regulations. Trusts
to which the statutes do not apply, because they are organized in provinces without
a statute or because they are not “reporting issuers,” are also likely partnerships.
Fund administrators can very easily make an election to classify newly formed trusts
as partnerships for US tax purposes. Finally, there is an argument, albeit a riskier
one, that all Canadian mutual fund trusts are partnerships (even those covered by
provincial legislation and formed after 2004) because, even with the enactment of
the statutes, the investors’ liability remains.
A partnership classification poses little problem for an individual investor. All it
requires is for the income from the fund to be reported on the US person investor’s
annual form 1040. No special paperwork is required. Many US person investors in
Canada who are unaware of the PFIC problem, or unwilling to grapple with the
complexity and expense of confirming the US treatment of their investment, have
already been relying on this strategy (perhaps unknowingly). Given the uncertainty
and complexity in this area, and the lack of an official IRS position, there is nothing
preventing the individual investor from taking his or her own view of the US tax
classification of an investment—even if a fund’s administrators have taken a contrary
position. For fund providers, a partnership classification can retroactively provide
PFIC relief to all of a fund’s investors. There is little downside in adopting this strategy for funds that do not invest in the United States. Adopting it for funds that do
invest in the United States is more complicated and more expensive, but may ultimately be more attractive to potential US person investors.
In short, the mutual fund trust structure that is so common in Canada need not
be a tax hazard to US taxpayers who invest in these funds. Such an outcome is relieving to the millions of Canadians who either have US citizenship or have moved to
the United States and whose retirement savings might have otherwise faced a rather
expensive tax penalty.
canadian tax journal / revue fiscale canadienne (2015) 63:4, 991 - 9 2
Policy Forum: Editors’ Introduction—
Targeted Tax Credits
The determination of the tax base in an income tax can be separated into two steps.
First, we must decide how various streams of income are to be combined—fully
included, partially included, or exempted. Next, we must decide to what degree we
will take account of taxpayers’ particular circumstances through credits and deductions. Many allowances are broad-based; an example is the basic personal amount.
Others are targeted to specific taxpayer groups or apply to specific types of spending
or activities. In this policy forum, we examine the increasing preponderance of
targeted tax credits in the Canadian personal income tax system.
All personal income tax systems feature exemptions of various types that take
into account individual taxpayers’ circumstances. Traditionally, these have been
justified as adjustments to a taxpayer’s ability to pay. If a taxpayer has expenses that
do not enhance his or her well-being (for example, medical expenses), the abilityto-pay approach suggests that the tax liability should be adjusted to account for
those expenses.
Since the election of the Conservative government in 2006, there has been a
renewed emphasis on tax adjustments for personal circumstances, such as spending
on public transit, children’s fitness, and student textbooks. Critics have often derisively referred to these new measures as “boutique tax credits,” to emphasize their
narrow and particular focus. Critics have also charged that these credits increase the
complexity of the tax system, fail to deliver changes in behaviour, and are targeted
unfairly.
In this policy forum, we present two articles to investigate the case for targeted
tax credits. In the first article, Vincent Chandler provides an analysis of one particular tax credit introduced in 2006, the public transit tax credit. The analysis finds no
evidence of increased transit ridership, and also finds that the non-refundability of
the credit has a material impact on the distribution of the benefits.
The second article offers an economic and policy defence of targeted tax credits.
Ken Boessenkool argues that government can and should alter market prices
through the use of tax incentives in order to shape society. He develops the argument by working through several examples, from children to home ownership to
supporting participation in civil society.
In a future policy forum, Neil Brooks will continue the discussion with a detailed
critique of the targeted tax credit approach to tax policy.
 991
992  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
Governments at both federal and provincial levels, along with political parties of
all stripes, have embraced the targeted tax credit approach. We hope this policy
forum helps to deepen the conversation about a growing aspect of our tax system.
Tim Edgar
Kevin Milligan
Editors
canadian tax journal / revue fiscale canadienne (2015) 63:4, 1001 - 10
Policy Forum: Kids Are Not Boats
Ken Boessenkool*
PRÉCIS
Dans cet article, je soutiens, premièrement, que l’intervention du gouvernement pour
modifier les options de l’économie de marché pure ou encourager les comportements
bénéfiques à la société peut être justifiée. Deuxièmement, je soutiens que le régime
fiscal, y compris les « crédits d’impôt à la pièce » souvent tournés en ridicule, est un
moyen acceptable d’y parvenir. J’aborde ensuite six situations où le gouvernement peut
et doit modifier positivement les comportements au moyen du régime fiscal : lorsqu’un
particulier 1) fonde une famille, 2) a des enfants, 3) engage des dépenses pour gagner un
revenu, 4) possède une maison, 5) économise pour l’avenir, 6) améliore la société civile.
ABSTRACT
In this article I argue, first, that government intervention to alter pure market alternatives,
or to promote socially beneficial behaviours, can be justified. Second, I argue that the tax
system—including often-derided “boutique tax credits”—is an acceptable vehicle for
such intervention. I then discuss six areas where government can, and should, positively
alter behaviour using the tax system: when someone (1) starts a family, (2) has children,
(3) incurs costs to earn income, (4) owns a home, ( 5) saves for the future, or
(6) improves civil society.
KEYWORDS: TAX CREDITS n TAX DEDUCTIONS n TAX EXPENDITURES n TAX POLICY n TAX REFORM n
FAMILY ALLOWANCES
CONTENTS
Introduction
When Governments Intervene . . .
. . . They Should Consider Using the Tax System . . .
. . . To Encourage the Following Things
Starting a Family
Having Children
Earning an Income
Owning a Home
Saving for Retirement
Improving Civil Society
Concluding Thoughts
1002
1002
1003
1007
1007
1007
1008
1008
1009
1009
1010
* Founding partner, KTG Public Affairs, Calgary. I benefited enormously from discussions with
my colleague Sean Speer and review comments from Tim Edgar and Kevin Milligan.
 1001
1002  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
The point, remember, is not just that statecraft should be soulcraft. My point is that statecraft
is soulcraft. It is by its very nature. Statecraft need not be conscious of itself as soulcraft; it
need not affect the citizens’ inner lives skillfully, or creatively, or decently. But the one thing
it cannot be, over time, is irrelevant to those inner lives.
George F. Will, Statecraft as Soulcraft: What Government Does
(New York: Touchstone, 1983), at ii.
INTRODUC TION
The central argument of George Will’s book Statecraft as Soulcraft: What Government Does 1 is that governments by their very nature affect not only the external
behaviour but also the “inner life” of citizens. To put it another way, government
cannot be neutral on matters of social values. Or, as Brian Lee Crowley asks, “What
do governments have to do with the character of the people who live under them?”2
The role of government in shaping social values is generally not thought to be
controversial for “thou shalt nots,” which are embodied in legislated sanctions.
Criminal law is the most obvious evidence that our government is not neutral with
respect to certain forms of behaviour, such as murder and stealing. This is not to say
that social values are not matters of difficult and vigorous public debate and do not
change or shift—as they have, for example, on the question of adultery.
But what about “thou shalts”? In this article I argue, first, that government intervention to alter pure market alternatives, or to promote socially beneficial behaviours,
can be justified. Second, I argue that the tax system—including often-derided “boutique tax credits”—is an acceptable vehicle for such intervention. I then discuss six
areas where government can, and should, positively alter behaviour using the tax
system: when someone (1) starts a family, (2) has children, (3) incurs costs to earn
income, (4) owns a home, (5) saves for the future, or (6) improves civil society.
WHEN GOVERNMENTS INTERVENE . . .
Not so long ago, the Canadian tax system implied that the government’s preference
for children decreased with the income of the family in which those children resided.3
1 George F. Will, Statecraft as Soulcraft: What Government Does (New York: Touchstone, 1983).
2 Brian Lee Crowley, Fearful Symmetry: The Fall and Rise of Canada’s Founding Values (Toronto:
Key Porter, 2009).
3 See Kenneth J. Boessenkool and James B. Davies, Giving Mom and Dad a Break: Returning
Fairness to Families in Canada’s Tax and Transfer System, C.D. Howe Institute Commentary
no. 117 (Toronto: C.D. Howe Institute, November 1998); Kenneth J. Boessenkool and James
B. Davies, “Per-Child Tax Deduction Would Be Fairer,” Calgary Herald, November 27, 1998;
Kenneth J. Boessenkool, “Putting Tax Policy in Its Place: How Social Policy Took Over the
Tax Treatment of the Family,” in John Richards and Douglas W. Allen, eds., It Takes Two: The
Family in Law and Finance, Policy Study no. 33 (Toronto: C.D. Howe Institute, March 1999),
129-69; and Kenneth J. Boessenkool, Give Mom and Dad a Break: Family Friendly Tax Options
for Canada (Montreal: Institute for Research on Public Policy, October 2001).
policy forum: kids are not boats  n  1003
In fact, until recently, middle- and upper-income families received the same tax
treatment for having children that they received for purchasing a boat.4
Should government be neutral with respect to the choice between purchasing a
boat and having a child; between purchasing a boat and preparing for and getting
a job; between purchasing a boat and starting a family (once called marriage); between purchasing a boat and purchasing a home; between purchasing a boat and
saving for retirement; between purchasing a boat and contributing to civil society?
If you are not persuaded a priori by any of these choices, or by the fact that all, or
nearly all, governments of advanced economies have tax preferences for employment,
marriage, children, a home, retirement savings, and the improvement of civil society, consider Thaler and Sunstein’s book Nudge.5 The authors argue that there are
circumstances in which people can be “nudged” toward outcomes that are patently
superior when, because of the way the human brain is wired, they would otherwise
choose the inferior. According to Thaler and Sunstein, real people (as opposed to
the libertarian utopia of pure economic automatons) need a bit of “libertarian paternalism” to nudge them to make better choices when faced with such challenges
as short-term pain for long-term gain; the inability to learn from practice for life’s
big and/or difficult decisions; and the degree of difficulty that some choices pose.
Thaler and Sunstein define “nudges” as follows:
A nudge, as we will use the term, is any aspect of the choice architecture that alters
people’s behavior in a predictable way without forbidding any options or significantly
changing their economic incentives. To count as a mere nudge, the intervention must
be easy and cheap to avoid. Nudges are not mandates. Putting fruit at eye level counts
as a nudge. Banning junk food does not.6
Nudging is almost always a matter of changing or adjusting incentives so that they
overcome the challenges listed above. Thaler and Sunstein talk about both financial
and non-financial nudges. While governments can create non-financial nudges
(through government advertising, using its bully pulpit, etc.), the focus here will be
on financial nudges, and more particularly financial nudges delivered through the
tax system.
. . . T H E Y S H O U L D CO N S I D E R
U S I N G T H E TA X S Y S T E M . . .
Why nudge via the tax system? I argue that the tax system can be an efficient, simple, and fair delivery mechanism.
4 Rhys Kesselman, “The Child Tax Benefit: Simple, Fair, Responsive?” (1993) 19:2 Canadian
Public Policy 109-32, at 117.
5 Richard H. Thaler and Cass R. Sunstein, Nudge: Improving Decisions About Health, Wealth, and
Happiness (New Haven, CT: Yale University Press, 2008).
6 Ibid., at 6.
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(2015) 63:4
Tax policy specialists look through three lenses to see if a tax system is well
designed:
1.Efficiency. Are we minimizing bad economic distortions and maximizing good
ones (nudges)?
2.Simplicity. Are we delivering policy in the most cost-effective manner?
3.Equity or fairness. Are we respecting ability to pay?
Efficiency first. Zelinsky suggests that there are three types of efficiency that one
can use to evaluate a tax system.7 “Universal market efficiency” is closest to the
libertarian utopia in which people are assumed to be pure economic automatons.
Such a world would reject tax expenditures completely. “Sectoral efficiency” has to
do with the allocation of resources across sectors of the economy. This view provides
some guidance to as to how the tax system might be used to improve investment
decisions. Of more interest to the nudge view of tax credits is the third type of efficiency, “technical efficiency,” which has to do with bang for the buck—how do we
get the largest incremental change in taxpayer behaviour?8
Jenn’s analysis of the technical efficiency issue concludes:
[T]he diminishing marginal utility of consumption means that the government can
most cost-effectively induce its desired behavior by offering the marginal incentive at
as low a rate as possible to as broad a group as possible.9
In other words, nudges are best delivered by altering behaviour on the margin using
a low rate—something that can be done relatively easily using the tax system, but
becomes more complex using an expenditure program. The tax system is also efficient at reaching the largest group possible.
Tax breaks can also maintain a greater preference for private choice over government involvement. Indeed, this is the argument frequently used to justify tax credits
for children rather than the provision of, say, government-provided institutional
child care.10 Levmore argues that we should use the tax system rather than direct
spending in cases where “there is some desire to encourage private action (such as
7 Edward A. Zelinksy, “Efficiency and Income Taxes: The Rehabilitation of Tax Incentives”
(1986) 64:5 Texas Law Review 973-1037, at 978.
8 Ibid., at 992.
9 Brian H. Jenn, “The Case for Tax Credits” (2008) 61:2 Tax Lawyer 549-97, at 574. Jenn adds
that this holds whether the public good is additive (with no diminishing returns) or nonadditive. See also Zelinsky, supra note 7, at 977.
10 Levmore explicitly makes the case for “delegation.” A tax credit for children, he argues, “allows
some consumers to allocate federal funds to suppliers, many of whom would not survive if the
federal government itself established and operated child-care centers.” Saul Levmore, “Taxes as
Ballots” (1998) 65:2 University of Chicago Law Review 387-431, at 427.
policy forum: kids are not boats  n  1005
volunteering for the charities to which one contributes) or where the people have
more information than their legislatures.”11
The underlying point here is that asymmetric information between the public
and the government could make programs delivered through tax breaks more efficient, and respond better to individual preferences, than the same program delivered
as spending from a government department. Or, to use political jargon, it is better
to leave money in the hands of taxpayers for them to determine how to spend it
than to give the money to governments for direct spending on specific programs.12
As an example, if we decide that we want government to encourage fitness, should
the government design a program to subsidize gyms and choose which ones should
get public money, or allow Canadians to deduct the cost of fitness programs from
their taxes and make those choices themselves? Surely better outcomes would be
achieved by encouraging individual experimentation rather than imposing topdown policy design. By the same reasoning, the administration of tax credits should
be biased toward flexibility rather than rigidity.
To put it another way, given the same amount of resources, would we prefer a
tax break for children or for child-care expenses over a government-run day-care
program?
Simplicity usually refers to the administrative burden (for the government) or
compliance costs (for the individual or the economy) of a tax measure.
Critiques of boutique tax credits often are fronts for saying we shouldn’t be doing
anything at all—a position that I have addressed in the introduction. But if we accept
that something should be done, then we should try and do it in a way that minimizes
administration costs, or avoids duplicating them. The tax system already collects
much of the data required to adjust incentives, and the administration of the tax
system is increasingly automated. Subsidy programs generally require application
and evaluation forms and processes to be created, and separate bureaucracies to be
set up to administer those programs. Banning the use of boutique tax credits where
something should be done would foolishly increase the costs of administering a
program.
While additional tax credits may make the tax system itself more costly to administer, the question is whether the increased cost would be less if the government
tried to achieve the same thing via a subsidy program. The real question, therefore,
is whether the criterion of simplicity ought to be applied across government or just
narrowly to the tax system itself.
To come at this question another way, Shaviro states, “The basic claim of tax
expenditure analysis, that certain tax rules are ‘really’ spending, is not quite correct,
because ‘taxes’ and ‘spending’ are not coherent categories to begin with.”13 The
11 Ibid.
12 See Filip Palda, “Fiscal Churning and Political Efficiency” (1997) 50:2 Kyklos 189-206.
13 Daniel N. Shaviro, “Rethinking Tax Expenditures and Fiscal Language” (2004) 57:2 Tax Law
Review 187-231, at 188.
1006  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
argument finds its roots in Musgrave’s distinction between the allocative and distributional branches of public finance, where allocation refers to “the amount, use and
character of all assets in society, while distribution affects who has what.”14 Starting
with those distinctions, taxing and spending are “two sides of the same coin and
there is no well-defined correspondence between these nominal categories and the
more theoretically coherent categories of allocation and distribution.”15 In short,
when we want to deliver a nudge, we should be, a priori, agnostic about whether
that is done through tax or expenditure mechanisms. As Weisbach and Nussim say,
[i]f we mistakenly look only at the tax system instead of overall government policy, we will
draw the wrong conclusions. Putting a program into the tax system makes the tax system
look more complicated, but there is unseen simplification elsewhere. The tax system will
seem less efficient, but the efficiency of government policy is unchanged.16
They conclude by suggesting that the decision as to whether a program should be
delivered through the tax system or through an expenditure system should be driven
by the degree to which the functions of a program “complement those performed by
the tax system.”17
The third principle of good tax design is that taxes ought to respect ability to
pay. Ability to pay is commonly separated into two buckets, vertical equity and horizontal equity. Vertical equity is straightforward: those with more income should pay
more in tax. Vertical equity is largely concerned with tax rates—how much you are
taxed.
Horizontal equity is straightforward conceptually: those in similar circumstances
should pay the same amount of tax while those in different circumstances should
not. Horizontal equity is largely concerned with the tax base—what is taxed.
For example, someone with a child has less ability to pay because of obligations
to that child. The same does not hold for someone who buys a boat. Children, unlike
boats, bring benefits to society at large that go beyond the benefits to the individual
family, so we should recognize those benefits by reducing the family’s tax burden.
Families have a continued obligation to care for their children, whereas boats can be
sold. Families can also accidentally have additional children, but there are no cases of
14 Ibid., at 188.
15 Jenn, supra note 9, at 558. Jenn thus describes the charitable deduction as follows: “Although
the operation of the deduction is not as stark as if a 25 percent marginal rate taxpayer wishing
to direct $100 to her favorite cause wrote a $75 check to the charity herself and then instructed
the government to write a $25 check on her behalf, the final distribution of resources in the
case of the deduction is the same as if the government were writing checks on behalf of private
citizens.” Ibid., at 561. See also David A. Weisbach and Jacob Nussim, “The Integration of Tax
and Spending Programs” (2004) 113:5 Yale Law Journal 955-1028, at 957-59.
16 Weisbach and Nussim, supra note 15, at 958.
17 Ibid., at 961.
policy forum: kids are not boats  n  1007
families accidentally acquiring a boat. In short, a certain amount of the family’s income
should be considered non-discretionary, and thus omitted from taxable income.
And so to those who rage against the distribution of benefits through boutique
tax credits, the proper response is that a differing distribution of benefits across taxpayers is precisely the point. These credits are responding to differences in ability to
pay attributable to differences in circumstances, which society has decided ought
to result in differential tax burdens. To put it another way, I am making a case
against neutrality with respect to certain types of spending. Kids are not boats.
. . . T O E N CO U R A G E T H E F O L L O W I N G T H I N G S
In practice, nearly all countries adjust their tax base—make horizontal equity adjustments—to take account of the differing ability to pay for individuals who
1. start a family,
2. have children,
3. incur costs to earn their income,
4. own a home,
5. save for the future, or
6. improve civil society.
And so we have arrived at a defence of targeted tax credits. Now let’s look at how
this might work itself out in the six categories above.
Starting a Family
Given the widespread social advantages of starting a family,18 folks doing so should
not pay higher taxes than individuals living alone; we need to eliminate what used to
be called “the marriage penalty.” Equalizing the personal and spousal exemptions has
largely done this. The move to income splitting for families and seniors, and in Alberta until recently the single-rate tax, has moved toward a family basis for taxation.
Having Children
Our tax and benefit system today is much fairer to families with children across
income levels. In addition, there are a number of specific tax breaks for child-related
18 Philip Cross and Peter Jon Mitchell, The Marriage Gap Between Rich and Poor Canadians: How
Canadians Are Split into Haves and Have-Nots Along Marriage Lines (Ottawa: Institute of Marriage
and Family Canada, 2014) (www.imfcanada.org/sites/default/files/event/CMD-FINAL.pdf );
Katherine Peralta, “Want More Money? Get Married,” U.S. News and World Report, October 28,
2014 (www.usnews.com/news/articles/2014/10/28/aei-report-marriage-decline-exacerbates
-income-inequality); Clair Cain Miller, “Study Finds More Reasons To Get and Stay Married,”
The New York Times, January 8, 2015 (www.nytimes.com/2015/01/08/upshot/study-finds-more
-reasons-to-get-and-stay-married.html?_r=1&abt=0002&abg=1); and Linda J. Waite, “Does
Marriage Matter?” (1995) 32:4 Demography 483-507 (http://homes.chass.utoronto.ca/~siow/
332/waite.pdf ).
1008  n  canadian tax journal / revue fiscale canadienne
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expenditures (for example, for participation in arts and sports programs) that provide for a reduction of tax for parents or guardians who incur such expenses. There
are also tax breaks for families who set aside income for their children’s education
through registered education savings plans (RESPs) or, in case of children who are
disabled, through registered disability savings plans (RDSPs).19 There are also adoption tax credits to offset the considerable costs of adopting children.
Earning an Income
In addition to tax breaks for saving for education (through RESPs), further tax breaks
have been created to recognize the costs of getting and keeping a job, such as the
following:
n
n
n
n
n
n
n
n
the child-care expense deduction (one of the few remaining deductions)20
apprenticeship tax credits
the tools tax credit
the public transit tax credit
the employment credit
moving expense tax credits
the textbook tax credit
the medical expense tax credit
Owning a Home
Research generally supports the proposition that home ownership generates positive
externalities. Glaeser and Shapiro find that homeowners generate positive externalities by taking better care of their property than non-owners and demonstrate
greater civic engagement by supporting investments in their local community.21
Dipasquale and Glaeser find a positive and likely causal relationship between home
ownership and social capital.22
There are two different ways in which tax systems are used to promote home
ownership. The US approach encourages debt through mortgage interest deductibility. The Canadian system encourages equity with the exemption from capital
gains for a primary residence, and during the recent federal election campaign, the
Conservatives proposed to make permanent the previous home renovation tax credit,
19 Both the RESP and the RDSP have a tax-sheltering component and a government
contribution component. The latter could arguably be called spending rather than a tax break.
20 Compared with tax credits, deductions are more consistent with the concept of horizontal
equity in that they exempt certain amounts of income from tax, rather than merely giving a
credit at the lowest rate of tax.
21 Edward L. Glaeser and Jesse M. Shapiro, The Benefits of the Home Mortgage Interest Deduction,
NBER Working Paper no. 9284 (Cambridge, MA: National Bureau of Economic Research,
2002), at 5-6.
22 Denise Dipasquale and Edward L. Glaeser, “Incentives and Social Capital: Are Homeowners
Better Citizens?” (1999) 45:2 Journal of Urban Economics 354-84.
policy forum: kids are not boats  n  1009
which allows a credit for a portion of the costs of renovating a home. In addition,
first-time homebuyers can withdraw funds, up to a specified amount, tax-free from
their registered retirement savings plans (RRSPs) to put toward the purchase of their
first home, so long as those funds are paid back over a specified period of time.
First-time homebuyers can also access the first-time homebuyers tax credit to offset
the costs of purchasing their first home.
Saving for Retirement
Canada has significantly increased the ways in which Canadians can save for
retirement:
n
n
n
RRSPs
provide the foundation with tax-deductible savings.
Tax-free savings accounts allow savings to grow tax-free, and pooled registered
pension plans allow smaller businesses or organizations, or even self-employed
individuals, to participate in pooled savings plans to reduce administration costs.
Deferred profit-sharing plans allow tax deferral on profit-sharing plans for
employees.
Together, these various savings vehicles provide greater flexibility to meet the needs
of Canadians than a one-size-fits-all spending approach, such as expanding the Canada Pension Plan. In addition, there are some narrower tax credits to assist with
saving such as the tax credit for carrying charges, pension income credits, and various tax breaks related to registered retirement income funds.
Improving Civil Society
Tax provisions that encourage the improvement of civil society include charitable
donation credits, the first-time donor’s super credit, political donation credits, and
tax breaks for voluntary firefighters. During the recent election campaign, the Conservatives proposed a tax break for service club memberships.23 Again, nearly all
governments provide some or all of these types of tax breaks. Our society does, and
ought to, rely on the voluntary sector to provide services that could be provided by
government.
The deduction for charitable contributions and similar civil society deductions
effectively delegate to citizens the ability to direct a “government subsidy to a third
party engaged in activity generating public benefits.”24 Thus, the charitable deduction can be viewed as a “social choice mechanism.”25 Levmore argues that the
charitable deduction “measures and aggregates citizens’ preferences” and “may be
23 Proposed by the Conservative Party of Canada on August 23, 2015: Ben Spurr, “Stephen Harper
Promises Tax Breaks for Service Clubs,” Thestar.com, August 23, 2015 (www.thestar.com/news/
canada/2015/08/23/stephen-harper-promises-service-club-tax-credit.html).
24 Jenn, supra note 9, at 587-88.
25 Levmore, supra note 10, at 404-5.
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superior to conventional voting.”26 This social choice mechanism generates greater
pluralism in outcomes than would be achieved if government made the choices
itself.
CO N C L U D I N G T H O U G H T S
In conclusion, let’s circle back to George Will with some political economy observations. In addition to the arguments above, I would argue the value of various tax
credits as “signals” that government sends to promote certain types of activities and
behaviours. The public widely accepts and supports such signals; for example, we
accept the imposition of punitive taxes aimed at reducing tobacco and alcohol use
as part of our collective signal to stop (in the case of tobacco) or moderate (in the
case of alcohol) these activities.
In a similar manner, broad public support for having and raising children, charitable giving, volunteer firefighting, owning a home, and working is reflected in the
tax treatment of these things. The public is signalling, through their governments,
support for these things quite aside from any technical or efficiency arguments for
such preferential treatment.
The flip side of the coin is also worth noting, namely, that the public can signal
to governments, via political parties and elections, things that they wish the government to positively (or negatively) support.27 In fact, there is some evidence that the
public prefers that governments use tax credits rather than spending to accomplish
such goals—or, at the very least, are more accepting of such nudges delivered
through the tax system rather than through spending programs.28
After all, on the big nudges identified here—to get a job, start a family, have
children, buy a home, save for retirement, and improve civil society—government
should not, indeed cannot, be neutral.
26 Ibid., at 389.
27 Full disclosure: I was working on one such campaign while completing this article.
28 See Conor Clarke and Edward Fox, “Perceptions of Taxing and Spending: A Survey
Experiment” (2015) 124:4 Yale Law Journal 1252-93.
canadian tax journal / revue fiscale canadienne (2015) 63:4, 993 - 99
Policy Forum: The Public
Transit Tax Credit—Ridership
and Distributional Impact
Vincent Chandler*
PRÉCIS
Cet article traite du crédit d’impôt non remboursable pour le transport en commun qui a
été adopté dans le but de promouvoir l’utilisation du transport en commun. L’auteur fait
un survol de la littérature empirique qui examine l’effet du crédit d’impôt et conclut qu’il
n’y a aucune preuve que le crédit a eu l’effet désiré sur l’achalandage. Puisqu’un crédit
de taxe non seulement crée des incitatifs, mais transfère également le revenu aux
ménages, l’auteur évalue aussi l’incidence distributive du crédit d’impôt. Il a constaté
que le crédit a été beaucoup plus utilisé par les contribuables dans les ménages fortunés
que par ceux dans les ménages à faible revenu, contribuant ainsi à l’inégalité du revenu.
L’auteur croit toutefois que la valeur politique accordée au crédit d’impôt pourrait
empêcher qu’il ne soit aboli, même si son inefficacité peut être prouvée.
ABSTRACT
This article discusses the non-refundable public transit tax credit, which was introduced
as a targeted incentive to promote public transit. The author provides an overview of the
empirical literature studying the impact of the tax credit and finds that there is no evidence
that the credit has had the intended effect on ridership. Since a tax credit not only creates
incentives but also transfers income across households, the author also assesses the
distributional impact of the tax credit. He finds that it was used disproportionately by
taxfilers in wealthy households relative to those in lower-income households, thereby
contributing to income inequality. However, in the author’s view, the perceived political
value of the tax credit may prevent its abolition despite evidence of its inefficiency.
KEYWORDS: INCOME TAX CREDITS n TAX INCENTIVES n PUBLIC EXPENDITURES n ECONOMICS
CONTENTS
Introduction
Impact of the Tax Credit on Ridership
Distributional Impact of the Tax Credit
Conclusion
994
995
996
998
* Of the Sobey School of Business, Saint Mary’s University, Halifax (e-mail: [email protected]
smu.ca).
 993
994  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
INTRODUC TION
The 2006 federal budget introduced the first of a series of “boutique tax credits.”
The objective of these measures is to promote specific socially beneficial activities. The public transit tax credit, which took effect on July 1, 2006, belongs to this
new category of tax credits. By reducing the after-tax cost of travel by public transit,
the tax credit should create an “incentive to use public transit [to] ease traffic congestion and improve the environment.”1 The tax credit is non-refundable and reduces the
claimant’s tax burden by 15 percent 2 of the amount paid during the year for eligible
transit passes.3 In 2012, 1.7 million individuals claimed the tax credit, and its cost in
forgone revenue for the federal government was $207 million.4
More specifically, the public transit tax credit can be claimed for the cost of
passes allowing unlimited travel within Canada during an extended period of time, on
local buses, streetcars, subways, commuter trains, commuter buses, or local ferries.5
A taxfiler can claim the cost of annual and monthly passes, and the cost of shortterm passes if
n
n
each pass entitles the user to unlimited travel for at least 5 consecutive days and
the passes purchased entitle the user to unlimited travel for at least 20 days in
any 28-day period.
A taxfiler can also claim the cost of electronic fare payment cards if
n
n
the card is used to make at least 32 one-way trips during an uninterrupted
period not exceeding 31 days and
the card is issued by a public transit authority that records and provides a
receipt for the cost and usage of the card.
The taxfiler may claim eligible passes purchased for his or her own use or on behalf
of a spouse or common-law partner or a child of the taxfiler under 19 years of age.
After the introduction of this tax credit, one can imagine commuters weighing
the cost of public transit versus the cost of a personal vehicle and deciding to choose
1 Canada, Department of Finance, 2006 Budget, Helping Individuals and Families (budget
pamphlet), May 2, 2006.
2 This percentage corresponds to the lowest tax bracket and is therefore subject to change.
3 For example, a commuter who purchases a pass for $100 each month can reduce his or her
income tax by $180 [($100 × 12) × 15%)] assuming that his or her tax burden is greater than
$180.
4 The Canada Revenue Agency (CRA) reported that in 2012 a total of $1.384 billion was
claimed: Canada Revenue Agency, Final Statistics—2014 Edition (for the 2012 Tax Year) (Ottawa:
CRA, 2014). The cost in forgone revenue is calculated as 15 percent of the amount claimed
(that is, the amount eligible for reimbursement).
5 See Canada Revenue Agency, “Public Transit Amount,” January 5, 2015 (www.cra-arc.gc.ca/
transitpass/) (“Eligibility” and “Who Can Claim?”).
policy forum: the public transit tax credit  n  995
public transit. If enough commuters are incentivized in this fashion, the forgone tax
revenue could, in effect, pay for significant environmental improvement. It is, however, unlikely that a large number of commuters would change their behaviour in
order to obtain a 15 percent reduction in pass prices, because evidence suggests that
factors other than price—for example, schedules, the speed of transit, and the frequency of service—matter more than price.6 Whether the tax credit is effective can
be determined by measuring its impact on transit use. The first part of this article
presents the methodology and results of three studies that have examined ridership
data in order to assess whether the availability of the tax credit has led to increased
transit use.
Beyond the potential impact on the behaviour of commuters, the public transit
tax credit leads to a wealth transfer: individuals who can claim the credit receive an
implicit transfer from those who cannot. Three conditions must be met for an individual to receive this transfer. First, the individual (or the individual’s spouse or
common-law partner or child) must use public transit and have an eligible pass. Since
public transportation is not equally distributed across Canada, the tax credit favours
residents of urban centres offering such amenities. Second, the individual must be
aware of the existence of the tax credit and properly claim it. Third, the individual
must owe income tax in order to benefit from this non-refundable tax credit. The
last two conditions put individuals with low English- or French-language literacy
skills and those with a low income at a disadvantage. The second part of this article
presents data on the propensity to claim the credit for different income groups and
considers the social cost associated with subsidizing public transit using a tax credit.
I M PA C T O F T H E TA X C R E D I T O N R I D E R S H I P
To assess the causal impact of the tax credit on ridership, one must determine the
difference between the number of commuters before and after the introduction of
the tax credit in regions affected by the tax credit, and ideally compare this difference
with the difference in ridership in regions unaffected by the credit. Unfortunately,
since the public transit tax credit was made available from the outset to taxfilers across
Canada, no Canadian region could show what would have happened to ridership in
its absence. While it is sometimes possible to draw inferences about commuter behaviour from comparative studies in other similar jurisdictions, notably the United
States, in this case recourse to such studies may not be helpful since it is unclear that
American trends in ridership are comparable to Canadian trends. Accordingly, one
must compare data on commuter behaviour in a particular region before and after
the introduction of the tax credit, and assume that the year following the introduction of the credit was not special for any other reason. In spite of this empirical
limitation, three studies have attempted to assess the impact of the tax credit.
6 A. Munro, “Public Transit in Canada, 2007” (2010) 4:2 EnviroStats 3-8, at 5 (Statistics Canada
catalogue no. 16-002-X).
996  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
The Department of Finance was the first to evaluate the effectiveness of the
public transit tax credit.7 Using annual data from 2001 to 2010, the study found that
the average year-to-year percentage increase in ridership was 1.9 percent from 2001
to 2005 and 2.9 percent from 2006 to 2010, and concluded that the public transit
tax credit was effective in increasing ridership. If this difference in the growth of
ridership was indeed due to the introduction of the tax credit, as suggested in the
report, one would expect the pattern of ridership variation to be similar to the pattern of variation in claims. As commuters would increasingly claim the tax credit,
they would also increase their use of public transit. There is, however, no evidence
for such a relationship. While the number of claims grew very rapidly at first (up to
916,525 in the first year), then more slowly to 1,473,046 in 2008, and plateaued at
1,642,250 in 2011, the year-to-year variation in ridership was first small (slightly
above 3 percent) in 2006 and increased to slightly above 4 percent in 2011.8 In other
words, when the increase in credit claiming was at its highest, the increase in ridership was at its lowest. It is already difficult to rely on only 10 observations to show
the effectiveness of a policy. The differences in trends cast some doubt on the conclusions of this study, and other factors—such as the increase in gas prices throughout
the period—could also be responsible for the increase in transit use.9
Boncenne10 delivers more credible results on the impact of the tax credit by estimating a panel regression for all provinces from 1997 to 2009 and controlling for
other factors that may have influenced the decision of commuters; he finds no statistically significant impact. In a more recent study,11 I confirmed these results using
monthly data from seven major Canadian cities and controlling for city-specific
events that may have affected transit use. Interestingly, I found that the policy did
have an unintended consequence: it led commuters to switch from tickets to monthly
passes when passes became relatively cheaper as a result of the tax credit. These two
independent studies show no evidence that this targeted tax credit hit the target.
D I S T R I B U T I O N A L I M PA C T O F T H E TA X C R E D I T
If the tax credit did not induce commuters to use public transportation, it was simply a transfer from those who did not claim the credit to those who claimed it. This
section will discuss who among Canadian taxfilers could claim the tax credit and
therefore take advantage of this transfer.
7 Canada, Department of Finance, Tax Expenditures and Evaluations 2011 (Ottawa: Department
of Finance, 2012), at 48-67.
8Ibid.
9 The average cost of a litre of gasoline in Ontario was 72.7 cents between 2001 and 2005, and
103.2 cents between 2006 and 2011. Ontario, Ministry of Energy, “Fuel Prices” (www.energy
.gov.on.ca/en/fuel-prices/).
10 A. Boncenne, “Assessing the Impact of the Canadian Tax Credit for Public Transit Passes”
(Master’s thesis, University of Montreal, 2012).
11 Vincent Chandler, “The Effectiveness and Distributional Effects of the Tax Credit for Public
Transit” (2014) 40:3 Canadian Public Policy 259-69.
policy forum: the public transit tax credit  n  997
The first condition to claim the credit is the use of public transit. Fifteen percent
of households used public transit in Canada in 2007.12 An important determinant of
public transit use is availability. While Ontario, with its large urban population, offered 74 percent of its residents nearby access to public transportation, in Prince
Edward Island, which is a more rural province, only 23 percent of the residents
enjoyed such access. Not surprisingly, a large share of the credit went to taxfilers
in Ontario (48.1 percent) and almost nothing went to taxfilers in Prince Edward
Island.13 The tax credit therefore disproportionately favours residents of areas that
already benefit from excellent public amenities.
Use alone is not enough for transit riders to take advantage of the tax credit; the
credit must also be actively claimed by a taxfiler. A rational economic agent would
probably have no difficulty learning about this potential tax benefit, including the
requirements to keep all receipts for passes purchased throughout the year and to
claim the appropriate amount on his or her tax return. However, it is reasonable
to assume that many taxfilers lack the foresight of the rational economic agent. It is
impossible to know how many individuals could have claimed the credit but omitted
to do so, but information on the registered education savings plan (RESP) does provide some information concerning the underuse of subsidies. The Department of
Employment and Social Development estimates that only 31 percent of eligible
children received the Canada learning bond, even though all that was required to
receive this substantial subsidy was registration.14 One can therefore expect that a
large number of taxfilers fail to claim the public transit tax credit because they do
not know about it or about the requirements for making a claim. Taxfilers with low
levels of English or French literacy probably have the most difficulty completing
their tax returns and may therefore underuse the credit. By subsidizing public transport through a tax credit, the government is excluding certain groups that lack the
skills to claim such a benefit.
Finally, since the tax credit is non-refundable, only taxfilers who owe income tax
can actually receive a transfer. The tax credit is therefore worthless to low-income
individuals. From table 1, one can even see that the propensity to claim the credit
among those who pay income tax increases with income. Also interesting is the fact
that the average claim per taxable return increases as income increases. This pattern
cannot be explained by a higher propensity to use public transportation for higherincome households, as reported by Munro.15 It is more likely that members of
higher-income households are more aware of the tax credit, as mentioned earlier, or
12 Munro, supra note 6, at 3.
13 Tax Expenditures and Evaluations 2011, supra note 7, at 54.
14 Employment and Social Development Canada, Canada Education Savings Program: Annual
Statistical Review 2014 (Ottawa: ESDC, 2015), at 36. Eligible children can receive $500 in the
first year and $100 thereafter in their RESP if they are registered. No contribution is required
to receive this subsidy.
15 Munro, supra note 6.
998  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
TABLE 1 Public Transit Tax Credit Claims, 2012 Taxation Year—Average Amount of
Credit Claimed per Return, by Taxfiler’s Reported Income for the Year
Share of taxable returns
Income range (dollars) claiming tax credit
Average claim per
taxable return
percent
dollars
20,000-24,999 . . . . . . . . . . . . . . . . . . . . . . . . . 6.35
25,000-29,999 . . . . . . . . . . . . . . . . . . . . . . . . . 7.05
30,000-34,999 . . . . . . . . . . . . . . . . . . . . . . . . . 6.91
35,000-39,999 . . . . . . . . . . . . . . . . . . . . . . . . . 6.96
40,000-44,999 . . . . . . . . . . . . . . . . . . . . . . . . . 6.84
45,000-49,999 . . . . . . . . . . . . . . . . . . . . . . . . . 7.25
50,000-54,999 . . . . . . . . . . . . . . . . . . . . . . . . . 7.40
55,000-59,999 . . . . . . . . . . . . . . . . . . . . . . . . . 7.57
60,000-69,999 . . . . . . . . . . . . . . . . . . . . . . . . . 7.53
70,000-79,999 . . . . . . . . . . . . . . . . . . . . . . . . . 7.70
80,000-89,999 . . . . . . . . . . . . . . . . . . . . . . . . . 7.95
90,000-99,999 . . . . . . . . . . . . . . . . . . . . . . . . . 7.89
100,000-149,999 . . . . . . . . . . . . . . . . . . . . . . . 8.00
150,000-249,999 . . . . . . . . . . . . . . . . . . . . . . . 6.94
250,000+ . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.06
45.55
55.80
58.21
61.28
62.63
68.16
71.10
74.23
74.75
77.54
81.70
83.23
84.86
73.15
55.25
Note: “Return” indicates a person filing an income tax return independently of whether he or
she paid any income tax in respect of the 2012 taxation year. “Taxable return” indicates a
person who has filed a return and paid income tax in respect of the 2012 taxation year.
Source: Author’s calculations based on numbers from Canada Revenue Agency, Final
Statistics—2014 Edition ( for the 2012 Tax Year) (Ottawa: CRA, 2014).
they may spend more on public transportation if they live farther away from their
workplace. In either case, wealthy individuals are receiving more from the tax credit
than are those with low incomes.
CO N C L U S I O N
A targeted tax credit makes sense only if it hits the target, and there is no independent empirical evidence suggesting that the public transit tax credit has hit its target
by increasing ridership. Moreover, introducing a subsidy in the form of a tax credit
comes at a social cost. It implicitly excludes individuals with low literacy skills who
will have difficulty taking advantage of this subsidy. Making the tax credit nonrefundable explicitly excludes low-income individuals who do not owe any income
tax. More generally, multiplying the number of such boutique tax credits increases
the compliance cost of income tax both for taxfilers, who now need to keep records
for all their socially beneficial activities and who must pay more attention when filing their tax return, and for the Canada Revenue Agency, which must now devote
additional resources to verifying claims in order to prevent abuse. These hidden
costs add to the $207 million in forgone tax revenue attributable to the tax credit.
If the federal government does indeed want to “ease traffic congestion and improve the environment,” it could simply transfer money to transit corporations
policy forum: the public transit tax credit  n  999
across the country and let them increase the speed of transit and improve the schedule of buses. According to Munro, these two reasons are mentioned by 21 and
27 percent of households, respectively, as barriers to the use of public transit, while
only 4 percent of households mention cost as a barrier.16 In spite of this potential
gain in efficiency, governments may see a political benefit in the public transit tax
credit that enters into their calculation to keep it.
16 Ibid., at 5.
canadian tax journal / revue fiscale canadienne (2015) 63:4, 1011 - 26
Finances of the Nation
Kenneth J. McKenzie*
THE CORPORATE INCOME TAX IN CANADA—
PAST, PRESENT, AND FUTURE
PRÉCIS
Cet article offre un survol général de l’impôt sur les sociétés (IS) au Canada. Il présente
des données historiques relatives aux taux d’imposition prévus par la loi, aux parts
des recettes, aux ratios impôts-produit intérieur brut, et à diverses mesures des taux
d’imposition réels. Un des aspects qui ressort des données présentées est la réduction
substantielle des taux d’imposition prévus par la loi et des taux d’imposition réels au
cours des dernières décennies, sans que les recettes aient diminué de façon marquée,
comme l’établissent diverses méthodes de mesure. L’article se termine par une brève
analyse du rôle futur de l’IS au Canada.
ABSTRACT
This article presents a broad overview of the corporate income tax (CIT) in Canada.
Historical data are presented relating to statutory tax rates, revenue shares, tax to gross
domestic product ratios, and various effective tax rate measures. A notable feature
of the data is the substantial reduction in statutory and effective tax rates over the last
several decades, without a marked reduction in revenue, measured in several ways. The
article concludes with a brief discussion of the future role of the CIT in Canada.
KEYWORDS: CORPORATE INCOME TAXES n EFFECTIVE INCOME TAX RATES n REVENUE n REFORMS
* Of the Department of Economics, University of Calgary.
 1011
canadian tax journal / revue fiscale canadienne (2015) 63:4, 1049 - 72
International Tax Planning
Co-Editors: Ken Buttenham and Michael Maikawa*
INTEGRATION ACROSS BORDERS
Paul Dhesi and Korinna Fehrmann**
The rules governing the Canadian taxation of foreign affiliates are most often considered
in the context of multinational corporations. In this article, the authors explore the
effectiveness of tax integration taking into account both foreign and Canadian domestic
taxation in respect of private corporation shareholders. The overall effective tax rates
that may apply are modelled for foreign accrual property income and capital gains based
on varying foreign tax rates. The trends observed from the models may be surprising to
some. First, the foreign affiliate regime may provide tax-deferral opportunities in certain
circumstances. Second, capital gains earned through a foreign affiliate are subject to
significantly higher effective tax rates since the private corporation capital dividend
mechanism does not apply. In light of these findings, the authors consider tax-planning
alternatives to reduce the ultimate tax cost to shareholders for foreign capital gains,
including the use of safe-income dividends. Key considerations in computing the safe
income of a Canadian corporation holding shares in a foreign affiliate are outlined to
assist practitioners.
KEYWORDS: FAPI n INTEGRATION n FOREIGN AFFILIATES n CCPC n GRIP n INVESTMENT INCOME
* Of PricewaterhouseCoopers LLP, Toronto.
** Of PricewaterhouseCoopers LLP, Vancouver. We thank Stephen May of Pricewaterhouse­
Coopers LLP, Toronto for his significant contribution to this article. We also thank Jerry
Mahnger of PricewaterhouseCoopers LLP, Vancouver, and Eoin Brady and Eric Lockwood of
PricewaterhouseCoopers LLP, Toronto for their valuable comments and assistance in the
preparation of the article. The views and analysis herein are solely our responsibility.
 1049
canadian tax journal / revue fiscale canadienne (2015) 63:4, 1073 - 95
Personal Tax Planning
Co-Editors: Gabriel Baron and Maureen De Lisser*
With this issue of the journal, we welcome Gabriel Baron, CPA, CA, and Maureen De Lisser,
CPA, CA, CFP, as the new co-editors of the Personal Tax Planning feature. Gabriel is a tax
partner with Ernst & Young LLP’s Private Mid-Market practice in Toronto. He has 11 years
of experience working with entrepreneurs and family-owned businesses on private company
mergers and acquisition planning, succession and estate planning, and compensation and
remuneration structuring. He has written and spoken on a variety of tax subjects. Maureen
is an associate partner with Ernst & Young LLP’s Tax Knowledge Network and Ernst &
Young Electronic Publishing Services Inc., where she leads the group’s editorial board and is
the editor of a number of Ernst & Young tax publications. With more than 20 years of
providing Canadian corporate and personal income tax advisory services, Maureen has extensive experience in a broad range of Canadian income tax matters affecting individuals
and corporations. She has contributed to a number of tax publications and has developed and
presented seminars on tax research and writing.
IDENTIFYING THE DE FACTO DIRECTOR
Brian M. Studniberg**
An individual need not be formally elected or appointed to the position of company
director to be considered a director-in-fact for tax purposes. This article discusses the
circumstances in which, according to the case law, an individual may be considered a
de facto director of a corporation and may therefore be subject to the director liability
provisions of the Income Tax Act and/or the Excise Tax Act. Precautions to avoid creating
a de facto directorship and steps that may be taken to end a de facto directorship are
also discussed.
KEYWORDS: DIRECTORS’ LIABILITY n CORPORATIONS n DIRECTORS n MANAGEMENT n ASSESSMENTS
* Of Ernst & Young LLP, Toronto.
** Of Couzin Taylor LLP (allied with Ernst & Young LLP), Toronto.
 1073
canadian tax journal / revue fiscale canadienne (2015) 63:4, 1097 - 1122
Planification fiscale personnelle
Co-rédacteurs : Gabriel Baron et Maureen De Lisser*
Avec le présent numéro de la revue, nous accueillons les deux nouveaux co-rédacteurs
de la chronique Planification fiscale personnelle, Gabriel Baron, CPA, CA et Maureen
De Lisser, CPA, CA, CFP. Gabriel Baron est associé en fiscalité au Service au marché
intermédiaire privé de Ernst & Young LLP à Toronto. Il possède 11 années d’expérience
auprès des entrepreneurs et des entreprises familiales pour les questions de fusion de sociétés
fermées et de planification d’acquisitions, de planification successorale et de structures de
rémunération. Il a écrit de nombreux articles et prononcé de nombreuses conférences sur
divers sujets fiscaux. Maureen de Lisser est associée déléguée au Réseau des connaissances
en fiscalité de Ernst & Young LLP et aux Services d’éditique Ernst & Young Inc. où elle
dirige le comité de rédaction et est rédactrice de plusieurs publications fiscales du cabinet.
Avec plus de 20 années d’expérience dans la prestation de services conseils en impôt
canadien des sociétés et des particuliers, Maureen de Lisser possède une solide expérience
dans un vaste éventail de questions d’impôt des particuliers et des sociétés. Elle a collaboré
à un certain nombre de publications fiscales et préparé et présenté des séminaires sur la
recherche et la rédaction en fiscalité.
IDENTIFIER L’ADMINISTRATEUR DE FAIT
Brian M. Studniberg**
Un particulier n’a pas à être officiellement élu ou nommé au poste d’administrateur
d’une société pour être considéré comme un administrateur de fait aux fins de l’impôt.
Le présent article traite des circonstances dans lesquelles, selon la jurisprudence,
un particulier peut être considéré comme un administrateur de fait d’une société et
être donc assujetti aux dispositions sur la responsabilité de l’administrateur de la
Loi de l’impôt sur le revenu et/ou de la Loi sur la taxe d’accise. On discute aussi des
précautions à prendre pour éviter de devenir un administrateur de fait et des mesures
nécessaires pour cesser de l’être.
MOTS CLÉS : RESPONSABILITÉ DE L’ADMINISTRATEUR n SOCIÉTÉ n ADMINISTRATEUR n GESTION n
COTISATION
* De Ernst & Young LLP, Toronto.
** De Couzin Taylor LLP (affilié à Ernst & Young), Toronto.
 1097
1098  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
SOMMAIRE
Introduction
Responsabilité fiscale de l’administrateur d’une société
Administrateur de fait et de droit
Aucune intention d’être un administrateur en dépit des apparences : MacDonald
Jouer un rôle significatif dans les affaires de la société : McDonald
Quelles actions font d’un particulier un administrateur de fait?
Exécuter les fonctions d’un administrateur
Caractère indispensable
Haut dirigeant sans privilège d’administrateur
Ancien rôle
Cesser d’être un administrateur de fait
Défense fondée sur la diligence raisonnable
Conclusion : Identifier l’administrateur de fait et éviter de l’être
1098
1099
1103
1105
1107
1109
1109
1112
1114
1115
1117
1120
1121
INTRODUCTION
Il peut y avoir des circonstances où un particulier qui n’est pas légalement élu
ou nommé à titre d’administrateur d’une société peut néanmoins être considéré
comme un administrateur et, en définitive, être responsable des déductions à la
source et autres taxes (incluant intérêts et pénalités) non remises qui sont exigibles
de la société. Par exemple, un employé d’expérience, un cadre ou autre particulier
qui s’acquitte des fonctions dont un administrateur s’acquitterait normalement
pour une société peut être considéré comme un administrateur de fait de celle-ci.
Le présent article traite des circonstances dans lesquelles un particulier peut être
considéré comme un administrateur de fait et suggère des précautions que les
praticiens peuvent prendre pour empêcher qu’un tel résultat se produise, y compris
des façons d’éviter la création d’une fonction d’administrateur de fait, les étapes à
suivre pour y mettre un terme et les éléments à prendre en considérations lors de
la documentation d’arrangements personnels.
Évidemment, la conformité complète aux obligations fiscales de la société,
incluant toutes les remises requises, devrait atténuer les risques en vertu des
diverses dispositions sur la responsabilité de l’administrateur. Toutefois, compte
tenu du ralentissement économique récemment observé dans certaines provinces
(notamment en Ontario et en Alberta), des pressions commerciales et des
contraintes exercées sur la trésorerie, il peut être tentant d’utiliser des fonds
détenus en fiducie pour la Couronne à des fins de financement.
La Cour canadienne de l’impôt (ci-après « la CCI ») entend régulièrement des
causes sur la responsabilité de l’administrateur. Une série de ces causes porte sur
des situations où l’on prétend que des particuliers sont des administrateurs de fait
d’une société. Malheureusement, une grande part d’incertitude entoure toujours la
question du moment précis où un particulier est devenu un administrateur de fait
d’une société ou a cessé de l’être.
La question est particulièrement préoccupante pour certaines sociétés fermées.
L’environnement dans lequel évoluent des sociétés fermées de plus petite taille et,
planification fiscale personnelle  n  1099
en particulier, leur gestion peuvent contribuer à accroître de façon appréciable le
risque de créer des fonctions d’administrateur de fait. En effet, dans une société
fermée, les contraintes de coûts et les multiples chapeaux que portent les
propriétaires-exploitants ou des membres clés de la direction peuvent accroître ce
risque de façon significative.
Au cours des dernières années, la CCI semble être devenue de plus en plus
critique à l’endroit de l’Agence du revenu du Canada (ci-après « l’ARC ») pour
ne pas établir davantage de cotisations au titre de la responsabilité dérivée
potentielle pour tous les administrateurs de société pour défaut de versement de
retenues d’impôt, ce qui accroît le risque qu’une certaine partie de cette dette
demeure impayée1. On pourrait donc s’attendre à ce que l’ARC cherchera à exiger
de quelqu’un le paiement d’impôts et taxes non versés de la société et, si cette
personne n’est pas un administrateur de droit (de jure), elle pourrait bien en être
un administrateur de fait (de facto).
Au départ, nous examinerons brièvement la responsabilité fiscale potentielle de
l’administrateur d’une société, puis nous traiterons de la notion d’administrateur
de fait qui est distincte de la notion familière d’administrateur de droit. Nous
examinerons ensuite la jurisprudence sur le sujet. Les jugements rendus dans
MacDonald 2 et McDonald 3, deux des causes les plus récentes sur la responsabilité
de l’administrateur de fait, font l’objet d’une description détaillée car on y formule
un grand nombre des thèmes importants de cette partie du droit. Suit une analyse
d’autres jugements où les tribunaux ont dégagé les principaux facteurs permettant
de déterminer l’existence de l’administrateur de fait.
RESPONSABILITÉ FISC ALE DE L’ADMINISTR ATEUR
D’UNE SOCIÉTÉ
Dans l’une des premières causes sur la responsabilité de l’administrateur entendue
par la Cour d’appel fédérale (ci-après « la CAF »), la Cour a commenté la politique
derrière l’imposition de responsabilité à l’administrateur d’une société, en faisant
remarquer ce qui suit :
[traduction] la justification de l’imposition de la responsabilité du fait d’autrui est
simple. Les administrateurs d’une société en sont l’âme dirigeante. Ce sont les
personnes responsables de s’assurer que la société s’acquitte de ses obligations
financières 4.
1 Voir, par exemple, Gariepy c. La Reine, 2014 CCI 254, au paragraphe 15, par le juge Boyle
(appel interjeté devant la Cour d’appel fédérale).
2MacDonald c. La Reine, 2014 CCI 308 (procédure informelle), par le juge Rossiter.
3McDonald c. La Reine, 2014 CCI 315, par le juge Campbell.
4The Queen v. Kalef, 96 DTC 6132, à 6134 (FCA), par le juge McDonald.
1100  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
De façon peut-être plus pertinente encore, la Cour ajoute ce qui suit :
[traduction] un administrateur ne peut et ne devrait pas jouir des avantages de la
constitution d’une société […] sans en accepter aussi les responsabilités 5.
Dans la Circulaire d’information 89-2R36, l’ARC résume les conséquences fiscales
que l’administrateur d’une société peut subir lorsque celle-ci omet de déduire, de
retenir, de verser ou de payer des sommes détenues en fiducie par la société pour
la Couronne. Dans ces circonstances, les administrateurs de la société peuvent être
tenus personnellement responsables de certaines sommes dues aux termes de la
Loi de l’impôt sur le revenu7, de la Loi sur l’assurance-emploi et de dispositions
semblables du Régime de pensions du Canada, et certaines lois provinciales sur
les impôts sur le revenu et sur les cotisations sociales et, pour le défaut de la
société de remettre la taxe sur les produits et services (TPS)/taxe de vente
harmonisée (TVH), aux termes de la Loi sur la taxe d’accise 8. Dans certaines
provinces, les lois provinciales correspondantes peuvent aussi s’appliquer 9. Il faut
noter que les administrateurs de société peuvent aussi faire face à d’autres types de
responsabilités, à savoir des responsabilités réglementaires autres que fiscales qui
couvrent des éléments comme les salaires impayés et les infractions en matière
d’environnement10. Une discussion de ces responsabilités additionnelles dépasse
cependant la portée du présent article.
Plus couramment, les causes fiscales sur la responsabilité de l’administrateur
portent sur le défaut de remise des retenues à la source sur la paie11 et de la TPS /
TVH12. Un administrateur peut cependant être tenu responsable d’autres sommes
non remises comme les droits d’accise ou le paiement ou le crédit de certaines
5 Ibid., à la p. 6135. Pour une discussion des considérations administratives justifiant
l’élargissement de la responsabilité de l’administrateur, voir Edwin G. Kroft, « The Liability of
Directors for Unpaid Canadian Taxes », dans Report of Proceedings of the Thirty-Seventh Tax
Conference, 1985 Conference Report (Toronto : Fondation canadienne de fiscalité, 1986),
30:1-90, à la p. 30:14.
6Circulaire d’information 89-2R3, « Responsabilité des administrateurs », 10 avril 2014.
7 LRC 1985, c. 1 (5e supp.), telle que modifiée (ci-après « la Loi »).
8 LRC 1985, c. E-15, telle que modifiée (ci-après « la LTA »).
9 Voir, par exemple, les dispositions sur la responsabilité de l’administrateur à l’article 24.0.1 de
la Loi sur l’administration fiscale du Québec, LRQ c. A-6.002, et l’article 77 de la Alberta
Personal Income Tax Act, RSA 2000, c. A-30, telle que modifiée.
10 Voir, par exemple, la Loi de 2000 sur les normes d’emploi de l’Ontario, LO 2000, c. 41, telle que
modifiée, et la Loi sur la protection de l’environnement de l’Ontario, LRO 1990, c. E.19, telle
que modifiée.
11 En vertu de l’article 227.1 de la Loi.
12 En vertu de l’article 323 de la LTA.
planification fiscale personnelle  n  1101
sommes à des non-résidents du Canada13. Pour simplifier, nous utiliserons le
terme « taxes et impôts non remis » dans l’article pour désigner les sommes pour
lesquelles la responsabilité de l’administrateur d’une société peut être retenue.
En cas de taxes et impôts non remis, la Loi prévoit, par exemple, que lorsqu’une
société a omis de déduire, de retenir, de verser ou de payer la somme requise, les
administrateurs de la société au moment du défaut sont « solidairement
responsables, avec la société, du paiement de cette somme, y compris les intérêts
et les pénalités s’y rapportant »14.
Généralement, l’administrateur d’une société n’est pas responsable de l’impôt
sur le revenu ordinaire de la Partie I de la société. Selon les circonstances,
toutefois, un administrateur avec lien de dépendance d’une société peut être tenu
responsable du paiement d’une partie de l’impôt de la Partie I à payer de la société
en vertu de l’article 160 de la Loi si la société lui a transféré un bien pour une
contrepartie inadéquate (comme un dividende)15. En outre, la responsabilité d’un
administrateur avec lien de dépendance pour les taxes et impôts non remis d’une
société peut, en vertu de cet article, s’étendre à une personne ayant un lien de
dépendance avec lui. Par exemple, dans la cause Filippazzo16, un administrateur
d’une société s’était vu émettre une cotisation pour des retenues à la source non
remises de la société. La cotisation avait été établie peu de temps après le transfert
d’un bien par l’administrateur à son épouse. La CCI a conclu que l’épouse de
l’administrateur était responsable, en vertu de l’article 160, des sommes dues par
son époux au titre de la responsabilité de l’administrateur. La Cour a fait remarquer
que l’obligation d’un administrateur remonte à la date du défaut de remise des
retenues à la source (en l’espèce, avant le transfert du bien à l’épouse de
l’administrateur)17.
L’article 159 de la Loi prévoit aussi la possibilité d’une responsabilité personnelle
si un administrateur, agissant en qualité de représentant légal de la société, a
13 Dans la CI 89-2R3, supra note 6, au paragraphe 3, l’ARC donne une liste des obligations
fiscales réglementaires de la société de retenir, verser ou payer dont un administrateur peut
devenir responsable.
14 Voir le paragraphe 227.1(1) de la Loi.
15 Pour une discussion sur l’article 160 de la Loi, voir A. Christina Tari, « Section 160: An Awesome
Power To Collect », dans 2009 Ontario Tax Conference (Toronto : Fondation canadienne de
fiscalité, 2009), 7:1-26 et David E. Graham, « Section 160 Update », dans 2009 British Columbia
Tax Conference (Toronto : Fondation canadienne de fiscalité, 2009), 11:1-32, aux pp. 11:25-26.
Voir également Paul K. Grower, « Recouvrement de l’impôt et risque du transfert d’un bien à
une valeur inférieure à la juste valeur marchande », article dans la chronique Planification
fiscale personnelle (2014) 62:2 Revue fiscale canadienne 5230-45 à la p. 546. Des règles
équivalentes qui se trouvent à l’article 325 de la LTA s’appliquent aux fins de la TPS/TVH.
16 Filippazzo v. The Queen, 2000 DTC 2326 (CCI).
17 Voir Pliskow c. La Reine, 2013 CCI 283 (procédure informelle), pour une cause semblable
portant sur l’article 325 de la LTA.
1102  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
attribué certains biens de la société sans avoir d’abord obtenu un certificat de
décharge. La responsabilité couvre des sommes pour lesquelles il est raisonnable
de s’attendre que la société soit redevable ou puisse le devenir en vertu du la Loi
jusqu’à concurrence de la valeur du bien attribué. Par exemple, un administrateur
peut être responsable en sa qualité de représentant légal d’une société s’il supervise
la dissolution de celle-ci18.
Les lois applicables fixent certaines restrictions à la responsabilité de
l’administrateur à l’égard de l’omission par une société de retenir ou de verser une
somme19. En particulier, l’ARC doit
n
n
n
enregistrer à la Cour fédérale un certificat précisant la somme pour laquelle
la société est responsable et établir le défaut d’exécution à l’égard de cette
somme;
prouver l’existence d’une créance dans les six mois suivant le premier en
date du jour où les procédures ont été engagées pour la liquidation ou
dissolution de la société ou du jour de la dissolution;
prouver l’existence d’une créance dans les six mois suivant la date de la
cession de la société ou de l’ordonnance de faillite en vertu de la Loi sur la
faillite et l’insolvabilité.
Comme la responsabilité potentielle de l’administrateur est tributaire de l’obligation
sous-jacente de la société, l’ARC peut poursuivre l’administrateur au moyen de ce
que l’on appelle parfois une cotisation à titre dérivé 20.
La responsabilité potentielle de l’administrateur d’une société n’est pas absolue;
plutôt, les lois prévoient fréquemment une défense fondée sur la diligence
raisonnable. Plus précisément, un administrateur n’est peut-être pas responsable
de l’omission de remettre l’impôt ou la taxe s’il a agi avec autant de soin, de
diligence et de compétence pour prévenir le manquement que ne l’aurait fait une
personne raisonnablement prudente dans les mêmes circonstances 21.
La responsabilité d’un administrateur pour les impôts et taxes non remis est
également assujettie à une prescription. Ainsi, aucune action ou procédure visant
18 Voir le paragraphe 3 de la Circulaire d’information 82-6R10, « Certificat de décharge »,
25 novembre 2013. Voir également l’article 270 de la LTA. Une discussion sur les circonstances
dans lesquelles un administrateur peut être considéré comme un « représentant légal » de la
société et sur la responsabilité personnelle de l’administrateur en vertu de l’article 159 de la Loi
ou de l’article 270 de la LTA dépasse la portée du présent article.
19 Voir le paragraphe 227.1(2) de la Loi et le paragraphe 323(2) de la LTA.
20 Il est maintenant établi que l’administrateur peut contester, dans son avis d’opposition de la
cotisation à titre dérivé de l’ARC ou en appel de celle-ci, l’exactitude de la cotisation
sous-jacente de la société. Voir, par exemple, Abrametz c. Canada, 2009 CAF 70, par le juge
Ryer et McKenzie c. La Reine, 2013 CCI 239, par le juge Hershfield.
21 Voir le paragraphe 227.1(3) de la Loi et le paragraphe 323(3) de la LTA.
planification fiscale personnelle  n  1103
le recouvrement d’une somme payable par un administrateur d’une société ne peut
commencer plus de deux ans à compter de la date à laquelle l’administrateur cesse
pour la première fois d’être un administrateur de cette société 22.
Un administrateur qui satisfait à une créance pour des taxes et impôts non
remis peut tenter de recouvrir les parts des autres administrateurs responsables de
la créance23, même si un litige ne garantit peut-être pas le recouvrement auprès
des autres parties ou ne donne pas lieu au recouvrement.
ADMINISTR ATEUR DE FAIT ET DE DROIT
Compte tenu des conséquences potentielles d’une cotisation à titre dérivé contre
l’administrateur d’une société, il est important pour les fiscalistes oeuvrant dans de
nombreuses sociétés fermées de pouvoir déterminer quand un particulier peut être
considéré ou non comme un administrateur de fait.
La législation fiscale canadienne ne définit pas le terme « administrateur ».
Alors qu’il est clair que les dispositions sur la responsabilité de l’administrateur en
vertu des lois fiscales s’appliquent aux administrateurs de jure (formels) d’une société,
la CAF a confirmé qu’une interprétation plus large du terme « administrateur » est
justifiée; le fait que le terme soit utilisé sans restriction dans la LIR indique que le
législateur voulait qu’il renvoie à « toutes les sortes » d’administrateurs, « qu’ils
soient de fait ou de droit, actifs ou inactifs, bénévoles ou rémunérés, internes ou
externes, d’un organisme à but lucratif ou non »24. Comme les tribunaux l’ont
déclaré à de nombreuses occasions, contrairement à un fournisseur qui choisit de
faire affaire avec une société donnée, la Couronne est un « créancier involontaire »,
ce qui laisse entendre que la notion d’administrateur ne devrait pas recevoir « une
interprétation si restrictive » qu’elle compromettrait les objectifs visés par l’adoption
de dispositions sur la responsabilité de l’administrateur 25.
En l’absence d’un définition du terme « administrateur » dans la législation
fiscale, sa signification est généralement déterminée en fonction de la loi qui régit
la société. Ainsi, dans la Loi canadienne sur les sociétés par actions (ci-après « la
22 Voir le paragraphe 227.1(4) de la Loi et le paragraphe 323(5) de la LTA.
23 Voir le paragraphe 227.1(7) de la Loi et le paragraphe 323(8) de la LTA.
24 Voir The Queen v. Wheeliker (sub nomine The Queen v. Corsano et al.), 99 DTC 5658, au
paragraphe 16 (CAF), par le juge Létourneau. Le juge Noël a rédigé le jugement pour la
majorité de la cour (la juge Desjardins, motifs concordants); le juge Létourneau a rédigé les
motifs de la minorité. Il s’est avéré que les motifs du juge Létourneau dans Wheeliker ont influé
sur des décisions ultérieures; ainsi, dans Bonotto c. La Reine, 2008 CCI 221, au paragraphe 52, le
juge Hershfield a expressément souligné que dans des jugements qui ont suivi, on a adopté le
point de vue du juge Létourneau sur la fonction d’administrateur de fait.
25 Wheeliker, supra note 24, au paragraphe 19. Voir également l’influent jugement de la Cour
d’appel fédérale dans Canada c. Buckingham, 2011 CAF 142, au paragraphe 49, par le juge
Mainville et (entre autres décisions de la CCI) Deakin c. La Reine, 2012 CCI 270, au
paragraphe 24, par le juge Boyle et Gariepy, supra note 1, au paragraphe 3.
1104  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
LCSA »), par exemple, le terme « administrateur » couvre « indépendamment
de son titre, le titulaire de ce poste »26. La partie X de la LCSA porte sur les
administrateurs et dirigeants et elle prévoit que, sous réserve de toute convention
unanime des actionnaires, « les administrateurs gèrent les activités commerciales
et les affaires internes de la société ou en surveillent la gestion » 27. Certaines
personnes ne peuvent être administrateurs — généralement, ce sont des personnes
autres que des particuliers et des particuliers qui n’ont pas l’âge de la majorité,
qui sont légalement incompétents ou qui ont le statut de failli 28. La LCSA prévoit
également que la qualité d’actionnaire n’est pas requise pour être administrateur
d’une société, sauf disposition contraire de ses statuts constitutifs 29.
Dans un récent texte sur le droit des sociétés commerciales canadiennes
moderne, l’auteur fait remarquer qu’il existe dorénavant trois catégories
d’administrateur de fait30 :
1. L’administrateur dont le mandat a expiré mais qui a néanmoins continué
d’agir comme si le mandat n’avait pas expiré.
2. Le particulier qui assume lui-même la fonction d’administrateur sans avoir
été validement élu.
3. La personne qui, dans le cas où tous les administrateurs ont démissionné ou
ont été révoqués, gère les activités commerciales et les affaires internes de
la société ou en surveille la gestion est réputée être un administrateur.
Il est plus exact d’identifier une personne qui appartient à la troisième catégorie
comme un administrateur réputé plutôt que comme un administrateur de fait.
Mais la participation du particulier à la gestion ou la supervision des activités
commerciales et des affaires internes d’une société semble compatible avec la
norme factuelle inhérente dans les deux premières catégories.
Nonobstant les formalités du droit des sociétés, le problème demeure : comment
déterminer si un particulier est ou non un administrateur de fait.
La jurisprudence canadienne a généralement retenu deux indicateurs clés
permettant de conclure qu’un particulier est ou a été un administrateur de fait d’une
société. Ces deux indicateurs peuvent être formulés ainsi : le fait d’« agir comme
un administrateur » (le particulier fait ce que fait un administrateur) et le fait de
« donner l’impression d’être un administrateur » (le particulier est présenté comme
étant un administrateur). Il est important de remarquer, au départ, que ces deux
facteurs généraux ne sont d’aucune façon d’égale importance. Bien au contraire.
26 LR 1985, c. C-44, telle que modifié (ci-après « LCSA »), paragraphe 2(1).
27 LCSA, paragraphe 102(1).
28 Voir, par exemple, le paragraphe 105(1) de la LCSA.
29 LCSA, paragraphe 105(2).
30 Voir Kevin P. McGuiness, Canadian Business Corporations Law, 2d ed. (Markham, ON :
LexisNexis Canada, 2007), aux pp. 775-77. Voir, par exemple, l’article 109 de la LCSA.
planification fiscale personnelle  n  1105
Il est généralement admis qu’une personne qui « agit comme un administrateur »
sera considérée comme étant un administrateur de fait de la société, alors que le
fait de « donner l’impression d’être un administrateur » peut être significatif ou
non mais, si on se fie à la jurisprudence existante, il risque d’être beaucoup moins
déterminant31. Il semble qu’il y ait encore quelque incertitude — la jurisprudence
n’a pas traité de la question directement à ce jour — quant à savoir si et comment
le fait d’être considéré comme un administrateur par la société ou le particulier
entre en ligne de compte dans l’analyse32.
Deux jugements récents de la CCI sont utiles à cet égard car ils clarifient les
facteurs essentiels à prendre en considération dans les causes portant sur
l’administrateur de fait. Dans MacDonald 33, le contribuable avait signé un certain
nombre de documents où il se faisait passer pour un administrateur de la société,
mais la Cour a néanmoins conclu qu’il ne l’était pas. Dans McDonald 34, au
contraire, la Cour a conclu que le contribuable était un administrateur car les faits
montraient qu’il jouait un rôle clé dans les activités de la société et qu’il participait
également en partie à sa gestion.
AUCUNE INTENTION D’ÊTRE UN ADMINISTR ATEUR
EN DÉPIT DES APPARENCES : MacDONALD
Même si la cause MacDonald a été entendue selon la procédure informelle et
qu’elle n’a donc pas valeur de précédent, elle contient un commentaire important
sur les circonstances dans lesquelles la CCI n’est pas prête à conclure qu’un
particulier était un administrateur de fait.
Great Canadian Pub Inc. (« GCPI ») avait exploité un bar du mois d’octobre 2007
au mois de décembre 2009. Avant l’ouverture, le dirigeant apparent (« M. Marney »)
de GCPI avait présenté un exposé devant un groupe d’investisseurs potentiels, dont
faisait partie le contribuable (M. MacDonald), qui était alors devenu actionnaire
en investissant quelque 10 000 $ dans l’entreprise. M. MacDonald occupait un
emploi à temps plein et il ne s’occupait pas des activités de l’entreprise, pas plus
qu’il n’avait travaillé à l’exploitation du bar. Cependant, peu après l’ouverture du
bar, M. MacDonald était devenu un signataire autorisé à la banque de l’entreprise;
en cour, il a témoigné que ce pouvoir ne lui avait été donné que parce que la
banque exigeait que deux personnes signent les chèques35.
31 Voir, par exemple, Hartrell c. La Reine, 2006 CCI 480, au paragraphe 27 (confirmé à 2008 CAF
59), où le juge Paris suggère que, dans certaines circonstances, un particulier n’a pas à se
présenter expressément comme administrateur à des tiers. Le critère est peut-être plutôt de
savoir si la personne a, dans les faits, assumé le rôle d’administrateur. Voir également
Beauchemin c. La Reine, 2007 CCI 105, au paragraphe 13, par le juge Bédard.
32 Une discussion de la question dépasse la portée du présent article.
33 Supra note 2.
34 Supra note 3.
35 MacDonald, supra note 2, aux paragraphes 3-5.
1106  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
Peu après l’ouverture du bar, certains autres actionnaires de GCPI ont demandé
à M. MacDonald de garantir un prêt. On lui a dit que, s’il n’aidait pas à garantir le
prêt, tous les actionnaires risquaient de perdre leur investissement. Selon les
documents du prêt, l’épouse de M. MacDonald, Mme Richard, était inscrite comme
présidente de GCPI et M. Marney et M. MacDonald, comme administrateurs.
M. MacDonald avait également été identifié par la suite comme administrateur de
GCPI dans divers autres documents relatifs à l’entreprise, incluant des certificats
bancaires, des déclarations annuelles et des documents de l’ARC. M. MacDonald a
expliqué qu’il apposait simplement sa signature sur les documents que les avocats
ou les comptables de la société, la banque ou l’ARC lui présentaient. M. MacDonald
signait aussi des chèques pour GCPI après le travail36.
M. Marney et Mme Richard ont démissionné de GCPI en octobre 2009. Après
leur départ, M. MacDonald a tenté de trouver des investisseurs qui reprendraient
l’entreprise, compte tenu de son manque d’expérience. Quand deux personnes
ont fait part de leur intérêt, M. MacDonald n’avait même pas su leur montrer où se
trouvaient les documents de la société ni comment allumer les lumières sur les lieux.
GCPI a mis fin à ses activités à la fin de 2009 quand l’électricité avait été coupé 37.
Devant la CCI, M. MacDonald arguait qu’il n’était pas un administrateur de
GCPI, faisant valoir que toutes les mesures qu’il avait prises avaient uniquement
pour but de protéger son investissement. La Couronne prétendait que
M. MacDonald était responsable comme administrateur de la société, soit de
droit, soit de fait38. Le juge Rossiter (qui siégeait alors à la CCI) n’a eu aucune
difficulté à conclure que M. MacDonald n’était pas un administrateur de droit39.
Quant à la possibilité que M. MacDonald ait été un administrateur de fait, le juge
Rossiter a fait remarquer que même s’il avait signé certains documents pour la
société, selon son propre témoignage, il n’avait signé les documents que lorsqu’on
lui avait demandé de le faire40.
Pour le juge Rossiter, la notion d’administrateur de fait ne s’appliquait qu’aux
personnes qui agissaient comme administrateurs et elle devrait se limiter
uniquement à « ceux qui se font passer pour des administrateurs »41. Il a conclu
que les faits en l’espèce montraient que M. MacDonald n’était qu’un actionnaire.
Élément important, toutes les décisions importantes concernant l’entreprise ont
été prises par des personnes autres que lui, et alors qu’il signait certains documents
de la société l’identifiant comme un administrateur, il ne le faisait qu’à la demande
d’autres personnes. On pourrait dire la même chose quand il avait co-signé des
36 Ibid., aux paragraphes 6-10.
37 Ibid., aux paragraphes 12 et 16.
38 Ibid., aux paragraphes 20-21.
39 Ibid., au paragraphe 36.
40 Ibid., au paragraphe 45.
41 Ibid., au paragraphe 39.
planification fiscale personnelle  n  1107
chèques simplement parce qu’il fallait deux signatures. La signature de l’emprunt
bancaire par M. MacDonald était explicitement liée à la protection de son
investissement en actions. Finalement, alors qu’il signait des documents pour le
compte de la société à l’intention de tiers — et que ces parties s’y étaient peut-être
fiées — M. MacDonald n’avait reçu que peu d’explications, voire aucune, quant à
ce qu’il signait exactement. Le juge Rossiter a donc indiqué que, dans l’ensemble,
M. Macdonald « a déclaré avec fermeté qu’il n’était pas un administrateur de
l’entreprise »42. La Cour a conclu que M. MacDonald n’était pas un administrateur,
quoique, selon le juge, « il a semblé être une personne quelque peu naïve »43.
JOUER UN RÔLE SIGNIFIC ATIF DANS LES
AFFAIRES DE LA SOCIÉTÉ : McDONALD
Dans la seconde cause portant un nom semblable, le contribuable (M. McDonald)
était un entrepreneur électricien assez expérimenté dans l’entreprise de sa société,
Arc Electrical Technicians Ltd. (« AETL »). Avant de constituer AETL, il exploitait
une entreprise similaire qu’il avait finalement vendue parce que, selon lui, il
« éprouvait des difficultés au sujet de la tenue des livres »44. Les premiers
administrateurs de AETL étaient son épouse (Mme McDonald) et son beau-père.
M. McDonald avait été embauché par la société pour gérer son entreprise45.
Mme McDonald s’occupait des aspects administratifs de AETL; M. McDonald
a signé des chèques ainsi que les formulaires de versement de la société, mais il a
expliqué qu’il ne le faisait que d’après les instructions de l’aide-comptable de la
société, qui lui présentait simplement le document pour signature46. Sur une
période de plusieurs années, M. et Mme McDonald avaient eu des rencontres avec
des représentants de l’ARC au sujet des problèmes de versements de la société.
Mme McDonald expliquait la présence de son mari à ces rencontres en déclarant
que son père commençait alors à montrer des signes d’incapacité à être un
administrateur à cause de son âge47.
À un moment au cours de l’existence de AETL, M. McDonald avait suggéré que
la société prenne de l’expansion afin d’obtenir des projets commerciaux plus
importants, mais son épouse et son beau-père étaient en désaccord, insistant pour
que la société soit confinée aux contrats plus modestes que la société exécutait
jusqu’alors 48.
42 Ibid., au paragraphe 49.
43 Ibid.
44 McDonald, supra note 3, au paragraphe 6.
45 Ibid., aux paragraphes 6-7.
46 Ibid., aux paragraphes 8-9.
47 Ibid., aux paragraphes 13 et 18.
48 Ibid., au paragraphe 10.
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(2015) 63:4
La juge Campbell de la CCI a déclaré que c’est la question de savoir si
M. McDonald « agissait […] à titre d’administrateur » de AETL qu’elle devait
trancher49. Pour elle, la « question fondamentale » était de savoir si le contribuable
avait, dans les faits, assumé le rôle d’administrateur50. Cette détermination n’est
pas toujours facile à faire car il est clair que des particuliers peuvent posséder et
exercer certains pouvoirs au sein d’une société sans que cela mène nécessairement
à la conclusion qu’ils en sont des administrateurs de fait 51.
La juge Campbell a conclu que M. McDonald ne jouait pas un « rôle
subordonné »52 dans les affaires de AETL comparativement à son épouse et à son
beau-père. Il a plutôt joué un rôle important. Il a signé des chèques, il avait
« accès » aux registres de la société, il était « libre de poser des questions aux aidescomptables sur les versements » et, de plus, il gérait et contrôlait seul les employés
dans leur travail sur le terrain53. M. McDonald a aussi assisté aux rencontres avec
les représentants de l’ARC et, ce faisant, il s’est « présenté comme » étant l’un des
particuliers possédant des connaissances approfondies sur les affaires de la
société 54. Alors que la juge Campbell a pris note de l’exemple où Mme McDonald
avait rejeté le plan de son mari d’obtenir des contrats plus importants, aucun autre
élément de preuve n’a été produit pour appuyer la conclusion selon laquelle
M. McDonald ne prenait pas part au contrôle des affaires de la société. En fait, ce
qui est d’une importance capitale, c’est l’expertise de M. McDonald qui était au
coeur même de l’exploitation de la société55.
Dans un commentaire fort utile, la juge Campbell ajoute qu’un particulier ne
doit pas nécessairement prendre part à « tous les aspects de la direction » des
activités d’une société pour en être déclaré administrateur de fait56. La question
de déterminer « si un particulier s’est acquitté de fonctions que l’on s’attendrait
à ne voir exécutées que par un administrateur de droit » est factuelle57, ce qui
laisse entendre que cette évaluation peut varier en fonction de la structure
organisationnelle de la société et de la complexité de ses activités commerciales.
Élément significatif, la juge Campbell a insisté sur le fait qu’il n’existe pas de
critère unique pour déterminer si un particulier est un administrateur de fait; on
doit plutôt trancher la question de savoir
49 Ibid., au paragraphe 21.
50 Ibid., au paragraphe 24, citant le juge Paris dans Hartrell, supra note 31, au paragraphe 27.
51 McDonald, supra note 3, aux paragraphes 21-26, citant le juge Bédard dans Beauchemin, supra
note 31.
52 McDonald, supra note 3, au paragraphe 27.
53 Ibid.
54 Ibid.
55 Ibid., au paragraphe 28.
56 Ibid., au paragraphe 29.
57 Ibid.
planification fiscale personnelle  n  1109
si un particulier peut être considéré comme faisant partie de la structure de direction
de la société, de sorte qu’il est responsable des questions à l’égard desquelles il a
détenu et exercé un certain pouvoir, comme s’il avait été nommé administrateur de
cette société58.
QUELLES ACTIONS FONT D’UN PARTICULIER
UN ADMINISTR ATEUR DE FAIT?
La ligne la plus claire qui se dégage de la jurisprudence canadienne semble être
qu’une personne qui pose des gestes que seul un administrateur peut poser risque
fortement d’être considérée comme un administrateur de fait. Au-delà, cependant,
la jurisprudence actuelle sur la responsabilité de l’administrateur ne contient pas
de principes organisationnels clairs et il n’existe pas non plus de liste exhaustive
des gestes qui transformeront un particulier en un administrateur de fait.
Exécuter les fonctions d’un administr ateur
Il semble se dégager une sorte de continuum qui va de la passivité complète à titre
d’investisseur à une participation extraordinaire aux affaires de la société. Dans
Paton 59, un jugement plus ancien, la CCI a observé que des investisseurs peuvent
poser un certain nombre de gestes, y compris rencontrer les principales parties
prenantes de la société, sans aller trop loin pour avoir le statut d’administrateur de
fait. Dans la cause plus récente Netuptsky 60, la Cour a conclu que les actions du
contribuable relativement à la société avaient pris la forme de réactions à des
questions portées à son attention en sa qualité d’actionnaire. La Cour a aussi noté
que la notion d’administrateur de fait n’englobe pas toutes les personnes qui
exercent des pouvoirs dans une société. Par exemple, signer des chèques pour la
société ou de rapports adressés aux autorités gouvernementales et rencontrer des
représentants des autorités fiscales ne permettent pas de présumer que la personne
qui accompli ces actions l’a fait en sa qualité d’administrateur 61.
Certains types de gestes se rapprochent davantage du rôle fondamental d’un
administrateur en vertu du droit des sociétés et indiqueraient donc fortement que la
personne qui les pose agit comme un administrateur d’une société. Dans Bremner,
la CCI a suggéré que les actions suivantes étaient caractéristiques du rôle d’un
administrateur 62 :
n
n
participer aux réunions du conseil d’administration,
signer des résolutions du conseil,
58 Ibid., au paragraphe 30.
59 Paton v. MNR, [1990] TCJ no. 765, par le juge Rip.
60 Netuptsky v. R, [2003] GSTC 15 (CCI), par le juge Bell.
61 Beauchemin, supra note 31, au paragraphe 13.
62 Bremner c. La Reine, 2007 CCI 509 (procédure informelle), au paragraphe 24, par le juge Rip;
confirmé à 2009 CAF 146, par le juge Ryer.
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n
n
n
(2015) 63:4
prendre des décisions d’administration de la société,
prendre des décisions d’aliénation d’actifs de la société, et
donner des instructions au nom de la société.
Un autre indicateur du statut d’administrateur pourrait être l’acceptation de la
démission d’un autre administrateur ou d’un haut dirigeant 63.
Il faut se rappeler que le fondement des pouvoirs de l’administrateur d’une
société réside dans son devoir général de gestion ou de supervision de la gestion
de l’entreprise et des affaires de la société. En général, l’administrateur agira
habituellement comme un surveillant de la gestion de la société plutôt que comme
un participant à ses activités quotidiennes. (Cela ne veut pas dire, cependant, que
celui qui est un administrateur d’une société ne peut pas également en être un
dirigeant.) La personne qui joue un tel rôle de surveillance de la gestion de la
société peut donc très bien assumer la responsabilité essentielle d’administrateur.
En ce qui a trait à une telle « fonction », la jurisprudence a établi que
l’existence de l’administrateur de fait reposait sur les actions du particulier dans un
certain nombre de situations, incluant les suivantes :
n
n
n
Le particulier participait et contribuait de manière non équivoque à
l’administration et à la gestion de la société et ce, non seulement pour les
affaires courantes, mais aussi (et ce qui est peut-être plus important) à des
décisions majeures (stratégiques) liées à l’entreprise de la société 64.
Le particulier jouait un rôle clé dans l’administration et la gestion de la
société et avait un pouvoir de prendre des décisions définitives 65.
Le particulier se supervisait lui-même, était le seul signataire autorisé et
n’avait effectivement aucun compte à rendre à qui que ce soit relativement
aux devoirs d’un administrateur 66.
Pourtant, il faut se rappeler que des administrateurs peuvent jouer des rôles
différents dans la supervision des affaires d’une société. Quoique, officiellement,
il n’existe pas de distinction entre les administrateurs (internes ou externes), en
pratique, l’expérience et la participation d’administrateurs individuels peuvent
varier considérablement. Parfois, les sociétés jugeront opportun ou utile d’avoir
un administrateur « vedette » ou un administrateur de nom seulement inscrit
dans les registres pour fins de négociation avec des tiers, comme les banques.
Mais tous les administrateurs d’une société font face à la même responsabilité
63 Voir, par exemple, Chell c. La Reine, 2013 TCC 29, au paragraphe 28, par le juge Hogan.
64 Milani c. La Reine, 2011 CCI 488 (procédure informelle), au paragraphe 25, par le juge Tardif.
65 Hartrell, supra note 31.
66 Baker c. La Reine, 2010 CCI 268, au paragraphe 70, par le juge Hershfield.
planification fiscale personnelle  n  1111
fiscale éventuelle, même si les faits entourant le statut de chaque personne comme
administrateur de droit ou de fait sont différents67.
Dans une certaine mesure, déterminer si un particulier a exercé les fonctions
d’un administrateur peut devenir un exercice comparatif. Ainsi, dans McDonald,
même si le contribuable avait tenté de laisser le plus possible l’administration de la
société aux mains de son épouse, la CCI a néanmoins conclu qu’il avait fonctionné
comme un administrateur, en particulier en comparaison avec la participation de
son épouse68. Par ailleurs, dans d’autres causes, où le contribuable relevait de
l’administrateur de droit de la société ou était clairement subordonné aux décideurs
ultimes de la société, la Cour a conclu que le contribuable n’exerçait pas les
fonctions d’un administrateur69.
La CCI a également laissé entendre que le fait d’avoir accès à tous les signes
extérieurs de la fonction d’administrateur, même s’ils ne sont pas utilisés sur une
base régulière, peut constituer un facteur influent. Aussi, même le fait de voir
des décisions importantes pour l’avenir de la société (comme c’était le cas dans
McDonald ) être contredites n’est pas nécessairement déterminant. Néanmoins,
il semble que l’on puisse évaluer si le particulier a exercé des fonctions d’un
administrateur, du moins en partie, en déterminant dans quelle mesure il est
supervisé par quelqu’un d’autre ou il relève de cette autre personne70.
La jurisprudence présente parfois comme autre option pour la qualification du
statut d’un particulier comme administrateur de fait (actif ) le fait que le particulier
n’était rien de plus qu’un investisseur (passif ) dans la société71. À cet égard, il est
important de se rappeler que c’est généralement le contribuable qui a le fardeau de
réfuter les hypothèses de l’ARC; par conséquent, il serait utile qu’il puisse témoigner
de sa participation passive et que celle-ci soit corroborée par d’autres preuves
testimoniales ou documentaires. Autrement, la cause reposera essentiellement sur
sa crédibilité comme témoin devant la Cour. Qui plus est, la CCI a averti qu’il y a
parfois des actes qui sont trop éloignés de ce que l’on pourrait raisonnablement
s’attendre d’un créancier ou d’un actionnaire de la société. Aussi, la Cour sera
peut-être prête, dans une cause appropriée, à conclure au statut d’administrateur
de fait du contribuable à partir d’une accumulation de preuves qui suggèrent la
présence d’une fonction d’administrateur, notamment s’il y a peu ou pas d’indication
contraire que le particulier ou la société ait jamais précisé à une partie prenante de
la société que le particulier ne participait pas à la gestion de la société à titre
d’administrateur.
67 Des circonstances différentes peuvent être pertinentes pour le défense fondée sur la diligence
raisonnable, dont il est question plus loin.
68 Voir la discussion dans le texte ci-dessus aux notes 44 à 58.
69 Voir Beauchemin, supra note 31 et Mosier v. R, [2001] GSTC 124 (CCI), par le juge Bowman.
70 Voir, par exemple, Mosier, supra note 69.
71 Voir, par exemple, Paton, supra note 59.
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(2015) 63:4
C ar actère indispensable
Si on revient sur les faits dans MacDonald, où la Cour avait conclu que, même si
le contribuable/investisseur dans GCPI s’était présenté lui-même comme un
administrateur dans les documents de la société, il n’en était cependant pas
un administrateur; un aspect de la cause qui a pu avoir un poids particulier pour
la cour était l’absence de ce quelque chose dont la Cour avait clairement établi
l’existence dans McDonald, à savoir, la participation du contribuable à la « structure
de direction » de la société 72. Dans McDonald, l’expérience de M. McDonald
comme entrepreneur électricien était centrale à l’existence de la société; on aurait
pu dire que, sans lui, il n’y aurait pas eu d’entreprise. Alors que l’on pourrait
peut-être aussi soulever le même argument dans une cause différente portant sur
un employé clé ou vedette, il semble que, dans cette cause, la Cour ait suggéré que
compte tenu de son importance centrale pour AETL, M. McDonald n’avait pas été
en mesure de montrer, à la satisfaction de la cour, qu’il ne participait pas à la
gouvernance de la société. Dans MacDonald, par ailleurs, le contribuable n’était pas
un employé de GCPI et, compte tenu de la nature de sa participation uniquement
occasionnelle, il ne représentait pas un élément essentiel à l’existence de la société.
Peut-être son comportement était-il assimilable à celui d’un investisseur qui tente
de protéger son investissement plutôt qu’à celui d’un particulier qui tente
d’orienter les affaires d’une société 73.
Il y a plusieurs arrêts rapportés où la nature essentielle de la contribution du
contribuable à l’existence de la société, à ses activités commerciales ou à sa gestion
laisse clairement entendre qu’il serait difficile de voir toute autre personne que lui
comme administrateur de la société. Ces causes couvrent des situations comme les
suivantes :
n
Le contribuable, qui était l’actionnaire principal de la société et initialement
son unique administrateur, avait démissionné comme administrateur.
Cependant, il dirigeait et contrôlait toujours la société et il s’était lui-même
donné le titre de directeur général. Il négociait avec les banques et signait
des contrats et autres documents pour la société. Il était la seule personne
autorisée à signer des chèques pour la société 74.
72 McDonald, supra note 3, au paragraphe 30.
73 Voir la discussion sur l’arrêt MacDonald dans le texte ci-dessus aux notes 35-43. Voir aussi
Baker, supra note 66, où la CCI n’a pas retenu la responsabilité du contribuable sur la base de la
défense de diligence raisonnable. Quant à ses conclusions, la Cour a cependant voulu préciser
que le contribuable n’était pas l’unique administrateur de la société puisque c’est son épouse qui
était la personne responsable de la gestion et de l’administration courantes de la société; pour la
Cour, la preuve montrait que l’épouse du contribuable avait agi au delà du rôle de responsable
de la conformité administrative. Voir également Dirienzo v. The Queen, 2000 DTC 2230, au
paragraphe 5 (CCI), par le juge Bowman.
74 Voir Thibeault c. La Reine, 2005 CCI 393 (procédure informelle), aux paragraphes 6, 8, 9 et 46,
par le juge Dussault.
planification fiscale personnelle  n  1113
n
n
n
Le contribuable était le seul signataire autorisé de la société avec sa banque.
La CCI a conclu que le contribuable avait « effectivement et sans immixtion »
pris le rôle de « tête dirigeante » de la société 75. Qui plus est, puisque c’était
le contribuable (et lui seul) qui préparait les chèques de la société, il aurait
été au courant du problème fiscal dès l’omission par la société de faire ses
versements76.
La Cour a conclu que le contribuable jouait « un rôle clé dans
l’administration » et, avec son associé en affaires, il avait « le pouvoir
de prendre les décisions définitives » concernant la société 77. Ainsi, le
contribuable avait signé un grand nombre des chèques émis par la société, il
communiquait régulièrement avec la banque, il participait à l’établissement
des budgets et il avait lui-même payé des montants significatifs des frais
d’exploitation78.
Après la démission de tous les autres administrateurs, le contribuable s’est
retrouvé le dernier administrateur. Même s’il avait alors posté sa lettre de
démission officielle, il semble qu’il soit demeuré la dernière personne en
poste; ainsi, il a continué de rencontrer des représentants de l’ARC pour
discuter des dettes fiscales impayées et a continué d’exploiter des possibilités
d’affaires pour la société 79.
Pourtant, même dans cette catégorie de causes sur l’administrateur de fait axées
sur le caractère indispensable du particulier pour la société, il y a encore des
questions que les tribunaux devront régler en bout de ligne. L’une de ces questions
possibles qui se pose ici est celle de savoir si le caractère indispensable concerne le
rôle central du particulier pour la gouvernance de la société ou son rôle comme
exploitant clé de l’entreprise. (À certains égards, ceci nous ramène à la très
controversée question de déterminer si une personne a le contrôle de fait d’une
société : Est-ce le contrôle du conseil d’administration qui compte ou le contrôle
des activités de la société 80 ?) Comme on l’indique plus bas, un employé clé ne
devient pas un administrateur parce qu’il est un employé indispensable. Il faudra
donc qu’il y ait « quelque chose de plus » avant que les tribunaux puissent conclure
75 Bonotto, supra note 24, au paragraphe 22.
76 Ibid., aux paragraphes 21 et 53. Pour la Cour, il était notable que, tout au long de la période
d’omission des versements, le contribuable était « la seule personne en mesure de faire respecter
ces exigences » et qu’il n’a pas forcé la société à effectuer les versements afin d’utiliser plutôt
l’argent pour financer l’entreprise : ibid., au paragraphe 42.
77 Hartrell, supra note 31, au paragraphe 28.
78 Ibid., au paragraphe 33.
79 Chell, supra note 63, au paragraphe 7.
80 Voir Brian Studniberg et Joel Nitikman, « De Facto Control: Do We Know What It Means—
Yet? (Part I) », Tax Topics no. 2244, 12 mars 2015, 1-7, et « […] (Part II) », Tax Topics no. 2245,
19 mars 2015, 1-6.
1114  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
qu’un tel employé agit comme un administrateur. Dans une petite entreprise, un
employé clé pourrait très bien faire quelque chose de plus pour la société que ne
le suggère son titre d’emploi officiel, mais est-ce important que ce quelque chose
de plus soit de nature administrative ou qu’il relève plutôt de l’exploitation, ou
doit-il se situer entièrement ailleurs, par exemple en remplacement partiel des
administrateurs officiels d’une société? Il serait utile que les tribunaux donnent des
précisions sur le sujet.
Haut dirigeant sans privilège d’administr ateur
Il y a un point sur lequel on revient et on insiste fréquemment dans les causes :
être un dirigeant ne fait pas en soi d’une personne un administrateur d’une
société. Comme la CCI l’a indiqué dans Bonotto, « il faut que la personne se soit
présentée comme assumant les pouvoirs et les responsabilités de gestion en tant
qu’administrateur » 81.
Mais quand peut-on conclure à l’existence de ce « quelque chose de plus »?
Les causes couvrent un certain nombre de situations où les responsabilités ou les
actions d’un haut dirigeant d’une société n’ont pas permis d’en faire un
administrateur de fait :
n
n
n
Avoir le pouvoir de signer pour la société ne fait pas d’une personne un
administrateur de la société 82.
Le contribuable était le directeur général de la société ayant le pouvoir de
signature pour le compte de la société, mais il ne s’est jamais présenté
comme un administrateur83.
Être cadre supérieur d’une société — même son président directeur général
(PDG) — ne signifie pas que l’on est devenu un administrateur84. L’élément
qui a semblé déterminant en l’espèce est que le contribuable était au service
de la société mais qu’il relevait des administrateurs de droit, qui contrôlaient
toujours la société et qui ne tenaient pas compte de l’avis de son PDG à ce
moment-là.
Avoir le pouvoir est donc clairement insuffisant pour qu’un particulier soit
considéré comme un administrateur de fait85. Comme l’a déclaré la CCI, les
particuliers ne deviennent pas des administrateurs simplement parce qu’on leur a
donné le pouvoir et la responsabilité de superviser les activités quotidiennes de la
société 86. Il faut également, dans la plupart des cas semble-t-il, aller plus loin de
81 Bonotto, supra note 24, au paragraphe 53.
82 Voir Perricelli v. R, [2002] GSTC 71 (CCI), par le juge C. Miller, et Beauchemin, supra note 31.
83 Scavuzzo c. La Reine, 2005 CCI 772, au paragraphe 27, par le juge Bowman.
84 Mosier, supra note 69.
85 Voir Bonotto, supra note 24, aux paragraphes 55-57.
86 Mosier, supra note 69, au paragraphe 28.
planification fiscale personnelle  n  1115
sorte que le particulier ait son mot à dire sur les affaires de la société ce que, en
droit, seuls les administrateurs peuvent faire. Par ailleurs, peut-être la
participation substantielle du particulier combinée au fait qu’il se fait passer pour
un administrateur suffit-elle pour faire pencher la balance. Autrement dit, la
question est de savoir si l’administrateur avait le pouvoir décisionnel ultime, s’il
effectuait des tâches pour le compte de la société que seul un administrateur
pouvait effectuer ou s’il ne relevait de personne et n’était dirigé par personne au
sein de la société. Un directeur général qui a un pouvoir de signature n’est
simplement pas un administrateur87.
Un commentaire général formulé ici pourrait peut-être avoir une pertinence
plus grande, mais il s’applique fréquemment lorsque la cause porte sur le
principal dirigeant d’une société. Dans les causes portant sur la responsabilité
de l’administrateur, la société a omis et est incapable de régler sa dette fiscale.
Son ancien dirigeant, surtout s’il n’était pas un actionnaire et n’avait jamais été
un administrateur de droit, n’aurait peut-être pas été en mesure de conserver
la documentation de la société établissant, par exemple, la voie hiérarchique
et l’identité des décideurs ultimes de la société. Dans certaines causes, la seule
personne connue des nombreux clients ou fournisseurs de la société comme étant
au premier rang de l’organisation était peut-être en fait son dirigeant. Quand
même, la jurisprudence offre certaines lignes directrices à cet égard, faisant
remarquer que le contribuable qui se présente clairement (et uniquement) à des
tiers comme le directeur général ou le secrétaire et contrôleur de la société offre
un important indicateur externe de son statut 88.
Ancien rôle
Une personne qui était auparavant l’unique administrateur d’une société et peutêtre aussi son seul actionnaire trouvera généralement plus difficile de se distancer
elle-même de la société. On peut comprendre la position selon laquelle toute
action qui suggère l’existence de la fonction d’administrateur (au sens où il s’agit du
type d’action dont on pourrait s’attendre de l’administrateur d’une petite société
fermée) peut faire passer le statut de la personne à celui d’administrateur de fait 89.
La CAF a noté qu’un administrateur sortant n’a pas grand chose à faire pour
continuer à être considéré comme demeurant un administrateur90. Certaines des
causes les plus difficiles à juger portent sur un ancien administrateur actif qui a
87 Scavuzzo, supra note 83, au paragraphe 34.
88 Et comme un telle correspondance ou de telles interactions ont lieu avec des personnes de
l’extérieur, il y a plus de chances que l’on trouve des preuves d’une telle déclaration à l’extérieur
des propres dossiers de la société.
89 Voir Bremner, supra note 62. Voir également Savoy c. La Reine, 2011 CCI 35, aux paragraphes
58-59, par le juge Hershfield.
90 Bremner, supra note 62 (FCA), au paragraphe 6.
1116  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
réduit sa participation dans la société et ses affaires. Des interactions occasionnelles
avec des dirigeants de la société sont-elles suffisantes?
Dans Perricelli 91, la Couronne prétendait que le contribuable ne pouvait,
d’une part, faire croire à la caisse de crédit de la société qu’il était encore un
administrateur de celle-ci et, d’autre part, insister sur le fait qu’il avait mis un
terme à sa participation dans la société. Dans sa décision, la CCI a fait remarquer
qu’à une seule occasion, le contribuable, après avoir cessé d’exercer sa fonction
d’administrateur de façon formelle, s’était fait passer pour un administrateur; à
d’autres occasions, il s’était contenté d’en donner l’impression (en ne disant pas
à la caisse de crédit qu’il avait quitté l’entreprise), sans toutefois faire de déclaration
claire à cet effet. Comme l’a noté la Cour, une seule déclaration concernant la
fonction d’administrateur permanent ne permettrait généralement pas de conclure
à l’existence du statut d’administrateur de fait 92.
Il n’est pas clair jusqu’à quel point au delà de tels faits une personne devrait aller
avant qu’une participation occasionnelle subséquente d’un ancien administrateur
fasse de celui-ci un administrateur de fait93. Est-ce l’irrégularité qui est importante
ou la nature très mineure des actions continues ou les deux? Quoi qu’il en soit, on
devrait insister sur le fait que, dans de tels cas, le contexte sera probablement
significatif. Par exemple, dans Ustel 94, la CCI a été sévère en ce qui a trait aux
déclarations de revenus signées par un ancien administrateur. La Cour a indiqué
que le contribuable aurait dû lire ce qu’il signait, et si les déclarations dans
lesquelles il était décrit comme un administrateur n’étaient plus exactes, le
contribuable aurait dû en faire mention au comptable de la société pour qu’il
effectue le changement nécessaire95. Par ailleurs, dans MacDonald, le contribuable
avait signé un bon nombre de documents dans lesquels il se présentait lui-même
comme un administrateur et pourtant, la CCI a été convaincue par son témoignage
où il insistait pour dire qu’il l’avait fait uniquement parce qu’on le lui avait
demandé. Bien qu’il semble qu’il ne s’agisse pas là d’un motif convaincant
lorsqu’un contribuable a signé des documents qu’il n’a ni lus ni compris, la Cour
était satisfaite que M. MacDonald était un investisseur préoccupé tant par le
capital déjà investi que par la perspective de garantir la dette96.
Une dimension importante de ces causes, généralement absente de l’analyse de
la CCI, concerne la question de savoir si la croyance du contribuable dans l’état
91 Perricelli, supra note 82.
92 Ibid., aux paragraphes 43-45. Voir également The Estate of Bela Miklosi c. La Reine, 2004 CCI
253 (procédure informelle), par le juge Paris.
93 Dans Parisien c. La Reine, 2004 CCI 276 (procédure informelle), la juge Lamarre a conclu que
le contribuable était un administrateur, mais qu’il avait exprimé de façon explicite son désir de
continuer à aider l’entreprise après sa démission officielle.
94 Ustel c. La Reine, 2010 TCC 444 (procédure informelle), par le juge Hogan.
95 Ibid., au paragraphe 15.
96 Perricelli, supra note 82, pourrait peut-être être interprété de façon semblable.
planification fiscale personnelle  n  1117
des affaires de la société était raisonnable au moment concerné. Dans l’arrêt
M. MacDonald, était-il raisonnable pour celui-ci, dans les circonstances, d’avoir
signé plusieurs documents dans lesquels il était identifié comme un administrateur de
la société même s’il croyait qu’il ne l’était pas? On peut penser que le fait de signer
des documents importants où le signataire est identifié comme un administrateur
suppose qu’il les a d’abord examinés de près. Nonobstant la conclusion formulée
dans cette cause, on aurait tort de penser que l’on pourra toujours s’en tirer,
comme l’a fait M. MacDonald, en étant (ou en prétendant être) naïf.
La jurisprudence couvre un certain nombre de situations où l’ancien rôle joué
par le contribuable a une influence persistante sur son statut d’administrateur,
incluant les suivantes :
n
n
La contribuable avait été administratrice d’une entreprise qui avait fait faillite.
Elle avait démissionné mais on lui avait demandé de signer des documents
(comme une résolution autorisant la vente des actifs de la société). La
contribuable s’était également présentée comme une administratrice dans
un document destiné aux autorités fiscales, qui avait été préparé par un
parajuriste et que la contribuable avait signé sans l’avoir lu. Malgré les
dénégations de la contribuable, la CCI a demandé pourquoi elle devrait se
préoccuper de signer de tels documents si elle n’avait pas l’intention d’agir
comme une administratrice97.
La CCI a conclu que les fonctions du contribuable n’avaient pas changé après
sa démission officielle comme administrateur. La Cour a expliqué que comme
le comportement du contribuable était demeuré le même, un tiers n’aurait
eu aucune raison de soupçonner quelque changement dans son statut98.
Si le contribuable demeure actionnaire d’une société après avoir mis fin à sa
participation active dans l’entreprise, il peut devoir répondre à des demandes
(provenant, par exemple, des autorités fiscales) à ce titre sans continuer d’être un
administrateur comme avant. Ce qui semble étayer l’argument dans ces
circonstances est que le contribuable n’a fait que le minimum pour y répondre99.
Cesser d’être un administr ateur de fait
Parmi les défenses à opposer à la responsabilité de l’administrateur, mentionnons
la prescription qui empêche que des procédures de recouvrement soient intentées
contre un administrateur d’une société plus de deux ans après qu’il a cessé d’en
97 Bouchard c. La Reine, 2013 TCC 31 (procédure informelle), par le juge Masse.
98 Chell, supra note 63, au paragraphe 31.
99 Voir, par exemple, Walsh c. La Reine, 2009 CCI 557, au paragraphe 43, par le juge Sheridan. La
CCI a accueilli l’appel du contribuable dans Walsh parce que l’ARC n’a pas prouvé qu’il y a eu
défaut d’exécution à l’égard du bref de saisie-exécution ainsi que l’exige le paragraphe 227.1(2)
de la LIR. Par conséquent, la discussion quant au statut d’administrateur dans Walsh est
présentée en obiter dictum; voir ibid., au paragraphes 29-30.
1118  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
être un administrateur100. Dans de nombreux cas, il semblerait que la cessation des
activités de la société serve de point de départ ou de démarcation pour déterminer
quand l’administrateur de fait allégué a cessé sa participation auprès de la société;
il faut cependant être prudent ici, car il est clair que certaines tâches assumées par
le contribuable après la cessation des activités de la société peuvent toujours faire
de lui un administrateur de fait. En outre, des erreurs dans les remises d’impôt et
taxes sont fréquentes dans la période de cessation des activités quand la vente des
actifs entraîne des obligations impayées, ce qui accroît le risque d’établissement
d’une cotisation à titre dérivé pour les taxes et impôts non remis.
Dans Moll 101, par exemple, le contribuable, qui était l’unique actionnaire et
l’unique administrateur de la société, prétendait avoir démissionné après que
celle-ci eût mis fin à ses activités. La CCI a déterminé que, même si le contribuable
avait démissionné, il était encore celui qui gérait les affaires internes de la société
après sa prétendue démission et il était donc réputé continuer à agir comme
administrateur de la société en vertu du droit des sociétés applicable102. Qui plus
est, le contribuable avait continué à se faire passer pour un administrateur. Selon
la Cour, le fait que la société avait cessé ses activités ne signifiait pas pour autant
que le contribuable avait cessé d’en être l’administrateur. La Cour a souligné que
c’est l’absence d’un élément de preuve montrant qu’il avait informé qui que ce
soit, et en particulier les tiers créanciers, qu’il n’était plus administrateur qui était
déterminant. Au contraire, le contribuable a continué de rencontrer des
représentants de l’ARC et à leur remettre des chèques postdatés à titre de
paiements pour les arriérés de la société 103.
La CCI a déclaré qu’aucune règle fixe ne permet de déterminer le moment où
l’administrateur de fait cesse de l’être. C’est le comportement de la personne qui
compte. Ce peut être, par exemple, qu’il « manquera quelque chose dans la
relation entre le particulier et la société »104. Un particulier peut donc cesser d’être
un administrateur de fait
n
n
n
lorsque les actionnaires éliront son remplaçant105;
en donnant un avis à la société de son intention de cesser ses activités à ce titre
et en cessant vraiment de diriger ou de superviser la gestion de la société 106;
lorsqu’il a effectué son dernier geste officiel pour la société (comme signer
un chèque pour les remises d’impôt)107; ou
100 Paragraphe 227.1(4) de la LIR et paragraphe 323(5) de la LTA.
101 Moll c. La Reine, 2008 CCI 234 (procédure informelle), par le juge Miller.
102 Ibid., au paragraphe 19.
103 Ibid., aux paragraphes 19, 21 et 25.
104 Bremner, supra note 62, au paragraphe 26.
105 Ibid.
106 Ibid.
107 Parisien, supra note 93.
planification fiscale personnelle  n  1119
n
lorsqu’il a mis un terme aux négociations avec un client prospectif pour le
compte de la société 108.
Comme on l’a laissé entendre précédemment, il peut être plus difficile en
pratique pour un actionnaire unique ou un administrateur unique de cesser d’être
un administrateur de fait. À cet égard, il serait possible pour la société de retenir
les services de comptables professionnels ou d’avocats pour aider à la liquidation
ordonnée de l’entreprise109. Un changement marqué dans le comportement du
particulier peut aussi être utile pour prouver la cessation alléguée de la fonction
d’administrateur. Comme l’a expressément mentionné la CCI, cette position se
justifie du fait qu’un tiers raisonnable, qui voit la société et son administrateur
allégué de façon objective, ne devrait avoir aucune raison de soupçonner que le
particulier demeure une force dirigeant de la société110. Plus le changement de
comportement du particulier par rapport à la société est important, plus il devrait
être facile de prouver la cessation. Ainsi, pour déterminer si un particulier a cessé
d’être un administrateur ou s’il exerce les fonctions d’un administrateur, on peut,
entre autres choses, chercher à savoir si sa participation continue aux affaires de la
société est davantage considérée comme simplement réactionnelle ou, au
contraire, engagée de façon positive.
Fait intéressant, dans Ustel, la CCI a souligné que l’on pouvait donc invoquer
l’argument selon lequel le contribuable avait cessé d’agir comme administrateur
de fait à compter de la date où il avait signé la dernière déclaration de revenus de
la société. Notons en particulier le commentaire de la Cour sur l’importance de
cette date, qui, a-t-elle laissé entendre, pourrait tout naturellement être le moment
à partir duquel le contribuable a cessé d’être un administrateur de fait de la société111.
De plus, l’un des facteurs les plus fréquemment cités par la CCI est que le
contribuable a été en mesure de prouver qu’il avait donné avis à des tiers faisant
affaire avec la société qu’il avait cessé de participer à ses affaires112. Un tel avis ne
doit pas nécessairement venir du particulier, mais probablement d’un dirigeant
haut placé (ou un autre administrateur) de la société ou peut-être d’un conseiller
professionnel 113.
108 Chell, supra note 63.
109 Voir Walsh, supra note 99.
110 Chell, supra note 63.
111 Ustel, supra note 94, au paragraphe 16. Par ailleurs, la Cour est claire dans sa conclusion selon
laquelle le contribuable n’avait pas établi à sa satisfaction qu’il n’était pas un administrateur
après avoir signé la déclaration. Il semble donc que le contribuable n’a pas été en mesure de
fournir la preuve nécessaire à la Cour.
112 Voir, par exemple, Parisien, supra note 93 et Bremner, supra note 62.
113 Par exemple, cet argument aurait pu être invoqué dans Bouchard, supra note 97, si l’avocat
(aussi le conjoint) de la contribuable avait informé les autorités fiscales de sa démission lors de
ses rencontres avec ses représentants.
1120  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
Dans Bremner ( jugement confirmé par la CAF ), la CCI a laissé entendre qu’une
personne pourrait cesser d’être un administrateur de fait en donnant avis de la
cessation à la société et en mettant un terme à sa participation à la gestion de
celle-ci114. Si le contribuable n’a rien fait de plus après que la société a cessé ses
activités, cette date pourrait servir d’indicateur utile à partir duquel évaluer le
calcul du délai de prescription. Cependant, la jurisprudence étaye, à juste titre, que
la position selon laquelle un particulier qui a agi de façon plutôt active comme
administrateur de fait avant que la société cesse d’exploiter son entreprise peut le
demeurer même si son comportement après la cessation des activités ne peut en
soi justifier qu’il soit un administrateur de fait115. Il s’agit d’un point important car
même un geste relativement mineur posé après la prétendue démission du particulier
ou la cessation des activités de l’entreprise pourrait assure le lien nécessaire.
Défense fondée sur l a diligence r aisonnable
Même si on arrive à conclure que le particulier est un administrateur de fait, il
peut se soustraire à sa responsabilité comme administrateur de la société en faisant
valoir qu’il a fait preuve de diligence raisonnable. Comme on l’a décrit plus haut
dans l’article, la défense fondée sur la diligence raisonnable prévoit qu’un
administrateur n’est pas responsable d’un défaut de remise s’il a agi avec autant de
soin, de diligence et de compétence pour prévenir le manquement que ne l’aurait
fait une personne raisonnablement prudente dans les mêmes circonstances116.
Il y a des exemples limités où la défense fondée sur la diligence raisonnable
pour un administrateur de fait a été retenue, mais la CCI évalue la question dans
ses décisions117. Il y a au moins une autre cause, Parisien118, où la CCI a conclu que
le contribuable était un administrateur de fait, mais qu’il avait été raisonnablement
diligent dans les circonstances. La Cour a noté que le dirigeant de la société
« freinait le processus de remise de taxe »119 et après une impasse avec celui-ci, le
contribuable avait officiellement démissionné comme administrateur. Toutefois,
après sa démission, le contribuable « a fait ce qu’il a pu pour aider tout en sachant
qu’il n’avait aucun contrôle sur la situation »120. La Cour a conclu que, selon la
prépondérance des probabilités, le contribuable avait pris les mesures nécessaires
en son pouvoir dans les circonstances pour prévenir le manquement121.
114 Bremner, supra note 62 (TCC), au paragraphe 26.
115 Voir, par exemple, Bremner, supra note 62.
116 Voir supra note 21.
117 Voir, par exemple, McDougall v. R, [2000] GSTC 99 (TCC) (procédure informelle), par le juge
Beaubier; confirmé à 2002 CAF 455, par le juge Létourneau.
118 Parisien, supra note 93.
119 Ibid., au paragraphe 32.
120 Ibid., au paragraphe 33.
121 Ibid., au paragraphe 34.
planification fiscale personnelle  n  1121
Si un particulier participe suffisamment aux activités et à la gestion d’une société
de sorte que l’on peut soupçonner qu’il est un administrateur de fait, l’analyse sur
la diligence raisonnable sera axée sur les actions de cette personne au cours de la
période pertinente. La CCI procède rarement à une analyse rétrospective, de sorte
que les mesures prises par le contribuable seront examinées sur une base ponctuelle.
Des interactions avec l’ARC, incluant des communications régulières combinées à
des efforts pour contrôler les dépenses de la société afin d’assurer que les remises
d’impôt et de taxes seront effectuées, peuvent être considérées comme des indicateurs
assez solides des efforts d’un particulier pour éviter les défauts de remise122.
Élément intéressant, les mêmes faits qui sous-tendent l’argument selon lequel
le particulier a agi comme un administrateur de fait peuvent aussi servir à établir
sa diligence raisonnable dans les circonstances. Ce qui sera raisonnable dans la plupart
des circonstances, c’est que l’administrateur a pris des mesures positives en vue
d’empêcher (par opposition à réparer) le défaut de remise de l’impôt par la société 123.
CONCLUSION : IDENTIFIER L’ADMINISTR ATEUR
DE FAIT ET ÉVITER DE L’ÊTRE
Dans les causes portant sur la responsabilité de l’administrateur, il est quelque peu
difficile de tirer des conclusions claires sur la façon dont les tribunaux analyseront
la présence d’un administrateur de fait. Cette difficulté réside principalement dans
la nature factuelle de l’exercice.
On pourrait résumer les observations formulées ci-dessus sur les causes portant
sur les administrateurs de fait en déclarant que plus l’entreprise est petite, plus son
personnel clé et ses actionnaires devront être prudents quant à la nature de leur
participation à la gestion et la supervision de la société, et à leur niveau d’activité.
Cependant, comme on l’a aussi dit, les particuliers qui se trouvent dans des
situations semblables peuvent être proactifs en recueillant des preuves documentaires
à l’appui de leur prétention selon laquelle ils n’agissaient pas à titre d’administrateur
ou, autrement, qu’ils avaient fait preuve de diligence raisonnable pour ce qui est
des remises d’impôt et de taxes de la société.
Lorsque le particulier n’a pas posé les actes définitifs ou majeurs que seul un
administrateur peut poser, mais qu’il a plutôt participé à la gestion ou aux activités
de la société, ce qui compte alors c’est la mesure dans laquelle l’accumulation des
gestes de moindre importance peut signaler la présence d’un administrateur de
fait. Alors qu’il est clair que le fait d’avoir et d’utiliser seul un pouvoir de signature
122 Voir, par exemple, Campbell c. La Reine, 2010 CCI 100, par la juge Campbell.
123 Parfois, une obligation de prendre des mesures positives souffre d’un exception lorsque le
particulier croit de façon raisonnable qu’il n’est pas réellement un administrateur. Il est
intéressant de spéculer sur le type de faits qui peuvent amener à conclure à l’existence d’un
administrateur de fait mais qui permettent encore à l’administrateur de se prévaloir de la
défense fondée sur la diligence raisonnable parce qu’il croyait ne pas être un administrateur de
la société.
1122  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
est insuffisant, l’apparence générale créée par le comportement du particulier dans
sa participation à la gestion de la société peut amener à conclure qu’il est un
administrateur de fait124.
Tout ceci étant dit, alors qu’il est possible de devenir progressivement un
administrateur de fait, on peut cependant penser qu’il est assez inhabituel, voire
très difficile, de devenir une partie essentielle de la structure organisationnelle de
la société de façon accidentelle ou inconsciente. Le particulier qui participe de
plus en plus à la gestion ou la supervision d’une société doit être prudent et faire
preuve de circonspection, que ce soit en conservant des documents ou copies de la
correspondance montrant qu’il consulte la direction de la société ou qu’il fait des
efforts pour assurer que la société respecte ses obligations de versement tout au
long de la période de participation active. Évidemment, des actions qui se
justifient de façon raisonnable, comme la diligence raisonnable elle-même,
dépendent du contexte et sont propres à une situation. Mais on devrait toutefois
éviter de supposer que du seul fait qu’une personne n’a jamais été officiellement
nommée comme administrateur d’une société, elle n’en est pas un administrateur.
124 Par exemple, dans Asadollah c. La Reine, 2007 CCI 333 (procédure informelle), le contribuable
avait un pouvoir de signature mais il utilisait également sa carte de crédit personnelle pour
payer certains créanciers de la société et il était ensuite remboursé à même les revenus de
celle-ci; il s’assurait aussi que les employés de la société soient payés. Ceci dit, le contribuable
« participait activement à la gestion et aux activités de » la société : ibid., au paragraphe 20, par
le juge Rossiter.
canadian tax journal / revue fiscale canadienne (2015) 63:4, 1123 - 32
Selected US Tax Developments
Co-Editors: Peter A. Glicklich* and Michael J. Miller**
IRS LIMITS DEFERRAL OPPORTUNITIES THROUGH
CONTROLLED PARTNERSHIPS
Peter A. Glicklich and Heath Martin*
In the recent Notice 2015-54, the Internal Revenue Service (IRS) announced future
regulations that may accelerate gain to a US partner that transfers appreciated property
to a partnership that includes one or more non-US partners that are related to the
transferor. In order to avoid immediate gain, the partnership agreement must include
an allocation method that provides for accelerated recognition of the built-in gain in the
appreciated property. The IRS also intends to focus more scrutiny on transactions with
controlled partnerships under section 482 of the Internal Revenue Code. Although these
rules mainly affect the timing, rather than the amount, of income recognized by a US
transferor, the theme of the new regulations will be consistent with the BEPS initiative of
the Organisation for Economic Co-operation and Development and the Group of Twenty,
which is aimed at reversing base erosion and profit shifting.
KEYWORDS: INTERNATIONAL TAXATION n UNITED STATES n US-CANADA n PARTNERSHIPS
* Of Davies Ward Phillips & Vineberg LLP, New York.
** Of Roberts & Holland LLP, New York and Washington, DC.
 1123
canadian tax journal / revue fiscale canadienne (2015) 63:4, 1133 - 61
Current Tax Reading
Co-Editors: Robin Boadway, Tim Edgar, Jinyan Li, and
Alan Macnaughton*
Tim Edgar, Jinyan Li, and Thaddeus Hwong, eds., “Tax Policy for a Better
Tomorrow: Intersectoral and Multidisciplinary Connections, a Workshop in
Honour of Neil Brooks” (2015) 52:2 Osgoode Hall Law Journal 377-551
This symposium issue of the Osgoode Hall Law Journal consists of five papers that
were presented at a workshop held on May 12-13, 2013 in Toronto to honour Professor Neil Brooks on his retirement after 40-plus years of teaching tax law and
policy at Osgoode Hall Law School, York University. Tax scholars in law and economics, as well as tax policy makers and practitioners, had been invited to prepare
and present papers in celebration of Brooks’s distinguished career as a tax-law academic; participants in the workshop came from Canada, Europe, the United States,
Australia, and New Zealand.
All aspiring tax academics should read Brooks’s body of work, beginning with his
1985 article on the subject of tax scholarship.1
The five articles in this symposium issue are motivated, at least in part, by one or
more of the major themes that Brooks has explored over the course of his career.
The overriding theme of his tax scholarship is the need for a comprehensive and
progressive income tax as the principal fiscal instrument for realizing a more economically just society; throughout his work, Brooks emphasizes the role of a progressive
income tax within the mix of various taxes commonly used in Canada and other
countries. His early work was the basis for his staunch opposition to the introduction
of the federal goods and services tax (GST).2 He later softened his position somewhat when he came to view a comprehensive sales tax as a defensible element of the
tax mix, accepting that such a tax can be an effective and efficient revenue-raising
instrument,3 provided that it is combined with a comprehensive and progressive
* Robin Boadway is of the Department of Economics, Queen’s University, Kingston, Ontario.
Tim Edgar is of Osgoode Hall Law School, York University, Toronto. Jinyan Li is of Osgoode
Hall Law School, York University, Toronto. Alan Macnaughton is of the School of Accounting
and Finance, University of Waterloo. The initials below each review identify the author of the
review.
1 N. Brooks, “Future Directions in Canadian Tax Law Scholarship” (1985) 23:3 Osgoode Hall Law
Journal 441-75.
2 Neil Brooks, The Canadian Goods and Services Tax: History, Policy, and Politics (Sydney: Australian
Tax Research Foundation, 1992).
3 See, for example, Junko Kato, Regressive Taxation and the Welfare State: Path Dependence and
Policy Diffusion (New York: Cambridge University Press, 2010).
 1133
1134  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
income tax as the principal policy instrument to realize a more equitable distribution of resources. Brooks’s work on the comprehensive income tax also includes a
more specific focus on narrower issues, including (1) the choice of the individual or
the family as the tax unit;4 (2) the principles governing the deduction of business
expenses;5 (3) the case for a comprehensive capital gains tax;6 (4) the case for a progressive tax rate structure;7 and (5) the role and design of the corporate income tax.8
Two other themes that Brooks has explored in depth are closely related to his
work on a comprehensive and progressive income tax. One of these themes is the
power of tax expenditure analysis that focuses on government spending delivered
through the tax system. Brooks pursued this subject throughout his career, leading
to a seminal article, published as a book chapter in 2009, that emphasizes the need
for an understanding of tax expenditures as a critical component of tax system reform.9 The conceptual clarity of Brooks’s argument is simply breathtaking. This
article is essential reading for anyone working in the area of tax expenditure accounting and tax expenditure analysis.
The other theme clearly related to Brooks’s work on a comprehensive and progressive income tax is the use of the tax system to pursue the collective aspirations
of a country’s citizens. Brooks explored this theme most recently in the popular bestseller The Trouble with Billionaires,10 which he co-authored with Linda McQuaig, the
well-known Canadian business journalist and public intellectual.
A fourth theme of Brooks’s tax scholarship is the theory and practice of statutory
interpretation. His argument in this area is a radical one, positing a role for the judiciary as pragmatic policy analysts who perform an essential function complementary
4 Neil Brooks, “The Irrelevance of Conjugal Relationships in Assessing Tax Liability,” in John
G. Head and Richard Krever, eds., Tax Units and the Tax Rate of Scale (Burwood, Victoria:
Australian Tax Research Foundation, 1996), 35-80.
5 Neil Brooks, “The Principles Underlying the Deduction of Business Expenses,” in Brian G.
Hansen, Vern Krishna, and James A. Rendall, eds., Essays on Canadian Taxation (Toronto: De
Boo, 1978), 249-309.
6 Neil Brooks, “Flattening the Claims of the Flat Taxers” (1998) 21:2 Dalhousie Law Journal
287-369.
7 Rick Krever and Neil Brooks, A Capital Gains Tax for New Zealand (Wellington: Victoria
University Press for the Institute of Policy Studies, 1990). See also Neil Brooks and Arthur
Peltomaa, “The Case for Full Taxation of Capital Gains” (1979) 1:1 Canadian Taxation:
A Journal of Tax Policy 7-12.
8 Neil Brooks, “Canadian Corporate Tax: Logic, Policies and Politics,” in John G. Head and
Richard Krever, eds., Company Tax Systems (Sydney: Australian Tax Research Foundation,
1997), 115-57.
9 Neil Brooks, “The Under-Appreciated Implications of the Tax Expenditure Concept,” in Chris
Evans and Richard Krever, eds., Australian Business Tax Reform in Retrospect and Prospect
(Pyrmont, NSW: Thomson Reuters, 2009), 233-58.
10 Linda McQuaig and Neil Brooks, The Trouble with Billionaires (Toronto: Viking Canada, 2010),
reviewed in this feature (2010) 58:4 Canadian Tax Journal 1053-68, at 1056-57.
current tax reading  n  1135
to that of the legislature in the development of a coherent tax system.11 Grounding
his argument in a deep knowledge of legal theory and statutory interpretation,
Brooks rejects legal formalism as well as a purposive approach to statutory interpretation. Instead, he argues that the judiciary should strive to reach a result in a
particular case that is a sensible one when framed within the relevant policy context.
He criticizes the Supreme Court of Canada for its formalistic approach to statutory
interpretation and contrasts that approach with the one espoused by the former
chief justice of the Tax Court of Canada Donald Bowman. Bowman’s decisions exemplify a pragmatic approach to statutory interpretation that strengthens the coherence
of the tax system rather than undermines it.12 It is probably fair to characterize this
theme as one that has resonated with tax practitioners, who do not always agree with
Brooks’s argument but will admit that they must engage with it, in particular by reexamining many of their assumptions underlying more conventional approaches to
statutory interpretation.
The articles in the symposium issue begin with “Taxation and Inequality in Canada and the United States: Two Stories or One?” by Richard M. Bird and Eric M.
Zolt. The authors consider the tax contours of the “fiscal contracts” in Canada and
the United States, and their article unpacks some of the underlying detail of a 2006
study in which Brooks and his co-author Thaddeus Hwong13 demonstrated a statistically significant relationship between levels of taxation and various measures of
desirable social outcomes. Bird and Zolt make the important point that, contrary to
popular belief, the Canadian tax system is actually less progressive than the US system,
primarily because of the much greater role in the Canadian tax mix of regressive
sales taxes, particularly the GST at the federal level. However, the Canadian transfer
system provides a much higher level of redistribution through the targeting of taxbased and non-tax-based programs at lower-income households. The US system
provides what are largely cross-subsidies among middle-income households. Bird and
Zolt conclude their article with some interesting speculation about future alterations
to the fiscal contracts in Canada and the United States, which remain markedly different. The article is a timely one, given the current debate over income inequality,
its effects, and possible policy responses.
Kathleen A. Lahey’s article, “Uncovering Women in Taxation: The Gender
Impact of Detaxation, Tax Expenditures, and Joint Tax/Benefit Units,” documents
11 Neil Brooks, “The Responsibility of Judges in Interpreting Tax Legislation,” in Graeme S.
Cooper, ed., Tax Avoidance and the Rule of Law (Amsterdam: International Bureau of Fiscal
Documentation, 1997), 93-129.
12 Neil Brooks and Kim Brooks, “Going for the Jugular: Justice Bowman’s Approach to the Craft
of Judging” (2010) 58, special supp. Canadian Tax Journal 5-28.
13 Neil Brooks and Thaddeus Hwong, The Social Benefits and Economic Costs of Taxation: A Comparison
of High- and Low-Tax Countries (Ottawa: Canadian Centre for Policy Alternatives, December
2006). See also Neil Brooks and Thaddeus Hwong, “Tax Levels, Structures, and Reforms:
Convergence or Persistence” (2010) 11:2 Theoretical Inquiries in Law 791-821, reviewed in this
feature (2010) 58:4 Canadian Tax Journal 1053-68, at 1058-59.
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(2015) 63:4
in detail the impact of Canada’s tax and transfer system on women historically, with
a particular emphasis on federal budgetary initiatives from the mid-1990s to the
present. Lahey focuses on the gender impact of such initiatives. She first considers
how various reductions in tax levels have affected women in a general way, and then
moves on to more specific initiatives, presenting a detailed critique of the family tax
cut/income-splitting initiative of the Harper government, referred to as the family
tax credit (FTC). As enacted legislatively and as introduced on October 30, 2014, the
FTC provides income splitting for families with children under the age of 18, up to a
limit of $50,000.14 Given the surprisingly thin state of the literature on gender-based
budgeting, Lahey’s article makes a notable contribution; it fits thematically with the
article by Bird and Zolt, and it is also conceptually linked with an essay by Brooks
published in 1996.15 In that essay, Brooks articulated a control theory of income
intended to justify the use of the individual as the tax unit for income tax purposes
but the household or family for the delivery of income support, presumably because
of the different distributional features associated with each. Lahey seems to prefer
the use of the individual wherever gender is implicated in the effect of a tax measure,
regardless of other considerations such as income and underlying empirical assumptions about the sharing of resources.
Peter W. Hogg and J. Scott Wilkie, in “Tax Law Within the Larger Legal System,” emphasize the constraints of the legal environment on the implementation of
tax policy in legislative form. Their thesis is that tax policy making does not occur in
a vacuum but is inevitably subject to the broader legal context, which can affect intended policy outcomes. This thesis is illustrated with two quite different examples.
The more obvious example concerns the limitations imposed by the Canadian Charter
of Rights and Freedoms,16 both generally and more particularly with respect to the
investigative powers of the Canada Revenue Agency (CRA). A principal focus of the
first part of the article is the recent Guindon case17 and its consideration of the characterization of the adviser civil penalties regime in the Income Tax Act18 as either
civil or criminal in nature. The less obvious example, considered in the second part
of the article, is the increasingly influential role of the Organisation for Economic
Co-operation and Development (OECD) in the evolution of Canada’s international
tax regime. As emphasized in a high-profile transfer-pricing case recently decided by
the Supreme Court of Canada,19 the OECD’s influence is constrained by the status
of principles as soft law or as hard law in the sense of their specific incorporation in
14 Canada, Department of Finance, News Release, October 30, 2014 and accompanying Notice of
Ways and Means Motion To Amend the Income Tax Act.
15 Supra note 4.
16 Part I of the Constitution Act, 1982, being schedule B to the Canada Act 1982 (UK), 1982, c. 11.
17 Guindon v. Canada, 2015 SCC 41.
18 RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as “the Act”).
19 Canada v. GlaxoSmithKline Inc., 2012 SCC 52.
current tax reading  n  1137
Canada’s domestic law. Hogg and Wilkie’s argument is one that is often ignored in
the tax literature.
In “The Responsibility of Judges in Interpreting Tax Legislation: Japan’s Experience,” Yoshihiro Masui surveys Japan’s judicial approach to statutory interpretation
in both a non-tax-avoidance and a tax-avoidance context. There is very little literature in English on the Japanese tax system, and this article is worthwhile for that
reason alone. It provides a unique view into the evolving approach of the judiciary in
Japan in tax appeals, including an interesting change in judicial attitudes to tax avoidance. In fact, the case-law survey provided by Masui suggests a creative, purposive
approach to statutory interpretation, which—although not quite the approach advocated by Brooks—is arguably much less formalistic than that of Canadian courts.
Sijbren Cnossen’s article, “What Kind of Corporation Tax Regime?”, concludes
the symposium issue with a survey of the role and design of corporate income tax
systems both in practice and in theory. Cnossen usefully contrasts the two approaches
and suggests some directions for future reform along the lines of the innovative
systems adopted in the early 1990s by the Nordic countries. In contrast to Cnossen’s
approach, Brooks’s work in this area separates the choice of corporate income tax
from the use of dual tax rates for income from capital and labour, arguing that the
Canadian corporate income tax, although conceptually somewhat opaque, has
functioned effectively. Brooks prefers a dual income tax primarily for its consistent
treatment of all forms of capital income, an approach that tends to constrain wasteful tax planning.20
The five articles in the symposium issue are preceded by a delightful retrospective on Brooks’s body of scholarship, written by his daughter, Kim Brooks, former
dean of the Schulich School of Law, Dalhousie University, and a well-known tax
academic herself. In describing her father’s work, Kim Brooks emphasizes the four
related themes discussed earlier in this review, and she provides an important annotated bibliography of that work, much of which has been published out of the
mainstream of tax writing and is hard to track down. But her retrospective offers
much more in including many entertaining personal anecdotes that only a daughter
could provide.
Many readers may be unaware that Neil Brooks was initially a leading scholar on
the law of evidence and then, for no obvious reason, switched to tax law and policy.
For that change of direction, countless students who have gone on to careers as tax
practitioners, academics, policy makers, and administrators are eternally grateful.
For many of them, his enthusiasm and passion for the public good have made a lasting impression. The debt that all members of the Canadian tax community and the
broader public owe Neil Brooks is captured in the following tribute written by
20 Neil Brooks, “An Overview of the Role of the VAT, Fundamental Tax Reform, and a Defence
of the Income Tax,” in Richard Krever and David White, eds., GST in Retrospect and Prospect
(Wellington, NZ: Brookers, 2007), 597-658.
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(2015) 63:4
Linda McQuaig in the acknowledgments section of her 1987 bestseller, Behind Closed
Doors: How the Rich Won Control of Canada’s Tax System:
Over the years, he has taught thousands of law students the importance of approaching the tax system critically, of asking why the tax system is the way that it is and who
benefits from it. Neil Brooks is really the unsung hero of tax in Canada. He brings an
intellectual rigour and a deep sense of justice to a subject too often approached in a
purely technical manner. Like many who have been exposed to his ideas and spirit, I
have been deeply inspired. This book is a product of that inspiration.21
T.E.
Michael P. Devereux and John Vella, “Are We Heading Towards a Corporate
Tax System Fit for the 21st Century?” (2014) 35:4 Fiscal Studies 449-75
Wei Cui, “A Critical Review of Proposals for Destination-Based Cash-Flow
Corporate Taxation as an International Tax Reform Option,” paper presented
at the Oxford University Centre for Business Taxation Academic Symposium
2015, 22 pages, www.sbs.ox.ac.uk/sites/default/files/Business
_Taxation/Events/conferences/symposia/2015/cui-paper.pdf
Corporate tax systems are coming under increasing scrutiny as a result of the growing
recognition that they are outmoded, inefficient, and prone to compliance problems.
The corporate tax distorts various business decisions, such as where to invest, how
much to invest, how to finance investments, how much risk to take, and where to
book profits. Recent high-profile cases have illustrated how multinational corporations (MNCs) can apparently game the system to reduce their tax liabilities. National
governments in turn face competitive pressure to make their tax systems more attractive to firms by reducing tax rates and distortions, though doing so also compromises
their ability to raise revenues. The OECD’s base erosion and profit shifting (BEPS)
initiative attempts to address some of these issues in a coordinated manner.
In the first of the two publications reviewed here, Devereux and Vella argue that
the problems with the current international corporate tax system arise from two
sources:
1. The system for allocating profits of MNCs among countries is incoherent. It
is based on a 1920s League of Nations compromise that proposed using the
source principle to allocate active business income and the residence principle to allocate passive investment income (dividends, interest, royalties).
The rationale, now discredited, was that source taxation should reflect the
benefit principle while residence taxation should be based on ability to pay.
The compromise implicit in this dichotomous treatment is reflected in the
21 Linda McQuaig, Behind Closed Doors: How the Rich Won Control of Canada’s Tax System . . . And
Ended Up Richer (Toronto: Viking, 1987), at x.
current tax reading  n  1139
OECD model treaty and in most existing tax treaties based on that model. It
has led to an international tax system in which tax avoidance is rampant—a
phenomenon that has motivated the BEPS initiative.
2. Tax competition is endemic. It encourages countries to use the corporate tax
system to attract business activity and favour their own firms, leading to the
perception that corporations pay too little tax.
Devereux and Vella argue that the piecemeal approach of the BEPS initiative is
insufficient and that more fundamental reforms of the international corporate tax
system are required. They begin by describing in more detail the two sources of the
problems with the existing system. With respect to the first, the compromise system
for allocating profits among countries has become ineffective because the concepts
of source and residence are no longer clearly defined. Given the complex and widely
dispersed activities of the modern MNC, it is unclear how to determine where profits
are being earned; the distinction between residence and source itself has become
untenable. The problems are evident in attempts to allocate royalties by country of
residence and active business income by country of source, and in the difficult valuation issues that this approach entails. In addition, hybrid financing instruments
make the distinction between debt and equity—and thus the definition of active
business income—ambiguous.
Allocation difficulties also arise with respect to transfer pricing—in particular,
the applicability of the arm’s-length principle (ALP) to the modern MNC. Not only
can the ALP be difficult to apply, but even where the conditions for its application are
satisfied, its use can lead to profit shifting to low-tax jurisdictions. Devereux and Vella
provide two examples of this, one based on the use of so-called cost-contribution
arrangements to allocate the costs of developing intangible properties among affiliates, and the other based on shifting risk from one affiliate to another. Even though
the ALP criteria are satisfied, outcomes are achieved that make little sense from an
economic point of view.
With respect to the second source of problems with the existing system—the
incentive for national governments to use the corporate tax to attract investment
and favour domestic firms—two examples are illustrative. One concerns the United
Kingdom, which recently pursued a policy of attracting investment by lowering its
corporate tax rate, introducing a patent box system, and reforming the controlled
foreign company rules, particularly the “finance company partial exemption” regime. Devereux and Vella argue that these measures are meant to (1) encourage
corporations to locate in the United Kingdom, (2) provide domestic firms with a
competitive advantage, and (3) in the case of the last reform, encourage the use of
offshore finance companies by UK MNCs, resulting in the erosion of foreign tax
bases. The second example concerns the United States and its check-the-box regulations. The authors cite the case of a US MNC that arranges to have royalties from
intellectual property shifted to a tax haven country rather than being taken in by a
foreign affiliate operating in a high-tax country. The royalty income will eventually
be taxed in the United States when it is repatriated, but tax is avoided in the high-tax
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(2015) 63:4
home of the affiliate. Effectively, the regulation has caused the tax base to be eroded
in the high-tax country with no ultimate effect on the United States. Thus, the US
MNC is being favoured at a cost to the high-tax country’s revenue. Thus, as these
examples show, the international tax regime encourages countries to compete with
one another both to attract investment and to protect their own firms.
Devereux and Vella then turn to a critique of the BEPS action plan. The central
challenge as enunciated by the OECD is to address double non-taxation or undertaxation rather than to reform the tax structure itself. The proposed actions do not
change the standards for allocating taxing rights across countries: the source/residence
logic and the active/passive income distinction are retained. The only alternative
mentioned by the OECD is formulary apportionment, but it is given short shrift.
According to the action plan, there is a need to realign the location of taxation with
“relevant substance” or “value creation” in order to prevent the segregation of taxable income from activities that generate it.
The authors discuss six problems with the action plan’s approach of basing taxation rights on the location of economic activity:
1. Aligning taxation rights with economic activity is a departure from existing
practice, particularly for passive income, and has been proposed without
careful explanation or evaluation.
2. Superimposing on the current structure a principle based on the location of
economic activity makes the system even more incoherent. The authors
provide examples showing that taxation by this principle will be aligned with
economic activity in some, but not all, cases. Inevitably, vague tests using
concepts such as “artificial” or “excessive” must be relied on.
3. It is possible that the economic activity test wrongly identifies instances of
low or zero economic activity—for example, in the case of royalty payments
from intellectual property.
4. The focus on economic activity suggests a misdiagnosis of the problem in
some cases—for example, where the problem arises from the inability to correctly price interfirm transactions. Devereux and Vella argue that such a case
should be addressed directly rather than through some economic activity
criterion.
5. Tax planning and the possible movement of real activity to satisfy the criterion will undermine the test and create inefficiencies.
6. In the case of MNCs that are involved in many coordinated activities, it is
unclear where economic activity is created, so the principle itself will be
ambiguous.
As well as these issues involving the location of taxation rights, the BEPS action
plan’s approach will not alleviate the incentives for tax competition in the existing
system, except to the limited extent that changes are embedded in negotiated tax
treaties. Many recommendations call for nations to change domestic legislation. It
current tax reading  n  1141
is not clear that states will fully comply by legislating against their perceived selfinterest. Moreover, the fact that not all states are party to the BEPS process undermines
changes based on voluntary state behaviour.
Devereux and Vella then consider whether wholesale changes might be made to
the international taxation system to resolve existing problems and discourage wasteful tax competition. They propose three options, without going into detail about
practical implementation.
n
n
n
The first option is formulary apportionment, analogous to the system used in
Canada to allocate profits among provinces. The formula that is chosen will
never result in a true allocation of profits, since that is an unachievable ideal,
but the existing system also fails to do so. Countries would have to agree on
the tax base and the allocation formula, a requirement that would be difficult
to satisfy; and even then, this option would not eliminate competition in tax
rates.
The second option is the allocation of taxation rights according to the location of final sales—that is, destination-based corporate taxation. Since final
consumers are relatively immobile, this would insulate the tax system from
competition for a mobile tax base. A destination-based corporate tax could
operate similarly to a value-added tax (VAT), especially if the corporate tax were
a cash flow tax, except that a deduction would have to be given for labour costs
where they were incurred. A destination-based corporate tax would not affect the location of investment, and if it were a cash flow tax, it would not
distort the intensity of investment or the financing decision. It could be implemented in a manner similar to a VAT, and securing international cooperation
would be less difficult than in the case of the first option. Countries would
have an incentive to join such a system once it had been implemented by a
subset of countries.
The third option is to implement a simpler corporate tax system, possibly one
that violates production efficiency. Examples include turnover taxes, payroll
taxes, and taxes based on asset size. Such taxes would not only distort production; they would also not be immune to tax competition.
Of these alternatives, a destination-based cash flow tax (DCT) offers the most
promise. It is arguably the most efficient of the options and has been proposed
elsewhere, notably by the Mirrlees review.22 In the second of the two publications
discussed here, Cui offers a critical review of DCT proposals that is both instructive
22 James Mirrlees, Stuart Adam, Timothy Besley, Richard Blundell, Stephen Bond, Robert Chote,
Malcolm Gammie, Paul Johnson, Gareth Myles, and James Poterba, Tax by Design: The Mirrlees
Review (Oxford: Oxford University Press, 2011), reviewed in this feature (2012) 60:1 Canadian
Tax Journal 257-74, at 263-65.
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and comprehensive. He begins with the motivation for the DCT. Existing corporate
taxes are designed to be withholding devices for the personal income tax system;
however, this role has become unnecessary in a world where much shareholder income is sheltered from personal tax and international capital markets imply that
shareholder after-tax rates of return are impervious to personal taxes. In the process,
corporate taxes distort business decisions on three margins: location, investment
intensity, and where to book profits. The DCT is intended to avoid these distortions.
Cui argues for more clarity in this motivation. What inefficiencies are involved in
deciding where to book profits? Doesn’t the destination basis undermine the case
for cash flow taxation, since location and profit shifting are less relevant? Why not
simply rely on a VAT, since it also avoids distorting the three margins? Should the
DCT apply only to corporations, in which case there will be implementation problems? How do we identify the destination country for a firm that mostly sells goods
and services to other firms?
To clarify some of the other issues, Cui outlines three separate forms that the
DCT could take:
n
n
n
Version 1, the benchmark case, would tax corporate profits in the country of
destination, not the country of origin. Implementing such a system would be
difficult. One would need to know what costs in the country of origin or
production should be attributed to sales to the destination country. Moreover,
corporate profits of firms that sell only intermediate goods would have to be
attributed to a final destination country. Cui argues that it would be both
feasible and efficient to tax firms on the basis of the residence of their owners
rather than the location of their final sales.
Version 2 is a VAT with a deduction for labour costs, since a VAT is effectively
a tax on rents plus labour income. Again, attributing the cost of labour to the
destination country would be difficult and would also give rise to negative tax
liabilities in the country of origin, which would need to be refunded there.
More generally, this version would involve the tax authorities of different
countries, with the country of origin needing to verify the labour costs claimed
by exporting firms.
Version 3 would tax exports in the country of origin, but at the destination
country’s tax rate. Having the revenues stay in the country of origin would
avoid negative tax liabilities in that country, but could create negative tax liabilities in the destination country; therefore, little would be accomplished.
Cui points out that all versions of the DCT could give rise to implicit export subsidies,
in violation of the rules under the general agreement on tariffs and trade (GATT).
A further important issue with the DCT, and one that applies more generally to
all corporate tax systems, concerns loss refunds. Cash flow tax proponents typically
call for full loss offsetting, or its equivalent, which entails either refundability of
losses or carryforward (or carryback) of losses with interest. Firms winding up with
tax losses on their books would require refundability. Tax systems almost never allow
current tax reading  n  1143
for refundability on windup—a limitation that can be used as an argument for preferential small business tax rates. Proponents of full loss offsetting argue that it is
required to avoid discouraging risk taking. (Corporate profits include both rents and
returns to risk, but losses are presumably due to the latter.) Cui takes issue with full
refundability and argues that there are two reasons why losses should not be refunded,
or (to use his term) subsidized. First, corporate losses entail losses to shareholders,
who can often offset realized capital losses against other income. As well, accrued
capital gains need not be realized, so that there is an asymmetry in favour of losses.
Second, losses might arise as a result of negative rent rather than ordinary risk, and
there is no reason why the government should subsidize investments anticipating
negative rents. These arguments, if accepted, would justify the current practice of
not refunding tax losses.
Cui concludes his paper with a discussion of some of the technical difficulties
involved in implementing a DTC. He takes the position that residence-based corporate taxation is at least as feasible as destination-based taxation from an informational
point of view, and has the same efficiency properties. In his view, the onus is on
proponents of the DCT to defend their view or at least to clarify their arguments.
His arguments are fairly persuasive.
R.B.
Alain Deneault, Canada: A New Tax Haven: How the Country That Shaped
Caribbean Tax Havens Is Becoming One Itself, trans. Catherine Browne
(Vancouver: Talonbooks, 2015), 224 pages, ISBN 9780889228368
For tax practitioners, policy makers, academics, and administrators, the provocative
title of this book by a Quebec-based journalist will likely be seen as unsupported by
sufficient analytical rigour. The author’s intended audience however, is not the
professional tax community but rather the general Canadian electorate. The book
is an attempt to provide an accessible account of tax avoidance, broadly defined, that
brings the subject into the political arena. Deneault does not want to limit his political call to arms to civil society and tax justice organizations but, in effect, seeks to
bypass these groups and appeal directly to Canadian voters. His approach is similar
to that of tax justice organizations in conflating under the rubric “tax avoidance”
activities that are regarded by the professional tax community as exhibiting distinctive
fact patterns with distinct legal consequences—namely, tax evasion, sham transactions,
aggressive tax planning, and structured tax-avoidance transactions.23 Deneault acknowledges that he has conflated these distinct legal categories in an effort to avoid
23 See, for example, Allison Christians, “Avoidance, Evasion, and Taxpayer Morality” (2014) 44:1
Washington University Journal of Law and Policy 39-59, reviewed in this feature (2014) 62:4
Canadian Tax Journal 1211-33, at 1223-25; and Allison Christians, “Drawing the Boundaries
of Tax Justice,” in Kim Brooks, ed., The Quest for Tax Reform Continues: The Royal Commission on
Taxation Fifty Years Later (Toronto: Carswell, 2013), 53-79.
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transforming into a legal debate what he believes needs to be a political debate. In
effect, his goal is to politicize the issue of tax avoidance, the role of tax havens, and
Canada’s role in facilitating tax haven accommodation by Caribbean countries, and
by the Canadian business community and Canadian governments themselves, for
the benefit of Canada’s political and business elites. Given that Canadian political
parties have no interest in politicizing these issues, one can see why Deneault, or
some other tax justice advocate, is required to present the Canadian electorate with
a direct appeal similar in content and tone to a political platform. His text bleeds a
passion that is nothing if not admirable.
Deneault defines a “tax haven” somewhat conventionally as “a jurisdiction whose
tax rate is or approaches zero and whose legal systems . . . [create] a level of bank
secrecy that conceals the identity of account holders as well as the nature of their
transactions.”24 He characterizes such jurisdictions as being highly permissive and
accommodating, and as providing not only tax advantages but also a wide range of
privileges of a regulatory and legal nature. His principal point of emphasis is Canada’s involvement in developing certain Caribbean countries as tax havens and then
using the lessons learned through that process to become, directly and indirectly,
something of a tax haven itself—a country whose tax laws and regulatory environment are designed to accommodate the wealthy and powerful, while denying similar
advantages to less privileged social classes (which constitute the majority of the
population).
Following a brief introductory chapter, the core of the book consists of 12 substantive chapters, 8 of which provide, in turn, a narrative of Canada’s involvement
in the development of a particular country as a tax haven. Of the other 4 chapters,
3 focus on provincial initiatives in Alberta, Ontario, and Nova Scotia that are cited
as evidence of Canada’s shift to tax haven status, while the fourth makes the case
for Canada’s tax haven status on the basis of aspects of the federal income tax system, particularly the corporate income tax. All of this material is wrapped up in a
concluding chapter. As Deneault notes, each of the chapters is intended to be read
independently, and there is some overlap in the material covered. The chapters are
presented chronologically rather than thematically, with the result that the chapters
describing the involvement of Canada’s business and political elites are separated by
the 4 chapters detailing Canada’s alleged descent into tax haven status. Each of the 8
country chapters is organized around what Deneault sees as a defining moment in the
development of the particular jurisdiction as a tax haven. The focus of these chapters
is almost exclusively on the design of accommodating regulatory and non-tax legal
regimes. The singular exception is the chapter on Barbados, which focuses on the
1980 Canada-Barbados tax treaty as the gateway to exempt surplus treatment for
third-country earnings of Canadian-based MNCs, relying on the lookthrough rule
in subparagraph 95(2)(a)(ii) of the Income Tax Act. Deneault then embarks on a
24 At 3.
current tax reading  n  1145
meandering discussion of tax information exchange agreements (TIEAs), the transferpricing decision in GlaxoSmithKline,25 the recent trio of tax treaty-shopping cases,26
and the Garron trust case.27
The 3 chapters citing the initiatives in Alberta, Ontario, and Nova Scotia similarly focus on the development of lax regulatory regimes for, respectively, the oil
and gas, mining, and finance sectors. The tax perspective for Alberta that is cited as
evidence of tax haven status is the reduction of rates under the royalty tax regime in
the 1990s, which Deneault compares unfavourably with the very different approach
and status of Norway (an oil- and gas-dependent country). The tax perspective for
Ontario is the tax expenditure regime provided by the treatment of Canadian exploration expenses and Canadian development expenses using flowthrough shares.
The tax perspective for Nova Scotia is its recently adopted payroll subsidy regime for
back-office expenses of hedge funds. The principal point of emphasis of the chapter
focused on federal initiatives that supposedly support a characterization of Canada as
a tax haven is the phased series of reductions in the corporate income tax rate. This
chapter, however, casts a wide net, also citing reductions in the capital gains tax rate
and customs duties, tax deferral generally, weak access to information in a crossborder context, income trusts, treaty relief from section 116 withholding on taxable
Canadian property, and the weakness of the general anti-avoidance rule in section
245 as interpreted by Canadian courts. At a general level, Deneault acknowledges
that reductions in the corporate income tax rate, as well as the provision of narrower
tax reduction regimes such as that for exempt surplus of Canadian-based MNCs, can
be—and conventionally are—justified on the basis of a perceived need for the Canadian income tax system to be competitive with the tax systems of other developed
countries. More particularly, policy makers can justify the adoption of tax regimes
that are seen to realize gains in national welfare on the basis that those gains exceed
the associated revenue loss. Although it is arguable that this relationship does not
stand up all that well to any sort of rigorous analysis, it is a conceptual leap to follow
with a characterization of Canada as a tax haven on the basis of a reluctance on the
part of our elected officials to repeal the relevant tax regimes.
The concluding chapter is almost frantic in tone and analytically thin in its attempt to weave together various topics as evidence of Canada’s shift to tax haven
status. Deneault canvasses a wide range of issues in a relatively superficial manner,
although virtually all of those issues have been explored in the existing analytical
literature, both empirical and theoretical. The sources reviewed with respect to
each discrete subject are very narrowly, and somewhat oddly, selected. There are,
25 Supra note 19.
26 See, for example, MIL (Investments) SA v. The Queen, 2006 TCC 460; aff ’d. 2007 FCA 236. See
also Velcro Canada Inc. v. The Queen, 2012 TCC 57; and Prévost Car Inc. v. The Queen, 2008
TCC 231; aff ’d. 2009 FCA 57.
27 Fundy Settlement v. Canada, 2012 SCC 14; aff ’g. St. Michael Trust Corp. v. Canada, 2010 FCA
309; aff ’g. Garron Family Trust v. The Queen, 2009 TCC 450.
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however, some interesting sources cited that are published in French only and that
readers may otherwise be unaware of. At the end of it all, Deneault provides nothing
more than a well-worn laundry list of policy initiatives that includes the following:
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eliminating the link between tax treaties and TIEAs on the one hand and exempt surplus treatment on the other;
requiring consolidated reporting of tax earnings broken down by country;
ensuring, through transfer-pricing rules, that earnings are located for income
tax purposes in the jurisdiction in which the relevant activity occurs;
adopting automatic exchange-of-information requirements in a cross-border
context; and
strengthening anti-avoidance laws generally.
It is odd that the book opens with a brief mention of the release of financial
records—first in 2008 by an employee of HSBC Bank in Geneva and then (involving
a different set of records) in 2013 by the International Consortium of Investigative
Journalists—yet never returns to discuss either episode in any detail. The CRA’s passive response to these document releases is curious, to say the least, and warrants
much more exploration than Deneault provides. Perhaps he avoids such exploration
in order to avoid focusing narrowly on tax evasion and information reporting,
which these episodes tend to highlight. He also avoids any mention of base erosion
and profit shifting—currently under review by the OECD—even though it is an obvious example of a form of tax avoidance that warrants political treatment. It might
be worthwhile for a subsequent edition of the book to incorporate a discussion of
the outcome of the BEPS initiative, including Canada’s response to an agreed-upon
action plan.
T.E.
Jonathan Rhys Kesselman, Family Tax Cuts: How Inclusive a Family?
(Ottawa: Caledon Institute of Social Policy, November 2014),
36 pages, ISBN 1-55382-632-9, www.caledoninst.org/
Publications/PDF/1055ENG.pdf
The introduction of the family tax credit (FTC) in 2014 by the former (Conservative)
government has spawned a small and recent literature assessing the revenue-loss
and distributional effects of the initiative.28 This policy paper assesses the distributional features of the income-splitting tax credit within the broader context of a
longstanding debate in the tax-policy literature over the appropriate concept of
a “family” (as opposed to the individual) as the unit of taxation. In adopting this
28 See, for example, Kathleen A. Lahey, “Uncovering Women in Taxation: The Gender Impact of
Detaxation, Tax Expenditures, and Joint Tax/Benefit Units” (2015) 52:2 Osgoode Hall Law Journal
427-59, reviewed in this issue. See also Richard Shillington, The Big Split: Income Splitting’s
Unequal Distribution of Benefits Across Canada (Ottawa: Broadbent Institute, June 2014); Sunhil
current tax reading  n  1147
perspective, Kesselman’s approach is similar to that of Kathleen Lahey (noted in the
first review above), which focuses on the gender impact of the credit.
Kesselman’s critique of the FTC is based on the Harper government’s earlier version of formal income splitting. He acknowledges that the conversion of this measure
to a tax credit addresses two aspects of his critique: (1) the otherwise automatic incorporation of the regime by the provinces, and (2) the legal liability for tax payable
by the transferee spouse where income is split. However, all other aspects of his
critique remain. Most importantly, at a general level, Kesselman observes that the
credit has two inconsistent rationales. One is the equalization of tax burdens for
couples with the same total household income. The other is the provision of income
support for families with children. Kesselman is most critical of the first rationale,
which he sees as the weaker of the two. He argues that the credit suffers from an
overly narrow concept of a family, excluding low- to moderate-income couples and
all single parents while concentrating benefits on high-income single-earner couples.
Moreover, delivery of the credit to provide the effect of a 50/50 income split within
the $2,000 annual cap assumes full sharing of income, which is not necessarily the
case empirically. This aspect of the credit also fails to consider economies of living
together, which are reflected in adult equivalence scales, and it ignores the value of
services provided by a stay-at-home spouse.
The stronger rationale for the FTC, in Kesselman’s view, is the provision of income support for children. But in this respect he notes that the credit remains
skewed in its distributional impact (presumably because of its other inconsistent
rationale) to 13 percent of all households with average income of $123,000. Fewer
than 3 percent of households will also be constrained by the capped amount of the
benefit than were constrained by the $50,000 limitation on the amount of income
that could be formally split under the earlier proposal. Kesselman then canvasses the
companion legislative changes that were introduced along with the credit, including
an increase in the amount of the universal child care benefit, the elimination of the
child tax credit, and an increase in the amount of the allowable deduction provided by
the child-care expense deduction. He argues that these changes represent a missed
opportunity to bolster income support for all low- to moderate-income families and
single parents who have children at younger ages (which are most critical in a child’s
development). He suggests that this goal could be achieved, for example, by introducing a new “birth bonus,” payable in monthly instalments, that would remain
revenue-neutral. The constraint of revenue neutrality would still allow a total payment of $7,000 per newborn as compared with the cost of the credit alone and
$11,000 per newborn in the case of a package that includes the FTC and the other
ancillary changes to the delivery of existing income support provisions.
T.E.
Johal, Income Splitting or Trojan Horse: The Federal Government’s Proposal and Its Impact on
Provincial Budgets (Toronto: Mowat Centre, September 2014); and David Macdonald, Income
Splitting in Canada: Inequality by Design (Ottawa: Canadian Centre for Policy Alternatives,
January 2014), reviewed in this feature (2015) 63:2 Canadian Tax Journal 606-26, at 610-11.
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William B.P. Robson and Alexandre Laurin, Adaptability, Accountability
and Sustainability: Intergovernmental Fiscal Arrangements in Canada,
C.D. Howe Institute Commentary no. 431 (Toronto: C.D. Howe Institute,
July 2015), 33 pages
It is a common among federations worldwide, as well as among multigovernment
unitary nations and within provinces or states, that higher levels of government
collect more revenue than they need for their own purposes and transfer the excess
to lower levels. The size of the so-called fiscal gap varies widely among federations,
and Canada ranks as having one of the smallest. Various arguments are made for
using federal-provincial fiscal transfers rather than requiring provincial governments
to collect sufficient revenue to fund their own programs. These arguments include
the equalization role of transfers; the use of block transfers to encourage common
standards in the provision of important public services; the correction of interprovincial benefit spillovers; and the retention of sufficient tax room at the federal level
to achieve standards of redistributive equity, to maintain federal-provincial tax
harmonization, and to preclude wasteful tax competition. At the same time, there
is a natural tension in a federation between the alleged benefits of a fiscal gap and
the advantages of decentralized revenue raising, especially the supposed accountability benefits of requiring provinces to finance their expenditures from their own
revenues.
Robson and Laurin revisit this issue in light of mounting fiscal pressures that the
provinces will face in coming years because of demographic changes that will both
increase public spending and dampen tax revenues. Should these fiscal pressures be
met mainly by expenditure restraint and increased provincial tax effort, by increases
in fiscal transfers, or by some or all of these?
The authors begin with a historical review that traces the evolution of fiscal
transfers in Canada since the time of Confederation and culminates in a succinct
explanation of the current system. They emphasize that the current system is not
the result of some grand design based on underlying principles, but rather has been
shaped by periodic responses to events that cause fiscal stresses.
Robson and Laurin next present a concise but thorough summary of the principles
of fiscal federalism, highlighting the tension between the benefits of decentralized
fiscal responsibility, subsidiarity, and healthy fiscal competition, and the benefits of
federal transfers and influence. They also point to a concern that fiscal transfers
could induce a perception that soft-budget constraints are limiting the fiscal discipline of provincial governments.
Finally, Robson and Laurin document quantitatively the fiscal pressures that
provinces will face in coming decades owing to the aging of the population in combination with implicit and explicit public-sector liabilities built into the system. They
consider alternative policies to address this problem, including tax increases, spending controls, the pre-funding of social insurance programs by the provinces, and
increased transfers by the federal government. They argue for relying mainly on
provincial consolidation, and in addition giving provinces more tax room, especially
current tax reading  n  1149
for consumption taxes. They argue that this approach will make provincial decision
making more efficient and accountable, and improve long-term fiscal sustainability,
thus implicitly outweighing any benefits that federal transfers might achieve.
R.B.
Sebastian Eichfelder and François Vaillancourt, “Tax Compliance Costs:
A Review of Cost Burdens and Cost Structures” (2014) 210:3 Hacienda
Pública Española 111-48
The administration of tax laws entails both compliance costs for taxpayers and collection costs for the government. From an economic perspective, compliance and
collection costs are like dead-weight costs, which, to the extent that they are avoidable,
are a waste of resources. Identifying compliance and collection costs is a prerequisite for designing tax policies that minimize them, especially policies that aim to
reduce the complexity of the tax system. Eichfelder and Vaillancourt focus on tax
compliance costs and present a broad survey of empirical studies of such costs covering different types of taxpayers, different taxes, and different types of compliance
activities. The literature on tax compliance is surprisingly large and is well documented in this comprehensive article.
The authors begin by outlining the methods used to measure compliance costs
and identifying some of the problems arising from those methods. The most common approaches used are surveys (by mail or interview) and time and motion studies
(usually for a single country). More detailed approaches include the simulation
method developed by the Internal Revenue Service (IRS) in the United States, which
combines detailed survey and tax return data, and the standard cost model in some
European countries, which is based on representative businesses. Among the methodological problems common to survey approaches are low response rates, which
have an unpredictable effect on results; the sensitivity of survey answers to the framing of questions; the problematic valuation of compliance time; and the difficulty of
separating compliance costs from the overhead costs of firms.
Next, the authors document the estimated size of the compliance cost burden for
various types of taxpayers. For employees, these costs are minimal (about 1 percent
of income), but they are much higher for the self-employed (up to 10 percent). Over
two-thirds of the burden consists of time and effort, though this is gradually decreasing as the use of tax software becomes more prevalent. Most of the remaining costs
are payments for external assistance. In the case of businesses, cost burdens are much
higher for small enterprises relative to medium-sized and large ones, and the burden
decreases for small businesses as they become larger. Moreover, the cost of tax compliance for businesses is high relative to the overall burden of administrative red
tape, such as complying with regulations. Not surprisingly, temporarily high burdens result from the introduction of new tax measures.
For individual taxpayers, compliance costs are high for income and wealth taxes
and for the property tax. Business taxpayers incur high costs for business-income
taxes, VAT, and payroll taxes, and much lower costs for import duties and excise taxes.
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For both individuals and businesses, documentation activities (record keeping and
tax filing) constitute the major part of compliance activities. Tax-planning activities
are limited for individuals and small businesses, but increase in importance with the
size of the firm.
Empirical studies also document the drivers of compliance costs. The most relevant driver is the complexity of the tax system. Others include the responsiveness
of the tax administration; tax accounting and its interaction with financial accounting, especially for smaller firms; and international or interprovincial tax issues for
firms that operate in more than one jurisdiction.
The upshot of these studies is the importance of bookkeeping and taxfiling activities, especially in complex tax systems. This suggests that tax simplification is a
critically important objective of tax policy. The user-friendliness of tax administration is also relevant.
R.B.
Michael P. Donohoe, “Financial Derivatives in Corporate Tax Avoidance:
A Conceptual Perspective” (2015) 37:1 Journal of the American Taxation
Association 37-68
Michael P. Donohoe, “The Economic Effects of Financial
Derivatives on Corporate Tax Avoidance” (2015) 59:1
Journal of Accounting and Economics 1-24
These two articles reflect an ambitious research agenda that is the basis of Donohoe’s
doctoral dissertation work focused on the use of derivative financial instruments
(DFIs) in corporate tax-avoidance transactions. In the first article, Donohoe (who is
an accounting academic at the University of Illinois) provides what he refers to as a
conceptual framework for clarifying thinking about the questions of why and how
DFIs are used in corporate tax-avoidance transactions. He defines “tax avoidance”
for his purposes broadly, to mean any reduction of explicit taxes.29
As to why DFIs are used in such transactions, Donohoe emphasizes their ability
to smooth income, mimic virtually any economic position, blur economic substance, and create ambiguity in tax reporting, making their use difficult to detect by
tax authorities. As to how DFIs are used in corporate tax-avoidance transactions, he
describes a continuum of transactions. At one end lie hedging transactions that are
intended to smooth taxable income. At the other end lie aggressive tax-avoidance
transactions that use DFIs to create tax attributes and that have no non-tax purpose.
In between lie those transactions that have a non-tax purpose that may even be the
dominant purpose but that also generate tax savings by their being structured to
access a tax benefit. As an example of the latter type of transaction, Donohoe reviews
an interest rate swap with a combination of periodic and non-periodic payments
that provide timing and character advantages within the context of the US notional
29 At 41.
current tax reading  n  1151
principal contract regulations.30 As an example of an aggressive tax-avoidance transaction, he reviews the loss-creation transaction that is the subject of IRS Notice
2002-50.31
Donohoe’s suggested conceptual framework is largely based on the existing legal
literature, which he cites extensively. What is decidedly lacking with regard to the
two questions that he poses—why and how DFIs are used in corporate tax-avoidance
transactions—is systematically rigorous empirical evidence, as opposed to the usual
anecdotal reporting that consigns tax policy making to a state of blissful ignorance.
Accounting academics are uniquely positioned to engage in this line of inquiry, because they possess the methodological skills to do so and because they tend to work
with data sets that lend themselves to this kind of research. Donohoe’s second article
is, in fact, a good example of this line of inquiry. Using a data set for fiscal years 20002008, Donohoe estimates that corporate tax savings from the use of DFIs are in the
range of 3.6 to 4.4 percentage point reductions in three-year current and cash effective tax rates. The criteria for inclusion in the data set are public trading, domestic
incorporation, non-financial and non-utility sector classification, and at least three
years of consecutive observations. New users of DFIs are identified by searching form
10-K from the Securities and Exchange Commission’s EDGAR database. The reduction in cash effective tax rates is estimated to generate tax savings of US $10.69 million
for the average firm and US $4.0 billion for the entire sample of 375 new users of
DFIs. Interestingly, Donohoe interprets the data as suggesting that US $8.75 million
and US $3.3 billion of these amounts, respectively, are incremental tax savings that
are incident to risk management practice rather than aggressive tax planning.
T.E.
Ruud de Mooij and Gaëtan Nicodème, eds., Taxation and Regulation
of the Financial Sector (Cambridge, MA: MIT Press, 2014),
407 pages, ISBN 9780262027977
In the wake of the financial crisis of 2007-2009, an arguably new literature has
emerged that focuses on the interplay between the public finance literature and the
regulatory and finance literature. Oddly, this somewhat obvious link has largely
been ignored until now. This collection of 14 papers (plus an editors’ introduction)
is, to our knowledge, the most comprehensive and explicit attempt yet to study this
interplay. The authors and paper (chapter) titles are as follows:
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Ruud de Mooij and Gaëtan Nicodème, “Taxation and Regulation of the Financial Sector” (chapter 1)
Michael Devereux, “New Bank Taxes: Why and What Will Be the Effects?”
(chapter 2)
Reint Gropp, “Taxes, Banks, and Financial Stability” (chapter 3)
30 Treas. reg. section 1.446-3 under the Internal Revenue Code of 1986, as amended.
31 Notice 2002-50, “Partnership Straddle Tax Shelters,” 2002-28 IRB 1.
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Brian Coulter, Colin Mayer, and John Vickers, “Taxation and Regulation of
Banks To Manage Systemic Risk” (chapter 4)
Jin Cao, “Insolvency Uncertainty, Banking Tax, and Macroprudential Regulation” (chapter 5)
Donato Masciandaro and Francesco Passarelli, “The Political Economy of
Containing Financial Systemic Risk” (chapter 6)
Ben Lockwood, “How Should Financial Intermediation Services Be Taxed?”
(chapter 7)
Thiess Buettner and Katharina Erbe, “FAT or VAT? The Financial Activities
Tax as a Substitute to Imposing Value-Added Tax on Financial Services”
(chapter 8)
Julia Lendvai, Rafal Raciborski, and Lukas Vogel, “Assessing the Macroeconomic Impact of Financial Transaction Taxes” (chapter 9)
Guiseppina Cannas, Jessica Cariboni, Massimo Marchesi, Gaëtan Nicodème,
Marco Petracco Giudici, and Stefano Zedda, “Financial Activities Taxes,
Bank Levies, and Systemic Risk” (chapter 10)
Ruud de Mooij, Michael Keen, and Masanori Orihara, “Taxation, Bank Leverage, and Financial Crises” (chapter 11)
Gunther Capelle-Blancard and Olena Havrylchyk, “Ability of Banks To Shift
Corporate Income Taxes to Customers” (chapter 12)
Timothy J. Goodspeed, “Incidence of Bank Regulations and Taxes on Wages:
Evidence from US States” (chapter 13)
Ricardo Fenochietto, Carlo Pessino, and Ernesto Crivelli, “Impact of Bank
Transaction Taxes on Deposits in Argentina” (chapter 14)
Lawrence L. Kreicher, Robert N. McCauley, and Patrick McGuire, “The 2011
FDIC Assessment on Banks’ Managed Liabilities: Interest Rate and BalanceSheet Responses” (chapter 15)
Part I of the book, consisting of chapters 2 through 6, explores conceptually the
interplay between taxation and regulation of the financial sector. Like all of the chapters, these 5 can be read independently of one another. However, chapters 2 and 3
are worth reading first if only because, to some extent, they set the stage for the
other chapters by canvassing the relevant economic and political economy issues.
Part II, consisting of chapters 7 through 10, focuses more specifically on the design
and effect of various taxes, such as a financial activities tax (FAT) originally proposed
by the International Monetary Fund,32 a financial transactions tax, and bank levies
generally. Arguably, however, the more interesting papers are the empirically focused
ones found in part III, which consists of chapters 11 through 15.
One of the more notable empirical papers is chapter 11. Using aggregated financial data covering 29 countries over the period 2001-2009, de Mooij, Keen, and
Orihara estimate that a reduction of 1 percentage point in the corporate income tax
32 Staff of the International Monetary Fund, A Fair and Substantial Contribution by the Financial
Sector: Final Report for the G-20 (Washington, DC: IMF, June 2010).
current tax reading  n  1153
rate reduces the aggregate leverage ratio of banks by somewhere between 0.08 and
0.11 percentage points. The estimated percentage is, however, slightly smaller when
inferred from macrodata; therefore, the authors consider the range of sensitivity to be
somewhere between 0.04 and 0.15 percentage points. Not surprisingly, they find that
the impact of a marginal increase in leverage on the likelihood of crisis depends on the
initial leverage ratios, which they assume, for illustrative purposes, to be 90 percent,
93 percent, or 96 percent of assets. Estimates of increases in the probability of crisis
are derived for these different leverage levels using the lower and upper bounds of
the tax-sensitivity estimates for increases in leverage, as well as a midpoint between
these two bounds. In general, the authors conclude that the increase in the probability of crisis attributable to an increase in leverage associated with a tax-debt bias
is not inconsiderable, especially at higher initial levels of leverage.
Other notable empirical papers are chapters 12 and 13. In chapter 12, CapelleBlancard and Havrylchyk explore the incidence of bank taxes. Unlike earlier studies,
which have tended to find that bank taxes are passed on to consumers, their study
uses a panel of data on European banks to eliminate the systemic effect of a bank’s
corporate tax burden on net interest margins and finds that there appears to be little
to no passthrough of taxes into interest margins; instead, the banks bear the economic incidence of these taxes.
In chapter 13, Goodspeed uses a database of over 500,000 records of US citizens
to find that there is a wage premium of 45 percent in the financial sector that can
only be explained by economic rents and educational attainment. The premium also
seems to follow deregulation in the relevant US states, while the corporate income
tax appears to have no impact on the wage premium in the financial sector, but adversely affects wage levels in the manufacturing sector.
T.E.
Susan C. Morse, “Safe Harbors, Sure Shipwrecks,”
UC Davis Law Review (forthcoming)
Boundaries in the tax law give rise to discontinuities whereby small changes in the
non-tax features of a transaction result in disproportionate tax treatment. Discontinuities tend to be a focus of tax planning in the absence of non-tax constraints on
the ability to undertake the necessary changes in transactional form. One of the
sources of boundaries in the law generally and in tax law in particular are safe harbours, which Morse defines as rules-based descriptions of behaviour that will not be
proscribed, and that leave other transactional forms to be judged on a case-by-case
basis. Another source of boundaries in the tax law are what Morse refers to as “sure
shipwrecks,” which she characterizes as the mirror image of safe harbours—rulesbased descriptions of behaviour that will be proscribed, and that leave other kinds of
behaviour subject to a case-by-case judgment. Both safe harbours and sure shipwrecks
combine rules and standards in legislatively articulating the law. Rules attempt to describe ex ante the relevant behaviour and relevant legal consequences, while standards
leave the determination of behaviour subject to legal consequences to be determined ex post as fact patterns unfold.
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Although Morse is a tax-law academic, her article draws mainly on examples in
the non-tax law. She does, however, also extend the relevance of her analysis to
boundaries in the tax law. She argues that both safe harbours and sure shipwrecks can
suffer from problems of overinclusiveness and underinclusiveness. Through the use
of a standard on one side or the other of the boundary, they avoid the sharp discontinuities and costs associated with unqualified bright lines. However, as the content
of a standard becomes more familiar through the determination of legal consequences
on a case-by case-basis, the standard can start to take on the features of a rules-based
description, and the costs otherwise associated with a sharper bright line.
Morse argues that the principal difference between safe harbours and sure shipwrecks is that a safe harbour results in the clustering of behaviour on both sides of
a boundary in the law, whereas a sure shipwreck results in clustering on one side
only. Morse suggests that this can have important efficiency effects, in that a safe
harbour may result in compliant behaviour shifting to partially compliant behaviour
and a sure shipwreck may result in non-compliant behaviour shifting to compliant
behaviour. Sure shipwrecks are preferable, therefore, as a policy instrument intended to discourage a specified behaviour. Safe harbours also have the negative
property of being more vulnerable to interest-group behaviour.
T.E.
Michael Smart, The Reform of Business Property Tax in Ontario:
An Evaluation, IMFG Paper on Municipal Finance and Governance no. 10
(Toronto: University of Toronto, Institute on Municipal Finance and
Governance, 2012), 24 pages
The business property tax has been identified as one of the profit-insensitive taxes
that can discourage business investment; and, since it is levied by local governments,
it can also influence business location. The Ontario government implemented a
significant reform of the tax in the first decade of the 21st century, which capped
property tax rates in high-tax municipalities and led to a reduction in business tax
rates relative to residential ones. In this paper, Smart investigates empirically the
effect of the tax reform on the change in the number of business establishments by
industry and municipality in Ontario over the period 2000-2006.
The effect of a reduction in the level and variance of business property rates
depends on who bears the incidence of the tax. Smart begins with a summary of the
theory of property tax incidence, emphasizing two different views: the capital tax
view and the benefit view. According to the former, the property tax is essentially a
tax on capital embedded in property structures. Since capital is mobile, one expects
that the business property tax will discourage investment, distort location decisions,
and reduce productivity. Therefore, a reduction in high property tax rates would be
a commendable reform. The benefit view argues that the property tax is a tax on
immobile land and is capitalized in local land values. Accordingly, the tax is of no particular concern from an efficiency point of view, though the fact that it is borne by
local property owners might constrain the rates chosen by municipal governments.
current tax reading  n  1155
Smart reviews the empirical studies of property tax incidence, focusing particularly on whether the tax affects investment or capitalization, or both. The evidence
turns out to be inconclusive. Complicating matters is the fact that property tax rates
may be influenced by tax competition effects, under the capital tax view, or by taxexporting effects if local property is owned by non-residents. The latter may account
for the fact that business property taxes are higher than residential ones, though it
is harder to explain the high rates of business taxation per se.
Smart then provides an overview of some evidence concerning business property
taxation and the location of businesses in Ontario. Compared with 2000, in 2008
business property tax rates were much lower, and differentials were reduced, including
those between core areas and suburbs. This is a consequence of Ontario’s mandated
reductions in business tax rates in combination with the caps on property tax rates
in high-tax municipalities. Surprisingly, there is little evidence of changes in the
suburbanization of employment as a result of reductions in urban-suburban tax rate
differentials.
The key contribution of the paper is an evaluation of the property tax reforms
using econometric techniques. Estimates of the effect of business property taxes on
business location are obtained by regressing the change in the logarithm of the
number of business establishments by industry and municipality on the changes in
the logarithms of the effective tax rate in the municipality and the effective tax rate
in neighbouring municipalities. In addition, other control variables are used. The
estimates yield an elasticity of the number of establishments with respect to ownmunicipality tax rates of about −0.2, and with respect to neighbours’ tax rates of
about 0.2. These estimates are statistically significant but rather small in magnitude.
They are consistent with either relatively low mobility of business property among
municipalities or capitalization of business property taxes into land values. Smart
concludes that the estimates suggest that the gains in productivity from more property tax rate harmonization are small, and that the reduction in property tax rates
leads to a transfer from the government to land and business owners with little cost
to municipality residents.
R.B.
Fiona Martin, “Has the Charities Act 2013 Changed the Common
Law Concept of Charitable ‘Public Benefit’ and, if So, How?”
(2015) 30:1 Australian Tax Forum 65-87
In what is perhaps the most prominent example of path dependency in tax policy
making, the concept of a registered charity for tax purposes in the United Kingdom,
Canada, and other Commonwealth countries continues to be defined by the preamble
to the 17th-century Statute of Elizabeth.33 This state of affairs would be amusingly
quaint were it not for the fact that the concept is so consequential. Numerous proposals in Canada over the years to modernize and expand the statutory concept of a
33 43 Eliz. 1, c. 4 (1601) (also known as the Charitable Uses Act).
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registered charity have been unsuccessful. As interpreted by Canadian and other
Commonwealth courts, charitable purposes fall under four heads:34 (1) relief of
poverty, (2) advancement of education, (3) advancement of religion, and (4) other
purposes beneficial to the community. The interpretive pressure point with respect
to these four heads is the concept of public benefit, the expansion of which has been
the goal of various unsuccessful attempts to legislatively define a charity for tax and
non-tax purposes.
Australia, however, managed to break out of this policy-making inertia and in
2013 enacted an exhaustive legislative definition of a charity, effective for 2014 and
subsequent years. In this article, Martin comprehensively reviews the new legislative definition in order to identify where it largely codifies the existing Australian
law as it developed under the recognized heads and where it differs from the judicial
articulation of the concept of a charity. For an organization to qualify as a charity,
the legislation requires that
n
n
n
n
the organization is a not-for-profit entity;
all of the entity’s purposes are charitable and for the public benefit (or are
ancillary or incidental to and in furtherance of or in aid of such purposes);
none of the entity’s purposes are disqualifying purposes; and
the entity is not an individual, political party, or government entity.
The legislative definition of a charity provides long and detailed descriptions of
charitable purposes, under enumerated heads. These purposes include promoting
or opposing a change to any matter established by a law, policy, or practice in the
Commonwealth, a state, a territory, or another country so long as the promotion or
opposition is in furtherance or in aid of any of the purposes that are otherwise
enumerated. These kinds of activities have proved to be especially contentious in
determining charitable status under the public benefit head as articulated by the
courts. Martin concludes, however, that the most important shift under the legislation is the elimination of the barrier to charitable status for certain organizations for
indigenous Australians that were previously considered ineligible because the ultimate beneficiaries are in a family relationship.
T.E.
Kevin M. Morrison, Nontaxation and Representation: The Fiscal
Foundations of Political Stability (New York: Cambridge University
Press, 2015), 148 pages, ISBN 9781107076778
The author of this book, a political scientist at the University of Pittsburgh, challenges what he perceives to be two generally accepted propositions articulated in
the political science literature. One is that taxation leads to representation. Morrison
34 Commissioners for Special Purposes of Income Tax v. Pemsel, [1891] AC 531.
current tax reading  n  1157
argues instead that higher levels of taxation destabilize political regimes and their
leaders, and can cause authoritarian regimes to move toward democracy and dem­
ocracies to move away from representation. The other proposition is that reliance
on non-tax revenues destabilizes political regimes through the phenomenon known
as the “resource curse.” Morrison argues that non-tax revenues can be stabilizing
because they allow governments to reduce taxation levels while increasing spending.
In other words, taxation hurts regimes and leaders, spending helps them, and nontax revenues increase spending.
Morrison defines non-tax revenues broadly to include foreign aid, resource revenue,
intergovernmental transfer payments, and borrowing. His concept is an aggregated
one that includes any revenue that provides a source of spending in place of taxes.
Oil revenues are included to the extent that they are generated through state-owned
enterprises rather than through royalty payments owed by foreign private-sector
firms, which are considered taxes. Morrison asserts that this aggregated approach
allows for an emphasis on the features that these sources of non-tax revenue have in
common, the most important of which is that they are all potential replacements for
taxation as source of spending. He uses cross-country, time series data to support
his arguments regarding the links between taxation, representation, spending, and
political stability. He also presents two countries—Mexico and Kenya—as case
studies, and analyzes an experiment undertaken in Brazil with intergovernmental
transfer payments.
Morrison suggests that his revisionist account of the two propositions is entirely
consistent with the obvious phenomenon of the resource curse and recognized
problems in the delivery of foreign aid. Indeed, his argument about non-tax revenue
leading to stabilization can be characterized as suggesting that these revenues have
good effects on democracies and bad effects on authoritarian regimes, because the
former tend to be associated with “good” institutions of government in general and
with health and education in particular, while the latter tend to be associated with
“bad” institutions. The feature common to both types of government is the use of
the institutional framework as the delivery mechanism for spending. An intriguing
line of future inquiry raised by Morrison is the extent to which democracies and
authoritarian regimes use different patterns of public finance in combination with
features of good and bad institutional frameworks. In terms of policy prescription,
Morrison concludes that some of the lessons from countries’ experience with foreign aid can be applied to break the resource curse. In particular, a movement away
from attempts to bypass government in the delivery of foreign aid and a reliance on
an approach of selectivity to limit aid to those governments that are perceived to
have good institutional frameworks might be modified to operate similarly with
resource-dependent countries.
T.E.
1158  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
Mark Tonkovich, “ ‘Render unto Caesar . . .’—Using the Freedom
of Conscience and Religion To Challenge Canadian Taxes”
(2015) 34:2 National Journal of Constitutional Law 121-43
This article provides a thorough and thoughtful review of Canadian case law considering challenges to the imposition of tax based on the argument of freedom of
religion as guaranteed by section 2(a) of the Canadian Charter of Rights and Freedoms.35 Tonkovich characterizes these Charter-based challenges to the imposition
of taxes as standard acts of civil disobedience, with the taxpayer’s challenge being an
indirect one to a particular government spending or other policy, such as legalized
abortion, legalized use of marijuana, or same-sex marriage. His review of the Canadian case law, as well as some of the US case law, reveals a categorical rejection of
these challenges. Tonkovich notes in this respect that Canadian courts are not always clear as to whether their rejection of a particular challenge is owing to their
failure to find a prima facie right or to their finding that there is such a right but
that the imposition of taxes to fund the relevant spending program out of general
revenue is a reasonable limitation.
Tonkovich suggests that section 15 of the Charter may be a means to challenge
successfully certain tax benefits that are provided, either formally or functionally, to
some organizations but not others. He cites as possible examples of such benefits
the income tax deduction for rent paid or accommodation provided to members
of the clergy, the granting of charitable registration to religious organizations, and
funding for political parties. Considering these examples, he observes that Canadian
courts may be more likely to interpret the relevant expenditure provisions as including less formal religious organizations or to strike down the particular benefit
provision because of its discriminatory impact. He speculates that indirect challenges to government policies through a challenge to the imposition of taxes have
generally been unsuccessful because of the uniform application of both the taxes
and the relevant policy.
T.E.
Stephen Smith, Taxation: A Very Short Introduction (Oxford: Oxford
University Press, 2015), 131 pages, ISBN 9780199683697
This book is part of the “little book” series published by Oxford University Press.
The series is intended to provide an introduction to a wide range of academic and
professional subjects, accessible to readers outside the particular field or discipline.
The author of this contribution to the series, Stephen Smith, is a UK tax economist.
He draws on his work for the Mirrlees review36 in providing a broad conceptual
overview of most of the main issues that are the focus of tax policy making. The
goal is to provide an interested reader with a basic tool kit for better understanding
35 See supra note 16 (herein referred to as “the Charter”).
36 Supra note 22.
current tax reading  n  1159
and thinking critically about the role of taxes and their effects. With an imperative
of accessibility in mind, there is little detailed discussion of second-order technical
design. In style and content, the book is generally comparable to, and can be compared favourably with, Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes by
the US tax economists Joel Slemrod and Jon Bakija.37
Following a two-page introduction, the book consists of six chapters. Chapter 1
deals with basic concepts, establishing at the outset the two principal roles of taxation: (1) raising revenue to fund the collective provision of goods and services, along
with social insurance; and (2) altering market outcomes to realize a more desirable
distribution of income and wealth. Smith defines taxes formally and conventionally
as “compulsory payments enacted by the state, that do not confer any direct individual entitlement to specific goods or services in return”38—a definition that
clearly distinguishes taxes from user fees. His emphasis in this chapter is much more
on the revenue-raising function than on the income- or wealth-redistribution function. Smith does make a somewhat contentious claim that it should be possible to
consider efficient and equitable tax-system design independently of the depth of the
role or intervention of government in the marketplace. To illustrate this point of
emphasis, he includes some OECD data on the growth of levels of taxation as a percentage of gross domestic product.
Chapter 2 considers the mix of tax bases commonly used in various countries,
with basic reviews of the personal income tax, sales taxes (particularly VAT), and
business taxes (particularly the corporate income tax), along with brief mentions of
wealth taxes, land taxes, environmental taxes, and resource rent taxes. The discussion
of the principal tax bases—personal income taxes, sales taxes, and business taxes—is
largely descriptive, although Smith does allude to their efficiency and distributional
effects. Smith emphasizes that the most dramatic development in the pattern of taxation in most countries over the past 50 years has been growth in the level of taxation
rather than a change in the mix of taxes. The mix of taxes has, however, been altered
in an important way by an increased reliance on sales taxes while the pattern of
personal and corporate income taxation has remained relatively stable. Again Smith
cites some cross-country OECD data to illustrate these points.
Chapter 3 reviews the incidence of taxation and notes the important distinction
between legal and economic incidence. Appropriately, the discussion is focused more
on the latter, describing for illustrative purposes the factors that determine economic
incidence in three contexts—sales taxes, labour taxes, and taxes on land and business
profits. Smith follows this review with a discussion of distributional incidence. He
observes that income taxes tend to be more progressive than sales taxes in their
distributional incidence, but points out that the regressivity of sales taxes tends to be
37 Joel Slemrod and Jon Bakija, Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes, 4th ed.
(Cambridge, MA: MIT Press, 2008).
38 At 4.
1160  n  canadian tax journal / revue fiscale canadienne
(2015) 63:4
offset by more strongly progressive income taxes, especially when the benefits of
government spending are fully brought into account.
Chapter 4 provides an account of the efficiency costs of taxation, including administrative costs, compliance costs, and the costs of behavioural responses. The
emphasis is on behavioural responses. In this respect, Smith provides an especially
lucid and accessible account of the economic concept of “excess burden,” which he
illustrates primarily in the context of sales taxes and the notion of an optimal tax. With
respect to the taxation of labour, Smith provides an interesting and slightly more
detailed discussion of the tax wedge—the gap between employer cost and employee
after-tax return—imposed by income and sales taxes. This chapter also includes
important, albeit brief, discussions of the poll tax and the taxation of land, identified
as efficient taxes because they evoke little, if any, behavioural response. The poll tax
discussion is for point of emphasis only, because of its undesirable distributional
properties. Land taxes are seen as preferable to the poll tax and as realistic, but they
are acknowledged to have undesirable transitional effects. There is surprisingly little
discussion of the supposed efficiency effects of consumption taxes versus income
taxes with respect to their impact on the savings decision, presumably because it is
now generally recognized that the effect is ambiguous at best.
Chapter 5 provides an overview of tax evasion and enforcement under both the
personal income tax and VAT systems. With respect to tax evasion, the standard economics model is described and then suitably modified with real-world detail, such
as psychological and moral considerations that affect the decision to comply. Smith
briefly contrasts evasion and avoidance, limiting his discussion of the latter to the
context of the corporate income tax. Enforcement mechanisms such as withholding
at source and third-party information reporting are reviewed, along with estimates
of the level of tax evasion.
Chapter 6 is conceptually the broadest. Smith provides a set of criteria drawn from
Adam Smith to judge the efficiency of tax system design. “Neutrality,” defined in
terms of consistency of treatment of activity, is emphasized, with the author contending that broad bases and low rates are both needed to avoid a behavioural response,
to simplify design, and to mute the influence of interest groups. Smith also provides
some discussion of the use of flat tax rates, drawing on the experience with such
systems in the Baltic states, in some of the former Russian republics, and in Russia
itself. Smith acknowledges that these experiences do not suggest much, if any, positive
impact on economic growth, and that flat taxes share one universal and undesirable
distributional property—upper-income households benefit disproportionately. This
chapter includes a discussion of sales tax exemptions that are intended to offset the
regressivity of the tax, and Smith notes that the policy preference is to use targeted
transfer payments. Political economy effects are seen, however, to undermine the use
of transfer payments and full taxation under VAT systems—a general theme of this
chapter in assessing the efficiency-equity tradeoff that tax policy makers commonly
face. The chapter concludes with brief reviews of environmental taxes as corrective
taxes and with a couple of cliché-ridden pages on the effect of the global context
on tax policy making. A subsequent edition of the book might more usefully include
current tax reading  n  1161
at this point a discussion of international taxation and of the concept and importance
of tax expenditures. The inclusion of such material need not undermine the accessibility of the book and its associated goal of informing a general readership about
tax-system design.
As noted above, Smith draws on relevant data to strengthen the discussion at
various points in the text. He also summarizes relevant empirical research, though
without including formal citations to the literature (which, indeed, are not required,
given the intention of the book). Smith does provide references to general readings
for the material in each chapter, in a selected bibliography. To lighten the subject
matter and make it more appealing to prospective readers, the book also includes
references to popular culture, as well as cartoons and photographs with a tax-related
theme or association.
T.E.