What is the most pressing issue in Canadian tax policy today?

The most pressing issue in Canadian tax policy today is that people don't like paying taxes, and it is increasingly hard to persuade them to do so.

The heavy duty engines of tax revenue generation are the personal income tax and the federal and provincial sales taxes. Federally, personal income taxes raise about half of all tax revenues. Provincial sales taxes raise considerably more revenue than provincial corporate income taxes.  Yet these bases are eroding.

The most reliable payers of income taxes are middle-class salaried employees. It's hard to get the poor to pay taxes, because they don't have much money, and it's hard to get the rich to pay taxes, because they are mobile, and can take advantage of tax planning opportunities. But income inequality in Canada has risen, and relatively more income - thus relatively more of Canada's tax base - is in the hands of the elusive 1%. This income concentration partly reflects an increase in the share of Canada's GDP going to capital - and capital income is much harder to tax than labour income.

It's also hard to get the self-employed to pay taxes, because they can write-off home office and other everyday expenses against income. And the number of self-employed has been growing more quickly than the labour force as a whole. 

But taxing the rich and taxing the self-employed is trivial compared to taxing retirees.

Back in the day some foresighted person in the federal government came up with a brilliant plan to ease the budget crunch that would inevitably accompany population aging: the Registered Retirement Savings Plan. Basically RRSPs allow people to defer their tax liabilities until the time that they retire - and start costing the government money. The money that the baby-boomers have sitting in RRSPs should be a revenue bonanza for federal and provincial governments - except that this is what happens when someone tries to remove a nest egg:

(For more on this, see my post RRSPs: brilliant economics, lousy psychology).

Just as changes in the way that people earn income threaten to erode the income tax base, changes in the way that people consume present challenges for consumption or sales taxes.  Cross-border shopping and on-line shopping are tractable issues as long as physical goods are changing hands - with appropriate enforcement, taxes could be collected. The real challenge is the world of virtual commodities. With the right brower extension, one's computer can appear to be in the US. Then what prevents one from buying virtual goods like games or apps or books at US rates paying US tax, completely by-passing the Canadian tax system? (something might, I honestly have no idea). 

The world of virtual commodities poses another more subtle, yet I think even greater, challenge to Canadian tax policy. Ultimately, people work so that they can afford to buy stuff. When things that people care about - music, books, movies, friends - are available for free on-line, people don't need to work so hard (the price of housing is a solid objection to this argument). Still, if labour elasticities are increasing, governments will find it hard to resolve their fiscal crises by raising taxes on workers.

I haven't said much about capital taxation, not because it doesn't matter, but because it's so complicated. The OECD's base erosion and profit shifting project (BEPS - for a Canadian take on the BEPS, see this Canadian Tax Journal symposium) is one of the more interesting developments here. Corporate tax design matters for investment, and for economic efficiency. But federally, corporate income taxes only account for one out of every seven tax dollars, and much of that revenue comes from small businesses, rather than multinationals. From a revenue point of view, there's just not that much at stake in the corporate income tax world.

This post is written in response to a query from a friend, who has no doubt read to this point and thought "nothing on income splitting? really?" I see income splitting as a manifestation of people's desire to pay lower taxes. The self-employed have opportunities to split income by employing spouses or other family members; the salaried want in on the deal. There is, perhaps, a socially conservative faction of the Conservative Party of Canada that has worked out that income splitting would create incentives for mothers to stay at home full-time, and figures this is a good thing.

On income splitting, my position has always been that the best way to give money to families with children is to give money to families with children. It's that simple.

 

Comments

[Patrick]

Compare the perception of income vs. consumption taxes. It seems to be rooted in how/when the taxman reaches into your pocket. Sticking it to me at the grocery checkout? Bad. Snag a chunk off my pay in a world of direct deposit and electronic spy slips most people never read? Works like a charm. So I am thinking that maybe the taxman just needs to be a little sneakier/discreet to get his hands on the nest egg without facing a hissing, squawking egg guard.

[Frances Woolley]

Patrick - I agree with you completely. This is a key reason why it's harder to persuade the self-employed to pay taxes - they have to remit taxes themselves out of money they've earned.

But can you think of a way for Canada Revenue Agency to discreetly deduct taxes from RRSP withdrawals? I can't.

[Joseph S]

"The real challenge is the world of virtual commodities. With the right brower extension, one's computer can appear to be in the US. Then what prevents one from buying virtual goods like games or apps or books at US rates paying US tax, completely by-passing the Canadian tax system?"

With proper enforcement, I doubt that this would be as big an issue as one might suspect. Proxies and VPNs are the two main ways to spoof your location online, but both can be tricky for most people to use who aren't on the advanced end of technology spectrum. Most U.S. sport leagues provide low cost or free options to watch their matches online, as long as you are outside of North America, so it used to be really popular for people to use VPNs and to a lesser extent proxies to access these services from the U.S. The problem is, when 10,000 people are all accessing the service from the same I.P. address, it becomes pretty obvious that its a VPN or a proxy and the leagues promptly blocked acess from that I.P. address. If there existed some law require retailers to do the same thing for all digital purchases, or if the Canadian government maintained a database of known location spoofing I.P. addresses, I imagine most major retailers operating in Canada would follow along. A similar thing happened with Amazon eventually giving up trying to help tax dodgers in the U.S. dodge state sales taxes. There would still be some leakage and additional cost of course but it won't be a wholesale evaporation of digital good tax revenue, at least if the government doesn't want there to be.

[Bob Smith]

Frances,

With respect to taxing transactions involving intangible property, technically, if you download software from Amazon.com and aren't charged GST/HST to have to self-assess yourself and submit the tax to the CRA. I think it's fair to say that compliance with that requirement is non-existent.

In practice, the difficulty around taxing intangible property doesn't arise from identifying Canadian consumers - no matter what technological wizardry you do with your browser, when you pay for your purchase, you'll give the supplier your Canadian billing address for your credit card (although perhaps not an issue if the supplier will take bitcoin). The bigger issue relates to having foreign suppliers charge and collect Canadian tax. If they don't carry on business in Canada, they're not required to register for GST/HST. While they can choose to do so, they generally have to post security for the tax that they may collect (since foreign courts, at least in Anglo-American jurisdictions, won't enforce Canadian tax law, in theory, in the absence of security, a foreign supplier could collect GST/HST and flip the bird to the CRA). Understandably, foreign companies generally decide they can't be bothered to help Canada collect it's taxes (if they're even aware that's an option - most foreign suppliers don't carry on their business with Canadian customers in mind).

One interesting recent development on this front is that Amazon.com will no longer permit Canadian purchasers (or at least people have Canadian billing addresses) to purchase e-books from the US site (which doesn't charge GST/HST), but instead punts them to the Canadian site (which does) This may be wholly unrelated to taxes (maybe some sort of intellectual property rights issues), but I wondered if it was a fall-out from the criticism Amazon was taking in the UK and elsewhere for its own tax planning and this sort of move was a sop to local tax authorities.

With respect to RRSPS, I haven't seen any recent indication that those may be a target for increased (or reduced) taxation, but you can see the truth in your proposition that people hate paying taxes on their RRSPS in the number of (ill-conceived) schemes floating around a few years ago which purportedly allowed people to melt down their RRSPS without paying tax. Invariably they didn't work, and people who tried them ended up getting kicked in the teeth with tax, interest and penalties (it also triggered a host of insidious new anti-avoidance rules which do nothing to prevent prior abuse - it was already caught - but do trap a whole host of non-abusive transactions). But the fact that people would take on such risks suggest a healthy appetite for reducing tax on RRSPs.

I do wonder why taxing of RRSPS has a bigger impact than, say, taxing employment or pension income. After all, in each case, there is withholding from payments to the taxpayer. I've got a couple of theories. One, ironically, is that RRSP withholding is often less onerous than, say, payroll withholding. Whereas, if you're subject to payroll withholding, the deducted taxes will, for most people, cover all of their tax liability for the year (if not putting them in a refund position). In contrast, RRSP withholding tends to be at a lower rate, meaning that, at the end of the year, people may have a further tax liability that they have to pay, making the tax more visible. Would RRSP withholding be more palatable if it more closely matched people's actual tax rates? (In practice, probably hard to do).

The other theory is that with RRSPS, people see the pre-tax amount in a way they don't with payroll taxes. The balance in their RRSP is a much more tangible number then, say, their pre-tax income. Off the top of my head, I couldn't tell you what my pre-tax bi-weekly income is (at least without some quick division), but I can tell you what my RRSP balance was the last time I checked. What might be interesting is to see if there's a difference between how people perceive the taxation of withdrawals from RRSPs/RRIFs versus the taxation of pension or annuity payments.

[Frances Woolley]

Joseph S - thanks for providing the perspective of someone who actually knows something about the virtual world!

The Amazon example is a really interesting one. Why did Amazon "give up trying to help tax dodgers"? I would be willing to bet that Amazon didn't suddenly become entranced with the idea that taxation is the foundation of a civilized society. Rather, what happened was that Amazon gained enough market power that it could add provincial sales taxes to the bill and people would still buy from them.

So the question is: in the long-run, will the world of on-line commerce be more or less concentrated than the world of bricks-and-mortar commerce? If the world of on-line commerce ends up being *more* concentrated, then conceivably tax collection becomes easier - all governments have to do is to persuade Amazon to collect tax revenues for them.

On the other hand, Amazon is bigger than a lot of governments, and it's aggressive use of strategies to avoid paying corporate taxes is precisely the kind of thing that prompted the OECD's BEPS project (http://www.theguardian.com/business/2013/jul/19/oecd-tax-reform-proposals-amazon.

So I don't know. Interesting.

[Bob Smith]

Frances,

I'm also not entirely convinced that it's becoming harder to collect tax revenue - witness the staggeringly high levels of taxes as a percentage of GDP in developed countries.

But to the extent it is, I think it's a function of politics rather than the various other factors you mention. The reality, at least in North America, is that there is no part of the political spectrum willing to make the case that taxes are unambiguously good. To be sure, you have elements of the left who are full of bright ideas about imposing taxes on corporations or faceless owners of capital, but even this illustrates the point - they're only willing to sell taxes that Jill Q Voter doesn't see (though, in both cases, that she may in fact pay). More to the point, while making this case, they also argue for reducing taxes for the poor (i.e., reducing the HST, on certain goods, if not universally), which reinforces the message that taxes are bad (at least when not imposed on someone else). When even the left-wing parties are adopting this message, what hope is there of raising taxes?

What I'd love to see is a political party make the case for raising taxes. Not because I want to pay higher taxes (although, professionally, I do benefit from a higher tax burden - no one hires a lawyer to avoid low taxes), but because I think that's a healthy addition to the debate. More to the point, if a political party can't sell, say, a 1% increase in the GST/HST to the median voter as a way of funding their spending commitments (which tax increase would likely result in no, or nominal, increase in tax for someone making $20k a year, and, maybe, a couple hundred bucks for someone making $50k a year) then I really wonder about the merits of those spending commitments.

[Bob Smith]

My own guess is that Amazon in the US became big enough that the compliance costs associated with collecting state taxes became less than the costs of fighting with state sales tax auditors or the risk of non-compliance.

From what i've been told by clients who carry on on-line business in the US is that state tax authorities often have expansive (if not insane) nexus rules which can trigger state sales tax collection and remittance obligations in all sorts of unforeseen circumstances. At some point, it's just easier to charge and collect the tax than have to fight with auditors and account for possible tax risk in your financial statements.

As an aside, those same US clients look at the Canadian HST system in wonder. "What, I can sell in 5 different provinces and only need to file one return? When are you guys going to invade us?". The Canadian HST regime provides an example of how you can have a multi-jurisdictional tax system making both collection and compliance easier (I believe the EU may have something similar in the context of business to business VAT, but that's beyond my ken).

[Joseph S]

Frances. The standing law in the U.S. is all derived from the 1992 Supreme Court case Quill Corp. v. North Dakota which ruled that an online retailer only had to collect sales tax if the retailer had some kind of physical presence in the purchaser's state (the purchaser was still responsible for paying the sales tax, but had do so on his/her own, which of course no one does). Amazon and other retailers aggressively exploited this by only setting up offices and warehouses in states without sales tax. States were naturally unhappy with this and several passed laws requiring Amazon to collect sales tax. States have also sued Amazon in federal court and argued that Amazon does in fact have some sort of physical presence in their state even if it's not a traditional office or warehouse. Federal courts have largely sided with states who sue so Amazon usually doesn't try to fight too hard if a state starts to make a public argument over taxes because it's not worth the negative publicity and the cost of fighting a doomed legal battle. It really all comes down to how much an individual state is willing to fight over the issue (several states have actually gone out of the way to keep the loop hole open for its residents). Amazon would also ideally like to build warehouses near every single major metro area so there are real costs to it going out of the way to avoid collecting sales tax. There are still some states that Amazon does not collect tax for.

How this history maps to an international stage, I'm not sure. I would imagine it comes down to how hard countries are willing to defend their home corporations so Jack Lew's comments in that Guardian article are not especially encouraging to hear.

Your comment that the ability of the state to collect taxes on international corporations will probably come down to average size of said corporations is likely true, but mostly because it's easier for the state to fight a few corporations that make up 90% of the market than thousands of corporations. I would reckon that online retailers are likely to be more concentrated because the marginal cost of expanding is much smaller than traditional brick and mortar shops, and there might even by positive returns to scale in this area.

Here's a wkipedia article with a very brief U.S. state by state summary of of this fight if you're interested.
http://en.wikipedia.org/wiki/Amazon_tax

[Joseph S]

Having just read Bob Smith's comments on Amazon, I agree entirely. It's all about getting the incentives right for the corporation. If the expected cost of compliance is less then the expected benefit of non-compliance they will do the "right" thing and getting the incentives right is easier when the number of firms is small.

[Majromax]

The US also has a horrible mix of local taxation rules. There are about 10,000 sales tax jurisdictions in the United States, because sales taxes are often used as a local funding measure at the county, city, or even school district level.

Enforcing a rule of "tax payable where the goods are delivered" is practically impossible in the US, whereas with the HST it's about three-quarters of the truth in Canada.

[Frances Woolley]

Joe S Thanks for that. States' willingness to fight large corporations, however, depends to a large extent on how many jobs and/or political donations are at stake - perhaps one reason why Amazon became a target for states was that it didn't employ anyone in states with sales taxes.

"I would reckon that online retailers are likely to be more concentrated because the marginal cost of expanding is much smaller than traditional brick and mortar shops, and there might even by positive returns to scale in this area."

But the barriers to entry are smaller as well, and that works against concentration. Though reputation/information effects should enhance concentration.

Then there's the phenomenon of sites like Abe Books or Etsy that aggregate tiny retailers into one mega-retailer. Is that an example of concentration or de-concentration? E.g. I just bought three copies of A Gentle Introduction to Stata for $10 plus shipping through Abe Books. The seller was actually some bookstore in the UK, I think. And then there's sites like threadless.com or Etsy - how easy is it to trace money designers and artists earn through these kinds of sites?

[Frances Woolley]

Bob -

Taxes as a percentage of GDP have fallen 5 percentage points since the early 1990s - that's a lot. See http://stats.oecd.org/Index.aspx?QueryId=21699. If the OECD is to be believed, our tax/GDP ratio is in the bottom half of OECD countries.

I don't see the tax/GDP ratio as staggeringly high. Ontario and Quebec are running large deficits and we're only just coming out of this demographic sweet spot where we had relatively few children and relatively few retirees. If we can't pay our bills with our current tax/GDP ratio, and we know health care etc is going to get a lot more expensive going forward, what's going to happen?

[Bob Smith]

Frances,

It depends. In some cases it's much easier for tax authorities to collect information through those sorts of sites. For example, a few years ago the CRA issued requirements to Ebay Canada demanding that it turn over information about its "power sellers" (i.e., people who were making significant sales online and, allegedly, carrying on business using EBay as their sales infrastructure) in

It's much easier for the CRA to issue a requirement to Ebay then to track down the internet service providers of a few thousand people carrying on business online.

[Joseph Heath]

If the most pressing issue is that people don't like paying taxes, the easiest way to improve the situation would be to require that GST/HST be included in the advertised price, not added on at the cashier. In other words, make the tax invisible the way that VATs are in Europe. Elementary behavioral psychology: you want the person paying the tax for classify it as a foregone gain rather than as a loss. This is why credit card companies went to such great lengths to bar retailers from imposing a surcharge on credit card use (as opposed to offering a discount for those paying cash).

Having the GST added on at the till was, in my view, a huge miscalculation by Mulroney -- who wanted a more efficient tax, but didn't want to expand state spending too dramatically, and so wanted to make it difficult for future governments to raise the GST. He got a bit more than he hoped for though; what he wound up doing was triggering widespread tax evasion and resistance.

Someone told me once that there's some kind of legal issue or jurisdictional issue between the federal government and the provinces that makes it difficult to require that all quoted prices include GST/HST, but I can't remember what it is. It can't be insurmountable though, since lots of states have "hidden" VATs. And with no more penny, there's even more reason not to have tax added on at the cashier.

[Frances Woolley]

Joseph "Having the GST added on at the till was, in my view, a huge miscalculation by Mulroney"

Agree with you 100% about the psychology of visible v. invisible taxes. But I don't think Mulroney miscalculated. The government was hoping that retailers would include the GST in their prices - I remember seeing pictures of government posters saying "price includes GST" but can't find any right now. I think Eatons actually did for a while - but it didn't last.

The old manufacturers sales tax, which the GST replaced, was included in the price. But it may be that the GST counted as a "direct tax" whereas the old manufacturers sales tax didn't, and the British North America act expressly gave power over direct taxation to the provinces (I can't find the section of the 1982 Canada act that deals with this).

[Bob Smith]

"Taxes as a percentage of GDP have fallen 5 percentage points since the early 1990s - that's a lot."

In Canada. Yes, but that's been as a result of conscious government policy decisions to reduce taxes (both federally and provincially). But I note that we're something of an exception to the general experience of developed countries.

After all, other OECD countries have significantly increased their tax burdens since the early between 1990 and 2012. Just amongst G7 countries, France, Germany and Italy have increased their tax burden as a percentage of GDP by 3.3, 2.8, and 6.4 percentage points, respectively. The tax burden in Japan and the UK is more or less the same as it was in 1990. And in Canada and the US it has fallen (by 4.6 and 2 percentage points, respectively). (I concede that all those numbers should be taken with a grain of salt, since there appears to be some significant annual fluctuations, I use 1990 as the base only because you did, and 2012 because its the latest year). For what its worth (not much because the make-up of OECD countries changed over the period), the overall tax burden amongst OECD countries have done up over the last few decades.

All of which is to say that I stand by my original point that if there's a resistance to raising taxes in Canada or elsewhere, I wouldn't say that that's been as a result of broader economic/technological/social/whatever changes that would make it more difficult to levy taxes. In some countries (France, Germany, Italy) the barriers may be that the tax burden is just as a high as it can get. In other countries (Canada, the US) it's because even left wing politicians have been pushing anti-tax policies (i.e., they're anti-tax on taxes imposed on their constituants, even if they're pro tax on non-voters (i.e., foreign investors, corporations).

[Bob Smith]

Joseph,

There's no constitutional restriction on having tax inclusive pricing. Even if it were characterized as an indirect tax (i.e., a tax on the supplier borne by the consumer) that's well within the constitutional powers of the federal government (which can levy both direct and indirect taxes). Moreover, there's no reason you can't have a direct tax with tax inclusive pricing - the provinces have done it for years with fuel tax (next time you buy gas, look at your receipt - no provincial fuel tax, but legally its your liability).

In fact, the Excise Tax Act (Division XI) used to contain provisions permitting the introduction of tax inclusive pricing once provinces containing more than 50% of the population adopted the HST and enacted corresponding provincial legislation (which technically occured when Ontario and BC signed on to the HST in 2010. These provisions were inserted at the insistence of the Senate when the original HST provisions were added to the ETA in 1997 (who says the Senate never does anything), but they never came into effect and were ultimately repealed (I didn't know this, but apparently we have a Federal Act that automatically repeals legislation that has't come into force within 10 years of receiving royal assent).

[Majromax]

@Joseph Heath:

> If the most pressing issue is that people don't like paying taxes, the easiest way to improve the situation would be to require that GST/HST be included in the advertised price, not added on at the cashier. In other words, make the tax invisible the way that VATs are in Europe. Elementary behavioral psychology: you want the person paying the tax for classify it as a foregone gain rather than as a loss.

I think that a compelling reason for inclusive pricing is, of all things, public health.

GST/HST rates are deliberately distorted to exempt basic groceries and non-prepared food. A pound of apples is not taxed at the till, but a bag of potato chips is. However, that deliberate pricing signal is hidden from the consumer because the tax is not included prior to checkout.

That leaves consumers in an uncomfortable position. The tax code expressly wants to encourage beneficial choices, but that encouragement only acts by way of... memorizing the tax code.

In the meantime, we're left with an awkward tax code where taxes have different visibilities. It's difficult for society to make an informed choice about, say, the CIT versus GST when the former is totally hidden from the average voter whilst the latter is tacked onto the end of every transaction. This distributional choice is even aside from a debate about what the proper tax *rate* should be.

[Taxrage]

You stated: "I see income splitting as a manifestation of people's desire to pay lower taxes".

I guess it depends on which form of income-splitting you're talking about. If you are referring to self-employed and business people paying a spouse, that's a given. If you mean pension splitting or the proposed splitting for couples with minor children, I think this is driven more by the desire to pay the same taxes as the neighbour with the same aggregate income. In our case, our children will all be over-18 within 5 years, so I won't argue as strongly for taxing household income (just less strongly).

If you're willing to advocate the elimination of deductions and subsidies for daycare, I'm will to stop pushing for equal tax treatment as the 70% of families who pay others to look after their kids so both spouses can work. I just want to see one group of parents receiving generous subsidies/breaks for child care, while the other group receives nothing.

[Matt]

I don’t know how to properly express this, so I will probably come off as too vague. It is my sense that globalization as most people understand it is coming to an end. I don’t think most people’s hearts are in it anymore, and one of the reasons is the obvious mobility of capital appears to be too destructive to the stability that most of us crave. Depending on your level of wealth, the system allows (perhaps is intended) for tax havens. And yet, I think there is a new nationalism that is surrounding us in the “Western” world (maybe in other parts of the world that I am less familiar), and I feel that there is a hunger for some form of “economic containment.” As Joseph S. wrote earlier, technology is simply a tool – and so it all depends on how nation states use it.

[Bob Smith]

Matt,

I think you're too pesimistic. Granted, globalization is reversible - it was reversed from 1914 to 1945, although in its current incarnation, reversing globalization would be much more difficult to do. But I don't think the factors you mention are what will reverse it.

First, I'm not sure that the economy has become more unstable that it has other points in the last two centuries. Nor is it clear that the mobility of capital has been particularly destructive, given that the last quarter century has witnessed arguably the most massive reduction in global poverty since the dawn of time. In some respects many of the debates about Globalization and its impacts in the west are, literally, "first world problems".

Second, the scope of abusive or illegal tax avoidance has to be put in context. As I noted earlier, governments - at least developed world governments - are collecting far more taxes (both in absolute terms and as a percentage of GDP) than they did 24 years ago (despite, in countries like Canada, having chosen to make significant tax cuts). Moreover, the extent of tax leakage has to be seen in context. The US Senate figures that tax havens cost the US fisc. $150B a year in lost revenue (there are other, larger estimates, but not ones that are particularly credible). Granted, that's a lot of money, but compared to a net tax tax of roughly $5 billion that Americans pay every year, at the risk of being flippant, it's a rounding error.

Moreover, in practice the use and abuse of tax havens is likely to be far more limited than public opinion often suggests. For individuals resident in Canada or the US it is increasingly difficult to "park" money abroad outside the Canadian tax net (whether legally or illegally). In recent years, the Canada Revenue Agency has had significant success in successfully taxing Canadians who had engaged int what they thought was successful tax avoidance strategies involving offshore trust (i.e., strategies that reduced taxes legally). Turns out, they were legal, they just didn't reduce taxes (see, for example, the decision of the SCC in St. Michel's trust aka Garron). In addition, Finance has introduced a host of new legislation to capture people who engage in more successful versions of such tax planning. The US, having finished shaking down Switzerland for information about tax evaders hiding their money in that country,is busy shaking down the world community for information about US citizens everywhere in the world (i.e., FATCA).

But here too, countries like Canada have had significant success. In the last 5 years Canada has coerced a number of traditional tax havens into entering into information exchange agreements to give Canada access to information about accounts in those jurisdictions (the coercion being that they either enter into the TIEAs or Canada effectively blacklists them as potential holding company jurisdictions for Canadian companies making outbound investments). The US, of course, is doing that on a much broader scale by coercing every country in the world (including Canada) whose citizens want to participate in the US market into providing them with information about US citizens (I.e., FATCA).

Indeed, in each of these cases, its globalization that makes it EASIER for countries to collect information about their citizens, since the various tax haven jurisdictions want to get access to different markets. Similarly, the US was able to shakedown the Swiss banks because they simply could not afford to be excluded from the US market (for what it's worth, Canada and has host of other countries were able to free ride on the US's coercive power and receive a list of a host of Canadian tax payers as well).

To be sure, people may continue to evade taxes illegally, but short of living in a police state, it's never going to be possible to stop everyone from breaking the law (even police states can't do that). There are going to be tax evaders. Similarly, you might be able to design tax laws with no loopholes that can be legally exploited, but the reality is that that has costs too, that a provision that may be a loophole for one person, may serve a legitimate purpose for another (indeed, in recent years, I've had a number of clients who, despite having genuinely done nothing wrong or inappropriate, have been caught by a host of recent, and overly broad, anti-avoidance rules intended to stomp out any possible tax avoidance, at whatever the price).The people at the Department of Finance won't accept this, but there is an efficient level of tax evasion or tax avoidance, just like there is an efficient level of crime or an efficient level of pollution. It will never be zero.

Granted, there's an arm's race in tax law, between those developing tax laws and those trying to find (legal, and less commonly, illegal) ways around them. The reality is the latter generally have more incentives (its their money) and can hire the best minds money can buy, so they have an advantage. For a time. But the people at Finance (in the case of Canada) always wins in the end. It may take them a while, but eventually they figure it out and, if they see something that is just to blatant or too offensive, they re-write the law and shut it down.

In short, globalization may collapse, but it won't be because of mobile capital or tax havens.

[Tom West]

I'm fairly certain that Amazon forces Canadians to use the Canadian website for e-books because rights for electronic books can be be split between the US and Canada. Amazon may not have the right to sell the e-book in Canada (or might be selling the wrong publisher's edition) and would be setting itself up for a big fat lawsuit if it was making money selling de facto pirated books.

Not that this doesn't happen. My wife has had to remind her publisher that it didn't have e-book rights in the UK. And had to remind another of her publishers that it *did* have rights to sell in the UK and would it please list its e-books there so she would stop getting hate mail about discriminating against the Brits.

[Patrick]

Frances: I dunno. Maybe a progressive tax marketed as a health care premiums? Sorta like what AB used to have, only progressive. I suppose it would have to be provincial, but so what? The provinces need the money and do most of the heavy lifting anyway.

[Bob Smith]

Tom,

Could be, but Amazon US was selling e-books in Canada for the last couple of years before this recent change.

[Tim]

Bob Smith

I used to comment here a lot and perhaps some of you remember me. The reason I haven't commented here in a long time is I am now waist deep in the legal fight against in the implementation of FATCA here in Canada(What Bob mentioned previously)

http://www.adcs-adsc.ca/

I don't have an official role with ADCS but I am a supporter and have helped them with some legal advice.

Frances mentioned the BEPS project. Just to explain what BEPS it is an initiative at the OECD to ensure better allocation of income at the corporate level between countries. However, to actually implement its final product all of the bilateral treaties in the world will need to be modified to incorporate the BEPS. So the tax treaty between Canada and US would have to be amended and then ratified by both Canada's Parliament and the US Senate. To obtain ratification in the US Senate a treaty requires 67 votes which means you need a significant amount of GOP Senators on board. One of the things I have been doing is corralling GOP grassroots activists in order to try to block any future modification of the US Canada Tax Treaty thereby taking CRA and Finance Canada "hostage" until they meet the demands of ADCS over FATCA. As you might expect Finance Canada really just loves me.

http://blogs.rollcall.com/wgdb/rand-paul-holding-tax-treaties-with-switzerland-other-countries/?dcz=

Senator Rand Paul has been one of the most important allies to the ADCS cause.

[Frances Woolley]

Tim - thanks for this comment.

[Bob Smith]

Tim,

I've been following the legal fight over FATCA and the Canadian IGA. I'm afraid the legal challenge is unlikely to succeed. Even if the alleged Charter violations are substantiated (and I read the plaintiff's statement of claim and thought the claims of alleged charter violations to be pretty weak, though I've seen the courts accept worse recently), the law will be upheld under section 1 of the Charter as a reasonable limitation. And I suspect the plaintiffs might be worse off if they win (i.e., when their banks start closing down their bank accounts), but we'll see. In any event, I'm not sure what's to be gained by holding Finance and the CRA hostage over FATCA - they can't repeal it, they could they would. My own suggestion - which has been poorly received, but I think would work - is that the developed countries should just band together to offer the US $50B a year to repeal FATCA. That would probably be more than the US fisc. would collect as a result of information obtained from FATCA, but less than it'll cost the rest of the world every year to comply with FATCA. Unfortunately, no one seems interested in Coasian solution.

The real problem isn't FATCA (although that is a monstrously stupid policy) or Canada's response to it (although, that has been poorly handled - I'm just working on a presentation I'm giving next week on it, and its a mess), the real problem is that the US (along with Eritrea) imposes taxation based on citizenship, while the rest of the world imposes taxes based on residency. Until that changes, American citizens living in Canada have a real tax problem, FATCA or no (the threat of hefty penalties and lengthy jail times has nothing to do with FATCA, FATCA's just a way of identifying US taxpayers). American citizens living abroad can vote in US elections - they would do well to keep this in mind when they do.

With respect to BEPS, much of what's going on that front involves coming to a common ground on high level concepts, such as how to tax e-commerce, how to value intangibles for transfer pricing purposes, and best practices for dealing with controlled foreign corporations. For the most part, these wouldn't be the subject of treaty changes, so much as providing suggestions on how countries should reform/implement/enforce their own domestic tax law.

In some areas, to be sure, treaty changes would be necessary (for example, with respect to treaty abuse or the definition of permanent establishments), although in this area,I'm not sure that the US would necessarily object to some of the anti-treaty shopping provisions of the BEPS initiative, given that the limitation on benefits provisions that are included in pretty much every US tax treaty (including the Canada-US Income Tax Convention) is widely seen as the model for what BEPS countries would impose (countries like Japan, Australia and Canada have been adding very limited limitation on benefits provisions to specific articles in some of their recent treaties - the Canada-Hong Kong tax agreement comes to mind - but they're very narrow in scope). So the US may well be the one country in the world that wouldn't have to change its tax treaties as a result of the BEPS initiative, and certainly it wouldn't have to change the US-Canada Tax Treaty. In any event, the most likely outcome from the OECD on treaty shopping is that they'll add a limitations on benefits clause to the OECD model tax convention that countries use as the template for negotiating their own conventions with one another (the US actually has its own model treaty, which is close to the OECD model convention but differs in a few areas - notably limitation on benefits).

But we'll see.

[Tim]

-Bob Smith

Your suggestion of simply passing the hat and paying off the US is good one and something I going to forward along to some other people more involved with Finance Canada than I am.

You are also completely right the problem is the US along with Eritrea's insistence on taxing its citizens wherever they live. Earlier in the spring I was at a public meeting with NDP MP Murray Rankin in Toronto who said until last January he did not know that any country in the imposed taxation on this basis of citizenship and thought it was the stupidest thing he ever heard. Again this is coming from an NDP MP.

Whatever my differences with Finance Canada over FATCA Canada has a tax system that is 100 times better than that of the US. One my reasons for opposing FATCA is I worry Canada has now opened the door to letting the US Congress push us into imposing some of the worst of the worst of US tax policy. The problem is in on American side it is far more difficult to repeal existing laws like FATCA or citizenship based taxation even under a Republican Congress. Where things like BEPS come into play is Finance Canada is trying to sugarcoat Canada's acceptance of FATCA by saying well the Obama Administration is committed to the BEPS project and they have also committed to "reciprocal" FATCA reporting by US banks both of which will help Canada in the end. What Finance Canada(and the Conservatives) isn't telling the public is both of those are contingent on the Obama Administration getting Republican votes to give the IRS necessary statuatory authority to enable both something due efforts by myself and others is becoming less likely by the day. The biggest challenge I have as actually finding a way for my side(anti FATCA) to win to not just to get in a neverending stalemate with the US government.
On the subject of the Charter. There was a case about 15 years back where the courts ruled you could challenge tax laws and tax treaties on the basis of Charter S.15.
http://reports.fja.gc.ca/eng/2001/2001fc27325.html
The Chua vs MNR case was really the impetus for the ADCS lawsuit. You are also correct to say how the Charter S.1 arguments play out is going be key. My feeling is the two plantiffs both of which have almost no ties to the US other being born there(no passport ever, never voted) have a much shot on winning a S.1 argument than someone such as myself who is a much more "active" US citizen(I have a US passport, have lived in the US, have voted in the US).

I will also add the goal of myself and ADCS people is not so much to knockout FATCA in one blow but to "chip" away at slowly and try to narrow the very broad definition of US citizenship the US uses with the medium/long term goal of forcing Congress to the negotiating table of Residency Based Taxation.

On the subject of BEPS you are also correct that for most part the existing Canada US Tax Treaty complies with most of the goals i.e. limitation on benefits, permanent establishment of BEPS. However, I have been hearing a lot of talk of the US OECD creating "multilateral" double taxation treaty to replace all the "existing" bilateral deals. The odds a Republican Congress will ever go along with that are slim to none. I hope Finance Canada and Joe Oliver for their sake don't actually go along with any communique that assumes Congress would.