Tax law not for timid

Tax law not for timid: [National Edition]
Czarnecka, Marzena. National Post [Don Mills, Ont] 07 Feb 2007: FP6.

Abstract:  “The Income Tax Act does not come with instructions,” says Stephen Ruby, a senior tax partner with the Toronto office of Davies Ward Phillips & Vineberg. “It’s like a chess game with 1,500 or 2,000 rules, and you have to learn all those rules, and how to manipulate them. And just to make things more interesting, they are always changing. You’re always putting the rules in a particular order,

Or the wide-sweeping legislative change involved, as in the case of the income trusts. “There is still some uncertainty with how the different proposed legislation and guidelines will fit with each other,” says Ms. [Sandra Jack]. “We will be watching that legislation, watching the Department of Finance, calling CRA, watching how they interpret the new rules.” Mr. Ruby is more outspoken.

“It’s absurd how busy things are in tax litigation,” says Al Meghji, a tax litigator with the Toronto office of Osler, Hoskin & Harcourt. “There is a view out there that the CRA is challenging more things than before, and there may be some truth to that. But also, there seems to be more and more uncertainty in controversial areas. Less direction.” And more money.

Full text: 

Canadian tax lawyers rock. Sure, there are more jokes about the social skills of these autistic savants of the bar than there are about the egos of star litigators. But where would Corporate Canada be without them?

There are 2,753 pages in the 2006 edition of the Canadian Income Tax Act, and the Canadian Revenue Agency and the Department of Finance like to keep everyone on their toes by tinkering with it on a monthly — if not weekly and daily — basis. Witness the tortuous evolution of the income trust rules. Are you going to read this stuff?

Of course not. And even if you did, you probably wouldn’t understand it. So the handful of lawyers who do are worth their weight in gold (especially at today’s prices).

In a deal world in which $1-billion deals have become quotidian and $10-billion deals have stopped raising eyebrows, it has become trite to say tax is king. Done a deal in recent memory without a kick-ass tax lawyer at the table? Didn’t think so.

“The structure of deals is certainly tax-driven,” says Sandra Jack, a partner with Felesky Flynn, the Alberta tax and trust law boutique. “The parties get the business deal, they say, we can carry on the business together, we want to do it in different jurisdictions, and then it is left to the tax people to figure out the best structure for the deal.”

The tax people don’t do it in a silo, of course. As Ms. Jack puts it, “We then go back and forth with the corporate- commercial guys.” Think of them not as dealmakers, but deal enablers.

Small wonder that in such a world, tax capability — read: top- tier, crossborder and international tax capability — has become the differentiator between the law firms that matter and the law firms that don’t.

Now, there is no business law firm of note that doesn’t boast of its army (small or not so) of competent tax lawyers. But today’s deals and clients demand more than competency. They demand perspicacity. And tenacity. Taking on the CRA is no task for the faint of heart or short of attention span. And a helluva lot of creavitiy.

“The Income Tax Act does not come with instructions,” says Stephen Ruby, a senior tax partner with the Toronto office of Davies Ward Phillips & Vineberg. “It’s like a chess game with 1,500 or 2,000 rules, and you have to learn all those rules, and how to manipulate them. And just to make things more interesting, they are always changing. You’re always putting the rules in a particular order,

especially on cross-border and international stuff. You have deals where something works for three countries, and doesn’t work for the fourth, and then suddenly you thread the needle and it works for all of them.

“That’s what keeps me going. That innovative and creative idea. Once in a while, the nickel drops, and you say, this is good. You create something that works. Something that’s a thing of beauty.”

John Brussa of Calgary’s Burnet Duckworth & Palmer must have felt like that when he structured the first royalty trust. But that’s grist for another novel — while the taxability and future of the Canadian income trust has been high on every business lawyer’s agenda since Oct. 31, tax lawyers have some bigger concerns these days.

Remember those 2,753 pages (and counting) in the Act? They’re getting too convoluted even for the stars of the bar.

“One of the unfortunate trends lately in tax generally is the complexity of tax l aw,” says Ms. Jack. “That is partially due to the complexity of some of the transactions that are being implemented.”

Or the wide-sweeping legislative change involved, as in the case of the income trusts. “There is still some uncertainty with how the different proposed legislation and guidelines will fit with each other,” says Ms. Jack. “We will be watching that legislation, watching the Department of Finance, calling CRA, watching how they interpret the new rules.” Mr. Ruby is more outspoken.

“I always enjoy the intellectual challenge of basically trying to master this complex legislation, but it also frustrates me, because I only have a finite amount of time on this earth and I feel some of these guys are wasting it,” he says.

Never mind income trusts. Have you had a gander at the non- resident trust rules and the foreign investment entity rules the government has been sitting on (“Fortunately,” says Mr. Ruby) since 2002?

“I do not understand the wisdom of drafting tax legislation that almost nobody can comply with it or afford to comply with,” he says. “In a hypothetical, theoretical sense, these rules make theoretical tax evaders out of a lot of Canadians that you wouldn’t think of as being tax evaders, because you just can’t comply with these rules.

“When you have a tax system that is so burdensome in terms of its difficulty that tax practitioners have a great deal of difficulty reading it and applying it, then in my view it becomes unenforceable.

“It’s hard to bring clarity to a page where the ink is smudged.”

Perhaps that’s why tax litigation is booming.

“It’s absurd how busy things are in tax litigation,” says Al Meghji, a tax litigator with the Toronto office of Osler, Hoskin & Harcourt. “There is a view out there that the CRA is challenging more things than before, and there may be some truth to that. But also, there seems to be more and more uncertainty in controversial areas. Less direction.” And more money.

“The size of the disputes is a lot bigger than it used to be,” notes Mr. Meghji. Corporate Canada wants to keep more. And so does the CRA.

It’s not greed. It’s globalization–or rather, the very slow, unsystematic and sometimes conflicted response of Canada’s tax regime to business that knows no borders.

“Globalization is a part of it,” says Mr. Ruby. “You see a lot of Canadian companies being purchased by non-residents and a lot of Canadians purchasing non-resident companies. International tax is on the front burner.”

But Canadian legislation that addresses the reality of cross- border and international deals? Lagging behind.

Mr. Ruby notes Canada is still waiting for exchangeable share legislation that will simplify the structure of tax efficient cross- border mergers.

“These deals will happen anyway,” says Mr. Ruby. “They’ll just have a complex structure. Why make tax so difficult? When you make it difficult, you make it expensive.” Maybe that’s the point?

Illustration

Black & White Photo : Brent Foster, National Post / Stephen Ruby: “The Income Tax Act does not come with instructions. It’s like a chess game with 1,500 or 2,000 rules, and you have to learn all those rules.”;

Word count: 1134

(Copyright National Post 2007)