The Evaluation of Job Tax Incentives: an Analysis of a Regional Tax Alessandro Zeli

Home , Canadian labour law, Tax incentive, Unreported employment

2020 ■ VOLUME 68, No 1

CANADIAN TAX JOURNAL REVUE FISCALE CANADIENNE

PEER-REVIEWED ARTICLES The Evaluation of Job Tax Incentives: An Analysis of a Regional Tax Alessandro Zeli

POLICY FORUM Editor’s Introduction—Taxes and Spending in Canada’s 43rd Parliament Kevin Milligan Tax Reform in Canada’s 43rd Parliament—Politics, Policy, and Second-Best Choices Sean Speer Expenditures, Efficiency, and Distribution—Advice for Canada’s 43rd Parliament Rob Gillezeau and Trevor Tombe

SYMPOSIUM The Future of Work: The Gig Economy and Pressures on the Tax System Celeste M. Black Automation and Workers: Re-Imagining the Income Tax for the Digital Age Jinyan Li, Arjin Choi, and Cameron Smith Tim Edgar: The Accidental Comparatist Kim Brooks Moving to a More “Certain” Test for Tax Residence in Australia: Lessons for Canada? Michael Dirkis

AWARDS Douglas J. Sherbaniuk Distinguished Writing Award / Prix d’excellence en rédaction Douglas J. Sherbaniuk Canadian Tax Foundation Regional Student-Paper Awards / Prix régionaux du meilleur article par un étudiant de la Fondation canadienne de fiscalité Best Newsletter Article by a Young Practitioner Award / Prix pour le meilleur article de bulletin par un jeune fiscaliste Canadian Tax Foundation Lifetime Contribution Award / Prix de la Fondation canadienne de fiscalité pour une contribution exceptionnelle

(Continued on inside front cover) (Continued from outside front cover)

FEATURES Finances of the Nation: Survey of Provincial and Territorial Budgets, 2019-20 David Lin Current Cases: (FCA) Tedesco v. Canada; (TCC) Eyeball Networks Inc. v. The Queen; (UKUT) (TCC) Irish Bank Resolution Corporation Ltd (in Special Liquidation) and Irish Nationwide Building Society v. Revenue and Customs Brian Studniberg, Maressa Singh, Michael Templeton, and Joel Nitikman Personal Tax Planning / Planification fiscale personnelle : Due Diligence Defence to Liability for Unpaid Statutory Remittances / Défense de diligence raisonnable relativement à la responsabilité des versements obligatoires impayés Wayne D. Gray Corporate Tax Planning: GAAR: An Economic Test?— The Courts Divide Brian R. Carr, Brittany Finn, and Ryan Wolfe Current Tax Reading Alan Macnaughton and Jinyan Li ■ CANADIAN TAX JOURNAL EDITORIAL BOARD/ COMITÉ DE RÉDACTION DE LA REVUE FISCALE CANADIENNE

■ Editors/Rédacteurs en chef Alan Macnaughton Daniel Sandler University of Waterloo EY Law llp Kevin Milligan University of British Columbia

■ Practitioners/Fiscalistes ■ University Faculty/Universitaires Brian J. Arnold Reuven Avi-Yonah Tax Consultant, Toronto University of Michigan Thomas A. Bauer Richard M. Bird Bennett Jones llp, Toronto University of Toronto Stephen W. Bowman Robin W. Boadway Bennett Jones llp, Toronto Queen’s University C. Anne Calverley Neil Brooks Dentons Canada llp, Calgary York University R. Ian Crosbie Arthur Cockfield Davies Ward Phillips & Vineberg llp, Toronto Queen’s University Cy M. Fien Graeme Cooper Fillmore Riley llp, Winnipeg University of Sydney James P. Fuller Bev G. Dahlby Fenwick & West llp, Mountain View, ca University of Calgary Edwin C. Harris James B. Davies McInnes Cooper, Halifax University of Western Ontario William I. Innes David G. Duff Rueter Scargall Bennett llp , Toronto University of British Columbia Brent Perry Judith Freedman Felesky Flynn llp, Calgary Oxford University Scott Jeffery Vijay Jog KPMG llp, Vancouver Carleton University Howard J. Kellough Jonathan R. Kesselman Davis llp, Vancouver Simon Fraser University Heather Kerr Ernst & Young llp/Couzin Taylor llp, Toronto Kenneth J. Klassen University of Waterloo Edwin G. Kroft Bennett Jones llp, Vancouver Gilles N. Larin Elaine Marchand Université de Sherbrooke Banque Nationale du Canada, Montréal Amin Mawani Janice McCart York University Blake Cassels & Graydon llp, Toronto Jack Mintz Thomas E. McDonnell University of Calgary Toronto Martha O’Brien Matias Milet University of Victoria Osler Hoskin & Harcourt llp, Toronto Suzanne Paquette W. Jack Millar Université Laval Millar Kreklewetz llp, Toronto Abigail Payne Michael J. O’Connor McMaster University Sunlife Financial Inc., Toronto Michael R. Veall François Vincent McMaster University KPMG Law llp, Chicago www.ctf.ca/www.fcf-ctf.ca Call for Book Proposals

The Canadian Tax Foundation, an independent, not-for-profit research and educational organization, is seeking proposals for books in the areas of taxation and public finance. Since its inception in 1945, the Foundation has published many books and articles on a wide range of subjects within its areas of interest. The Foundation seeks proposals for research projects that will

n result in a book on a single topic of interest in the area of taxation or public finance; n be undertaken by an experienced researcher who has expertise in an area of taxa - tion or public finance; and n be carried out within a time frame that is reasonable, given the nature of the project.

Projects selected by the Foundation may qualify for its full or partial financial support of the research and for its underwriting of the publication costs. The Foundation retains the absolute right at its sole discretion to choose whether to support a given proposal or to publish a project. Interested parties should send a brief written outline of a proposal, for initial consider - ation by the Foundation, to:

Heather Evans Executive Director and Chief Executive Officer Canadian Tax Foundation/Fondation canadienne de fiscalité 145 Wellington Street West, Suite 1400 Toronto, Ontario M5J 1H8 [email protected]

For further information, please contact the director, as indicated above, or the co-chairs of the Canadian Tax Foundation Research Committee:

Hugh Woolley c/o Canadian Tax Foundation/Fondation canadienne de fiscalité

Kim Brooks c/o Canadian Tax Foundation/Fondation canadienne de fiscalité

■ i ■ Appel de propositions de livres

La Fondation canadienne de fiscalité (FCF ) / Canadian Tax Foundation, un organisme sans but lucratif indépendant de recherche et à caractère éducatif, souhaite recevoir des propo - sitions de livres dans les domaines de la fiscalité et des finances publiques. Depuis sa fondation en 1945, la FCF a publié de nombreux livres et articles sur divers sujets dans ses champs d’intérêt. La FCF souhaite obtenir des propositions de projets de recherche qui :

n mèneront à la rédaction d’un livresur un sujet unique d’intérêt en fiscalité ou en finances publiques; n seront dirigés par un chercheur chevronné ayant une expertise dans un domaine de la fiscalité ou des finances publiques; n seront effectués dans un délai raisonnable, compte tenu de la nature du projet.

Les projets qui seront sélectionnés par la FCF pourront être partiellement ou totalement admissibles à une aide financière pour la recherche et les frais de publication. La FCF se réserve le droit absolu, et à sa seule discrétion, d’appuyer une proposition particulière ou de publier un projet. Toute personne intéressée doit faire parvenir un bref sommaire de la proposition pour examen initial par la FCF à :

Heather Evans Directrice exécutive et chef de la direction Canadian Tax Foundation/Fondation canadienne de fiscalité 145 Wellington Street West, Suite 1400 Toronto, Ontario M5J 1H8 [email protected]

Pour plus d’information, veuillez communiquer avec le directeur, tel qu’il est mentionné plus haut, ou avec les co-présidentes du comité de recherche de la Fondation canadienne de fiscalité :

Hugh Woolley a/s Canadian Tax Foundation/Fondation canadienne de fiscalité

Kim Brooks a/s Canadian Tax Foundation/Fondation canadienne de fiscalité

■ ii ■ ■ Recent and Upcoming Events * ■ Activités récentes et à venir *

We remain optimistic that most of our core conferences will proceed, particularly those scheduled for the fall. However, given the protocols to which many of our volunteer program committee members are currently subject, and the uncertainty of travel over the coming weeks, we will be holding most of the planning meetings virtually. We will rely on our live webcasts as an option for delegates, and we’ll be prepared to postpone or modify our events as appropriate. Please check our events page to see which events have been can - celled or postponed.

Nous demeurons optimistes que la plupart de nos conférences principales procèderont tel que prévu, particulièrement celles prévues à l’automne. Nous tiendrons toutefois la plupart de nos réunions de planification de façon virtuelle et à distance et ce, par respect pour les protocoles auxquels nos membres de comités bénévoles de planification des conférences sont présentement soumis et quant à l’incertitude des déplacements au cours des prochaines semaines. À titre d’option pour nos participants, nous compterons sur nos webémission en direct et nous demeurons à l’écoute pour reporter ou modifier nos événe - ments, le cas échéant. Veuillez svp consulter notre page événements afin de connaitre quels événements ont été annulés ou reportés.

Disclaimer. The material contained in this publication is not intended to be advice on any particular matter. No subscriber or other reader should act on the basis of any matter contained in this publication without considering appropriate professional advice. The publisher, and the authors and editors, expressly disclaim all and any liability to any person, whether a purchaser of this publication or not, in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance upon the contents of this publication. Opinions expressed by individual writers are not necessarily endorsed by the Canadian Tax Foundation and its members. Photocopying and reprinting. Permission to photocopy or reprint any part of this publication for distribution must be applied for in writing; e-mail: [email protected]. Advertising. Inquiries relating to advertisements should be directed to Christine Escalante, e-mail: [email protected]. Exonération de responsabilité. Le contenu de cette publication ne doit être interprété d’aucune façon comme un avis ou une opinion. L’abonné ou le lecteur ne devrait pas fonder ses décisions sur le contenu de cette publication sans envisager une consultation professionnelle appropriée. L’éditeur et les auteurs réfutent toute responsabilité envers toute personne, qu’elle soit abonnée ou non, relativement à toute conséquence résultant d’actes ou omissions faits en fonction du contenu de la présente publication. Les opinions exprimées par les auteurs particuliers ne sont pas nécessairement appuyées par la Fondation canadienne de fiscalité et ses membres. Photocopie et réimpression. L’autorisation de photocopier ou de réimprimer toute portion de cette publication à des fins de distribution devra être obtenue en adressant une demande écrite à permissions @ctf.ca. Annonces publicitaires. Toutes demandes concernant les annonces publicitaires devront être adres- sées à Christine Escalante, courriel : [email protected].

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Canadian Tax Foundation La Fondation canadienne de fiscalité 145 Wellington Street West 1250, boul. René-Lévesque ouest Suite 1400 Bureau 2935 Toronto, Canada M5J 1H8 Montréal (Québec) H3B 4W8 Telephone: 416-599-0283 Téléphone : 514-939-6323 Toll Free: 1-877-733-0283 Télécopieur : 514-939-7353 Facsimile: 416-599-9283 Internet : www.fcf-ctf.ca Internet: www.ctf.ca

2020, vol. 68, no. 1 2020, vol. 68, no 1 (Issued April 2020) (publication : avril 2020)

ISSN 0008-5111 ISSN 0008-5111

Printed in Canada Imprimée au Canada 6,200 04-20 6,200 04-20

■ iv ■ ■ 2020 VOLUME 68, No 1

Canadian Tax Journal Revue fiscale canadienne

PEER-REVIEWED ARTICLES 1 The Evaluation of Job Tax Incentives: An Analysis of a Regional Tax ALESSANDRO ZELI

POLICY FORUM 33 Editor’s Introduction—Taxes and Spending in Canada’s 43rd Parliament KEVIN MILLIGAN

35 Tax Reform in Canada’s 43rd Parliament—Politics, Policy, and Second-Best Choices SEAN SPEER

49 Expenditures, Efficiency, and Distribution— Advice for Canada’s 43rd Parliament ROB GILLEZEAU AND TREVOR TOMBE

SYMPOSIUM 69 The Future of Work: The Gig Economy and Pressures on the Tax System CELESTE M. BLACK

99 Automation and Workers: Re-Imagining the Income Tax for the Digital Age JINYAN LI, ARJIN CHOI, AND CAMERON SMITH

125 Tim Edgar: The Accidental Comparatist KIM BROOKS

143 Moving to a More “Certain” Test for Tax Residence in Australia: Lessons for Canada? MICHAEL DIRKIS

AWARDS 169 Douglas J. Sherbaniuk Distinguished Writing Award / Prix d’excellence en rédaction Douglas J. Sherbaniuk

171 Canadian Tax Foundation Regional Student-Paper Awards / Prix régionaux du meilleur article par un étudiant de la Fondation canadienne de fiscalité

179 Best Newsletter Article by a Young Practitioner Award / Prix pour le meilleur article de bulletin par un jeune fiscaliste

183 Canadian Tax Foundation Lifetime Contribution Award / Prix de la Fondation canadienne de fiscalité pour une contribution exceptionnelle

■ v ■ FEATURES 185 Finances of the Nation: Survey of Provincial and Territorial Budgets, 2019-20 DAVID LIN

251 Current Cases: (FCA) Tedesco v. Canada; (TCC) Eyeball Networks Inc. v. The Queen; (UKUT) (TCC) Irish Bank Resolution Corporation Ltd (in Special Liquidation) and Irish Nationwide Building Society v. Revenue and Customs BRIAN STUDNIBERG, MARESSA SINGH, MICHAEL TEMPLETON, AND JOEL NITIKMAN

281 Personal Tax Planning: Due Diligence Defence to Liability for Unpaid Statutory Remittances WAYNE D. GRAY

313 Planification fiscale personnelle : Défense de diligence raisonnable relativement à la responsabilité des versements obligatoires impayés WAYNE D. GRAY

351 Corporate Tax Planning: GAAR: An Economic Test?— The Courts Divide BRIAN R. CARR, BRITTANY FINN, AND RYAN WOLFE

391 Current Tax Reading ALAN MACNAUGHTON AND JINYAN LI

■ vi ■ ■ Canadian Tax Journal

The Canadian Tax Journal publishes research in, and informed comment on, taxation and public finance, with particular relevance to Canada. To this end, the journal invites interested parties to submit manuscripts for possible publication as peer-reviewed articles, and it especially welcomes work that contributes to the analysis, design, and implementation of tax policies. Articles may be written in English or French and should present an original analysis of the topic. Submitted work, or any substantial part or version thereof, must not have been previously published, either in print or online, and it must not be submitted or scheduled for publication elsewhere. The journal welcomes shorter submissions (from 4,000 to 8,000 words) focused on specific topics as well as longer submissions (to a maximum of 20,000 words) that analyze issues in depth. Submitted articles are subject to a double-blind peer review; authors’ identities are not known to reviewers, and reviewers’ identities are not known to authors. (Non-peer-reviewed contributions may appear elsewhere in the journal.) Final decisions on publication of articles are made by the editors, Alan Macnaughton, Daniel Sandler, and Kevin Milligan, on the advice of reviewers. Many reviewers are drawn from the editorial board (listed on the inside front cover of this journal), although ad hoc reviewers are also consulted. Submissions may be (1) accepted outright; (2) accepted if recommended revisions are made; (3) revised by the authors, as requested by the editors on the advice of reviewers, and resubmitted for further review; or (4) rejected with reasons. The time from submission to the first edi - torial decision is usually two months or less. Prospective contributors should submit a copy of the manuscript to the journal’s editorial department. The preferred method of submission is by e-mail with an attached Word document. E-mail inquiries are welcome: write to [email protected]. Contributors are responsible for providing complete and accurate citations to sources, a detailed abstract (200 to 400 words), and up to six keywords for indexing purposes. The full text of many articles that have appeared in the Canadian Tax Journal since 1991 can be found on the Canadian Tax Foundation’s website: www.ctf.ca. Additionally, the journal in its entirety appears in the Canadian Tax Foundation’s TaxFind, which is updated regularly. The Canadian Tax Journal is indexed in EconLit, ABI Inform, LegalTrac, Index to Canadian Legal Literature, CCH Canadian’s Canadian Income Tax Research Index, Carswell’s Income Tax References, Accounting and Law Index, Current Law Index, Canadian Index, Canadian Periodicals Index, Index to Canadian Legal Periodical Literature, Index to Legal Periodicals and Books, and PAIS International in Print.

■ vii ■ ■ Revue fiscale canadienne

La Revue fiscale canadienne publie des recherches et des commentaires éclairés sur la fiscalité et les finances publiques, particulièrement pertinents pour le Canada. À cette fin, la revue invite les personnes intéressées à soumettre des articles en vue d’une éventuelle publication en tant qu’articles revus par des pairs, et elle accueille tout particulièrement les travaux qui contribuent à l’analyse, à la conception et à la mise en oeuvre des politiques fiscales. Les articles peuvent être rédigés en anglais ou en français et doivent présenter une analyse originale du sujet. Les articles soumis, ou toute partie substantielle ou version des articles, ne doivent pas avoir été publiés antérieurement en format papier ou électronique, et ne doivent pas être soumis ou prévus pour publication ailleurs. Vous pouvez soumettre pour publication, dans la revue fiscale, des articles plus courts (4 000 à 8 000 mots) sur des sujets particuliers ainsi que des articles plus longs (maximum de 20 000 mots) analysant des sujets en profondeur. Les articles soumis sont sujets à une double revue à l’aveugle par des pairs; l’identité des auteurs n’est pas connue des réviseurs et celle des réviseurs n’est pas connue des auteurs (certains articles non soumis à cette révision par des pairs peuvent paraître ailleurs dans la revue.) La décision finale de publier ou non un article est celle des rédacteurs en chef Alan Macnaughton, Daniel Sandler et Kevin Milligan, à la recommandation des réviseurs. Bien que certains réviseurs ad hoc soient aussi consultés, la majorité des réviseurs sont choisis parmi les membres du Comité de rédaction (énumérés à l’endos de la page couver - ture de la revue). Les articles soumis peuvent être 1) acceptés d’emblée; 2) acceptés après modifications; 3) modifiés par les auteurs tel que demandé par les rédacteurs en chef sur l’avis des réviseurs, et resoumis à une nouvelle révision; ou 4) rejetés avec raisons. Le temps écoulé entre la soumission d’un article et la première décision éditoriale est habitu - ellement de deux mois ou moins. Les aspirants contributeurs doivent soumettre un exemplaire de l’article proposé au service éditorial. Il est préférable que la soumission se fasse par courriel, avec une pièce jointe en Word. Les demandes de renseignements par courriel sont les bienvenues. Elles doivent être adressées à [email protected]. Les contributeurs doivent soumettre l’ensemble de leurs sources, un précis détaillé de leurs articles (entre 200 et 400 mots), et jusqu’à six mots clés aux fins d’indexation. On peut trouver le texte intégral de nombreux articles publiés dans la Revue fiscale canadienne depuis 1991 sur le site Internet de le Fondation : www.fcf-ctf.ca. De plus, la revue dans son entier se trouve dans TaxFind, qui est mis à jour régulièrement. La Revue fiscale canadienne est indexée sous EconLit, ABI Inform, LegalTrac, Index to Canadian Legal Literature, Canadian Income Tax Research Index de CCH Canadian, Income Tax References de Carswell, Accounting and Law Index, Current Law Index, Canadian Index, Canadian Periodicals Index, Index to Canadian Legal Periodical Literature, Index to Legal Periodicals and Books, et PAIS International in Print.

■ viii ■ ■ Canadian Tax Foundation

The Canadian Tax Foundation is Canada’s leading source of insight on tax issues. The Foundation promotes understanding of the Canadian tax system through analysis, research, and debate, and provides perspective and impartial recommendations concerning its equity, efficiency, and application. The Canadian Tax Foundation is an independent tax research organization and a regis - tered charity with over 12,000 individual and corporate members in Canada and abroad. For more than 70 years, it has fostered a better understanding of the Canadian tax system and assisted in the development of that system through its research projects, conferences, publications, and representations to government. Members find the Foundation to be a valuable resource both for the scope and depth of the tax information it provides and for its services, which support their everyday work in the taxation field. Government policy makers and administrators have long respected the Foundation for its objectivity, its focus on current tax issues, its concern for improvement of the Canadian tax system, and its significant contribution to tax and fiscal policy.

MEMBERSHIP Membership in the Foundation is open to all who are interested in its work. Membership fees are $399.00 a year, except that special member rates apply as follows: (a) $199.00 for members of the accounting and legal professions in the first three years following date of qualification to practise; (b) $199.00 for persons on full-time teaching staff of colleges, universities, or other educational institutions; (c) $40.00 for students in full-time attend - ance at a recognized educational institution; and (d) $171.00 for persons who have reached the age of 65 and are no longer actively working in tax. Memberships are for a period of 12 months dating from the receipt of application with the appropriate payment. Applications for membership are available from the membership administrator for the Canadian Tax Foundation: facsimile: 416-599-9283; Internet: www.ctf.ca; e‑mail: [email protected].

■ ix ■ ■ Fondation canadienne de fiscalité

La Fondation canadienne de fiscalité est un organisme indépendant de recherche sur la fiscalité inscrit sous le régime des œuvres de charité. Elle compte environ 12 000 membres au Canada et à l’étranger. Depuis plus de 70 ans, la FCF favorise une meilleure compréhension du système fiscal canadien et aide au développement de ce système par le biais de ses projets de recherche, conférences, publications et représentations auprès des gouvernements. Les membres considèrent l’étendue et le détail de l’information offerte par la FCF comme une importante ressource. Ils apprécient également les autres services de la FCF qui facilitent leur travail quotidien dans le domaine de la fiscalité. Les décideurs et administrateurs gouvernementaux respectent depuis longtemps l’objectivité de la FCF, son attention aux questions fiscales de l’heure, sa préoccupation envers l’amélioration du système fiscal canadien et son importante contribution au développement des politiques fiscales.

ADHÉSION Toute personne intéressée aux travaux de la FCF peut en devenir membre. Les droits d’adhésion sont de 399,00 $ par année, à l’exception des tarifs spéciaux suivants : a) 199,00 $ pour les personnes faisant carrière en comptabilité ou en droit pendant les trois premières années suivant leur admission à la profession; b) 199,00 $ pour le personnel enseignant à temps plein dans un collège, une université ou une autre maison d’enseignement; c) 40,00 $ pour les étudiants fréquentant à temps plein une maison d’enseignement reconnue; et d) 171,00 $ pour les personnes qui ont 65 ans et plus et qui ne travaillent plus activement en fiscalité. La période d’adhésion est de 12 mois, à compter de la réception de la demande accompagnée du paiement approprié. Il est possible de se procurer les demandes d’adhésion auprès de l’administratice responsible de l’adhésion à la FCF : télécopieur : 514-939-7353; Internet : www.fcf-ctf.ca; courriel : [email protected].

■ x ■ ■ BOARD OF GOVERNORS/CONSEIL DES GOUVERNEURS Elected December 1, 2019/Élu le 1 er décembre 2019

Albert Anelli, QC1* Ted Gallivan, ON3 Elizabeth Murphy, ON3 Cheryl Bailey, ON1 Rachel Gervais, ON1* Anu Nijhawan, AB2 Jeffery Blucher, NS2 Siobhan Goguen, AB2 Heather O’Hagan, ON3 Eoin Brady, ON1 Kay Gray, BC1 John Oakey, NS1 Mark Brender, QC2* Ken Hauser, BC2 Mitchell Sherman, ON2 Alycia Calvert, ON1* Soraya Jamal, BC2 Michael Smith, AB1 Marlene Cepparo, ON1* Timothy Kirby, AB2 Martin Sorensen, ON2* Grace Chow, ON1 Dean Landry, ON1* John Tobin, ON2 Allison Christians, QC3 Rick McLean, ON1 Dave Walsh, ON1 Michael Coburn, BC2 Stefanie Morand, ON2 Hugh Woolley, BC1 Marie-Claire Dy, BC2 Michael Munoz, AB3 Barbara Worndl, ON2* Olivier Fournier, QC2

* Executive Committee of the Board of Governors Comité de direction du conseil des gouverneurs 1 Nominee of the Chartered Professional Accountants of Canada 2 Nominee of the Canadian Bar Association 3 Non-sponsor

■ OFFICERS/MEMBRES DE LA DIRECTION Chair/Présidente du conseil Alycia Calvert Vice-Chair and Chair of the Executive Barbara Worndl Committee/Vice-présidente du conseil et présidente du comité de direction Second Vice-Chair/Deuxième vice-présidente Marlene Cepparo Past Chair/Président sortant du conseil Mark Brender Executive Director and Chief Executive Heather Evans Officer/Directrice exécutive et chef de la direction Director, Membership Development and Wayne Adams Community Relations/Directeur, Développement du programme de l’adhésion et relations avec la communauté Regional Director, Quebec/ Lucie Bélanger Directrice régionale du Bureau du Québec Director of Finance and Treasurer/ Shelly Ali Directrice financière et trésorière

■ STAFF/PERSONNEL Events and Web Manager/Directrice Roda Ibrahim des événements et du site Web Librarian/Bibliothécaire Judy Singh Managing Editor/Directeur de Michael Gaughan la rédaction

■ xi ■ ■ Canadian Tax Foundation Publications

The Foundation’s publications comprise a range of forms and delivery formats. A number of the regularly issued publications are distributed without charge to Foundation members: the Canadian Tax Journal (4 issues), Canadian Tax Highlights (12 issues, delivered electronically), Tax for the Owner-Manager (4 issues, delivered electronically), Canadian Tax Focus (4 issues, delivered electronically), and the annual conference report. Monographs and books may be purchased on the Foundation’s website at www.ctf.ca.

Canadian Tax Journal — issued quarterly to members via www.ctf.ca (Non-Members $75 per copy, $343.75 per year). Newsletters Perspectives on Tax Law & Policy — issued quarterly to members via www.ctf.ca. Tax for the Owner-Manager — issued quarterly to members via www.ctf.ca. Canadian Tax Focus — issued quarterly; available to members and non-members via www.ctf.ca. Canadian Tax Highlights — archives (2000-2019) available to members via www.ctf.ca. Conference Reports — Reports of the proceedings of annual tax conferences (Members $40; Non‑Members $95). Latest issue: 2018 (Members $40; Non-Members $350). — Tax Dispute Resolution, Compliance, and Administration in Canada: Proceedings of the June 2012 Conference (Members $30; Non-Members $195) — Collections of papers delivered at regional and special tax conferences (British Columbia, Prairie Provinces, Ontario, and Atlantic Provinces) are available in USB format (Members $445; Non-Members $495). Finances of the Nation — Review of expenditures and revenues and some budgets of the federal, provincial, and local governments of Canada. PDFs for the years 2002-2012 are available on the CTF website at no cost. In 2014, “Finances of the Nation” began to appear as a feature in issues of the Canadian Tax Journal. Monographs 2019. Funding the Canadian City, Enid Slack, Lisa Philipps, Lindsay M. Tedds, and Heather L. Evans, eds. ($40 each) 2018. Tax Treaties After the BEPS Project: A Tribute to Jacques Sasseville, Brian J. Arnold, ed. (Members $60; Non-Members $90) 2018. Reforming the Corporate Tax in a Changing World, School of Public Policy of the University of Calgary (Members $30; Non-Members $50) 2017. Income Tax at 100 Years: Essays and Reflections on the Income War Tax Act, Jinyan Li, J. Scott Wilkie, and Larry F. Chapman, eds. (Members $60; Non-Members $90) 2016. Reform of the Personal Income Tax in Canada, School of Public Policy of the University of Calgary (Members $35; Non-Members $50) 2016. Canadian Taxation of Trusts, Elie S. Roth, Tim Youdan, Chris Anderson, and Kim Brown (Members $150; Non-Members $200; Students $50) 2016. User Fees in Canada: A Municipal Design and Implementation Guide, Catherine Althaus and Lindsay M. Tedds ($40 each) 2015. Timing and Income Taxation, 2d edition, Brian J. Arnold, Colin Campbell, Michael Hiltz, Richard Marcovitz, Shawn D. Porter, and James R. Wilson (Members $25; Non-Members $125; Students $25) 2015. Effective Writing for Tax Professionals, Kate Hawkins and Thomas E. McDonnell, QC (Members $35; Non-Members $40) 2014. After Twenty Years: The Future of the Goods and Services Tax, School of Public Policy of the University of Calgary (Members $25; Non-Members $35) 2013. Essays on Tax Treaties: A Tribute to David A. Ward, Guglielmo Maisto, Angelo Nikolakakis, and John M. Ulmer, eds. ($100 each)

■ xii ■ 2012. Tax Policy in Canada, Heather Kerr, Ken McKenzie, and Jack Mintz, eds. (Members $75; Non-Members $100; Students $50) 2011. Canadian Tax Foundation Style Guide, 5th edition (Members $35; Non-Members $40) 2011. International Financial Reporting Standards: Their Adoption in Canada, Jason Doucet, Andrée Lavigne, Caroline Nadeau, Jocelyn Patenaude, and Dave Santerre (Members $30; Non‑Members $40) 2011. Tax Expenditures: State of the Art — Selected Proceedings of the Osgoode 2009 Conference, Lisa Philipps, Neil Brooks, and Jinyan Li, eds. (Members $45; Non-Members $55; Students $30) 2010. Taxation of Private Corporations and Their Shareholders, 4th edition (Members $75; Non-Members $100; Students $25) Tax Professional Series (Please specify title and author when ordering.) 2003. The Taxation of Business Profits Under Tax Treaties, Brian J. Arnold, Jacques Sasseville, and Eric M. Zolt, eds. (softcover edition, $75) 2003. International Taxation in the Age of Electronic Commerce: A Comparative Study, Jinyan Li. Co-published with International Fiscal Association (Canadian Branch) (Members $95; Non-Members $145; Students $45) 1999. Countering Tax Treaty Abuses: A Canadian Perspective on an International Issue, Nathalie Goyette ($75 each) Canadian Tax Paper Series (Please specify publication number when ordering.) No. 112: 2009. Effective Responses to Aggressive Tax Planning: What Canada Can Learn from Other Jurisdictions, Gilles N. Larin and Robert Duong, with a contribution from Marie Jacques No. 111: 2009. Reforming Canada’s International Tax System: Toward Coherence and Simplicity, Brian J. Arnold (Members $100; Non-Members $125) No. 110: 2006. Financing Education and Training in Canada, 2d edition, Douglas Auld and Harry Kitchen No. 109: 2004. The Canadian Federal-Provincial Equalization Regime: An Assessment, Alex S. MacNevin No. 108: 2004. Venture Capital and Tax Incentives: A Comparative Study of Canada and the United States, Daniel Sandler No. 107: 2002. Municipal Revenue and Expenditure Issues in Canada, Harry M. Kitchen (Members $20; Non‑Members $40) No. 106: 2002. Taxes and the Canadian Underground Economy, David E.A. Giles and Lindsay M. Tedds No. 105: 2000. The Income Tax Treatment of Financial Instruments: Theory and Practice, Tim Edgar No. 104: 1999. Rationality in Public Policy: Retrospect and Prospect, A Tribute to Douglas G. Hartle, Richard M. Bird, Michael J. Trebilcock, and Thomas A. Wilson, eds. No. 103: 1999. Canadian Tax Policy, 3d edition, Robin W. Boadway and Harry M. Kitchen No. 102: 1997. Financing the Canadian Federation, 1867 to 1995: Setting the Stage, David B. Perry No. 101: 1997. General Payroll Taxes: Economics, Politics, and Design, Jonathan R. Kesselman No. 100: 1995. Growth of Government Spending in Alberta, Paul Boothe No. 99: 1995. Financing Education and Training in Canada, Harry Kitchen and Douglas Auld Special Studies in Taxation and Public Finance (Please specify publication number when ordering.) No. 2: 2000. Gambling and Governments in Canada, 1969-1998: How Much? Who Plays? What Payoff? François Vaillancourt and Alexandre Roy No. 1: 1998. Federal-Provincial Tax Sharing and Centralized Tax Collection in Canada, Ernest H. Smith

■ xiii ■ ■ Les publications de la Fondation canadienne de fiscalité

Les publications de la Fondation existent sous différentes formes et elles sont disponibles de diverses façons. Certaines de ces publications régulières sont distribuées gratuitement aux membres de la Fondation : la Revue fiscale canadienne (4 numéros), Faits saillants en fiscalité canadienne (12 numéros, offerts électroniquement), Actualités fiscales pour les propriétaires exploitants (4 numéros, offerts électroniquement), Canadian Tax Focus (4 numéros, offerts électroniquement) et le Rapport de la conférence annuelle. Les livres et monographies peuvent être achetés sur le site Web de la Fondation www.fcf-ctf.ca.

Revue Fiscale Canadienne — parution trimestrielle aux membres sur www.fcf-ctf.ca (Non-membres 75 $ par numéro, 343,75 $ par année). Bulletins Perspectives en fiscalité et en politique fiscal — parution trimestrielle disponible aux membres sur www.fcf-ctf.ca. Actualités fiscales pour les propriétaires exploitants — parution trimestrielle disponible aux membres sur www.fcf-ctf.ca. Canadian Tax Focus — parution trimestrielle disponible aux membres et non-membres sur www.fcf-ctf.ca. Faits saillants en fiscalité canadienne — archives (2000-2019) accessibles aux membres sur www.fcf-ctf.ca. Rapports des Conférences — comptes rendus des conférences annuelles sur la fiscalité (Membres 40 $; Non-membres 95 $). Dernière édition : 2018 (Membres 40 $; Non-membres 350 $). — Tax Dispute Resolution, Compliance, and Administration in Canada: Proceedings of the June 2012 Conference (Membres 30 $; Non-membres 195 $) — Collections contenant les travaux présentés aux conférences régionales sur la fiscalité, soit British Columbia, Prairie Provinces, Ontario et Atlantic Provinces, sont disponibles en format USB (Membres 445 $; Non-membres 495 $). Finances of the Nation — Analyse des recettes et dépenses, et quelques budgets, des gouvernements fédéral, provinciaux et locaux au Canada. Les copies PDF pour les années 2002-2012 sont disponibles sur le site Web de la FCF pour téléchargement gratuit. Dans le numéro 62:3 (2014), « Finances of the Nation » est apparu dans les éditions de la Revue fiscale canadienne à titre de nouvelle rubrique. Monographies 2019. Funding the Canadian City, Enid Slack, Lisa Philipps, Lindsay M. Tedds et Heather L. Evans, éds. ($40 chacun) 2018. Tax Treaties After the BEPS Project: A Tribute to Jacques Sasseville, Brian J. Arnold, éd. (Membres 60 $; Non-membres 90 $) 2018. Reforming the Corporate Tax in a Changing World, l’École de politique publique de l’Université de Calgary (Membres 30 $; Non-membres 50 $) 2017. Income Tax at 100 Years: Essays and Reflections on the Income War Tax Act, Jinyan Li, J. Scott Wilkie et Larry F. Chapman, éds. (Membres 60 $; Non-membres 90 $) 2016. Reform of the Personal Income Tax in Canada, l’École de politique publique de l’Université de Calgary (Membres 35 $; Non-membres 50 $) 2016. Canadian Taxation of Trusts, Elie S. Roth, Tim Youdan, Chris Anderson et Kim Brown (Membres 150 $; Non-membres 200 $; Étudiants 50 $) 2016. User Fees in Canada: A Municipal Design and Implementation Guide, Catherine Althaus et Lindsay M. Tedds (40 $ chacun) 2015. Timing and Income Taxation, 2 ième édition, Brian J. Arnold, Colin Campbell, Michael Hiltz, Richard Marcovitz, Shawn D. Porter et James R. Wilson (Membres 25 $; Non-membres 125 $; Étudiants 25 $)

■ xiv ■ 2015. Effective Writing for Tax Professionals, Kate Hawkins et Thomas E. McDonnell, QC (Membres 35 $; Non-membres 40 $) 2014. After Twenty Years: The Future of the Goods and Services Tax, l’École de politique publique de l’Université de Calgary (Membres 25 $; Non-membres 35 $) 2013. Essays on Tax Treaties: A Tribute to David A. Ward, Guglielmo Maisto, Angelo Nikolakakis et John M. Ulmer, éds. (100 $ chacun) 2012. Tax Policy in Canada, Heather Kerr, Ken McKenzie et Jack Mintz, éds. (Membres 75 $; Non-membres 100 $; Étudiants 50 $) 2011. Canadian Tax Foundation Style Guide, 5 ième édition (Membres 35 $; Non-membres 40 $) 2011. International Financial Reporting Standards: Their Adoption in Canada, Jason Doucet, Andrée Lavigne, Caroline Nadeau, Jocelyn Patenaude et Dave Santerre (Membres 30 $; Non-membres 40 $) 2011. Tax Expenditures: State of the Art — Selected Proceedings of the Osgoode 2009 Conference, Lisa Philipps, Neil Brooks et Jinyan Li, éds. (Membres 45 $; Non-membres 55 $; Étudiants 30 $) 2010. Taxation of Private Corporations and Their Shareholders, 4 ième édition (Membres 75 $; Non-membres 100 $; Étudiants 25 $) Collection Tax Professional (Prière d’indiquer le titre et le nom de l’auteur sur votre commande.) 2003. The Taxation of Business Profits Under Tax Treaties, Brian J. Arnold, Jacques Sasseville et Eric M. Zolt, éds. (édition brochée, 75 $) 2003. International Taxation in the Age of Electronic Commerce: A Comparative Study, Jinyan Li. Publié en collaboration avec l’Association fiscale internationale (chapitre canadien). (Membres 95 $; Non-membres 145 $; Étudiants 45 $) 1999. Contrer l’abus des conventions fiscales : Point de vue canadien sur une question internationale, Nathalie Goyette (75 $ chacun) Canadian Tax Paper Series (Prière d’indiquer le numéro de la publication.) No 112 : 2009. Des résponses efficaces aux planifications fiscales agressives : leçons à retenir des autres juridictions, Gilles N. Larin et Robert Duong, avec la contribution de Marie Jacques No 111 : 2009. Reforming Canada’s International Tax System: Toward Coherence and Simplicity, Brian J. Arnold (Membres 100 $; Non-membres 125 $) No 110 : 2006. Financing Education and Training in Canada, 2 ième édition, Douglas Auld et Harry Kitchen No 109 : 2004. The Canadian Federal-Provincial Equalization Regime: An Assessment, Alex S. MacNevin No 108 : 2004. Venture Capital and Tax Incentives: A Comparative Study of Canada and the United States, Daniel Sandler No 107 : 2002. Municipal Revenue and Expenditure Issues in Canada, Harry M. Kitchen (Membres 20 $; Non-membres 40 $) No 106 : 2002. Taxes and the Canadian Underground Economy, David E.A. Giles et Lindsay M. Tedds No 105 : 2000. The Income Tax Treatment of Financial Instruments: Theory and Practice, Tim Edgar No 104 : 1999. Rationality in Public Policy: Retrospect and Prospect, A Tribute to Douglas G. Hartle, Richard M. Bird, Michael J. Trebilcock et Thomas A. Wilson, éds. No 103 : 1999. Canadian Tax Policy, 3 : édition, Robin W. Boadway et Harry M. Kitchen No 101 : 1997. General Payroll Taxes: Economics, Politics, and Design, Jonathan R. Kesselman) No 102 : 1997. Financing the Canadian Federation, 1867 to 1995: Setting the Stage, David B. Perry No 100 : 1995. Growth of Government Spending in Alberta, Paul Boothe No 99 : 1995. Financing Education and Training in Canada, Harry Kitchen et Douglas Auld Special Studies in Taxation and Public Finance Series (Prière d’indiquer le numéro de la publication.) No 2 : 2000. Gambling and Governments in Canada, 1969-1998: How Much? Who Plays? What Payoff? François Vaillancourt et Alexandre Roy No 1 : 1998. Federal-Provincial Tax Sharing and Centralized Tax Collection in Canada, Ernest H. Smith

■ xv ■ ■ In the Research Centre

The Canadian Tax Foundation maintains for its staff and members a comprehensive refer - ence library of current and historical materials on taxation, public finance, and related subjects. The Douglas J. Sherbaniuk Research Centre contains one of the largest publicly accessible collections of tax information in the world. While the collection is built around a large base of Canadian materials, it also contains a significant portion of information covering international taxation, including country tax profiles, low-tax jurisdictions, inter - national tax treaties, and cross-border and international tax planning. The Research Centre currently holds domestic and international periodicals, case reporters, looseleaf services, and books. Housed at the Foundation’s Toronto headquarters, the Douglas J. Sherbaniuk Research Centre is open from 9 am to 5 pm, Monday to Friday. Staff are available for research assistance, particularly to members who cannot visit the Research Centre in person. Access is by e-mail (“Ask a Librarian” on our website or [email protected]), by telephone (416-599-0283, ext. 505), by facsimile (416-599-9283), or by toll-free (1-877-733-0283, ext. 505). The following books have been added to the Research Centre in recent months.*

CANADA Krishna, Vern. Fundamentals of Canadian Income Tax Volume 1: Personal Tax, 2d ed. Toronto: Thomson Reuters Canada, 2019. Sherman, David M., ed. Department of Finance Technical Notes: Income Tax, 31st ed. Toronto: Thomson Reuters Canada, 2019. Thomson Reuters Canada. Practitioner’s Income Tax Act, 56th ed., supplement. Toronto: Thomson Reuters Canada, 2019.

INTERNATIONAL Buijze, Renate, Tackling the International Tax Barriers to Cross-Border Charitable Giving: Philanthropy for the Arts in the Era of Globalization. IBFD Doctoral Series vol. 51. Amsterdam: IBFD, 2019. Debelva, Filip. International Double Taxation and the Right to Property: A Comparative, International and European Law Analysis. IBFD Doctoral Series vol. 20. Amsterdam: IBFD, 2019. International Fiscal Association. Congress Report IFA 2019: Summary of Proceedings of the 2019 London Congress. Rotterdam: IFA, 2019. Organisation for Economic Co-operation and Development. Country-by-Country Reporting— Compilation of Peer Review Reports (Phase 2). Paris: OECD, 2019. ______. Tax Administration 2019: Comparative Information on OECD and Other Advanced and Emerging Economies. Paris: OECD, 2019. Spies, Karoline. Permanent Establishments in Value Added Tax: The Role of Establishments in International B2B Trade in Services Under VAT/GST Law. European and International Tax Law and Policy Series vol. 13. Amsterdam: IBFD, 2019. Wheeler, Joanna, ed. The Aftermath of BEPS. Amsterdam: IBFD, 2019.

* Please contact the respective publishers if you wish to purchase any of the items listed.

■ xvi ■ canadian tax journal / revue fiscale canadienne (2020) 68:1, 1 - 3 1 https://doi.org/10.32721/ctj.2020.68.1.zeli

The Evaluation of Job Tax Incentives: An Analysis of a Regional Tax

Alessandro Zeli*

PRÉCIS On utilise souvent la déduction d’impôt à l’emploi comme outil de politique publique pour stimuler la croissance et la relance économique. L’analyse de l’incidence des dispositions de ce genre qui ont été adoptées dans un passé récent peut éclairer les effets des politiques fiscales actuelles. Cet article vise à étudier les effets d’une déduction fiscale de l’imposta regionale sulle attività produttive (impôt régional sur les activités productives), ou IRAP, accordée par l’Italie aux entreprises qui ont augmenté leur personnel entre 2005 et 2007. Les principaux objectifs de l’analyse sont d’évaluer l’augmentation et la permanence des nouveaux emplois, de discerner tout changement dans la structure de l’emploi des entreprises bénéficiaires, et d’évaluer l’efficacité des différents montants de déduction accordés aux entreprises des régions défavorisées afin de réduire l’écart d’emplois. Selon les résultats de l’analyse effectuée à l’aide d’un modèle de différence dans la différence, les entreprises qui ont bénéficié des incitations de l’IRAP ont enregistré des changements plus importants et plus durables des indicateurs sélectionnés par rapport aux entreprises n’appliquant pas la déduction, ce qui confirme l’efficacité de la disposition. La mesure adoptée prévoyait des déductions plus importantes pour les régions défavorisées du sud de l’Italie, mais les résultats n’indiquent pas une augmentation plus élevée de l’emploi dans ces régions.

ABSTRACT An employment tax deduction is frequently used as a public policy tool to stimulate economic growth and recovery. Analysis of the impact of such provisions adopted in the recent past may shed light on the effects of current tax policies. This article aims to estimate the effects of a tax deduction for Italy’s imposta regionale sulle attività produttive (regional tax on productive activities), or IRAP, granted to firms that increased their personnel between 2005 and 2007. The main objectives of the analysis are to assess the increase in, and the permanence of, new employment; to detect any changes in the

* Senior researcher, Istituto Nazionale di Statistica (Istat), Division for Data Analysis and Economic, Social, and Environmental Research (e-mail: [email protected]). I am grateful to Marco Ventura, whose many suggestions enhanced the quality of this article. I am also grateful to Antonella Caiumi, Lorenzo Di Biagio, and Marco Rinaldi for reading the article and providing useful comments. I bear sole responsibility for any errors or omissions.

1 2 n canadian tax journal / revue fiscale canadienne (2020) 68:1 employment structure of beneficiary firms; and to evaluate the effectiveness of different deduction amounts granted to firms in disadvantaged regions in order to reduce the employment gap. The results of the analysis using a difference-in-difference model indicate that firms enjoying IRAP incentives registered more significant and more enduring changes in the selected indicators as compared with firms not taking the deduction, thus verifying the effectiveness of the provision. The adopted measure provided for larger deductions for disadvantaged regions of southern Italy, but the results do not register a larger increase in employment in those regions. KEYWORDS: TAX DEDUCTIONS n ITALY n EMPLOYMENT POLICIES n EVALUATION n REGIONAL n TAX POLICY

CONTENTS Introduction 2 Prior Studies of the Impact of Tax Incentives on Employment 3 Aims of This Study 6 The IRAP Tax Deduction 9 The IRAP 9 The IRAP Deduction Introduced To Promote Employment 10 Data and Variables 12 Methodological Framework 13 DiD model 13 Robustness Check 18 Displacement Effects 19 Matched Sample 20 Difference-in-Difference Results 24 Results 24 Robustness Check 27 Displacement Effects 27 Conclusions 28 Appendix Efficiency Estimation 29

INTRODUCTION An employment tax deduction is frequently used as a public policy tool to stimulate economic growth and recovery. In many countries, tax deductions are implemented to help firms to hire new employees. For instance, Canadian political parties have included different job creation tax measures in their election platforms. Examples are a tax cut of 9-11 percent for small businesses (which are primary job creators) proposed in the federal New Democratic Party (NDP) platform for the 2011 general election, and a proposal for a tax credit to help businesses to invest in new job creation included in the Alberta NDP platform for the province’s 2015 election.1

1 New Democratic Party, Giving Your Family a Break: Practical First Steps, federal NDP platform, 2011 (www.documentcloud.org/documents/83745 -ndp- 2011 -platform.html); and Alberta New the evaluation of job tax incentives: an analysis of a regional tax n 3

On a regional basis, there are many other initiatives. For example, the Ontario cooperative education tax credit, which aims to create new fixed-term (four-month) employment contracts, mainly for students that are still enrolled in post-secondary programs, offers the employer a tax benefit of up to $3,000 for each newwork placement/contract; and the Ontario apprenticeship training tax credit encourages the hiring of trainees by providing a refundable tax credit based on salaries and wages paid to apprentices (capped at $5,000 annually for each apprenticeship, for a maximum of three years).2 The ex-post evaluation of these kinds of incentive provisions may shed light on their advantages and disadvantages, and contribute to the debate on their use. In Italy, a measure was enacted in 2005 providing a deduction for the imposta regionale sulle attività produttive (regional tax on productive activities), or IRAP, that was available to Italian firms for new job creation. The deduction expired in 2008. In this article, the effects of this measure between 2005 and 2007 are analyzed. A frequently recurring question related to employment tax deductions is whether they lead to the creation of jobs that would not have been created in the absence of the incentive. In addressing this question, it is necessary to determine whether employment tax deductions generate additional effects relating to job creation and to identify any differential effects between regions. We contribute to this discussion by conducting a systematic investigation of how the Italian IRAP deduction affected employment and the benefiting firms’ performances linked to employment. The novelty of this research is the use of a database that permits the inclusion of firms of any size and with varying characteristics, in addition to the estimated impact of the deduction on employment. Our analysis describes in detail the impact of the IRAP deduction at the regional level, and how a broad set of variables (productivity, sales, and average salaries) responded to the provision, in order to gain an understanding of the overall effect on firms’ employment policies. Finally, we compute the cost of obtaining such impact, broken down by industry and geographical zone, using information on the actual amount of the subsidy. In particular, we calculate the average cost of an additional job created as a result of the subsidy. These estimates permit a straightforward interpretation of the provision’s effects.

Prior Studies of the Impact of Tax Incentives on Employment A number of studies have been conducted to determine the impact of tax incentives on employment in both the United States and Europe.3 Indeed, in recent years,

Democratic Party, Leadership for What Matters: Election Platform 2015 (http://d3n8a8pro7vhmx .cloudfront.net/themes/5532a70aebad640927000001/attachments/original/1429634829/ Alberta_NDP_Platform_2015.pdf?1429634829). 2 See University of Waterloo, “Ontario Co-operative Education Tax Credit” (https://uwaterloo .ca/hire/funding-opportunities/tax-credits-and-incentives); and Ontario, Ministry of Finance, “Apprenticeship Training Tax Credit” (www.fin.gov.on.ca/en/credit/attc/index.html). 3 Jonathan R. Kesselman, Samuel H. Williamson, and Ernst R. Berndt, “Tax Credits for Employment Rather Than Investment” (1977) 67:3 American Economic Review 339 - 49; 4 n canadian tax journal / revue fiscale canadienne (2020) 68:1 many European governments have implemented tax incentives to encourage firms to expand employment. For EU countries, the European Commission encourages policies that enhance the flexibility of labour markets and promote increased labour market participation, such as reforms in tax benefit systems that may contribute to improving the functioning of EU labour markets.4 A statistical and econometric analysis by Carone et al.5 showed that a greater tax wedge has a significant negative impact on labour force participation and employment rates for non-EU member countries. More recent studies on this topic were carried out by Huttunen, Pirttilä, and Uusitalo6 and by Neumark and Grijalva.7 Both studies indicated positive effects of job subsidies and credits on employment using a difference-in-differenceD ( iD) methodology. Huttunen et al.8 analyzed the employment effects of a Finnish payroll- tax subsidy scheme targeted at older and low-wage workers. They found that there was an increase of approximately 1 percent in the employment rate of older workers as a result of the subsidy, but they did not find statistically significant effects for low- wage workers. They argued that the subsidy provision was inefficient owing to the high cost relative to the minimal effect on employment rates. Neumark and Grijalva9 analyzed state hiring credits in the United States. They did not find an effect on employment growth for the types of hiring credits that they examined. The results of their research indicated that a non-categorical and more broadly targeted hiring credit is substantially effective only during recessions. Moreover, evidence indicated

John H. Bishop and Mark Montgomery, Does the Targeted Jobs Tax Credit Create Jobs at Subsidized Firms? CAHRS Working Paper (Ithaca, NY: Cornell University, School of Industrial and Labor Relations, Center for Advanced Human Resource Studies, September 1991); Peter Bohm and Hans Lind, “Policy Evaluation Quality: A Quasi-Experimental Study of Regional Employment Subsidies in Sweden” (1993) 23:1 Regional Science and Urban Economics 51 - 65; Hildegunn E. Stokke, Regional Payroll Tax Cuts and Individual Wages: Heterogeneous Effects Across Education Groups, Working Paper series no. 16815 (Trondheim: Norwegian University of Science and Technology, Department of Economics, 2015); and Robert S. Chirinko and Daniel J. Wilson, Job Creation Tax Credits and Job Growth: Whether, When and Where? Working Paper 2010 - 25 (San Francisco: Federal Reserve Bank of San Francisco, 2010). 4 See Giuseppe Carone and Aino Salomäki, Reforms in Tax-Benefits System in Order To Increase Employment Incentives in the EU, Ecofin Economic Papers no. 160 (Brussels: European Commission, Directorate-General for Economic and Financial Affairs, September 2001). 5 Giuseppe Carone, Klara Stovicek, Fabiana Pierini, and Etienne Sail, Recent Reforms of the Tax and Benefit Systems in the Framework of Flexicurity, European Economy Occasional Papers (Brussels: European Commission, Directorate-General for Economic and Financial Affairs, February 2009) (https://doi.org/10.2765/92751). 6 Kristiina Huttunen, Jukka Pirttilä, and Roope Uusitalo, “The Employment Effects of Low-Wage Subsidies” (2013) 97:1 Journal of Public Economics 49 - 60. 7 David Neumark and Diego Grijalva, “The Employment Effects of State Hiring Credits” (2017) 70:5 Industrial and Labour Relations Review 1111 - 45. 8 Huttunen et al., supra note 6. 9 Neumark and Grijalva, supra note 7. the evaluation of job tax incentives: an analysis of a regional tax n 5 that the effects of state hiring credits are stronger when such measures target the unemployed. Another recent study10 analyzed a 2007 Swedish provision that substantially reduced the employer payroll tax for younger workers. The study’s findings showed a small impact on employment and wages; however, the effect on employment differed across ages and over the business cycle. The provision was more effective for younger employees than for older workers; furthermore, the impact of the provision appeared to be strongly procyclical. In the context of Italy, prior studies have considered IRAP provisions and deductions aimed at employment growth. For example, Bordignon, Schmitz, and Turati11 focused on the relationship between reduction of the fiscal wedge (consisting of an IRAP deduction on the labour side) and the contemporaneous increase of value-added tax or fiscal devaluation. Their paper was based on a DiD model that analyzed the differential treatment of northern and southern Italian regions. The study revealed that the tax cut significantly increased the employment rate and that doubling the deduction increased the employment rate by about 2 percent. Many subsidies and grants may be differentiated at the regional level or may be provided directly by local authorities. In such cases, the differential impact of a provision at the regional level can be studied. In the United States, the findings of studies administered locally in several states12 suggested evidence of job creation in response to tax incentives, specifically employment tax credits. Gabe and Kraybill13 analyzed the effects of economic development incentives on employment growth at the state level in the United States between 1993 and 1995, while Porro and Salis14 recently analyzed four types of incentives aimed at firm growth provided in the Lombardy region in northern Italy. Neither analysis revealed evidence that those provisions had a positive impact on employment growth at the regional level. On the other hand, Shuai and Chmura15 carried out a state-level study in the United

10 Niklas Kaunitz and Johan Egebark, Payroll Taxes and Firm Performance, IFN Working Paper no. 1175 (Stockholm: Research Institute of Industrial Economics, 2017) (revised April 8, 2018). 11 Massimo Bordignon, Marie-Luise Schmitz, and Gilberto Turati, “Does Fiscal Devaluation Really Work? Evidence from an Italian Experiment,” paper presented at CESifo Area Conference on Public Sector Economics, April 16 - 18, 2015. 12 Dagney Faulk, “Do State Economic Development Incentives Create Jobs? An Analysis of State Employment Tax Credits” (2002) 55:2 National Tax Journal 263 - 80 (https://doi.org/10.17310/ ntj.2002.2.04); and Jungyul Sohn and Gerrit-Jan Knaap, “Does the Job Creation Tax Credit Program in Maryland Help Concentrate Employment Growth?” (2005) 19:4 Economic Development Quarterly 313 - 26. 13 Todd M. Gabe and David S. Kraybill, “The Effect of State Economic Development Incentives on Employment Growth of Establishments” (2002) 42:4 Journal of Regional Science 703 - 30. 14 Giuseppe Porro and Valentina Salis, “Do Local Subsidies to Firms Create Jobs? Counterfactual Evaluation of an Italian Regional Experience” (2018) 97:4 Papers in Regional Sciences 1039 - 56. 15 Xiaobing Shuai and Christine Chmura, “The Effect of State Corporate Income Tax Rate Cuts on Job Creation” (2013) 48:3 Business Economics 183 - 93. 6 n canadian tax journal / revue fiscale canadienne (2020) 68:1

States to analyze the impact of a tax cut on employment growth. They found a positive relationship between the tax cut and growth of employment for those states that cut their corporate taxes, and they verified a decrease in the gap between states with higher employment growth and states with lower employment growth. Another study based on US state-level data16 found that any increase in state tax on dividend income reduced tax revenue, while states benefited, in terms of revenue, from an increase in tax on income from wages or in sales or property tax. Similar incentives have been implemented in Canada in the past. For instance, the Cape Breton investment tax credit aimed to spur investment, employment, and productivity in Cape Breton, although the effectiveness of this provision was questioned.17 In the context of France, a study that aimed to determine the most efficient instrument to fill the gap in economic performance (productivity) at the regional level18 found that providing a financial incentive and granting an investment credit were less costly policies than the alternative option of lowering the corporate tax rate. Finally, a UK study by Devereux, Griffith, and Simpson19 aimed to analyze how the impact of government grants influenced firms’ decisions on the location of their plants. The results showed that the location decisions of firms were influenced more by the local industry structure than by government grants, which were found to be of little importance.

Aims of This Study In Italy, some incentives in the form of deductions from the IRAP tax base were introduced in the last decade to promote employment. These measures included incentives for small firms, facilitation of job placement for disadvantaged employees, incentives for transitioning from fixed-term employment contracts to permanent (open-ended) employment contracts, and help for disadvantaged regions. Owing to the peculiar characteristics of the IRAP, a large portion of employment tax deductions in Italy are implemented through IRAP deductions.20

16 Hakan Yilmazkuday, “Individual Tax Rates and Regional Tax Revenues: A Cross-State Analysis” (2017) 51:5 Regional Studies 701 - 11. 17 Michael Daly, Ian Gorman, Gordon Lenjosek, Alex MacNevin, and Wannakan Phiriyapreunt, “The Impact of Regional Investment Incentives on Employment and Productivity: Some Canadian Evidence” (1993) 23:4 Regional Science and Urban Economics 559 - 75. 18 Hélène Laurent, Michel Mignolet, and Olivier Meunier, “Regional Policy: What Is the Most Efficient Instrument?” (2009) 88:3Papers in Regional Science 491 - 507. 19 Michel P. Devereux, Rachel Griffith, and Helen D. Simpson, “Firm Location Decisions, Regional Grants and Agglomeration Externalities” (2007) 91:3 - 4 Journal of Public Economics 413 - 35. 20 This provision did not overlap any other subsidy granted to firms before or after the period considered here. The actual sample data span the years 2004 - 2010, which include one year before the introduction of the provision and three years after the last deduction was obtained. the evaluation of job tax incentives: an analysis of a regional tax n 7

Our contribution is to estimate the impact of the IRAP tax deduction on employment using a large sample of Italian firms and applying a reduced-form approach to empirical modelling. We explore the effects of the IRAP deduction on employment growth from the following perspectives:

n the durability of the increasing effects of the tax deduction on employment owing to a change in the occupational structure of firms; n the reduction of the employment gap between more developed regions and regions that are disadvantaged; n increasing employment of a skilled workforce; and n an increase in productivity in the form of an increase in market share, as indicated by increased sales.

Other studies have examined similar measures and similar incentives related to the IRAP. For instance, Monteduro et al.21 investigated an IRAP tax credit granted for job hiring after 2007; however, this study focused only on small and medium- sized enterprises (SMEs) located in southern regions, and it did not calculate the average cost of an additional job. Recently, Porro and Salis22 considered four programs granted at the local level by the Lombardy region that provided financial incentives for job-hiring firms, with a partial focus on territory regarding the targets of the provisions. However, the authors implemented only a short-run analysis, so some questions remain about the long-run effects. Kangasharju23 analyzed the wage subsidy policy in Finland. This provision is quite different from a tax credit, since the subsidies aim to increase wages up to the minimum level granted in Finland. Hence, “wage subsidies are directed to firms who employ the kind of unemployed whose productivity and qualifications are lower than the levels needed in active labour markets.”24 In other words, the instrument is not targeted to a generalized public. As stated above, the IRAP deduction generated some questions. For example, is there a real differential in employment growth as between beneficiaries and non- beneficiaries? Is there a greater employment change for southern regions given the greater deductions granted for firms located there? Are the effects of the deduction on employment permanent? Does the deduction affect the performance of non- beneficiary firms? How efficient is the provision in terms of cost per new job created

21 Maria Teresa Monteduro, Marco Manzio, Federica Alivernini, Daniela Bucci, Jacopo Canello, Febrizio De Grandis, Marco Mastracci, and Paolo Pavone, “Employment Tax Credits and Job Creation Trends in SMEs: Evidence from a Policy Intervention in Italy,” paper presented at the 2014 Counterfactual Methods for Policy Impact Evaluation (COMPIE) Conference, Rome, 2014. 22 Porro and Salis, supra note 14. 23 Aki Kangasharju, “Do Wage Subsidies Increase Employment in Subsidized Firms?” (2007) 74:293 Economica 51 - 67. 24 Ibid., at 57. 8 n canadian tax journal / revue fiscale canadienne (2020) 68:1 in different regions? To address these questions, we carried out a two-step procedure (using propensity score matching and DiD), which identified a firm as “treated” if it benefited from the IRAP deduction after hiring an employee with a permanent contract (subject to the rules and limitations discussed in the next section). This implies greater deductions from the IRAP base with respect to non-beneficiary firms. To sum up, the aim of this article is multifold. We try to verify not only the employment increase for beneficiaries, but also whether the change was enduring. In other words, we want to verify the existence of a differential effect on another dimension—the duration of the employment increase. The methodology used in estimating differential effects can help to determine whether the differential change in employment level is permanent (an important consideration), and whether the differential effects calculated for other variables, such as productivity, salary, and sales, are actual as well. Many authors studying economic measures have utilized, as an outcome variable, the target of the provisions. Kangasharju25 analyzed the effects of a wage subsidy for new workers on employment and employees’ skill and wage level by means of a DiD methodology. Other studies analyzed the effects of employment tax deductions on total employment growth for all firms located in southern Italian regions, by means of “average treatment effect on the treated” AT( T) estimates.26 In the same way, analyses of the impact of tax policies on other economic variables, carried out by means of DiD methodologies, have considered the provision target as an outcome variable. For instance, Haegeland and Møen27 and Bozio, Irac, and Py28 examined the effects of a tax deduction for investment in research and development R & D( ) on the increase in such investments, while Bronzini and de Blasio29 investigated the effect on investment growth of investment incentives granted by Law 488/12 in Italy. Our study analyzes an extensive and generalized provision not targeted to specific firms or employees, but aimed at improving employment all over the country. It represents a comprehensive analysis of this particular measure—a tax deduction granted on the basis of a regional tax—implemented in 2005-2007, which also compares the effects at the regional level. The rest of the article is organized as follows. The next (second) section describes the IRAP tax deduction. The third section describes the data sources and summary

25 Kangasharju, supra note 23. 26 See, for example, Monteduro et al., supra note 21. 27 Torbjørn Haegeland and Jarle Møen, Input Additionality in the Norwegian R & D Tax Credit Scheme, Report no. 2007/47 (Oslo: Statistics Norway, December 2007). 28 Antoine Bozio, Delphine Irac, and Loriane Py, Impact of Research Tax Credit on R & D and Innovation: Evidence from the 2008 French Reform, Banque de France Working Paper no. 532 (Paris: Banque de France, December 2014). 29 Raffaello Bronzini and Guido de Blasio, “Evaluating the Impact of Investment Incentives: The Case of Italy’s Law 488/1992” (2006) 60:2 Journal of Urban Economics 327 - 49. the evaluation of job tax incentives: an analysis of a regional tax n 9 statistics for this study, and the fourth section outlines the study methodology. The fifth section explains the evaluation of the results of the matching procedure, and the sixth section presents the results of the DiD estimation for employment and other indicators. The conclusions are reported in the last section. An appendix to the article provides an estimate of the efficiency of theIRAP tax deduction.

THE IRAP TAX DEDUCTION The IRAP The IRAP is a regional production tax adopted in 1998 as part of a reform package designed to remedy certain weaknesses in the Italian tax system. The IRAP represents perhaps the most important modern move toward a local business value-added tax. It is similar, in some respects, to the French territorial economic contribution (contribution économique territoriale); for instance, both programs use a method of allocating revenues among localities that is essentially based on local employment, as described in Gilbert.30 Implementation of the IRAP was intended to address multiple issues, including avoiding the imposition of high statutory tax rates on income or additional taxation on business net worth, and to provide regions with an autonomous source of revenue to increase their fiscal accountability, specifically in the health-care sector. The tax burden was no longer focused on gross profits, but instead was based on a broader definition of corporate revenues to allow for a reduction in rates. The IRAP’s tax base is the net value added generated by all types of businesses in each region. Thus, the tax is based not on net income before tax, but on the value added produced by a company at the local level. Value added is defined as the difference between operating revenues and costs before interest income and expenses, and, in particular, labour costs are deducted, so that part of the tax affects values other than the company’s pure income. As well as differentiating tax base from gross profit, theIRAP is also payable in the event of a reported loss. This provision makes the tax procyclical and thus may worsen the already difficult situation of companies during economic and financial crises. Given the broad tax base, the ordinary statutory rate applied at the time the IRAP was enacted was relatively low—though, notwithstanding the low rate, the tax revenue was considerable—and the initial tax rate has been reduced in the last decade. As for the definition of the tax base, specific rates apply to different sectors of -eco nomic activity and different organizational forms. If the activity is conducted in several regions, the value is divided according to the remuneration payable to staff in each region. Once the tax has been collected, the revenues are allocated among regions in proportion to labour costs incurred in each region, net of a share to be paid to the Italian state, as compensation for costs associated with control and certification activities. The regions then distribute a share of the income toeach

30 Guy Gilbert, “Finances Publiques Locales Enjeux et Perspectives,” paper presented at the Institut National des Études Territoriales, Strasbourg, France, May 31 -June 1, 2010. 10 n canadian tax journal / revue fiscale canadienne (2020) 68:1 province and municipality. The introduction of the IRAP, moving taxation toward the regional level, implies a better balance between national and subnational tax systems. Almost all IRAP revenue is allocated to health-care expenditures, the main field of competence of the regions. Since 2005, regions can modify the tax rate by up to 1 percent when running into deficits with health-care expenditures. This option became compulsory in 2006 and since then has resulted in increased IRAP rates in the Abruzzo, Campania, Lazio, Molise, and Sicilia regions. Since the implementation of the IRAP, various incentives (in the form of deductions from the tax base) have been introduced to promote small businesses and permanent employment, and to reduce regional gaps. The IRAP remains distinct from the corporate tax (IRES), even if it is possible to deduct some IRAP items from general corporate tax liabilities. (For an in-depth analysis of the IRAP, see Bor dignon et al.)31

The IRAP Deduction Introduced To Promote Employment Law n. 80 (2005) and Law n. 311 (2004) (Budget Law for 2005) introduced an important IRAP deduction aimed at increasing the employment base. The deduction, operative from 2005 until 2008, when it expired,32 was intended to promote employment through permanent contracts and to improve employment rates to a greater extent in disadvantaged regions relative to the rest of the country. The provision covered both full-time and part-time permanent contracts, but was conditional on an actual increase in a firm’s employment base. The structure of theIRAP deduction influenced the effectiveness of the provision in creating jobs. The most relevant features of the deduction include the following:

n The IRAP’s new employment deduction was available for the creation of new, permanent contract jobs, so the deduction was not available for fixed-term contract jobs. n The deduction applied against the IRAP tax base; firms with no IRAP tax liabilities could not use the deduction. n The provision allowed for the deduction of labour costs up to € 20,000 for each new employee if the average number of permanent employees, calculated on an annual basis, increased relative to the previous year. n An increase in the level of employment was realized if the difference between the number of employees at the end of a year and the annual average of the number of employees in the previous year was positive. n The deduction was maintained if the total employment did not increase in the fiscal years following the fiscal year for which the deduction was granted.

31 Bordignon et al., supra note 11. 32 In this study, we considered the deduction effect only for the three-year period before the financial crisis (that is, 2005 - 2007). the evaluation of job tax incentives: an analysis of a regional tax n 11

n The deduction aimed to provide additional permanent employment and was not available for replacement workers (employees replacing laid-off workers). n The amount of the deduction granted varied, depending on the location of the firm. This provision was intended to foster employment in less-developed regions; thus, a greater deduction was allowed if a firm was located in one of the less-developed regions in southern Italy (Campania, Puglia, Basilicata, Calabria, Sicilia, Sardinia, Abruzzo, or Molise).33 n A firm had to maintain the additional jobs created until the end of the 2008 financial year in order to maintain the employment base increase. n The deduction was extended to all types of industries. n A firm could obtain the IRAP deduction for one or more years. For example, a firm could obtain the deduction for 2005 and 2006, or a beneficiary firm in 2006 could obtain a further deduction (for other new employees) in 2007. n Finally, the deduction granted for each new job in a disadvantaged area (a southern region) increased during the period 2005 - 2007.

These provisions can be summarized as follows. Beneficiary firms had to increase their employment base from the average of the preceding financial year before receiving the deduction. It was possible for the same firm to decrease its employment base in subsequent financial years, but only if the employment change remained positive compared to the initial year until financial year 2008. The benefit for the firm was achieved by means of deductions from the IRAP tax base, which includes the cost of labour. An example of the calculation of the number of deductions granted to a hypothetical firm is presented in table 1. In order to benefit from the provision, eligible enterprises must be informed about the existence of the incentive and apply if the expected benefits exceed the expected cost of application. The costs incurred by firms in becoming beneficiaries of the IRAP deduction fall into several categories: search costs, compliance costs, reporting costs (linked to providing additional information to fiscal authorities), and hiring costs. Depending on those costs, firms in different industries and of different sizes may find it more or less advantageous to exploit tax deductions linked to new employment; moreover, they must maintain a positive employment differential relative to the initial year. Access to the deductions differed according to firms’ characteristics. In 2005, more “younger” firms, in business for fewer years, accessed the deduction than “older” firms. Newer firms are more dynamic and better able to accommodate the administrative costs referred to above. For the same reasons, the larger (and best- organized) firms accessed the deduction more often than smaller firms. The geographical and economic-sector classifications also mattered: in the northern

33 The additional deduction differs from one region to another. The calculation of the deduction is more complicated in these cases, but it can be estimated at around three to five times the base deduction granted for the rest of the country. 12 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 1 Calculation of Deductions Granted to a Hypothetical Firm

2005 2006

Number of employees at Number of employees at 31/12/2004 ...... 22 31/12/2005 ...... 27 Hirings in 2005 ...... 5 Deductions granted for 2005 . . . 5 Number of employees at Number of employees at 31/12/2005 ...... 27 31/12/2006 ...... 25 Average number of employees in 2004 ...... 26.3 Dismissed in 2006 ...... 5 Employment growth, 2005 . . . . 0.7 Hirings in 2006 ...... 3 Average number of employees Deductions granted for 2005 . . . 5 in 2005 ...... 26.5 Employment growth, 2005 . . . . −1.5 Deductions granted for 2006 . . . 5 Granted for 2005 ...... 5 Granted for 2006 ...... 0

Note: Employment growth is calculated as the difference between the prior-year average and the current-year number of employees at year-end. Assumed financial year-end is December 31. Source: Agenzia delle Entrate (Italian Revenue Agency), Administrative Circular, February 13, 2006, n. 7/E. regions, in 2005, the share of beneficiaries was higher than in the southern regions; and industries (manufacturing and energy supply) received a larger share of the benefits than the service sector. These facts may explain why some eligible firms were not beneficiaries. They also contribute to the construction of the profile of the beneficiary firm used in the matching procedure described below.

DATA AND VARIABLES We exploited two main sources of data: corporate tax return data from the Italian Ministry of Economy, including all tax forms related to Italian limited enterprises (approximately 1,050,000 firms per year); and the balance sheet data of limited enterprises, a database acquired by the Italian Institute of Statistics (Istat) from the Chamber of Commerce. We identified eligible firms as those described in a study by Caiumi,34 or firms for which the IRAP economic base was greater than zero. We assembled a panel of approximately 1.2 million observations relating to about 168,000 firms per year over the seven years from 2004 through 2010.35 We considered only those firms

34 Antonella Caiumi, The Evaluation of the Effectiveness of Tax Expenditures—A Novel Approach: An Application to the Regional Tax Incentives for Business Investment in Italy, OECD Taxation Working Paper no. 5 (Paris: Organisation for Economic Co-operation and Development, 2011). 35 We considered a span of time longer than 2005 - 2007 in order to have data for a one-year period before the introduction of the provision and a three-year period after the last deduction was received. the evaluation of job tax incentives: an analysis of a regional tax n 13 that remained in the panel for at least five consecutive years and that received a certain deduction amount; hence, having at maximum only seven presences, we obtained a quasi-balanced panel with very little attrition, concentrated in the first year (2004) and in the last two years (2009 and 2010). This panel is representative of incorporated enterprises. In this study, the following variables were considered:

n ROA (return on assets): calculated as operating income (OI) over total assets; n Tangibles: defined as the ratio of tangible fixed assets to total assets; n Age: information about a firm’s age, in years; n Tax status: if the firm had corporate tax IRES( ) liabilities, tax status = 1; otherwise, tax status = 0; n Persons employed: the number of persons employed at the firm; n Sales: annual turnover; n Average salary: salary amount per head; n Productivity: the ratio of value added to persons employed; and n Export tendency (Exp_tend): export amount on turnover.

Firms were classified according to some categorical variables. Firm size was divided into three large revenue (turnover) classes: small (under € 2 million), medium (from € 2 million to € 10 million), and large (over € 10 million). Two other classifications were considered: economic sector classification and geographical area classification. The use of a geographical area classification allowed for the disentanglement of the differential area deduction effects in the probit model described below. A summary of the sample firms’ statistics for the variables considered in this study is presented in table 2. From 2005 to 2007, the specific deduction amount for permanent contracts tripled for the firms included in the panel, while the number of beneficiaries -in creased by 20 percent. Consequently, the average firm deduction doubled in the period for the sample firms (table 3). In general, the deduction amount increased with firm size, and the distribution of size categories remained substantially unaltered during the period. Southern regions received increasing average deductions owing to the additional deduction granted to them at the local level.

METHODOLOGICAL FRAMEWORK DiD model This empirical study aims to determine whether exploiting the IRAP tax deduction had a causal effect on firms’ economic indicators, by reference to a targeted eligible firm. Following the approach and notation used by Blundell and Costa Dias36 and

36 Richard Blundell and Monica Costa Dias, “Evaluation Methods for Non-Experimental Data” (2000) 21:4 Fiscal Studies 427 - 68. 14 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 2 Summary Statistics, 2004-2010

Standard Variable Mean deviation Median

Persons employed ...... 26.8 240.9 9.0 Average salarya ...... 23.2 19.2 21.1 ROA ...... 5.8 10.5 4.8 Tax status ...... 0.8 0.4 1.0 Age ...... 17.2 12.3 14.0 Productivitya ...... 47.3 91.4 36.2 Salesa ...... 6,608 6,610 1,268 Export tendency ...... 0.04 0.15 0.02 Tangibles ...... 0.21 0.22 0.1 a Thousands of euros.

TABLE 3 Annual IRAP Deductions, Sample Firms, 2005-2007

2005 2006 2007

Total IRAP deductiona ...... 1,549,865 3,203,217 4,544,177 Number of beneficiaries ...... 71,697 80,893 86,200 Average firm deductiona All firms ...... 22 40 53 By geographic area North-west ...... 21 38 46 North-east ...... 21 32 45 Centre ...... 21 35 48 South ...... 24 57 79 By firm size (turnover classes) Less than € 2 million ...... 12 19 29 € 2 million to € 10 million ...... 24 43 60 Over € 10 million ...... 85 163 181

IRAP = regional tax on productive activities. a Thousands of euros. by Bandick and Karpaty,37 we adopted a two-stage strategy.38 We first constructed a sample of matched beneficiary and non-beneficiary firms, and then we estimated a DiD coefficient for the matched sample. For this purpose, we developed the following formula and series of equations. Let TC ∈{0,1} be an indicator of whether firm i is a beneficiary of the IRAP deduc- 1 tion in time period t, and let y i, t + s be employment at time t + s; s > 0, after the first

37 Roger Bandick and Patrik Karpaty, “Employment Effects of Foreign Acquisition” (2011) 20:2 International Review of Economics and Finance 211 - 24. 38 Also described in Alessandro Zeli, “The Impact of ACE on Investment: The Italian Case” (2018) 35:3 Economia Politica 741 - 62. the evaluation of job tax incentives: an analysis of a regional tax n 15

0 deduction year. If firm i is a non-beneficiary firm, its outcome is denoted as y i, t + s . The causal effect on employment by being an IRAP tax deduction beneficiary for firm i at time t can be defined as

1 0 y i, t + s - y i, t + s . (1)

1 0 Now it is possible to observe y i, t + s , while y i, t + s is not observable; this is the primary problem in the estimation of causal effects. So it is possible to define the average effect of exploiting the tax deduction as

1 0 1 0 E{ y i, t + s - y i, t + s |TCit = 1} = E{ y i, t + s |TCit = 1} - E{ y i, t + s |TCit = 1}. (2)

The last term of equation 2 is the counterfactual, which is difficult to construct. In other words, we must estimate what the outcome for firms exploiting the tax deduction would have been, on average, had those firms not used the tax deduction. One method to determine this estimation is to use the average employment of firms 0 that were not deduction beneficiaries, expressed as E{ y i, t + s |TCit = 0}. Variable TCit is influenced by many other variables and simultaneous effects being endogenously so determined. If these influences are not considered, the estimation of causal effects will be biased. Since this is a missing-data problem, we need to use the available information to impute the relevant information that is not possible to observe. However, if the selection into treatment is completely determined by a set of exogenous covariates (X), and if those covariates can be observed by the researcher and the assignment into treatment is random, then the outcomes for the non-treated firms are independent of the participation status. Our approach employed a matching technique. Matching involves pairing beneficiary with non-beneficiary firms on the basis of similar pre-provision characteristics (X), including size, location, age, and profitability. Using this technique, we built a sample of non-recipient firms twinned with recipient firms to better approxi- mate the non-observed counterfactual event in equation 2. We used the Rubin39 and Rosenbaum and Rubin40 propensity score matching methodology. Under the conditional independence assumption, the selection occurs only on observables. A probit model was used to estimate the probability (or propensity score) of being a beneficiary firm. This is the first step in implementing propensity score matching. We begin with the following formula:

p(TCit = 1) = F (Xit - 1,Dj,Dt), (3)

39 Donald B. Rubin, “Assignment to Treatment Group on the Basis of a Covariate” (1977) 2:1 Journal of Educational Statistics 1 - 26. 40 Paul R. Rosenbaum and Donald B. Rubin, “The Central Role of the Propensity Score in Observational Studies for Causal Effects” (1983) 70:1Biometrika 41 - 55. 16 n canadian tax journal / revue fiscale canadienne (2020) 68:1

where TCit = 1 denotes a non-beneficiary firm in year t − 1 that benefits from tax deduction in year t; Xit − 1 is a vector of relevant firm-specific variables in year t − 1 that may influence the firm’s probability of being a beneficiary in year t; Dj controls for industry or area effects; andD t controls for time-fixed effects. The following equation explicitly indicates the variables included in the probit model.

2 p(TCit = 1) = b0 + b1Aget - 1 + b2Age t - 1 + b3TSt - 1 + b4ROAt - 1 + b5Exp_tendt - 1 + b6Tangiblest - 1 + d1Size + d2 Area + d3Industry + e. (4)

Using the propensity scores after the probit model estimation, it is possible to select the control firms for which the propensity score determines the closest match with a treated firm. We utilized the Stata procedure PSMATCH2 developed by Leuven and Sianesi41 to match treated and control firms. To identify the counterfactual, the main estimation method adopted was nearest-neighbour matching without replacement. When the control group of firms is identified, the DiD estimator can be used to estimate the impact of use of the tax deduction on the firms’ economic indicators. According to Wooldridge,42 this estimate can be obtained by employing the following regression:

yit = b0 + b1TCAi + b2 Afterit + s + b3TCAi × Afterit + s + b4Xit + εit, (5) where yit is the target outcome variable (change in employment). TC is a dummy variable equal to 1 for beneficiary (treated) firms and equal to 0 for non-beneficiary firms C. We multiply this dummy by the total deduction amount 43 for the single ith firm over the period A( i) to exploit this micro-level information, and thus obtain the 44 variable TCA as shown in Angrist and Pischke. The dummy variable Aftert + s takes a value of 1 in the post-tax deduction year t + s and a value of 0 in the year before the tax deduction. This dummy variable captures aggregate period effects that are common between the two groups T and C. The last term TCAi × Aftert + s represents the interaction between TCAi and Aftert + s . The coefficient of this last term (β3)

41 Edwin Leuven and Barbara Sianesi, “PSMATCH2: Stata Module To Perform Full Mahalanobis and Propensity Score Matching, Common Support Graphing, and Covariate Imbalance Testing,” Statistical Software Components, Boston College Department of Economics, 2003 (http://ideas.repec.org/c/boc/bocode/s432001.html). 42 Jeffrey M. Wooldridge,Econometric Analysis of Cross-Section and Panel Data (Cambridge, MA: MIT Press, 2002). 43 In thousands of euros. 44 Joshua A. Angrist and Jörn-Steffen Pischke,Mostly Harmless Econometrics: An Empiricist’s Companion (Princeton, NJ: Princeton University Press, 2009). the evaluation of job tax incentives: an analysis of a regional tax n 17 represents the DiD estimator of the effect of being a beneficiary on treated firm T, or β3 = γt + s . The DiD estimator eliminates unobserved time-invariant differences in employment between beneficiary and non-beneficiary firms. Finally,X t + s is a set of control dummy variables: geographical area, size, industry, and year. Moreover, as in Bandick and Karpaty,45 we included a vector of firm characteristics to control for differences in observable attributes among firms. In particular, following the literature on similar topics,46 sales and a measure of profit RO( A) were included in the control variables matrix X. Regression 4 was replicated for each of the variables of interest (turnover, average salary, and productivity). An important hypothesis underlying the DiD procedure is the parallelism assumption—that, without the deduction, the supported firms would have followed a trajectory parallel to that of the non-supported firms. However, there is nothing to support the truth of that assumption, as discussed in a 2012 report by the Associazione per lo Sviluppo della Valutazione e l’Analisi delle Politiche Pubbliche (ASVAPP).47 To address this issue, the employment trends for beneficiaries and non-beneficiaries in the matched sample and the probably natural dynamic for beneficiaries (that is, employment without the IRAP deduction) were further analyzed. The results are presented in figure 1. The beneficiaries and non-beneficiaries have parallel trajectories before 2005 (the starting year for IRAP deductions). After 2005, there is an increase in employment for beneficiaries that surpasses the increase for non- beneficiaries. The beneficiaries’ trajectories remain divergent from those ofthe non-beneficiaries throughout the three-year period 2005 - 2007. After 2008, the trajectories resume a parallel path, showing an impact of the tax deduction provision and a constant differential between beneficiaries and non- beneficiaries owing to the provision itself. The graph does not show effects in the years before the provision was adopted. The beneficiaries’ employment impact trend displays a strong increase in the first years after the provision was enacted (2005 - 2007); subsequently, the trend flattens out, indicating a permanent higher employment level for the beneficiaries.48 Hence, figure 1 supplies evidence of a common underlying trend (the natural dynamic) for treated and control firms, and a treatment effect producing a deviation from that trend.

45 Bandick and Karpaty, supra note 37. 46 Bronzini and de Blasio, supra note 29; and Kangasharju, supra note 23. 47 Associazione per lo Sviluppo della Valutazione e l’Analisi delle Politiche Pubbliche (ASVAPP), Counterfactual Impact Evaluation of Cohesion Policy: Impact and Cost-Effectiveness of Investment Subsidies in Italy, final report to the European Commission (DG Regional Policy) (Torino: ASVAPP, June 2012). 48 David H. Autor, “Outsourcing at Will: The Contribution of Unjust Dismissal Doctrine to the Growth of Employment Outsourcing” (2003) 21:1 Journal of Labor Economics 1 - 42, at 25-26; and Angrist and Pischke, supra note 44, at 178-80. 18 n canadian tax journal / revue fiscale canadienne (2020) 68:1

FIGURE 1 Decomposing Observed Change into Impact and Natural Dynamic Effects—Employment for the Matched Sample 900 800 700 Impact 600 ’000s) 500 Period for which 400 the deduction was granted 300 Employment ( 200 100 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Non-beneﬁciary Beneﬁciary Natural dynamic

Note: The employment natural dynamic is calculated for beneficiary firms by multiplying the beneficiaries’ employment level at year t − 1 by the employment annual increments registered for non-beneficiaries.

Robustness Check To assess the robustness of our results, we used an alternative format in which propensity score matching and DiD are computed simultaneously, as shown by Blundell and Costa Dias.49 In this case, the DiD matching estimator is given by the equation

1 ATT = Σ __ [ y T - y C - Σ ijw ( y C - y C )], (6) i∈T ∩S N T i, t + s i, t - 1 j∈C∩S ij j, t + s j, t - 1 where ATT is the average effect of treatment on treated; N T is the number of bene- T ficiary firms; y i, t + s is the outcome variable (employment) for beneficiary firm i at C C year t + s; y j, t + s and y j, t - 1 are the outcome variables for non-beneficiary firm j at years t + s and t − 1, respectively; S denotes the region of common support; and the weights wj are defined by wj = ∑iwij. We use a nearest-neighbour matching al- gorithm, for which standard errors are obtained by bootstrapping, as described in Becker and Ichino.50

49 Richard Blundell and Monica Costa Dias, “Alternative Approaches to Evaluation in Empirical Microeconomics” (2009) 44:3 Journal of Human Resources 565 - 640. 50 Sascha O. Becker and Andrea Ichino, “Estimation of Average Treatment Effects Based on Propensity Scores” (2002) 2:4 Stata Journal 358 - 77. the evaluation of job tax incentives: an analysis of a regional tax n 19

Displacement Effects In our analysis, we assumed that the potential outcome for firms located in one region did not depend on whether firms located in another region (or in the same region) received treatment or not. The identification of the treatment effect was based on the premise that subsidized firms did not influence the actions of non- subsidized or less-subsidized firms. Among the factors that could influence non-treated firms, given the presence of treated ones, were the competitive edge of treated firms owing to the decrease in the marginal cost of labour and the reallocation of spared funds for labour costs to marketing intensification. A negative effect may be the gain in market share for beneficiaries relative to non-beneficiaries. A positive effect of treatment on non- treated firms is the tendency for those firms to have increasing employment because of favourable market prospects and an improved business climate. Moreover, if there was different treatment at the regional (or geographical zone) level, firms located in less-subsidized zones may be inclined to move to more-subsidized zones. This effect may occur among different geographical areas. Such movement would imply an effect on a positive net inflow of firms because of the incentive to relocate to areas with more generous deduction schemes, as analyzed by Bennmarker, Mellander, and Öckert51 and by Bordignon et al.52 If these factors were not negligible, the estimate included both the effect of treatment on the treated firms and the effect of subsidies on other firms. Hence, the counterfactual employment estimate decreased/increased (since the employment of non-subsidized firms decreased/ increased), and estimates were biased upward/downward. We followed the approach of Kangasharju53 to address the first displacement effect. The displacement effects most likely occur within the same industry and/or geographical area. There are three potential displacement effects, generated by firms within the same industrial sector, within the same region, or within the same sector and region as the beneficiary firms. In building the industry-specific displacement variable, it was necessary to sum the industry-specific deduction amounts for each ith firm and then subtract from this aggregate the deduction that the same ith firm received that year. In the case of non-beneficiary firms, the deducted amount was 0. Thus, this variable showed for each firm the total deductions given to other firms in a specific industry. The same approach was followed to create the displacement for region-specific variables and for industry- and region-specific variables. The following formulas give the formal notation for the displacement variables as described:

51 Helge Bennmarker, Erik Mellander, and Björn Öckert, “Do Regional Payroll Tax Reductions Boost Employment?” (2009) 16 Labour Economics 480 - 89. 52 Bordignon et al., supra note 11. 53 Kangasharju, supra note 23. 20 n canadian tax journal / revue fiscale canadienne (2020) 68:1

N DIi,y = S i = 1( Di, y, k) - Di, y , i ∈ k, (7a)

N DRi,y = S i = 1( Di, y, r) - Di, y , i ∈ r, and (7b)

N DIRi,y = S i = 1( Di, y, k) - Di, y , i ∈k, r, (7c) where i represents firms,k indicates industry, r reflects region,y stands for year, and D is the amount of deductions. The estimation was implemented utilizing the DiD model described previously (equation 4) and including the displacement variables DI (for industry-level effect),DR (for regional-level effect), andDIR (for industry and regional effect). Finally, to detect firm relocation toward more-subsidized geographical zones, we analyzed the effect of the provision on net firm inflow at the “nomenclature of territorial units for statistics” (NUTS) 3 level (Italian provinces) by estimating the following equation over the provision’s duration period, 2005 - 2007:

Net_inflowp = a + b1Dedp + b2 A_Dedp + b3Zone × A_Dedp + e, (8) where Dedp is the total amount of deduction for the province p; A_Dedp is the average deduction calculated for beneficiary firms; and Zone × A_Dedp is an interaction term between the more-subsidized zone and the average deduction.

MATCHED SAMPLE Differences in characteristics between beneficiary and non-beneficiary firms before deductions could result in biased estimates of the causal effects of access to the deduction. This is because it is difficult to distinguish whether the performance of firms in those post-deduction years was attributable to the deduction itself or to the fact that firms with high performance tended to be beneficiaries. To determine the firm-specific characteristics that may affect the probability of being a tax-deduction-receiving firm, we referred to some prior studies of local job- creation incentive programs.54 The main variables used in these studies included tax status, age, age2, ROA, firm location (headquarters), size (in terms of persons employed), a sales class dummy, and an economic activity dummy. We also added the ratio of tangible assets to total assets (Tangibles) and tendency to export (Exp_tend). Having or not having corporate tax (IRES) liabilities determined, in part, the benefits to firms from participating in the employment tax deduction. Firms that had low or no corporate tax liabilities had little incentive to take the IRAP deduction, while firms with high corporate tax liabilities in the current year were more likely to try to decrease liabilities by taking the deduction. Since the IRAP deduction facilitates the participation of firms in less-developed regions, those firms may be

54 Dagney Faulk, “The Participation of Firms in Tax Incentive Programs” (2001) 31:1 Review of Regional Studies 39 - 50; and Faulk, supra note 12. the evaluation of job tax incentives: an analysis of a regional tax n 21 more likely to take the deduction for job creation, and thus to participate in the tax incentive provision. The sales class is a measure of firm size. A tax incentive for larger firms may yield better outcomes than provision of the same incentive to smaller firms. Moreover, firms in certain industries may be more likely to take the tax deduction, either because certain industries use labour-intensive technologies and therefore can more easily increase employment, or because they are more likely to have corporate tax liabilities. To evaluate different specifications, we used the balancing condition in order to ensure that each independent variable did not differ significantly as between treated and non-treated firms. Thus, only treated and non-treated firms with the same propensity score and the same distribution of their observable characteristics were matched. Table 4 shows the results from estimating the probit model evaluated for the years before the deduction was introduced (that is, in the year t − 1). It appears that more capital-intensive firms were less likely to be beneficiaries, while more profitable firms and firms with corporate tax liabilities were more likely to be beneficiaries. A range of specifications with different satured models and interactions of different explicative variables were estimated.55 The outcomes were not significantly different from those of the base model, and there was no substantial improvement of the goodness-of-fit statistics. The base model was chosen because of its simplicity. The result of the matching procedure with regard to the common support is illustrated in figure 2. It can be observed that the common support extended over all propensity score values. To verify the quality of matching, t-tests for equality of means in the treated and non-treated groups, both before and after matching, were performed. For good balancing, t-statistics should be non-significant after matching. Moreover, the standardized bias, as stated in Rosenbaum and Rubin,56 should be less than 5 percent after matching. As reported in table 5, all covariates were well balanced (with a percentage bias after matching of less than 5 percent). Thus, the matching procedures were effective in building a good control group. A subsample consisting of only matching units was also considered, reducing the sample size to around 347,000 firms. This set of firms was utilized to estimate the DiD model described in equation 5. The distribution of the control group firms by propensity score values, calculated in the t − 1 year, is presented in figure 3.

55 The models’ estimations are available on request. 56 Paul R. Rosenbaum and Donald B. Rubin, “Constructing a Control Group Using Multivariate Matched Sampling Methods That Incorporate the Propensity Score” (1985) 39:1 American Statistician 33 - 38 (https://doi.org/10.2307/2683903). 22 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 4 Probit Model To Estimate Propensity Score

Probability of being a beneficiary t( = 1)

Persons employed ...... 0.005 0.010 Age ...... −0.017 *** 0.000 Age 2 ...... 0.0001 *** 0.000 Tax status ...... 0.068 *** 0.008 ROA ...... 0.004 *** 0.000 Tangibles ...... 0.034 ** 0.014 Exp_tend ...... −0.080 *** 0.021 Productivity ...... −0.0004 *** 0.000 Size dummies ...... yes Area dummies ...... yes Industry dummies ...... yes LR chi2(22) ...... 8,292.4

Notes: Persons employed in thousands; productivity in thousands of euros. Standard error in italics. *** Statistically significant at the 0.01 level. ** Significant at the 0.5 level. * Significant at the 0.1 level.

TABLE 5 Balance Checking Statistics

Unmatched / Mean Reduction t-test Variable matched treated Control Bias (%) (%) bias t p > t

Persons employed . . . . U 31.912 22.728 3.4 7.64 0 M 31.912 29.565 0.9 74.4 1.37 0.171 Age ...... U 13.99 15.55 −13 −24.56 0 M 13.99 14.04 −0.4 96.9 −0.6 0.547 Age2 ...... U 332.97 393.52 −8.9 −16.39 0 M 332.97 333.81 −0.1 98.6 −0.18 0.854 Tax status . . . . U 0.83 0.8 8.5 16.07 0 M 0.83 0.83 −0.1 98.5 −0.19 0.846 ROA ...... U 7.55 6.66 9.2 17.29 0 M 7.55 7.53 0.2 97.6 0.31 0.756 Tangibles . . . . U 0.19 0.2 −5.3 −9.69 0 M 0.19 0.19 −0.1 98.0 −0.16 0.876 Exp_tend . . . . U 0.04 0.04 0.6 1.08 0.281 M 0.04 0.04 −0.6 −0.6 −0.8 0.423 Productivity . . . U 47.6 46.4 1.4 2.4 0.016 M 47.6 48.3 −0.9 35.2 −1.43 0.151 the evaluation of job tax incentives: an analysis of a regional tax n 23

FIGURE 2 After-Matching Estimated Probability of Being an IRAP Deduction Beneficiary (Propensity Score)—Distribution by Treated and Control Groups

5 Kdensity − pscore

0 0 0.1 0.2 0.3 0.4 Propensity score Treated Control

IRAP = regional tax on productive activities.

FIGURE 3 Distribution of the Control Group Firms by Propensity Score Values 3,500

3,000

2,500

2,000

No. of ﬁrms 1,500

1,000

500

0 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07 0.08 0.09 0.10 0.11 0.12 0.13 0.14 0.15 0.16 0.17 0.18 0.19 0.20 0.21 0.22 0.23 0.25

p score value 24 n canadian tax journal / revue fiscale canadienne (2020) 68:1

DIFFERENCE-IN-DIFFERENCE RESULTS Results To study whether the IRAP deduction has had any effects on employment in post- deduction years, we estimate the regression model in equation 5. The dependent variables are employment, sales, average salary, and productivity changes at the firm level, and the key estimate is the DiD estimator. Table 6 presents the effects of the IRAP deduction on post-deduction employment estimated by means of an ordinary least square (OLS) robust estimator. The results for OLS estimation of the base model are shown in column 1. The

DiD estimator inter (TCAi × Aftert + s) is positive and indicates that, on average, the IRAP deductions had a positive effect on employment in the years for which the deduction was granted. The coefficients are also highly significant when firm-level controls—firm sales and the profitability ratio—are added (column 2). If we want to check the parallelism assumption (as described above) in the framework of the DiD identification strategy, we have to add an individual-specific time 57 trend to the regressors in Xst, as shown in Angrist and Pischke. If the estimated effects of interest remain substantially unchanged and significant by the inclusion of this trend, we can accept the results obtained by the DiD procedure described previously. Column 3 in table 6 presents the estimated inter coefficients for theOLS base model when trend is included, and we can note that the inter coefficient (our DiD effects) registers a decrease but remains strongly significant; this confirms the effects found using our model. The DiD estimator for the model in column 3 suggests that the deduction has had a positive and significant impact on employment in beneficiary firms. These results are in line with the outcomes of, for instance, Huttunen et al.,58 although they present higher values and so a larger economic impact of the deduction on employment growth. To investigate the dynamic pattern of the post-deduction employment effects, in column 4 the interaction variable for the whole post-deduction period inter =

(TCAi × Aftert + s) with year-by-year interaction variables is replaced—that is, intera 0 = (TCAi × Aftert + 0 ), starting from the first deduction year and continuing for the next three years. All coefficients on these interactions are significant and present an increasing effect over time until the second year after the year of initial deduction. The third year presents a decrease relative to the second year. The differential outcome in terms of employment growth between treated and non-treated firms remains significant in all three periods after the last deduction year. Also, after 2008, when the financial crisis caused employment to begin to decrease, the outcomes of the non-beneficiaries do not fill the gap, but a decrease in the differential can be registered. This raises some doubt about the persistency of the deduction’s effects.

57 Angrist and Pischke, supra note 44. 58 Huttunen et al., supra note 6. the evaluation of job tax incentives: an analysis of a regional tax n 25 *** ** 0.406 0.742 (7) yes yes yes yes yes − 0.377 − 1.993 -ratio) OLS 296.70 508.6 0.121 t ( 346,807 − 173.742 Productivity − 6,420.11 *** * (6) yes yes yes yes yes 0.112 0.0002 0.000 0.188 2.146 0.099 -ratio) OLS 0.112 salary t ( − 0.0001 − 0.001 Average Average 346,807 *** *** (5) 0.681 1.080 2.540 yes yes yes yes yes -ratio) OLS Sales 0.147 t − 0.253 110.340 181.4 ( 346,807 − 30.373 − 607.25 *** *** *** *** *** *** (4) yes yes yes yes yes 0.145 0.001 0.001 0.001 0.001 0.001 1.989 0.007 0.113 0.026 0.047 0.062 0.051 -ratio) OLS 0.247 0.132 t ( 346,807 ** *** (3) yes yes yes yes yes 0.308 0.006 0.566 0.001 1.459 0.210 0.037 -ratio) OLS 0.112 t ( − 0.0002 346,807 gnificant at the 0.5 level. * Significant 0.1 Robust estimations. *** *** Employment no (2) yes yes yes yes 0.7 0.006 0.455 0.06 2.733 0.217 0.038 -ratio) OLS 0.097 t − ( − 0.0001 346,807 *** *** *** no no (1) yes yes yes 3.17 0.64 0.007 0.472 2.758 0.002 0.198 0.04 -ratio) OLS 0.111 t ( 346,807 2004-2010 and Productivity, Salary, Sales, Average Changes in Employment, Deduction on Post-Deduction . . . . . Effects of the IRAP 2 R . -statistics in italics. *** Statistically significant at the 0.01 level. ** Si T ...... Inter After_s Intera 0 TABLE 6 TABLE Treated Constant Firm controls Intera 1 Intera 2 Intera 3 Variables (changes) Variables No. of observations IRAP = regional tax on productive activities; OLS ordinary least square. Notes: Regional dummies Year dummies Year Industry dummies . Individual-specific trend . Adjusted 26 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Our data permit an indirect evaluation of the quality of the jobs created. The evaluation is carried out by estimating the impact of the deduction on average salary and labour productivity measured at the firm level, as previously done by Monte- duro et al.59 Average salary could also be interpreted as a proxy of the firm’s human capital, and competitiveness increases if the ratio of highly qualified workers rises. A higher number of qualified workers also augments the efficiency of the firm, thus stimulating its growth. Arrighetti and Lasagni60 found a positive relationship between the high level of human capital and the augmented probability of new hiring among Italian firms. We analyzed the impact of the deduction on average labour costs and labour productivity by treating those factors as dependent variables in equation 5. Columns 5 to 7 in table 6 show the results for these estimations. The analysis shows that the average effect of the deduction on the firms’ average salaries (column 6) was negative and non-significant—that is, there were no significant effects of treatment on average salaries. This result may be cautiously interpreted as an insufficient stimulus to hire more skilled employees. It may also suggest that the jobs created were of low quality (or at least the deduction did not help to enhance job quality). This result is consistent with the estimated effect of the deduction on productivity; in the latter case, the deduction had a strong negative impact (column 7). If there were no other elements (such as investments in terms of both tangible/intangible assets and human capital) to offset the increasing employment, in general the provision of the deduction entailed a decrease in productivity. Despite this result, it seems that the deduction has had a positive and significant impact on sales (column 5), meaning that the provision may enhance firm growth. We similarly investigated the differential effects of treatment among the 11 Italian macro-regions.61 For each macro-region, we included the interaction effect between regional dummy and the treatment. The estimates are presented in table 7. The parameters are all statistically significant and positive except for the northwest macro region (comprising Piedmont, Liguria, and Valle d’Aosta). On average, the coefficients were higher for north-central regions, indicating a stronger impact for these regions. Despite the greater effort made toward rebalancing the employment levels in southern regions (through larger deductions), it seems that the outcomes were limited.

59 Monteduro et al., supra note 21. 60 Alessandro Arrighetti and Andrea Lasagni, Assessing the Determinants of High-Growth Firms in Italy, Working Paper 2010 - 07 (Parma: University of Parma, Department of Economics, September 2012). 61 In this case, we utilized level 1 of the 1999 version of the Eurostat-NUTS classification (http:// ec.europa.eu/eurostat/web/nuts/history). the evaluation of job tax incentives: an analysis of a regional tax n 27

TABLE 7 Effects of the IRAP Deduction on Post-Deduction Employment at the Macro-Regional Level, 2004-2010

OLS OLS Variable (t-ratio) Variable (t-ratio)

After_s 0.237 1.1

North-Central South

North-west ...... −0.017 Abruzzi-Molise 0.027 *** −1.9 11.6 Lombardy ...... 0.036 *** Campania 0.022 *** 91.4 23.6 North-east ...... 0.042 *** South 0.021 *** 30.4 16.5 Emilia-Romagna ...... 0.041 *** Sicily 0.034 *** 92.9 27.6 Centre ...... 0.027 *** Sardinia 0.016 *** 43 Lazio ...... 0.052 *** 95.5 Firm controls ...... yes Year dummies ...... yes Individual-specific trend . . . yes Adjusted R2 ...... 0.141 No. of observations . . . . . 346,807

IRAP = regional tax on productive activities; OLS = ordinary least square. Notes: T-statistics in italics. *** Statistically significant at the 0.01 level. ** Significant at the 0.5 level. * Significant at the 0.1 level. Robust estimations.

Robustness Check We implemented a robustness check by calculating a DiD matching estimator in equation 6. In all estimates, we controlled for changes in the firm-specific characteristics of sales and ROA. The estimates were calculated for the three financial years after the last year for which the firm benefited from the deduction. The results, shown in table 8, indicate that the obtained DiD estimates were robust for almost all of the firms’ characteristics considered in our analysis. The ATT coefficients were not significant only for average salary. This suggests that there may have been weak (or null) effects of the deduction in terms of average salary (that is, in terms of the quality of the jobs created). Finally, the ATT estimates confirm a persistent effect of the deduction for some periods after the provision expired.

Displacement Effects The displacement effect for employment change was tested by adding each displacement variable in equation 7. If there was a displacement effect, the previously 28 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 8 Effects of the IRAP Deduction on Employment, Productivity, Average Salary, and Sales—ATT Approach

Standard Variables ATT error t

Employmentt + 1 ...... 0.006 0.001 6.653 *** Employmentt + 2 ...... 0.007 0.001 9.093 *** Employmentt + 3 ...... 0.007 0.001 7.158 ***

Productivityt + 1 ...... −1.789 0.626 −2.861 *** Productivityt + 2 ...... −1.442 0.621 −2.322 *** Productivityt + 3 ...... −1.463 0.625 −2.34 ***

Average salaryt − 1 ...... 0.107 0.184 0.584 Average salaryt − 2 ...... 0.082 0.193 0.424 Average salaryt − 3 ...... 0.231 0.207 1.112

Salest + 1 ...... 804 296 2.716 *** Salest + 2 ...... 874 327 2.671 *** Salest + 3 ...... 874 352 2.483 *** ATT = average effect of treatment on treated; IRAP = regional tax on productive activities. Notes: *** Statistically significant at the 0.01 level. ** Significant at the 0.5 level. * Significant at the 0.1 level. Standard errors are obtained by bootstrapping (100 iterations). found coefficient should be influenced by the impact on other firms, as studied by Kangasharju.62 The analysis was carried out considering the deduction amounts for region-level and industry-level data. Results give no indication of a displacement effect that may bias the estimate of deduction effects, even if the interaction effect between industries and regions was considered. The estimated results of deductions were in all cases positive, but none indicated a statistically significant effect. The results for firms’ net inflow estimated by equation 8 did not present significant effects of theIRAP deduction’s differential treatment between the north-central and southern zones. This indicates that the deduction amount had no effect on the creation of new firms and did not provide an incentive to relocate firms to zones with more generous deduction schemes. The results of our analysis of displacement effects encourage us to consider that there was little interference owing to such effects and the stable unit treatment value assumption is satisfied.

CONCLUSIONS This article has provided estimates of the employment impact of the Italian IRAP deduction granted for new additional jobs created in the period 2005 - 2007, by comparing employment (and other variables) of firms that exploited the deduction and firms that did not exploit the deduction. Other studies analyzing the effects of

62 Kangasharju, supra note 23. the evaluation of job tax incentives: an analysis of a regional tax n 29 economic policy measures have utilized, as an outcome variable, the target of the policy provisions itself; however, we have further broadened the study’s objectives to include the verification of other aspects, such as duration of the employment increase and effects on employment structure of the firm. Results from the models indicate that firms taking advantage of the IRAP tax incentive created relatively more employment opportunities; but, more relevant, they also maintained this new employment at least up to 2008. Moreover, the efficiency analysis revealed that these provisions performed well in terms of cost per job created. These results are noteworthy also because the analysis was conducted on a large sample of firms. Moreover, the analysis yielded results that are quantitatively similar to those of other studies relevant to this topic, as described above. Other important aspects that we tried to verify are related to the effects of the provision both on other important economic variables and at the regional level. The effects of the provision in terms of job quality seem to be negative, since average salaries did not show significant changes and productivity presented a negative effect for beneficiaries. Perhaps firms did not accurately calculate the optimal amount of new employment required to obtain the deductions, and thus restricted growth in efficiency and productivity, as suggested by Bernini and Pellegrini.63 Only the growth in volume of sales presented a positive and significant differential. Efforts to redirect new employment toward the southern regions do not seem to have been successful. The evidence derived from this kind of analysis may help in building forecasting models to foresee the effect of a fiscal provision and its interaction with the economic cycle. These models can illuminate the economic effects of tax policies on firms and the influence of such policies on firms’ competitiveness. This information should be provided to policy makers so that they may know the expected impact before designing incentive programs.

APPENDIX EFFICIENCY ESTIMATION Having produced estimates regarding the effectiveness of the IRAP deduction, we can determine the efficiency of the provision. For this purpose, we transformed the impact estimates obtained from the econometric analysis into more easily interpreted quantities. Following the approach utilized for other Italian subsides (as discussed, for example, in the ASVAPP report),64 we added cost information to the firm variables, thus obtaining a simple cost-effectiveness measure—the average cost per job created—calculated as follows:

63 Cristina Bernini and Guido Pellegrini, “How Are Growth and Productivity in Private Firms Affected by Public Subsidy? Evidence from a Regional Policy” (2011) 41:3Regional Science and Urban Economics 253 - 65. 64 ASVAPP, supra note 47. 30 n canadian tax journal / revue fiscale canadienne (2020) 68:1

To t al funds disbursed to beneficiary firms Cost per job created = ______ . Average employment impact × no. of beneficiaries

Analogously to employment, we present the impact on sales in the following form:

To t al funds disbursed to beneficiary firms Cost per extra euro of sales = ______ . Average impact on sales × no. of beneficiaries Some firms may exhibit a small number of jobs created, but they may also receive relatively fewer resources. For example, larger firms receiving larger grants tend to generate larger gains in employment per firm, but they also receive huge amounts of money, so the cost of job creation is also much higher. As shown in table A.1, the cost-effectiveness indicators (cost of a job) are not high. This may be interpreted as a sign of efficiency if these results are compared with those reported in other studies of similar provisions.65 The average costs are higher in the services sector and for larger enterprises. This is a reasonable result given the higher amount of deductions granted to larger enterprises. The cost per extra euro of sales is quite high. Thus, in this case, it is difficult to take this result as a sign of efficiency; the cost is also high relative to the effects of other provisions. Moreover, the cost dramatically increases for services. One possible objection is that a large fraction of the deduction amount is increasingly concentrated in southern Italy, which enjoys a higher deduction for each job created. The efficiency performance of firms associated with the IRAP deduction is marked by highs and lows. The cost per job created is not high with respect to other similar provisions that aim to encourage employment, at both national and regional levels.66 The cost per extra euro of sales otherwise indicates a poor efficiency performance. Finally, we must highlight that this analysis most likely overestimated the costs. We could not consider the positive feedback effects, including higher consumption and increased fiscal revenues driven by salary increases resulting from additional employment.

65 Ibid. 66 See, for example, ibid. the evaluation of job tax incentives: an analysis of a regional tax n 31

TABLE A.1 Average Impacts and Cost-Effectiveness of the IRAP Deduction on Employment and Sales, by Economic Activity and Firm Size

No. of supported firms Variable used in the analysis Costa

Employment ...... Total ...... 26,088 3,891 Industry ...... 11,637 3,730 Services ...... 14,451 6,304 Turnover class Less than € 2 million ...... 14,118 3,103 € 2 million to € 10 million ...... 8,954 10,842 Over € 10 million ...... 3,016 18,264 Sales ...... Total ...... 26,088 41 Industry ...... 11,637 14 Services ...... 14,451 166

IRAP = regional tax on productive activities. Note: Figures not reported in the case of negative coefficient estimates or results with no statistical significance at the level of 0.1. a Employment: cost per job created. Sales: cost per extra euro of sales. canadian tax journal / revue fiscale canadienne (2020) 68:1, 33 https://doi.org/10.32721/ctj.2020.68.1.pf.editor

Policy Forum: Editor’s Introduction—Taxes and Spending in Canada’s 43rd Parliament

The October 2019 Canadian federal election resulted in the return of the Liberal government, but now without a majority of seats in Parliament. Given this electoral outcome, what are the implications for tax and spending decisions? We have brought together two articles to address these fiscal questions in this Policy Forum. While the authors are now in academia, they all have experience advising governments in the past. That experience provides necessary insight into not just what ought to be done but also what can be achieved, given administrative and political constraints. The first article is from Sean Speer. Speer provides specific examples oftax policy changes that may find favour in this Parliament. He also delivers a more fundamental structural message about the tax reform process. Building on the previous Policy Forum on the topic,1 Speer argues that successful tax reform must engage normative questions that require political input and deliberation. This is in contrast to a “technocratic” model that attempts to isolate reform from democratic input and pressures. Speer believes that there are good prospects for cooperation on a middle-income tax cut and a substantial program and tax expenditure review. In the second article, Rob Gillezeau and Trevor Tombe discuss the prospects for expenditure decisions by the 43rd Parliament. They provide detailed and insightful analysis of the expenditure plans in the Liberal platform, as well as in the plans of the opposition parties, whose support will be needed to pass budgets and legislation. The analysis, however, goes beyond immediate policy initiatives by placing the discussion in the context of larger themes: long-run fiscal sustainability, and the economic appropriateness and interplay of federal-provincial spending. Together, these two articles show that there is a clear and implementable program on both taxes and expenditures that should be feasible, even with a minority government. Kevin Milligan Editor

1 See “Policy Forum” (2018) 66:2 Canadian Tax Journal 349 - 99.

33 canadian tax journal / revue fiscale canadienne (2020) 68:1, 3 5 - 4 7 https://doi.org/10.32721/ctj.2020.68.1.pf.speer

Policy Forum: Tax Reform in Canada’s 43rd Parliament—Politics, Policy, and Second-Best Choices

Sean Speer*

PRÉCIS Un Parlement minoritaire à Ottawa demandera du gouvernement et des partis d’opposition qu’ils trouvent des domaines de convergence politique. Un de ces domaines pourrait être la prise de mesures pour effectuer un examen complet du système fiscal fédéral, ce à quoi s’étaient engagés plusieurs partis politiques dans leur campagne électorale. Il est possible de procéder à un exercice d’examen qui améliorera en fin de compte l’efficacité et l’équité du code des impôts fédéral, mais un tel examen devra reconnaître qu’on ne peut pas séparer la politique fiscale de la politique. Cet article présente une analyse critique des appels à la création d’une commission royale ou à l’adoption du modèle big bang de réforme fiscale. Ces approches à la réforme fiscale supposent que la politique est un obstacle majeur à une réforme fiscale fondée sur des données probantes et que les impulsions politiques doivent être minimisées ou exclues du processus. Cette perspective ne tient pas compte des aspects normatifs de la politique fiscale et de la mesure dans laquelle les choix politiques sont façonnés par un mélange complexe d’intérêts, de préférences et de valeurs. L’auteur plaide plutôt pour un exercice de réforme qui s’enracine dans les institutions et les processus politiques. Il propose en particulier un modèle progressif mais systématique de réforme fiscale qui s’inspire de l’expérience des « examens stratégiques » des dépenses de programmes au fédéral, menée de 2007 à 2011. Dans ce modèle, le gouvernement procéderait à des examens thématiques des dépenses fiscales (axés, par exemple, sur l’accession à la propriété, la retraite et l’épargne, et les investissements dans les énergies propres) sur une base régulière et continue, afin de rationaliser progressivement le système fiscal fédéral en consolidant et en redéfinissant les dépenses fiscales actuelles. Les résultats peuvent être moins transformateurs à court terme que ceux qui pourraient être obtenus par d’autres approches, mais ils conduiront en fin de compte à une réforme plus durable à long terme.

* Of the Munk School of Global Affairs and Public Policy, University of Toronto (e-mail: [email protected]); previously an adviser to the Right Honourable Stephen Harper.

35 36 n canadian tax journal / revue fiscale canadienne (2020) 68:1

ABSTRACT A minority Parliament in Ottawa will require that the government and the opposition parties search for areas of policy convergence. One area where there is potential for cooperation is action on a comprehensive review of the federal tax system, which was an election commitment by multiple political parties. There is scope for a review exercise that ultimately can enhance the efficiency and equity of the federal tax code. But such a review will need to recognize that tax policy and politics cannot be divorced from one another. This article presents a critical analysis of calls for a royal commission or adoption of the “big-bang” model for tax reform. These approaches to tax reform assume that politics is a major barrier to evidence-based tax reform and that political impulses need to be minimized or excluded from the process. This perspective neglects the normative aspects of tax policy and the extent to which policy choices are shaped by a complex mix of interests, preferences, and values. Instead, the author argues for a reform exercise that is rooted in political institutions and processes. In particular, he proposes an incremental yet systematic model for tax reform that draws from the 2007- 2011 experience with “strategic reviews” of program spending at the federal level. This model would envision the government conducting thematic reviews of tax expenditures (focusing, for example, on home ownership, retirement and savings, and clean energy investments) on a regular, ongoing basis, in order to gradually rationalize the federal tax system by consolidating and redesigning current tax expenditures. The results may be less transformative in the short term than those potentially achievable by alternative approaches, but will ultimately lead to more durable reform over the long term. KEYWORDS: TAX REFORM n TAX POLICY n TAX EXPENDITURES n EFFICIENCY n EQUITY n POLITICAL ECONOMY

CONTENTS Introduction 36 The Case for Tax Reform 38 Is It Time for a Royal Commission? 39 Conditions for Successful Tax Policy Reform 41 The Strategic Review Model—An Alternative to a Royal Commission 44 Conclusion 47

INTRODUCTION As we approach the 2020 federal budget, there is plenty of speculation about how the Trudeau government will navigate the interplay between politics and policy that is inherent to budget making in a minority parliament. If “politics is the art of the possible,” as Otto von Bismarck famously observed, designing a budget for a minority context is often an exercise in second-best theory.1 It will invariably involve a series of political trade-offs.

1 R.G. Lipsey and Kelvin Lancaster, “The General Theory of Second Best” (1956) 24:1 Review of Economic Studies 11 - 32 (https://doi.org/10.2307/2296233). policy forum: tax reform in canada’s 43rd parliament n 37

In October 2019, Canadians elected a Parliament with a strong Liberal plurality but without sufficient votes to pass legislation or maintain the confidence of the House without support from other parties. Identifying policy and political con vergence will therefore be key to the government’s survival. The good news is that there are some areas of broad political convergence that can be the subject of cross- party support in the 43rd Parliament. Perhaps the most significant example is tax policy. The major political parties differed on various aspects of tax policy in the 2019 campaign, but there were also areas of considerable overlap. There was some combination of support for several policy changes, including lowering personal income taxes for low-income earners,2 increasing the generosity of the volunteer firefighter tax credit,3 cracking down on tax loopholes,4 and modernizing the tax treatment of non-domiciled digital service providers.5 The most interesting area of political convergence on tax policy, however, may be the Liberal and Conservative parties’ agreement on the need for a review of the federal tax code. There is certainly scope for such an exercise, as previous Canadian Tax Journal articles have observed.6 The growing number of tax expenditures has complicated the tax system and in turn made it less efficient and less progressive. A tax reform exercise that sought to achieve rationalization could therefore conceivably achieve both conservative and progressive ends. But, as this article argues, tax reform will not occur according to the “big-bang” model favoured by some politicians, business organizations, and policy experts. This approach, including the creation of a royal commission, fails to reckon with the extent to which tax policy is informed and shaped by normative factors that cannot be reconciled through technocratic processes or sweeping changes. Instead, tax reform will need to come in the form of an incremental yet systematic model. One might think of it as an ongoing exercise of second-best choices rooted in theory and practice.

2 Liberal Party of Canada, Forward: A Real Plan for the Middle Class (Ottawa: Liberal Party of Canada, 2019), at 7 (https://2019.liberal.ca/wp-content/uploads/sites/292/2019/09/Forward -A-real-plan-for-the-middle-class.pdf ); and Conservative Party of Canada, Andrew Scheer’s Plan for You To Get Ahead (Ottawa: Conservative Party of Canada, 2019), at 3 (https://cpc-platform .s3.ca-central- 1.amazonaws.com/CPC_Platform_8.5x11_FINAL_EN_OCT11_web.pdf ). 3 Andrew Scheer’s Plan for You To Get Ahead, supra note 2, at 8; and New Democratic Party of Canada, A New Deal for People: New Democrats’ Commitments to You (Ottawa: NDP, 2019), at 87 (https://action.ndp.ca/page/-/2019/Q2/2019 - 06 - 19_Commitments-Doc_EN.pdf ). 4 Forward: A Real Plan for the Middle Class, supra note 2, at 79 - 80; and A New Deal for People: New Democrats’ Commitments to You, supra note 3, at 44. 5 Forward: A Real Plan for the Middle Class, supra note 2, at 79; Andrew Scheer’s Plan for You To Get Ahead, supra note 2, at 100; and A New Deal for People: New Democrats’ Commitments to You, supra note 3. 6 See, for example, Fred O’Riordan, “Policy Forum: Why Canada Needs a Comprehensive Tax Review” (2018) 66:2 Canadian Tax Journal 351 - 62. 38 n canadian tax journal / revue fiscale canadienne (2020) 68:1

The first section of the discussion that follows will examine the case for tax reform. The second section will consider the limits of an arm’s-length tax review process, including the possible creation of a royal commission, owing in large part to the inherent politics of tax policy. The third section will describe the political economy conditions for successful tax policy reforms. The fourth and final section will set out the case for an incremental yet systematic approach to tax reform that can make steady and ongoing progress in the direction of rationalization.

THE CASE FOR TAX REFORM It is not surprising that the Liberal Party and the Conservative Party have both committed to a review of the federal tax system. The idea has been percolating in Ottawa for several years. It is the subject of growing support among stakeholders that include the Business Council of Canada7 and the Canadian Chamber of Com- merce,8 Senate committees,9 and other high-profile voices.10 Some have even argued for the establishment of a royal commission.11 What is the motivation for tax reform? The Liberal Party and the Conservative Party have different reasons behind their platform commitments. The Liberal Party’s proposal was framed primarily around enhancing progressivity. The Conservative Party’s case for such a review was mostly focused on improving economic competitiveness. Yet these rationales are not necessarily incompatible. Most stakeholders who have advocated for such a review seem to be motivated by the goals of tax simplification and broad-based tax reform (involving a broader base and flatter rates) that could conceivably improve both efficiency and equity.

7 Jesse Snyder, “Business Group Calls for Sweeping Tax Reforms Ahead of Federal Election as Competitiveness Worries Deepen,” National Post, April 25, 2019 (https://nationalpost.com/ news/politics/business-group-calls-for-sweeping-tax-reforms-ahead-of-federal-election-as -competitiveness-worries-deepen). 8 Canadian Chamber of Commerce, “Time To Cut Canada’s Losses on Obsolete Tax System, Says Canadian Chamber of Commerce,” News Release, October 4, 2019 (www.chamber.ca/ media/news-releases/Time_to_cut_Canada%27s_losses_on_obsolete_tax_system). 9 See, for example, Canada, Senate, Fair, Simple and Competitive Taxation: The Way Forward for Canada: Report of the Standing Senate Committee on National Finance (Ottawa: Senate Standing Committee on National Finance, December 2017) (https://sencanada.ca/content/sen/ committee/421/NFFN/Reports/NFFN_Tax_Planning_24th_Report_e.pdf). 10 For example, Alan Lanthier, “The $40 -Billion Reason Canada Needs Real Corporate Tax Reform,” Financial Post, July 16, 2019 (https://business.financialpost.com/opinion/the- 40 -billion-reason-canada-needs-real-corporate-tax-reform). 11 Gerry Macartney, “Canada Needs a New Royal Commission on Taxation,” London Free Press, February 22, 2019 (https://lfpress.com/opinion/columnists/macartney-canada-needs-a-new -royal-commission-on-taxation); Mike Holden, Restoring Canada’s Advantage: A Need for Tax Reform (Canadian Manufacturers & Exporters and BDO, June 2018) (https://cme-mec.ca/ wp-content/uploads/2018/11/Doc_QC_Restoring-Canadas-Advantage.pdf ); and Jim Warren, “It’s Time for a Royal Commission on Taxation,” Toronto Sun, November 11, 2017 (https:// torontosun.com/opinion/columnists/warren-its-time-for-a-royal-commission-on-taxation). policy forum: tax reform in canada’s 43rd parliament n 39

The case for such reforms is certainly justified. It has been nearly 30 years since the federal government undertook a serious reform of the credits, deductions, and other special provisions included in the tax code. The result is a buildup of tax expenditures that complicate the tax system, narrow the tax base, and harm both efficiency and progressivity. The cost to government is also significant. Tax expenditures in the federal tax system alone now represent as much as $117.9 billion in forgone revenues or more than half of total revenues from income taxes and the goods and services tax (GST).12 A 2014 study by former Statistics Canada chief statistician Munir Sheikh estimated that the size of government in Canada when accounting for tax expenditures increased from 44 percent to 54 percent of gross domestic product.13 Yet while we have seen regular reviews of program spending over the past 25 years, the federal tax system has not been subjected to the same level of rigour. This amounts to effectively excluding from regular and ongoing scrutiny a set of federal policies that in total represent as much as three-quarters of direct program spending.14 There is a therefore good case for the federal government to launch a review of the tax system with the goal of making it more efficient, fairer, and simpler.

IS IT TIME FOR A ROYAL COMMISSION? The question of course is, how should such a review be conducted? The Policy Forum in a 2018 issue of this journal grappled with this question.15 The “how,” as Jennifer Robson put it in one of the issue’s articles, is as important as the “what” because the format and process will invariably shape the eventual policy outcomes.16 The prevailing view among contributors to that Policy Forum was that, on balance, comprehensive reform was preferable to incremental changes and an

12 Canada, Department of Finance, Report on Federal Tax Expenditures—Concepts, Estimates and Evaluation 2017 (Ottawa: Department of Finance, 2017) (www.canada.ca/en/department- finance/services/publications/federal-tax-expenditures/2017.html). There are limits to summing up the cumulative costs of tax expenditures because of the interaction of such measures. Changes to the basic personal amount, for instance, would affect revenue costs of other tax credits. Still, the Department of Finance’s estimate of $117.9 billion is a good back-of-the- envelope indication of the magnitude of the federal government’s mix of tax expenditures. 13 Munir A. Sheikh, Estimating the True Size of Government: Adjusting for Tax Expenditures (Ottawa: Macdonald-Laurier Institute, February 2014) (www.macdonaldlaurier.ca/files/pdf/ MLISheikhPaper02 - 14 -final.pdf ). 14 Direct program spending (which excludes transfers to persons and other levels of government) is estimated to be roughly $152 billion in 2019 - 20: Canada, Department of Finance, 2019 Budget, Budget Plan, March 19, 2019, at 289, table A2.6. 15 “Policy Forum” (2018) 66:2 Canadian Tax Journal 349 - 99. 16 Jennifer Robson, “Policy Forum: Building a Tax Review Body That Is Fit for Purpose— Reconciling the Tradeoffs Between Independence and Impact” (2018) 66:2Canadian Tax Journal 375 - 86, at 377. 40 n canadian tax journal / revue fiscale canadienne (2020) 68:1 arm’s-length process was preferable to conventional policy making.17 Joseph Heath’s article, which proposed a permanent administrative agency that would have del- egated responsibility for setting tax policy similar to the Bank of Canada’s role in monetary policy, was the most decidedly in favour of such a technocratic model.18 As he wrote, “an ITA [independent tax authority] represents a response to a genuine problem, which is the exploitation by politicians of public ignorance and irrational- ity with respect to taxes.”19 The underlying assumption for these different models (including a royal commission) is that there is a need to “depoliticize” the review process in particular and tax policy more generally.20 The models vary by degree on how to achieve this goal. The common view, though, is that a technocratic process would insulate federal tax policy from the vicissitudes of politics. This perspective fails, in my view, to properly account for the normative dimension of tax policy. The unit of taxation, the level of progressivity, the trade-off between efficiency and equity, and even definitions of income are informed and shaped by normative forces. Delegating these choices to economists or tax policy experts is asking them to act as moral philosophers.21 Of course, we can attempt to bring empirical analysis to bear in trying to address these questions. Analyses of the costs of taxation or the marginal efficiency costs of different forms of taxation,22 or of behavioural responses to changes in marginal tax rates,23 are useful inputs into the policy process. But it is misguided to think that data and evidence are all we need to craft an optimal tax policy framework. Most people, including economists, ultimately rely on a complex set of preferences to reconcile the inherent tensions in public policy. It is no surprise, therefore, that research finds that few of us actually hold strict utilitarian views on tax policy.24

17 The exception was Shirley Tillotson, whose contribution was a historical perspective on past tax reform efforts. She argued in favour of “incremental change” because of the inevitable role of politics. See Tillotson, “Policy Forum: Then and Now—A Historical Perspective on the Politics of Comprehensive Tax Reform” (2018) 66:2 Canadian Tax Journal 363 - 74, at 373 - 74. 18 Joseph Heath, “Policy Forum: From Independent Tax Commission to Independent Tax Authority” (2018) 66:2 Canadian Tax Journal 387 - 99. 19 Ibid., at 389. 20 Ibid., at 387. 21 Benjamin B. Lockwood and Matthew Weinzierl, “Positive and Normative Judgments Implicit in U.S. Tax Policy, and the Costs of Unequal Growth and Recessions” ( January 2016) 77 Journal of Monetary Economics 30 - 47. 22 Jason Clemens, Niels Veldhuis, and Milagros Palacios, “Tax Efficiency: Not All Taxes Are Created Equal” [2007] no. 4 Studies in Economic Prosperity (www.fraserinstitute.org/studies/ tax-efficiency-not-all-taxes-are-created-equal). 23 Canada, Department of Finance, Tax Expenditures and Evaluations 2010 (Ottawa: Department of Finance, 2010), at 45 - 65. 24 Matthew Weinzierl, “The Promise of Positive Optimal Taxation: Normative Diversity and a Role for Equal Sacrifice” (2014) 118Journal of Public Economics 128 - 42 (http://dx.doi.org/ 10.1016/j.jpubeco.2014.06.012). policy forum: tax reform in canada’s 43rd parliament n 41

If tax policy is messy and complicated, this is in large part because our competing normative perspectives on the underlying questions are messy and complicated. Decisions on tax policy are, in my view, less about exploitation by politicians of public ignorance25 and more about the work of politics to try to reconcile our differences. The outcome may be suboptimal, but optimality is a mostly conceptual question in a world of competing interests, preferences, and values.26 Reconciling these tensions is an inherently political project. It is even more so given that the government’s taxing power is a fundamental part of the social contract between individuals and the state.27 We grant the state a taxation capacity to ensure that the distribution of public benefits and public burdens is decided by collective political deliberation rather than by individual actions and choices. Gov- ernment is then responsible for the protection of property rights, production of public goods, and redistributive goals on our behalf. It is therefore wrong to think of taxation as merely a technical matter similar to monetary policy. It is more accurate to see it as foundational to our relationship with the government and how the state interacts with individuals and the broader society. Outsourcing responsibility for tax policy’s design, development, and implementation, as Heath and others propose, neglects this fundamental point. The key takeaway then, in my view, is that efforts to divorce tax policy from politics are both conceptually mistaken and ultimately bound to fail. Politics is the rightful mechanism for tax policy questions.

CONDITIONS FOR SUCCESSFUL TAX POLICY REFORM This, of course, does not mean that the Liberal Party and the Conservative Party should abandon their commitments to carry out a review of the federal tax system. It just means that the process needs to lean into politics rather than try to exclude it. One way to judge how to best account for the role of politics is to think about conditions for successful tax policy reform. While this may seem counterintuitive, the best approach is to consider the characteristics of failed policy changes. There are, in my experience, three factors associated with unsuccessful tax reforms that can inform how to design a more effective process. It is worth outlining them here before developing a better model for the Trudeau government to deliver on its platform pledge.

25 As argued by Heath, supra note 18. 26 Sean Speer, “We Need To Restore Our Diminished Politics,” Policy Options Politique, September 18, 2019 (https://policyoptions.irpp.org/magazines/september- 2019/we-need-to -restore-our-diminished-politics). 27 Allison Christians, Sovereignty, Taxation, and Social Contract, University of Wisconsin Law School Legal Studies Research Paper no. 1063 (Madison, WI: University of Wisconsin Law School, August 2008) (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1259975). 42 n canadian tax journal / revue fiscale canadienne (2020) 68:1

The first factor is that complexity is a vice. Not only is it impossible for taxpayers to understand a complex set of changes; it is also challenging for policy makers to communicate them, and in turn becomes much easier for critics to set the prevailing narrative. Complexity also often leads to longer implementation timelines, which produce more political exposure.28 The second factor is that a government cannot have too many political fronts open at once. Otherwise the government risks creating the perception that it is embattled and increases the probability for a policy reversal. Reform gradualism, by contrast, can enable policy makers to be intentional about targeting different policy areas and taxpayer groups at different times.29 The third factor is that reform cannot be distributionally skewed. It is notable, for instance, that while the totality of the Harper government’s tax policies enhanced the tax system’s progressivity, the government was still criticized for its policy changes that benefited higher-earning households.30 That experience is a reminder that the current political environment will not permit a set of tax changes that are not carefully calibrated to achieve distributional balance or even enhanced progressivity. Such calibration can be more difficult when a government is attempting to manage several reforms involving various tax expenditures and even different forms of taxation.31 The recent US tax reform package in 2017 may present a counter example to this premise, but that episode might best be explained as a product of the United States’ unique political institutions and its dire need to reform the tax treatment of corporations. Proponents of “big bang” tax reform tend to argue that it is a better model than incremental change because it can more effectively deal with interactions among parts of the tax system—think, for instance, of the integration between personal and corporate income taxes—and provides policy makers with more tools to trade off efficiency and distributional considerations. These arguments are not without basis. In an idealized world, the “big bang” model would be the most efficient means of producing a better tax system. But democracy and pluralism are not necessarily prone to efficiency, especially in a world of competing preferences and competing views about the public interest. Those arguing in favour of the “big bang” model or of outsourcing reform decisions to non-political actors do not tend to satisfactorily engage the inherent role of politics in reconciling these differences in tax policy. This is a huge blind spot.

28 Bert Brys, Making Fundamental Tax Reform Happen, OECD Tax Working Papers no. 3 (Paris: OECD, 2011) (https://doi.org/10.1787/22235558), at 20. 29 Paola Profeta and Simona Scabrosetti, “The Political Economy of Taxation in Europe” (2017) 220:1 Hacienda Pública Española/Review of Public Economics 139 - 72 (www.ief.es/docs/destacados/ publicaciones/revistas/hpe/220_Art5.pdf ). 30 Trevor Shaw, Revenue and Distributional Analysis of Federal Tax Changes: 2005 - 2013 (Ottawa: Office of the Parliamentary Budget Officer, May 27, 2014) (www.pbo-dpb.gc.ca/web/default/ files/files/files/Fiscal_Impact_and_Incidence_EN.pdf ). 31 See Brys, supra note 28. policy forum: tax reform in canada’s 43rd parliament n 43

Recent debates about income splitting for two-earner families, or higher rates for top income earners, or carbon taxation, are not evidence of politics run amok. They are examples of politics working through nuanced questions involving a combination of normative and empirical considerations. Experts, organizations, and scholars in favour of a royal commission (or some variation thereof ) also do not satisfactorily engage the political economy challenges associated with instituting sweeping, comprehensive reforms or outsourcing the process to non-political actors. This is another blind spot and is especially problematic in a populist moment when western societies are expressing skepticism about the wisdom of experts.32 The cultural, political, social, and technological environment has fundamentally changed since the Carter commission.33 It stands to reason that we similarly need to adjust how we think about the right model for reviewing and reforming the federal tax system. Managing the risks of complexity, political exposure, and distributional effects is best achieved by an incremental yet systematic model developed through conventional policy making. A focused, targeted approach to tax reform enables policy makers to take on a discrete piece of the tax system and to refine and adjust its design in a relatively short time frame involving a clear and identifiable group of taxfilers. This model allows policy makers to navigate the normative waters of tax policy with fewer challenges than they face when aiming to take on the whole system at once. It will be less ambitious than some stakeholders would prefer and may require second-best choices. But if well-structured and properly executed, it can achieve steady and ongoing progress in the direction of rationalization. The goal should be to replicate the Trudeau government’s consolidation of caregiving tax expenditures in the 2017 budget34 across other parts of the tax system. The new Canada caregiver credit consolidated three separate tax expenditures related to caregiving, streamlined the eligibility rules, enhanced the generosity, and ultimately simplified the tax system. These changes were broadly supported by stakeholders as well as tax and social policy experts.35 The 2017 measures are a good example of politics and policy reinforcing one another. The government was able to advance a political priority related to care giving at minimal incremental cost because the three existing tax expenditures were

32 Tom Nichols, “How America Lost Faith in Expertise and Why That’s a Giant Problem,” Foreign Affairs, March/April 2017 (www.foreignaffairs.com/articles/united-states/2017 - 02 - 13/ how-america-lost-faith-expertise). 33 The Royal Commission on Taxation, which issued its six-volume report in 1966 - 67. 34 Canada, Department of Finance, 2017 Budget, Budget Plan, March 22, 2017, at 204 - 5. 35 See, for example, Sherri Torjman, Michael Mendelson, and Ken Battle, The 2017 Farewell Budget (Ottawa: Caledon Institute of Social Policy, March 2017) (https://maytree.com/ wp-content/uploads/1111ENG.pdf ); and Canadian Cancer Society, “Federal Budget Investment in Home and Palliative Care a Win for Cancer Patients,” Press Release, March 22, 2017 (www.cancer.ca/en/about-us/for-media/media-releases/national/2017/federal-budget -announcement/?region=on). 44 n canadian tax journal / revue fiscale canadienne (2020) 68:1 already costing roughly $185 million per year.36 And in turn we got a simpler, more progressive, and better-functioning tax system. The government should carry out similar thematic reforms across the federal tax system. It can tackle a specific set of policy themes each year and incrementally yet systematically make progress in the direction of rationalization through a combination of consolidation and redesign.

THE STRATEGIC REVIEW MODEL—AN ALTERNATIVE TO A ROYAL COMMISSION What model could the government draw from? The Harper government’s experiment with regularized, annual reviews of program spending may provide a useful model. The “strategic review” process ran from 2007 to 2011 as a bottom-up exercise to scrutinize program spending across federal departments.37 The goal was not primarily focused on fiscal savings but rather on controlling the growth of new spending. Strategic reviews were supposed to identify low-priority spending that could be reallocated to new, higher priorities. Roughly 25 percent of federal program spending was reviewed annually over a four-year cycle. Programs and services were subjected to various tests—including core federal role, efficiency, and priorities—and 5 percent of departmental spending was to be reallocated from low-performing, low-priority activities to higher ones. Ministers identified fiscal savings in their respective portfolios and were able to put forward proposals suggesting where these savings could be “reinvested” in their departments. Strategic reviews contributed to some useful reforms and helped to control the growth of new program spending. The results were reflected in the federal budgets from 2008 to 2011.38 In total, $2.8 billion in annual savings was realized and re- cycled to new and different priorities.39 There is scope to extend the strategic review model to the tax system. It would not be precisely the same for various reasons, including (but not limited to) the concentration of tax expenditures in the Department of Finance. But the government could fulfill its platform commitment by establishing a regularized review process that evaluates and reforms different components of the tax system on an annual basis.

36 The caregiver credit was $100 million, the family caregiver tax credit was $75 million, and the infirm dependant tax credit was $10 million. Canada, Department of Finance, Report on Federal Tax Expenditures—Concepts, Estimates and Evaluations 2016 (Ottawa: Department of Finance, 2016), at 34. 37 Treasury Board of Canada Secretariat, “Strategic Reviews” (www.tbs-sct.gc.ca/sr-es/index-eng .asp). 38 Kevin McCarthy and Sean Speer, “Supporting Ontario’s Fiscal Strategy,” Ontario 360, November 26, 2019 (https://on360.ca/policy-papers/supporting-ontarios-fiscal-strategy). 39 See “Strategic Reviews,” supra note 37. policy forum: tax reform in canada’s 43rd parliament n 45

Rather than targeting a share of spending, a strategic review process for the tax system could operate on a thematic basis similar to the consolidation of caregiving- related tax expenditures. This thematic model could be expanded to include home ownership, post-secondary education, employment, medical expenses, savings and retirement, and aging, as well as fossil fuels, clean energy investments, research and development, capital expenses, and small businesses. Consider home ownership, for instance. Currently the federal tax code contains at least six housing-related tax expenditures totalling over $7 billion per year in forgone revenues.40 Accepting that the government intends to continue supporting housing and home ownership through the tax system, one could envision a simpler, more efficient, and fairer approach than the current mix and design of tax expenditures. One of the benefits of the consolidation approach is that the Department of Fi- nance already organizes its tax expenditures along thematic lines in its annual report on federal tax expenditures. A multi-year review process could be organized on the basis of the report’s themes or a subset of them. Another benefit is that the consolidation approach aligns with the three political economy conditions for successful reforms. It is relatively simple, since it is limited to a single policy theme; and because it targets an identifiable set of taxpayers, it helps with communications and designing a distributionally neutral package. It also prevents a political lag or policy uncertainty between the elimination of any tax expenditures and the related announcement of new policies. How would this approach work in practice? Each year the government could tackle some number of thematic groups with the goal of simplification and greater progressivity in the personal income tax system, and simplification and efficiency in the corporate income tax system. The exercise could target revenue neutrality, aim for net revenue gains as part of an overall fiscal strategy, or even incur net costs if the reforms were part of a broader policy strategy, such as the caregiving example. The reviews could be conducted each summer, and the results could be effectuated in the subsequent budget. The review process would be managed by the Department of Finance, but it would necessarily involve input and perspective from officials in other departments as well as external experts. The involvement of departmental officials would be -im portant to understanding the interaction of tax-based policies with other, related federal programs and the relative utility of those policies. Think, for instance, of the role of tax expenditures related to home ownership and the Canada Mortgage and

40 These include the first-time home buyers’ tax credit, the non-taxation of capital gains on principal residences, the home buyer’s plan, the GST exemption for certain residential rent, the GST rebate for new housing, and a rebate for new residential property. Canada, Department of Finance, Report on Federal Tax Expenditures—Concepts, Estimates and Evaluations 2019 (Ottawa: Department of Finance, 2019). The list could also include the non-taxation of imputed rent, which is not classified as a tax expenditure by the department but is considered by some economists as a deviation from a pure Haig-Simons tax base. 46 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Housing Corporation’s mortgage insurance. It would also be useful to draw on analyses by external experts to determine the effectiveness of different tax expenditures. Think, for instance, of academic research on the children’s fitness tax credit41 or the labour-sponsored venture capital tax credit.42 In order to inform and guide the thematic reviews, the government could make use of a standardized checklist to evaluate tax expenditures. This would help to inform decisions about possible reforms similar to the tests applied to program spending in the strategic review process. The US Government Accountability Office (GAO) has produced a useful checklist for evaluating tax expenditures.43 The framework sets out criteria and analytical questions for policy makers to consider in weighing competing priorities and evaluating the merits or effectiveness of a particular tax expenditure. The checklist consists of five considerations, each involving a series of tests or metrics:

1. What is the tax expenditure’s purpose, and is it being achieved? 2. Even if its purpose is being achieved, is the tax expenditure good policy? 3. How does the tax expenditure relate to other federal programs? 4. What are the consequences of the tax expenditure for the federal budget? 5. How should evaluation of the tax expenditure be managed?

There is room to improve the GAO’s framework. First, item 2 should be changed to add “Is the tax expenditure the best way to achieve this goal?” There may be worthy goals that are not best supported or promoted through the tax system. Second, item 4 should be changed to consider the interaction and effect of federal changes on provincial responsibilities such as health care and education. The government could use the checklist for internal purposes only, or it could release the results as part of its annual budget, where it would ostensibly enact any resulting policy changes. Making the completed checklists public could have political economy benefits by clearly and comprehensively outlining the justifications for reforms in a standardized form. And it would require the inevitable critics to contend with the substantive results of the review rather than merely criticize the government’s motives.

41 John Spence, Nicholas Holt, Julia Dutove, and Valerie Carson, “Uptake and Effectiveness of the Children’s Fitness Tax Credit in Canada: The Rich Get Richer” (2010) 10 BMC Public Health (https://doi.org/10.1186/1471 - 2458 - 10 - 356). 42 Douglas Cumming, Jeffrey MacIntosh, and Keith Godin, “Crowding Out Private Equity: Canadian Evidence,” Fraser Alert, September 2007 (https://pdfs.semanticscholar.org/bab0/ 190103eae482746f6c359872024cdf4f247b.pdf ). 43 United States, Government Accountability Office,Tax Expenditures: Background and Evaluation Criteria and Questions, document no. GAO- 13 - 167SP (Washington, DC: GAO, November 2012) (www.gao.gov/products/GAO- 13 - 167SP). policy forum: tax reform in canada’s 43rd parliament n 47

The use of such a checklist would not remove the role for preferences and values, but it would root our normative debates in a common set of evidence and facts. This would mitigate one of the biggest challenges arising from the small-business tax controversy in 2017. Normative differences in that case were exacerbated by unclear and competing understandings of the facts.44 Moving through the tax system on an incremental and thematic basis may not produce fundamental change, especially in the short term. But if the government were able to replicate the caregiving-related reforms across the tax system, we would, over time, incrementally get a simpler, more efficient, and fairer tax code. That strikes me as a highly satisfactory second-best outcome.

CONCLUSION As the federal government determines how to deliver on its commitment to review the federal tax system, it should resist calls for a royal commission or other approaches that would attempt to divorce tax policy from politics. Instead it should pursue a model that leans into politics and political economy insights about the conditions for successful tax reform. An incremental yet systematic model based on the Harper government’s strategic review process can help the government to make progress on rationalizing the federal tax system. It will be less ambitious than some stakeholders would prefer and may require second-best choices. But this is unavoidable in an environment with a multiplicity of normative perspectives on the goals and design of tax policy. The reform process will necessarily require moderation and compromise. And that requires politics. Still, if such a process for policy review and reform is well structured and properly executed, it can achieve steady and ongoing progress in the direction of rationalization of the federal tax system. This ought to be a basis for policy and political convergence in the context of a minority Parliament and into the future.

44 Sean Speer, “Who’s Right in the Small Business Tax Controversy?” Macdonald-Laurier Institute Inside Policy, September 15, 2017 (www.macdonaldlaurier.ca/whos-right-small-business-tax -controversy-sean-speer-inside-policy). canadian tax journal / revue fiscale canadienne (2020) 68:1, 4 9 - 6 7 https://doi.org/10.32721/ctj.2020.68.1.pf.gillezeau

Policy Forum: Expenditures, Efficiency, and Distribution—Advice for Canada’s 43rd Parliament

Rob Gillezeau and Trevor Tombe*

PRÉCIS Cet article examine les engagements de dépenses, individuellement et globalement, qui ont été pris par le Parti libéral du Canada lors de la 43e élection fédérale canadienne en octobre 2019. Les auteurs indiquent quelles politiques proposées sont relativement efficaces dans leur conception ex ante, quelles politiques pourraient être modifiées pour améliorer les objectifs d’efficacité ou de répartition, et quelles politiques ont des bases politiques limitées. En général, ils soutiennent que le gouvernement devrait adopter une approche ciblée, en choisissant bien les mesures et en limitant le nombre de nouvelles initiatives simultanées. Ils concluent en indiquant quels domaines pourraient faire l’objet d’une collaboration avec les trois autres grands partis du 43e Parlement, en particulier les possibilités d’améliorer les régimes de transferts aux provinces.

ABSTRACT This article examines the expenditure commitments, individually and in aggregate, from the Liberal Party of Canada in the 43rd Canadian federal election in October 2019. The authors articulate which proposed policies are relatively efficient in their design ex ante, which could be adjusted to improve efficiency or distributional goals, and which have limited policy grounding. In general, they argue that government should take a focused approach to expenditures, both with respect to appropriately targeting measures and in limiting the number of simultaneous new initiatives. They conclude by indicating areas of potential cooperation with the other three major parties in the 43rd Parliament, with a particular emphasis on possibilities to improve provincial transfer regimes. KEYWORDS: EXPENDITURES n FISCAL PLANNING n TRANSFERS n REVIEWS

* Rob Gillezeau is of the Department of Economics, University of Victoria (e-mail: [email protected]). Trevor Tombe is of the Department of Economics and the School of Public Policy, University of Calgary (e-mail: [email protected]).

49 50 n canadian tax journal / revue fiscale canadienne (2020) 68:1

CONTENTS Introduction 50 A Critical Perspective on LPC Policy Commitments 52 Aggregate Fiscal Track 52 Individual Transfers 55 Health Care 57 The Environment and Climate Change 58 Child Care 60 Housing 60 Other Expenditure Measures 61 Minority Party Expenditure Commitments 62 New Democratic Party 62 Bloc Québécois 63 Conservative Party of Canada 64 Recommendations for the New Parliament 64 Expenditures and Individual Transfers 65 Provincial Transfers 65 Efficient Public Spending 66

INTRODUCTION The 43rd federal general election in October 2019 left Canada with a fractured minority Parliament, in which the governing party—the Liberal Party of Canada (LPC)—was returned with the smallest share of the popular vote in Canadian history.1 Despite this, Prime Minister Justin Trudeau has indicated that he will govern without a formal or informal arrangement with any of the opposition parties;2 essentially, the government will operate in a manner similar to its majority predecessor, given the likelihood that it can find a supportive partner for most potential policies.3 And while governing involves choices that go beyond platform commitments—which will be unavoidable as unexpected events unfold or administrative and implementation challenges appear—exploring those commitments is valuable.

1 The 43rd Parliament is unique in its divisions with respect to the popular vote. Prior to the 33.07 percent received by the LPC in the 2019 election, the lowest share of the popular vote for the governing party was 35.9 percent for Joe Clark’s Progressive Conservatives in 1979. The first- and second-place finishers in 2019, in total, also received a historically small share of the vote. See Parliament of Canada, “Elections and Ridings” (https://lop.parl.ca/sites/ ParlInfo/default/en_CA/ElectionsRidings). 2 Kathleen Harris, “Trudeau Rules Out Coalition, Promises Gender Equity in New Cabinet,” CBC News, October 23, 2019 (www.cbc.ca/news/politics/trudeau-liberal-minority-government -2019-1.5331926). 3 With each of the Conservative Party of Canada (CPC), the New Democratic Party (NDP), and the Bloc Québécois (BQ) holding sufficient seats to independently ensure the survival of the government, there is a broad range of policy spaces in which they could feasibly operate while maintaining support. policy forum: expenditures, efficiency, and distribution n 51

To that end, we consider the policy agenda that the LPC offered in the 2019 election and offer suggestions as to how the values articulated by the governing party, and supported by Canadian voters across the political spectrum, may be most effectively and efficiently realized. This is a particularly useful task because electoral platforms, even with their increasing technical complexity, largely remain signals of values rather than providing specific policy prescriptions.4 We begin with an overview of the spending path proposed by the new government and provide important historical context. We then consider major spending proposals across a range of areas, relating them to the broader economic literature and the historical context, and suggest how they may be improved. Given the size and scope of individual transfer programs, we start with the proposals in this area laid out during the campaign. Fully one-third of promised spending increases are found in an enlarged old age security (OAS) benefit and Canada child benefitCCB ( )— specifically, a 10 percent increase to OAS for individuals over the age of 75 and a 15 percent increase to the CCB for parents of newborns. We argue that while most of the proposed transfers are reasonable, addressing poverty for those over 75 through OAS is not ideal. Rather, much more could be done through targeted measures, such as a substantially expanded guaranteed income supplement (GIS), for the same aggregate cost. We then move on to exploring a number of direct program expenditure proposals, including health care, the environment and climate change, housing, child care, and other measures. While there are many important details yet to be determined, we highlight several concerns and principles, including the desirability of focusing resources on a small number of programs, the need for piloting otherwise untested policy measures, and—an overarching consideration relevant for many of these programs—appropriate federal-provincial cooperation given the jurisdictional-fiscal divide. Regarding the latter, we argue that it is reasonable for the federal government to be involved if there are potential spillovers from an area of public spending, if there are economies of scale that cannot be fully realized at the provincial level, if harmonization enhances national-level efficiency, or if an area is already one of joint federal-provincial jurisdiction in practice.5 Finally, we extend this discussion to areas of viable compromise with potential minority partners, spanning a range of fiscal options, and conclude with a set of selected recommendations for the new government. We argue that the government should be highly focused in its decisions on new expenditures or revenue reductions,

4 This is not to understate the scale of the transformation to platforms with more policy content; most major parties now include viable fiscal plans in their campaign materials. Further, the introduction of high-quality costing services through the Office of the Parliamentary Budget Officer (PBO) should further the shift from values articulation to concrete, well-defined policy proposals. 5 While not necessarily ideal, federal interventions in growth-enhancing areas that may help to relieve the federal-provincial fiscal imbalance are also reasonable in our opinion. 52 n canadian tax journal / revue fiscale canadienne (2020) 68:1 choosing a focus on “affordability,” service provision, or strengthening the fiscal position of the federation. We argue that it is particularly important for the new government to begin to address the large and growing fiscal challenges of provincial governments.6 The federal government can help to mitigate some of this pressure by increasing the growth in health-related transfers, for example. Another option— which may be adopted in lieu of or as a complement to expanded health transfers— is direct federal spending on various health-care measures; in particular, multiple parties and the federal government have clearly signalled their commitment to pharmacare and, potentially, government-funded national dental care. We conclude by noting the appropriateness of a program review to provide additional fiscal space to meet priorities and offer some recommendations as to its approach.

A CRITICAL PERSPECTIVE ON LPC POLICY COMMITMENTS The 2019 election campaign marked a shift in values articulated by Justin Trudeau’s Liberal Party. In the 2015 campaign, Mr. Trudeau set out an agenda grounded in an expanded state with a substantial increase in means-tested transfers to individuals.7 The 2019 campaign saw a shift from expenditure growth to tax reductions as the core policy offer. Even with this shift, there are substantial expenditure commitments in the LPC’s platform that, in aggregate, are larger than the proposed tax reductions. Such proposals should be evaluated against best practices and empirical evidence.

Aggregate Fiscal Track The LPC’s commitments include moderate revenue and expenditure changes that we detail below. With respect to revenues, the cost of the LPC proposal to increase the basic personal amount totals nearly $5.7 billion per year in forgone revenue by 2023 - 24. This is partially offset by proposed new revenues that include a 10 percent luxury goods tax, a national tax on vacant properties, a proposed “crackdown on corporate tax loopholes,’’ a levy on certain multinational technology companies, and other

6 The PBO has repeatedly noted that the long-run challenges facing provinces are substantial. An aging population in particular will strain health-care budgets for decades. See, for example, Office of the Parliamentary Budget Officer,Fiscal Sustainability Report 2018 (Ottawa: PBO, September 2018). 7 Principal among these measures was the introduction of the CCB. For a thorough review of the transformation of child benefits and its impacts, see Adriene Harding, The Effect of Government Transfer Programs on Low-Income Rates: A Gender-Based Analysis, 1995 to 2016, Income Research Paper series, catalogue no. 75F0002M (Ottawa: Statistics Canada, 2018). policy forum: expenditures, efficiency, and distribution n 53 measures.8 Overall revenue increases amount to $3.7 billion by 2023 - 24. We illustrate the aggregate changes, as a share of gross domestic product (GDP), in figure 1.9 Turning to expenditures, the LPC proposed increased government operations and transfers. While not all commitments may be cleanly separated between direct operating spending by government, transfers to individuals, or transfers to governments and other entities, the majority of LPC spending commitments are increased transfers to individuals.10 We explore individual proposals below. In aggregate, expenditure commitments exceed $11.3 billion per year by 2023 - 24. Over the next four years, this represents an average increase of 0.4 percent of GDP, but is partially offset by spending reductions through a “tax expenditure and government spending review.”11 The average net spending increase is roughly 0.3 percent of GDP.12 With respect to direct program spending, the LPC platform implies a decrease from the current level of 14.7 percent of GDP to 14.3 percent by 2023 - 24. We illustrate this change in figure 2, comparing the spending path articulated in the LPC platform with the projected fiscal path generated by the Office of the Parliamentary Budget OfficerPBO ( ) prior to the election. From a macroeconomic perspective, the change in the federal fiscal stance proposed by the LPC is modest.13 Importantly, the government retains the fiscal space

8 Liberal Party of Canada, Forward: A Real Plan for the Middle Class (Ottawa: LPC, 2019), at 79 - 80 (https://2019.liberal.ca/wp-content/uploads/sites/292/2019/09/Forward-A-real -plan-for-the-middle-class.pdf ). 9 We compare changes in revenues and expenditures under the LPC platform with the projected fiscal path generated by the PBO prior to the election commitments. In this analysis, we exclude the incremental revenue attributed to the trans-mountain expansion project, which reflects estimated corporate tax revenues (largely in upstream oil and gas) from the project. In our view, the baseline projections implicitly incorporate such revenues, and therefore the amount reported in the LPC platform is not incremental. 10 For example, boosting OAS benefits by 10 percent for individuals over the age of 75, increasing the CCB for the first year of a child’s life, doubling the Canada child disability benefit, increasing Canada student grants, and so forth. 11 Forward: A Real Plan for the Middle Class, supra note 8, at 79 - 80.There is no indication of what share of this review will draw from operating expenses versus tax expenditures. As we discuss later, a program review focused on new expenditures since 2015 should be able to recover a reasonable share of these allocated dollars. 12 For perspective, this will maintain the overall size of federal expenditures at roughly 15.6 percent of GDP at the end of the four years, fully offsetting the decline to less than 15.3 percent under the PBO’s baseline projection. 13 The implied change in the federal debt-to-GDP ratio as a result of the LPC platform commitments is also modest. This metric is central to long-run debt sustainability and therefore an important gauge of a government’s overall fiscal stance. Previously accumulated federal debt grows at the rate of interest while the aggregate federal tax base grows with GDP. So long as growth rates exceed interest rates, the federal government can sustain a primary budget deficit—the difference between spending and revenues without considering debt costs—in perpetuity. And under the LPC platform commitments, the federal primary balance is positive, with a projected surplus of roughly $13 billion in 2023 - 24. The sustainability of the 54 n canadian tax journal / revue fiscale canadienne (2020) 68:1

FIGURE 1 Change in the Projected Federal Budget Deficit, 2019-20 to 2023-24, Under the 2019 LPC Platform 1.2

1.0

0.8

0.6

0.4 Share of DP (%)

0.2

0.0 PBO proected New Tax New Spending LPC proected budget deﬁcit revenues reductions spending reductions budget deﬁcit

DP = gross domestic product; LPC = Liberal Party of Canada; PBO = Parliamentary Budget Officer. Sources: Authors’ calculations from Liberal Party of Canada, Forward: A Real Plan for the Middle Class (Ottawa: Liberal Party of Canada, 2019); and Office of the Parliamentary Budget Officer, Election Proposal Costing Baseline (Ottawa: PBO, June 2019).

FIGURE 2 Federal Program Spending as a Percentage of GDP—Historical Data Versus LPC Platform Projections, 1990-2025 Proections 18

16 Data LPC platform

14 PBO baseline Share of DP (%) 12

10 1990 1995 2000 2005 2010 2015 2020 2025

DP = gross domestic product; LPC = Liberal Party of Canada; PBO = Parliamentary Budget Officer. Sources: Royal Ban of Canada, RBC Economics: Canadian ederal and Provincial iscal Tables, November 27, 2019 (www.rbc.com/economics/economic-reports/pdf/canadian-fiscal/prov_fiscal.pdf ); and authors’ calculations from Liberal Party of Canada, Forward: A Real Plan for the Middle Class (Ottawa: Liberal Party of Canada, 2019) and Office of the Parliamentary Budget Officer, Fiscal Sustainability Report 2018 (Ottawa: PBO, September 2018). policy forum: expenditures, efficiency, and distribution n 55 to respond through both automatic stabilizers and active fiscal policy in the event of a recession of reasonable size, and we would urge the government to time its capital projects, particularly in relatively overheated labour markets, to align with a potential future downturn. However, depending on both the depth and the length of a future downturn, the federal government may face substantial pressure to increase transfers to provinces that are already experiencing fiscal sustainability challenges. While Canada’s fiscal health is sound, individual spending proposals detailed in the LPC platform come with important strengths and weaknesses to be evaluated. We explore each in turn below.

Individual Transfers The single largest area of expenditure commitments in the LPC platform is transfers to individuals. These include targeted increases to OAS and the CCB. Together, these measures comprise well over a third of promised new expenditures. The largest of these commitments is a 10 percent increase to OAS for individuals over the age of 75 at a cost of $2.2 billion annually in the first full fiscal year of 2021 - 22, increasing annual OAS expenditures by approximately 5 percent. This commitment addresses an important policy concern regarding increasing levels of poverty among older individuals.14 Poverty is a particular concern among older women, since the male/female poverty gap widens for older cohorts, as shown in figure 3. While there is a clear rationale for this policy, does the LPC’s proposed measure lower seniors’ poverty efficiently and as cost-effectively as possible? The answer is undoubtedly “no.” Given that adverse work incentives are of minimal concern to a population over the age of 75, the rationale for a near-universal benefit like theOAS is weak.15 Alternatively, increasing GIS benefits for the 75+ population would achieve the same objective at a substantially reduced cost or, alternatively, achieve greater poverty reduction (by a 15 percent boost to the GIS) for the same incremental cost. The second substantial LPC proposal is a 15 percent increase to the CCB for parents of newborns. Over the child’s first year, theCCB maximum base benefit will rise to $7,750 by July 2020. According to the PBO, the incremental cost of this

federal debt is visible in the clearly non-increasing debt-to-GDP ratio (discussed in the text below following note 58). It is also worth reflecting on the scale of the debt increase that occurred during the financial crisis. If a similarly large negative shock were to hit Canada, the debt-to-GDP ratio may increase from the LPC platform’s path of roughly 30 percent by 2024 to 36 percent—a level that Canada experienced as early as 2004, and not one that raises concerns over federal long-run fiscal sustainability. 14 See Tammy Schirle, “Senior Poverty in Canada: A Decomposition Analysis” (2013) 39:4 Canadian Public Policy 517 - 40 (https://doi.org/10.3138/CPP.39.4.517), which reports rising elderly poverty (measured as the share of individuals with incomes less than the median after-tax income among the working-age population) that started in the mid- to late 1990s. 15 As of the 2019 income year, the OAS pension recovery tax begins to phase in at $77,580 and fully recovers OAS payments for individuals with an income of $126,058. 56 n canadian tax journal / revue fiscale canadienne (2020) 68:1

FIGURE 3 Poverty Rates by Age Category, Canada, 2016 20

10 Poverty rate (%) 5

0 20-24 25-29 30-34 35-39 40-44 45-49 50-54 55-59 60-64 65-69 70-74 75-79 80-84 85+ emale Male

Note: e than Tammy Schirle for highlighting these poverty rates and for generous assistance with the data. Any errors are our own. Source: Authors’ calculations from Statistics Canada, 2016 Census Public Use Microdata ile (PUM), Hierarchical ile (www150.statcan.gc.ca/n1/en/catalogue/98M0002X), using maret-baset measure.

will be $345 million annually once fully implemented in 2021 - 22.16 While there is mixed evidence as to whether costs are highest for parents in a child’s first year,17 there is a reasonable policy rationale for this single-year age adjustment, given the possibility of higher costs associated with purchases of durable goods, lower income as a result of maternity or parental leave, and the importance of infant nutrition for positive long-run outcomes. A decision to simply modify the existing CCB cost schedule by a flat percentage is a similarly reasonable approach.18

16 Office of the Parliamentary Budget Officer,Measures To Support Parents with Children Under One (Ottawa: PBO, September 29, 2019), at 4 (www.pbo-dpb.gc.ca/web/default/files/ Documents/ElectionProposalCosting/Results/33100547_EN.pdf ). 17 See Mark Lino, Kevin Kuczynski, Nestor Rodriguez, and TusaRebecca Schap, Expenditures on Children by Families, 2015, United States Department of Agriculture, Center for Nutrition Policy and Promotion, Miscellaneous Report no. 1528 - 2015 (Washington, DC: USDA, January 2017) (https://fns-prod.azureedge.net/sites/default/files/crc2015_March2017_0.pdf ). 18 It is worth noting that the CCB increase is part of a package of commitments to increase after-tax income available to new parents. The additional measure, making parental benefits “tax-free,” potentially by exempting such benefit income from taxation in the first place, totals $725 million annually as of 2021 - 22. If the government’s policy goal is to help families with relatively low incomes, or if the government wants its measures to be progressive distributionally, these funds (or a share of them) could instead be channelled to an additional increase in the CCB. policy forum: expenditures, efficiency, and distribution n 57

Health Care Health-care spending19 is another dominant spending area in the LPC platform. This is a particularly difficult area to unravel, given a lack of details in many of the proposals. The primary commitment is an ongoing $1.75 billion expenditure as of 2021 - 2220 that will

n theoretically guarantee that all Canadians have a family doctor, n set and fund national standards for timely access to mental health care, n expand home and palliative care, and n implement a national pharmacare strategy based on the recommendations of the federal government’s advisory panel.21

While this is a substantial incremental expenditure, it is an order of magnitude smaller than necessary to achieve its stated goals.22 In particular, the PBO has estimated that a national pharmacare program would require over $20 billion on an annual basis.23 While full implementation would take years,24 the funding allocated would still likely be insufficient to bring the provinces to the table.25 If the federal

19 Presumably through transfers made to provincial governments under prescribed conditions. 20 See Liberal Party of Canada, “Liberals To Boost Investments in Health Care for Canadians” (https://2019.liberal.ca/wp-content/uploads/sites/292/2019/09/2019 -backgrounder-health -ENG- 6.pdf ). 21 See Advisory Council on the Implementation of National Pharmacare, A Prescription for Canada: Achieving Pharmacare for All: Final Report of the Advisory Council on the Implementation of National Pharmacare (Ottawa: Health Canada, June 2019). 22 This point has generally been acknowledged by the prime minister, who has referenced this spending commitment as a “down payment.” See Hannah Thibedeau, “Liberals Aren’t Setting Aside Enough Cash Yet for Pharmacare, Says Advisory Panel Chair,” CBC News, October 7, 2019 (www.cbc.ca/news/politics/pharmacare-hoskins-trudeau-liberals- 1.5311601). The LPC was cautious in the early weeks of the campaign regarding the scope of its pharmacare commitment, but toward the end of the campaign it mirrored the NDP and CPC in committing to a national, universal program. See Justin Trudeau, @JustinTrudeau, Twitter.com, October 18, 2019: “And that’s why we’re going to implement universal pharmacare, so all Canadians can get the prescription drugs they need. Read more about our plan to close the gaps in our health care system: http://lpc.ca/aptl.” 23 See Parliamentary Budget Officer,Federal Cost of a National Pharmacare Program (Ottawa: Office of the Parliamentary Budget Officer, September 2017), at 2. 24 While the government does inherently control the timing of such a rollout, the civil service would likely need several months, or even a year, to complete the preparatory work before negotiations with the provinces could begin. Those negotiations in turn would take several months, followed by the provincial-level preparatory and legislative work for provinces opting to engage in the process. Depending on the timing of the rollout, both the federal government and appropriate provincial governments would need to allocate funds through their estimates process. 25 If any of the major Canadian provinces were to opt into the program, the current allocation would prove insufficient. 58 n canadian tax journal / revue fiscale canadienne (2020) 68:1 government intends to pursue a national pharmacare program, additional funds may be necessary. Presumably the federal government would also set conditions for a national model and offer a high cost-share for provinces in a manner similar to the Pearson government’s approach to medicare.26 Given the scale of the fiscal commitment, only some provinces may agree to participate at first. But after a period of adjustment, and the resulting political pressure in non-participating provinces, it is reasonable to expect that with an appropriate cost-share most provinces would opt to join.27 In light of the inadequate funding commitment and the jurisdictional challenges associated with the health portfolio, the new Cabinet should focus on a single major challenge. A commitment to pharmacare would be consistent with the message that the LPC articulated in the election campaign, but this comes with an important caveat: while the federal government would be able to fund a national pharmacare program with a small number of initial signatories using existing resources, additional revenue would be necessary to maintain fiscal sustainability over the long run if a majority of provinces were to join. There are potentially both meaningful economies of scale and efficiencies in cross-provincial harmonization to justify federal involvement in this area of provincial jurisdiction. Of the other health items detailed by the LPC, increased targeted transfers to combat the opioid crisis are sufficiently time-sensitive that they could be pursued alongside a national pharmacare program. Finally, we want to touch briefly on the promise to “guarantee all Canadians a family doctor.”28 This appears to be modelled after a similar initiative implemented by the government of British Columbia between 2010 and 2015, which included a website matching doctors to patients along with other initiatives. Given the limited evidence regarding this program’s efficacy, we would urge the federal government to target funds at more evidence-based health programming or generalized transfers. Further, there are no clear economies of scale or advantages to national harmonization justifying federal intervention.

The Environment and Climate Change Environmental protection and climate-change mitigation are priorities for the Trudeau government. The 2019 LPC platform included a number of new spending

26 See Tom Kent, “When Minority Government Worked: The Pearson Legacy,” Policy Options Politique, October 1, 2009. 27 With a sufficiently generous federal contribution to the cost-sharing regime, it is certainly feasible that all provinces could opt into the program. There is a reasonable case for the federal government to offer more than a 50 percent share, owing to the fiscal unsustainability faced by the provinces. As noted below, this is an area where the LPC could likely secure a full mandate in the minority Parliament with NDP support, given the length of time required to implement this policy item. 28 “Liberals To Boost Investments in Health Care for Canadians,” supra note 20, at 1. policy forum: expenditures, efficiency, and distribution n 59 measures consistent with this agenda, although many of these measures lack details or costing.29 The largest expenditure in this area is the commitment of more than $300 million annually, rising to more than $430 million by 2023 - 24, to increase home and business energy efficiency. The proposed program involves a free energy audit, a $250 -$750 cash grant, and a 10 -year interest-free loan of up to $40,000 for efficiency renova- tions.30 This measure mirrors a series of similar federal and provincial programs over the last decade.31 While this is highly popular and is consistent with lower carbon emissions, it is important for the government to consider this type of programming from a distributional perspective. Prior retrofit programs have typically tended toward usage by higher income cohorts, particularly given the necessary constraint of home ownership. Since the policy rationale for these initiatives is primarily to tackle a liquidity constraint, there could be substantial savings to the government if a meaningful income test were applied. The same may apply to the government’s rebate commitment for electric vehicles.32 The government’s other signature environmental promise is an expenditure of $300 million a year to plant 2 billion trees in the next decade.33 A growing body of evidence suggests that, at the margin, tree-planting initiatives are a relatively cost- effective way to manage carbon.34 There may also be non-environmental benefits, such as increased property values,35 to consider. But a global perspective is also important here. Avoiding deforestation is a substantially more cost-effective measure to address greenhouse gas emissions than reforestation. And the abatement effect of

29 In particular, the environmental measures were generally not made subject to PBO costing, and the relevant backgrounders contain only topline details on the programs. 30 Forward: A Real Plan for the Middle Class, supra note 8, at 32 and 81. 31 See Natural Resources Canada, Financing Energy Efficient Retrofits in the Built Environment, report prepared for Energy and Mines Ministers’ Conference, Winnipeg, Manitoba, August 21 - 23, 2016 (www.nrcan.gc.ca/sites/www.nrcan.gc.ca/files/emmc/pdf/Financing%20 Report-acc_en.pdf ). 32 Canada, Department of Finance, Budget 2019: Investing in the Middle Class (Ottawa: Department of Finance, March 2019), at 82. In both cases, there would likely be meaningful industry opposition to such an income test since this would be viewed as lowering uptake. However, apart from a recession, the demand shock element of such a program should be second order to climate and distributional concerns. 33 Forward: A Real Plan for the Middle Class, supra note 8, at 30. This is likely an underestimate of costs, given the lack of PBO costing and an indication that the measure will be cost-shared. 34 See, for example, Bronson W. Griscom et al., “Natural Climate Solutions” (2017) 114:44 Proceedings of the National Academy of Sciences of the United States of America 11645 - 50 (https:// doi.org/10.1073/pnas.1710465114). 35 See Liqing Li, The Effect of Urban Tree Planting on Residential Property Values and Gentrification (Urbana, IL: University of Illinois, Department of Agricultural and Consumer Economics, September 2019). 60 n canadian tax journal / revue fiscale canadienne (2020) 68:1 reforestation varies by country. There may be scope to allocate some funds to international reforestation efforts or deforestation prevention with greater carbon abatement effects per dollar spent than are achievable by tree-planting initiatives within Canada.

Child Care While child care did not play a central role in the campaign,36 the LPC platform did commit half a billion dollars annually to “lower child care fees for before and after school programs by 10 per cent across the board.”37 How this will be accomplished is unclear, since direct fee reduction is a provincial matter. Given the absence of any discussion of provincial negotiations, the most viable federal policy option is a refundable tax credit calibrated to reduce costs by 10 percent. While achievable, it is unclear why the federal government should add an additional layer to the already complex series of provincial and federal credits, benefits, and deductions for parents using child care. Further, such an approach would provide minimal benefit to provinces that have the most robust pre-existing child-care regimes, and would essentially create a disincentive to provincial child-care provision.38 Rather than adding to the patchwork federal approach supporting child-care provision, funds should be reserved until a formalized agreement with the provinces is reached.39 That being said, there are justifiable grounds for federal involvement in the area, given efficiencies with national harmonization and the potential to relieve pressure on provincial finances over the medium to long term.

Housing Housing affordability is a growing concern for many Canadians, especially those in Vancouver, Toronto, and other cities with rapidly rising real estate prices.40 In response, the LPC platform committed to making it easier to qualify for the existing

36 Child care and the provision of universal versus targeted support were a central topic of policy debate in the 2015 federal election campaign and have remained a dominant political issue in both Quebec and British Columbia. 37 Forward: A Real Plan for the Middle Class, supra note 8, at 9. 38 A similar critique applies to the child-care expense deduction, which involves greater federal benefits accruing to provinces with less expansive child-care programming. 39 While we view any greater expansion of the federal role in child care as unlikely in the current Parliament, the LPC could plausibly secure a full mandate with both NDP and BQ support, since rollout would take several years and the BQ would likely endorse a meaningful increase in federal transfers to Quebec for an already existing program. 40 In a recent report, the Royal Bank of Canada estimates that the share of income a household needs to cover home-ownership costs is nearly 85 percent in Vancouver, 66 percent in Toronto, and 52 percent nationally. See Craig Wright and Robert Hogue, “Housing Trends and Affordability,”Royal Bank of Canada Economic Research, March 2019, at 7, summary table (www.rbc.com/newsroom/_assets-custom/pdf/house-mar2019.pdf ). policy forum: expenditures, efficiency, and distribution n 61 first-time home buyer incentive in certain high-cost markets.41 For qualifying buyers, the federal government effectively partners with home buyers by directly purchasing 5 - 10 percent of the home.42 This lowers the amount that the buyer puts up, and on the sale of the property the government is entitled to a corresponding share of the proceeds. The LPC proposed to increase the income threshold from $120,000 to $150,000 and the property value threshold to $800,000, and to raise the maximum mortgage-to-income ratio from 4:1 to 5:1.43 While there are limited expenditures associated with such a change, there is a potential balance-sheet risk to the government if real estate prices decline. We are concerned that the government would actually be undermining the most elegant aspect of its own proposal, which has prevented it from boosting demand in overheated markets like Vancouver, Victoria, and Toronto. We see little rationale for the government’s looking to increase demand for housing at all, let alone in markets that may be in bubble-like conditions.

Other Expenditure Measures While individual transfers and health and environmental spending measures are the dominant features of the LPC plan, there are other areas that are worth exploring, given the scale of the fiscal commitment. These include new spending on post- secondary education (PSE), starting at $172 million and increasing to $1.03 billion over the mandate; expanded employment insurance (EI) sickness benefits at a cost of roughly half a billion dollars; $250 million up front to tackle gun crime; and $150 million annually to fund canoeing and camping lessons.44 The PSE commitment, while lacking in detail or timelines, is reasonable from a policy perspective, with increases to the Canada student grants program and fur- thering income contingency in the loan repayments. The extension of EI sickness benefits from 15 weeks to 26 weeks is consistent with the program’s design, and while there may be some labour force impacts, there is a values-based decision as to the right degree of benefits. The $200 million to tackle gun crime appears to be funding to buy back assault rifles. If the government does opt to ban these weapons, a buyback program is reasonable from an equity perspective. Finally, the government’s promise to introduce broad, travel-based camping and canoeing education appears to intrude on provincial jurisdiction45 and has little grounding in evidence. We would strongly urge the government to consider piloting this initiative and considering the opportunity cost of these funds before pursuing it on a broad scale.

41 Forward: A Real Plan for the Middle Class, supra note 8, at 8. 42 Ibid. 43 Ibid. 44 Ibid., at 81 - 82. 45 It does so without any grounding in economies of scale, benefits related to national harmonization, or fiscal relief for the provinces. 62 n canadian tax journal / revue fiscale canadienne (2020) 68:1

MINORITY PARTY EXPENDITURE COMMITMENTS The Trudeau government appears likely to govern unilaterally. However, there remains a chance that it will introduce individual policies to secure support from potential minority partners on a case-by-case basis or engage in a longer-term governing framework that could be linked to a major, ongoing policy commitment.

New Democratic Party The New Democratic Party (NDP) has been traditionally viewed as the most likely minority partner to Liberal governments,46 and there are sufficient areas of policy overlap to imagine the two partnering to maintain the government. In a speech shortly after the election47 and again in mid-November, the leader of the NDP, Jagmeet Singh, clarified the party’s priorities for providing its support in a minority Parliament: first and foremost is a national, single-payer universal pharmacare plan, followed by a national, potentially means-tested dental-care program, increased investments in affordable housing, the waiving of interest from student loans, the ending of fossil fuel subsidies, the capping of cellphone fees, and the introduction of a wealth tax.48 At their first post-election meeting in early November, it was clear that both Mr. Singh and Mr. Trudeau saw pharmacare as an area of common ground,49 and Mr. Singh clearly staked this out as his primary issue for the minority Parliament. Given the central place of pharmacare in the campaign narrative for both parties, the LPC would certainly have a mandate from the public to take this route. Fur- ther, the fiscal pressures related to implementation could potentially be alleviated by drawing on one or more of the fiscal measures proposed by the NDP.50 Of the remaining NDP fiscal priorities, there is a reasonable rationale for policy intervention in the provision of dental coverage, expansion in affordable housing, and funding for First Nations communities. While there is little likelihood that the

46 Canada does not have a history of grand, centrist coalitions, and the NDP has traditionally been the only federalist party with sufficient seats in the House of Commons to secure a majority of votes for a formal or informal coalition. 47 See Alex Ballingall, “NDP Leader Jagmeet Singh Lays Out ‘Urgent Priorities’ for a Minority Government,” Toronto Star, October 10, 2019 (www.thestar.com/politics/federal/2019/10/10/ ndp-leader-jagmeet-singh-lays-out-urgent-priorities-for-a-minority-parliament.html). 48 This announcement also included fiscal commitments to reconciliation and the United Nations Declaration on the Rights of Indigenous Peoples, along with proportional representation as additional priorities. 49 While the NDP and the Green Party of Canada incorporated full-scale pharmacare into their platforms and the LPC did not, all three used language referencing universal pharmacare in their campaigns. 50 The most viable fiscal tools with respect to scale would be increasing the capital gains inclusion rate or increasing the corporate income tax rate. The introduction of wealth taxation was another notable proposal, though it comes with more revenue and implementation uncertainty. policy forum: expenditures, efficiency, and distribution n 63

Trudeau government would support the first of these proposals, we could certainly see case-by-case support for budget measures grounded in the latter two.

Bloc Québécois As a strictly regional party, the Bloc Québécois (BQ) campaigns on a more limited set of issues than most others. Despite this, its campaign commitments touch on at least two areas where broader party support may be achieved: environmental initiatives and provincial transfers. On the environment, the BQ proposed relatively large home renovation subsidies to support “eco-responsible” improvements and increased subsidies for electric vehicles.51 Since all parties have proposed environmental spending initiatives of varying degrees, this is one area of potential cooperation. The BQ’s proposals for federal-provincial transfers are significantly larger in scale. Federal transfers are a recurring source of concern for the government of Quebec. In response, the BQ proposed to boost the growth rate in the Canada health transfer (CHT) to 6 percent per year until federal transfers represent one- quarter of total public health spending, and to boost the Canada social transfer (CST) to 6 percent per year until the CST share of GDP returns to its 1996 level. By 2023 - 24, these proposals would increase the total value of the CHT by $4.3 billion and the CST by $2 billion per year.52 Further, the BQ proposed a change in the formula for CHT allocations, from the current equal per capita rule to distribution on the basis of the population aged 65 and over. This would be a substantial reallocation. For perspective, allocating the 2019 - 20 CHT on this basis would increase Quebec’s entitlement by nearly $1 billion and decrease Alberta’s by $1.1 billion.53 Though the BQ’s proposal could be challenging to implement, because of the adverse consequences for some provinces, there may be scope to provide supplementary support to provinces with older populations without subtracting from other provinces. As we discuss below, there is an increasingly strong case for increasing and potentially reforming certain federal transfers, particularly given the fiscal sustainability imbalance between federal and subnational levels of government. And there is a clear opportunity for cooperation with the BQ on this issue, which could span the life of a minority Parliament.

51 Bloc Québécois, Le Québec, c’est nous: Plateforme politique du Bloc Québécois (Québec: BQ, 2019), at 13 (www.blocquebecois.org/wp-content/uploads/2019/09/Plateforme_Bloc2019_web.pdf ). Over the four years ending in 2023 - 24, the BQ proposed to spend nearly $4 billion on home renovation subsidies, delivered primarily through a 20 percent refundable tax credit to eligible homeowners. 52 In terms of health transfers, the federal contribution might approach one-quarter of health- care spending by 2027. In that year, the BQ proposal would boost transfers by 20 percent relative to current projections—equivalent to $10 billion per year. Our calculations based on Le Québec, c’est nous, supra note 51, at 20. 53 Quebec has 22.5 percent of Canada’s total population but 24.8 percent of the population aged 65 and over, whereas Alberta accounts for 11.6 percent of the total population but only 8.8 percent of those 65 and over. 64 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Conservative Party of Canada Although the platform of the Conservative Party of Canada (CPC) featured greater emphasis on tax reductions than spending increases, there are some potential commitments that may achieve broader support across party lines. Three areas stand out in particular. First, the CPC proposed that $1.6 billion be used to support “green home reno- vations.”54 Although delivered in the form of a tax credit, this may be seen appropriately as a spending proposal. It is also close to the $1.5 billion committed for a similar purpose over the same four-year period by the LPC. Given the priority of climate policy, and Canada’s commitment to meeting the Paris agreement’s target by 2030, subsidies to homeowners to improve energy efficiency is a potential area of cooperation, particularly within a budget that includes the kind of broad-based, targeted income tax reductions that both parties campaigned on. Second, both parties have an emphasis on infrastructure spending. This is another area where cross-party agreement and cooperation may be seen. The government’s previous mandate saw an emphasis on infrastructure but with only limited (and highly delayed) results. Its second mandate may provide an opportunity to refocus and reprioritize this area. Third, health-care spending was highlighted in the CPC platform, with a commitment to ensure that federal transfers grow at their current rates and to boost funding for magnetic resonance imaging and computerized tomography equipment, with a four-year commitment of over $1.5 billion.55 Measures to increase health- care spending or transfers to the provinces may also find cross-party support if enacted in a fiscally sustainable manner. While there are reasonable areas of policy overlap between the LPC and the CPC,56 the likelihood of cooperation across the aisle remains extremely low.

RECOMMENDATIONS FOR THE NEW PARLIAMENT While the government clearly has a number of viable paths available, both fiscally and politically, we view it as appropriate to conclude this article with some recommendations for the new Parliament. In general, we recommend that the government should

1. focus incremental resources on doing a few things well rather than spending a little in a scattershot fashion;

54 Conservative Party of Canada, Andrew Scheer’s Plan for You To Get Ahead (Ottawa: CPC, 2019), at 6 (https://cpc-platform.s3.ca-central- 1.amazonaws.com/CPC_Platform_8.5x11_FINAL _EN_OCT11_web.pdf ). 55 Ibid., at 72. 56 For example, the two parties’ platforms included similar fiscal offers with an emphasis on tax cuts for the middle class. policy forum: expenditures, efficiency, and distribution n 65

2. pilot new measures where there is little existing evidence as to their efficacy; 3. help to tackle the federal-provincial fiscal sustainability imbalance; and 4. review program spending, particularly for new programs, to identify funds that can be reinvested elsewhere.

Expenditures and Individual Transfers The federal government, in general, has a responsibility to move forward on the expenditure path conveyed to the electorate. However, as is often the case, the fiscal platform articulated by the newly elected LPC is not necessarily consistent with what the government can actually afford. Further, consideration should be given to grounding particular policies in evidence and implementation. In particular, governments often attempt to do too much in the early stages of their mandate, spending small-to-modest amounts across many areas and accomplishing relatively little in the process. We therefore urge the government to selectively choose priority areas and focus expenditures there. If the focus is to put more dollars in the pockets of individuals, then start with the promised increase in the basic personal amount and perhaps a new GIS adjustment for those over the age of 75. If the focus is on program provision, then invest time and resources toward delivering on the commitment to a national universal pharmacare program. If the priority is to strengthen the federation from a fiscal perspective, then consider some of the proposals below.

Provincial Transfers The federal government is on a sustainable fiscal path. The provinces, however, are not. And as populations age and health-care spending mounts,57 provincial finances will be increasingly strained. Increased provincial tax rates or reduced spending in other areas will, in the medium term, be required. This observation is not new and is repeatedly highlighted by long-term fiscal forecasts—most notably the PBO’s annual fiscal sustainability reports. In its 2018 report, the PBO forecasts substantial debt-to-GDP ratios among provincial governments with the sole exception of Quebec.58 The federal government, meanwhile, is projected to see consistently declining debt to GDP. By the PBO’s estimate, there is scope to immediately and

57 Currently, health transfers increase with Canada’s national economy, subject to a lower-bound growth rate of 3 percent per year even though health-care spending projections consistently exceed this rate of growth. The PBO, for example, estimates that the average annual growth rate of provincial and territorial health-care spending will be a full percentage point higher than nominal GDP growth between 2020 and 2040. Over this period, subnational health- care spending will increase from 7.5 percent of GDP today to over 9 percent, while the CHT will remain at its current rate of 1.6 percent of GDP. Over time, the federal transfer for health will account for a declining share of provincial health-care spending, and by 2040 will potentially decline by nearly 4 percentage points. Our calculations using data from the PBO’s Fiscal Sustainability Report 2018, supra note 6. 58 Ibid., at 25. British Columbia is the only other province near the threshold of long-run fiscal sustainability. 66 n canadian tax journal / revue fiscale canadienne (2020) 68:1 permanently increase federal spending or decrease federal taxes by 1.4 percent of GDP and still maintain long-run debt sustainability, while the provinces face the need to undertake the reverse fiscal adjustment, in the order of 0.8 percent ofGDP . Enhanced federal transfers may mitigate some of these vertical imbalances. There are a number of paths available to ensure provincial fiscal sustainability. Most directly, provinces may increase their own revenues. Aligning tax effort with expenditure responsibility is, after all, important in any federation. But there is a strong economic efficiency argument for the federal government to raise funds through tax instruments that have particularly elastic tax bases at the provincial level. Income tax—especially on corporate income—is more efficiently levied federally, for example.59 Further, redistributing federal revenue to provinces can also help improve interregional equity. We would urge the federal government to consider measures to enhance health transfers to provincial governments. This could be as simple as adding a 1 percent growth increment over and above the current formula. Or it could be as complex as adjusting for differences in population demographics between provinces to help address differences in health expenditure needs. Alterna- tively, if the federal government were to pursue a national child-care program with an aggressive cost-share, the longer-term impacts on growth would improve the provinces’ fiscal track even if there were a short-run increase in expenditures.60 Whatever form adjustment takes, the federal government has a role to help address the long-run fiscal pressures that nearly all provinces currently face. Finally, given the recent pressure from Alberta and Saskatchewan, reforms to Canada’s fiscal stabilization may be in order. The federal government should continue to resist calls to eliminate or dramatically shrink equalization payments, but expanding the role for federal insurance of provincial tax bases may provide some relief. The case for insurance of provincial revenue is to efficiently and equitably pool risk across provinces and to shift some of the debt burden to the federal level, where debt-service costs are lowest. Current stabilization payments cover revenue drops in non-resource revenues in excess of 5 percent and resource-revenue drops in excess of 50 percent. There is a limit of $60 per person, however, which is roughly equivalent to 1 percent of provincial revenue. Thus, the current stabilization program plays no material insurance role at all. This may be an area ripe for reform in the new government’s first budget to address rising concerns in the West.

Efficient Public Spending Finally, we want to conclude with ensuring the efficient use of public funds. The LPC platform commits to $3 billion in savings from a new “tax expenditure and government spending review” by the end of the government’s mandate.61 Given the

59 Health transfers, for example, are equal per capita even though some provinces have larger own-source fiscal capacities than others. 60 For which they could likely rely on both NDP and BQ support in the House of Commons. 61 Forward: A Real Plan for the Middle Class, supra note 8, at 80. policy forum: expenditures, efficiency, and distribution n 67 scale of government, this represents less than 1 percent of federal operations per year. Since economic, social, and political circumstances evolve continuously, such reviews are valuable and should be undertaken regularly. There is particular value in such a review today given the rapid and somewhat scattershot approach of new federal spending commitments post- 2015.62 The process for such a review matters, and to ensure its efficacy, we would urge government to conduct this review in its first year.63 A quarter of a century ago, during the Chrétien-Martin program reviews, individual departments were given targets and the responsibility to meet them. Programs were evaluated on the basis of six tests, ranging from whether the program continues to serve the public interest, whether there is a legitimate role for government, whether the federal government is the appropriate level for delivery of the program, whether the program could be more efficiently structured, and so on. A specific secretariat within the Privy Council Office was created to facilitate this process. While the most appropriate model today may differ, detailing a specific and concrete approach for undertaking program and spending reviews will not only improve external transparency and predictability, but also improve internal decision making. Regardless, it is essential that the exercise have buy-in from the Prime Minister’s Office, the finance minister, and the Cabinet, and that incentives be in place such that ministers and departments actively co- operate, particularly with respect to finding administrative savings.

62 With sufficient time since the rollout of these programs, their efficacy can be reasonably determined, and the political risk of discontinuing Trudeau-era enabled programs should be low. 63 See Rachel Curran, “Returning to Balanced Budgets Requires a Careful Game Plan: Stakes Are High When a Government Shifts Away from Deficit Spending. Landmines Abound. The Harper Government’s Strategy in 2011 - 12 Offers Lessons,”Policy Options Politique, August 27, 2019 (https://policyoptions.irpp.org/magazines/august- 2019/returning-to-balanced-budgets -requires-a-careful-game-plan). canadian tax journal / revue fiscale canadienne (2020) 68:1, 6 9 - 9 7 https://doi.org/10.32721/ctj.2020.68.1.sym.black

The Future of Work: The Gig Economy and Pressures on the Tax System

Celeste M. Black*

PRÉCIS Dans un certain nombre de pays où la common law est appliquée, les travailleurs à la demande ( gig workers) (c’est-à-dire les travailleurs qui fournissent des services par l’entremise de plateformes numériques Web) ont récemment cherché à obtenir des protections des travailleurs réservées aux employés, telles que le salaire minimum, les congés de maladie et la protection contre les licenciements abusifs. Ces cas impliquent souvent l’application du critère multifactoriel de l’emploi en common law à ce nouveau contexte, et les résultats dépendent de la particularité de chaque cas. En outre, la classification en tant que salarié a des répercussions sur toute une série de questions fiscales. Dans cet article, l’auteur examine si les règles fiscales actuelles s’appliquant aux emplois atypiques sont suffisamment souples pour couvrir les travailleurs à la demande. L’analyse porte sur les impôts australiens (en particulier, l’impôt sur le revenu, les cotisations obligatoires d’épargne-retraite, et les cotisations sociales), mais l’article fait également référence à des questions semblables dans la législation canadienne. L’auteur soutient qu’en ce qui concerne l’impôt australien sur le revenu, le travail à la demande ne présente pas de risque substantiel pour l’assiette fiscale en tant que question juridique; cependant, un risque pour l’assiette fiscale nationale provient de l’écart de conformité qui est révélé lorsque les travailleurs ne sont plus couverts par les mécanismes de retenue des employeurs, mais ne sont pas non plus pris en charge par les régimes d’administration fiscale conçus pour les grandes entreprises. L’auteur laisse entendre que le recours à l’enregistrement des petites entreprises au moyen du numéro d’entreprise australien, combiné à un nouveau régime de déclaration obligatoire pour les plateformes de travail à la demande, contribuerait grandement à combler le manque de transparence, et que cela favoriserait la conformité volontaire des travailleurs à la demande, et fournirait à l’administration fiscale des données pouvant être utilisées pour détecter les cas de non-conformité. Il existe un risque réel que de nombreux travailleurs à la demande soient exclus du champ d’application du régime de cotisations de retraite et des cotisations sociales. Le gouvernement devrait en conséquence examiner s’il est approprié de modifier la loi pour inclure ces travailleurs à la demande.

* Associate professor, the University of Sydney Law School, Australia.

69 70 n canadian tax journal / revue fiscale canadienne (2020) 68:1

ABSTRACT In a number of common-law jurisdictions, gig workers (that is, workers who provide services through the use of web-based digital platforms) have recently sought to claim labour protections reserved for employees, such as the minimum wage, sick leave, and protection from unfair dismissal. These cases often involve the application of the multifactorial common-law test of employment to this new context, and the outcomes turn on the specifics of each case. In addition, classification as an employee has ramifications for a variety of tax matters. In this paper, the author considers whether the tax rules currently in place to capture non-standard employment arrangements have sufficient flexibility to capture gig workers. The focus of the analysis is Australian taxes (in particular, income tax, compulsory retirement savings contributions, and payroll tax), but reference is also made to similar issues under the laws of Canada. The author submits that, with respect to Australian income tax, gig work does not present a substantial risk to the tax base as a legal matter; however, a risk to the national revenue base comes from the compliance gap that is exposed when workers are no longer covered by employers’ withholding mechanisms but are not picked up by tax administration regimes designed with larger businesses in mind. The author suggests that reliance on the registration of small businesses through the Australian business number, coupled with a new mandatory reporting regime for gig work platforms, would go a long way toward filling the transparency gap, and that doing so would both foster the voluntary compliance of gig workers and provide revenue authorities with data that could be used to detect non-compliance. A real risk exists that many gig workers will be outside the scope of the retirement contributions scheme and payroll tax and that the government, in consequence, will need to consider whether it is appropriate policy to change the law to include these on-demand workers. KEYWORDS: GIG WORKERS n INCOME TAXES n TAX ADMINISTRATION n SUPERANNUATION n PAYROLL TAXES n AUSTRALIA

CONTENTS Introduction 71 The Employment Law Context 74 The Common-Law Multifactorial Test and Gig Workers 74 The Dependent Contractor Alternative 76 Income Tax: Is the “Right” Amount of Tax Being Paid? 77 Tax Base Issues: Deductions and Rates 77 Australia’s Personal Services Income Regime 78 Applying the PSI Rules to Gig Workers 80 Income Tax: Compliance Issues 81 Pay-As-You-Go Withholding on Wages 81 No-Australian Business Number Withholding and Voluntary Agreements 83 Pay-As-You-Go Instalments 84 Supporting the Voluntary Compliance of Workers 85 Reporting by Gig Platforms to Revenue Authorities 86 the future of work: the gig economy and pressures on the tax system n 71

Retirement Contributions: A Potential Policy Problem 89 Compulsory Superannuation in Australia 89 Definition of “Employee” for Superannuation Purposes 89 Are Incentives Enough? 92 The CPP and Employment Insurance 92 Payroll Taxes in Australia: A Tax Base Problem for the States 93 Employees and Labour-Hire Arrangements 94 Relevant Contracts Extension 95 Conclusions and a Way Forward 95

INTRODUCTION The OECD’s 2018 interim report, Tax Challenges Arising from Digitalisation, highlighted the fact that digitalization, which has bolstered the rise of the so-called gig economy and sharing economy, is changing the nature of work and testing the traditional distinction between employees and independent contractors.1 These developments have obvious implications for employment law; in a number of common- law jurisdictions, gig workers have recently sought to claim labour protections provided to employees, such as the minimum wage, sick leave, and protection from unfair dismissal.2 There are also obvious implications for the revenue base, notably in the areas of income tax, social security and retirement savings contributions, and payroll tax. This issue is hardly new, however, and employment law and taxation policy have long sought to address the trend of converting employees into what Harry Arthurs, back in 1965, coined “dependent contractors.”3 The gig economy has analogies with piecework and labour-hire arrangements, but with a web-based twist. What is perhaps new is the relative ease of engagement with such platforms— for both requester and worker—and the resulting scale of engagement, along with the greater possibility that the worker, requester, and platform operator may be located in different jurisdictions. Although the gig economy presents challenges from a tax base and tax administration perspective (challenges that are addressed in this paper), the electronic information generated through web-based platforms presents opportunities to assist both workers and revenue authorities with tax compliance. Any potential legislative or administrative response to these challenges must take into account the scale of the challenge, in circumstances where measures of the sharing and gig economy may not be reliable4 and may quickly become out of date.

1 Organisation for Economic Co-operation and Development, Tax Challenges Arising from Digitalisation—Interim Report 2018: Inclusive Framework on BEPS (Paris: OECD, 2018), chapter 7. 2 See, for example, in the United States: O’Connor v. Uber Technologies Inc., 904 F. 3d 1087 (9th Cir. 2018); and in the United Kingdom: Uber BV v. Aslam, [2018] EWCA Civ. 2748. 3 Harry W. Arthurs, “The Dependent Contractor: A Study of the Legal Problems of Countervailing Power” (1965) 16:1 University of Toronto Law Journal 89 - 117. 4 Tax Challenges Arising from Digitalisation, supra note 1, at 195, box 7.1. 72 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Work completed by Deloitte Access Economics for the New South Wales (NSW) Department of Finance, Services and Innovation showed a growth in revenue from the collaborative (sharing and gig) economy in NSW of 68 percent from 2015 to 2016 and a doubling of the number of users generating income in the same period, when income from this economy represented 0.5 percent of the gross NSW state product.5 More recent work commissioned by the Victorian Department of Premier and Cabinet shows that 7.1 percent of respondents either currently or in the last 12 months earned income by working through a digital platform and that another 6 percent had done so in the past (but not in the last 12 months).6 My focus in this paper is “gig work”—the provision of services through the use of web-based digital platforms. Although I emphasize the tax issues that arise under Aus- tralian law with respect to such work, I also refer to comparable concerns under Canadian law. Other important tax issues raised by other kinds of digitalized economic activity—such as the sharing economy (for example, the rental, or “sharing,” of accommodation or the hiring of motor vehicles) and the online sales of goods— are outside the scope of this paper. Another area that I do not address is the international tax implications raised by cross-border gig arrangements. The gig economy comprises a wide variety of arrangements. This diversity, along with the rapid pace at which new platforms are developed, makes categoriza- tion difficult and complicates the development of legislative responses. This new on-demand labour can be grouped into two types, following Cherry and Aloisi’s analysis:7 (1) application or web-based platforms used to deploy workers to perform

5 Deloitte Access Economics, Developments in the Collaborative Economy in NSW, commissioned by the New South Wales Department of Finance, Services and Innovation (Sydney: Deloitte Access Economics, 2016), at 4. The data for revenue generated and users were sourced from the businesses’ websites. The number of users generating income is measured at 92,400 out of a total state population of approximately 7.5 million (so 1.2 percent of the population), but the user numbers do not appear (and are not likely) to adjust for unique participants. Another report, by RateSetter, found that 60 percent of respondents used a sharing-economy service in the relevant six months and that 21 percent earn at least $50 per month through such services. However, 16 percent of the users reported using Uber and only 3 percent used service platforms (the largest share, at 53 percent, being sales of goods), and the breakdown of sources of income are not provided. These data are based on a survey of 1006 respondents. See “Sharing Economy Trust Index: Winter 2016,” Ratesetter.com.au (www.ratesetter.com.au/blog/posts/ratesetter -sharing-economy-trust-index-winter- 2016). According to its website, Airtasker has over 2 million registered workers (roughly 8 percent of the Australian population), which seems rather high in comparison with the other data. See Airtasker.com (https://www.airtasker.com). 6 Paula McDonald, Penny Williams, Andrew Stewart, Damian Oliver, and Robyn Mayes, Digital Platform Work in Australia: Preliminary Findings from a National Survey (Melbourne: Victorian Department of Premier and Cabinet, June 18, 2019), at 10. The survey produced more than 14,000 usable responses and included individuals from across Australia. The report is available through the Victorian Government’s inquiry, currently underway, into the Victorian on-demand workforce: See “Inquiry into the Victorian On-Demand Workforce” (https://engage.vic.gov.au/ inquiry-on-demand-workforce). 7 Miriam A. Cherry and Antonio Aloisi, “ ‘Dependent Contractors’ in the Gig Economy: A Comparative Approach” (2017) 66:3 American University Law Review 635 - 89. the future of work: the gig economy and pressures on the tax system n 73 tasks in the real world and (2) cloud labour, where transactions are wholly online and whose workers can be located anywhere. The first category requires location- specific work, such as transporting a person or food from one location to another (for example, Uber or DoorDash) or cleaning or assembling furniture (for example, Airtasker or AskforTask), as arranged through the platform. This type of gig work is perhaps more familiar to the general public and more likely to be used by private individuals. Cloud labour is more akin to labour outsourcing: a requester makes a call for work through a platform, and the workers with the necessary skills are matched, bid for the gig, get accepted by the requester, perform the work wherever they are located, submit online, and are paid online. Gig work can be further sub- divided into (1) project work, in which the task is more complex and “manually managed” by the requester; and (2) scalable micro-tasks in which work is broken down into small constituent parts that are programmatically managed by the platform (more akin to piecework).8 Examples of platforms that use cloud labour are Free- lancer, Upwork, and Amazon’s Mechanical Turk (MTurk). Payments are ordinarily for the completion of a task, though some platforms do have gigs paid on the basis of hours worked.9 What is consistent across these models is the platform’s role as the facilitator and coordinator of the connection between requester and worker and as the means of processing the payment by the requester to the worker, with the platform operator retaining a fee of some description. The contractual arrangements are often three-sided, or tripartite: there are often contractual relationships between the requester and the platform operator, the worker and the platform operator, and the requester and the worker. These relationships may be compared with traditional labour-hire arrangements, which involve worker-agency and agency-client agreements but no worker-client contracts. In the second part of this paper, I provide an overview of the way in which the tension inherent in the binary distinction between employee and independent contractor is being manifested in the context of gig workers, and I introduce Arthurs’s “dependent contractor” alternative. As my discussion shows, many provisions in the tax legislation attempt to address certain contractor and labour-hire arrangements, and I proceed to consider tensions in the revenue system. Arguably the greatest concern is how to treat gig work under income tax law. This is the first question I consider in the third section of this paper, where I analyze both tax base and tax administration issues. Two other tax issues related to gig work are discussed in this paper. In the fourth part of the paper, I consider mandatory

8 Robert Kern, Dynamic Quality Management for Cloud Labour Services: Methods and Applications for Gaining Reliable Work Results with an On-Demand Workforce (Cham, Switzerland: Springer, 2014), chapter 2 (http://doi.org/10.1007/978 - 3 - 319 - 09776 -3). 9 Freelancer’s online support pages discuss the options of fixed-price versus hourly projects: “Fixed-Price vs Hourly Projects,” Freelancers.come.au (www.freelancer.com.au/support/Project/ fixed-price-vs-hourly-projects). 74 n canadian tax journal / revue fiscale canadienne (2020) 68:1 social security/retirement savings contributions, and in the fifth part I address state- level payroll taxes. I suggest that the tax base issues posed by the gig economy are not likely to be as significant as the administrative challenges, and that a cooperative approach between platforms and revenue authorities, as well as between revenue authorities, has great potential to support revenue collection and voluntary taxpayer compliance.

THE EMPLOYMENT LAW CONTEXT Characterization of a worker as an employee, rather than as an independent contractor, has been called the gateway to a variety of protections provided by employment legislation, such as rights to minimum wage and to benefits, and protection from unfair dismissal. Employee status also activates a number of employer obligations, such as contributions to worker insurance and social security, and it is a trigger for many tax rules, such as payroll tax liability and employer withholding obligations.

The Common-Law Multifactorial Test and Gig Workers At law, the classification of a worker as an employee generally commences with a common-law test that developed in relation to the tort of vicarious liability and contract law, but this test may be augmented by the legislature, depending on the context. The application of these tests to workers engaged in precarious employment is litigated with some regularity, largely because the determination of whether to classify a worker as an employee or an independent contractor is a factually based determination. The rise of gig work continues to trigger litigation as the precarious nature of this work is being more fully realized by the workers involved. In Australia, the binary common-law divide between employees and independent contractors has been maintained as the relevant test for federal employment-law purposes.10 As in other common-law jurisdictions, the employment test is multifactorial and takes into account such matters as who controls the manner, location, and timing of the performance of the work; who bears the risk of rectification; who provides tools and equipment; whether delegation of the work is allowed under the contract; whether the worker maintains a separate place of work and holds herself out to the public for similar services; and how remuneration is calculated (that is, by hour or by task).11 Australia’s Fair Work Commission (FWC) has recently applied these tests to workers in the gig economy. A decision of the FWC in late 2017 determined that Uber drivers were not employees and therefore not eligible for the “unfair dismissal” protections afforded by the Fair Work Act 2009, although Deputy President

10 Australia Fair Work Act 2009, No. 28, 2009, section 11. 11 For consideration of these tests by the High Court of Australia, see, for example, Stevens v. Brodribb Sawmilling Co. Pty Ltd. (1986), 160 CLR 16; and Hollis v. Vabu Pty Ltd. (2001), 207 CLR 21. the future of work: the gig economy and pressures on the tax system n 75

Gostencnik noted that the traditional notions of employment that he was bound to apply are perhaps now outmoded.12 A 2019 investigation by the Fair Work Ombuds- man recently reconfirmed the conclusion that Uber drivers are not employees.13 In contrast, the FWC applied the multifactorial employment test to a Foodora (food delivery platform) worker and found that the bicycle delivery worker was an employee and therefore entitled to a remedy for unfair dismissal.14 The Fair Work Ombudsman commenced legal action to test some of these principles before the Federal Court of Australia but was forced to abandon the case when Foodora entered voluntary administration.15 The details of arrangements with gig workers are not standardized; thus, the determination of whether, in any particular case, the worker is an employee under the common-law test will be determined by weighing up the various relevant facts. In many cases, gig workers may fall outside the definition of “employee.” The employ ment status of gig workers was recently considered in some depth by a select committee of the Australian Senate, as part of an enquiry into the future of work.16 The committee, on the basis of the evidence provided, rejected the view that gig workers are “independent contractors in the true spirit of the term”17 and, recognizing the workers’ dependence on the platform for work and income,18 called for legislative

12 Kaseris v. Raiser Pacific VOF, [2017] FWC 6610. The commission noted as relevant that both the driver and Uber exercised elements of control but that the driver (1) provided his own equipment, (2) was not required to wear a uniform or identify the car with the platform, (3) was registered for GST, and (4) was managing his own tax affairs like a small business operator; and that the contract identified the relationship as one of independent contractor. 13 Australian Government, Fair Work Ombudsman, “Uber Australia Investigation Finalised,” Media Release, June 7, 2019. Key points made by the ombudsman were that “Uber Australia drivers have control over whether, when, and for how long they perform work, on any given day or any given week” and that “Uber Australia does not require drivers to perform work at particular times and this was a key factor in . . . [the] assessment.” See ibid. This accords with the conclusion reached by the general counsel of the US National Labor Relations Board, Peter Robb, that Uber drivers are independent contractors and not employees: see United States, National Labor Relations Board, Office of the General Counsel, Advice Memorandum (AM) 13 -CA- 163062, April 16, 2019 (www.nlrb.gov/case/13 -CA- 163062). 14 Klooger v. Foodora Pty Ltd., [2018] FWC 6836. 15 Proceedings were commenced in June 2018, alleging that Foodora engaged in sham contracting that sought to classify employees as independent contractors in order to avoid its responsibilities as employer, thus resulting in underpaying employees. Proceedings were discontinued in September 2018. See Australian Government, Fair Work Ombudsman, “Fair Work Ombudsman Commences Legal Action Against Foodora,” Media Release, June 12, 2018 (www.fairwork.gov.au/about-us/news-and-media-releases/2018 -media-releases/june- 2018/ 20180612 -foodora-litigation). 16 Parliament of Australia, The Senate, Select Committee on the Future of Work and Workers, Hope Is Not a Strategy—Our Shared Responsibility for the Future of Work and Workers (Canberra: Commonwealth of Australia, September 2018), at paragraphs 4.58 - 4.84 and 4.115 - 4.124. 17 Ibid., at paragraph 4.122. 18 Ibid., at paragraph 4.123. 76 n canadian tax journal / revue fiscale canadienne (2020) 68:1 amendment to broaden the definition of “employee” to include gig workers for employment law purposes.19 This recommendation has not been taken up by the Australian government.

The Dependent Contractor Alternative Employment law in Canada has in some important respects moved beyond the binary test to recognize the need to extend certain protections to a third category of worker, the “dependent contractor,” a category based on Arthurs’s influential work.20 The scenarios described by Arthurs involved small businesses, such as truck owner-drivers, taxi operators, and fishers, that are economically dependent on a larger company but are contractors at law. Arthurs’s main concern was the ability of these dependent contractors to engage in collective action in order to balance the power of the larger company.21 Bendel notes that rules deeming dependent contactors to be employees for the purposes of collective bargaining law were adopted in seven jurisdictions in Canada in the 1970s; these rules varied in some degree from Arthurs’s recommendations and from that of the 1968 Woods Task Force on Labour Relations, and they varied from province to province.22 For example, such a deeming rule for dependent contractors can now be seen in the Canada Labour Code, part I, in relation to industrial relations.23 A more recent review of Canada’s federal labour standards, headed by Arthurs in 2006, recommended that certain minimum standards and conditions in part III of the Canada Labour Code be extended to a subset of dependent contractors identified as “autonomous workers,” with the criteria for such status being set on a sector-by-sector basis to include persons who provide services comparable

19 See recommendation 10 in ibid., at paragraph 4.129. 20 Arthurs, supra note 3. 21 Arthurs, supra note 3, at 89. 22 Michael Bendel, “The Dependent Contractor: An Unnecessary and Flawed Development in Canadian Labour Law” (1982) 32:4 University of Toronto Law Journal 374 - 411, at 376. 23 Canada Labour Code, RSC 1985, c. L- 2, section 3(1). For the purposes of part I, the term “employee” is defined to include a “dependent contractor,” which includes, in paragraph (c), the following meaning: “any other person who, whether or not employed under a contract of employment, performs work or services for another person on such terms and conditions that they are, in relation to that other person, in a position of economic dependence on, and under an obligation to perform duties for, that other person.” By way of comparison, in Ontario’s Labour Relations Act (1995), SO 1995, c. 1, schedule A, section 1(1), “employee” includes a “dependent contractor,” defined as “a person, whether or not employed under a contract of employment, and whether or not furnishing tools, vehicles, equipment, machinery, material, or any other thing owned by the dependent contractor, who performs work or services for another person for compensation or reward on such terms and conditions that the dependent contractor is in a position of economic dependence upon, and under an obligation to perform duties for, that person more closely resembling the relationship of an employee than that of an independent contractor; (‘entrepreneur dépendant’).” the future of work: the gig economy and pressures on the tax system n 77 to those provided by employees.24 This recommendation has not been adopted, however. A similar approach has been taken in the United Kingdom, where individuals defined as “workers” are provided with some but not all of the rights extended to “employees” (for example, workers are entitled to the minimum wage but not to protections against unfair dismissal).25 As these government reviews show, there are legitimate concerns that the current employment law framework may not provide adequate protections for workers engaged in non-standard employment, including but not limited to gig workers. The test of employment under the common law may evolve over time to include such workers in the category of employees, but recommendations to date have been for more immediate and controlled parliamentary intervention to extend worker protections to at least some of these classes of workers. Such action will not automatically affect revenue laws, however, and it must be acknowledged that the policy goal in protecting those engaged in precarious work (that is, the goal of extending the right to collective action and minimum work standards) does not automatically involve a requirement to change tax rules. In the following sections of this paper, I consider (1) the three main imposts on employers in Australia that are triggered by services arrangements (that is, the Commonwealth income tax, mandatory retirement savings contributions, and state-based payroll taxes); (2) how the law and administrators have sought to deal with non-standard workers; and (3) whether further intervention may be required.

INCOME TAX: IS THE “RIGHT” AMOUNT OF TAX BEING PAID? A concern expressed in some commentary about gig workers is that they are not paying the “right amount” of tax and that the tax base consequently suffers. Although some income tax base issues clearly arise under Australian law when a worker operates as an independent contractor rather than as an employee, I would suggest that the bigger issue in this regard is one of compliance—gig workers either failing to appreciate the tax consequences of their income-earning activities, lacking adequate records to support voluntary compliance, or wilfully ignoring their obligations.

Tax Base Issues: Deductions and Rates The two main income tax base issues for gig workers are deductions and rates. Whether receipts are assessable income is not really a question, given that both rewards for services (whether provided by an employee or an independent contractor) and income from business are assessable as ordinary income in Australia.26

24 See recommendations 4.2 and 4.3 in Harry W. Arthurs, Fairness at Work: Federal Labour Standards for the 21st Century (Gatineau, QC: Government of Canada, 2006), at 61 - 65. 25 Employment Rights Act 1996 (UK), 1996, c. 18, section 230. 26 Income Tax Assessment Act 1997, No. 38, 1997, section 6-5 (herein referred to as “the ITAA 1997”). 78 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Although evidence of repetition and scale may be relevant for determining whether an activity is a business27 and thus whether the proceeds are business income, criteria related to repetition and scale are not necessary for determining whether a receipt is income from services; the important test under Australian tax law is whether the amount is a product or reward for the services provided.28 The issues of deductions and rates have been addressed in both Australia and Canada, and integrity measures already in place may be sufficiently effective to control these issues. In Canada, provisions within the Income Tax Act29—in particular, the “personal services business” rules—limit the benefits that might otherwise be obtained from offering services through a corporate structure. The “incorporated employee” rules are triggered when a corporation carries on a business of providing services, and the incorporated employee, who is a specified shareholder, “would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporation.”30 The Act limits the deductions that the corporation can claim to those expenses that are listed,31 and the rate of tax payable is adjusted32 so as to be significantly higher than the small business or general business rates.

Australia’s Personal Services Income Regime Australia, too, has rules that target the issues of deductions and rates. The “personal service income” (PSI) rules operate to limit the deductions available to individuals and companies earning the PSI of an individual.33 PSI is a key concept, defined as income that is mainly a reward for an individual’s personal effort or skills, and, importantly, it applies regardless of whether the income is earned for doing work or for producing a result.34 To prevent taxpayers from taking advantage of the gap between the top individual income tax rate (currently 45 percent plus a Medicare levy of another 2 percent) and the company tax rate for small active businesses (currently 27.5 percent), the rules attribute PSI of the company to the individual if that amount is not otherwise promptly paid out by the company to the individual as wages.35 This ensures that

27 See, for example, Ferguson v. Federal Commissioner of Taxation, 1979 FCA 29. 28 Hayes v. Federal Commissioner of Taxation (1956), 96 CLR 47 (HCA); and Scott v. Federal Commissioner of Taxation, 1966 HCA 48. 29 Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as “the Act”). 30 Subsection 125(7) of the Act. 31 Paragraph 18(1)(p) of the Act. 32 Section 123.5 of the Act. 33 ITAA 1997 divisions 85 and 87. 34 ITAA 1997 section 84 - 5. 35 ITAA 1997 division 86. Sole traders carrying on a small business are also entitled to an income tax offset that recognizes the rate differential between individuals and companies. The rate of the offset is currently 8 percent of the small business net income (up to a maximum of AU $1,000) the future of work: the gig economy and pressures on the tax system n 79 the PSI is taxed to the individual at the individual’s marginal rate. These consequences can be avoided if the company is carrying on a personal services business (PSB), as defined in theITAA .36 The “limitation on deduction” rules broadly limit business-related deductions incurred in producing PSI to those that would have been available had the income been derived as an employee.37 This restriction reflects the perception that businesses are entitled to certain expense deductions that are not otherwise available to employees. The denial-of-deduction rules apply both to companies with PSI and to individuals who are in business as independent contractors. Certain expenses are still allowed (such as advertising and income protection insurance premiums), and specific ones are denied (some home-office expenses and payments to associates). If the business is in the form of a company, other expenses, such as entity maintenance (for example, business registration fees), are specifically allowed.38 The full range of deductions will still be available if it can be shown that the business is a PSB. This serves to limit the application of these rules to situations that are identified as having the potential to erode the tax base—that is, cases of dependent contractors and of services provided in an employee-like manner.39 The firstPSB test is the results test. This test is satisfied if at least 75 percent of the individual’s income meets the following three criteria: (1) the income is for producing a result; (2) the individual is required to supply any necessary tools; and (3) the individual bears the commercial risk (expressed in the legislation as being liable for the cost of rectifying any defect).40 The results test picks up some of the traditional criteria for distinguishing independent contractors from employees. If the results test is not met, the next question is whether 80 percent or more of the PSI comes from one service acquiror (this situation is similar to the dependent contracts scenario from Arthurs’s work). If so, the taxpayer must apply to the Aus- tralian Taxation OfficeATO ( ) for a determination that there is a PSB; if not, taxpayers can self-assess under the other PSB tests. If the business involves any one of the following elements, it is a PSB and therefore not subject to the integrity rules: it has two or more clients that are obtained by advertising (and thereby passes the unrelated clients test); it engages at least one employee to do at least 20 percent of the principal work; or it maintains and uses exclusive and separate business premises.41

but will rise to 16 percent by 2021 - 22. ITAA 1997 section 328 - 355. An individual earning PSI cannot access this offset unless he or she is carrying on a PSB. ITAA 1997 section 328 - 365. 36 ITAA 1997 division 87. 37 ITAA 1997 section 85 - 10. 38 ITAA 1997 subdivision 86 -B. 39 Australia, Review of Business Taxation, A Tax System Redesigned: More Certain, Equitable and Durable (Canberra: Australian Government Publishing Services, July 1999), at 286 - 94. 40 ITAA 1997 section 87 - 18. 41 ITAA 1997 subdivision 87-A. The ATO’s views on the application of these tests can be found in Australian Taxation Office,Taxation Ruling TR 2001/8, “Income Tax: What Is a Personal Services Business,” August 31, 2001. 80 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Applying the PSI Rules to Gig Workers In applying this regime to the typical gig worker, who would usually be unincorporated, the concern would be the limitation on available deductions. The payments for gig work would likely be PSI. Although some gig work does require that the worker provide sizable assets (for example, a vehicle for providing rides or delivering parcels), it is still likely that the payments would be mainly for the worker’s services. The legislation provides an example of a commercial truck owner-driver whose income is not PSI,42 but the ATO’s guidance materials distinguish this case from that of a person using an ordinary vehicle (that is also used for private purposes) for deliveries, which, in the ATO’s opinion, does give rise to PSI.43 So the analysis turns to whether there is a PSB. In many cases, a contract to provide gig work will provide for payment based on the production of a result rather than on (for example) time, and the gig worker would ordinarily provide his or her own equipment and be liable if the service or result is not acceptable. The results test would therefore usually be satisfied, such that the other tests need not be considered. If one proceeds to the “80 percent from one source” and “unrelated clients” tests, the issue is whether one tests the platform or the requester as the client. The ATO’s ruling states that a labour-hire firm would often be considered one source under the 80 percent test,44 and the legislation provides that using a service arranger (such as a labour-hire firm) to obtain work does not qualify as advertising under the unrelated-clients test.45 However, arrangements with a platform operator differ in nature from arrangements with a labour-hire firm, especially in that gig contracts may specifically provide that the customer is paying the worker and that the platform is merely an intermediary facilitating such payment (reflecting the tripartite nature of the contracts). The employment test and the business premises test would likely be difficult for a gig worker to satisfy. In summary, the typical gig scenario, where the worker is an unincorporated independent contractor, does not risk a lower tax rate, but it may give the contractor access to deductions as a small business operator that would not be available to an employee. On the basis of the analysis above, Australia’s current PSI rules are not likely to be triggered by gig work, especially if the PSB results test is satisfied, and this may be entirely appropriate, given the commercial risk assumed by a gig worker. If the gig work produces an overall loss in a given year, the “non-commercial loss” rules could apply to quarantine that loss from other income.46 If the residual

42 Example 2 included in ITAA 1997 section 84 - 5(1). 43 Australian Taxation Office,Taxation Ruling TR 2001/7, “Income Tax: The Meaning of Personal Services Income,” August 31, 2001, examples 4 and 5, at paragraphs 81 - 90. 44 TR 2001/8, supra note 41, at paragraph 88. 45 ITAA 1997 section 87 - 20(2). 46 ITAA 1997 division 35. A business will be considered “commercial,” such that the loss is not quarantined, if any one of the assessable income, profits, real property, and other assets tests are satisfied. the future of work: the gig economy and pressures on the tax system n 81 risk to the revenue base of allowing these deductions is considered material, legislative amendment would seem necessary in order to include gig workers in the PSI regime or to otherwise limit their deductions. It would appear, however, that the greater risk is non-compliance, which I consider next.

Income Tax: Compliance Issues The greater risk to the revenue base, from an income tax perspective, comes arguably from difficulties in administration and compliance. The systems for tax reporting and collection have developed according to the binary classification of employee versus business operator. Some issues may be solved by greater taxpayer education, but improvements to withholding or tax instalment regimes may be desirable. The risk of non-compliance in relation to informal transactions is not new (the Australian government is currently partway through a reform agenda directed at the so-called black economy);47 what is new is (1) the relative ease of participation in gig work transactions owing to their web-based operations, and (2) the perceived growth in such participation. As the Organisation for Economic Co-operation and Develop- ment (OECD) has recognized, however, the digitalization of transactions itself offers a new potential for tax authorities,48 since information is recorded in forms of data that may be made more readily available to such authorities. In the next section of this paper, I will describe the current reporting and tax collection regimes in Australia that are relevant to the gig economy, and I will identify some of their weaknesses.

Pay-As-You-Go Withholding on Wages Many jurisdictions employ a collection mechanism like the one used in Australia and Canada, whereby employers are obliged to withhold income tax from the pay of their employees and forward this tax to the revenue authority in advance of assessment. This operates as a system of instalments in advance. The Australian mechanism is called pay-as-you-go withholding (PAYGW), and it applies to payments for work and services (as well as to other payments not relevant to this discussion). This system mainly applies to payments made to individuals as employees (in the ordinary [common-law] meaning of “employee”),49 but the regime also extends to payments under labour-hire arrangements,50 whereby the withholding obligations

47 Australia, The Treasury, Black Economy Taskforce: Final Report (Canberra: Commonwealth of Australia, October 2017). 48 Tax Challenges Arising from Digitalisation, supra note 1, at paragraph 467. For a detailed consideration of such opportunities, see Clement Okello Migai, Julia de Jong, and Jeffrey P. Owens, “The Sharing Economy: Turning Challenges into Compliance Opportunities for Tax Administrators” (2018) 16:3 eJournal of Tax Research 395 - 424. 49 Taxation Administration Act 1953, schedule 1, section 12 - 35 (herein referred to as “the TAA”). See also Australian Taxation Office,Taxation Ruling TR 2005/16, “Income Tax: Pay As You Go—Withholding from Payments to Employees,” August 31, 2005. 50 TAA schedule 1, section 12 - 60. 82 n canadian tax journal / revue fiscale canadienne (2020) 68:1 apply to the labour-hire firm. As discussed above, gig workers will in many cases not meet the definition of “employee” under common law, so PAYGW will not be triggered on this basis. In a labour-hire arrangement, the labour-hire firm arranges for workers to provide labour or services to a client, and the worker does not become an employee of the client. The client pays the firm, and the firm pays the workers. PAYGW applies to the firm’s payments to the workers for that work or those services, and in the opinion of the ATO, it is irrelevant, in this particular context, whether the individual worker is an employee of the firm or an independent contractor.51 An important distinction between labour-hire and gig work is in the contractual relationships of the parties. As the ATO points out in its guidance, a labour-hire situation involves no contract between the client and the worker.52 This is a material difference from tripartite gig arrangements; as a result of the contract between the requester and the worker, a platform operator is unlikely to be characterized as a labour-hire firm. The legislation extending PAYGW to labour-hire arrangements also allows for additional payments to be specified in the regulations. Currently, however, only four quite specific types of payments are listed in the regulations (for example, payment for certain translation and interpretation services provided to government).53 The ATO provides online electronic calculators to assist payers in determining the amount to withhold. The system requires that the individuals provide their tax file numberTFN ( ) and asks whether the workers want to claim the benefit of the tax-free threshold in relation to this payer (it can be claimed only once a year), and the calculation assumes that the amount is received as regular earnings throughout the year. If a gig worker is caught as either an employee of the platform operator or a labour-hire worker, such that PAYGW applies to the payments, the worker will in many cases have another, primary employment situation for which he or she will be claiming the tax-free threshold; therefore, the withholding rate on gig payments will be relatively high. The payer (which in this case would likely be the platform operator) is obliged to withhold the required amount from the payments, to report such withholding, and to pay the withheld amounts to the commissioner.54 Under a new initiative currently being rolled out, which is called “single touch payroll,” wages and withholding are to be reported in real time to the ATO.55

51 Australian Taxation Office, “Labour-Hire Firms and Their Workers” (www.ato.gov.au/ business/payg-withholding/payments-you-need-to-withhold-from/labour-hire-firms -and-their-workers). 52 Ibid. 53 Taxation Administration Regulations 2017, regulation 27. 54 TAA schedule 1, division 16. 55 TAA schedule 1, section 389 - 5. the future of work: the gig economy and pressures on the tax system n 83

No-Australian Business Number Withholding and Voluntary Agreements Individuals carrying on business as independent contractors (and not in labour-hire arrangements) may also be subject to PAYGW through two additional channels: voluntary agreements and no-Australian business number (no-ABN) withholding. Both of these regimes link to the ABN system, so a brief overview of that system is warranted. The ABN is an 11 -digit business identifier that is primarily needed to engage with the goods and services tax (GST) system and is required in addition to a tax file number (TFN). Individuals are entitled to an ABN only if they are “carrying on an enterprise” in Australia,56 where the meaning of “enterprise” is linked to the GST legislation.57 This requires that a business or activity be in the nature of a trade, but it specifically excludes employees and individuals who are receiving payments subject to the PAYGW labour-hire rules.58 The no-ABN withholding rule encourages individuals in business to obtain and quote their ABN; the rule requires payers to withhold tax at the top marginal individual income tax rate plus the Medicare levy (thus, a combined total rate of 47 percent) in relation to payments to an individual for the supply of goods or services if the individual does not quote an ABN.59 Some exclusions are provided, the most relevant being the one provided to the individual payee who provides a written statement to the payer that the supply is made without reasonable expectation of profit or gain or as part of a hobby or wholly private or domestic in nature.60 Many gig contracts are based on the assumption that the worker is an independent contractor, and signing up to the platform often requires the provision of an ABN. I would suggest that prompting a gig worker to apply for an ABN when signing up reduces the risk of misclassifying an income-producing activity as a mere hobby. If an ABN is not provided, the effective penalty rate of withholding will apply, so the worker has an incentive to obtain and quote the ABN even if there is doubt as to eligibility. If the ATO disagrees with the independent contractor classification and concludes that the workers are in fact employees, it can cancel their ABNs (the ATO is also the administrator of the ABN registry), but such cancellation has potentially dire commercial consequences for the workers.61

56 A New Tax System (Australian Business Number) Act 1999, No. 84, 1999, section 8 (herein referred to as “the ABN Act”). 57 ABN Act section 41. 58 A New Tax System (Goods and Services Tax) Act 1999, No. 55, 1999, section 9 - 20 (herein referred to as “the GST Act”). 59 TAA schedule 1, section 12 - 190. 60 TAA schedule 1, section 12 - 190(6). 61 A special investigation report by the ABC’s Four Corners television program and Fairfax media in 2018 described a case where, allegedly, as part of an ATO audit of a transcription business, the ATO concluded that the workers completing the transcribing were employees rather than 84 n canadian tax journal / revue fiscale canadienne (2020) 68:1

In short, if a gig worker believes that he or she is carrying on a small business, the worker is entitled to hold an ABN and, by quoting one, will avoid no-ABN PAYGW. However, the downside of such an approach is that the worker may be surprised by a large tax debt on assessment, since no advance payments have been made. Such an assessment may trigger the operation of the pay-as-you-go instalments (PAYGI) regime (described below), but this process is subject to a lag in operation and has its own weaknesses. Another option available to a (non-employee) worker who holds an ABN is to enter into a voluntary agreement with the payer such that PAYGW applies at a flat rate of 20 percent (or at a rate otherwise notified by the ATO, based on a previous year’s assessment of business income).62 A potential reform would be to make PAYGW mandatory for gig work payments, perhaps at the flat 20 percent rate, but I would suggest that it is preferable, in the short term, to seek to bolster compliance with improved reporting, as discussed below.

Pay-As-You-Go Instalments As the alternative to PAYGW, the PAYGI regime imposes obligations related to small business reporting and tax instalments through a regular business activity statement.63 This regime operates similarly to PAYGW, and it requires instalments of income tax to be made throughout the year and in advance of assessment. One weakness of the system is that the obligations are first triggered only if the ATO has notified the taxpayer of their PAYGI rate. This rate is based on the effective tax rate resulting from the most recent tax return,64 which could mean a delay of 18 months to two years between the commencement of a business and the due date for the first instalment. Many of the details of the operation of the PAYGI system in relation to any specific individual are based on theATO notice,65 and the ATO has a degree of flexibility in the application of the regime. The ATO’s approach is to include individuals in the instalment system only if the amount of gross business and investment income is AU$4,000 or more for the previous year.66 Although the frequency of instalments

independent contractors and cancelled the ABNs of the contractors. See Adele Ferguson, Lesley Robinson, and Lucy Carter, “ ‘It’s Malicious and It’s Vengeful’: The Tax Office Is Facing Calls for Curbs on the ‘Draconian’ Powers It Uses To Target Small Businesses,” ABC News, April 7, 2018 (www.abc.net.au/news/2018 - 04 - 07/australian-tax-office-accused-of-misusing -draconian-powers/9613808). 62 TAA schedule 1, section 12 - 55. 63 TAA schedule 1, part 2 - 10. 64 The commissioner may notify a taxpayer of an instalment rate under TAA schedule 1, section 45 - 15, which is then applied to the instalment income for the period (ibid., section 12 - 120) or, alternatively, instalments will be based on a GDP adjusted figure derived from the prior year’s return (ibid., section 45 - 112). 65 TAA schedule 1, section 45 - 15. 66 This is according to the guidance provided in Australian Taxation Office, “PAYG Instalments” (www.ato.gov.au/General/PAYG-instalments). the future of work: the gig economy and pressures on the tax system n 85 can also vary, the usual payment and reporting cycle for small and medium-sized businesses is quarterly; however, taxpayers assessed a low amount of tax may instead be allowed an annual instalment.67 Another weakness of the system is that the instalment amount or rate is based on the previous year’s return and therefore does not automatically adjust to variations in business turnover in the way that PAYGW can. Although a taxpayer does have the option to vary instalments down, penalty interest can be triggered if the variation proves to be excessive.68 This system is subsidiary to PAYGW, so if the worker opts for a PAYGW voluntary agreement, payments covered by that agreement will not be subject to PAYGI.69 Given that many gig workers are not classified as employees and have ABNs, they will, unless they voluntarily enter the PAYGW system, be covered by PAYGI once their annual gig work turnover exceeds the ATO’s set threshold.

Supporting the Voluntary Compliance of Workers In conjunction with these systems, the ATO and the Canada Revenue Agency (CRA) have made it a priority to assist workers and employers to voluntarily comply with their obligations. To this end, both tax authorities currently provide a wide range of guidance and advice materials on the distinction between employees and independent contractors and on the variety of compliance obligations.70 For example, in addition to providing formal advice, the ATO has designed an “employee/contractor decision tool,” which is available online,71 both to assist in making this determination and to alert potential employers of their various obligations. However, this tool is not designed to be used by workers. The ATO has a detailed set of materials available through a gateway called “The Sharing Economy and Tax,”72 which covers both the gig economy and the sharing economy, with an emphasis currently on sharing platforms and ride-sourcing. The

67 See Australian Taxation Office, “How Often You Lodge and Pay” (www.ato.gov.au/General/ PAYG-instalments/How-often-you-lodge-and-pay). 68 The general interest charge can be applied to the underpayment due to the excessive downward variation. 69 TAA schedule 1, section 45 - 120(3). 70 See Canada Revenue Agency, “Compliance in the Sharing Economy” (www.canada.ca/en/ revenue-agency/programs/about-canada-revenue-agency-cra/compliance/sharing-economy .html). The United States Internal Revenue Service launched a detailed site in 2016, The Sharing Economy Resource Center, that includes information regarding estimates of income tax payments and voluntary withholding (like the systems in Australia) as well as self-employment taxes (social security and Medicare taxes). See Internal Revenue Service, “Sharing Economy Resource Center” (www.irs.gov/businesses/small-businesses-self-employed/sharing-economy -tax-center). 71 See Australian Taxation Office, “Employee/Contractor Decision Tool” (www.ato.gov.au/ calculators-and-tools/employee-or-contractor). 72 See Australian Taxation Office, “The Sharing Economy and Tax” (www.ato.gov.au/general/ the-sharing-economy-and-tax). 86 n canadian tax journal / revue fiscale canadienne (2020) 68:1 emphasis on ride-sharing is in part owing to special GST rules that require all providers of taxi services, which have been held judicially to include Uber’s ride- sourcing,73 to be registered for GST regardless of turnover.74

Reporting by Gig Platforms to Revenue Authorities The ATO has both broad and specific information-gathering powers that may assist in fostering compliance as well as in detecting non-compliance. These powers have been used to some extent in relation to the gig economy, and the government is currently considering whether to legislatively expand these powers. As noted above, payments subject to PAYGW must be reported regularly to the ATO. However, what has been coined a “transparency gap” exists if a worker is outside PAYGW, since the ATO must (1) rely on information provided in the annual tax return to identify business income and then (2) determine whether to include the taxpayer in the PAYGI system from then on, which further relies on voluntary compliance. In addition, there is no statutory legal requirement that platforms provide any regular reports to workers, though some platforms do provide this assistance—a good example is Uber in Australia.75 A similar transparency gap has been identified in the United States.76 An entity making payments to a non-employee for services in excess of US $600 is required to lodge a form 1099 -MISC (rather than the form W- 2 for employees), but this form is not to be used if such payments are made by credit card or payment card. In that case, the payment settlement agency must instead report on form 1099 -K; however, this form has a reporting threshold of US $20,000 in value or 200 transactions.77 Work done by Bruckner identifying this gap suggests that a substantial number of US gig workers are not receiving any form 1099.78

73 Uber BV v. Commissioner of Taxation, 2017 FCA 110. 74 GST Act section 144 - 5. The usual GST turnover threshold is AU $75,000. There is a specific ride-sourcing and tax information product available: Australian Taxation Office, “Ride- Sourcing” (www.ato.gov.au/General/The-sharing-economy-and-tax/Ride-sourcing). 75 According to its website, Uber provides Australian drivers with monthly and annual tax summaries to assist them in managing their tax affairs, as well as providing them with some general tax information and links to tax and accounting service providers that can provide additional assistance. See “Australian Rideshare Tax Requirements,” UBER.com (www.uber.com/ au/en/drive/tax-information). PwC has designed a specific business product called “Airtax” that links to the driver’s Uber account to streamline tax processes. See “Get Tax-Ready with Airtax,” Airtax.com.au (https://rideshare.airtax.com.au). 76 Caroline Bruckner, Shortchanged: The Tax Compliance Challenges of Small Business Operators Driving the On-Demand Platform Economy (Washington, DC: American University, Kogod School of Business, Kogod Tax Policy Center, May 2016) (www.american.edu/kogod/research/ upload/shortchanged.pdf ). 77 Internal Revenue Service, “2019 Instructions for Form 1099 -MISC,” 2018, at 2. 78 Bruckner, supra note 76, at 15. the future of work: the gig economy and pressures on the tax system n 87

In Australia, in order to fill a similar gap, specified categories of payments must be reported annually under the taxable payments reporting system (TRPS). The TRPS, which was designed for the building and construction industry (considered to be at high risk of non-reporting) and commenced in legislation in 2012, requires purchasers of construction services who are themselves primarily engaged in building and construction to report data on such purchases annually to the commissioner.79 This is similar to Canada’s contract payment reporting system. As a consequence of the work of the Black Economy Taskforce,80 the TRPS has been extended to certain other contractor payments—initially, in 2018, to payments for cleaning and courier services, and then, in 2019, to road freight, security, and information technology (IT) services.81 A reporting entity is one that itself makes a supply of the type of specified service, and the transaction that is reportable is payment to another entity to supply such services (thus, in effect, this definition covers payments by contractors to subcontractors).82 Although the Black Economy Taskforce did not support an earlier recommendation to extend the TRPS to all contractor payments,83 it did recommend that improvements to current reporting in the sharing economy be considered.84 The ATO currently relies on its general information-gathering powers to run data- matching programs,85 whereby participants in certain sectors are identified and required by notice to provide the specified information, if they have collected such information. Such programs are currently in place for ride-sourcing (facilitators and their financial institutions) and for sharing-economy accommodation (platforms

79 The basics of this regime are provided in TAA schedule 1, division 405, while the specification of relevant purchasers and relevant transactions is provided in the regulations: Taxation Administration Regulations 2017, part 6, division 5. The legislation provides for quarterly reporting but this can be varied by the commissioner: TAA schedule 1, section 405 - 10. 80 Black Economy Taskforce, supra note 47, at 128. 81 Rather than include these new categories by way of regulation, a different reporting regime has been amended to include these transactions. Australian Treasury Law Amendment (Black Economy Taskforce Measures No. 1) Act 2018, amending TAA schedule 1, section 396 - 55, to add items 11 (cleaning) and 12 (couriers), effective July 1, 2018; and items 13 (security) and 14 (IT), effective July 1, 2019. 82 The commissioner has issued a ruling providing additional details as to the meaning of various terms in the legislation and its operation: Australian Taxation Office,Law Companion Ruling LCR 2018/8, “Expansion of the Taxable Payments Reporting System to Courier and Cleaning Services,” October 31, 2018. A separate ruling was issued by the ATO in relation to the other categories that came into the system in 2019: see Australian Taxation Office,Law Companion Ruling LCR 2019/4, “Expansion of the Taxable Payments Reporting System to Road Freight, Security, Investigation or Surveillance, and Information Technology Services,” August 14, 2019. 83 See Australian Government, Inspector General of Taxation, Taxation Ombudsman, “Review into the ATO’s Employer Obligations Compliance Activities,” December 2016. 84 Black Economy Taskforce, supra note 47, at 136. 85 TAA schedule 1, section 353 - 10. 88 n canadian tax journal / revue fiscale canadienne (2020) 68:1 and financial institutions).86 However, the use of this information-gathering power depends on two conditions: (1) that the information exists and is held by the data owner (that is, the ATO’s power is to obtain information that exists but not to require that data be collected); and (2) that the data owner or a related party is operating the business in Australia and is therefore governed by Australian law.87 Another weakness is that the ATO cannot specify the form in which the data are provided— the legislation requires only that the information be provided in whatever form it is held. The Australian government released a discussion paper in January 2019 to canvass proposals for strengthening the regime by formalizing the requirement to report through legislative amendment.88 Both the OECD and the Black Economy Taskforce recognize that requiring platforms to report will also reinforce the message that in most cases, payments received by workers are taxable, and it may allow the data to be used by revenue authorities for pre-filling returns.89 A potentially more difficult issue, as identified by the OECD, is how to obtain information on local workers’ earnings when a platform does not have a presence in the home jurisdiction.90 If the other jurisdiction has a mechanism in place to obtain the relevant data, international collaboration among tax administrators may be possible, and the OECD’s Forum on Tax Administration is working on this issue. The forum’s 2019 report provides a number of suggestions on how to improve the provision of usable data to tax administrators.91 A system such as the common reporting standard (CRS) could be an option, with standardized reporting, formatting, and due diligence,92 combined with automatic exchange. However, it must be judged whether the scale and scope of potential tax avoidance warrant such a response. It

86 Details of the various data-matching protocols can be found here: Australian Taxation Office, “Data Matching Protocols” (www.ato.gov.au/General/Gen/Data-matching-protocols/?page=1). 87 The information must be in the custody or under the control of the local entity. See Australia and New Zealand Banking Group Limited v. Konza, [2012] FCAFC 127, in which a notice seeking information regarding the operation of a Vanuatu subsidiary was deemed valid because the data were held in a database under the control of the Australian head company. See data-matching protocol for ride-sourcing, 2018 - 19, Australian Taxation Office, “Data Providers” (www.ato.gov.au/General/Gen/Ride-sourcing- 2016 - 19 -data-matching -protocol/?page=2#Data_providers). 88 Australia, The Treasury, Tackling the Black Economy: A Sharing Economy Reporting Regime— A Consultation Paper in Response to the Black Economy Taskforce Final Report (Canberra: The Treasury, January 2019) (https://static.treasury.gov.au/uploads/sites/1/2019/01/Consultation -Paper-A-sharing-economy-reporting-regime- 1.pdf ). 89 Tax Challenges Arising from Digitalisation, supra note 1, at paragraph 484; Black Economy Taskforce, supra note 47, at 138. 90 Tax Challenges Arising from Digitalisation, supra note 1, at paragraph 485; Black Economy Taskforce, supra note 47, at 140. 91 Organisation for Economic Co-operation and Development, The Sharing and Gig Economy: Effective Taxation of Platform Sellers: Forum on Tax Administration (Paris: OECD, March 2019) (https://doi.org/10.1787/574b61f8 -en). 92 Ibid., at 41. the future of work: the gig economy and pressures on the tax system n 89 may be possible to encourage voluntary engagement by relying on platform operators’ principles of corporate social responsibility, with no need for penalties such as internet service provider (ISP) blocking.93 Australia’s experience with the application of GST to imports of services and digital products (since 2017) and low-value goods (since 2018) may prove to be instructive regarding approaches to the administration of situations where the supplier, or in this case the platform, does not have a physical presence in the jurisdiction.94

RETIREMENT CONTRIBUTIONS: A POTENTIAL POLICY PROBLEM Although the regimes differ, employers in both Australia and Canada are required to make payments related to the provision of retirement benefits to employees. In Australia, the public pension is funded out of consolidated revenue, but employers are legislatively required to make contributions to superannuation fund accounts for the benefit of their employees, with such savings ultimately becoming payable to the specific employee upon his or her retirement under this concessionally taxed but heavily regulated system. The closest comparison in Canada is the requirement that employers make contributions to the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP), as appropriate.

Compulsory Superannuation in Australia Under the Australian system, employers must make contributions of 9.5 percent of an employee’s ordinary-time earnings to a complying superannuation fund or else be subject to the superannuation guarantee charge (equal to the shortfall in contributions plus interest).

Definition of “Employee” for Superannuation Purposes The key issue in this context is the meaning of “employee,” which commences with the ordinary (common-law) meaning and then has a number of extensions.95 Most relevantly, if “a person works under a contract that is wholly or principally for the labour of the person,” the person is considered to be an employee of the other party to the contract.96 However, a person working no more than 30 hours per week doing work of a wholly domestic or private nature is not considered to be an employee for

93 ISP blocking was suggested as a potential last-resort compliance tool in the report of the Black Economy Taskforce, supra note 47, at 136. 94 Australia’s GST system requires offshore merchants and electronic distribution platforms that are importing to consumers low-value goods and digital products and services to register in Australia and to charge and pay the relevant amount of GST to the ATO. See GST Act division 84. 95 Superannuation Guarantee (Administration) Act 1992, No. 111, 1992, section 12 (herein referred to as “the SGAA”). 96 SGAA section 12(3). 90 n canadian tax journal / revue fiscale canadienne (2020) 68:1 these purposes.97 The ATO considers that this exclusion covers, for example, cleaning, childminding, home repairs, and gardening,98 and thus might apply to some types of gig work. There is also a de minimis rule whereby the contribution requirements are generally triggered only if AU$450 or more is paid to the worker in a calendar month. It is arguable that the requester is paying for the work rather than the platform, so that the lower-value one-off jobs would not trigger the contribution requirements, regardless of the worker’s status as an employee or contractor. The phrase “contract that is wholly or principally for the labour of the person” has been interpreted by the courts. This element of the test was formerly part of the PAYGW regime (payments under such a contract were treated as salary or wages), but it is no longer included. An early decision of the High Court, interpreting the phrase in the context of the services of a roof-tiling contractor, concluded that when the contract allows the contractor to employ another person to do the work, the payment is not “for the labour of the person”; rather, it is a contract to produce a given result.99 In a later case, the “contract for the labour of the person” test was applied to an encyclopedia sales agent who was paid a commission for each product order secured.100 Owing to intervening amendments, the focus of this case was not on the power to delegate but on whether the contract was for the labour of a person or a result. The court concluded that, on the facts, the commission payment was for a result and therefore not subject to withholding.101 The ATO has issued guidance on the interpretation of the definition of “employee” in the context of the superannuation legislation.102 The “contract for the labour of the person” extension (noted above) will apply if, having regard to the terms of the contract and the conduct of the parties, the following three elements are found:

n the individual is remunerated (either wholly or principally) for his or her personal labour and skills; n the individual must perform the contractual work personally (there is no right of delegation); and n the individual is not paid to achieve a result.103

97 SGAA section 12(11). 98 Australian Taxation Office,Superannuation Guarantee Ruling SGR 2005/1, “Superannuation Guarantee: Who Is an Employee,” February 23, 2005, at paragraph 98. 99 Neale v. Atlas Products (Vic) Pty Ltd., 1955 HCA 18, at paragraph 3 (emphasis added). 100 World Book (Australia) Pty Ltd. v. Federal Commissioner of Taxation (1992), 108 ALR 510, at 513 - 14 (decision of the New South Wales Supreme Court—Court of Appeal). 101 Ibid., at 518 - 20. 102 SGR 2005/1, supra note 98. 103 Ibid., at paragraph 11. the future of work: the gig economy and pressures on the tax system n 91

This definition also captures labour-hire arrangements, in which the agency (not the client) is the employer and the worker is the employee.104 The legislative history of this provision reveals that it was intended to capture some independent contractors who principally supply their labour and therefore are “in fact not very distinguish- able from an employee.”105 The specific SGAA extension of the meaning of “employee” to include a person working under a contract wholly or principally for the labour of that person was considered in the context of deliverers contracted with a document courier-services company.106 The Court of Appeal of the Supreme Court of NSW considered this option after first concluding that the couriers were not employees, a conclusion with which the High Court later disagreed in a different matter.107 The Court of Appeal’s conclusion that the “contract for the labour of the person” extension also did not capture the arrangements was unanimous, but the opinions supporting this conclusion were based on somewhat differing grounds: (1) that the test asked whether the courier was “working for himself” (which, it was concluded, he was);108 and (2) that the courier contracted to produce a result (the delivery of a particular parcel to a particular client).109 The High Court’s later decision on a different matter that involved the same courier company held that the couriers were employees, so the court did not need to consider the “contract for the labour of the person” extension. However, given the commonality of the criteria, the Court of Appeal’s reasoning is subject to some doubt. In a decision of the Federal Court with respect to contracted interpreters and translators, there was a suggestion that a contract for a result was not automatically outside the scope of the “contract for the labour of the person” extension,110 but, since these comments were made in obiter and diverge from authority to date, the ATO has expressed the view that it will continue to apply the results test as per the earlier cases.111 The concept of the contract for the labour of a person is therefore, in effect, rather narrow and is unlikely to capture the typical gig worker, who is paid for a result even though, ordinarily, the gig worker is not allowed, under the

104 Ibid, at paragraphs 79 - 80. 105 Ibid., at paragraph 68, referring to Parliament of Commonwealth of Australia, Second Report of the Senate Select Committee on Superannuation: Superannuation Guarantee Bills (Canberra: Australian Government Publishing Services, June 1992). 106 Vabu Pty Ltd. v. Federal Commissioner of Taxation (1996), 33 ATR 537. 107 Hollis v. Vabu Pty Ltd., 2001 HCA 44. 108 Vabu Pty Ltd., supra note 106, at 539 (per Meagher JA). 109 Ibid., at 542 (per Sheller JA). 110 On Call Interpreters and Translators Agency Pty Ltd. v. Commissioner of Taxation (No. 3), 2011 FCA 366, at paragraph 311. 111 Australian Taxation Office, “Decision Impact Statement: On Call Interpreters and Translators Agency Pty Ltd. v. Commissioner of Taxation” (www.ato.gov.au/law/view/document ?DocID=LIT/ICD/VID409of2009/00001). 92 n canadian tax journal / revue fiscale canadienne (2020) 68:1 contracts with the platform, to subcontract out the work (given, especially, that these systems rely on an individual’s ratings from customers to maintain quality assurance).

Are Incentives Enough? A broader policy question for government is whether it is desirable that the compulsory superannuation system be applied to payments to individuals who are technically not employees. The system currently relies on a number of incentives to encourage rather than require sole proprietors to contribute to superannuation,112 and it also provides capital gains tax concessions in relation to the sale of small business assets,113 the proceeds of which can then be used to self-fund retirement—an alternative to the government pension. A deduction for personal contributions was, until 2017, available only to individuals who had employment income less than 10 percent of total earnings,114 which might have excluded many gig workers, but this rule has now been removed and the limit comes through a cap on “concessional” (which includes deducted) contributions from all sources of AU$25,000 per annum.115 Whether this system should be further adjusted in light of the growth in non-standard work would be a matter for government.

The CPP and Employment Insurance The CPP provides a retirement pension to individuals that is based on their contributions and is a factor of earnings, up to a current cap of Cdn $1,154.58 per month in 2019.116 Under the laws of Canada, when a worker is characterized as an employee, the employer is obliged to make CPP contributions and pay employment insurance (EI) premiums as well as deduct and forward to the CRA the employee’s portion of CPP contribution, EI premiums, and income tax under the payroll system. The total CPP rate is currently 10.2 percent of earnings (up to a cap of Cdn $57,400 per annum in 2019). The ordinary test for employment status is whether the worker is employed under a contract of service. As a general matter, self-employed workers pay both portions of CPP contributions, but EI applies only on election. However, certain self-employed individuals (for example, barbers, hairdressers, and taxi drivers) are deemed to have insurable employment, and therefore the deemed employer must pay both the worker’s and the deemed employer’s share of EI premiums.117 As

112 The main incentive is the combined effect of an available deduction (see ITAA 1997 section 290 - 150) and a concessional (15 percent) tax rate on contributions and earnings in the hands of the complying superannuation fund. 113 ITAA 1997 division 152. 114 Former ITAA 1997 section 290 - 160. 115 ITAA 1997 section 291 - 20(2). 116 See Government of Canada, “Canada Pension Plan: Overview” (www.canada.ca/en/services/ benefits/publicpensions/cpp.html). 117 CRA guide T4001, “Employers’ Guide—Payroll Deductions and Remittances.” the future of work: the gig economy and pressures on the tax system n 93 a result, unless one of the special industry regimes operates, the employee/self- employed test operates in the same way for the various regimes. The CRA has issued guidance on the operation of the test for employment status, which is relevant for both income tax and CPP and EI contributions.118 The CRA will begin by examining the intention of the parties (that is, whether the contract is intended to be a contract of service [employment] or a contract for services [business relationship]) and then will apply a multifactorial test.119 Aside from the “intention of the parties” test, introduced into law by the Wolf v. Canada decision in 2002,120 the factors are the same in nature as those considered relevant in Australia for these purposes, and it is likely that many gig workers will not be characterized as employees of either the platform operator or the requester and will instead be considered self-employed for CPP and EI purposes. Where the status relates to employment in Quebec for the purposes of the QPP, attention must be paid to the Civil Code of Quebec, which provides that a contract of employment is one whereby a person undertakes for a limited time to do work for remuneration according to the instructions and under the direction or control of the employer (a relationship of subordination).121 Self-employment is characterized as contracting to provide work or to provide a service for a price—an arrangement in which the contractor is free to choose the means of performance and there is no relationship of subordination.122 The criteria identified as relevant for this test by Revenu Québec are very similar to those for the common-law test, and so in many cases, gig workers in Quebec, as in common-law jurisdictions, are likely to be considered self-employed.123

PAYROLL TAXES IN AUSTRALIA: A TAX BASE PROBLEM FOR THE STATES An important contributor to the revenue base of Australia’s states and territories is payroll tax, whereby employers are required to pay tax, usually at a flat rate, on the basis of the total value of their payroll for employees within the state. This is to be distinguished from the payroll program in Canada, which includes employers’ obligations regarding EI, CPP contributions, and income tax.

118 CRA guide RC4110, “Employed or Self-Employed?” 119 Ibid, at 5. 120 Wolf v. Canada 2002 FCA 96. For an analysis of the application of the employee/independent contractor test in the tax context in Canada, and with specific consideration of the intention test, see Tamara Larre, “The Role of Intention in Distinguishing Employees from Independent Contractors” (2014) 62:2 Canadian Tax Journal 927 - 70. 121 Civil Code of Québec, CQLR c. CCQ- 1991, article 2085. 122 Ibid., articles 2098 and 2099. 123 Revenu Québec, Bulletin d’interprétation RRQ.1 -1/R2, “Statut d’un travailleur [Status of Worker],” October 30, 1998 (www2.publicationsduquebec.gouv.qc.ca/dynamicSearch/ telecharge.php?type=16&file=R9F1T1R2BULB.pdf ). 94 n canadian tax journal / revue fiscale canadienne (2020) 68:1

In Australia, a degree of harmonization across the states and territories has been achieved, and I will consider the law of NSW by way of example. According to the most recent budget statements, approximately 30 percent of NSW’s taxation revenue comes from payroll tax, making it the largest tax revenue contributor,124 so any structures that have the effect of removing workers’ pay from the tax base will be of concern.

Employees and Labour-Hire Arrangements The tax base for payroll tax is the wages paid in the jurisdiction by an employer in relation to services performed by employees.125 The terms “employer” and “employee” take their ordinary meaning for these purposes,126 but the legislature has recognized some non-standard working arrangements by including specific provisions for contractors and employment agencies.127 The employment agent (labour-hire) rules are relatively straightforward in that they determine the agency and not the client to be the employer and the service provider/worker to be an employee of the agency.128 As with PAYGW, a gig worker may not be a common- law employee of either the platform operator or the requester, and the employment agent provisions would also seem not to be triggered. These rules operate when there is a contract between the agency and the client and a contract between the worker and the agency, but no contract between the worker and the client.129 It seems unlikely that the tripartite contractual relationship between the requester, the platform, and the worker typical of gig work would be seen to have this character. Situations where there is a contract between the worker and the client have been addressed by the NSW revenue authority, which determined that the employment tests should then be applied to that contract to see whether the client, not the agency, will be the employer.130

124 New South Wales Government, Budget Statement 2019 - 2020, Budget Paper no. 1, June 18, 2019, at 4.4, under the heading “Taxation Revenue” (www.budget.nsw.gov.au/sites/default/ files/budget- 2019 - 06/2019 - 20%20Budget%20Paper%20No.%201%20 -%20Budget%20 Statement%20%281%29.pdf ). 125 New South Wales Payroll Tax Act 2007, No. 21, section 11. 126 New South Wales Revenue, Revenue Ruling PTA 038, “Determining Whether a Worker Is an Employee,” July 29, 2011. 127 New South Wales Payroll Tax Act 2007, part 3, divisions 7 and 8, respectively. Inserted into the previous Payroll Tax Act 1971, No. 22 in 1985: New South Wales Payroll Tax (Amendment) Act 1985, No. 175, schedule 1. 128 New South Wales Payroll Tax Act 2007, sections 38 and 39. 129 New South Wales Revenue, Revenue Ruling PTA 029, “Recruitment Agencies/Placement Agencies/Job Placement Agencies,” June 30, 2008. 130 Ibid. the future of work: the gig economy and pressures on the tax system n 95

Relevant Contracts Extension The alternative contractor provisions turn on the concept of a “relevant contract,” under which the person providing the work is deemed to be an employee131 and the person to whom the services are provided is deemed to be an employer.132 The potential employer in a gig context would therefore seem to be the requester. The concept of a relevant contract begins with a contract in relation to the performance of work, but then it carves out a number of types of contracts, excluding, broadly, contracts under which (1) the services provided by the contractor are ancillary to the supply of goods; (2) the services are not integrated into the business (not ordinarily required, ordinarily required for less than 180 days, or actually provided for less than 90 days); (3) the services are provided by a contractor who normally provides those services to the public; and (4) the services are performed by two or more people.133 Where a relevant contract includes the provision of goods, the non-service component is excluded from the deemed wages.134 The contractor provisions are not likely to capture gig arrangements, given that the on-demand services, when viewed from the perspective of the requester, are by their nature provided on a short-term basis and therefore would be excluded by the 90 -day rule. Depending on the manner in which the gig work is organized and controlled, the revenue authority may argue (as, according to media reports, NSW Revenue argued in relation to Foodora) that gig workers are employees under the common- law test and therefore the payments to them are subject to payroll tax;135 however, this has not been tested in court. Where the common-law tests are not satisfied, the nature of the contracts between worker, requester, and platform makes the employment agency and contractor provisions unlikely to apply to gig workers in a consistent way. For these arrangements to be included within the scope of the payroll tax, legislative intervention would therefore appear necessary to extend the deeming rules (perhaps through the contractor rules) to include gig workers whose work arrangements fall outside traditional employment, and it would seem most appropriate to deem the platform to be the employer for these purposes.

CONCLUSIONS AND A WAY FORWARD It can be argued that the growth in the gig economy represents not so much a disruption of employment markets as the digitalization of non-standard labour

131 New South Wales Payroll Tax Act 2007, section 34. Similar contractor deeming provisions exist in all Australian jurisdictions except for Western Australia. 132 Ibid., section 33. 133 Ibid., section 32. 134 Ibid., section 35. 135 Anna Patty, “Foodora Faces Claims for Unpaid Tax and Superannuation,” The Sydney Morning Herald, August 28, 2018 (www.smh.com.au/business/workplace/foodora-faces-claims-for -unpaid-tax-and-superannuation- 20180828 -p5007n.html). 96 n canadian tax journal / revue fiscale canadienne (2020) 68:1 contracting. These new platform-based arrangements raise many concerns, including concerns about worker protection and the impact of outsourcing on the economy more broadly. In this paper, I have focused on tax issues, specifically with regard to income tax, compulsory superannuation contributions, and payroll tax in Australia. In each case, the common-law notion of “employment” is a key determiner of the tax outcome, but each regime also incorporates provisions aimed at contractors and other forms of on-demand labour. In each case, however, it is apparent that the tripartite arrangements common to gig work—between platform operator, worker, and requester—do not easily fit within these classification rules. In relation to income tax, I have argued that the shift from employment to gig worker/contractor does not present a substantial risk to Australia’s income tax base on a technical basis, although the PSI rules could be slightly reformulated to deal more clearly with gig arrangements. The real challenge—because of the transparency gap that emerges when revenue authorities can no longer rely on employers to withhold and report on worker earnings—is compliance. I would submit that, rather than creating a new category of deemed employee, the current ABN system plus enhanced reporting can fill the gap. Requiring workers to quote an ABN reinforces the message that participating in gig work is carrying on taxable business, and meaningful data could be created and reported by way of an enhanced mandatory periodic reporting mechanism for platforms. Workers could also be encouraged to opt into voluntary withholding arrangements or otherwise to rely on the PAYGI system to report actual receipts on a quarterly basis. The current PAYGI threshold of AU $1,000 per quarter of earnings would operate to capture only those workers who are either regularly engaged or are providing high-value services, when these taxpayers are likely to be the focus of compliance action. These data can be used for detecting non-compliance as well as for pre-filling returns, further encouraging voluntary compliance. Of course, some weaknesses must be acknowledged. Voluntary PAYGW arrangements would create administrative costs for platforms, making it less likely that platforms would encourage such arrangements, and any mandatory reporting regime has compliance costs attached. In the case of superannuation, non-employee gig workers will often not be engaged under a “contract for the labour of the person” and therefore will not benefit from mandatory superannuation contributions. The system will instead operate on a basis of incentives. Non-standard contract work, depending on its market penetra- tion, runs the risk of creating a generation of workers with insufficient private savings for retirement, which will increase the pressure on a public pension system that is already under stress. In the case of payroll tax, a shift to the outsourcing of labour to gig workers has the potential to erode the tax base, and legislative amendment, perhaps in the form of an extension of the notion of “relevant contracts,” may be considered necessary for platform operators to be deemed employers. The growth of cloud labour and offshore platforms has created particular challenges, but coordination between revenue authorities can lead to the creation of the future of work: the gig economy and pressures on the tax system n 97 meaningful data sets that can then be exchanged, especially if the platform requires the quotation of a relevant business number before payments can be released to bank accounts. With regard to (at least) platforms with a domestic presence, combining a new payment-reporting regime with the current ABN system could be sufficient to reach acceptable compliance rates, with no need for more draconian measures, such as mandatory withholding. canadian tax journal / revue fiscale canadienne (2020) 68:1, 99 - 124 https://doi.org/10.32721/ctj.2020.68.1.sym.li

Automation and Workers: Re-Imagining the Income Tax for the Digital Age

Jinyan Li, Arjin Choi, and Cameron Smith*

PRÉCIS À l’ère de l’automatisation, de plus en plus de travailleurs perdent leur emploi ou deviennent des travailleurs à la demande, et on s’attend à ce que la part du revenu national provenant du revenu du travail diminue encore. Ces changements menacent la viabilité du régime canadien de l’impôt sur le revenu qui, depuis 102 ans, a été une source majeure de recettes publiques et un instrument clé de redistribution du revenu collectif. Les auteurs plaident en faveur de la réinvention de l’impôt sur le revenu pour l’adapter à l’ère numérique. Ils proposent que tous les travailleurs soient imposés également, quels que soient les arrangements de droit privé ou les moyens techniques utilisés pour effectuer le travail. Ils appellent à une reconceptualisation de la source de revenus en tant que capital humain, capital ou entreprise. Ils proposent des moyens de modifier la Loi de l’impôt sur le revenu afin d’assurer que le revenu du travail ne soit pas intégré dans le capital ou déguisé en revenu provenant d’une entreprise exploitée activement justifiant des subventions fiscales. Pour assurer la mise en œuvre de cet impôt réinventé, les auteurs proposent d’élargir le champ d’application de la retenue à la source en tirant parti des progrès technologiques.

ABSTRACT In the age of automation, more and more workers lose jobs or become gig workers, and the share of labour income in national income is expected to decline further. These developments threaten the sustainability of Canada’s 102-year-old income tax as a major source of government revenue and a key instrument for redistributing social income. The authors make the case for re-imagining the income tax to suit the digital age. They propose that all workers should be taxed the same, regardless of the

* Jinyan Li is of Osgoode Hall Law School, York University (email: [email protected]). Arjin Choi and Cameron Smith received their JD degrees in 2019 from Osgoode Hall Law School, York University. The authors thank Jin Bao, a second-year JD student at Osgoode Hall Law School, for his research assistance; and Scott Wilkie, Alan Macnaughton, and Patrick Edgit for their feedback on some of our ideas and earlier drafts. We benefited from the feedback that an earlier version of this paper received from participants at the symposium “Re-Imagining Tax for the 21st Century: A Conference Inspired by the Scholarship of Tim Edgar,” held in Toronto, February 8 - 9, 2019.

99 100 n canadian tax journal / revue fiscale canadienne (2020) 68:1 private-law arrangements or technical means used to carry out the work. They call for a reconceptualization of the source of income as human capital, capital, or business. They suggest ways of amending the Income Tax Act to ensure that income from work is not embedded in capital or disguised as active business income that warrants tax subsidies. To ensure the implementation of such re-imagined tax, the authors suggest broadening the scope of withholding tax by taking advantage of technological advances. KEYWORDS: AUTOMATION n GIG WORKERS n TAX EQUITY n LABOUR n CAPITAL n DEMOCRACY

CONTENTS Introduction 101 Automation and Workers 104 Automation 104 “Surplus” Workers 104 The Rise of Gig Workers 106 Implications for the Income Tax 106 The Current Taxation of Workers 107 Overview of the Income Tax 107 Born To Be Fair 107 Becoming Democratic 108 The Largest Source of Government Revenues 109 Employment-Oriented 109 Differential Taxation of Workers 110 Classification of Workers 110 Deduction of Expenses 112 Timing of Taxation 113 Income Shifting and Character Transformation 113 Justifications for Differential Taxation of Workers 114 Administrative Simplicity and Expediency 114 Linkage with Social Security and Political Expediency 115 Deference to General Law 116 Tax Subsidies on the Ground of Societal Benefits 117 The Case for Reform 118 Sustainability of the Tax Base 118 Preserving the Income Tax as a Fair and Democratic Tax 119 Administrative Feasibility 120 Re-Imagining the Income Tax 121 Taxing All Workers the Same 121 Technical Design 122 Deduction for Work-Related Expenses 122 Characterization of Income from Work 122 Purifying the Small Business Deduction 123 Broader Use of Withholding Tax 123 Conclusion 124

automation and workers: re-imagining the income tax for the digital age n 101

INTRODUCTION The Canadian income tax was 102 years old in 2019.1 As a major source of revenue and an instrument of redistributing social income, it has traditionally relied on employment income as a base. The income tax was designed for the industrial era, when most Canadians worked as employees. The onset of automation, which features digitalization, robots, and artificial intelligence AI( ), poses significant challenges to the income tax system. Automation enables or forces more and more Canadians to become gig workers, freelancers, or independent contractors as opposed to traditional employees. Many Canadians may lose their jobs permanently. These forces have the potential to alter the traditional tax base and threaten the income tax system. Recognition of this threat has been growing.2 To address it, various proposals have been made. Some scholars recommend reforming the income tax by requiring that “all income—regardless of source—bear a similar tax burden”3 or by imposing a universal wage tax.4 Other commentators, including Bill Gates,5 have proposed implementing a tax on robots6 to raise revenue for use in training workers whose

1 The current Act evolved from the Income War Tax Act (IWTA) enacted in 1917. See Income War Tax Act, SC 1917, c. 28. 2 For example, Jay A. Soled and Kathleen DeLaney Thomas, “Automation and the Income Tax” (2019) 10:1 Columbia Journal of Tax Law 1 - 48; and Joachim Englisch, “Digitalisation and the Future of National Tax Systems: Taxing Robots?” (2018) (https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=3244670). 3 Soled and Thomas, supra note 2, at 1. 4 Edward J. McCaffery, “The Death of the Income Tax (or, the Rise of America’s Universal Wage Tax),” Indiana Law Journal (forthcoming). 5 Matthew Rimmer, “The Wild West of Robot Law” (2017) 38:3 Australasian Science (www.australasianscience.com.au/article/issue-mayjune- 2017/wild-west-robot-law.html); and M. Mustafa Erdoğdu and Coşkun Karaca, “The Fourth Industrial Revolution and a Possible Robot Tax,” in Irem Berksoy, Kutlu Dane, and Milenko Popovic, eds., Institutions & Economic Policies: Effects on Social Justice, Employment, Environmental Protection & Growth (London, UK: IJOPEC, 2017), 103 - 22, at 112. 6 For example, Ryan Abbott and Bret Bogenschneider, “Should Robots Pay Taxes? Tax Policy in the Age of Automation” (2018) 12:1 Harvard Law & Policy Review 145 - 75; Sami Ahmed, “Cryptocurrency & Robots: How To Tax and Pay Tax on Them” (2018) 69:3 South Carolina Law Review 697 - 740; Orly Mazur, “Taxing the Robots” (2019) 46:2 Pepperdine Law Review 279 - 329; Xavier Oberson, “Taxing Robots? From the Emergence of an Electronic Ability To Pay to a Tax on Robots or the Use of Robots” (2017) 9:2 World Tax Journal 247 - 6; and Erdoğdu and Karaca, supra note 5. During the 2019 federal election campaign, the Green Party’s Elizabeth May proposed a robot tax; to prepare for future of automation, see Cherlyn Chan, “Green Party’s Elizabeth May Proposes ‘Robot Tax’ To Prepare for Future of Automation,” Vancouver Sun, revised September 30, 2019 (https://vancouversun.com/news/ local-news/green-partys-elizabeth-may-proposes-robot-tax-to-prepare-for-future-of -automation). 102 n canadian tax journal / revue fiscale canadienne (2020) 68:1 jobs are eliminated by automation.7 These “tax on robot” proposals include systems in which the taxation of robots’ owners or users functions as an equalization of labour taxation.8 Alternatively, the taxpayer could be the robot itself—an “artificially intelligent person”—such that the robot tax is similar to a tax on legal “persons” (as with, for example, corporations).9 In this paper, we draw on the work of previous scholars in outlining the challenges posed by automation. We examine how automation exposes the fundamental defects in the Canadian Income Tax Act.10 We then make a case for reform. Although the design of progressive tax rates and the taxation of capital are outside the scope of this paper, we argue that the true source of individual income is work (or human capital/efforts) and that the current approach to taxing workers—that is, taxing them differently according to their different settings—is outdated. In this paper, we propose that all workers should be taxed the same, regardless of the legal or technical means by which they perform their work. We also propose that the withholding tax mechanism should be extended to all payments made to workers. Our paper builds on and seeks to contribute to recent literature on tax reform in Canada.11 Some recent ideas about tax reform include the following:

7 However, there are significant criticisms of the robot tax, including the following: (1) that it would stifle innovation, reduce productivity, and dampen a booming new industry and Canadian competitiveness in that industry; and (2) that it would not generate much additional tax revenue. A narrowly defined concept will not achieve the social and fiscal purpose of “equalizing” robots and workers in terms of production of goods and services. A broadly defined concept will include any process or device that displaces workers. A recent EU report defined robots on the basis of autonomy, self-learning, and adaptation. Most automation exists in forms that cannot be directly linked to job losses; it takes the form not of physical robots but of software robots, which means that an all-encompassing rule cannot address which of these systems are creating problems in the job market. If the tax base cannot be defined with reasonable certainty, the tax would be highly problematic. See Erdoğdu and Karaca, supra note 5; Filipe Maia Alexandre, “The Legal Status of Artificially Intelligent Robots: Personhood, Taxation and Control” (Degree Master of Laws, Tilburg University, 2017); Abbott and Bogenschneider, supra note 6, at 149; and Ahmed, supra note 6, at 731 - 32. 8 See Abbott and Bogenschneider, supra note 6; Oberson, supra note 6; and William Meisel, The Software Society: Cultural and Economic Impact (Bloomington, IN: Trafford, 2013), at 220. 9 Taxing robots as taxpayers would make sense if robots assume “legal personality” status in private law, a change that is being considered in the European Parliament Resolution of 16 February 2017 with Recommendations to the Commission on Civil Law Rules on Robotics (2015/2103(INL)), [2018] OJ C 252 (herein referred to as “the European Parliament resolution.” The logic is similar to the logic of taxing corporations (legal persons, in private law). An income tax would be imposed on an imputed salary from robots’ activities (for example, the salary that would have been paid to the workers replaced by the robots). See Englisch, supra note 2, at 6; and Xavier Oberson, Taxing Robots: Helping the Economy To Adapt to the Use of Artificial Intelligence (Cheltenham, UK: Edward Elgar, 2019). 10 RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as the “ITA”). 11 Robin Boadway, “Policy Forum: Piecemeal Tax Reform Ideas for Canada—Lessons from Principles and Practice” (2014) 62:4 Canadian Tax Journal 1029 - 59; Richard M. Bird and automation and workers: re-imagining the income tax for the digital age n 103

1. Canada needs to review the tax system because of changing circumstances, especially the economic settings related to globalization, changes in the labour market, rising income inequality, and the evolution of tax theories and principles since the Carter commission report;12 2. Canada should consider switching to a dual income tax system like those in Nordic countries;13 and 3. Canada should consider reforming the corporate tax system, including the taxation of private corporations.14

The proposal that we set out in this paper is inspired by the design of the dual income tax, which essentially treats all personal income as income from labour or capital, and by insights regarding how labour income is embedded in capital or business for tax purposes.15 We seek to contribute to the literature on tax reform by demonstrating the urgency of such reform in the age of rapid automation and by presenting reform ideas that can protect the sustainability of the income tax. This paper is organized as follows: in the following section, we present evidence on the phenomenon of automation, its transformative nature, and its impact on workers and the tax system. Next, we provide an overview of the current income tax treatment of workers and the historical justifications for imposing a heavier tax burden on employees than on self-employed and incorporated workers. We proceed

Thomas A. Wilson, “The Corporate Income Tax in Canada: Does Its Past Foretell Its Future?” (2016) 9:38 SPP Research Papers [University of Calgary, School of Public Policy] 1 - 32; Alan Macnaughton and Kevin Milligan, “Policy Forum: Editors’ Introduction—Should Canada Have a Tax Commission?” (2018) 66:2 Canadian Tax Journal 349 - 50; Kevin Milligan, Tax Policy for a New Era: Promoting Economic Growth and Fairness, C.D. Howe Institute Benefactors Lecture, 2014 (Toronto: C.D. Howe Institute, November 2014) (www.cdhowe.org/ public-policy-research/tax-policy-new-era-promoting-economic-growth-and-fairness); Fred O’Riordan, “Policy Forum: Why Canada Needs a Comprehensive Tax Review” (2018) 66:2 Canadian Tax Journal 351 - 62; and Jennifer Robson, “Policy Forum: Building a Tax Review Body That Is Fit for Purpose—Reconciling the Tradeoffs Between Independence and Impact” (2018) 66:2 Canadian Tax Journal 375 - 86. 12 Canada, Report of the Royal Commission on Taxation (Ottawa: Queen’s Printer, 1966 - 67) (herein referred to as “the Carter commission”). 13 Bird and Wilson, supra note 11; and Milligan, ibid. 14 Boadway, supra note 11; and Bird and Wilson, ibid. 15 Victor Fleischer, “Taxing Alpha: Labor Is the New Capital Gain,” April 7, 2019 (https:// scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=1151&context=law_econ); Lily Kahng, “Who Owns Human Capital?” (2017) 94:3 Washington University Law Review 607 - 48, discussing how business owners increasingly are able to “propertize” labour into intellectual capital—to capture the returns on their workers’ labour by embedding it in intellectual property; Jonathan Rhys Kesselman, “Toward a Broader Base for Personal Taxation: Reconciling Equity and Efficiency,” in Jinyan Li, J. Scott Wilkie, and Larry Chapman, eds., Income Tax at 100 Years: Essays and Reflections on the Income War Tax Act (Toronto: Canadian Tax Foundation, 2017), 3:1 - 40; and Edward D. Kleinbard, “Capital Taxation in An Age of Inequality” (2017) 90:3 Southern California Law Review 593 - 682. 104 n canadian tax journal / revue fiscale canadienne (2020) 68:1 to make the case for re-imagining the income tax. Following that, we present ideas on how to redesign the income tax base to ensure the universal treatment of workers. We conclude with a note on the urgency of the issue and on why policy makers should act sooner rather than later.

AUTOMATION AND WORKERS Automation The term “automation” refers to the technology by which a process or procedure is performed without human assistance.16 Previous automation was “mechanical”: control systems were used for operating equipment or machinery.17 In the 21st century, automation has become “robotic,” using digitalization, robots, the Internet of things, and AI. The technology propelling robotic automation is changing much faster than the technology propelling mechanical automation.18 Some commentators suggest that the digital revolution is transformative insofar as it not only digitizes production but also performs intelligence-based tasks that, previously, could be handled only by the human mind.19 “Ultimately,” as the European Parlia- ment has said, “there is a possibility that in the long-term, AI could surpass human intellectual capacity.”20

“Surplus” Workers There has been much debate about the impact of digital automation on jobs.21 The precise extent of this impact is uncertain, and future job loss is hard to predict, but there seems to be consensus that the impact will be significant enough that some jobs will be eliminated entirely, and some workers may become surplus. Automation eradicates existing jobs and creates new ones. New jobs tend to be either (1) higher- skilled jobs in the information technology (IT) sector, which has seen the increased

16 The term “automation” is defined in the Merriam-Webster dictionary as “the technique of making an apparatus, a process, or a system operate automatically; the state of being operated automatically; and automatically controlled operation of an apparatus, process, or system by mechanical or electronic devices that take the place of human labor.” For further definition, see Mikell P. Groover, Fundamentals of Modern Manufacturing: Materials, Processes, and Systems, 6th ed. (New York: Wiley, 2015). 17 Richard G. Lipsey, Economic Growth, Technological Change, and Canadian Economic Policy, C.D. Howe Institute Benefactors Lecture, 1996 (Vancouver: C.D. Howe Institute, November 1996). 18 See Mark J. Barrenchea, The Golden Age of Innovation (Waterloo, ON: Open Text, 2017), at 8. 19 Ibid. 20 See European Parliament resolution, supra note 9, at paragraph p. 21 Shawn DuBravac, Digital Destiny: How the New Age of Data Will Transform the Way We Work, Live, and Communicate (New Jersey: Regnery, 2015); Centre for the New Economy and Society, The Future of Jobs Report 2018 (Geneva: World Economic Forum, 2018); and Steven Globerman, ed., Technology, Automation and Employment: Will This Time Be Different? Collected Essays (Vancouver: Fraser Institute, 2019). automation and workers: re-imagining the income tax for the digital age n 105 use of robots, the digitalization of businesses, and the rise of digital businesses;22 or (2) “lower-skilled jobs in other sectors due to spillover effects,”23 such as jobs associated with the warehousing and delivery of tangible goods ordered online. Job eradication is already evident in areas of digital commerce where the function of traditional intermediaries has been eliminated. Examples are the closing of traditional retail stores, including bookstores; of investment brokerage firms; and of travel agencies. Automation has already eliminated jobs that require minimal human intervention, such as those of toll collectors, telephone operators, and bank tellers.24 More profoundly, automation now has the potential to eradicate jobs that previously required human decision making, such as driving and health-care services. The economy-wide net impact of digital automation on jobs is currently unclear. In the short term, there may be a net increase in jobs;25 some even predict the rise of “strong complementarities between automation and labor that increase productivity, raise earnings, and augment demand for labor.”26 In Canada, 38 percent to 42 percent of the labour force may be at high risk of being affected by automation.27 Even if there is increased productivity and greater demand for labour, those who lose their jobs to automation may not have the transferrable skills necessary to find other jobs, and may become surplus workers.

22 Examples include the increased demand for software engineers, the increasingly robotics- intensive manufacturing sectors, and, of course, the increased demand for people who make, maintain, and repair robots. See The Future of Jobs Report 2018, supra note 21. 23 International Federation of Robotics, “The Impact of Robots on Productivity, Employment and Jobs” (Frankfurt: IFR, 2017) (https://ifr.org/img/office/IFR_The_Impact_of_Robots_on_ Employment.pdf ), at 6. 24 One example of permanent job loss is the demise of Kodak and the rise of Instagram. Kodak used to employ more than 140,000 people and was worth $28 billion. Kodak even invented the first digital camera, but decided not to adopt it. It went bankrupt when digital photography became the norm. Instagram became the “new face of digital photography.” When Instagram was sold to Facebook for $1 billion in 2012, it employed only 13 people and its value came from the millions of users who contribute to the network without being paid for it. See Arwa Mahdawi, “What Jobs Will Still Be Around in 20 Years? Read This To Prepare Your Future,” The Guardian, June 26, 2017 (www.theguardian.com/us-news/2017/jun/26/jobs-future -automation-robots-skills-creative-health); and Jaron Lanier, Who Owns the Future? (New York: Simon & Schuster, 2013), at 2. 25 A European study found that, because of computerization, the overall labour demand increased by 11.6 million jobs between 1999 and 2010 in the 27 EU member countries. See Terry Gregory, Anna Salomons, and Ulrich Zierahn, Racing with or Against the Machine? Evidence from Europe, ZEW Centre for European Economic Research Discussion Paper no. 16 - 053, (Mannheim, Germany: ZEW, 2016) (http://ftp.zew.de/pub/zew-docs/dp/dp16053.pdf ). 26 David H. Autor, “Why Are There Still So Many Jobs? The History and Future of Workplace Automation” (2015) 29:3 Journal of Economic Perspectives 3 - 30, at 5. 27 For a prediction that 38 percent of jobs in Canada are at high risk of being automated, see Melanie Arntz, Terry Gregory, and Ulrich Zierahn, The Risk of Automation for Jobs in OECD Countries: A Comparative Analysis, OECD Social, Employment and Migration Working Papers no. 189 (Paris: OECD, 2016) (https://doi.org/10.1787/5jlz9h56dvq7 -en). 106 n canadian tax journal / revue fiscale canadienne (2020) 68:1

The Rise of Gig Workers Although the number of jobs affected by automation may be uncertain, automation’s effects on how people do their work are already evident. Two of the most significant of these effects are the increase in work done digitally and the creation of a gig economy. Automation will continue to drastically change the way work is done and how businesses operate. The change is expected to erode the number of people traditionally employed and to foster the rise of self-employed workers, freelancers, and gig workers. It has become increasingly easy for taxi drivers to operate as self- employed drivers who use the platform provided by a ride-sharing app as opposed to working as the employees of a taxi company. Individuals providing intellectual capital in sectors such as communications, media, design, art, technology, financial services, and professional services are now more commonly becoming freelancers. This trend has dramatically reshaped the Canadian workforce, with one study showing that freelancers, independent contractors, and on-demand workers will make up 45 percent of the workforce by 2020.28 The majority of millennial workers are already freelancing.29

Implications for the Income Tax The decline of traditional employment through the rise of “surplus workers,” along with the displacement of traditional employees by freelancers and gig workers, has profound implications for the Canadian income tax system. As detailed below, the income tax system is oriented around traditional employment, and it depends on employment income as its major tax base. In an era of rapid technological advances, this tax base is at risk of rapid erosion, which would make the tax more inequitable and inefficient. This threat may undermine the income tax as the primary instrument for generating revenues, redistributing social income, and promoting economic growth. It is true that the income tax system has adapted to major changes in the past 100 years and that it “rests on an amazingly resilient and internally consistent framework of norms that have withstood the scrutiny of a number of tax reviews.”30 However, the changes wrought by automation may be more significant than previous changes because they undermine the system’s fundamental orientation around employment. Automation has the potential to blur the distinction

28 Josh McConnell, “Intuit Says 45% of Canadians Will Be Self-Employed by 2020, Releases New App To Help with Finances,” Financial Post, January 23, 2017 (https://business.financialpost.com/ technology/personal-tech/intuit-says- 45 -of-canadians-will-be-self-employed-by- 2020 -releases -new-app-to-help-with-finances). 29 “Freelancing in America: 2017,” Upwork (https://www.upwork.com/i/freelancing-in-america/ 2017). The same trend is seen in North America and the European Union. See Anthony Hussenot, “The Future of Work Could Lie in Freelancing,” World Economic Forum, August 21, 2017 (www.weforum.org/agenda/2017/08/why-the-future-of-work-could-lie-in-freelancing). 30 Jinyan Li and J. Scott Wilkie, “Celebrating the Centennial of the Income War Tax Act, 1917,” Income Tax at 100 Years, supra note 15, 1:1 - 18, at 1:17. automation and workers: re-imagining the income tax for the digital age n 107 between employment, business, and capital, enabling more people to incorporate their services and eroding the tax base to a point where the income tax loses its capacity to raise revenue and redistribute income.

THE CURRENT TAXATION OF WORKERS Overview of the Income Tax Born To Be Fair “The income tax is widely regarded as the fairest tax,” as Neil Brooks has said.31 It was created to be so.32 When the Income War Tax Act (IWTA) was introduced in 1917 in the midst of a conscription crisis, the debate on the draft legislation focused primarily on the progressive nature of the tax and how to make the new tax system work.33 The 1917 IWTA defined “income” as the aggregate amount of income from all sources, including wages and salary, profit, and other amounts, but not capital gains (which became taxable in 1972). Tax rates for personal income were progressive while the corporate tax rate was flat, correlating with the basic personal income tax rate (4 percent in 1917). The IWTA adopted anti-avoidance measures to protect the integrity of the system while respecting private law and taxpayers’ right to use legal constructs to arrange their affairs, including the right to earn income through corporations. For example, subsection 3(4) of the IWTA taxed shareholders on the undistributed income of a corporation unless the minister found that the accumu- lation of income was not for the purpose of evading tax. Fairness—in the sense of sharing the cost of government in accordance with one’s ability to pay—has been “a hallmark of the Canadian income tax system” since its inception.34 Fairness and equity were objectives of subsequent tax reforms, the most notable of which was the 1971 reform. The seminal report by the Carter commission provided the conceptual framework and principles for the reform. One of the reform’s key principles is the ability to pay.35 A recent movement toward

31 Richard Bird, Neil Brooks, Larry F. Chapman, Robert Couzin, Kevin Dancey, and Jack Mintz, “Looking Back to Look Ahead: Critical Themes, Milestones, and Future Directions,” in Income Tax at 100 Years, supra note 15, 25:1 - 36, at 25:5. 32 For the historical context of this legislation, see Shirley Tillotson, Give and Take: The Citizen-Taxpayer and the Rise of Canadian Democracy (Vancouver: UBC Press, 2017); and Colin Campbell and Robert Raizenne, “The 1917 Income War Tax Act: Origins and Enactment,” in Income Tax at 100 Years, supra note 15, 2:1 - 96. The IWTA was “a reaction to the political crisis over conscription; the financial sacrifice imposed on the wealthy was meant to be commensurate with the personal sacrifice of the soldier.” Li and Wilkie, supra note 30, at 1:4. 33 See Campbell and Raizenne, supra note 32. 34 Li and Wilkie, supra note 30, at 1:4. 35 For further discussion of the 1972 tax reform, see Richard M. Bird, “The Tax Kaleidoscope: Perspectives on Tax Reform in Canada” (1970) 18:5 Canadian Tax Journal 444 - 73; and Neil Brooks, “Canadian Tax Journal: The Second Decade—1963 - 1972” (2002) 50:2 Canadian Tax Journal 630 - 48. 108 n canadian tax journal / revue fiscale canadienne (2020) 68:1 the preferential taxation of savings and capital gains has reduced the scope of the comprehensive tax base advocated by the Carter commission, but the income tax still represents a “collective judgment by Canadians that people’s contributions to the cost of government should be based on their ability to pay.”36

Becoming Democratic The income tax was transformed from a tax on the wealthy into a “mass,” or “democratic,” tax in the 1940s. The transformation, as Colin Campbell has noted, “was driven by the need for the Canadian government to raise unprecedented amounts [of money] to finance the unlimited war effort to which Canada committed in 1940.”37 It was achieved through the introduction of the pay-as-you-go (PAYG) withholding system.38 Through the withholding system, many taxpayers were “revealed” to the tax system. For example, the number of tax returns filed by individuals jumped from 31,130 in 1918 to 300,000 in 1940, to nearly 900,000 in 1941, to about 1.8 million in 1942, and to 2.25 million in 1945.39 In terms of tax revenue, personal income tax generated $45 million in 1939 - 40, $296 million in 1941, and $768 million by 1945.40 Between 1939 and 1945, personal income tax revenue increased by approximately 1,700 percent, and it went from being a secondary source of federal revenue that was derived entirely from a high-income minority to being “democratized”—that is, nearly “universal and well on the way to becoming the principal single source of government revenue.”41 Fairness is sometimes considered the “glue of a democratic society.”42 A fair tax is thus indispensable in a democracy. Since becoming disassociated from wars in 1948, the income tax, as has been noted elsewhere, has “played a foundational role

36 Brooks remarks, supra note 31, at 25:6. 37 Colin Campbell, “J.L. Ilsley and the Transformation of the Canadian Tax System: 1939 - 1943” (2013) 61:3 Canadian Tax Journal 633 - 70, at 635. 38 The IWTA was amended in 1939 with the introduction of a “national defence tax” collected through the withholding of tax by the payer: all incomes over $600 (approximately 50 percent of the average industrial wage) at a rate of either 2 percent or 3 percent and interest and dividends; Campbell, supra note 38. For further discussion of the 1939 IWTA, see Herbert A.W. Plaxton, The Law Relating to Income Tax of the Dominion of Canada (Toronto: Carswell, 1939). 39 Livio Di Matteo, “Major Changes to the Federal Personal Income Tax: 1917 - 2017,” in William Watson and Jason Clemens, eds., Zero to 50 in 100 Years: The History and Development of Canada’s Personal Income Tax (Vancouver: Fraser Institute, 2017), at 11 - 16 (www.fraserinstitute .org/sites/default/files/history-and-development-of-canadas-personal-income-tax.pdf ). 40 Ibid. 41 Campbell, supra note 37, at 667 - 68. In 1938, only 2.3 percent of the population filed personal income taxes, but it increased to 24 percent in 1955 and 52 percent in 1975. See Di Matteo, supra note 39, at 12. 42 Richard M. Bird and Scott Wilkie, “Tax Policy Objectives,” in Heather Kerr, Ken McKenzie, and Jack Mintz, eds., Tax Policy in Canada (Toronto: Canadian Tax Foundation, 2012), 2:1 - 39, at 2:3. automation and workers: re-imagining the income tax for the digital age n 109 in the development of modern Canadian society by generating the necessary revenue to finance Canada’s public goods and services and by functioning as a main tool for achieving distributive fairness, sustainable economic development, and democratic politics.”43

The Largest Source of Government Revenues Income taxes paid by individuals (personal income tax, or PIT) is the single largest source of revenue for the federal government.44 The amount of PIT rose from $116 million (in 2016 real dollars) in 1918 to about $153.6 billion in 2018.45 As a share of federal revenues, the PIT grew from 2.6 percent in 1918 to about 51 percent in 2017. As a share of the gross domestic product (GDP), the PIT rose from 0.2 percent in 1918 to about 7.2 percent in 2017.46 The amount of PIT “increased from $14 per person in 1918 (adjusted for inflation and in 2016 real dollars) to roughly $4,120 in 2017, an almost 300 -fold increase.”47 In 2018, PIT accounted for over 71 percent of total income tax revenues.48

Employment-Oriented Since becoming a mass tax during the Second World War, the income tax has relied on the mass employment of Canadians to generate tax revenue. Employment is the main source of income for Canadians: about 70 percent of Canadians aged 15 years and over earned income through employment in 2010, and those earnings represented 74.7 percent of the total income received by private households.49 In 2017, 21,030,000 Canadians earned employment income, 8.9 percent of whom earned more than $100,000.50

43 Li and Wilkie, supra note 30, at 1:4. 44 Bev Dahlby, “The High Cost of Raising Revenue Through the Personal Income Tax,” in Zero to 50 in 100 Years, supra note 39, 39 - 43, at 39. 45 Di Matteo, supra note 39, at 14 - 15; and Canada, Department of Finance, “Annual Financial Report of the Government of Canada Fiscal Year 2017 - 2018” (https://www.fin.gc.ca/afr-rfa/ 2018/index-eng.asp). 46 See Di Matteo, supra note 39; and Livio Di Matteo, The Federal Fiscal History: Canada, 1867 - 2017 (Vancouver: Fraser Institute, February 2017) (www.fraserinstitute.org/sites/ default/files/federal-fiscal-history-canada- 1867 - 2017.pdf ). 47 Di Matteo, supra note 39, at 14. 48 “Annual Financial Report of the Government of Canada Fiscal Year 2017 - 2018,” supra note 45. 49 See Statistics Canada, “Income Composition in Canada” (www12.statcan.gc.ca/nhs-enm/2011/ as-sa/99 - 014 -x/99 - 014 -x2011001 -eng.cfm#archived). In the Northwest Territories, employment income accounted for 87.8 percent of total income, the highest in the country, while in Prince Edward Island, employment income was 68.6 percent of total income, the lowest in the country. 50 Statistics Canada, “Distribution of Employment Income of Individuals by Sex and Work Activity, Canada, Provinces and Selected Census Metropolitan Areas” (https://www150.statcan.gc.ca/ t1/tbl1/en/tv.action?pid=1110024001). 110 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Employment and office are listed as two sources of income under section 3 of the ITA. Out of concerns for equity, fairness, and simplicity of compliance, the scope of employment income is broadly defined under sections 5 to 7, and tax is imposed on more or less a gross basis, with deductions restricted by section 8. Employers are required to deduct and remit tax from employment income and report the information to the Canada Revenue Agency (CRA).51 Employees may get a tax refund upon filing a tax return. The ITA is biased toward capital and business income. Even though the “ability to pay” principle calls for the aggregation of income from all sources and a comprehensive tax base was recommended by the Carter commission, the PIT falls primarily on individuals earning employment income. Compared with business income and capital gains, employment income bears the highest tax burden because of the limited deductions allowed in the computation of table income and the limited opportunities for shifting income to lower-taxed family members or for transform- ing income’s character into tax-preferred capital gains. In 2016, for example, the top rate for individuals with taxable income exceeding $300,000 was 33 percent on salary, 16.5 percent on capital gains, 26.3 percent on non-eligible dividends, and 24.8 percent on eligible dividends.52 In addition to income tax, employment income also bears the burden of contributions to the Canada Pension Plan (CPP) and employment insurance (EI) programs.53

Differential Taxation of Workers Classification of Workers The term “workers” is not used in the ITA, and in this paper we give it a generic meaning, applying it to any individuals who exert themselves physically or mentally, especially in a sustained effort, for the purpose of earning income.54 Canadian workers typically fall into one of the following categories:

n employee workers, who provide their labour to others (known as employers) in return for remuneration in the form of wages or salaries; n self-employed workers, who provide their labour to themselves during the course of rendering services to third parties as their clients;

51 ITA section 153. 52 Canada, Department of Finance, “Tax Planning Using Private Corporations,” table 12 (www.fin.gc.ca/activty/consult/tppc-pfsp-eng.asp). 53 Some self-employed individuals are also liable to contribute to the CPP. For an employee with average earnings ($40,983), the combined rate of income tax and social security contributions was 22.8 percent of gross wage earnings: 15 percent if income tax plus 7 percent of social security contributions; see Organisation for Economic Co-operation and Development, Taxing Wages 2018, at 22 (https://dx.doi.org/10.1787/tax_wages- 2018 -en). 54 Merriam-Webster Online, www.merriam-webster.com/dictionary/work. automation and workers: re-imagining the income tax for the digital age n 111

n entrepreneur workers, who provide labour to themselves through the operation of a business that combines physical (stock-in-trade or equipment) and financial capital with human capital; or n incorporated workers, who provide their labour to a corporation that they themselves own.

To enable workers to work, some financial or physical capital is needed—to cover, for example, the expense of physical tools, working space, or information and communication technology. For the four types of workers listed above, however, the origin of the income is simply human effort or human capital. In the case of entrepreneur workers, the factor of capital may be relevant in varying degrees depending on the nature of the business, but such capital must still be deployed through human effort in order to make profit. For income tax purposes, the distinction between an employee worker and a self- employed worker is largely a legal matter. Subsection 248(1) of the ITA defines “employment” to mean “the position of an individual in the service of some other person” and “employee” to mean a person holding such a position. There is a body of case law on the meaning of “employment,” and on the distinction between “contract of service” (employment relationship) and “contract for service” (independent contract, or self-employed).55 Relevant factors include the contractual terms, the level of control, the opportunity for profit and risk of loss, the ownership of tools, whether the worker performs the services as a person in business on his own account, and the common intention of the parties. The importance of contracts in this classification is reflected in the common reference to the self-employed as “independent contractors” and the employed as “servants.” By default, a worker who is not an employee is self-employed, earning income from a “business.” Self-employed workers and entrepreneur workers have the option of using a private corporation to carry out their work and thus becoming incorporated workers. The effect of the corporate form is to legally separate the worker from her income for tax purposes and to transform income from work to income from capital (for example, dividends or capital gains). Under the ITA, workers are treated differently depending on the characterization of their work despite the fact that all of the income they generate is derived from human effort. As shown in the accompanying table, employee workers are taxed more heavily than other workers. The differences lie in the scope of deductions, the timing of taxation, the tax character of the income, and the method of tax payment.

55 Wiebe Door Services Ltd. v. MNR, [1986] 3 FC 553; 671122 Ontario Ltd. v. Sagaz Industries Canada Inc., 2001 SCC 59; Wolf v. Canada, 2002 FCA 96; and Royal Winnipeg Ballet v. Canada (Minister of National Revenue), 2006 FCA 87. For an overview, see Jinyan Li, Joanne Magee, and J. Scott Wilkie, Principles of Canadian Income Tax Law, 9th ed. (Toronto: Thomson Reuters, 2017), at 130 - 5; and Tamara Larre, “The Role of Intention in Distinguishing Employees from Independent Contractors” (2014) 62:4 Canadian Tax Journal 927 - 70. 112 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Differential Taxation of Workers

Incorporated workers

Self-employed Qualifying Employees (entrepreneurs) General for SBD

Top rate (combined federal and provincial) . . . . . 51.6% 36% 26.7% 14.4% Deduction of expenses ...... Very limited No specific No specific No specific limitation limitation limitation (except “incorporated employees”) Sanctioned tax-deferral . . . . . RRSPs and RRSPs and • Lower corporate tax rate RPPs RPPs than PIT rate • No mandatory distribution of dividends • No imputation of dividends Sanctioned tax shifting . . . . . Spousal Spousal RRSPs • Using the corporate form to RRSPs “sprinkle” shareholding to family members • Maximize the lifetime capital gains exemption Method of tax payment ...... Withholding Self-assessment Self-assessment of tax by employer

Source: Canada, Department of Finance, “Tax Planning Using Private Corporations” (www.fin.gc.ca/activty/consult/tppc-pfsp-eng.asp).

Deduction of Expenses Employees are generally taxed on a gross basis; the ITA limits deductions to specific circumstances.56 In contrast, self-employed workers, entrepreneurs, and corporations can deduct all reasonable expenses incurred for the purpose of earning income, including travel expenses, home office expenses, car expenses, and mobile phone charges.57 The difference in the scope of deductions is often a major motivation for workers to opt for classification as independent contractors.

56 ITA section 8. Examples are union dues and travel expenses incurred by employees who are remunerated on the basis of sales or who are required to travel away from the office. 57 ITA section 9. automation and workers: re-imagining the income tax for the digital age n 113

Corporations are presumed to be business entities. The deductions claimed by a corporation reduce corporate income for tax purposes, which ultimately benefits the shareholder/worker. The ITA seeks to limit corporate tax deductions in respect of a “personal service business”—essentially a business in which the shareholder/ worker of the corporation would otherwise be an officer or employee of that entity (that is, an “incorporated employee”).58 The deductions are limited to those available to employees.59

Timing of Taxation The amount of PIT is determined and paid annually. Accordingly, employees, the self-employed, and entrepreneurs pay tax annually at the progressive rates, which range from 15 to 33 percent at the federal level. Apart from the registered retirement savings plan (RRSP) and registered pension plan (RPP) programs permitted by the ITA, these workers have limited opportunities to defer the PIT.60 Incorporated workers, on the other hand, can defer the PIT until income is received from the corporation in the form of employment income or dividends. In other words, the timing of the taxation of the income earned by an incorporated worker can be delayed indefinitely. Tax deferred is tax saved.

Income Shifting and Character Transformation Employees, the self-employed, and entrepreneurs can shift a limited amount of income to their spouses or common-law partners through contribution to spousal RRSPs.61 Retired workers can split some pension income.62 No opportunities exist for these workers to transfer the character of their income from employment or business income to capital gains or dividends. In contrast, incorporated workers, by taking advantage of corporate law principles and the separate taxation of corporations, can split their income with family members and transform the character of the income from employment or business income to income from capital or capital gains. Through the issuing of shares to family members, the income earned by the corporation through the efforts of the

58 ITA subsection 125(7) defines “personal services business” to mean a business of providing services where an individual who performs services on behalf of the corporation (incorporated employee) or any person related to the incorporated employee is a specified shareholder (owning at least 10 percent of the issued shares of any class) of the corporation and the incorporated employee would reasonably be regarded as an officer or employee of the person or partnership to whom or to which the services were provided but for the existence of the corporation. There are two exceptions: where the corporation employs more than five full-time employees throughout the year; or where the corporation provides services to an associated corporation. 59 ITA paragraph 18(1)(p). 60 ITA paragraph 60(i), subsection 146(5), and section 147.2. 61 For an overview, see Li, Magee, and Wilkie, supra note 55, at 349 - 53. 62 ITA paragraphs 60(c) and 56(1)(a.2). 114 n canadian tax journal / revue fiscale canadienne (2020) 68:1 incorporated worker can be distributed to family members by way of dividends.63 Furthermore, each shareholder may be entitled to the lifetime capital gains exemption.64 Such shifting is limited by some anti-avoidance rules, such as the recently enhanced “tax on split income” (TOSI) rules,65 but these rules do not eliminate opportunities for tax shifting through the use of private corporations. The income earned by workers typically has the character of earned income from employment or business. This character changes when the income is earned by a corporation and then distributed to the incorporated worker. If the incorporated worker sells the shares of the corporation to realize the value of the corporation, the gains from the sale are taxed as capital gains, only half of which are taxable in general, and up to $800,000 can be exempt from tax entirely under the lifetime capital gains exemption regime. Overall, the income tax system is biased against employee workers and allows workers to rely on contracts or the corporate form to avoid being taxed as employees.

Justifications for Differential Taxation of Workers Historically, the differential treatment of workers has several justifications, including administrative simplicity, the linkage between income tax and social security programs, deference to legal and accounting principles, and the encouragement of business activities for social benefits. Although the underlying rationale remains largely relevant, some of the historical justifications for the differential treatment of workers are outdated today, in the age of automation. Most importantly, it is questionable whether these justifications outweigh the concerns for equity and tax base erosion.

Administrative Simplicity and Expediency Administrative simplicity justifies the reliance on PAYG withholding in the case of employment income and the near gross-basis taxation of employees.66 The withholding regime was originally believed to prevent taxpayers from being left short of

63 For an example, see the facts in Neuman v. The Queen, [1998] 1 SCR 770; and Pellerin v. The Queen, 2015 TCC 130. 64 ITA section 110.6. 65 The ITA contains anti-splitting rules in subsection 56(2), section 74.2, or section 120.4. See also Tax Planning Using Private Corporations, supra note 52. 66 The 1917 IWTA called for a broad withholding of tax at source on all payments of fixed and determinable annual or periodic gains, profits, or income of any taxpayer. However, this requirement was withdrawn the following year and reintroduced in 1942. See J. Harvey Perry, Taxes, Tariffs, and Subsidies: A History of Canadian Fiscal Development, vol. 1 (Toronto: University of Toronto Press, 1955), at 217. The reintroduction of withholding tax was considered necessary to raise revenue quickly to finance the efforts in the Second World War and dampen the inflationary tendencies in the economy. For an overview of the current withholding tax system, see Jinyan Li, “Withholding Tax on Domestic Interest and Dividends” (1995) 43:3 Canadian Tax Journal 553 - 91, at 559 - 63. automation and workers: re-imagining the income tax for the digital age n 115 funds when their taxes became due and to make it virtually impossible for employees to evade or avoid tax on their employment income.67 It was thought impractical to expect millions of workers to keep adequate records of their expenses and compute net income from employment.68 The ITA allows some limited deductions for employees whose jobs generally involve incurring expenses that are not reimbursed by the employer—for example, employees who are engaged in sales, who must travel, or who do their jobs away from the employer’s premises.69 In other cases, the employee is presumed to bear no or negligible expenses. The absence of a trusted third party in the case of non-employee workers makes it difficult to extend the PAYG withholding mechanism beyond traditional employees.

Linkage with Social Security and Political Expediency The income tax is an example of Canadians “taxing ourselves.”70 It is linked to the social benefits enjoyed by most Canadians. For example, two of the most important social security programs, CPP and EI, are linked to employment income. Contribu- tions to these programs are withheld by the employer, as with the income tax. Tax-assisted private retirement saving programs, such as the RPP and RRSP, are also linked to employment income. More broadly, the ITA is used to deliver subsidies to Canadians to promote social goals (such as poverty reduction) and economic goals (such as encouraging entrepreneurship and economic growth).71 The linkage between paying tax and social benefits may help make the relatively heavy taxation of workers more politically acceptable, since these workers are the main beneficiaries of social benefits.72 In addition, compared with capital owners and business owners, employees tend to be less responsive to higher tax rates because they need to put the proverbial “bread on the table.”73 Labour is less mobile and the labour market less elastic, compared with capital.74

67 Perry, supra note 66, at 368. 68 To simplify tax compliance, a standard deduction of $500 was allowed for all employees under former paragraph 8(1)(a). It was repealed in 1988. 69 For example, ITA paragraphs 8(1)(f ) and (h). 70 Joel Slemrod and Jon Bakija, Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes, 5th ed. (Cambridge, MA: MIT Press, 2017). 71 For a list of these tax expenditures, see Canada, Department of Finance, Report on Federal Tax Expenditures—Concepts, Estimates and Evaluations 2019 (Ottawa: Department of Finance, 2019). 72 Joel Slemrod and Jon Bakija, Taxing Ourselves: A Citizen’s Guide to the Debate over Taxes, 5th ed. (Cambridge, MA: MIT Press, 2017); and Geoffrey Hale,The Politics of Taxation (Toronto: University of Toronto Press, 2001). 73 Soled and Thomas, supra note 2, at 14. 74 The supply of labour is less elastic than the supply of capital. Low- and middle-income taxpayers need to work to support themselves and their families, and increased taxation will likely not cause them to work less and opt for more leisure. In other words, their supply of labour is less responsive to taxation, and the substitution effect is low. Higher-income taxpayers 116 n canadian tax journal / revue fiscale canadienne (2020) 68:1

As a “tax on ourselves,” the income tax seems to have been accepted by Canad- ians as a fair tax. There have been no serious attempts to eliminate it. As citizens, taxpayers are also voters, many of whom, as Geoffrey Hale has said, may view “continuing and steady improvement in their standard of living, accommodated and assisted by governments, as something approaching a national birthright.”75 Lower- income and middle-income groups may support higher taxes on higher-income earners. Upper-income groups’ share of the tax burden is very disproportionate to what most of them receive in public services or benefits.76 The political process has thus far resulted in an entwining of “taxing the rich” and “taxing labour” in the income tax system.77

Deference to General Law The differential taxation of workers may also be justified on the grounds of legal reality. As part of the Canadian legal system, the ITA recognizes the effects of non-tax law, such as contracts and corporate personality, and it treats independent contractors and incorporated workers differently from employees. TheITA removes the undesirable fiscal effects of general law in limited circumstances through so-called

may work even more when taxes go up so that they can maintain the same level of after-tax income and maintain the same standard of living. See Miles S. Kimball and Matthew D. Shapiro, Labor Supply: Are the Income and Substitutions Effects Both Large or Both Small? NBER Working Papers no. 14208 (Cambridge, MA: National Bureau of Economic Research, July 2008) (www.nber.org/papers/w14208.pdf ). In general, however, the empirical literature shows that the responsiveness of high-income earners to tax is much greater than that of low-income earners, but the response is not to work less, but rather to find other ways to maximize their after-tax earnings by shifting income across jurisdictions, time, or form to avoid some taxation. See Kevin Milligan and Michael Smart, “Taxation and Top Incomes in Canada” (2015) 48:2 Canadian Journal of Economics 655 - 81 (https://doi.org/10.1111/caje.12139); Mike Brewer, Emmanuel Saez, and Andrew Shephard, “Means-Testing and Tax Rates on Earnings,” in Stuart Adam, Timothy Besley, Richard Blundell, Stephen Bond, Robert Chote, Malcolm Gammie, Paul Johnson, Gareth Myles, and James Poterba, eds., Dimensions of Tax Design: The Mirrlees Review (Oxford: Oxford University Press, 2010), 90 - 173; Costas Meghir and David Phillips, “Labour Supply and Taxes,” ibid., 202 - 74; and Thomas Piketty, Emmanuel Saez, and Stefanie Stantcheva, “Optimal Taxation of Top Labor Incomes: A Tale of Three Elasticities” (2014) 6:1 American Economic Journal: Economic Policy 230 - 71. 75 Hale, supra note 71, at 43. 76 Ibid., at 265. See also Charles Lammam, Hugh MacIntyre, and Milagros Palacios, “Measuring the Distribution of Taxes in Canada: Do the Rich Pay Their ‘Fair Share’?” Fraser Institute.org, November 30, 2017 (www.fraserinstitute.org/studies/measuring-the-distribution-of-taxes-in -canada): the top 1 percent of tax filers paid 14.7 percent of total taxes, while their collective share of total income earned is 10.7 percent. 77 For further discussion of this phenomenon in the United States, see Dennis J. Ventry Jr., “Equity Versus Efficiency and the U.S. Tax System in Historical Perspective,” in Joseph J. Thorndike and Dennis J. Ventry Jr., eds., Tax Justice: The Ongoing Debate (New York: Rowman & Littlefield, 2002), 25 - 71. See also Joel B. Slemrod, Does Atlas Shrug? The Economic Consequences of Taxing the Rich (Cambridge, MA: Harvard University Press, 2002). automation and workers: re-imagining the income tax for the digital age n 117 anti-avoidance rules (for example, the TOSI rules). Case law generally adheres to a form-over-substance approach to interpreting the ITA and sanctions taxpayers’ right to minimize tax through tax planning.78

Tax Subsidies on the Ground of Societal Benefits The ITA is used by the government to promote certain activities or behaviours on the grounds of broader societal benefits. One example is the taxation of active business income earned through a private corporation on a deferred basis—known as the “small business deduction” under section 125 of the ITA. Incorporated workers can take advantage of the small business deduction, which results in a tax rate of 9 percent on active business income to $500,000, deferring 24 percent of PIT indefinitely.79 The small business deduction was intended to promote entrepreneurship, because, as the minister has said, the growth of the Canadian economy and the creation of jobs for Canadians are important: “The Canadian economy depends upon the creative business activity of small, growing businesses.”80 Despite this aim for the deduction, empirical evidence is lacking on the effect of this tax subsidy on the growth of small businesses or the positive societal benefits of incorporated workers. The lifetime capital gains exemption was also intended to encourage entrepreneurship by enabling owners of small businesses to retire with additional money, since these owners could not, presumably, take advantage of RRSPs or RPPs, which were tied to employment income.81

78 For an overview of statutory interpretation, see Li, Magee, and Wilkie, supra note 55, at 484 - 527; and David G. Duff, Benjamin Alarie, Geoffrey Loomer, and Lisa Philipps, Canadian Income Tax Law, 6th ed. (Toronto: LexisNexis Canada, 2018), chapter 2. 79 This tax deferral is not available if the corporate income is derived from a “personal service business” or “specified investment business”; both terms are defined in ITA subsection 125(7). 80 See Canada, Department of Finance, 1971 Budget, Budget Speech, June 18, 1971, at 13. In the 1971 budget introducing the tax reform bill that included the small business deduction, the minister of finance stated: “This government supports the view that entrepreneurial initiative should be encouraged through the tax system.” See ibid. 81 Jack M. Mintz and Thomas A. Wilson, Capitalizing on Cuts to Capital Gains Taxes, C.D. Howe Institute Commentary no. 137 (Toronto: C.D. Howe Institute, February 2000), at 20. According to the 1985 federal budget that proposed this measure, its purpose is to “encourage risk-taking and investment in small and large businesses and to assist farmers by providing a cumulative tax exemption for capital gains up to a lifetime limit of $500,000.” See Canada, Department of Finance, 1985 Budget, Budget Papers, May 23, 1985, at 3. The measure was intended to (1) support “equity investment and broaden participation by individuals in equity markets,” (2) “improve the balance sheets and financial health of Canadian companies,” (3) “provide a tax environment that is more conducive to high technology companies raising capital,” and (4) “encourage individual Canadians to start new businesses and . . . help small businesses grow.” See ibid. 118 n canadian tax journal / revue fiscale canadienne (2020) 68:1

THE CASE FOR REFORM The historical justifications for the tax bias in favour of non-employee workers, especially incorporated workers, are less and less relevant in the age of automation. Such bias is expected to result in the erosion of the tax base as more workers are able to opt out of the “box” of employment. It may also lead to an increase in tax discrimination against employee workers when more of these workers are able to adopt non-traditional or flexible ways of working that are not substantially different from the methods used by self-employed workers. Such inequity cannot be justified by administrative expediency: the same technology that enables freelance work can also facilitate more efficient tax administration. A re-imagining of the income taxis needed to ensure the sustainability of the tax base and the fair and democratic nature of the income tax.

Sustainability of the Tax Base The rise in surplus workers and gig workers and the decline in traditional employment will likely threaten the tax base. The increased proportion of non-employee workers in the workforce is likely to be accompanied by an increase in (1) the deductions claimed in computing income, (2) the small business deductions claimed, and (3) the leakage in the tax system. These effects should be weighed against the fact that when a worker changes her employee status to that of an independent contractor or incorporated worker, the type of work she undertakes may undergo no discernible change and the societal benefits of the work may remain the same. Further, it is estimated that technological change has caused at least half of the decline in the labour share in advanced economies in the last four decades and that the share of labour income in national income is expected to decline further in the age of automation.82 Leakage in the tax system could also be the result of (1) the reduced scope of PAYG withholding and (2) more opportunities for underreporting without detection. In other words, if more workers work online but do not report their income for tax purposes (that is, they operate in the underground economy), they will enlarge the existing tax gap related to the underground economy. This tax gap was estimated to be $8.7 billion in 2014, accounting for 0.4 percent of gross domestic product (GDP) or 6.4 percent of PIT revenues.83 The CRA noted that “self-employment income is a completely non-assured income base, due to a near complete lack of third-party

82 Mathew Lawrence, Carys Roberts, and Loren King, Managing Automation: Employment, Inequality and Ethics in the Digital Age, Institute for Public Policy Research Commission on Economic Justice: Discussion Paper (London, UK; IPPR, December 2017), at 25 - 26. For further discussion of this topic, see Thomas Piketty, Capital in the Twenty-First Century (Cambridge, MA: Belknap Press, 2014). 83 Canada Revenue Agency, Tax Assured and Tax Gap for the Federal Personal Income Tax System (Ottawa: CRA, 2017), at 4. automation and workers: re-imagining the income tax for the digital age n 119 reporting and a more complex reporting process”; and that “self-employed individuals may contribute disproportionately to tax loss resulting from UE [underground economy] activity.”84 Further, as the CRA has said, “while this does not mean that all self-employment income is reported inaccurately, it is at higher risk of reporting non-compliance, be it unintentional or intentional.”85

Preserving the Income Tax as a Fair and Democratic Tax The differential taxation of workers who are in similar settings violates horizontal equity. Currently, workers earning the same amount of economic income could end up with different tax liabilities depending on their type of employment. More significantly, the current system weakens the progressive nature of the income tax. A significant risk attributed to automation is the “paradox of plenty,” whereby technological advancement makes society as a whole economically richer, but this enrichment is biased in favour of capital ownership (financial capital and human capital). This risk coincides with the increasing income inequality that is evident in the age of automation.86 Those without the requisite skills to adapt in this age have been left worse off. For the first time in recent history, both wages and jobs have decreased despite increased productivity, and this is partly because of technological pressure. The past 40 years have seen a widening income gap between skilled and unskilled labour; the earnings of holders of college or graduate degrees have increased while the earnings of those without degrees have stagnated or decreased.87 Addressing income inequality will therefore be one of the most important policy goals in this country. And yet the decline of a tax base subject to progressive taxation and to the biases in favour of skilled workers could weaken the redistributive role of the income tax system. It has been shown that private corporations are used by higher-income individuals 88 and that the main source of income in skill-intensive industries is the labour of the corporations’ owners.89 The increased use of private corporations

84 Ibid., at 4 - 5. 85 Ibid. 86 David Rotman, “Technology and Inequality,” MIT Technology Review, October 21, 2014 (www.technologyreview.com/s/531726/technology-and-inequality). 87 Daron Acemoglu and David Autor, “Skills, Tasks and Technologies: Implications for Employment and Earnings,” in David Card and Orley Ashenfelter, eds., Handbook of Labor Economics, vol. 4b (Amsterdam: North Holland, 2011), 1043 - 1171. 88 Michael Wolfson, Mike Veall, Neil Brooks, and Brian Murphy, “Piercing the Veil: Private Corporations and the Income of the Affluent” (2016) 64:1Canadian Tax Journal 1 - 30. 89 See also Matthew Smith, Danny Yagan, Owen Zidar, and Eric Zwick, “Capitalists in the Twenty-First Century” (2019) 134:4 Quarterly Journal of Economics 1675 - 1745, finding that a primary source of top income in the United States is private “passthrough” business profit, and three-quarters of such income is derived from human capital of the owners of closely held mid-market firms in skill-intensive industries. 120 n canadian tax journal / revue fiscale canadienne (2020) 68:1 would further undermine the fairness and equity of the tax system. More importantly, increasing numbers of workers are able to use the corporate form in a manner that does not create jobs for arm’s-length persons or encourage investment in innovation. No policy justification exists for using the corporate form as a proxy for measuring societal benefits. Moreover, the use of private corporations to carry out work can “meld the two inputs [labour and capital] in their operation.”90 The value of the business and of the shares of the corporation may be created primarily by the efforts of the owner- manager. Rhys Kesselman suggests the following:

Almost all supernormal returns conventionally attributed to capital in fact reflect the individual’s characteristics and thus are more properly viewed as the product of labour- type inputs. Supernormal returns in business and investment reflect not only good luck or pure rents but also the contribution of individual efforts, experience, ingenuity, perseverance, vision, social skills, connections, and special knowledge—all of which are aspects of labour rather than of capital per se.91

According to Kesselman, “virtually any large fortune accumulated by individuals will involve these personal attributes.”92 With the advance of technologies and the ability to render services remotely, more individuals can make use of private corporations.93 If the line between labour and capital is not carefully delineated, the traditional political justification for the progressive income tax—the entwining of “taxing labour” and “taxing the rich”—would be weakened.

Administrative Feasibility As early as 1969, then Deputy Commissioner William H. Smith of the Internal Revenue Service said that “automation provides new tools for improving and, to some extent, simplifying tax administration.”94 Arguably, technological advances that facilitate the rise of non-traditional work can also facilitate the collection of income tax from non-employee workers through information reporting or source withholding.95 Today, in the age of e-commerce, most, if not all, payments and

90 Kesselman, Income Tax at 100 Years, supra note 15, 3:6. 91 Ibid., at 3:6 - 7. 92 Ibid., at 3:7. 93 This issue has been considered by a UK consultation paper and is subject to new anti- avoidance measures. United Kingdom, HM Revenue & Customs, “Tax Avoidance Involving Profit Fragmentation—Consultation Document” (www.gov.uk/government/consultations/ tax-avoidance-involving-profit-fragmentation). 94 William H. Smith, Deputy Commissioner of Internal Revenue, “Automation in Tax Administration” (1969) 34:4 Law and Contemporary Problems 751 - 68. 95 For further general discussion, see Garima Pande and Rahul Patni, Tax Technology and Transformation: Tax Functions “Go Digital” (Kolkata, India: EY, 2017) (https://assets.ey.com/ content/dam/ey-sites/ey-com/en_gl/topics/digital/ey-tax-technology-transformation.pdf ). automation and workers: re-imagining the income tax for the digital age n 121 transactions made by individuals leave a digital trail. A third party (for example, a bank, credit card company, or even a vendor) who is not a traditional employer could be tasked to provide financial information or withhold tax. Technology andAI make it more feasible than ever to require third parties to withhold tax. It is even conceivable that the tax compliance function will soon be performed by robots.96

RE-IMAGINING THE INCOME TAX Taxing All Workers the Same We propose that the income tax should be reformed to treat all workers the same, regardless of the choice of legal arrangements or the technical means of work. It can be conceived as a “universal tax on earned income.” This proposal requires a clearer conceptualization of source of income as a result of “human capital” (human efforts, labour, or work), “capital,” or “business” (which combines labour and capital). The characterization of source would be based on economic origin as opposed to legal arrangements. Some current income from capital would be treated as earned income. Our proposal would also require a rethinking of two existing practices: (1) permitting tax deferral in cases where societal benefits are absent or minimal and (2) extending the PAYG withholding regime to payments to workers who are in non- traditional employment settings. Some of the key technical design features of this extended regime are set out below. Our proposal has, we argue, the potential to improve tax equity while achieving the simplification that would result from reducing the need to draw lines between different types of workers. Our proposal would also simplify the taxation of income earned through private corporations. The current regimes for giving incentive to active business activities at the corporate level and integrating the corporate tax and personal tax are very complex. The 2018 amendments designed to prevent private corporations from being used to defer tax on passive income or split income add complexity to the system.97 Our proposal would make such complex rules unnecessary or at least reduce the need for such complex anti-avoidance rules. Anti-avoidance

96 Organisation for Economic Co-operation and Development, Tax Administration 2019: Comparative Information on OECD and Other Advanced and Emerging Economies (Paris: OECD, 2019) (https://doi.org/10.1787/74d162b6-en). This study shows how the availability of new technologies is providing new opportunities for tax administrations to better manage compliance, protect their tax base, and reduce administrative burdens. See also “Spotlight: Robotic Process Automation (RPA)—What Tax Needs To Know Now,” PwC Tax Function of the Future Series, May 2017 (www.pwc.com/gx/en/tax/publications/assets/pwc-tax-function -of-the-future-focus-on-today-robotics-process-automation.pdf ). 97 These amendments deny a CCPC’s claim to the small business deduction if its annual passive investment income exceeds $150,000; see ITA subsection 125(5.4). They also extended the TOSI rules to apply to certain income received by adult family members (formerly limited to individuals under the age of 18). 122 n canadian tax journal / revue fiscale canadienne (2020) 68:1 rules would still be needed to prevent income from work from being disguised or shifted, but we would not expect such rules under our proposal to be more complex than the current rules.

Technical Design Deduction for Work-Related Expenses The current restrictions on income tax deductions reflect the traditional presump- tion that employees do not bear any costs associated with their work. In the age of automation, however, workers may bear these kinds of expenses, such as the cost of mobile devices and home offices, whether they work as employees or as freelancers. Expanding the deduction under section 8 of the ITA to mimic the deductions permitted by section 9 would make sense.

Characterization of Income from Work A reconceptualization of income derived from work and labour is a critical component of the proposal. This involves not only disregarding the legal form chosen by the workers but also recharacterizing what is traditionally regarded as income from business (that is, income of the self-employed) or income from property (for example, dividends) as income from work. Fortunately, there are precedents internationally and in the ITA. Internationally, the dual income tax system98 provides some inspiration. As Richard Bird and Thomas Wilson have said, “[T]here are decades of experience with the dual income tax in countries not all that unlike Canada in many important respects.”99 Under the dual income tax system, income is classified as either income from labour or income from capital. The ITA itself contains rules to tax incorporated workers as employees in certain circumstances. We can look to these examples in implementing our suggested reform. Under our proposal, the income earned by employees, the self-employed, entrepreneurs, and incorporated workers would be characterized as income from work for tax purposes, because the economic origin of the income is labour. When capital is combined with the worker’s own labour, the predominant character of the income remains labour, unless the business qualifies as an “active business” or the worker’s

98 For further discussion of the dual income tax systems, see Richard M. Bird and Eric M. Zolt, “Dual Income Tax for Developing Countries” (2010) 1:2 Columbia Journal of Tax Law 174 - 217; Robin Boadway, “Income Tax Reform for a Globalized World: The Case for a Dual Income Tax” (2005) 16:6 Journal of Asian Economics 910 - 27 (https://doi.org/10.1016/j.asieco.2005.10.001); Sijbren Cnossen, “Taxing Capital Income in the Nordic Countries: A Model for the European Union?” in Sijbren Cnossen, ed., Taxing Capital Income in the European Union: Issues and Options for Reform (Oxford: Oxford University Press, 2000), 180 - 213; and Peter Birch Sørensen, “The Nordic Dual Income Tax: Principles, Practices, and Relevance for Canada” (2007) 55:3 Canadian Tax Journal 557 - 602. 99 Bird and Wilson, supra note 11, at 19. The dual income tax can be readily be combined, if desired, with taxing corporations on a rent basis. See Milligan, supra note 11. automation and workers: re-imagining the income tax for the digital age n 123 income is below an imputed rate of return on capital deployed in the business (the “imputed return” test). The active business test can be based on whether or not the income-earning activity requires the services of a minimum number of workers. A similar test is used in defining passive income earned by private corporations (subsection 125(7) in the case of Canadian-controlled private corporations, and section 95 in the case of controlled foreign affiliates). If a worker’s income-earning activity constitutes an active business, the income could be taxed at the corporate rate and benefit from the deferred payment of PIT. This distinguishes businesses that depend on the owner’s own labour from those that depend on other workers’ labour—an important distinction, because the latter generate more positive societal benefits in terms of job creation. The “imputed return” test is more relevant to capital-intensive income-earning activities. Income up to the imputed return on capital would be characterized as income from capital, and the remaining portion would be characterized as income from work. This is similar to the imputation approach adopted by some Nordic countries. For example, the Norwegian dual income tax system imputes a return to the corporation’s business assets by multiplying the value of the assets by an assumed rate of return on capital, and profits exceeding the imputed return are deemed to be returns from labour.100 The assumed rate of return can be based on the interest rate on government debt plus some risk premium.101 In other words, there is an imputed “normal” rate of return to invested capital (for example, a dividend), and the excess is treated as earned income. This test reveals the labour income embedded in capital.

Purifying the Small Business Deduction Given its original rationale, the small business deduction would be purified under our proposal so that it applies to businesses that generate positive societal benefits, such as job creation and innovation. It would not apply to the labour income of incorporated workers as determined by the characterization rules set out above.

Broader Use of Withholding Tax The PAYG withholding tax could be extended to payments to workers outside the traditional employment setting. Such an extension would be a natural evolution of

100 For example, the Norwegian approach uses the interest rate on five-year government bonds plus a risk premium of 4 percent. If the imputed rate of return equals the interest on business debt, it will not matter whether the calculation is based on gross assets or net assets (excluding liabilities). If the rates differ, taxpayers under a net asset regime may have incentive to adjust their borrowings to maximize the amount of income from capital. See Peter Birch Sørensen, “From the Global Income Tax to the Dual Income Tax: Recent Tax Reforms in the Nordic Countries” (1994) 1:1 International Tax and Public Finance 57 - 79, at 73 - 75 (https://doi.org/ 10.1007/BF00874089). 101 A similar approach is used in respect of foreign investment funds; see ITA subsection 212(5.1). 124 n canadian tax journal / revue fiscale canadienne (2020) 68:1 the existing rules that require the withholding of tax on payments for services rendered by non-residents in Canada under regulation 105.102 One way of doing this would be to amend either section 153 or regulation 105.

CONCLUSION Wayne Gretzky once said, “I skate to where the puck is going to be, not where it has been.”103 This way of thinking is quite apt for addressing the disruptions to the tax system brought about by automation. In this digital age, the transformation of how people work is occurring much faster than in the previous age of mechanical automation. If close to 50 percent of the workforce will soon be leaving traditional employment jobs, the sustainability of the income tax as an instrument of generating revenue in a fair and equitable manner will be threatened. It is time for Canada to take notice of this shift and its implications for the tax system. As past experience shows, successful tax reforms take time. So now is a good time to start the process. The income tax system is capable of remaining a key policy instrument for raising revenue and achieving the redistribution of social income, even in the automation age. Fortunately, Canada has seen recent debates about reforming the tax system. Our proposal adds to the current ideas about such reform. It proposes to treat all workers equally, irrespective of the legal arrangements (for example, a private corporation) or legal constructs (contract of services or contract for services) used to earn the income. Our proposal would also treat skilled workers, knowledge workers, and entrepreneurial workers the same as all other workers and treat entrepreneurs differently only if their activities generate positive societal benefits. We admit that these ideas are preliminary, but it is time to start preparing the tax system to better meet the challenges of the age of automation.

102 Since the 1920s, Canada has used the withholding mechanism to collect taxes from non- residents who receive dividends, interest, rent, or royalties, and other periodical payments from Canadian sources (ITA part XIII). Unlike employment income withholding tax, the non- resident withholding taxes are “final” in the sense that the non-resident taxpayers are not required to file an annual tax return. More recently, Canada has extended the withholding tax system to fees paid to non-residents for rendering services in Canada (see ITA regulation 105), and to fees paid to non-residents for the provision in Canada of the acting services of the actor in a film or video production (see ITA subsection 212(5.1)). These withholding taxes are “provisional,” like employment income withholding. Their effect is to get the taxpayer to account to the CRA for their income and tax liability. 103 Jason Kirby, “Why Businesspeople Won’t Stop Using That Gretzky Quote,” MacLean’s, September 24, 2014 (www.macleans.ca/economy/business/why-business-people-wont-stop -using-that-gretzky-quote). canadian tax journal / revue fiscale canadienne (2020) 68:1, 125 - 42 https://doi.org/10.32721/ctj.2020.68.1.sym.brooks

Tim Edgar: The Accidental Comparatist

Kim Brooks*

PRÉCIS Cet article traite des contributions de Tim Edgar en tant que grand spécialiste du droit comparé. Il passe en revue les principaux débats et orientations théoriques en droit comparé, et propose une étude de cas des contributions de Tim Edgar à la lumière des grands débats dans ce domaine. L’évolution de ce spécialiste en tant que comparatiste est décrite en trois phases distinctes. L’article met en évidence la détermination du problème de politique à résoudre comme un aspect majeur de sa contribution.

ABSTRACT This paper focuses on the contributions of Tim Edgar as a major comparative law scholar. It reviews the major debates and theoretical directions in comparative law scholarship and offers a case study of Edgar’s contributions in the light of the major debates in comparative law. Edgar’s development as a comparatist is traced through three defined phases. His identification of the policy problem to be resolved is highlighted as a major feature of his contribution. KEYWORDS: COMPARATIVE ANALYSIS n CORPORATE FINANCE n ANTI-AVOIDANCE

CONTENTS Why Study the Tax Laws of Other Countries? 126 The Questions of Comparative Law 127 A Model Insider 133 The First Decade (1987-2000): Careful and Sustained Study of a Small Number of Jurisdictions 134 The Second Decade (2000-2010): Comparativism That Refocuses the Policy Debate 137 The Third Decade (2010-2016): An Established and Model Comparatist 140 Conclusion 141

* Of the Schulich School of Business, Dalhousie University, Halifax (e-mail: [email protected]).

125 126 n canadian tax journal / revue fiscale canadienne (2020) 68:1

WHY STUDY THE TAX LAWS OF OTHER COUNTRIES? Practitioners, policy makers, and academics regularly compare tax laws across jurisdictions. The epistemic question is why. What kind of new knowledge does comparison yield? A review of the substantial tax literature that uses comparative law techniques reveals that authors look to the practices of other countries to achieve multiple ends. In some cases, the authors’ aspirations are primarily doc- trinal. They seek to understand the laws of another country in order to engage in better tax planning, to learn more about their own tax law system (through the study of it in comparison to alternatives), or simply to satisfy their curiosity about how another country’s system is designed and functions.1 In other instances, the authors’ aims are explanatory: to assess why some countries adopt different tax law frameworks, administrative practices, or institutional designs.2 Sometimes, comparative tax scholarship is instrumental: an author cites tax laws or practices from other jurisdictions in arguing for tax policy changes (and related changes in tax design) in the author’s home country or more generally.3 Finally, and less often, the aim of a comparative work is normative: the author uses comparative law to urge countries to elevate some underlying value, such as equality or privacy, or to suggest that countries’ tax laws should be harmonized or coordinated.4 Recognition of the growing complexity of commercial transactions and forms has inspired renewed interest in comparative law generally and in comparative tax law in particular, and practitioners and scholars have rapidly produced the literature that defines the modern field. Tim Edgar was a remarkable, if perhaps unintentional, participant in the expansion and development of comparative tax scholarship. His career path and his publication record offer a ready case study in tax comparativism, and his use of comparative law has some distinctive features that are worth exploring. The remainder of this paper proceeds as follows. In the next section, I review the major debates and theoretical directions in comparative law scholarship, focusing on recent work in the field. My goal here is to provide a framework against which the contributions of comparative tax scholars, and of Tim Edgar in particular, can be analyzed. The final section of the paper is a case study of Edgar’s contributions in the light of the major debates in comparative law. It traces Edgar’s development

1 See, for example, Peter Harris, Corporate Tax Law: Structure, Policy and Practice (Cambridge: Cambridge University Press, 2013). 2 See, for example, Cedric Sandford, Successful Tax Reform: Lessons from an Analysis of Tax Reform in Six Countries (Fersfield, UK: Fiscal, 1993). 3 See, for example, Brian J. Arnold, “The Process of Tax Policy Formulation in Australia, Canada and New Zealand” (1990) 7:4 Australian Tax Forum 379-94, at 381. 4 See, for example, Antony Ting, The Taxation of Corporate Groups Under Consolidation: An International Comparison (Cambridge: Cambridge University Press, 2013). tim edgar: the accidental comparatist n 127 through three defined phases of comparative work, and it identifies his focus on the identification of policy problems as a major feature of his contribution.

THE QUESTIONS OF COMPARATIVE LAW This paper does not attempt to cover the literature on comparative law in a detailed way.5 That literature has a long history; in its modern incarnation, it may be traced to 1900 Paris and the International Congress of Comparative Law.6 Rather, my aim in this paper is to highlight the preoccupations of comparative law scholars, with a view to better informing an analysis of Tim Edgar’s contributions to the field. To oversimply, comparative law scholars are concerned with five major questions:

1. What is comparative law? 2. What unit of comparison is used? 3. What is compared? 4. From what perspective is the comparison undertaken? 5. What process should be adopted to effect the comparison?

An overview of comparative law scholarship divulges no definitive answer to the first, most fundamental question: What is comparative law? Over a century’s worth of debates among comparatists has provided few assurances even about the basic question of whether comparative law is a distinct science or simply a method that can be applied in any area of jurisprudence.7 Nevertheless, there is some consensus on the taxonomy of approaches to comparative law projects.8 Although there is

5 This paper has benefited from a number of relatively recent, outstanding books on comparative law. See, for example, Maurice Adams and Dirk Heirbaut, eds., The Method and Culture of Comparative Law: Essays in Honour of Mark Van Hoecke (Oxford: Hart, 2015); Michael Bogdan, Concise Introduction to Comparative Law (Groningen: Europa Law, 2013); William E. Butler, O.V. Kresin, and Iu Shemshuchenko, Foundations of Comparative Law: Methods and Typologies (London: Wildy, Simmonds & Hill, 2011); Nicholas H.D. Foster, Michael Palmer, and Maria Federica Moscati, Interdisciplinary Study and Comparative Law (London: Wildy, Simmonds & Hill, 2016); Jaakko Husa, A New Introduction to Comparative Law (Oxford: Hart, 2015); Pier Giuseppe Monateri, ed., Methods of Comparative Law, Research Handbooks in Comparative Law (Cheltenham, UK: Edward Elgar, 2012); and Geoffrey Samuel,An Introduction to Comparative Law Theory and Method (Oxford: Hart, 2014). 6 H. Patrick Glenn, “Against Method?” in The Method and Culture of Comparative Law, supra note 5, 177-88, at 183. (Glenn acknowledges this origin story and further claims that comparison of law has been around for much longer than this story suggests.) 7 For a discussion of these debates, see Geoffrey Samuel, “Comparative Law and Jurisprudence” (1998) 47:4 International and Comparative Law Quarterly 817-36. 8 The many excellent taxonomies of comparative law theories include Jaakko Husa, “Research Designs of Comparative Law—Methodology or Heuristics?” in The Method and Culture of Comparative Law, supra note 5, 53-68. See also the two standard comparative law encyclopedias: Mathias Reimann and Reinhard Zimmermann, eds., The Oxford Handbook of Comparative Law (Oxford: Oxford University Press, 2006); and Jan M. Smits, ed., Elgar Encyclopedia of Comparative Law, 2d ed. (Cheltenham: Edward Elgar, 2012). 128 n canadian tax journal / revue fiscale canadienne (2020) 68:1 disagreement about precisely how these frameworks, along with their scholarly adherents, should be categorized, it seems useful, broadly speaking, to divide comparatists into five camps. Functionalist approaches continue to dominate comparative law scholarship.9 The basic thrust of the functionalist approach (or approaches) is to look at how multiple jurisdictions tackle through legal regulation the same underlying social, political, or economic issue. Despite this common denominator, as one of the main proponents of functionalism observes,

[a]s a theory [functionalism] hardly exists, at least in an elaborated version. The standard reference text for supporters and opponents alike is a brief chapter in an introductory textbook, a text that in its original conception is almost half a century of age and whose author, Zweigert, expressed both disdain for methodological debate and a preference for inspiration over methodological rigour as the comparatist’s ultimate guide.10

Put another way, functionalists adopt a variety of approaches, often determined by the particular outcome the scholar seeks. In the main, adherents of the functionalist approach may be identified by three (or perhaps four) chief tendencies: (1) they focus on the facts as reflected by the effects of rules; (2) they see law in the light of its functional relationship to society and therefore believe that law and society can be separated; and (3) they maintain that institutions can be compared if they fulfill similar functions, even if they exist in different legal systems.11 Finally, most (but not all) functionalists share the view that comparative law can provide guidance in determining which legal resolutions are better than others. The most striking counter-theory to functionalism might be described as a cultural (or hermeneutics) approach to comparative law scholarship. As with functionalism, the scope and underlying principles of cultural comparativism are debated even by those who adhere to it.12 What unifies work in the cultural school is the shared view that law is simply a signifier of a culture or mentality. The scholar who adopts this approach must develop an appreciation of his or her role as a culturally situated interpreter. This leads to (1) considerable skepticism about the very possibility of comparativism, (2) heavy questioning of comparativism’s potential value, and (3) a significant cynicism about whether one country’s laws can ever be appropriate for, or transplanted to, another country.

9 There is a rich literature on each of these functionalist approaches. See, for example, Ralf Michaels, “The Functional Method of Comparative Law,” in The Oxford Handbook of Comparative Law, supra note 8, 339-82; and Catherine Valcke and Mathew Grellette, “Three Functions of Function in Comparative Legal Studies,” in The Method and Culture of Comparative Law, supra note 5, 99-112. 10 Michaels, supra note 9, at 340-41 (notes omitted). 11 Ibid., at 342. 12 The quintessential cultural comparatist is Pierre Legrand. See, for example, Pierre Legrand, Le droit comparé, 5th ed. (Paris: Presses Universitaires de France, 2015). tim edgar: the accidental comparatist n 129

Historically, there was greater emphasis than there is now on what is sometimes referred to as a structuralist approach to comparative law study. This line of scholarship seeks to identify structurally similar elements between systems. For example, a structuralist approach to comparative law might compare how branches of law in different jurisdictions are differentiated in similar or different ways. In the main, this line of work appears to have become less prominent or to have been subsumed into the broad category of functionalism, although, occasionally, a work of scholarship emerges that appears to be rooted firmly in the structuralist tradition. More recently, a strand of work has emerged in comparative law that might be described as critical comparative study, or critical comparativism.13 Scholars working in this theoretical vein have proceeded in a variety of ways. Some may be identified on the basis of their commitment to using comparative law to expose the power dynamics involved in the formulation of legal responses. Others have focused on bringing a broader frame into view—for example, by stepping outside the usual comparative concerns with identifying similarities and differences, and focusing, instead, more on the consequences of legal regulation. Still other critical comparatists start by identifying legal “formants” (“a type of personnel, or a community, institutionally involved in the activity of creating Law”)14 and then seek to look at what those institutions or institutional actors produce as legal text instead of starting, as functionalists do, by identifying a common underlying problem that law seeks to address. At their heart, however, all critical comparatist approaches undertake, as an aspect of their method, an unveiling of how powerful players and institutions influence the design of legal institutions.15 Finally, there is an orientation to comparative law—an approach often ignored in the standard taxonomy of comparative law theories—that sees its function as providing “the cognitive frames through which social actors, including legal and social scientific observers, apprehend social realities.”16 Under this model, which contrasts with that of some mid- and late-20th-century scholars17 but is close, arguably, to that of the 19th century pre-comparatists, comparative law provides an

13 For an illustration, see Pier Giuseppe Monateri, “Methods in Comparative Law: An Intellectual Overview,” in Methods of Comparative Law, supra note 5, at 7-24. 14 Ibid., at 7. 15 As stated by Monateri, “[W]hat I claim as a new outline of the task of Comparative Law is an insight into the ‘ceaseless discursive warfare’ which is fought within legal cultures among competing groups” (ibid., at 21 [notes omitted]). 16 Annalise Riles, “Comparative Law and Socio-Legal Studies,” in The Oxford Handbook of Comparative Law, supra note 8, at 775-813, at 808. 17 Riles analyzes this evolution as follows: “Unlike other legal fields, for example, over the course of the twentieth century comparative law moves towards a more radical separation from other disciplines, their methods and their work. From the 1930s forward, the ideal reader of twentieth- century comparative legal scholarship is the law professor and, even more importantly, the bureaucrat or the judge, not the social scientist” (Annelise Riles, “Introduction,” in Annelise Riles, ed., Rethinking the Masters of Comparative Law [Oxford: Hart, 2001] 1-18, at 10). 130 n canadian tax journal / revue fiscale canadienne (2020) 68:1 avenue for fierce interdisciplinarity. Annelise Riles, who is perhaps the most prominent proponent of this sociolegal comparativism,18 has identified some of its broad themes and directions. These include the effects of globalization on the practice of law; a resurgence of interest in the role of the rule of law, particularly in lower-income countries; the consequences of globalization for national and local regulatory practices; legal pluralism and its consequences for comparison; the consequences of the social dimensions of legal transnationalism for legal transplants; and the role of legal culture, whether as an explanatory tool or as a barrier to legal importation.19 Before I conclude this overview of the competing approaches to comparative law, it might be helpful to address the rich literature on legal transplants.20 That literature, which concerns the migration of law (or legal processes, institutions, or ideas about law) from one jurisdiction to another, is often slightly divorced from, although always connected with, the comparative law literature. It is divorced from it in the sense that scholars of legal transplant theory often make only minimal reference to the different “schools of thought,” or approaches to comparative law, that I have identified in this overview. Still, the scholarship on legal transplants might be best understood as a specific strand of the debate between the functionalist and cultural- ist schools of comparative law. This scholarship seeks to explore and explain why some transplants are effective and others are not. To oversimplify, functionalists tend to proffer a range of explanations for why legal transplants are effective or not, while cultural comparativists tend to hold that most (or all) transplants are ineffect- ive, given the importance and influence of the cultural foundations to which legal rules are inevitably affixed. In the remainder of this section of the paper, I provide a brief review of the remaining four questions (listed above) that concern comparative law scholars.21 First, what unit of comparison is to be used in undertaking comparative law scholarship? Speaking generally, comparative law operates at the level of the nation-state. Most of the work that is identified with the comparative law movement seeks to compare one nation’s legal system with another’s, even though comparative work at the subnational level (for example, comparing one state or province with another) would presumably qualify as comparative law scholarship. A smaller body of work

18 See, for example, ibid., Rethinking the Masters of Comparative Law. 19 See Riles, supra note 16, at 789-99. 20 For the mandatory starting place, see Alan Watson, Legal Transplants: An Approach to Comparative Law, 2d ed. (Athens, GA: University of Georgia Press, 1993) (first published in 1974). See also, for example, Pierre Legrand, “The Impossibility of ‘Legal Transplants’ ” (1997) 4:2 Maastricht Journal of European and Comparative Law 111-24; and Mathias M. Siems, “The Curious Case of Overfitting Legal Transplants,” inThe Method and Culture of Comparative Law, supra note 5, 133-46. 21 For a helpful review of the questions raised in this part of the chapter, see Esin Örücü, “Developing Comparative Law,” in Esin Örücü and David Nelken, eds., Comparative Law: A Handbook (Portland: Hart, 2007), 43-65. tim edgar: the accidental comparatist n 131 attempts to compare countries by legal “family” (usually drawing on a common historical evolutionary pattern) or by legal tradition or culture.22 Comparative law scholars also debate the ontological question of what to compare. The more conventional approaches to comparative law look to formal expressions of law, generally to state-made law, whether expressed in the form of legislation or cases. Recently, however, scholars have become more innovative in their use of comparative approaches and have sought to use comparative law as a lens through which to consider legal institutions, legal structures, administrative practices, regulatory practices, legal cultures, legal actors, and even the problems (social, economic, and political) addressed by law.23 As with many methodologies, there has been a fierce debate about the position of the researcher relative to the subject of study. Some scholars allege that comparative work can be undertaken only by legal insiders and that a scholar cannot effectively compare two legal regimes without deep knowledge of the social, economic, and political conditions in each. William Ewald espouses that view, claiming that if “one’s aim is to understand the ideas that lie behind the foreign legal system (and . . . this should be the aim of comparative law) the sociological data and rule- books alike are unable to furnish what we want, which is a grasp, from the inside, of the conscious reasons and principles and conceptions that are employed by the foreign lawyers.”24 Others allege that it is only by remaining an outsider that a scholar can truly appreciate the contours of the object of study. Thus, for example, James Whitman argues that an outsider might uncover “differences in unarticulated assumptions” that “will frequently be the most revealing and gratifying work a comparatist can do.”25 The process used for comparison (that is, the method) exposes something about the objectives of the study. Some comparatists have laid out in considerable detail the precise steps to be followed in undertaking comparative study. For example, Jaakko Husa’s summary of the technical decisions to be made in developing a research project in comparative law includes the following alternatives:

22 See H. Patrick Glenn, “Comparative Legal Families and Comparative Legal Traditions,” in The Oxford Handbook of Comparative Law, supra note 8, 421-40. 23 As Geoffrey Samuel asks, “[W]hat actually forms the object of comparison[?] Is it a question of comparing rules, norms, concepts, institutions, categories, systems, factual situations, reasoning techniques or what?” (Geoffrey Samuel, “What Is Legal Epistemology” in The Method and Culture of Comparative Law, supra note 5, 23-36, at 26.) 24 See William Ewald, “Legal History and Comparative Law” (1999) Zeitschrift für Europäisches Privatrecht 553, at 555-56; cited in Samuel, An Introduction to Comparative Law, supra note 5. 25 See James Q. Whitman, “The Neo-Romantic Turn,” in Pierre Legrand and Roderick Munday, eds., Comparative Legal Studies: Traditions and Transitions (Cambridge: Cambridge University Press, 2003), 312-44, at 336. 132 n canadian tax journal / revue fiscale canadienne (2020) 68:1

1. micro/macro, 2. longitudinal/traverse, 3. multilateral/bilateral, 4. vertical/horizontal, and 5. monocultural/multicultural.26

In other words, comparative law projects can compare narrow institutions or issues or they can compare fundamental characteristics or functions; they can be based on the current circumstances or they can take a longer-term perspective; they can focus on two jurisdictions or on multiple jurisdictions; they can compare similar systems (as in, for example, country-to-country comparison) or they can compare layered systems (for example, supranational versus national, or national formal laws versus some other kind of normative order); and they can focus on systems in the same general cultural sphere or systems whose cultural contexts are distinct. Iden- tifying where a comparative study lands with respect to these various choices reveals much about the author’s otherwise implicit views on comparativism and law. Other scholars (for example, Esin Örücü) have explored the differing steps required for a comparative law method, finding some approaches to be more fruitful than others. Örücü endorses an approach with at least five phases.27 The first phase requires the scholar to conceptualize the project. Scholars should choose meso- or micro-comparison, the sources of law or legal systems, and so on. In brief, the scholar elects what to compare, with an eye to the theoretical framework—whether that framework is functionalism, structuralism, or another interdisciplinary approach. In the second phase, the scholar undertakes to describe the norms, concepts, and institutions of the chosen systems. This is the observation phase. The third phase is the identification phase, in which the scholar takes note of similarities and differences; a phase that Örücü also refers to as “the classification phase.” In the fourth phase, the scholar works to explain those divergences and similarities.28 The fifth and final, theory-testing phase seeks to test or suggest hypotheses that might tran- scend the cases being compared. Örücü notes that some projects may also include

26 Husa, supra note 8, at 57. For a similar list of decisions that need to be taken before a comparative project is undertaken, see Bogdan, supra note 5, at 45. 27 A. Esin Örücü, “Methodology of Comparative Law,” in Elgar Encyclopedia of Comparative Law, supra note 8, at 567-71. 28 The comparative law literature is weakest when it comes to this process of explanation—that is, delineating the kinds of factors that might be relevant for the purpose of explaining differences and similarities. This weakness may stem from the fact that such identification is more likely to be aligned with the questions asked in political science. For a brief list of relevant factors, see Bogdan, supra note 5, at 57-62. (Bogdan identifies differences in the economic system, the political system and ideology, religion, history and geography, demographic factors, co- influences [for example, other control mechanisms like collective bargaining agreements], and accidental or unknown factors.) See also Husa, supra note 5, at chapter 7 (which adds culture and climate to the list). tim edgar: the accidental comparatist n 133 an evaluation phase, in which the comparatist seeks to discover whether one approach is better than another. The foregoing overview of the questions and directions of comparative law scholarship, although it oversimplifies considerably the dense and intense scholarly debates that have been held among comparatists for well over a century, has provided, I hope, sufficient context to enable us to assess one scholar’s contributions to the field.

A MODEL INSIDER Tim Edgar made a remarkable contribution to tax scholarship. Over the course of his career, he authored at least 40 journal articles (many of them well over 60 pages), six book chapters, one major report, one monograph, one co-authored casebook, and several introductions.29 Although he had a few publications that stood substan- tively alone (for example, on capital gains,30 the concept of taxable consumption,31 charitable giving,32 trusts,33 and source attribution34), most of his work was focused on corporate income tax issues and the taxation of financial instruments in both income and consumption taxes, with a minor strand devoted to general anti-avoidance rules. To frame it another way, the focus of Edgar’s work was the exercise of drawing the line between substitutable activities or transactions in a second-best world (where it is unlikely that policy makers could be convinced to abandon the line altogether). Except for his casebook, all of his work had better tax policy as its ultimate aim (and perhaps even his casebook had that aim, albeit indirectly), and much of this work undoubtedly benefited from his comparative study. Twelve of Edgar’s scholarly contributions adopt a comparative approach, and these works are the focus of the remainder of this paper.

29 Publications list compiled by Alan Macnaughton, on file with author. 30 Brian Arnold and Tim Edgar, “Selected Aspects of Capital Gains Taxation in Australia, New Zealand, the United Kingdom and the United States” (1995) 21, supp. Canadian Public Policy S58-76. 31 Tim Edgar, “The Concept of Taxable Consumption and the Deductibility of Expenses Under an Ideal Personal Income Tax Base,” in Richard Krever, ed., Tax Conversations: A Guide to the Key Issues in the Tax Reform Debate: Essays in Honour of John G. Head (The Hague: Kluwer Law International, 1997), 293-363. 32 Daniel Sandler and Tim Edgar, “The Tax Expenditure Program for Charitable Giving: Kicking a Gift Horse in the Teeth” (2003) 51:6 Canadian Tax Journal 2193-2214. 33 Tim Edgar, “Deemed Realization of the Trust Property: Proposed Amendments to the 21-Year Rule” (1992) 11:3 Estates & Trusts Journal 207-43; and Tim Edgar, “The Trouble with Income Trusts” (2004) 52:3 Canadian Tax Journal 819-52 (although arguably his interest in this topic was connected to his work on corporate income taxation, and so the article is not an outlier). 34 Tim Edgar and David Holland, “Source Taxation and the OECD Project on Attribution of Profits to Permanent Establishments” (2005) 37:6Tax Notes International 525-539. 134 n canadian tax journal / revue fiscale canadienne (2020) 68:1

The First Decade (1987-2000): Careful and Sustained Study of a Small Number of Jurisdictions Edgar’s career offers a model study in thoughtful comparative tax scholarship. His first article, which he published as anLLM student in 1987, was on the tax rules that apply when a corporation borrows money to finance a foreign subsidiary. His publication of this article in the Australian Tax Forum constitutes dramatic foreshad- owing: throughout his career, his interest in certain comparator countries and in the taxation of financial instruments remained steadfast.35 In this early article, Edgar reviews the Canadian position on the deductibility of interest incurred to finance a foreign subsidiary in Canada, and he compares this position with the equivalent positions of Australia, the United Kingdom, and the United States. Even in this early work, Edgar is an adept comparatist. Instead of simply reciting the rules of each of the four jurisdictions, he offers an integrated summary of how the practices of Australia, the United Kingdom, and the United States vary from the Canadian approach, and he reviews with specificity alternative policy options, assessing each against clearly articulated tax policy criteria. Where some scholars dip occasionally into the ocean of comparative tax law, Edgar revealed himself very quickly to be a keen and adept swimmer. His second comparative piece was published in 1990, “The Classification of Corporate Secur- ities.”36 His career mantra is captured by a line early in this article: “[T]ax law should not treat economically similar transactions differently.”37 In this article, Edgar reviews in detail proposed American regulations on securities classification. He found reason for optimism in the United States’ willingness to worry about the classification of debt held by shareholders. However, ever dissatisfied with rules that ignore the economic substance of financial instruments, Edgar identified substantial inadequacies in the American approach proposed at the time—inadequacies in both the legislative framework and the judicial decisions (which, he argued, lacked any organizing principle).38 In the comparative tax literature, it is rare to find a scholar reviewing another country’s rules in order to identify their inadequacies. On the basis of his analysis of the failings of both the Canadian and American systems, Edgar recommends an approach that would (1) draw the debt-equity line at one of the far ends of the spectrum between debt and equity and (2) classify everything else as the alternative. He argues that this approach (assuming that we live in a world where debt and equity are unlikely to be treated the same) would best serve to minimize tax planning.

35 Tim Edgar, “The Corporate Interest Deduction and the Financing of Foreign Subsidiaries” (1987) 4:4 Australian Tax Forum 491-528. 36 Tim Edgar, “The Classification of Corporate Securities for Income Tax Purposes” (1990) 38:5 Canadian Tax Journal 1141-88. 37 Ibid., at 1145. (Persuading the Supreme Court of Canada of this point was not among Edgar’s successes.) 38 Ibid., at 1162. tim edgar: the accidental comparatist n 135

In 1992, Edgar is back in the pages of the Canadian Tax Journal, where he published most of his work.39 He has fixed his comparative eye firmly on Australia and the United States, this time with a view to pressing for policy reform of Canada’s thin capitalization rules. In this article, Edgar praises Canada’s approach to its thin capitalization rules, arguing that they should be expanded, and he offers a nod to some design features of the US and Australian rules. He explicitly justifies the choices of Australia and the United States: they are countries that impose thin capitalization rules by legislation rather than by administrative guidance,40 and he assesses their legislative frameworks to be more comprehensive than Canada’s. Atypically for his comparative work, Edgar, in this article, presents each country’s rules in turn. While this presentation makes for easy reading, it leaves the comparative work to the reader. Edgar proceeds to draw on the Australian and US experiences as he reviews in meticulous detail the various policy choices reflected in the design of each country’s thin capitalization rules, and he offers an assessment of the pros and cons of variations on each of those policy choices.41 To that end, the comparator countries are used as a mechanism to help Edgar identify a wide range of policy alternatives. Three years later, Edgar returns with an article, co-authored with Brian Arnold, comparing capital gains taxation in Australia, New Zealand, the United Kingdom, and the United States.42 At its outset, the article offers a clarifying discussion of both its focus and its choice of comparator countries. The authors are explicit about rejecting a high-level overview of many countries and opting instead for a narrow cluster of countries and a limit on the number of features of capital gains taxation that are subject to review.43 The four countries are chosen because the authors believe that they provide a fairly representative sampling of approaches, because they share a common-law tradition, and because they are major trading partners for Canada. The article advocates, implicitly, for harmonization among Canada and the four countries.44 The comparative review is organized under headings that highlight

39 Tim Edgar, “The Thin Capitalization Rules: Role and Reform” (1992) 40:1 Canadian Tax Journal 1-54. Macnaughton’s publication list suggests that Edgar published at least 18 major articles with the Canadian Tax Journal, in addition to minor contributions. 40 Ibid., at 10. (Although it is unclear why this difference matters.) 41 Ibid. Specifically, Edgar examines in this article the definition of a specified non-resident (32-33), the appropriate level of share ownership (33-37), the relevant debt-to-equity ratio (37-39), the calculation of debt and equity (39-44), the clawback of short-term equity (44-46), loanbacks (46-47), hybrid securities (47), consolidation (47-48), the calculation and treatment of interest on excess indebtedness (48-50), the issuers and investors subject to the rule (50-53), and the debt creation rules (53-54). On most policy issues, Edgar does not recommend a specific option for Canada; instead, he lays out in detail the various policy options, and assesses which of them seem suitable for Canada. 42 Arnold and Edgar, supra note 30. 43 Ibid., at S58-59. 44 “In an increasingly globalized and competitive economy, Canada’s tax system cannot differ significantly from the tax systems of its trading partners” (ibid., at S59). 136 n canadian tax journal / revue fiscale canadienne (2020) 68:1 some of the major design features of capital gains taxation (for example, under the heading “Special Exemptions,” the authors discuss the distinction between capital gains and ordinary income, short- versus long-term gains, gains on shares, debt obligations, gains on real property and principal residences, relief for small businesses, gains on personal-use property, realization and rollovers, instalment sales, dividends compared with capital gains, and miscellaneous receipts). Each section of the article addresses in summary form the general approach taken by each country. Ultimately, the authors discover that in contrast to what might be predicted, Canada and the four other countries vary dramatically from one another in their design of capital gains taxation. The authors underscore the particularly anomalous provision by Canada of the $100,000 lifetime exemption.45 Although the authors do not expressly recommend the removal of this provision, they seem to intend for readers to infer such a recommendation. In 1996, Edgar published a major article on the concept of interest in the Income Tax Act.46 Of this article’s 70 pages, only 11 are devoted to a discussion of the legislative approach taken in other countries (primarily New Zealand).47 However, Edgar’s capacity to make sense of the tax law in other jurisdictions—and his willingness to stay abreast of the laws of Australia and New Zealand in particular—shines through. He explains the comprehensive accrual regime adopted by New Zealand in 1987, and he offers an accessible summary of that complicated regime. For the first time in one of his comparative works, Edgar uses New Zealand legislation as a model for the rules that Canada should adopt.48 By the end of the 1990s, Edgar’s answer to most of the major comparative law debates is clear. He is an untroubled functionalist, never questioning his position as an interpreter of others’ laws and concerned primarily (although at this stage still

45 Ibid., at S70. 46 Tim Edgar, “The Concept of Interest Under the Income Tax Act” (1996) 44:2 Canadian Tax Journal 277-347. This appears to be the only article of Edgar’s in which he took case law seriously. See, for example, his description of the Supreme Court’s work in tax cases as “tax follies” (Tim Edgar, “Policy Forum: Interest Deductibility Restrictions—Expecting Too Much from REOP?” (2004) 52:4 Canadian Tax Journal 1130-72, at 1132). (See also Andrea Black, “Timothy W. Edgar (1960-2016),” December 27, 2016, online: Let’s Talk About Tax NZ (letstalkabouttaxnz.com/2016/12/27/timothy-w-edgar-1960-2016) [perma.cc/64FK-3TX4].) 47 Edgar, “Concept of Interest Under the Income Tax Act,” supra note 46, at 337-47. 48 See ibid, at 346-47: “[A]ll debt-financing charges that economically represent the cost of credit should be recognized for deductibility and inclusion purposes on an annual accrual basis. In the face of an apparently limitless capacity for the development of sophisticated financial instruments in the current marketplace, this goal can be most effectively realized through the enactment of comprehensive accrual rules similar to those in New Zealand.” Similarly, in an article that does not discuss in any detail the approaches taken by New Zealand or Australia, Edgar urges Canada to follow these two countries’ lead in legislating to address the challenges of taxing financial instruments (in response to the Supreme Court’s efforts to cope with weak-currency borrowings in Shell Canada Ltd. v. Canada, [1999] 3 SCR 622 and Canadian Pacific Limited v. Canada, [1999] SCCA no. 97): Tim Edgar, “Some Lessons from the Saga of Weak-Currency Borrowings” (2000) 48:1 Canadian Tax Journal 1-34. tim edgar: the accidental comparatist n 137 relatively implicitly) with the policy problems that tax law seeks to resolve. He engages at the macro level, choosing to focus on countries with similar legal traditions and languages. Perhaps unsurprisingly, given the importance of the legislative basis of tax law, Edgar focuses almost exclusively on tax legislation, delving only briefly into, and then without much deference for, tax jurisprudence.

The Second Decade (2000-2010): Comparativism That Refocuses the Policy Debate While Edgar’s work in the 1990s was characterized by a preoccupation with taxing similar economic transactions similarly, his work in the 2000s expanded on that insight to focus more directly on the harms that arise from tax avoidance when governments fail in their duty to address such avoidance. Edgar kicked off the decade with a massive monograph on the income tax treatment of financial instruments, a work for which he has become justly renowned.49 This book, which he worked on over a five-year period, was originally a doctoral dissertation prepared under the tutelage of Canadian-born, Australian-employed, world-engaged tax expert Rick Krever. In the monograph, Edgar borrows from Australia and New Zealand (primarily highlighting their proposed and enacted legislation, respectively) and the United States (primarily borrowing from the work of US tax scholars). The preface to the work reveals that Edgar did not merely read the law of those countries from the comfort of his office; instead, he met with officers at the Australian Tax Office, the Australian Treasury, and the New Zealand Inland Revenue Department in order to better understand the draft and enacted legislation in those jurisdictions. He made careful study of the laws of other countries. In this book, Edgar does not ad- vocate for the wholesale adoption by Canada of the rules of any other jurisdiction; instead, he uses the approaches from other jurisdictions as a starting place for the discussion of possibilities. Ultimately, he argues for a comprehensive accrual regime as a means of enacting expected-return taxation. Edgar’s summary explanation of the aim of the monograph reveals that, by 2000, his initial focus on equivalent economic transactions has become entwined with his aim of preventing tax avoidance:

[T]he principal goal of policy makers should be the consistent taxation of equivalent cash flows identified in terms of expected and unexpected gains and losses. This goal ensures that perfectly substitutable transactions are taxed equivalently. The imperative underlying this goal is the need to block revenue leakage from avoidance transactions and minimize the associated welfare loss.50

49 Tim Edgar, The Income Tax Treatment of Financial Instruments: Theory and Practice (Toronto: Canadian Tax Foundation, 2000). Amusingly, Edgar claims (at vii) that his “original intention was to keep the monograph to a manageable size so that readers might be able to take it in with a minimal commitment of time.” He also asserts that he “tried to maintain true to [his] goal of providing an accessible overview of the tax-policy issues associated with financial instruments and the related approaches to legislative design.” These seem like unrealistic (and unrealized) goals. 50 Tim Edgar, “Response: A Defensible and Workable Approach to the Income Tax Treatment of Financial Instruments” (2002) 50:1 Canadian Tax Journal 249-58, at 251. 138 n canadian tax journal / revue fiscale canadienne (2020) 68:1

In the year following the publication of his monograph (2001), Edgar published three peer-reviewed articles—two in the New Zealand Journal of Taxation Law and Policy51 and one in the Canadian Tax Journal.52 Edgar’s publication venues make it clear that by 2001, he has become an “insider” to the Australian and New Zealand tax communities, resolving his position on one of the remaining comparative law debates. The biographical entry for Edgar in two of the articles acknowledges his work on secondment as a senior policy adviser with the New Zealand Inland Rev- enue Department, Policy Advice Division.53 Each of Edgar’s articles in the New Zealand journal compares the approaches taken to financial instruments and personal tax shelters in Canada, the United States, New Zealand, and Australia. Each article highlights concerns about the avoidance possibilities offered by the design of current regimes. This era also sees a shift in how Edgar uses his comparative knowledge in his Canadian tax work. Fewer of his articles offer an explicitly comparative review, with an extended discussion of the approaches that multiple jurisdictions take to a particular issue.54 More commonly during this period—particularly in articles where he further develops his policy position on financial instruments or the taxation of interest—Edgar simply alludes to how the works of American scholars and Austral- ian and New Zealand policy makers have inspired his thinking. In a 2004 article, he exhibits his characteristic modesty in offering a nod to those influences:

51 Tim Edgar, “Financial Instruments and the Tax Avoidance Lottery: A View from North America” (2001) 6:2 New Zealand Journal of Taxation Law & Policy 63-102; Tim Edgar, “At-Risk Rules as a Legislative Response to ‘Abusive’ Personal Tax Shelters” (2001) 7:4 New Zealand Journal of Taxation Law & Policy 291-321. 52 Tim Edgar, “Exempt Treatment of Financial Intermediation Services Under a Value-Added Tax: An Assessment of Alternatives” (2001) 49:5 Canadian Tax Journal 1133-99. This article is not explicitly comparative, although it is clear that Edgar has benefited from his study of the goods and services tax in Australia and New Zealand. It is the first of his articles to be focused on the value added tax, and it is perhaps typical of Edgar’s working style in that it is long, clocking in at almost 70 pages. In his biographical note, he thanks an external referee for bringing his attention to the approaches used in Singapore and South Africa. In the article, however, he does not appear to reference or build on those countries’ approaches. This seems consistent with his approach to comparativism; typically, he uses only jurisdictions with which he is willing to become highly familiar. 53 Edgar’s work with the New Zealand government seems to animate at least some of this 2002 report: New Zealand, Inland Revenue Department, GST & Financial Services: A Government Discussion Document (Wellington, NZ: Inland Revenue Department, Policy Development Division, 2002) (http://taxpolicy.ird.govt.nz/sites/default/files/2002-dd-gst-financial-services .pdf ). 54 On the other hand, a few of Edgar’s articles in this era maintain that approach. See, for example, Reuven Avi-Yonah, Tim Edgar, and Fadi Shaheen, “Stapled Securities—‘The Next Big Thing’ for Income Trusts? Useful Lessons from the US Experience with Stapled Shares” (2007) 55:2 Canadian Tax Journal 247-88. (In this article, the authors offer a review of the US response to the taxation of stapled share structures as an illustration of a sensible direction for Canada.) tim edgar: the accidental comparatist n 139

I confess that there is little in this paper that is original. The policy case for restrictions on the deduction of interest expense is well developed in the literature, which is the almost exclusive preserve of a handful of tax academics at US law schools.55

Another feature of his work in this decade—and one that represents, I believe, a distinctively Edgarian contribution to comparative tax scholarship—is a marked increase in the amount of space that he devotes to the articulation of the policy problem to be solved. In a 2003 article on corporation income tax coordination, for example, he devotes 18 pages to articulating and resolving the policy interaction of international tax competition and international tax arbitrage.56 Ultimately, he takes a different tack from the previous literature on those two phenomena, arguing in favour of framing the policy problem as the perfect or near-perfect substitutability of higher- for lower-taxed transactions. As a result, he sees international tax competition and tax arbitrage as linked and the required policy response as common. This 2003 article is not explicitly comparative. I would observe, however, that the exercise of thinking comparatively—that is, of considering the different ways in which different jurisdictions identify and resolve tax policy problems—trains researchers to better articulate the policy problem they believe they are addressing. That being the case, Edgar’s previous comparative work stands him in good stead in these articles because his accustomed type of thinking helps him approach old issues in new ways, which is one of the main attributes of comparative law. Finally, by his second decade, Edgar had clearly become—presumably in part because of his comparative tax expertise—a valued (if not always heeded) government adviser. His scholarship reveals that, in addition to contributing (as noted above) to the New Zealand government,57 he was serving as an adviser to the Can- adian government.58 In 2008, recognizing the depth of Edgar’s Australian expertise, the University of Sydney Law School formalized its academic connection with him, and he began an ongoing arrangement with that university.59

55 Tm Edgar, “Policy Forum: Interest Deductibility Restrictions—Expecting Too Much from REOP?” supra note 46, at 1133-72. 56 Tim Edgar, “Corporate Income Tax Coordination as a Response to International Tax Competition and International Tax Arbitrage” (2003) 51:3 Canadian Tax Journal 1079-1158, at 1104-21. 57 See Ewen McCann and Tim Edgar, “The International Income Taxation of Portfolio Debt in the Presence of Bi-Directional Capital Flows” (2006) 4:1 eJournal of Tax Research 5-24 (in which the authors acknowledge that a first draft of the paper was prepared for the New Zealand “Tax Review 2001”). 58 In “The Trouble with Income Trusts” (2004) 52:3 Canadian Tax Journal 819-52, Edgar reports that his article is a revised and condensed version of a background paper prepared for the Department of Finance. In 2008, Edgar wrote a research report for the Advisory Panel on Canada’s System of International Taxation: see Tim Edgar, Interest Deductibility Restrictions and Inbound Direct Investment (Ottawa: Department of Finance, Advisory Panel on Canada’s System of International Taxation, October 2008). 59 He held a unit of study appointment there in 2008 and 2009 and was appointed to staff between 2010 and 2014. 140 n canadian tax journal / revue fiscale canadienne (2020) 68:1

The Third Decade (2010-2016): An Established and Model Comparatist The third decade of Edgar’s professional life was shorter than it should have been. As a result, his publications in this decade were fewer than in the first two decades. Yet even in this reduced output, Edgar’s comparativism is apparent. A book chapter that he contributed in 2010 reflects his continued push for sensible rules ina second-best (or third- or fourth-best) world.60 The focus of the chapter is the appropriate policy response to three behavioural margins: the choice of intragroup debt versus equity; the choice of location of external debt; and the choice of investment location. In his characteristic way, Edgar combines what had previously been separate policy issues, with the result that he advocates for a modification of the Australian or New Zealand thin capitalization regime. A few years later, returning to work that builds on his early attention to UK tax law and his career-long commitment to Australian tax law, Edgar published an article that lays out the policy implications of the academic literature on taxation and risk taking (and, more specifically, the ability to transfer risk to the government through the income tax system).61 In a novel application of his attention to comparable transactions, he argues for a loss limitation provision to restrict the transfer to government of risk that flows from post-tax, perfectly hedged positions. Finally, Edgar’s last major foray into policy (in 2015), while clearly not designed as a capstone effort, serves both to bring his scholarship full circle and to substantially advance it.62 The topic—risk-based anti-avoidance rules—is not far from his earliest work on the basic building blocks of financial arrangements (interest deductibility and classification of securities). He remains true to one of his primary scholarly aims: the development of better law—law that is based on a clear articulation of the policy problem to be solved and on pragmatic solutions borrowed, where applicable, from the insights gained through his study of the United States and the United Kingdom and through his deep connections to Australia and New Zealand. Indeed, the US and Australian approaches feature prominently in his policy recommendations. In this final article, Edgar’s work with comparator jurisdictions is exemplary. He does not treat other jurisdictions as simply the subject of descriptive study. Instead, he uses his insights into the law and policy of the United States— insights generated from several decades of careful study and engagement—to bolster (but not without caveats) his policy recommendations for Canadian tax law.

60 Tim Edgar, “Outbound Direct Investment and the Sourcing of Interest Expense for Deductibility Purposes,” in Arthur J. Cockfield, ed.,Globalization and Its Tax Discontents: Tax Policy and International Investments: Essays in Honour of Alex Easson (Toronto: University of Toronto Press, 2010), 60-83. 61 Tim Edgar and Amir Aghdaei, “Using the Tax System as Your Hedge Counterparty” (2013) 28:2 Australian Tax Forum 317-75. 62 Tim Edgar, “Risk-Based Overrides of Share Ownership as Specific Anti-Avoidance Rules” (2015) 63:2 Canadian Tax Journal 397-465. tim edgar: the accidental comparatist n 141

CONCLUSION Having offered a detailed catalogue of Tim Edgar’s contributions to comparative tax law scholarship, I will conclude with four general reflections about his work. First, his work seems to have had, at least occasionally, an impact on policy. As my review of his scholarship has shown, he was a consummate policy analyst and a committed functionalist. Every one of his journal articles and book chapters includes recommendations for policy reform. And in some cases, the governments of Canada, Australia, and New Zealand appear to have heeded his advice. While it is impossible to claim that his work directly caused policy change, it is certain that the governments in Canada, Australia, and New Zealand reformed their thin capitalization rules, their capital gains exemptions, and their taxation of financial instruments in the wake of his substantial work on those topics. At least some of that impact was likely the result of Edgar’s ability to point to the rules adopted in other jurisdictions, rules that must have provided both technical guidance and political reassurance to Canadian, Australian, and New Zealand policy makers. Second, Edgar’s scholarly path serves as a model for tax comparatists. His sustained focus on a small number of countries, and the considerable amount of time that he spent in Australia and New Zealand, made him, perhaps inadvertently, an “insider” to those countries. His understanding of their social, political, and economic contexts (as well as his detailed knowledge of much of Australia’s and New Zealand’s income tax law and goods and services tax law) made him a valuable contributor to the Australian and New Zealand landscapes of tax scholarship and policy.63 Put another way, Edgar demonstrated a willingness to immerse himself in the rules and contexts of the countries that he used for comparison purposes. Third, Edgar was adept in his use of comparativism. At times, he used the tax law framework of another jurisdiction to urge Canada’s (or another country’s) policy makers to make changes. At other times, he engaged in comparative work in order to ensure that his articulation of policy options was complete. There were occasions when he verged on using comparative work to promote the harmonization of countries’ regimes, in the service of preventing tax avoidance and abuse. Perhaps most distinctively, relative to other tax comparatists, Edgar rarely suggests wholesale tax transplants, despite what seems to be his general view that countries should coordinate or harmonize their rules to reduce tax avoidance. Instead, he uses the experiences of Australia, New Zealand, and the United States as springboards, affording opportunities to see the policy choices available and to test them against tax policy criteria.

63 In 2000, Edgar published an article on the Australian project related to the taxation of financial arrangements, urging Australia to enact their proposed reforms. By that point in his career, he was in a position to claim that these reforms were “the most thoroughly developed of any government.” Tim Edgar, “The Taxation of Financial Arrangements (TOFA) Proposals: A Modest and Defensible Agenda for Reform” (2000) 23:2 University of New South Wales Law Journal 288-98. 142 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Fourth, and perhaps most significantly, Edgar made a distinguished and unique contribution to the design of policy-relevant comparative tax-law research. As his comparative work matured, it would typically include a section explicitly setting out the policy problem to be resolved.64 In every case, this section would offer a novel combination of real-world conditions that allowed him to clarify with unusual pre- cision the problem that governments should be trying to solve in drafting tax laws. I have not seen other comparative tax scholars emulate this approach, but they should. Edgar’s scholarly career answers the major questions of comparative law. He was a thoughtful and considerable tax scholar whose countless contributions, which have helped us better understand the tax world, are in some cases connected to understanding, comparing, and evaluating the tax laws of other jurisdictions. His scholarly work, seen in its entirety, suggests that Edgar did not set out to be a tax comparatist. Rather, it suggests that he set out to be an outstanding tax scholar, and comparative law provided him with an effective avenue for achieving that goal.

64 For an excellent example, see his co-authored 2013 article, Edgar and Aghdaei, supra note 61, at 331-43. canadian tax journal / revue fiscale canadienne (2020) 68:1, 143 - 68 https://doi.org/10.32721/ctj.2020.68.1.sym.dirkis

Moving to a More “Certain” Test for Tax Residence in Australia: Lessons for Canada?

Michael Dirkis*

PRÉCIS Le Canada et l’Australie ont, en apparence, des critères semblables pour établir la résidence fiscale des particuliers. Les deux pays ont un critère de résidence de common law (resides test, en Australie), des règles de « lien continu » (continuing attachment, un critère obligatoire en Australie), un critère de type 183 jours, et des dispositions axées sur les fonctionnaires. Une différence clé entre les deux pays, malgré des critères de résidence très semblables, est que les litiges sont rares au Canada tandis qu’en Australie, au cours de la dernière décennie, au moins 43 décisions en matière de résidence fiscale ont été rendues par des tribunaux administratifs, la Cour fédérale et la Haute Cour. En réaction au nombre élevé de litiges résultant des programmes intensifs de conformité menés par l’Australian Taxation Office, le Board of Taxation a entamé en 2016, de sa propre initiative, un examen des règles de résidence fiscale s’appliquant aux particuliers. Le rapport en résultant qui a été soumis au gouvernement établissait que les règles actuelles n’étaient plus appropriées et devaient être mises à jour et simplifiées. Bien que le gouvernement australien n’ait pas approuvé les recommandations du Board of Taxation, il a chargé ce dernier d’entreprendre d’autres consultations afin de s’assurer que les règles de résidence proposées soient bien conçues et ciblées, en particulier en ce qui a trait aux questions d’intégrité (c’est-à-dire, d’anti-évitement). Un rapport final, envoyé au gouvernement en avril-mai 2019, proposait un certain nombre de critères de démarcation. Ces critères proposés sont basés en partie sur l’approche adoptée par la Nouvelle- Zélande et, en 2013, par le Royaume-Uni, dans leurs règles de résidence. Dans cet article, l’auteur examine les similarités et les lacunes des règles canadiennes et australiennes en matière de résidence fiscale des particuliers selon les critères d’équité, de simplicité et d’efficacité (intégrité), puis il passe en revue les recommandations du Board of Taxation en vue de déterminer si les modifications proposées des règles australiennes pourraient servir de guide à une future réforme canadienne, si les circonstances politiques l’exigent.

* Professor of Taxation Law, University of Sydney Law School. The author would like to acknowledge the support of the Ross Parsons Centre of Commercial, Corporate and Taxation Law in respect of this research. An earlier draft of this extensively revised and updated paper was presented at the conference “Re-Imagining Tax for the 21st Century: A Conference Inspired by the Scholarship of Tim Edgar,” held in Toronto, February 8 - 9, 2019.

143 144 n canadian tax journal / revue fiscale canadienne (2020) 68:1

ABSTRACT Canada and Australia have superficially similar tests for determining the tax residence of individuals. Both have a common-law residence (or resides) test, “continuing attachment” rules (a statutory test in Australia), a 183-day type of test, and provisions focused on government officials. A key difference between the countries in this regard, despite broadly similar residence tests, is that litigation in Canada is rare whereas Australia, over the last decade, has seen at least 43 administrative tribunal, Federal Court, and High Court decisions with respect to tax residence. In response to the high levels of litigation resulting from concentrated Australian Taxation Office compliance programs, the Board of Taxation commenced a self- initiated review of the income tax residence rules for individuals in May 2016. The report subsequently submitted to government noted that the current rules were no longer appropriate and needed to be updated and simplified. Although the Australian government has not endorsed the board’s recommendations, the board was directed to undertake further consultation in order to ensure that the proposed residence rules are appropriately designed and targeted, with a particular focus on integrity (that is, anti- avoidance) issues. A final report, sent to the government in April/May 2019, proposed a number of bright-line tests. These proposed tests are based in part on the approach adopted in the NZ and 2013 UK residence rules. In this paper, the author considers the similarities and shortcomings of the Canadian and Australian rules on individual tax residence according to the criteria of equity, simplicity, and efficiency (integrity), and then reviews the Board of Taxation’s recommendations with an eye to whether the proposed Australian changes could provide guidance for any future Canadian reform, should the political circumstances so dictate in the future. KEYWORDS: AUSTRALIA n CANADA n COMPARATIVE ANALYSIS n INDIVIDUALS n REFORMS n RESIDENT

CONTENTS Introduction 145 Overview of Canada and Australia’s Individual Residence Tests: The Rules and Their Weaknesses 146 Canada’s Individual Residence Tests 146 Australia’s Tests for Individual Residence 149 Overview of the Weaknesses in Australia’s and Canada’s Tests for Individual Residence 151 Abandoning the Role of the Common Law in Testing for Individual Residence 154 The 2013 UK Rules 154 Drivers and Policy 154 Overview of the Legislation 156 Is This Model Applicable for Australia and Canada? 159 The Proposed Australian Changes 160 Rationales and Policy 160 Outcome of the Board of Taxation’s Self-Initiated Review 163 Potential Problems with the Proposed Model 165 Lessons for Canada? 168 Conclusion 168

moving to a more “certain” test for tax residence in australia n 145

INTRODUCTION In May 2016, the Australian Board of Taxation—a non-statutory advisory body that provides the government with real-time advice on tax policy in an effort to improve the design and operation of taxation law—commenced a self-initiated review simply titled “High Wealth Individuals and Residency.”1 On July 9, 2018, Australia’s then minister for revenue and financial services released the results of that review,2 in a report titled Review of the Income Tax Residency Rules for Individuals.3 The board concluded, following a targeted, confidential, and “extensive” consultation, “that the existing residency rules are no longer appropriate as the fundamental basis of individual income taxation,” and it recommended that the rules be modernized and reformed.4 This finding with respect to Australia’s rules could be applied to Canada’s rules, given that Canada and Australia have superficially similar tests for determining the residence of individuals.5 The Australian finding is not new. A comprehensive review of Australia’s residence and source rules, completed in 2005 by this author,6 established that Australia’s residence rules for individuals were inadequate in their practical application when evaluated according to four tax policy objectives: the

1 Australian Government, Board of Taxation, “CEO Update—July 2017,” at 2 (https://cdn.tspace .gov.au/uploads/sites/74/2016/12/July-CEO-updates.pdf ). 2 Australian Government, The Treasury, “Review of Tax Residency Rules for Individuals,” Media Release, July 9, 2018 (http://ministers.treasury.gov.au/ministers/kelly-odwyer- 2016/ media-releases/review-tax-residency-rules-individuals). 3 Australian Government, The Board of Taxation, Review of the Income Tax Residency Rules for Individuals (Parkes, ACT: Board of Taxation, August 2017) (herein referred to as “the board’s 2017 report”) (https://cdn.tspace.gov.au/uploads/sites/70/2018/07/T307956 -income-tax -res-rules.pdf ). 4 Ibid., at paragraph 1.2. The board concluded in ibid., at paragraph 1.4, that the modernized residency rules should (a) reflect current global work practices; (b) provide certainty to individuals of their tax residency status; (c) . . . be [applicable] by an ordinary individual without tax advice in all but the most complex of cases; (d) remove antiquated concepts such as domicile; and (e) adopt factors that are easy to understand, reduce reliance on common law definitions, and are less open to manipulation. 5 Both Australia and Canada have (1) a common-law residence test, (2) continuing attachment rules (“ordinary resident” and “domicile,” respectively), (3) a 183 -day type of test, and (4) provisions focused on government officials. 6 Michael J. Dirkis, Is It Australia’s? Residency and Source Analysed, Australian Tax Research Foundation Research Study no. 44 (Sydney, NSW: Australian Tax Research Foundation, 2005), specifically chapter 3 examining individual residency. 146 n canadian tax journal / revue fiscale canadienne (2020) 68:1 three traditional “good tax policy” objectives of equity, simplicity, and efficiency, plus a fourth objective of preventing tax avoidance.7 The 2005 review, in attempting to determine whether the rules on individual residence could be modified within the jurisdictional framework to meet these four policy objectives more fully, also evaluated other jurisdictions’ residence rules according to these policy objectives. In particular, the review examined the Canadian rules on individual residence. The 2005 study concluded that the “individual fact and circumstances” element of the individual residence tests in a number of jurisdictions, including Canada, could, in certain situations, (1) result in horizontal inequity, (2) reduce simplicity, and (3) leave the rules open to manipulation.8 In this paper, I do not seek to update or reproduce that study. Rather, I start by exploring the similarities between Canada’s rules on individual residence and Aus- tralia’s rules, and I consider their common weaknesses in terms of equity, simplicity, efficiency, and prevention of tax avoidance. Then, after briefly describing the Board of Taxation’s recommendations and the 2013 UK rules (which have influenced the proposed Australian reforms), along with the motives for those reforms and proposals, I evaluate them, too, according to the objectives of equity, simplicity, and efficiency (including the prevention of tax avoidance). Finally, I speculate about whether the proposed Australian changes might be a guide for any future Canadian reform, should the political circumstances of the future so dictate.

OVERVIEW OF CANADA AND AUSTRALIA’S INDIVIDUAL RESIDENCE TESTS: THE RULES AND THEIR WEAKNESSES Canada’s Individual Residence Tests The terms “resident” and “ordinarily resident” have been used in Canadian income tax law since the enacting of Canada’s first income tax statute in 1917.9 However, although the term “resident” is used more than 400 times10 in the Income Tax Act11 (more times than that, if we include the deeming provisions), the Act defines neither the term “resident” nor the term “ordinarily resident.” The Canadian tax law relies

7 Historically, since tax avoidance is distortionary, it would be considered in the context of efficiency. At the time of the study, however, a number of the Australian government’s most recent reform reviews had treated the prevention of tax avoidance as a separate policy objective. 8 Dirkis, supra note 6, at part VI conclusions. It is important to note that although the “facts and circumstances” element of the tests addresses an individual’s circumstances, individual facts and circumstances do not equate to horizontal equity. 9 Under subsection 4(1) of the Income War Tax Act, 1917, SC 1917, c. 28, tax was payable by “every person residing or ordinarily resident in Canada or carrying on any business in Canada.” 10 Edwin G. Kroft, “Jurisdiction To Tax: An Update,” in Tax Planning for Canada-US and International Transactions, 1993 Corporate Management Tax Conference (Toronto: Canadian Tax Foundation, 1994), 1:1 - 138. 11 Income Tax Act, RSC 1985, c. 1 (5th Supp.), as amended (herein referred to as “the Act”). moving to a more “certain” test for tax residence in australia n 147 principally on the common law12 to determine the residence status of individuals, basing the determination on whether they are “resident” in Canada (that is, they reside in Canada) or “ordinarily resident” in Canada13 (that is, they maintain a sufficient number of residential ties with Canada while abroad).14 Although the outcome of such a determination under common law is ultimately based on an individual’s facts and circumstances, the Canada Revenue Agency (CRA), in administrating the law, states:

The most important factor to be considered in determining whether an individual leaving Canada remains resident in Canada for tax purposes is whether the individual maintains residential ties with Canada while abroad.15

Thus, the residence concept in Canadian common law, given that it is wide enough to cover persons absent from Canada,16 seems to cover the same ground as the concept of “ordinarily resident” (that is, the place where a taxpayer has a settled routine of life and regularly, normally, or customarily lives).17 In fact, Rand J in Thomson noted that if the common-law concept of residence is given its full significance, “ ‘ordinarily resident’ becomes ‘superfluous.’ ”18 Even if “ordinarily resident” has a different meaning from “resident” at common law, under Canadian tax law a person who is ordinarily resident is deemed to be a resident.19

12 The source jurisdiction for interpreting these words appears to be the United Kingdom. In Thomson v. MNR, [1946] SCC 812, all four judges who reviewed legal precedents (Kerwin, Taschereau, Rand, and Estey JJ) considered the UK cases of Inland Revenue Commissioners v. Lysaght, [1928] AC 234 (HL) and Levene v. Inland Revenue Commissioners, [1928] AC 217 (HL). 13 See Thomson, supra note 12. 14 Rand J in Thomson, ibid., at 224, stated that the term “ ‘ordinarily resident’ carries a restrictive signification . . . and means residence in the course of the customary mode of life of the person concerned, and . . . is contrasted with special or occasional or casual residence.” Thus, the term is equated with habitual residence. This is further illustrated in cases where a person who is not “resident,” having left a country for work purposes (Cohen v. Commissioner of Inland Revenue, [1945] 13 SATC 362) or for military service (Slater v. Commissioner of Taxes, [1949] NZLR 678), is found to be “ordinarily resident” in that country. 15 Income Tax Folio S5 -F1 -C1, “Determining an Individual’s Residence Status,” at paragraph 1.10. 16 See McFadyen v. The Queen, 2000 TCC 2473; and Gaudreau v. The Queen 2004 TCC 840; aff ’d 2005 FCA 388. See also, generally, Jinyan Li, Joanne E. Magee, and J. Scott Wilkie, Principles of Canadian Income Tax Law, 9th ed. (Toronto: Thomson Reuters Canada, 2017), at 83 - 85, at paragraph 3.2(b). 17 The concept of “residence” covers former residents who have not severed all links with Canada. See McFadyen, supra note 16. See also Jack Bernstein and Kay Leung, “Who Is Ordinarily Resident in Canada?” (2001) 22:11 Tax Notes International 1309 - 16; and Jack Bernstein and Kay Leung, “News Analysis: CCRA Updates Residency Guidance” (2002) 26:3 Tax Notes International 260 - 62. 18 See Thomson, supra note 12, at 226. 19 Section 250(3) of the Act. 148 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Canada also has a 183 -day type of test. The Act20 deems persons to be residents if they “sojourn” in Canada for more than 183 days, or for several periods totalling 183 days, in a year.21 This deeming rule applies only when an individual is a non- resident throughout the year under common law. Thus, as has been noted, the term “sojourn” means something less than residence:

A sojourner is a person who is physically present in Canada, but on a more transient basis than a resident. A sojourner lacks the settled home in Canada which would make him or her a resident. A person who is a resident of another country and who comes to Canada on a vacation or business trip would be an example of a sojourner.22

Canada also has deeming rules provisions on residence that are focused on government officials and their dependants. The Act23 deems persons to be residents if they

n are members of Canadian Forces24 or overseas Canadian Forces school staff 25 or their dependent child;26 n are an ambassador, high commissioner, minister, agent-general, or other Can- adian or provincial government official or their dependent child;27 n are participants in certain international aid projects or their dependent child;28 or n are persons exempt under a tax treaty because they were related to, or a family member of, a Canadian-resident individual.29

Finally, if a person fulfills the residence requirements under the Act but is deemed under the tiebreaker test in a tax treaty to be a resident in another state, the person is treated as a non-resident for tax purposes.30

20 The fundamental concepts underlying the rules can be traced back to 1927: see Kroft, supra note 10, at 1:6. They were last modified in 1999: see Bernstein and Leung, “Who Is Ordinarily Resident in Canada?” supra note 17. 21 Section 250(1)(a) of the Act. 22 Li, Magee, and Wilkie, supra note 16, at 85 - 86, at paragraph 3.2(c). 23 The fundamental concepts underlying the rules can be traced back to 1927: see Kroft, supra note 10, at 1:6. They were last modified in 1999: see Bernstein and Leung, “Who Is Ordinarily Resident in Canada?” supra note 17. 24 See paragraph 250(1)(b) of the Act. 25 Ibid., at paragraph 250(1)(d.1). 26 Ibid., at paragraph 250(1)(f ). 27 Ibid., at paragraphs 250(1)(c) and (f ). 28 Ibid., at paragraphs 250(1)(d) and (f ). 29 Ibid., at paragraph 250(1)(g). 30 Ibid., subsection 250(5). moving to a more “certain” test for tax residence in australia n 149

Australia’s Tests for Individual Residence A statutory definition of “resident” came into effect on July 1, 1930, following Aus- tralia’s adoption of worldwide (residence-based) taxation.31 These residence rules had their genesis in the recommendations of the Australian 1920 Royal Commis- sion on Taxation,32 and the rules’ design was influenced by the 1920UK Report of the Royal Commission on The Income Tax33 and by the British common law. A definition of “resident” similar to the “current resident” definition in section 6(1) of the Income Tax Assessment Act 1936 was enacted in 1930.34 The term “Australian resident” is currently defined, in section 995 - 1 of the In- come Tax Assessment Act 1997,35 as a person who is a resident under the ITAA 1936. The statutory definition of “resident or resident of Australia” in section 6(1) of the ITAA 1936 consists of a “resides” (that is, residence) test and three statutory deeming tests.36 This residence test, as with the Canadian approach, is the primary test for individual residence. It classifies an individual as a resident if he or she can be said to be actually “residing in Australia”: “If a person is in fact residing in Australia then, irrespective of his nationality, citizenship or domicile, he is to be treated as a resident for the purposes of the Act.”37 Given the UK origins of the “resides” test, it is not surprising that Australia, like Canada, has continued to rely on those British decisions in interpreting the meaning of the word “resides.”

31 Section 4 of the Income Tax Assessment Act, No. 37 of 1922, was amended by section 2(a) and (i) of the Income Tax Assessment Act, No. 50 of 1930 (assented to on August 18, 1930) to substitute a new definition of “assessable income” (which extended the scope of assessable income to include, in the case of a resident, the gross income derived from all sources), and to insert a definition of “resident” or “resident of Australia.” 32 Australia, Royal Commission on Taxation, Reports of the Royal Commission on Taxation, Nos. 1 - 3, Together with Appendices (Melbourne: Government Printer, 1921 - 22), at 108. 33 United Kingdom, Report of the Royal Commission on the Income Tax, 1920, Presented to Parliament by Command of His Majesty (London: His Majesty’s Stationary Office, 1920), at 9. 34 The section 6(1) definition in the Income Tax Assessment Act 1936, No. 27, 1936 (herein referred to as “the ITAA 1936”) is practically identical to the original definition enacted by the Income Tax Assessment Act 1930, except for the superannuation test (section 6(1) definition (a)(iii)), which was added by the Income Tax Assessment Act, No. 30 of 1939. The subsequent changes to the section 6(1) definition (a)(i) only reflect changes to the Commonwealth’s superannuation scheme named in section 6(1) definition (a)(iii). 35 Income Tax Assessment Act 1997, No. 38 of 1997. 36 There also exists a definition of “temporary resident” in section 995 - 1 of the Income Tax Assessment Act 1997, and the undefined term “ordinarily resident” is used in sections 23AA, 251U(1)(e), and 252A(2A)(b) of the ITAA 1936. 37 Australia, Explanatory Notes, Bill To Amend the Income Tax Assessment Act 1922 - 1929 (Canberra: Commonwealth Government Printer, 1929), at 9. 150 n canadian tax journal / revue fiscale canadienne (2020) 68:1

The first two statutory tests, which originate in the 1930 definition, are the “domicile” test38 and the “more than half year,” or “183 -day,” test.39 The approach of these tests is similar to that of the “continuing attachment” rules and to the approach informing Canada’s “183 -day sojourn” rules. These tests were aimed at extending residence to individuals who may not reside in Australia on the basis of the primary test.40 But, unlike the Canadian tests, both of these Australian tests are subject to qualifications aimed at limiting their scope so as to avoid possible double taxation.41 In 1939, a third statutory test was enacted, the “superannuation” (that is, pension fund) test.42 It was enacted in order to bring within the scope of Australian taxation the salaries paid to locally engaged High Commission staff who had recently been extended the benefits of the Commonwealth superannuation scheme.43 The superannuation test has been changed since 1939 to reflect the introduction of new

38 The “domicile” test is in subsection (a)(i) of the definition and treats as a resident a person “whose domicile is in Australia, unless the Commissioner is satisfied that the person’s permanent place of abode is outside Australia.” The purpose of this test was to place public officials located abroad in the same position as foreign public officials representing their governments in Australia. See supra note 37, at 10. The government had determined that the high commissioner for Australia in London did not pay tax in Australia because services were rendered outside Australia; they were exempt from British income tax and received the general exemption available to residents on their Australian-source income. 39 The “more than half year” or “183 - day” test is in subsection (a)(ii) of the definition and treats a resident as a person “who has actually been in Australia, continuously or intermittently, during more than one-half of the year of income, unless the Commissioner is satisfied that the person’s usual place of abode is outside Australia and that the person does not intend to take up residence in Australia.” The test was introduced for the purpose of obviating the difficulties in establishing whether a person is a resident in any country. See supra note 37, at 11. This exception was enacted (in the absence of tax treaties in 1930) in order to reduce the possibility of double taxation by ensuring that the visitors were not treated as residents. 40 See supra note 37, at 9. 41 The “domicile” test does not apply if a person has established a permanent place of abode elsewhere. The purpose of the rebuttal was to ensure that persons who had abandoned their Australian residence would not continue to be treated as residents. Such a protection was crucial at the time because, in the absence of tax treaties, those persons would have been potentially subjected to double taxation in respect of the income earned in their new place of residence. See supra note 37, at 10. The “more than half year” test will not apply if the commissioner is satisfied that the person’s usual place of abode is outside Australia and that he does not intend to take up residence in Australia. The qualification was introduced (in the absence of tax treaties) to reduce the possibility of double taxation by ensuring that the visitors were not treated as residents (for example, “no danger of treating as residents persons who are purely visitors”). See ibid., at 11. 42 The “superannuation” test in subsection (a)(iii) of the definition was added by the Income Tax Assessment Act 1939. Under this provision, a person who is either (1) a member of the superannuation scheme established by deed under the Superannuation Act 1990, No. 38 of 1990 or (2) an eligible employee for the purposes of the Superannuation Act 1976, no. 31 of 1976 (the “named schemes”) is deemed to be a resident. The spouse, or a child under 16 years of age, of such a person is also deemed by that relationship to be a resident under the test. 43 See Australia, House of Representatives, Parliamentary Debates, September 21, 1939, at 964. moving to a more “certain” test for tax residence in australia n 151

Commonwealth superannuation schemes. Unlike Canada’s government-service deeming rules, the superannuation test is not a government-service test per se, since it applies only to persons in the named schemes. It is also important to note that the scope and relevance of the superannuation test have been dramatically reduced; both schemes have been closed to new participants and to the impact of fund choice introduced by the Superannuation Legislation Amendment (Choice of Superannu- ation Funds) Act 2004.44 This act has generally enabled employees, from July 1, 2005, to choose the complying superannuation fund to which their employers are required to make compulsory superannuation contributions.45

Overview of the Weaknesses in Australia’s and Canada’s Tests for Individual Residence As mentioned above, I do not intend, in highlighting the common weaknesses of the Australian and Canadian rules on individual residence, to repeat the comprehensive review undertaken in 2005.46 Rather, my intention is to highlight the features of these rules that most clearly fail to meet the four tax policy objectives of equity, efficiency, simplicity, and the prevention of tax avoidance. To determine an individual’s residence, Canada’s and Australia’s residence rules, like those in many jurisdictions, rely on “individual facts and circumstances” tests and requirements. In Canada, a finding of whether an individual is “resident in Canada” or “ordinarily resident” is determined according to many factors that have been identified by the common law (for example, presence in Canada, location of family, and business ties). Similarly, in Australia, the “principal residence” (“resides in Aus- tralia”) test is based on many of the same factors as are identified by the common law. Even the statutory tests for deeming residence contain undefined terms that require the common law’s definitions. In Canada, the deeming rules use terms, such as “sojourn,” that are not only unique to Canada but also undefined and therefore of uncertain meaning.47 Australia’s deeming rules, too, use undefined words and phrases, such as “domicile,”48 “permanent place of abode,” “usual place of abode,”

44 Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004, No. 102, 2004. This Act was introduced on June 26, 2002 as Superannuation Legislation Amendment (Choice of Superannuation Funds) Bill 2002. 45 Superannuation Legislation Amendment (Choice of Superannuation Funds) Act 2004, sections 32C(1), (3), (4), and 32NA(2)(a). 46 See chapter 3 in Dirkis, supra note 6. 47 That said, one may consider the NZ case of Slater, supra note 14, at 683 - 84, where a medical practitioner, held as a prisoner of war between 1940 and 1944, was found to be “ordinarily resident” in New Zealand. Northcroft J noted that this individual was no more than a sojourner and that, although he had a continued presence in prisoner of war camps, he could not be said to be resident in the camps. 48 Although the general common-law concept of “domicile” was received from the United Kingdom upon settlement, it has been modified in Australia by uniform state and federal legislation: Domicile Act 1982, No. 1 of 1982, as amended, New South Wales Domicile Act 152 n canadian tax journal / revue fiscale canadienne (2020) 68:1 and “does not intend to take up residence,” that rely on the common law for interpretation. Although it is claimed that the “fact and circumstances” tests are more “compat- ible with the political theory that government power comes from the consent of the governed,”49 they do not satisfy all of the policy objectives of equity, simplicity, efficiency, and the prevention of tax avoidance. Under these tests, the horizontal equity criterion is not met, since minor variations in taxpayers’ circumstances may result in taxpayers in similar circumstances being taxed differently. Second, “fact and circumstances” tests generally do not meet the simplicity criterion. The case-by- case determination of all key concepts means the rules can (1) give rise to arbitrary outcomes, (2) impose high compliance costs, (3) create uncertainty, and (4) be hard to administer.50 Finally, because the tests rely on individual facts and circumstances, they are easy to manipulate, and they generally fail the efficiency (prevention of tax avoidance) criterion. Australia’s Board of Taxation, in its August 2017 report to the Australian Treas- ury, concluded that Australia’s rules on individual residence

impose an inappropriate compliance burden on many taxpayers with relatively simple affairs as the rules are inherently uncertain to apply, include outdated concepts and rely on a “weighting” system that leads to inconsistent outcomes, which also gives rise to integrity risks.51

Further, both countries have half-year tests based on whether the individual’s presence (sojourn) in the jurisdiction is for more than (1) 183 days in a year (Canada) and (2) one-half of the year of income (Australia). Australia’s test, however, fails to meet the equity criterion because it includes exclusionary glosses that excuse individuals when the commissioner is satisfied that they have a “usual place of abode elsewhere” and “do not intend to take up residence.” As noted above, these “facts and circumstance” glosses can result in horizontal inequity because taxpayers in

1979, No. 118; Queensland Domicile Act 1981; South Australia Domicile Act 1980; Tasmania Domicile Act 1980, Victorian Domicile Act 1978, Western Australian Domicile Act 1981; and Northern Territory Domicile Act 1979. These acts abolish the rule of dependent domicile of married woman (section 6) and the rule of revival of domicile of origin (section 7), and they define when the capacity to have independent domicile exists (section 8); however, they do not actually define “domicile.” 49 Michael J. McIntyre, The International Income Tax Rules of the United States, 2d ed. (Stoneham, MA: Butterworth, 1992), at 1 - 21. 50 Peter G. Whiteman, David Goy, Francis Sandison, and Michael Sherry, Whiteman on Income Ta x , 3d ed. (London: Sweet and Maxwell, 1988), at 137. 51 Supra note 2, at paragraph 1.2(b). However, this finding by the board is at odds with the recommendation made in Canada, Report of the Royal Commission on Taxation, vol. 4 (Ottawa: Queen’s Printer, 1966), at 541, stating that “residence continue[s] to be the principal basis for determining liability to tax, largely because residence seems to imply a closer association than citizenship between the taxpayer and the use of services provided by a taxing jurisdiction.” moving to a more “certain” test for tax residence in australia n 153 similar circumstances can be taxed differently, while the facts and circumstance elements of the Australian test fail to meet the simplicity criterion. This is also a problem for Canada’s use of the term “sojourn,” as discussed above. In addition, because the measurement for residence under Australia’s half-year test involves an income year (that is, July 1 to June 30), the test fails to meet the efficiency (prevention of tax avoidance) criterion: taxpayers could spend upto 364 days in Australia but still satisfy the 183 -day test, provided that the 182 days were prior to July 1 and the balance were from July 1.52 Thus, the 183 -day test does not meet the tax-avoidance criterion because specific classes of persons can easily satisfy the test. Further, it has been argued that such arbitrary “day” tests tend to catch only taxpayers who are unsophisticated, unadvised,53 unlucky (for example, an individual taxpayer who is deemed a resident because a tailwind caused him to arrive in the country half an hour earlier than he might have),54 or poor planners (for example, the taxpayer has not taken into account that the time period covered a leap year).55 Finally, the Canadian rules contain a series of tests for determining whether civil servants of various kinds and their children should be deemed residents. These “government service” tests are driven by a political or national imperative. If the scope of the test is wide, however, as it is in Canada, these tests create horizontal equity between all government workers (that is, government workers in similar economic circumstances are treated similarly). At the same time, however, the tests perpetuate horizontal inequity between those government workers and all other non-resident workers employed by the non-government sector. And yet the government-service tests generally meet the simplicity criterion: the rules apply in a predictable way, are not complex, result in low compliance costs, and are expressed clearly. These tests also meet the “co-ordinated with other tax rules” element of the simplicity criterion, being consistent with the government-service rules in most tax treaties. In contrast, Australia’s superannuation test, which was not devised as a government- service test, lacks horizontal equity insofar as it applies inconsistently to public

52 Arthur Andersen, Working Overseas (c 1988), at 4, noted that this measurement rule provides a major tax-planning opportunity, particularly for expatriate experts employed in Australia in the first and last year of their assignment. 53 See Brian J. Arnold, International Tax Primer, 3d ed. (Alphen aan den Rijn, the Netherlands: Kluwer Law International BV, 2016), at paragraph 2.2.1. 54 Clinton R. Alley and Duncan Bentley, “In Need of Reform? A Trans-Tasman Perspective on the Definition of ‘Residence’ ” (1995) 5:1 Revenue Law Journal 40 - 54, cites the case of an unlucky taxpayer (a university lecturer) who, because of a tailwind, arrived on day 365 of his absence, thereby retaining his residence in New Zealand. Unfortunately, the judgment in Case F138 (1984), 6 NZTC 60237; TRA Case 21 (1984), 8 TRNZ 140 does not record this fact. 55 In Wilkie v. Commissioner of Inland Revenue, [1951] 32 TC 495, a taxpayer was found not to be resident for more than six months in a leap year (365 days) because he had been present for only 182 days and 20 hours. 154 n canadian tax journal / revue fiscale canadienne (2020) 68:1 servants (only applying to those who are members of the prescribed schemes) and to the spouses and children of those public servants (because it deems them to be residents regardless of the degree of actual connection between the employee and her spouse and children). In addition, the rule also appears to amount to discrimination based on marital status. In summary, both the Australian and the Canadian tests for individual residence fail in some degree the four tax policy objectives of equity, simplicity, efficiency, and the prevention of tax avoidance.

ABANDONING THE ROLE OF THE COMMON LAW IN TESTING FOR INDIVIDUAL RESIDENCE The weaknesses common to the residence tests of both Canada and Australia are the same in many other jurisdictions. As mentioned above, the United Kingdom, in an attempt to overcome these weaknesses, has moved to a more arbitrary test, and a similar reform has been recommended in Australia. Below, I briefly explore the 2013 UK changes and the reform proposals in Australia. After briefly considering the reasons for change and the scope of the actual and proposed changes, I evaluate them according to the criteria for good tax law.

The 2013 UK Rules Drivers and Policy In 2013, the United Kingdom, after almost 200 years of having no definition of “residence” for individuals and of relying on the jurisprudence that constitutes the common-law resident test,56 adopted a statutory definition of “residence” for individuals.57 The changes were made in conjunction with reforms to the definition of “ordinary residence.” It was achieved after a stop-start reform process that spanned some 77 years.58 This whole process was driven by a desire to create certainty.

56 As noted by Dixon J in Gregory v. Deputy Federal Commissioner of Taxation (WA), 1937 HCA 57, the principles were first settled inAttorney General v. Coote, [1817] 146 All ER 433. 57 See section 218 and schedule 45 of the Finance Act 2013 (UK), c. 29 (herein referred to as “the Finance Act 2013 (UK)”), which received royal assent on July 17, 2013. 58 The process leading to codification of the residence test began in 1936 and finally, after many false starts, progress was made on March 23, 2011, with the United Kingdom, HM Treasury, 2011 Budget, March 23, 2011, at paragraph 1.136; its intention was to introduce a statutory definition of “residence” as of April 6, 2012. On June 17, 2011, HM Treasury and HM Revenue & Customs (HMRC) released Statutory Definition of Tax Residence: A Consultation (London: HM Treasury and HMRC, June 2011) (www.gov.uk/government/uploads/system/uploads/ attachment_data/file/81588/consult_condoc_statutory_residence.pdf ), which also included options for the reform of ordinary residence and overseas workday relief and a second consultative paper Reform of the Taxation of Non-Domiciled Individuals. This consultation is concluded. See United Kingdom, HM Treasury and HM Revenue & Customs, Reform of the Taxation of Non-Domiciled Individuals: Summary of Responses to Consultation (London: HM Treasury and HMRC, December 2011) (www.gov.uk/government/consultations/ moving to a more “certain” test for tax residence in australia n 155

The successful latest part of this process began in 2011. On June 17 of that year, HM Treasury and HM Revenue & Customs (HMRC) claimed that the reform process that restarted on March 23, 2011 was being driven by the government’s commitment “to introducing a statutory test that is transparent, objective, and simple to use.”59 Similarly, the HM Treasury and HMRC claimed in a statement on June 21, 2012 that the process was driven by a “desire that the rules for determining whether an individual is tax resident in the UK should be clear, objective and unambiguous.”60 There were other motives, however, unrelated to simplification or clarity. The first was a desire to reverse the Supreme Court’s 2011 decision in the Gaines-Cooper case.61 In that case, the Supreme Court found that a taxpayer was resident in the United Kingdom under the law despite appearing not to be a resident under the HMRC’s practice.62 The HM Treasury and HMRC also wanted to close down a

reform-of-the-taxation-of-non-domiciled-individuals). In a ministerial statement issued on December 6, 2011, the exchequer secretary to the Treasury advised that a number of “detailed issues” were raised in the consultation and that, therefore, this test would be delayed until the Finance Bill 2013, effective April 2013. It was noted that any reforms to the definition of “ordinary residence” would also be made at this time. See United Kingdom, HM Treasury, “Ministerial Statement: Non-Domicile Taxation and Statutory Residence Test,” December 6, 2011 (https://webarchive.nationalarchives.gov.uk/20131211102258/http://www.hmrc.gov.uk/ budget-updates/06dec11/wms-non-dom.pdf ). On March 21, 2012, the budget 2012 confirmed that, effective April 6, 2013, the government would introduce a statutory definition of “tax residence” and that it would publish a summary of responses to the consultation, together with draft legislation for comment. See United Kingdom, HM Treasury, 2012 Budget, March 21, 2012, at paragraph 2.51. On June 21, 2012, the HM Treasury and HMRC issued United Kingdom, HM Treasury and HM Revenue & Customs, Statutory Definition of Tax Residence and Reform to Ordinary Residence: A Summary of Responses (London: London: HM Treasury and HMRC, June 2012) (www.gov.uk/government/uploads/system/uploads/attachment_data/ file/190098/condoc_r esponses_srt_or_summary.pdf ), which included (1) the government’s response to the issues raised in consultation and (2) draft legislation, and it requested further consultation to refine some details. In December 2012, HM Treasury releasedStatutory Definition of Tax Residence and Reform of Ordinary Residence: Summary of Responses to the June 2012 Consultation (London: HM Treasury, December 2012) (www.gov.uk/government/uploads/ system/uploads/attachment_data/file/190097/consult_responses_statutory_definitions_of_tax _residence_reform_of_ordinary_residence_responses.pdf ), which sets out the government’s responses to the June 2012 consultation and provides an overview of changes made to the draft legislation. 59 See Statutory Definition of Tax Residence: A Consultation, supra note 58, at paragraph 1.7. 60 Statutory Definition of Tax Residence and Reform of Ordinary Residence: A Summary of Responses, supra note 58, at 3. 61 Davies & Anor, R (on the application of ) v. Revenue and Customs, 2011 UKSC 47 (BAILII). 62 Anna Florczak, “The New Statutory Definition of Residence for Individuals in the UK in the Light of the Tax Treaty Dual Residence Rules” (Master’s thesis, University of London, Institute of Advanced Legal Studies, 2013) (http://sas-space.sas.ac.uk/5887/1/Anna%20 Florczak%20MA%20Dissertation.pdf ). 156 n canadian tax journal / revue fiscale canadienne (2020) 68:1 number of opportunities for tax minimization. A clear policy motive underlying the change was to ensure that residence, once obtained, is very difficult to lose.63

Overview of the Legislation The new “statutory residence” test consists of a “basic rule”64 stating that a person will be deemed a resident only if she satisfies either the “automatic residence” test65 or the “sufficient ties” test.66 If neither test is satisfied for a tax year, that person (referred to as “P” in the legislation) is non-resident for that year.67 The “automatic residence” test is satisfied if P satisfies at least one of the four “automatic UK” tests68 and none of the “automatic overseas” tests.69 The four “automatic UK” tests consist of (1) a 183 -day rule,70 (2) a rule that “sufficient time” must be spent at home in the United Kingdom,71 (3) the “full time work in the UK” test,72 and (4) a specific test that applies to a year of death.73

63 See Statutory Definition of Tax Residence: A Consultation, supra note 58, at paragraph 3.6. 64 See section 218 and paragraph 3 of schedule 45 of the Finance Act 2013 (UK), which states the following: “An individual (‘P’) is resident in the UK for a tax year (‘year X’) if—(a) the automatic residence test is met for that year, or (b) the sufficient ties test is met for that year.” 65 The Finance Act 2013 (UK), schedule 45, at paragraph 5. 66 Ibid., schedule 45, at paragraph 17. 67 Ibid., schedule 45, at paragraph 4. 68 Ibid., schedule 45, at paragraphs 6 - 10. 69 Ibid., schedule 45, at paragraphs 11 - 16. 70 Ibid., schedule 45, at paragraph 6. 71 Ibid., schedule 45, at paragraph 8. The person’s presence must be for at least one period of 91 consecutive days (at least 30 of which fall within the tax year) throughout which condition A or condition B (or a combination of those conditions) is met. Condition A is that P has no home overseas, while condition B addresses the situation where P has one or more homes overseas but does not spend more than a “permitted amount of time” in any one of those homes in the tax year. A “sufficient amount of time” in a UK home is presence there at any point on at least 30 separate days in the tax year (ibid., schedule 45, at paragraph 8(4)), while “permitted amount of time” in an overseas home is presence there at any point on fewer than 30 days in the tax year (ibid., schedule 45, at paragraph 8(5)). References to P being present in a home on at least, or fewer than, 30 days are to 30 separate days, whether consecutive or intermittent, and that for these purposes, P is present at a home only if it is P’s home at that time (ibid., schedule 45, at paragraph 8(6)). Where P has more than one home in the United Kingdom, the test must be applied to each of those homes individually (ibid., schedule 45, at paragraph 8(8)). For a more detailed explanation, see Explanatory Notes to the Finance Act 2013 (UK) (www.legislation.gov.uk/ukpga/2013/29/notes/contents). 72 Finance Act 2013 (UK), schedule 45, at paragraph 9. The test is met if P works “sufficient hours” (as defined in ibid., schedule 45, at paragraph 9(2)) in the United Kingdom over a period of 365 days without a “significant break” from work (defined in ibid., schedule 45, at paragraph 29), and all or part of the 365 -day period falls within the tax year. More than 75 percent of P’s working days in the 365 -day period must be UK work days (ibid., schedule 45, at paragraph 9(1)(d)). A UK work day is a day in which P does more than 3 hours’ (Notes 72 and 73 are continued on the next page.) moving to a more “certain” test for tax residence in australia n 157

There are also five exclusionary “automatic overseas” tests any one of which, if satisfied, deems P to be non-resident for the tax year for which the test is applied.74 P will be non-resident for a tax year if

1. P spends fewer than 16 days in the United Kingdom in that year, does not die during the year, and was resident for one or more of the three tax years immediately preceding that year;75 2. P spends fewer than 46 days in the United Kingdom in that year and was resident for none of the three tax years immediately preceding that year;76 3. P works “sufficient hours overseas” for that year without a significant break from work,77 has fewer than 31 UK work days (that is, days on which the individual, while in the United Kingdom, works for more than three hours) in that year, and spends fewer than 91 days in the United Kingdom in that year78 (the “full time work overseas” test);79

work in the UK. There must be at least one day falling within both the 365 -day period and the tax year that is a UK work day (ibid., schedule 45, at paragraph 9(e)). “Sufficient hours” is determined by a five-step calculation in paragraph 9(2). Under that calculation process, P will have worked sufficient hours in the United Kingdom if P has worked on average 35 hours a week or more in the UK. The test will not apply if P has a relevant job on board a vehicle, aircraft, or ship at any time in the tax year (as defined in ibid., schedule 45, at paragraph 30) and makes, as part of the job, at least six cross-border trips in the tax year that either begin or end in the United Kingdom (or both begin and end in the United Kingdom) (ibid., schedule 45, at paragraph 9(3)). 73 Ibid., schedule 45, at paragraph 10. The broad effect of this test is that if P has been resident under one of the automatic UK residence tests in each of the previous three tax years and has a home in the United Kingdom, P remains resident in the year of death unless P went abroad in the previous year in circumstances such that split-year treatment applied (provided none of the automatic overseas tests are met). For a more detailed explanation, see the explanatory notes to the Finance Act 2013 (UK), supra note 71. 74 The Finance Act 2013 (UK), schedule 45, at paragraph 11. 75 Ibid., schedule 45, at paragraph 12. The Explanatory Notes to the Finance Act 2013 (UK), supra note 71, section 218, schedule 45, at paragraph 31, notes that this “exclusion ensures that P does not automatically become non-resident if P dies early in the tax year.” 76 The Finance Act 2013 (UK), schedule 45, at paragraph 13. 77 Ibid., schedule 45, at paragraph 29. 78 Ibid., schedule 45, at paragraph 22. 79 Ibid., schedule 45, at paragraph 14. As with the “sufficient hours” test in paragraph 9 of schedule 45, there is a five-step calculation in paragraph 14(3) for assessing whether or not P has worked sufficient hours overseas—an average of more than 35 hours in the tax year (ibid., schedule 45, at paragraph 14(3))—and there is an exclusion from the third “automatic overseas” test if P has a relevant job on board a vehicle, aircraft, or ship at any time in the year (as defined in paragraph 30) (see ibid., schedule 45, at paragraph 14(4)). The special rule in paragraph 23(4) (under which certain days on which P is present in the United Kingdom other than at midnight count as days spent in the United Kingdom) does not apply for the purposes of the third automatic overseas test (see ibid., schedule 45, at paragraph 14(2)). 158 n canadian tax journal / revue fiscale canadienne (2020) 68:1

4. P is non-resident for a tax year and dies during that year (subject to special conditions);80 or 5. P dies during a tax year after having already been non-resident under the third automatic overseas test for the two preceding tax years (or for the year preceding the current tax year, with the year before that qualifying for case 1 split-year treatment), and meets the third automatic overseas test as modified.81

As mentioned above, the second criterion under the basic test is the “sufficient ties” criterion. P will be resident under that test if P satisfies none of the “automatic UK” tests and the “automatic overseas” tests and has sufficient “UK ties”82 for the tax year.83 The number of UK ties sufficient to makeP a UK resident for a tax year depends on (1) whether she was a UK resident for any of the three tax years immediately preceding that year and (2) the number of days she spends in the United Kingdom in the year.84 The number of UK ties required is set out in paragraphs 18 and 19 of schedule 45 of the Finance Act 2013 (UK).85 In summary, the legislation enacted to give effect to the various tests—the basic test, the “automatic residence” test, the “automatic UK” tests, and the “automatic overseas” tests, along with the “sufficient tie” test and its embedded definitions— consists of 159 complex sections. This legislation includes numerous detailed definitions (covering, for example, what constitutes a “day spent,” a “home,” “work,”

80 Ibid., schedule 45, at paragraph 15. The conditions are that P “spends fewer than 46 days in the UK in that year, and either P was non-resident for the two tax years immediately preceding the tax year in which P dies or was non-resident for the tax year immediately preceding that tax year and the tax year before that was a ‘split year’ by virtue of Case 1, 2, or 3 of Part 3 of this Schedule (see paragraphs 44 - 46).” See the Explanatory Notes to the Finance Act 2013 (UK), supra note 71, section 218, schedule 45, at paragraph 37. The explanatory notes, ibid., state that the effect of this provision is “to ensure that an individual who dies without establishing three full years of non-residence may in certain circumstances benefit from a 46 -day rule equivalent to that in paragraph 13.” 81 The Finance Act 2013 (UK), schedule 45, at paragraph 16. The fifth automatic overseas test ensures that P’s non-resident status is preserved in certain circumstances where she dies while working overseas. The modifications to be applied to the third automatic overseas test in this situation are set out in paragraph 16(3). 82 Ibid., schedule 45, at paragraph 17. 83 Ibid., part 2 of this schedule. 84 Ibid., schedule 45, at paragraph 17(3). 85 Ibid., schedule 45, at paragraph 17(3), paragraph 18, sets out how the number of days P spends in the United Kingdom in a tax year determines the number of UK ties sufficient to make P resident for that year if P was a UK resident in one or more of the three tax years immediately preceding the year. Paragraph 19 sets out how the number of days P spends in the United Kingdom in a tax year determines the number of UK ties sufficient to make P resident for that year if P was a UK resident in none of the three tax years immediately preceding the year. Modifications for where P dies during the year are set out in paragraph 20. moving to a more “certain” test for tax residence in australia n 159 and a “location of work”) and extensive and specific anti-avoidance rules (many focused on countering actions that aim to avoid the scope of the defined terms). This is not an ideal outcome, since the complexity of subjectiveness has been replaced with legislative complexity. One commentator, however, has concluded that although the new rules bring

a greater certainty when dealing with the complex situations of internationally mobile individuals than the old rules . . . there are certain areas which are still subjective and . . . [they are] . . . undesired complexity as the legislation is a maze of the tests combined with their subsidiary tests and the definitions which are either confusing or illogical at times.86

Thus, the very attempt to convert a complex policy into a certain outcome is made at the cost of complexity and a loss of equity, which is not ideal.

Is This Model Applicable for Australia and Canada? Whether such a model is suitable for Australia or Canada can be determined only in relation to each jurisdiction’s policy parameters. From the Australian perspective, the policies that underlie the UK rules do not reflect Australia’s current policy.87 The major difference is the UK policy of ensuring that resident status, once obtained, is very difficult to lose.88 Another major policy difference between the United Kingdom and the other two countries is that the UK rules are designed to work hand in hand with a “non- domiciled residents” regime under which UK residents who have their permanent home (“domicile”) outside the United Kingdom may not have to pay UK tax on foreign income if it is not remitted to the United Kingdom and is less than £2,000 in a year. If the income is £2,000 or more, or any money is brought back to the United Kingdom, that income is either subject to UK tax or the “remittance basis” of taxation applies. An exit tax can also be imposed. Australia does not have this system, and therefore the scope of the UK rules might need modification if the rules were adopted in Australia. The Board of Taxation observed, in its 2017 report, that the United Kingdom’s statutory residence test

would improve certainty for individuals applying the residency rules. However, the Board does not consider that the increased complexity and divergence from “principles based drafting” is justified.89

86 Florczak, supra note 62, at 50. 87 That policy is expressed in the source cited in supra note 37. 88 See Statutory Definition of Tax Residence: A Consultation, supra note 58, at paragraph 3.6. 89 See observation 1 in the board’s 2017 report, supra note 3, at 10. It is noted in ibid., at paragraph 1.172, “that codification akin to the UK approach would not align with the 160 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Despite that, the board recommended that,

[s]ubject to the policy statement, . . . each residency test begin with a bright line test to remove the facts and circumstances based tests for the majority of individuals . . . [and] that further consultation on these bright line tests be based on the New Zealand and United Kingdom residency rules.90

The author is unable to determine whether similar concerns about complexity and divergence from “principles-based” drafting exist in Canada.

The Proposed Australian Changes Rationales and Policy Despite the “facts and circumstances” nature of Australia’s rules on individual tax residence, only 25 matters dealing with the residence of individuals were heard by the High Court, the Full Federal Court of Australia, the Federal Court of Australia, and the Administrative Appeal Tribunal (AAT) in the 79 years between 1930 and 2009. This low level of litigation was probably owing to (1) the fact that much of the foreign income earned by residents was exempt in Australia91 until 1987; and (2) the existence, from 1987, of a wide exemption for foreign employment income derived by Australian-resident individuals.92 This changed, however, with the narrowing (as of July 1, 2009) of an exemption93 for foreign employment income derived by an Australian-resident individual94 and with the increased compliance activity in respect of offshore income, carried out by an ongoing cross-agency task force led by the ATO.95 Between 2010 and 2019, there

Government’s simplification agenda and the Board’s preferred principles based drafting approach. The overly complex drafting of the law and increased length of legislation is in direct conflict with simplification. Further, as codification is solely a process of importing into strict legislative provisions the current common law and guidance on the residency tests, it would not allow for the modernisation of the rules that the Board considers necessary.” 90 See recommendation 5 in the board’s 2017 report, supra note 3, at 53. 91 Under the former section 23(q) of the ITAA 1936, income that was subjected to tax in country of source was exempt. By late 1985, this prevailing exemption of foreign-source income encouraged investment in low-tax jurisdictions, which resulted in much foreign-source income being either not taxed or taxed lightly. See Alan Boxer, “Tax Reform Revisited” (1985) 2:4 Australian Tax Forum 363 - 84; and Richard D. Fayle, “Controlling Abusive Tax Shelters” (1985) 2:1 Australian Tax Forum 53 - 69. 92 In 1987, section 23(q) of the ITAA 1936 was repealed as the foreign tax credit rules (as they were then) were introduced with the Taxation Laws Amendment (Foreign Tax Credits) Act 1986 No. 51 of 1986, and a wide employment income exemption was enacted (section 23AG of the ITAA 1936). 93 In section 23AG of the ITAA 1936. 94 See Tax Laws Amendment (2009 Budget Measures No. 1) Act 2009, No. 62, 2009. 95 The task force, Project Wickenby, was established in 2006. Its membership includes the ATO, the Australian Crime Commission (ACC), the Australian Federal Police, the moving to a more “certain” test for tax residence in australia n 161 have been 43 matters heard by the High Court, the Full Federal Court of Australia, the Federal Court of Australia, and the AAT in respect of the residence of individuals and issues associated with the residence of individuals. The issues covered in the litigation have included

n the application of the “resides” and “domicile” tests;96 n the determination of “permanent place of abode”;97 n the application of the “more than half year” test;98 n the application of the “superannuation” test;99 n the treaty tiebreaker test in article 4(2);100 and n related matters associated with the onus of proof and the provision of evidence in the context of residence disputes, and with the application of the former section 23AG of the ITAA 1936 (the “foreign employment income” exemption).101

Australian Securities and Investments Commission, the Attorney General’s Department, the Commonwealth Director of Public Prosecutions, and the Australian Transaction Reports and Analysis Centre. For more information, see Australian Government, Taxation Office, “Project Wickenby Results” (www.ato.gov.au/General/The-fight-against-tax-crime/News-and-results/ Project-Wickenby-results). 96 Mynott and Commissioner of Taxation, [2011] AATA 539; Iyengar and Commissioner of Taxation, [2011] AATA 856; Gunawan and Commissioner of Taxation, [2012] AATA 119; Sneddon and Commissioner of Taxation, [2012] AATA 516; Sully and Commissioner of Taxation, [2012] AATA 582; Re: Bezuidenhout and Commissioner of Taxation, [2012] AATA 799; Ellwood and Commissioner of Taxation, [2012] AATA 869; Re: Pillay and Commissioner of Taxation, [2013] AATA 447; ZKBN and Commissioner of Taxation, [2013] AATA 604; Murray and Commissioner of Taxation, [2013] AATA 780; Re: Dempsey and Commissioner of Taxation, [2014] AATA 335; Agius and Commissioner of Taxation, [2014] AATA 854; aff’d [2015] FCA 707; but further appeal lodged in 2015;The Engineering Manager and Commissioner of Taxation, [2014] AATA 969; Hughes and Commissioner of Taxation, [2015] AATA 1007; Landy and Commissioner of Taxation, [2016] AATA 754. 97 Re: Boer and Commissioner of Taxation, [2012] AATA 574; Mayhew and Commissioner of Taxation, [2013] AATA 130; Harding v. Commissioner of Taxation, [2018] FCA 837; rev’d [2019] FCAFC 29; aff ’d [2019] HCATrans 191;Handsley and Commissioner of Taxation, [2019] AATA 917; and Stockton v. Commissioner of Taxation, [2019] FCA 1679. 98 Re: Clemens and Commissioner of Taxation, [2015] AATA 124; Re: Jaczenko and Commissioner of Taxation, [2015] AATA 125; Re: Koustrup and Commissioner of Taxation, [2015] AATA 126; Groves and Commissioner of Taxation, [2011] AATA 609; and Guissouma and Commissioner of Taxation, [2013] AATA 875. 99 Baker and Commissioner of Taxation, [2012] AATA 168. 100 Re: Tan and Commissioner of Taxation, [2016] AATA 1062. 101 Shord v. Commissioner of Taxation, [2017] FCAFC 167 (AAT error re section 23); rev’g Shord v. Commissioner of Taxation, [2016] FCA 761 (section 23AG(7) and onus); aff ’g [2015] AATA 355 (resident test); Boyd and Commissioner of Taxation, [2013] AATA 494 (section 23AG); Coventry v. Commissioner of Taxation, [2018] AATA 175 (section 23AG(1AA)(a) exempted a public servant’s employment income from an aid project despite its being exempt from tax in Pakistan under 162 n canadian tax journal / revue fiscale canadienne (2020) 68:1

The sheer volume of this litigation gave the commissioner ammunition to argue that the current system is unsustainable because it is too complex in application and because the tax avoidance to which it gives rise is costly to government. The increased volume of litigation, however, was not due to uncertainty or complexity. Most of the recent litigation was

n consistent with existing jurisprudence;102 n driven not by the difficulties of interpretation and application103 but by the government’s 2009 decision to remove most taxpayers’ entitlement to the foreign employment income exemption.

The number of cases litigated after 2009 was also inflated by

n the ATO’s adoption of a mechanical “continuity of association with the place” test, which resulted in some cases being argued that should not have been litigated;104 n the ATO’s establishment of compliance programs, such as “Project Wick- enby,” that target offshore income; and n a failure to ensure compliance with the foreign employment income exemption in section 23AG of the ITAA 1936 from 1987 to 2009, which resulted in section 23AG issues being litigated more than 20 years later than they should have been.105

a development agreement between that country and Australia); Lochtenberg v. Commissioner of Taxation, [2018] AATA 4667 (section 23AG and Swiss component of Glencore incentive profit participation plan);Horrocks v. Commissioner of Taxation, [2010] AATA 307; Mulherin v. Commissioner of Taxation, [2013] FCAFC 115; aff ’g [2012] AATA 557) (on onus of proof ); and Commissioner of Taxation v. Seymour, [2015] FCA 320; rev’g [2014] AATA 788, allowing video evidence; and Seymour and Commissioner of Taxation, [2016] AATA 397, where the AAT allowed the taxpayers in Singapore to provide evidence in the proceedings, on the condition that the taxpayers reimbursed AAT for the expenses it incurred by conducting that part of the hearing outside Australia; and Addy v. Commissioner of Taxation, [2019] FCA 1768, on the validity of the backpackers tax—appeal filed on November 26, 2019. 102 For a comprehensive review of the futility of this litigation, see Michael Dirkis, “The Ghosts of Levene and Lysaght Still Haunting Ninety Years on: Australia’s ‘Great Age’ of Residence Litigation?” (2018) 47:1 Australian Tax Review 41 - 53. 103 Ibid. 104 Ibid. See also Michael Dirkis, “The Residency Rules,” in Phil Broderick, et al., The Australian Taxation System: The 2017 Great Debate (Sydney, NSW: The Tax Institute, 2018), 57 - 75. 105 Michael Dirkis and Angie Ananda, “Taxing Beyond Australia’s Horizon: The Section 23AG Changes” (2009) 44:3 Taxation in Australia 153 - 56. moving to a more “certain” test for tax residence in australia n 163

Outcome of the Board of Taxation’s Self-Initiated Review Despite these arguments, in May 2016 the Board of Taxation began a self-initiated project on the residence tests for high-wealth individuals,106 which posed the question, among others, of whether Australia’s rules on tax residence for individuals sufficiently reflect the goals of certainty, simplicity, and integrity when it comes to the fact patterns of 21st-century residence. As noted above, the 2013 UK model was something that the board considered as a model for reform. On July 9, 2018, the minister for revenue and financial services released the board’s 2017 report.107 The board concluded, following a targeted, confidential, and “extensive” consultation, that “the existing residency rules are no longer appropriate as the fundamental basis of individual income taxation” and recommended that the rules be modernized and reformed.108 The board’s case for changing the rules was that they

(a) no longer reflect global work practices in an increasingly global mobile labour force, that have changed both the frequency and nature of interactions with the residency rules; (b) impose an inappropriate compliance burden on many taxpayers with relatively simple affairs as the rules are inherently uncertain to apply, include outdated concepts and rely on a “weighting” system that leads to inconsistent outcomes, which also gives rise to integrity risks; and (c) are an increasingly prevalent area of dispute for taxpayers and the ATO given the fundamental difference in tax consequences for residents and non-residents—this is illustrated by the increased number of court decisions and ATO private rulings issued since 2009 (and the amendments to narrow section 23AG of the Income Tax Assessment Act 1936).109

106 Australian Government, Board of Taxation, “Self-Initiated Review of the Income Tax Residency Rules for Individuals” (http://taxboard.gov.au/consultation/self-initiated-review-of -the-income-tax-residency-rules-for-individuals). 107 The board’s 2017 report, supra note 3. 108 Ibid., at paragraph 1.2. The Board concluded in ibid., at paragraph 1.4, that the modernized residency rules should (a) reflect current global work practices; (b) provide certainty to individuals of their tax residency status; (c) [be able to] be applied by an ordinary individual without tax advice in all but the most complex of cases; (d) remove antiquated concepts such as domicile; and (e) adopt factors that are easy to understand, reduce reliance on common law definitions, and [be] less open to manipulation. 109 Ibid., at paragraph 1.2. 164 n canadian tax journal / revue fiscale canadienne (2020) 68:1

The board set out, in a further seven recommendations, its preferred framework for a new definition of tax “residence.”110 The key elements were that

(a) there should be a policy statement, such as an objects clause, that outlines the Government’s overarching individual tax residency policy addressing the tax policy objectives of equity, efficiency, simplicity and integrity [recommendations 2 and 3]; (b) in accordance with the policy statement, the new resident definition should include separate definitions for individuals establishing residency and ceasing- resi dency [recommendation 4]: (i) each definition should commence with a simple bright line ‘days count’ test that ensures the vast majority of individuals can determine their residency quickly and with certainty [recommendation 5]; and (ii) for individuals that do not satisfy either bright line test, an objective test based on the individual’s facts and circumstances should then apply to determine residency on the basis of specific key factors (to determine the individual’s connection or relationship to Australia) [recommendation 6]; (c) a rule should be adopted to the effect that Australian residency is maintained until tax residency is provably established in another jurisdiction, to address integrity concerns identified during consultation [recommendation 7]; (d) the current rule that seeks to deem Government officials and their families resident no longer captures many Government officials and, as such, any new definition should include a more effective rule that reflects the Government’s position regarding public servants (such as a specific government services rule) [recommendation 8].111

Following the release, on July 9, 2018, of the board’s 2017 report, the minister for revenue and financial services noted that complex issues raised in the report “deserve further analysis and consideration.”112 Thus, the government did not take a position on the recommendations in the board’s report. The minister noted that “before the Government takes any position on these matters I have asked the Board to consult further on key recommendations, including how Australia could draw on residency tests in other countries.”113 The minister indicated that once the board has completed its additional work, the government would consider the entirety of the board’s work on this topic and would do so in the light of broader reform priorities.

110 There were a three further recommendations concerning (1) labour mobility and the indirect consequences of the employee exemption (recommendation 9), (2) limitation of the “temporary residents” concession to four years (recommendation 10), and (3) consideration of the alignment of the rules on the individual’s tax residence and Australia’s immigration visa regime. See ibid., at 11 - 12. 111 The board’s 2017 report, supra note 3, at paragraph 1.5, and recommendations at 10 - 11. 112 See “Review of Tax Residency Rules for Individuals,” supra note 2. 113 Ibid. moving to a more “certain” test for tax residence in australia n 165

In September 2018, the board released a consultation guide,114 which sets out the board’s observations on potential design principles for guiding the modernization and reform of the rules on an individual’s tax residence. The guide poses 33 questions about how these design principles would operate to provide simplicity, certainty, and integrity; and whether these considerations are appropriately balanced. It focuses on

n the options for a two-step model for individual tax residence; n the integrity risk posed by “residents of nowhere,”115 and related schemes to circumvent the tax residence rules; and n updating the superannuation test.

The 33 questions posed in the 2018 consultation guide were divided up into the following seven categories:

1. policy statement (2 questions); 2. bright-line test (7 questions); 3. secondary test (12 questions); 4. integrity: resident nowhere (4 questions); 5. the superannuation test: options for reform (3 questions); 6. part-year residence (3 questions); and 7. transitional rules (1 question).

Potential Problems with the Proposed Model In this paper, I do not seek to respond to every question raised about the proposed model but will focus on the major areas of apparent difficulty.116 There are three overarching concerns with the board’s approach:

1. The board, as part of its terms of reference, focused on modifying what was intended to be a rule on tax jurisdiction in such a way that the rule became an anti-avoidance rule. The better approach would have been to redefine the jurisdiction claim and support it with targeted anti-avoidance rules.

114 Australian Government, Board of Taxation, Review of the Income Tax Residency Rules for Individuals: Consultation Guide (Parkes, ACT: Board of Taxation, September 2018) (herein referred to as “the 2018 consultation guide”) (https://cdn.tspace.gov.au/uploads/ sites/70/2018/09/BoT-Residency-Consulation-Guide-FINAL.pdf ). 115 Ibid., at 4. 116 The language and content of the following will be similar to those in the Taxation Institute’s November 20, 2018 submission to the board as it was drafted by the author. See Australian Tax Institute, “Review of the Income Tax Residency Rules for Individuals,” submission to the Australian Board of Taxation, November 20, 2018 (https://cdn.tspace.gov.au/uploads/ sites/74/2019/11/TRRI-Tax-Institute.pdf). 166 n canadian tax journal / revue fiscale canadienne (2020) 68:1

2. The proposed changes appear to frustrate the board’s goals of certainty and simplicity; an integrity regime is proposed that seeks to deal with rare occur- rences that arise not necessarily because of residence abuse but often because of the operation of other provisions of the Income Tax Assessment Acts.117 3. Despite the 2018 consultation guide’s assertion that the revenue impact of the measure will be “immaterial or negligible,”118 the reform proposals mooted in the guide will expand the scope of persons caught by the rules and thereby increase government revenue. The proposals—which include the development of a more adhesive residence rule, the creation of two clear bright-line tests (which may include the measurement of presence over any 12 -month period), and a factor test combined with revision of the superannuation test—will also increase the current scope of the rules on individual tax residence.

From a tax policy perspective, there are a number of issues with the bright-line test (that is, the primary test, based on time spent according to a “day count”) proposed by the board for automatically determining the tax residence status of the majority of individuals.119 These issues arise from the test’s departure from recommendation 4 of the board’s 2017 report—that is, the recommendation that a single outbound test should be developed.120 The board has now proposed three different bright-line outbound tests for individuals: (1) a lower bright-line threshold for those who have previously been resident; (2) a different threshold test for those who have not previously been resident; and (3) a special threshold test to determine whether individuals who are working full-time overseas are non-residents in certain circumstances.121 This departure from recommendation 4 seems to complicate rather than simplify matters. The “previous resident” test seems sufficient to establish an outbound bright-line test—that is, based on the rule that if any individual spends less than x days in Australia over any 12 -month period (that is, a period not tied to a financial year), he is a non-resident. The application of this test could also take into account presence in prior years, and thereby minimize avoidance by persons who leave the country before the specified time period is satisfied and return once the period restarts.

117 For example, (subject to the new anti-hybrid rules) a taxpayer who becomes a US resident will get the fully franked dividends tax-free under both the US and Australian rules even if the profits giving rise to those dividends accrued in a proprietary limited company while the taxpayer was an Australian-resident shareholder. The tax-free nature arises from the franking/ withholding rules, not from the residence status of the taxpayer. 118 2018 consultation guide, supra note 114, at 26. 119 Ibid., at 6 and 10 - 13. 120 The board’s 2017 report, supra note 3, at 10. 121 2018 consultation guide, supra note 114, at 10 - 11. moving to a more “certain” test for tax residence in australia n 167

The “previously not a resident” test seems unnecessary, and, from a policy viewpoint, it seems to undermine the inbound bright-line test. It seems to provide that if a person enters Australia for the first time and her stay exceeds 183 days, this “test the residence” determination is reversed, such that she is treated as a non-resident if she is here for more days than a person who was formerly a resident. This is the case because she is resident for the first time. This different treatment cannot be justified on the grounds of the adhesive principle. In fact, it undermines that principle by saying that it is adhesive only if you are a serial resident. For consistency and certainty, the factor test should be the instrument used to exclude them. The third outbound test seems to reinstitute the former scope of the amended employment exemption (section 23AG of the ITAA 1936) and extend its scope further by treating persons working full-time in non-taxing jurisdictions as non- residents. The only difference between this person and other departing Australians is that he must have a continuing employment relationship with an Australian employer and that the employment must be full-time. This “employment” element leads to definitional questions regarding what amounts to full-time work and whether the employment must be with the Austral- ian employer or with an affiliated entity. For example, defining full-time work in terms of hours can be problematic because, under some European countries’ labour laws, full-time work can range from 28 hours to 38 hours per week. In these countries, if you work longer weeks you get longer holidays. In the “gig” environment of today, in which a person is remunerated on a per-task or a piecemeal basis, full-time work as traditionally defined may not exist. Verification can be difficult for people who are employed by companies that the people themselves control. If someone is posted overseas for two or three years, she will either fall outside the bright-line outbound test or succeed under the factor test. Therefore, this test will increase complexity and is inconsistent with the guiding principles expressed in the 2018 consultation guide122 and in recommendation 4. Finally, recommendation 7 of the board’s 2017 report—the recommended adoption of a “new residency test for outbound individuals [to] ensure that all residents remain resident unless and until tax residency is established in another jurisdiction”123—was not picked up in the proposed outbound tests. Given that tax residence is easily acquired in a number of countries around the world (for example, Portugal) but may be difficult to establish in countries (for example, Lebanon) that do not have an income tax system, such a rule would result in inequitable outcomes in some cases and would encourage avoidance in other cases. Accordingly, recommendation 7 should not be adopted. There also remain issues with the proposed secondary test, which seems to be based on the United Kingdom’s “UK ties” approach. Although the factors that are

122 2018 consultation guide, supra note 114, at 7. 123 The board’s 2017 report, supra note 3, at 11. 168 n canadian tax journal / revue fiscale canadienne (2020) 68:1 relevant under the secondary test should all be easily verifiable, they also need to be highly relevant to a determination of residence. Some factors, suggested in the 2018 consultation guide124 and taken into account under the existing residence tests, are of little relevance (for example, immigration passenger cards, club memberships, driver’s licences, bank accounts, and health insurance) or are able to be manipulated, or they do not take into account the practical circumstances of modern life (for example, the inclusion of family members as a determinant factor regardless of dependence, age, and estrangement). The other issue with the proposal is the weighting of the factors. Any weighting system would no doubt add some complexity. However, there may be merit in exploring a weighting system as a secondary factor-based test, as the consultation guide suggests, provided that it is based on a short list of objective factors and it is clear what “weighting” is allocated to each one.

Lessons for Canada? In summary, issues with the board’s proposals remain, in addition to the issues discussed above in respect of the basic outbound tests and the factor proposals in the secondary test. Until these issues are resolved, the final approach to be adopted by Australia remains unclear. Therefore, at this stage, the Australian reform exercise, while it has highlighted a range of possible solutions to the shortcomings identified in Canada’s “facts and circumstances” approach to individual tax residence, has yet to provide a viable template for reform.

CONCLUSION The paper has highlighted defects common to the “fact and circumstances” approaches adopted by Canada and Australia in respect of rules for determining individual tax residence. Although the United Kingdom’s 2013 adoption of a statutory residence test for individuals removed the complexity arising from the subjectivity of the “facts and circumstances” approach, it came at a cost—namely, complexity. Therefore, the UK test’s value to Canada as a model for reform may be viewed as limited. Similarly, the incomplete Australian reform proposal highlights the difficulty of moving away from a facts-and-circumstance model, particularly where compliance objectives override the perceived objectives of simplicity and certainty. At best, the Australian proposals offer alternative avenues that Canada may consider should changes in its political climate make it a priority to repair the shortcomings in the country’s rules on individual tax residence.

124 Questions 11 to 17 in the 2018 consultation guide, supra note 114, at 14. canadian tax journal / revue fiscale canadienne (2020) 68:1, 169 https://doi.org/10.32721/ctj.2020.68.1.awards

Douglas J. Sherbaniuk Distinguished Writing Award

JIM SAMUEL Jim Samuel is the 2019 recipient of the Canadian Tax Foundation’s Douglas J. Sherbaniuk Distinguished Writing Award. His article, “Interaction of the Foreign Affiliate Surplus and Safe-Income Regimes: Selected Anomalies, Issues, and Plan- ning Considerations,” was published in (2018) 66:2 Canadian Tax Journal 269 - 307. The article was selected by a committee of experienced tax professionals as the best writing published by the Foundation in 2018 - 19. The award, which is conferred annually, is named for the Foundation’s late director emeritus. Jim Samuel, FCPA, FCGA, is a partner with KPMG’s international tax group in Calgary. Since graduating from the University of Calgary with a Bachelor of Com- merce, he has been practising tax for over 27 years in several roles. In recent years, Jim’s practice has been particularly focused on all matters related to the taxation of foreign affiliates, and he has been actively involved as a lecturer or tutor at CPA Canada’s international tax courses. Jim is the author of numerous articles that have been published in the Canadian Tax Journal and elsewhere, and he has also spoken at various conferences and seminars, including the Canadian Tax Foundation, IFA (Canadian branch), and the Tax Executives Institute. He is also currently a member of the IFA (Canadian branch) council and the CBA-CPA joint committee on taxation.

169 canadian tax journal / revue fiscale canadienne (2020) 68:1, 170

Prix d’excellence en rédaction Douglas J. Sherbaniuk

JIM SAMUEL Jim Samuel est le récipiendaire 2019 du Prix d’excellence en rédaction Douglas J. Sherbaniuk de la Fondation canadienne de fiscalité. Son article intitulé « Interaction of the Foreign Affiliate Surplus and Safe-Income Regimes: Selected Anomalies, Issues, and Planning Considerations » a été publié dans (2018) 66:2 Revue fiscale canadienne 269 - 307. Son article a été retenu par un comité composé de professionnels en fiscalité à titre de meilleur article publié par la Fondation en 2018 - 19. Ce prix, décernée annuellement, est nommé à la mémoire du défunt directeur emeritus de la Fondation. Jim Samuel, FCPA, FCGA est associé chez KPMG et œuvre au sein du groupe de fiscalité internationale à Calgary. Depuis l’obtention d’un baccalauréat en commerce de l’Université de Calgary, il pratique la fiscalité depuis plus de 27 ans dans divers rôles. Ces dernières années, la pratique fiscale de Jim se concentre sur tous les aspects liés à l’imposition des filiales étrangères. Il est impliqué activement à titre de professeur dans le cadre des cours en fiscalité internationale de CPA Canada. Jim est l’auteur de nombreux articles publiés dans la Revue fiscale canadienne et ailleurs, et il a agi à de nombreuses reprises à titre de conférencier notamment pour la Fondation canadienne de fiscalité, l’AFI (chapitre canadien) et l’Institut des cadres fiscalistes. Il est actuellement membre du conseil de l’AFI (chapitre canadien) et du Comité mixte sur la fiscalité de l’ABC et de CPA Canada.

170 canadian tax journal / revue fiscale canadienne (2020) 68:1, 171 - 74

Canadian Tax Foundation Regional Student-Paper Awards

Each year, the Canadian Tax Foundation awards up to four regional student-paper prizes. Depending on the merit of the papers received, one prize may be awarded for each of four regions of the country: Atlantic Canada (the Canadian Tax Foundation- McInnes Cooper Award); Quebec (the Canadian Tax Foundation-Osler Hoskin Harcourt Award); Ontario (the Canadian Tax Foundation-Fasken Martineau Du- Moulin Award); and western Canada (the Canadian Tax Foundation-Bert Wolfe Nitikman Foundation Award). Papers must be written as a requirement of a tax- related course, including directed research courses, and can address any aspect of the Canadian tax system, including comparative analyses, tax policy, tax compliance, tax planning, and tax system design. Papers may be written in either English or French and must be recommended for award consideration by the professor or instructor of the course. Papers will be reviewed by three independent reviewers, and abstracts (of 400 words or less) of the award-winning papers will be published in the Canadian Tax Journal. The authors of the winning papers will also receive a cash prize from the firms or institutions sponsoring the awards and a one-year membership in the Foundation, entitling them to receive complimentary copies of many of the currently issued Foundation publications, including the Canadian Tax Journal, Canadian Tax Focus, Tax for the Owner-Manager, Perspectives on Tax Law & Policy, and the annual tax conference report, along with one year of complimentary access to TaxFind, the Foundation’s online research database. As members of the Foundation, winners can also take advantage of generous discounts on other publications as well as dis- counted registration fees for Foundation conferences and courses. Submissions to the student-paper competition should be addressed to the Can- adian Tax Foundation, Student-Paper Competition, 145 Wellington Street West, Suite 1400, Toronto, ON M5J 1H8, or e-mailed to [email protected]. Entries must be accompanied by a letter of recommendation from the professor or instructor of the tax course for which the paper was written and must include the student’s name and e-mail address if known. The submission deadline for the 2019 - 20 academic year is July 15, 2020.

171 172 n canadian tax journal / revue fiscale canadienne (2020) 68:1

THE CANADIAN TAX FOUNDATION-MCINNES COOPER AWARD FOR ATLANTIC CANADA Karen Perry (2018 - 19 recipient) The Canadian Tax Foundation is pleased to announce that Karen Perry is the winner of the Canadian Tax Foundation-McInnes Cooper Award for the best Atlantic Canada paper of 2018 - 19 dealing with an aspect of Canadian taxation. Ms. Perry’s paper, “Challenges and Potential Changes to the Taxation of Inter- national Athletes Under Bilateral Tax Treaties,” was written for Professor Kim Brooks’s Tax Treaties LLM class at Osgoode Hall Law School. Ms. Perry holds a BComm from the University of Calgary and a JD from Thomp- son Rivers University. She is completing her LLM in Tax Law at Osgoode Hall Law School, while working as an associate lawyer in PwC Law LLP’s Calgary office.

ABSTRACT International athletes represent a niche segment of taxpayers who are highly compensated individuals with the ability to compete and receive income in multiple jurisdictions each year. For the majority of these athletes, a determination of their taxable position stems from the application of applicable bilateral tax treaties and the tax codes of both the state in which the athlete earns income and the athlete’s resident state. In reaching a determination of their taxable position, and in considering where they are going to compete, athletes may face challenges under bilateral tax treaties for three reasons. First, since bilateral tax treaties vary in their approach to the taxation of athletes, athletes may face different tax consequences depending on the countries in which they compete. Second, the different tax consequences that arise under these bilateral tax treaties may result in selective athlete participation in a given country’s athletic competitions. Third, the variance in bilateral tax treaty treatment of athletes may make it challenging for athletes to fully understand the tax consequences that they face. To address these concerns, this article recommends that the athlete provision of bilateral tax treaties be altered to mirror the taxation of dividend payments. This will provide more consistency in the taxation of both resident and non-resident athletes, and athletes providing both independent personal services and services to a team. canadian tax foundation regional student-paper awards n 173

THE CANADIAN TAX FOUNDATION-OSLER HOSKIN HARCOURT AWARD FOR QUEBEC Maxime Lussier (2018 - 19 recipient) The Canadian Tax Foundation is pleased to announce that Maxime Lussier is the winner of the Canadian Tax Foundation-Osler Hoskin Harcourt Award for the best Quebec paper of 2018 - 19 dealing with an aspect of Canadian taxation. Mr. Lussier’s paper, “La perspective fiscale des cryptomonnaies au Canada,” was written for the Master in Tax program at the University of Sherbrooke. Mr. Lussier holds a bachelor’s degree in law from the University of Sherbrooke. He completed a degree in software development at Concordia University and a master’s degree in tax from the University of Sherbrooke. He is currently a computer programmer for Redox Technologies Inc., a company he co-founded in 2017.

ABSTRACT The meteoric rise in the price of many cryptocurrencies in 2017 has been extensively written about and fuelled many debates. Some question their speculative nature, while others question what they really contribute to society and the economy. In the meantime, the issue of cryptocurrency taxation is not receiving much attention, even though many taxpayers incur gains or losses as a result of their cryptocurrency transactions. Whether such gains or losses are incurred through cryptocurrency mining, through speculation on its price, or simply by spending it to acquire a good or service, Canadian taxpayers have well-defined tax obligations that result from the Canadian tax authorities’ determination that cryptocurrencies are a good, as opposed to a currency. Because they are qualified as such, any transaction with virtual money becomes a barter transaction subject to the Income Tax Act. When it comes to sales taxes, cryptocurrency transactions are subject to the GST and QST because they do not fall within the definition of a currency or financial instrument, both of which are exempt from such taxes. Transactions involving cryptocurrencies are thus considered to be taxable supplies. Although this has a significant impact on the tax obligations of cryptocurrency miners, the impact is just as significant for taxpayers who use cryptocurrencies to make purchases. Effectively, it means that they end up paying taxes twice. The GST and QST apply both when the cryptocurrency is acquired and when a taxable property or service is purchased with it. Taken together, these measures by Canadian tax authorities are part of an effort to protect Canada’s tax base while remaining open to financial innovation. Because of the decentralized nature of digital currencies, Canada understands that, in order to maintain some control over cryptocurrency, it makes more sense to regulate the technology rather than banning it. 174 n canadian tax journal / revue fiscale canadienne (2020) 68:1

THE CANADIAN TAX FOUNDATION-FASKEN MARTINEAU DUMOULIN AWARD FOR ONTARIO François-Xavier Beaudry (2018 - 19 recipient) The Canadian Tax Foundation is pleased to announce that François-Xavier Beaudry is the winner of the Canadian Tax Foundation-Fasken Martineau DuMoulin Award for the best Ontario paper of 2018 - 19 dealing with an aspect of Canadian taxation. Mr. Beaudry’s paper, “The Interaction Between Back-to-Back Imputed Payments and Tax Treaties,” was written for Professor Jinyan Li’s Taxation of Cross-Border Transactions class in the LLM in Tax Law program at Osgoode Hall Law School. Mr. Beaudry holds a bachelor’s degree in civil law from the University of Sher- brooke where he completed the co-op program in 2018. He completed his last articling with the law firm Miller Thomson LLP in Montreal. He now completing an LLM specialized in tax law at the Osgoode Hall Law School. He mainly concen- trates his studies on the deficiencies, for corporations, of the taxation system from an international perspective.

ABSTRACT Back-to-back arrangements can be used by taxpayers to avoid Canadian withholding taxes by relying on tax treaty relief. The government’s attempts to prevent such avoidance by invoking the general anti-avoidance rule (GAAR) or the beneficial ownership rule were not successful in court. Parliament responded by enacting specific mechanical anti-avoidance rules—the back-to-back rules in part XIII. In this paper, the author demonstrates how the notional nature of the deemed interest and royalty payments under these rules constitutes an attempt by Parliament to bypass the unfavorable jurisprudence on alleged treaty-shopping arrangements, resulting in a potential treaty override. Under public international law, treaty overrides occur where a country’s domestic law is given priority and breaches bilateral treaty obligations. Canadian tax treaties permit Canada to impose withholding taxes on interest and royalties as defined in the treaties. Under Canadian general law, fully defined treaty terms such as “royalties” and “interest” take precedence over the meaning under domestic law. Canada cannot amend domestic law to override treaty provisions. The author argues that imputation of notional amounts under part XIII would not withstand judicial scrutiny regarding Canada’s tax treaty obligations. He recommends an amendment to the Income Tax Conventions Interpretation Act so as to preserve the application of the back-to-back regime, despite the public international law violation this would create. Under the current measures, the residence of the ultimate funder or licensor in a treaty jurisdiction is relevant only to determine the appropriate rate of withholding tax to impute, and should not be the basis on which the rule applies. canadian tax journal / revue fiscale canadienne (2020) 68:1, 175 - 78

Prix régionaux du meilleur article par un étudiant de la Fondation canadienne de fiscalité

Chaque année, la Fondation canadienne de fiscalité FCF( ) décerne jusqu’à quatre prix régionaux pour des articles rédigés par des étudiants. Selon la qualité des articles qui ont été soumis, un prix peut être décerné pour chacune des quatre régions du pays : le Canada atlantique (le Prix FCF-McInnes Cooper); le Québec (le Prix FCF-Osler Hoskin Harcourt); l’Ontario (le Prix FCF-Fasken Martineau DuMoulin); et l’Ouest canadien (le Prix FCF-Bert Wolfe Nitikman Foundation). Les articles doivent avoir été rédigés dans le cadre d’un cours lié à la fiscalité, comprenant les cours de travaux dirigés, et ils peuvent porter sur tout aspect du régime fiscal canadien, y compris les analyses comparatives, la politique fiscale, l’observation des règles fiscales, la planification fiscale et la conception du régime fiscal. Les articles peuvent être rédigés en anglais ou en français et une lettre de recommandation du professeur ou du chargé d’enseignement du cours doit être au dossier. Les articles sont évalués par trois examinateurs indépendants, et des précis (de 400 mots ou moins) des articles primés seront publiés dans la Revue fiscale canadienne. Les auteurs des articles primés recevront aussi une récompense en argent des organismes ou des sociétés qui commanditent le prix ainsi qu’une adhésion d’une année à la FCF, leur donnant le droit de recevoir des exemplaires gratuits d’un grand nombre d’ouvrages publiés par la FCF, dont Revue fiscale canadienne, Canadian Tax Focus, Actualités fiscales pour les propriétaires exploitants, Perspectives on Tax Law & Policy ainsi que le rapport de la conférence annuelle en fiscalité, avec un accès d’un an à TaxFind en ligne, l’outil de recherche électronique de données de la FCF. À titre de membre de la FCF, les lauréats bénéficient également de réductions appréciables sur le prix d’autres publications ainsi que sur les frais d’inscription aux conférences et aux cours offerts par laFCF . Les dossiers de participation au concours du meilleur article rédigé par un étudiant doivent être transmis par la poste à la FCF, Concours du meilleur article rédigé par un étudiant, 145 Wellington Street West, bureau 1400, Toronto, ON M5J 1H8, ou par courriel à [email protected]. Les dossiers doivent être accompagnés d’une lettre de recommandation du professeur ou du chargé d’enseignement du cours en fiscalité dans le cadre duquel l’article a été rédigé ainsi que des nom et adresse courriel de l’étudiant si connue. La date d’échéance de présentation des dossiers pour l’année universitaire 2019 - 2020 est le 15 juillet 2020.

175 176 n canadian tax journal / revue fiscale canadienne (2020) 68:1

PRIX DE LA FONDATION CANADIENNE DE FISCALITÉ- MCINNES COOPER POUR LE CANADA ATLANTIQUE Karen Perry (récipiendaire 2018 - 19) La Fondation canadienne de fiscalité a le plaisir d’annoncer que Karen Perry est la lauréate du Prix Fondation canadienne de fiscalité-McInnes Cooper pour le meilleur article de 2018 - 19 du Canada atlantique qui traite d’un aspect de la fiscalité canadienne. L’article de Mme Perry intitulé « Challenges and Potential Changes to the Taxation of International Athletes Under Bilateral Tax Treaties » a été rédigé dans le cadre du cours sur les conventions fiscales de Professeure Kim Brooks à Osgoode Law School. Mme Perry est détentrice d’un baccalauréat en commerce de l’Université de Calgary et un JD de l’Université Thompson Rivers. Elle complète actuellement sa maitrise en droit fiscal à Osgoode Hall Law School tout en œuvrant au sein de PwC Law au bureau de Calgary.

PRÉCIS Les athlètes internationaux représentent un groupe restreint de contribuables. Ils sont des particuliers hautement rémunérés qui chaque année compétitionnent et gagnent des revenus dans de multiples juridictions. Pour la majorité de ces athlètes, la détermination de leur imposition prend source dans l’application de conventions fiscales pertinentes et des lois fiscales où le revenu de l’athlète est gagné et celles de son pays de résidence. Dans l’analyse de leur imposition et du lieu où se tiendront leurs compétitions, les athlètes peuvent faire face à de problématiques en vertu des conventions fiscales bilatérales, et ce pour trois raisons. Premièrement, puisque les conventions fiscales bilatérales varient dans leurs approches vis-à-vis l’imposition des athlètes, ceux-ci peuvent faire face à des conséquences fiscales différentes selon le pays où se tient la compétition. Deuxièmement, les différentes conséquences fiscales qui peuvent découler de ces conventions fiscales bilatérales peuvent avoir pour effet de mener à une participation sélective par l’athlète à une compétition dans un pays donné. Troisièmement, la différence du traitement fiscal réservé aux athlètes par les conventions fiscales bilatérales peut avoir pour effet de rendre difficile pour eux de bien comprendre leurs conséquences fiscales. Afin de répondre à ces inquiétudes, ce texte recommande que l’article qui vise les athlètes dans les conventions fiscales bilatérales soit modifié de façon à refléter celui réserver à l’imposition des dividendes. Ceci procurera plus de consistance dans l’imposition des athlètes résidents et non résidents, mais aussi lorsqu’ils offrent des services personnels indépendants et des services à une équipe. prix régionaux du meilleur article par un étudiant n 177

PRIX DE LA FONDATION CANADIENNE DE FISCALITÉ- OSLER HOSKIN HARCOURT POUR LE QUÉBEC Maxime Lussier (récipiendaire 2018 - 19) La Fondation canadienne de fiscalité a le plaisir d’annoncer que Maxime Lussier est le lauréat du Prix Fondation canadienne de fiscalité-Osler Hoskin Harcourt pour le meilleur article de 2018 - 19 de la province de Québec qui traite d’un aspect de la fiscalité canadienne. L’article de M. Lussier intitulé « La perspective fiscale des cryptomonnaies au Canada » a été rédigé dans le cadre du programme de maîtrise en fiscalité de l’Université de Sherbrooke. M. Lussier détient un baccalauréat en droit de l’Université de Sherbrooke. Il a complété un diplôme en développement de logiciels à l’Université Concordia et un diplôme de maîtrise en fiscalité de l’Université de Sherbrooke. M. Lussier est actuellement programmeur chez Redox Technologies Inc., une société qu’il a cofondée en 2017.

PRÉCIS L’ascension fulgurante du prix des plusieurs cryptomonnaies en 2017 a fait couler beaucoup d’encre et a alimenté de nombreux débats. Plusieurs s’interrogent quant à leur nature spéculative tandis que d’autres questionnent leur réel apport social et économique. Pendant ce temps, la question de l’imposition des cryptomonnaies reçoit une attention marginale. Pourtant, plusieurs contribuables ont réalisé des gains et d’autres ont épongé des pertes en transigeant des cryptomonnaies. Que le gain ou la perte ait été réalisé par l’entremise du minage de cryptommonaie, par la spéculation sur les cours de celles-ci ou simplement par le fait de dépenser des cryptomonnaies pour se procurer un bien ou un service, le contribuable canadien à des obligations fiscales bien précises. Ces obligations prennent source du fait que les autorités fiscales canadiennes ont établi qu’une cryptomonnaie constitue un bien, et ce par opposition à une monnaie. En la qualifiant ainsi, toute opération conclue avec de la monnaie virtuelle consiste en une opération de troc assujettie à la Loi de l’impôt sur le revenu. Sous l’angle de la taxe à la consommation, l’assujettissement des transactions de cryptomonnaies à la TPS et la TVQ est attribuable au fait qu’une cryptomonnaie ne rentre pas dans la définition de monnaie ni d’effet financier, qui sont tous les deux exonérés pour les fins de la taxe à la consommation. Or, les transactions impliquant les cryptomonnaies représentent des fournitures taxables. Bien que cette qualification ait un impact important sur les obligations fiscales des mineurs de cryptomonnaies, l’impact est tout aussi majeur pour le contribuable qui transige à l’aide de cryptomonnaie pour ses achats. Effectivement, cela signifie donc qu’il devra s’imposer doublement. LaTPS et la TVQ s’appliquent, une première fois, lorsqu’il se procure les cryptomonnaies, et s’appliquent également lorsqu’il acquiert un bien ou un service taxable. Prises dans son ensemble, ces mesures des autorités fiscales canadiennes s’inscrivent dans un effort qui a pour objectif de protéger l’assiette fiscale du Canada tout en restant ouvert à l’innovation financière. De par la nature décentralisée de ces monnaies digitales, le Canada comprend qu’il est plus judicieux de réglementer les cryptomonnaies, que de tout simplement les bannir, afin de garder un certain contrôle sur la technologie. 178 n canadian tax journal / revue fiscale canadienne (2020) 68:1

PRIX DE LA FONDATION CANADIENNE DE FISCALITÉ- FASKEN MARTINEAU DUMOULIN POUR L’ONTARIO François-Xavier Beaudry (récipiendaire 2018 - 19) La Fondation canadienne de fiscalité a le plaisir d’annoncer que François-Xavier Beaudry est le lauréat du Prix Fondation canadienne de fiscalité-Fasken Martineau DuMoulin pour le meilleur article de 2018 - 19 de l’Ontario qui traite d’un aspect de la fiscalité canadienne. L’article de M. Beaudry intitulé « The Interaction Between Back-to-Back Imputed Payments and Tax Treaties » a été rédigé dans le cadre du cours Taxation of Cross-Border Transactions de Osgoode Law School donné par la professeure Jinyan Li. M. Beaudry détient un baccalauréat en droit civil de l’Université de Sherbrooke où il a complété le programme coopératif, en 2018. Notamment, il a effectué son dernier stage au sein du cabinet d’avocats Miller Thomson S.E.N.C.R.L. à Montréal. Il est en voie de compléter son LLM avec spécialisation en droit fiscal à la faculté d’Osgoode Hall Law School et concentre principalement ses recherches sur les lacunes du système de fiscalité, pour les sociétés, au niveau international.

PRÉCIS Les accords de prêts adossés peuvent être utilisés par les contribuables afin d’éviter les retenues à la source canadiennes en s’appuyant sur l’allègement prévu par une convention fiscale. La tentative du gouvernement de prévenir un tel évitement en invoquant la règle générale anti-évitement (RGAE) ou la règle du propriétaire réel n’ont pas connu de succès devant les tribunaux. Le Parlement a répondu en adoptant des règles spécifiques et mécaniques — les règles d’accord de prêts adossés à la partie XIII. Dans cet article, l’auteur démontre comment la nature notionnelle des paiements d’intérêts et des paiements de royautés en vertu de ces règles constitue une tentative par le Parlement de contrecarrer la jurisprudence défavorable sur les ententes de chalandage fiscal, ce qui en résulte en une possible dérogation à la convention fiscale. En vertu du droit public international, la dérogation à la convention fiscale survient lorsque la priorité est donnée à loi domestique d’un pays et qu’elle contrevient aux obligations de conventions bilatérales. Les conventions fiscales canadiennes permettent au Canada d’imposer les retenues à la source sur les intérêts et royautés tels que définis dans les conventions. En vertu des lois canadiennes générales, les termes spécifiquement définis dans les conventions tels que « royautés » et « intérêts » ont préséance sur leurs sens prévus dans la loi domestique. Le Canada ne peut pas modifier la loi domestique afin de déroger aux articles de la convention. L’auteur prétend que l’allocation de montants notionnels dans la partie XIII ne pourrait être maintenue face à une révision judiciaire des obligations du Canada quant aux conventions fiscales. Il recommande de modifier la Loi sur l’interprétation des conventions en matière d’impôts sur le revenu afin de préserver l’application du régime des prêts adossés, et ce malgré le fait que cela créerait une violation du droit international public. En vertu des dispositions actuelles, la résidence de l’ultime prêteur ou donneur de licence dans une juridiction est pertinente seulement pour la détermination du taux de retenue à appliquer. Elle ne devrait pas servir de base sur laquelle la règle s’applique. canadian tax journal / revue fiscale canadienne (2020) 68:1, 179 - 80

Best Newsletter Article by a Young Practitioner Award

For a fifth year, the Canadian Tax Foundation has presented the Best Newsletter Article by a Young Practitioner Award. The winners were announced at the Canad- ian Tax Foundation’s annual conference in Montreal in December 2019. Newsletter articles, in addition to being a valuable service to the profession in their own right, are often a stepping stone to lengthier pieces of writing, such as contributions to Canadian Tax Foundation conferences and articles in the Canadian Tax Journal. Early success in writing newsletter articles as a young practitioner (YP) may lead to a career in tax in which writing is a regular and ongoing part of one’s contribution to the profession. The Foundation defines aYP as an individual who has 10 years or less of experience working in the taxation field after becoming fully qualified (for example, receiving their professional designation). The award is given for the best newsletter article that (1) was written solely by one or more authors who was a YP at the time of publication, and (2) appeared in any of the three newsletters published by the Foundation in 2018: Canadian Tax Focus, Canadian Tax Highlights, or Tax for the Owner-Manager. The vast majority of these articles appeared in Canadian Tax Focus, which generally publishes only articles for which the author (or one of the co-authors) is a YP. In all, 72 newsletter articles were eligible for the award. A total of 12 of the articles eligible for the award were reviewed by a four-member committee consisting of YPs who have been extensively involved in publishing with the Foundation. The criteria applied by the committee were essentially the same as those used for the Foundation’s Douglas J. Sherbaniuk Distinguished Writing Award. The members of the committee were:

n Corinne Grigoriu, Cassels Brock LLP, Calgary n Korinna Fehrmann, PricewaterhouseCoopers LLP, Vancouver n Nathalie Perron, Barsalou Lawson Rheault, Montreal n Jin Wen, Grant Thornton LLP, Toronto

The committee gave the awards to four authors in respect of the following articles:

n Kyle Ross (Felesky Flynn LLP, Calgary: [email protected]), “Taxable Windup: A Practical Approach to Capital Dividends” (2018) 18:3 Tax for the Owner- Manager 3 - 4. n Matt Trotta and Rami Pandher (with Shea Nerland LLP, Calgary at the time of writing, but now at Field Law, Calgary: [email protected] and

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[email protected]), “Trust Residence Post-Fundy” (2018) 26:2Canad - ian Tax Highlights 11 - 13. n Kathryn Walker (with Thorsteinssons LLP, Toronto at the time of writing, but now at Fasken Martineau DuMoulin LLP, Toronto: [email protected]), “Making or Accepting Payment in Crypto: A GST/HST Risk?” (2018) 8:1 Can- adian Tax Focus 3.

Young practitioners (and anyone else) interested in writing for the Founda- tion’s newsletters are invited to contact the newsletter editors: Alan Macnaughton ([email protected]) for Canadian Tax Focus and Thomas McDonnell ([email protected]) for Tax for the Owner-Manager. In Quebec, they are invited to contact Sonia Gobeil ([email protected]) of the Quebec office. Individuals interested in participating in any of the events and activities of the Foundation’s Young Practitioners chapters across Canada are invited to contact the chair of the steering committee of the local chapter or Robyn Corrigan (rcorrigan @ctf.ca) of the national office. In Quebec, they are invited to contact Sonia Gobeil ([email protected]) of the Quebec office. There are Young Practitioners chapters in Calgary, Edmonton, Halifax, Kelowna, Kitchener-Waterloo, Mississauga, Montreal, Ottawa, Quebec City, Saskatoon, Toronto, Vancouver, and Winnipeg. canadian tax journal / revue fiscale canadienne (2020) 68:1, 181 - 82

Prix pour le meilleur article de bulletin par un jeune fiscaliste

Pour une cinquième année, la Fondation canadienne de fiscalité a présenté le Prix pour le meilleur article de bulletin par un jeune fiscaliste. Les récipiendaires ont été annoncés en décembre 2019 à la conférence annuelle à Montréal de la FCF. En plus d’être une valeur à la profession, les articles publiés dans les bulletins sont souvent un tremplin vers des articles plus longs, tels que des papiers pour les conférences de la FCF et des articles publiés dans la Revue fiscale canadienne. Les premiers succès à la rédaction d’articles par un jeune fiscaliste peuvent mener à une carrière en fiscalité où la rédaction est une contribution régulière et continue à la profession. La FCF définie « jeune fiscaliste » comme étant une personne qui a 10 ans ou moins d’expérience en fiscalité après avoir reçu son titre professionnel. Le prix est décerné pour le meilleur article publié dans un bulletin (1) qui a été rédigé par un ou plusieurs jeunes fiscalistes au moment de sa publication, et (2) a été publié dans l’un ou l’autre des trois bulletins de la FCF publié en 2018 : Canadian Tax Focus, Faits saillants en fiscalité canadienne ou Actualités fiscales pour les propriétaires exploitants. La grande majorité des articles ont été publiés dans Canadian Tax Focus lequel, en général, publie des articles dont l’auteur est un jeune fiscaliste (ou l’un des co-auteurs est un jeune fiscaliste). En tout, 72 articles étaient éligibles au prix. Un total de 12 articles ont été révisés par un comité composé de quatre membres. Ces membres sont de jeunes fiscalistes qui ont été activement impliqués dans les publications à la FCF. Les critères de sélection du comité sont essentiellement les mêmes que ceux du Prix d’excellence en rédaction Douglas J. Sherbaniuk de la FCF. Les membres du comité étaient :

n Corrine Grigoriu, Cassels Brock LLP, Calgary n Korinna Fehrmann, PricewaterhouseCoopers LLP, Vancouver n Nathalie Perron, Barsalou Lawson Rhealt, Montréal n Jin Wen, Grant Thornton LLP, Toronto

Le comité a décerné le prix à quatre auteurs pour les articles suivants :

n Kyle Ross (Felesky Flynn LLP, Calgary : [email protected]), « Liquidation imposable : Une approche pratique pour les dividendes en capital » (2018) 18:3 Actualités fiscales pour les propriétaires exploitants 3 - 4. n Matt Trotta et Rami Pandher (chez Shea Nerland LLP, Calgary au moment de la rédaction, mais maintenant chez Field Law, Calgary :

181 182 n canadian tax journal / revue fiscale canadienne (2020) 68:1

[email protected] et [email protected]), « Lieu de résidence d’une fiducie depuis l’arrêt Fundy » (2018) 26:2Faits saillants en fiscalité canadienne 13 - 16. n Kathryn Walker (chez Thorsteinssons LLP, Toronto au moment de la rédaction, mais maintenant chez Fasken Martineau DuMoulin LLP, Toronto : [email protected]), « Making or Accepting Payment in Crypto: A GST/HST Risk? » (2018) 8:1 Canadian Tax Focus 3.

Les jeunes fiscalistes (ou toute autre personne) qui souhaitent écrire pour les bulletins de la FCF sont invités à contacter les rédacteurs : Alan Macnaughton ([email protected]) pour le Canadian Tax Focus et Thomas McDonnell ([email protected]) pour Actualités fiscales pour les propriétaires exploitants. Au Québec, ils sont invités à contacter Sonia Gobeil ([email protected]) du bureau du Québec. Les personnes désireuses de participer aux événements ou activités du chapitre des jeunes fiscalistes au Canada sont invitées à contacter le président du comité dudit chapitre ou Robyn Corrigan ([email protected]) du bureau national. Au Québec, ils sont invités à contacter Sonia Gobeil ([email protected]) du bureau du Québec. On retrouve des chapitres de jeunes fiscalistes à Calgary, Edmonton, Halifax, Kelowna, Kitchener-Waterloo, Mississauga, Montréal, Ottawa, Québec, Saskatoon, Toronto, Vancouver et Winnipeg. canadian tax journal / revue fiscale canadienne (2020) 68:1, 183

Canadian Tax Foundation Lifetime Contribution Award

As of 2016, the Canadian Tax Foundation honours each year individuals who, through their volunteer efforts and body of work, have made substantial and outstanding contributions to the Foundation during their careers. The Lifetime Contribution Award is the most prestigious award conferred by the Foundation. The selection committee takes into account the individual’s contributions to Foun- dation publications and conferences, service on the board of governors and other committees, and participation in other organizations and activities that further the Foundation’s purposes. The 2019 recipients were Philip Friedlan and the Honourable Karen Sharlow. For further information about the nomination and selection process for this award, see the Foundation website.

183 canadian tax journal / revue fiscale canadienne (2020) 68:1, 184

Prix de la Fondation canadienne de fiscalité pour une contribution exceptionnelle

Depuis 2016, la Fondation canadienne de fiscalité rend hommage chaque année à des personnes qui, par leur travail bénévole et leurs réalisations, ont contribué de façon importante et exceptionnelle à la Fondation au cours de leur carrière. Le Prix pour une contribution exceptionnelle est le prix le plus prestigieux décerné par la Fondation. Le comité de sélection prend en compte la contribution de la personne aux publications et aux conférences de la Fondation, son travail au sein du conseil des gouverneurs et d’autres comités, ainsi que sa participation à d’autres organisations et activités qui contribuent à la réalisation des objectifs de la Fondation. Les lauréats 2019 étaient Philip Friedlan et l’honorable Karen Sharlow. Pour obtenir de plus amples renseignements sur le processus de nomination et de sélection pour ce prix, consultez le site Web de la Fondation.

184 canadian tax journal / revue fiscale canadienne (2020) 68:1, 185 - 250 https://doi.org/10.32721/ctj.2020.68.1.fon

Finances of the Nation David Lin*

SURVEY OF PROVINCIAL AND TERRITORIAL BUDGETS, 2019 - 20 For almost 60 years, the Canadian Tax Foundation published an annual monograph, Finances of the Nation, and its predecessor, The National Finances. In a change of format, the 2014 Canadian Tax Journal introduced a new “Finances of the Nation” feature, which presents annual surveys of provincial and territorial budgets and topical articles on taxation and public expenditures in Canada. This article surveys the 2019 - 20 provincial and territorial budgets. The underlying data for the Finances of the Nation monographs and for the articles in this journal will be published online in the near future. KEYWORDS: BUDGETS n PROVINCIAL n TERRITORIAL n GOVERNMENT FINANCE n REVENUE n EXPENDITURES

CONTENTS Introduction 186 Summary Information 186 Provincial and Territorial Budgets by Jurisdiction 207 British Columbia (Table 12) 212 Tax Highlights 212 Tax Changes 212 Alberta (Table 13) 216 Tax Highlights 216 Tax Changes 216 Saskatchewan (Table 14) 219 Tax Highlights 219 Tax Changes 219 Manitoba (Table 15) 221 Tax Highlights 221 Tax Changes 221

* Of the School of Accounting and Finance, University of Waterloo (e-mail: [email protected]). I would like to thank the Canadian Tax Foundation for developing figures 1 through 4. I would also like to thank Heather Evans of the Canadian Tax Foundation, Michael Smart of the University of Toronto, and Ken McKenzie of the University of Calgary for their insightful comments.

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Ontario (Table 16) 224 Tax Highlights 224 Tax Changes 224 Quebec (Table 18) 230 Tax Highlights 230 Tax Changes 230 New Brunswick (Table 19) 235 Tax Highlights 235 Tax Changes 235 Nova Scotia (Table 20) 237 Tax Highlights 237 Tax Changes 237 Prince Edward Island (Table 21) 239 Tax Highlights 239 Tax Changes 239 Newfoundland and Labrador (Table 22) 241 Tax Highlights 241 Tax Changes 241 Yukon (Table 24) 245 Tax Highlights 245 Tax Changes 245 Northwest Territories (Table 25) 247 Tax Highlights 247 Tax Changes 247 Nunavut (Table 26) 249 Tax Highlights 249 Tax Changes 249

INTRODUCTION This article has two distinct parts. First, it sets out tables and charts that show aggregate figures related to projected 2019 - 20 budget revenues and expenditures for the various provinces and territories, as well as tables that show corporate income tax rates, personal income tax brackets and rates, and other matters. Second, the article summarizes the projected budget revenues and expenditures in tabular form and also summarizes the tax changes in narrative form, for each province and territory.

SUMMARY INFORMATION Most of the provinces and territories brought down their 2019 - 20 fiscal-year budgets between January and April 2019. Only 5 of the 13 jurisdictions forecasted a deficit for the 2019 - 20 fiscal year: Ontario, Alberta, Manitoba, Nunavut, and Yukon. Most of the jurisdictions that issued projections with a forecasted deficit expected to return to a balanced budget or surplus over the longer term (three or more years). Alberta’s economy continues to struggle to recover from the 2015 - 16 recession. The 2019 budget, delivered by Alberta’s new government on October 24, 2019, shows an improved medium-term outlook, but a quick rebound is not predicted. finances of the nation n 187

The province does not expect to return to a balanced budget until 2022 - 23. The continued deficit position in 2019 - 20 is partly attributed to “chronic pipeline delays and a slowing global economy.”1 The 2019 budget attempts to move Alberta from recovery into expansion by providing sweeping reductions in the general corporate income tax rate from 12 percent prior to the delivery of the budget to 8 percent by January 1, 2022. Ontario’s 2019 budget indicates that the province’s economy has been under performing since 2003 but has been showing positive signs in the recent term and is expected to grow steadily from 2019 to 2024. The government previously delivered a 2018 fall economic outlook and fiscal review2 shortly after taking office in June 2018, but the budget delivered on April 11, 2019 is its first full budget. The government also delivered a 2019 fall economic outlook and fiscal review on Nov- ember 6, 2019. Unlike the 2019 Alberta budget, neither the 2019 Ontario budget nor the province’s 2019 fall economic outlook and fiscal review forecasts a return to a balanced budget in the medium term. However, the government included a five- year recovery plan in the 2019 budget and has committed to balancing the budget by 2023 - 24 in a responsible manner. Manitoba’s 2019 budget, delivered on March 7, 2019, reflects the government’s view that “Manitoba does not have a revenue problem; it has a spending problem.”3 In 2019 - 20, the province is continuing its plan to reduce the budgetary deficit primarily through spending restraint and to return spending to sustainable levels. Expenditures for 2019 - 20, budgeted at $17,480 million, remain relatively flat compared to 2018 - 19 expenditures forecasted at $17,164 million. The government forecasts a deficit in the 2019 - 20 year that is expected to continue, though gradually decreasing, until at least 2022 - 23. The budget does not specify when Manitoba will return to a balanced budget. In 2019, the government called an early election and was re-elected in September with a majority for a second term. Quebec’s 2019 budget is the first full budget delivered by the new government elected in October 2018. The 2019 budget shows that while the province is expecting moderate growth in the coming years, Quebec is confronted with an aging population that puts pressure on its labour market. Compounding this problem is a reduction in the size of the labour pool. This outlook explains some specifically targeted tax changes introduced in the 2019 budget: an expansion of the personal tax credit for experienced workers and the introduction of a refundable tax credit for corporations that employ individuals aged 60 or over. British Columbia’s 2019 budget shows a projected surplus in the 2019 - 20 fiscal year, increasing slightly in 2020 - 21 and then doubling in 2021 - 22. The theme in

1 Alberta, Ministry of Treasury Board and Finance, 2019 Budget, Budget Plan, October 24, 2019, at 27. 2 Ontario, Ministry of Finance, 2018 Fall Economic Outlook and Fiscal Review, November 15, 2018. 3 Manitoba, Department of Finance, 2019 Budget, Budget Plan, March 7, 2019, at 28. 188 n canadian tax journal / revue fiscale canadienne (2020) 68:1 the 2019 budget is to make life better for British Columbians, and the changes introduced by the government represent specifically targeted and deliberate measures toward the achievement of that goal. Saskatchewan’s 2019 budget indicates that the province’s economy is strengthening; it projects a positive outlook, showing a return to a balanced budget, with a small surplus, in 2019 - 20 and moderate growth in the medium and longer term. Prince Edward Island is also showing strong economic growth, with the province announcing unexpected tax cuts at the end of 2018 as well as in the 2019 budget, while maintaining a budgetary surplus in 2019 - 20 and future years. Newfoundland and Labrador’s 2019 budget shows a sizable surplus in 2019 - 20, the province’s first surplus since 2011 - 12. This surplus is attributable to the recently signed Atlantic accord providing for $2.5 billion of federal funding, which the province recognized in its entirety in 2019 - 20. However, deficits are forecast in 2020 - 21 and 2021 - 22, followed by a return to a surplus in 2022 - 23. The Northwest Territories’ budget is funded mainly through federal transfers, and in 2017, the territory concluded that it had only limited capacity to secure operating surpluses by increasing taxes or other own-source revenues. This view is reiterated in the 2019 budget. The Yukon government faces similar pressures; in 2016, the surplus projected by the former government had not materialized, and the then new government had been forced to make a special borrowing to meet its financial needs. In recognition of its precarious revenues owing to a dependence on resources, Yukon forecasted its first deficit in 2018 - 19 if no action was taken, and enlisted advice from its populace concerning expenditure pressures. In its 2019 budget, Yukon continues to forecast a deficit in 2019 - 20 while planning to return to surplus in subsequent years. In 2019, there were significant discussions and developments in the provincial and territorial jurisdictions with respect to carbon pricing. Provinces that did not develop a carbon-pricing plan before 2019 would be subject to carbon pricing imposed by the federal government in 2019. Four provinces did not have a carbon- pricing plan in place by the deadline; accordingly, the federal carbon tax came into effect on April 1, 2019 in Saskatchewan, Manitoba, Ontario, and New Brunswick. Alberta’s new government repealed its provincial carbon tax in 2019 (except for high-emission facilities that emit more than 100,000 tonnes of specified gases per year), and the federal carbon tax will apply to consumers and low-emission facilities in that province on January 1, 2020. In late 2019, the federal government accepted a carbon-pricing plan developed by New Brunswick. New Brunswick’s carbon tax will come into effect on April 1, 2020, and the federal carbon tax will no longer be levied in that province as of the same day. Ontario launched a constitutional challenge to the federal imposition of a carbon tax, and the case was heard by the Ontario Court of Appeal in April 2019. In June 2019, the court announced a majority decision that the federal carbon tax is constitutional. The Ontario government has appealed the decision to the Supreme Court of Canada. Saskatchewan launched a similar constitutional challenge, and the case was heard by the Saskatchewan Court of Appeal. In May 2019, the court announced a majority decision that the federal carbon tax is finances of the nation n 189 constitutional. The Saskatchewan government has also appealed the decision to the Supreme Court of Canada. In 2019, Alberta and Manitoba also filed similar judicial challenges, and no decision had been rendered at the time of writing. The outcome of the appeals to the Supreme Court of Canada also remains unknown at this time. Overall, the budgets as delivered were neither good news nor bad news for most taxpayers: many of the tax changes made either created, extended, or improved tax credits targeting very specific initiatives. Balanced budgets inspire confidence in -in vestors and consumers, and most provincial and territorial jurisdictions arrived at a close-to-balanced budget without increasing tax revenue except by natural growth and inflation. Table 1 aggregates the projected budget revenue and expenditure items in each province and territory for the 2019 - 20 fiscal year. The figures reflect the budget summaries presented in the second part of this article. The different jurisdictions’ budget projections are not strictly comparable, owing in part to accounting differences across the provinces and territories.4 However, the placement of the various jurisdictions’ figures in a single table illustrates trends and distinctions that are intended to stimulate discussion. The provinces and territories are listed in descending order based on each jurisdiction’s original budget projection of its expected tax revenue. Figure 1 presents similar information and includes surpluses and deficits at the right of the figure. Each projected revenue source amount is shown as a percentage of total revenues, and the projected surplus or deficit is shown as a percentage of total expenditures. Figure 2 shows projected tax revenues by source as a percentage of total revenues. Figure 3 shows projected expenditures by spending category as a percentage of total expenditures, and health-care expenditures per capita. The provinces and territories have the primary responsibility for education, health, and social services expenditures. Across all jurisdictions, health-care expenditures for the 2019 - 20 fiscal year averaged about 39 percent of total expenditures, as shown in table 2. For example, for the 2019 - 20 fiscal year, Ontario projected health-care and long-term-care expenditures of $63,831 million or 38.97 percent of total expenditures ($163,785 million, as shown in table 16). In contrast, in the territories, projected spending on health care in 2019 - 20 accounted for 21.54 percent of total expenditures for Nunavut, 27.52 percent for the Northwest Territories, and 30.88 percent for Yukon. However, on a per capita basis, the results for the territories vis-à-vis Ontario appeared to reverse. These trends are reflected in table 3, which sets out the health-care expenditures (as projected in the 2013 - 14 to 2019 - 20

4 For a discussion of accounting differences between Canadian jurisdictions, see Colin Busby and William B.P. Robson, Credibility on the (Bottom) Line: The Fiscal Accountability of Canada’s Senior Governments, 2013, C.D. Howe Institute Commentary no. 404 (Toronto: C.D. Howe Institute, March 2014). For a reconciliation of changes in the Alberta budget, see Ron Kneebone and Margarita Wilkins, “Recent Changes to Provincial Government Budget Reporting in Alberta” (2018) 10:1 SPP Communiqué [University of Calgary School of Public Policy] 1 - 8 (http://dx.doi.org/10.11575/sppp.v11i0.43275). 190 n canadian tax journal / revue fiscale canadienne (2020) 68:1 2 (6) 34 34 23 60 (34) 274 (360) 2,504 1,924 (8,704) (9,024) (deficit) Surplus / b , which the federal (95) (71) (30) 167 (500) (100) (2,180) (1,000) Adjustments (1,436) (2,199) (1,802) (9,823) (8,425) (2,166) Total Total (56,540) (58,273) (17,480) (14,991) (11,144) (113,034) (163,785) expenditures , November 6, 2019. 1,430 2,201 1,933 9,846 2,162 Total Total 50,016 59,047 17,025 15,025 11,011 10,350 115,638 155,761 revenues 2019-20 Year millions of dollars a 246 266 130 288 4,288 4,969 1,584 1,570 2,556 Other 18,883 15,892 19,687 22,564 revenue sources of 860 9,200 1,058 9,423 4,815 1,543 2,467 3,456 3,485 3,871 1,738 24,924 25,453 Federal transfers 126 260 136 7,922 1,075 7,589 5,971 4,791 3,923 21,933 33,732 71,027 107,744 Tax revenue Tax . Fiscal and Expenditures, Budget Projections, Revenues Territorial ...... and Provincial . . . .

c . d . Other sources of revenue included resource royalties; premiums, fees, and licences; commercial Crown corporation transfers; investment income. Adjustments included consolidation numbers (in some cases) and transfers to from reserve funds. Ontario numbers are from Ontario, Ministry of Finance, 2019 Fall Economic Outlook and Fiscal Review filers in Quebec qualify for the abatement, which reduces their federal income tax by 16.5 percentage points. Of this amount, Tax 13.5 percentage points relates to opting-out arrangements for certain federal-provincial programs, such as hospital care and social welfare, where Quebec increased its personal income taxes by an equivalent amount. receives the value through provincial tax revenue, while other provinces receive the corresponding amounts in cash. The remaining 3.0 percentage points relates to youth allowances recovery government recovers each year from Quebec. None of the amounts presented in this table and elsewhere article are adjusted for Quebec abatement. Source: Based on provincial and territorial budget documents cited in the source notes for tables 12-16, 18-22, 24-26. Differences are due to rounding. Alberta a b c d British Columbia Manitoba Prince Edward Island Northwest Territories Yukon Saskatchewan Nova Scotia New Brunswick Newfoundland and Labrador Nunavut TABLE 1 TABLE Province /territory Ontario Quebec finances of the nation n 191

FIGURE 1 Projected Provincial and Territorial Revenues by Source, as a Percentage of Total Revenues, and Projected Surplus/Deficit as a Percentage of Projected Expenditures, Fiscal Year 2019-20

Ontario 69.2 16.3 14.5 5.5

Quebec 61.4 21.6 17.0 2.2

British 57.1 16.0 26.9 0.5 Columbia

Alberta 43.9 18.4 37.8 15.4

Manitoba 46.5 28.3 25.2 2.1

Saskatchewan 50.5 16.4 33.1 0.2

Nova Scotia 54.2 31.4 14.4 0.3

New Brunswick 48.7 35.4 15.9 0.2

Newfoundland 37.9 37.4 24.7 22.8 and Labrador Prince Edward 48.8 39.1 12.1 0.1 Island Northwest 13.5 79.8 6.7 3.3 Territories

Yukon 8.8 74.0 17.2 0.4

Nunavut 6.3 80.4 13.3 1.6

0 20 40 60 80 100 Projected surplus/deﬁcit as a percentage of Percentage of total revenues projected expenditures

Tax Federal Other Deﬁcit Surplus revenue transfers revenue

Source: Based on provincial and territorial budget documents cited in the source notes for tables 12-16, 18-22, and 24-26, and the data summary in table 1. 192 n canadian tax journal / revue fiscale canadienne (2020) 68:1

FIGURE 2 Projected Provincial and Territorial Tax Revenues by Source as a Percentage of Total Revenues, Fiscal Year 2019-20

Ontario 23.8 10.3 18.0 17.0 69.2

Quebec 28.1 7.4 18.9 7.0 61.4

British Columbia 18.7 7.1 12.8 18.5 57.1

Alberta 24.0 8.4 11.5 43.9

Manitoba 22.0 3.0 13.5 8.1 46.5

Saskatchewan 17.0 4.9 15.3 13.3 50.5

Nova Scotia 25.5 5.5 17.2 6.0 54.2

New Brunswick 18.0 3.9 15.6 11.5 48.7 Newfoundland and Labrador 15.3 4.0 11.5 7.1 37.9 Prince Edward Island 19.1 3.9 14.4 11.2 48.8 Northwest Territories 5.4 1.2 6.9 13.5

Yukon 5.2 1.0 2.5 8.8

Nunavut 1.6 0.9 3.7 6.3

0 20 40 60 80 100 Percentage of total revenues

Personal Corporate Sales tax Other taxes income tax income tax

Source: Based on provincial and territorial budget documents cited in the source notes for tables 12-16, 18-22, and 24-26. finances of the nation n 193

FIGURE 3 Projected Provincial and Territorial Expenditures by Spending Category as a Percentage of Total Expenditures, Fiscal Year 2019-20

Ontario 39.0 19.4 7.9 33.8 4,400

Quebec 40.2 21.6 8.0 30.2 5,400

British 39.4 25.1 4.8 30.7 4,500 Columbia

Alberta 39.1 15.2 4.0 41.7 5,100

Manitoba 38.0 26.1 6.2 29.6 4,900

Saskatchewan 39.3 21.9 4.6 34.2 5,000

Nova Scotia 41.6 12.8 7.7 37.9 4,800

New Brunswick 28.8 13.7 6.9 50.7 3,600

Newfoundland 35.9 9.9 16.6 37.7 5,800 and Labrador Prince Edward 34.1 19.1 5.8 41.0 4,800 Island Northwest 27.5 18.4 0.6 53.4 11,100 Territories

Yukon 30.8 15.0 1.0 53.2 10,900

Nunavut 21.6 10.8 0.0 67.6 12,000

0 20 40 60 80 100 0 5,000 10,000 15,000

Percentage of total expenditures Health expenditures per capita (rounded Health Education Debt Other to nearest $100) servicing expenditures

Source: Based on provincial and territorial budget documents cited in the source notes for tables 4, 12-16, 18-22, and 22-24. 194 n canadian tax journal / revue fiscale canadienne (2020) 68:1 b 38.97 40.19 39.44 39.10 38.05 39.28 41.62 28.79 35.85 34.11 27.52 30.88 21.54 2019-20 a 38.13 39.57 40.38 39.26 38.75 39.46 40.09 28.81 35.72 35.79 26.69 32.21 18.81 2018-19 38.12 38.78 40.01 39.10 39.17 38.02 40.02 28.56 34.10 35.32 25.00 35.18 18.03 2017-18 Percentage of total expenditures 38.68 38.32 41.38 39.95 39.88 38.65 40.73 29.02 31.55 35.87 24.91 36.97 19.48 2016-17 , November 15, 2018. , November 6, 2019. to 2019-20 2016-17 Years b millions of dollars 750 496 443 467 6,651 5,888 4,639 2,828 3,021 63,831 45,433 22,983 22,105 2019-20 a 710 462 431 414 6,751 5,765 4,367 2,770 2,985 61,678 43,013 21,651 22,057 2018-19 640 423 451 353 6,681 5,627 4,214 2,679 2,768 53,763 40,223 20,747 21,449 2017-18 Health-care expenditures 461 617 414 338 6,497 5,588 4,132 2,602 2,676 51,785 38,372 19,638 20,414 2016-17 . Fiscal Expenditures, Budget Projections, Health-Care Territorial ...... and Provincial ...... Numbers are from Ontario, Ministry of Finance, 2018 Fall Economic Outlook and Fiscal Review Numbers are from Ontario, Ministry of Finance, 2019 Fall Economic Outlook and Fiscal Review Source: Based on provincial and territorial budget documents cited in the source notes for tables 12-16, 18-22, 24-26. See those further details. Province /territory TABLE 2 TABLE Ontario Quebec British Columbia Alberta Manitoba Saskatchewan Nova Scotia New Brunswick Newfoundland and Labrador Prince Edward Island Northwest Territories Yukon Nunavut Note: Owing to accounting differences between provinces and territories, direct comparison of the above numbers is not strictly appropriate. Numbers may not add because of rounding. a b finances of the nation n 195

TABLE 3 Health-Care Expenditures in Ontario and the Territories as a Percentage of Total Expenditures and per Capita, 2013-14 to 2019-20

Health-care expenditures as a percentage Health-care expenditures of total expenditures per capita

Territorial (Nunavut, Northwest Northwest Territories, Fiscal year Ontario Nunavut Territories Yukon Ontario Yukon) range

percent dollars 2019-20 ...... 38.97 21.54 27.52 30.88 4,400 10,900-12,000 2018-19 ...... 38.13 18.81 26.97 32.21 4,300 10,400-11,200 2017-18 ...... 38.12 18.03 25.00 35.18 3,800 9,500-12,100 2016-17 ...... 38.67 19.48 24.70 37.97 3,700 9,100-12,300 2015-16 ...... 38.49 20.07 24.70 30.32 3,700 9,100-10,200 2014-15 ...... 38.39 20.29 24.30 29.60 3,700 8,600-9,200 2013-14 ...... 38.29 20.64 24.81 32.13 3,600 8,400-9,500

Sources: Numbers for 2013-14 through 2018-19 are from Vivien Morgan, “Survey of Provincial and Territorial Budgets, 2013-14,” Finances of the Nation feature (2014) 62:3 Canadian Tax Journal 771-812, at 774; “Survey of Provincial and Territorial Budgets, 2014-15,” Finances of the Nation feature (2015) 63:1 Canadian Tax Journal 157-215, at 162; “Survey of Provincial and Territorial Budgets, 2015-16,” Finances of the Nation feature (2016) 64:1 Canadian Tax Journal 147-206, at 151; “Survey of Provincial and Territorial Budgets, 2016-17,” Finances of the Nation feature (2017) 65:1 Canadian Tax Journal 87-145, at 96; “Survey of Provincial and Territorial Budgets, 2017-18,” Finances of the Nation feature (2018) 66:1 Canadian Tax Journal 37-109, at 51; and “Survey of Provincial and Territorial Budgets, 2018-19,” Finances of the Nation feature (2019) 67:1 Canadian Tax Journal 81-160, at 91. Numbers for 2019-20 are from this article. The population data were taken from Statistics Canada, as of the end of 2019. Because the budget numbers were estimated and the population data were taken at slightly different dates, the per capita numbers are rounded. budgets) as a percentage of total expenditures and per capita in Ontario and the territories. Table 4 sets out the health-care expenditure projections for all the provinces and territories for 2019 - 20 as a percentage of total expenditures and per capita. Table 5 shows the provincial and territorial surpluses and deficits since the (revised) budget projections for 2014 - 155 and also shows figures set out in the 2019 - 20 budgets for planned or targeted surpluses or deficits for up to the ensuing five fiscal years. Most jurisdictions that projected beyond the 2019 - 20 fiscal year planned for a surplus within the following two to four years. The previous Ontario government originally forecasted a large deficit for 2018 - 19, but the revised results under the new government came in lower than forecasted, but close to the revised deficit of $9.0 billion provided for in the 2018 economic outlook and fiscal review. In

5 See Vivien Morgan, “Survey of Provincial and Territorial Budgets 2015 - 16,” Finances of the Nation feature (2016) 64:1 Canadian Tax Journal 147 - 206, at 150, table 1. 196 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 4 Health-Care Expenditures as a Percentage of Total Expenditures and per Capita, Budget Projections, 2019-20

Health-care expenditures as a percentage Health-care Health-care of total expenditures Province /territory expenditures Population expenditures per capita

millions of dollars ’000s % dollars British Columbia ...... 22,983 5,071.3 39.44 4,500 Alberta ...... 22,105 4,371.3 39.10 5,100 Saskatchewan ...... 5,888 1,174.5 39.28 5,000 Manitoba ...... 6,651 1,369.5 38.05 4,900 Ontario ...... 63,831 14,566.5 38.97 4,400 Quebec ...... 45,433 8,485.0 40.19 5,400 New Brunswick ...... 2,828 776.8 28.79 3,600 Nova Scotia ...... 4,639 971.4 41.62 4,800 Prince Edward Island . . . . 750 157.0 34.11 4,800 Newfoundland and Labrador ...... 3,021 521.5 35.85 5,800 Northwest Territories . . . . 496 44.8 27.52 11,100 Yukon ...... 443 40.9 30.88 10,900 Nunavut ...... 467 38.8 21.54 12,000

Sources: Table 2; and population data from Statistics Canada, table 17-10-0005-01 (formerly CANSIM table 051-0001), “Population Estimates on July 1st by Age and Sex” (www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1710000501). the 2019 - 20 budget, the Ontario government planned for continuing deficits in the current and medium term. However, in the 2019 fall economic outlook and fiscal review, the government stated that it intends to balance the budget by the 2023 - 24 fiscal year.6 The new Alberta government continues to forecast a deficit in 2019 - 20 with a planned return to surplus in 2022 - 23. While Manitoba projected a balanced budget within eight years in its 2018 - 19 forecast, the long-term projections in the 2019 - 20 budget no longer show a return to a balanced budget in future years. On the basis of budget projections in the tables set out in the second part of this article, projected aggregate income tax revenue in the 2019 - 20 budgets of all provinces and territories was $105.8 billion from personal income tax and $35.8 billion from corporate income tax, for total revenue of $141.5 billion from income tax. Projected aggregate sales tax revenue was $67.1 billion, for a total of $102.8 billion from sources other than personal income tax (that is, corporate income tax and sales tax). Thus, as has been the case since 2014, in 2019 - 20 the provinces and territories expected to collect slightly more tax revenue from personal income tax than from corporate income tax and sales tax combined. In comparison, the 2019 - 20 federal

6 Ontario, Ministry of Finance, 2019 Fall Economic Outlook and Fiscal Review, November 6, 2019, at 3. finances of the nation n 197 plan 4,032 2023-24 84 71 73 (28) 584 plan 3,360 2022-23 13 72 63 66 585 (128) plan 2,947 (5,400) (2,603) 2021-22 7 49 33 52 287 (273) plan 2,684 (6,700) (5,883) 2020-21 2 34 23 34 274 (360) 2,504 budget (9,024) (8,704) 2019-20 2 [5] 29 [14] [28] 219 904 (521) [374] (365) (189) millions of dollars [(470)] [(380)] [5,606] (8,802) budget [(7,435)] [(6,711)] (14,544) 2018-19 [revised] 0.6 [1] 21 [26] 246 (840) [151] (685) [850] (192) nil [(775)] [(595)] [(152)] 2,488 budget [(9,066)] (10,344) 2017-18 [revised] Surpluses and Deficits, 2014-15 Onward Territorial (Table 5 is concluded on the next page.) (Table 17 (35) [(17)] (911) (434) (231) [150] [(890)] [(249)] 1,458 2,028 (4,306) [2,737] [2,292] budget [(1,000)] [(1,289)] [(3,077)] (10,421) 2016-17 [revised] (28) (98) 730 107 [(28)] [(71)] (422) [379] (477) [(427)] [(466)] 1,586 (8,512) (6,118) [1,431] budget [(1,012)] [(5,686)] [(6,492)] 2015-16 [revised] 71 (40) [41] [(35)] (357) [879] (391) (279) [(451)] [(255)] [(101)] 1,692 2,644 (2,350) [1,115] budget [(2,350)] (12,505) 2014-15 [revised] [(10,933)] . . . . and and Planned Provincial Projected, Revised, .

b . .

. .

d c a Island Quebec Ontario TABLE 5 TABLE Province /territory British Columbia Alberta Saskatchewan Manitoba New Brunswick Nova Scotia Prince Edward 198 n canadian tax journal / revue fiscale canadienne (2020) 68:1 plan 2023-24 /(deficit) of 23 plan 2022-23 4 (300) plan 2021-22 5 (796) plan 2020-21 (6) 60 (34) 1,924 budget 2019-20 (5) 23 [(7)] (54) [40] (683) [(105)] [(521)] budget 2018-19 [revised] 7 [6] 23 [75] 167 [(67)] (778) budget [(2,042)] 2017-18 [revised] 9 [(8)] (11) 119 [(11)] [155] (1,830) budget [(1,717)] 2016-17 [revised] 23 23 [14] 147 [(14)] [110] (1,093) budget [(2,093)] 2015-16 [revised] 36 72 200 [112] (538) budget [(1,052)] 2014-15 [revised] . . Concluded .

e . Alberta’s budget numbers for 2018-19 were restated on the 2019-20 basis, incorporating ministry reorganizations under Government Alberta’s Organization Act, RSA 2000, c. G-10, on April 30, 2019 and October 24, under the Appropriation SA 2019, c. 17. projections in 2015 do not include other government entities. The budget numbers for 2016 and onward as shown are the Manitoba’s reporting entity; no forecast is included in the 2017 budget, but a balanced budget was anticipated “before end of [the] second term” 2024. See Manitoba, Ministry of Finance, 2017 Budget, Budget Plan, April 11, 2017, at 13. accounting for the 2014-15 fiscal year was changed, and amounts were reported on a consolidated basis, showing general fund plus Quebec’s consolidated entities. accounting for the 2016-17 fiscal year was changed; reclassifications preceding appear in appendix III of Prince Edward Island’s estimates. The three-year Nunavut forecast in the 2019 budget does not include revolving fund revenues and expenditures showed a surplus ($26,961) in 2018-19; ($11,964) 2019-20; $18,196 2020-21; and $113,136 2021-22. The operating $34 million deficit the budget includes revolving funds and considers accounting adjustments relating to capital. Source: Based on provincial and territorial budget documents cited in the source notes for tables 12-16, 18-22, 24-26. Labrador Territories a b c d e TABLE 5 TABLE Province /territory Newfoundland and Northwest Yukon Nunavut finances of the nation n 199 budget projected $170.4 billion of revenue from personal income tax, $46.3 billion from corporate income tax, and $9.7 billion from non-resident income tax, for a total of $226.4 billion from income tax, plus $40.8 billion from sales tax7—for a total of $96.8 billion from sources other than personal income tax (corporate income tax, non-resident income tax, and sales tax). Thus, as was the case in 2013 - 14, the federal government projected that in fiscal 2019 - 20 it will raise almost twice as much revenue from personal income tax than from corporate income tax, non-resident income tax, and goods and services tax (GST) combined. While personal income tax was a declining number as a share of all budgetary revenues in prior years, the federal government is forecasting that personal income tax as a share of all budgetary revenues will begin to increase in 2019 - 20 through to 2023 - 24.8 See table 6 for a tabular and detailed presentation. Table 6A shows the projected tax revenues for each province and territory as detailed in the 2019 - 20 budgets, including total and per capita amounts. Table 7 shows the corporate income tax rates in the provinces and territories for 2019. From a personal income tax perspective, most jurisdictions have established a higher tax rate bracket for high income earners over the past decade: British Col- umbia (for 2014, 2015, and from 2018 onward), Ontario (from 2012), Quebec (from 2013), Nova Scotia (from 2010), and Alberta, New Brunswick, Newfoundland and Labrador, and Yukon (all from 2015). Newfoundland and Labrador continued to increase its tax rates on its top tax brackets for 2016 and 2017. Newfoundland and Labrador also imposed a temporary deficit reduction levy that increased with higher tax brackets until the end of calendar 2019. In Ontario, the previous government had proposed to increase tax rates and add a new tax bracket, while eliminating the province’s two surtaxes in its March 2018 budget, but the newly elected government rejected all these changes. Manitoba and Prince Edward Island did not establish a higher tax rate bracket for high income earners, given that in both provinces the highest marginal tax rate applies at relatively lower levels of income. Furthermore, Prince Edward Island continues to impose a surtax on high income earners. In 2017, Alberta increased its credit amounts and bracket thresholds, and those amounts were indexed in 2018 and 2019. However, owing to large projected deficits in the current and future years, Alberta has suspended indexation indefinitely starting with the 2020 tax year. In Quebec, the government’s November 21, 2017 economic plan reduced the lowest tax rate from 16 percent to 15 percent, retroactively for all of 2017.9

7 Canada, Department of Finance, 2019 Budget, Budget Plan, March 19, 2019, at 285, table A2.5. 8 Ibid. 9 Quebec, Department of Finance and the Economy, 2017 Budget, Economic Plan, November 2017 Update, Section C: Measures for Individuals, November 21, 2017, at C.5, table C.3. 200 n canadian tax journal / revue fiscale canadienne (2020) 68:1 + 7) 78.2 79.8 83.5 81.7 88.7 98.8 102.8 (6 Non-PIT 87-145; Canadian Tax Canadian Tax + 6) 101.5 113.0 118.4 122.2 130.3 134.0 141.5 (5 Income tax Tax— (7) 52.6 53.3 55.5 53.4 57.7 64.6 67.1 37-109; and “Survey of Sales tax Canadian Tax Journal Canadian Tax Provincial and territorial 81-160, at 96. Numbers for 2019-20 are (6) 25.6 26.5 28.0 28.3 31.0 34.2 35.8 CIT Canadian Tax Journal Canadian Tax and Non-Resident Tax, (5) PIT 75.9 86.5 90.4 93.9 99.3 99.9 105.8 Canadian Tax Journal Canadian Tax Sales Tax, 69.9 74.0 75.8 80.6 85.6 93.3 96.8 + 3 4) Non-PIT (2 millions of dollars + 2 3) 171.5 180.5 186.5 197.8 202.6 217.0 226.4 (1 Income tax (4) 29.9 31.3 32.7 34.6 35.1 37.7 40.8 Sales tax Federal 771-812; “Survey of Provincial and Territorial Budgets, 2014-15,” Finances of the Nation feature (2015) Budgets, 2014-15,” Finances of the Nation feature (2015) 771-812; “Survey of Provincial and Territorial (3) 5.4 5.7 6.2 6.5 6.9 8.3 9.7 Non- resident tax to 2019-20 Jurisdictions, 2013-14 Territorial (2) 34.6 37.0 36.9 39.5 43.6 47.3 46.3 CIT Canadian Tax Journal Canadian Tax 157-215; “Survey of Provincial and Territorial Budgets, 2015-16,” Finances of the Nation feature (2016) 64:1 157-215; “Survey of Provincial and Territorial (1) PIT 131.5 137.8 143.4 151.8 152.1 161.4 170.4 Income and Corporate Personal from Revenues Comparison of Projected and Provincial, Federal, 147-206; “Survey of Provincial and Territorial Budgets, 2016-17,” Finances of the Nation feature (2017) 65:1 147-206; “Survey of Provincial and Territorial ...... Canadian Tax Journal Canadian Tax 63:1 “Survey of Provincial and Territorial Budgets, 2017-18,” Finances of the Nation feature (2018) 66:1 “Survey of Provincial and Territorial Journal from this article and Canada, Department of Finance, 2019 Budget, Budget Plan, March 19, 2019, at 285, table A2.5. Provincial and Territorial Budgets, 2018-19,” Finances of the Nation feature (2019) 67:1 Provincial and Territorial Sources: Numbers for 2013-14 through 2018-19 are from Vivien Morgan, “Survey of Provincial and Territorial Budgets, 2013-14,” Finances of the Morgan, “Survey of Provincial and Territorial Sources: Numbers for 2013-14 through 2018-19 are from Vivien Nation feature (2014) 62:3 TABLE 6 TABLE 2013-14 Fiscal year 2014-15 2015-16 2016-17 2017-18 2018-19 2019-20 CIT = corporate income tax; PIT personal tax. finances of the nation n 201

TABLE 6A Projected Tax Revenues for Provinces and Territories, by Category and per Capita, 2019-20

Province /territory PIT CIT Sales tax Other Total Per capita

millions of dollars dollars British Columbia . . . . . 11,055 4,192 7,586 10,899 33,732 6,700 Alberta ...... 11,990 4,177 na 5,766 21,933 5,000 Saskatchewan ...... 2,556 729 2,305 1,999 7,589 6,500 Manitoba ...... 3,744 506 2,293 1,379 7,922 5,800 Ontario ...... 37,125 16,107 28,067 26,445 107,744 7,400 Quebec ...... 32,498 8,516 21,864 8,149 71,027 8,400 New Brunswick ...... 1,773 381 1,539 1,098 4,791 6,200 Nova Scotia ...... 2,811 605 1,896 659 5,971 6,100 Prince Edward Island . . . . 420 86 316 253 1,075 6,800 Newfoundland and Labrador ...... 1,587 411 1,187 738 3,923 7,500 Northwest Territories . . . 104 23 na 133 260 5,800 Yukon ...... 75 15 na 36 126 3,100 Nunavut ...... 35 20 na 81 136 3,500 Total and per capita average ...... 105,773 35,768 67,053 57,635 266,229 7,100

CIT = corporate income tax; PIT = personal income tax. Source: Based on provincial and territorial budget documents cited in the source notes for tables 12-16, 18-22, and 24-26. Population data are from Statistics Canada, table 17-10- 0005-01 (formerly CANSIM table 051-0001), “Population Estimates on July 1st by Age and Sex” (www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1710000501).

In 2019, there were no changes to provincial personal tax rates and brackets other than an adjustment for indexation. Provinces and territories that wanted to reduce personal income taxes for their residents in 2019 generally did so by providing new targeted tax credits or by increasing the basic personal amount. Surtaxes are sometimes applied in addition to regular provincial or territorial personal income tax. All federal, provincial, and territorial marginal personal income tax rates on ordinary income and interest, as well as surtaxes, are shown in graphic form in figure 4 as a function of taxable income. Table 8 sets out the provincial and territorial personal income tax brackets and rates for 2019. Table 9 shows the sales tax rates in each jurisdiction for 2019. British Columbia, Saskatchewan, and Manitoba imposed a separate provincial sales tax (PST). Ontario and the Atlantic provinces—Newfoundland and Labrador, Nova Scotia, New Brunswick, and Prince Edward Island—are harmonized sales tax (HST) participating provinces that harmonize sales taxes with the federal GST. Quebec has its own Quebec sales tax (QST), which applies in a manner similar to the GST. Alberta and the three territories do not impose sales taxes. In 2016, each of New Brunswick, Prince Edward Island, and Newfoundland and Labrador increased the provincial portion of its HST so that the combined HST rate in each province was 15 percent, the same as the rate in Nova Scotia. In 2016, New Brunswick and Newfoundland 202 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 7 Provincial and Territorial Corporate Income Tax Rates, 2019

Small Small General M & P business business Province /territory rate rate rate limita

percent dollars British Columbia ...... 12.0 12.0 2.0 500,000 Alberta ...... 12.0 / 11.0b 12.0 / 11.0b 2.0 500,000 Saskatchewanc ...... 12.0 10.0 2.0 600,000 Manitoba ...... 12.0 12.0 0.0 500,000d Ontario ...... 11.5 10.0e 3.5 500,000 Quebec ...... 11.6 11.6 6.0 or 4.0 500,000 New Brunswick ...... 14.0 14.0 2.5 500,000 Nova Scotia ...... 16.0 16.0 3.0 500,000 Prince Edward Island ...... 16.0 16.0 3.5f 500,000 Newfoundland and Labrador . . . 15.0 15.0 3.0 500,000 Northwest Territories ...... 11.5 11.5 4.0 500,000 Yukon ...... 12.0 2.5 2.0 or 1.5g 500,000 Nunavut ...... 12.0 12.0 4.0 / 3.0h 500,000

M & P = manufacturing and processing. a The threshold is reduced straightline if the Canadian-controlled private corporation (CCPC) and associated corporations had taxable capital between $10 million and $15 million in the preceding year. Ontario adopted the clawback effective May 1, 2014. The small business limit may also be reduced if the corporation earns aggregate investment income paralleling federal measures; however, not all provinces have chosen to adopt this reduction. b Alberta’s general rate, which also applies to M & P corporations, decreased from 12 percent to 11 percent effective July 1, 2019. c Saskatchewan restored its general rate to 12 percent and its M & P rate to 10 percent as of July 1, 2017, and the small business threshold was raised to $600,000 after 2017; the combined federal and Saskatchewan rate applicable to income between $500,000 and $600,000 is 17 percent. d The small business deduction threshold was increased to $500,000 on January 1, 2019, as announced in Manitoba’s 2018 budget. e In Ontario, the M & P rate applies to income from manufacturing, processing, farming, mining, logging, and fishing operations carried on in Canada and allocated to the province. f Prince Edward Island’s small business rate was reduced to 3.5 percent effective January 1, 2019, as announced by the government in late 2018. g In Yukon, the 1.5 percent rate applies to M & P income of a CCPC up to the small business limit. h Nunavut decreased the small business tax rate to 3 percent effective July 1, 2019. Source: Based on provincial and territorial budget documents cited in the source notes for tables 12-16, 18-22, and 24-26. finances of the nation n 203

FIGURE 4 Personal Income Tax Marginal Rates Applicable to Taxable Income, 2019 Dollars 0 50,000 100,000 150,000 200,000 250,000 300,000 0 50,000 100,000 150,000 200,000 250,000 300,000 0 50,000 100,000 150,000 200,000 250,000 300,000 % % 48.00% 50 45.80% 50

40 40 33.00% 30 30

20 20

10 10

0 0 ederal British Columbia Alberta

53.53% 50.40% 50 47.50% 50

40 40

30 30

20 20

10 10

0 0 Sasatchewan Manitoba Ontarioa

53.31% 53.30% 54.00% 50 50

40 40

30 30

20 20

10 10

0 0 uebecb New Brunswic Nova Scotiac

(igure 4 is concluded on the next page.) 204 n canadian tax journal / revue fiscale canadienne (2020) 68:1

FIGURE 4 Concluded Dollars 0 50,000 100,000 150,000 200,000 250,000 300,000 0 50,000 100,000 150,000 200,000 250,000 300,000 0 50,000 100,000 150,000 200,000 250,000 500,000

% 51.37% 51.30% % 48.00% 50 50

40 40

30 30

20 20

10 10

0 0 Prince Edward Islanda Newfoundland and uon Labrador

% 47.05% 50 44.50%

40 ederal income tax 30 Provincial/territorial 20 surtax

10 Provincial/territorial income tax (before surtax) 0 Nunavut Northwest Territories a Surtax calculations assume that the only credit claimed by the taxpayer is the basic personal amount. b Federal income tax has been reduced by 16.5 to reﬂect the provincial abatement. c Nova Scotia’s basic personal amount is increased by up to 3,000 if taxable income is under $75,000. The provincial rates do not reﬂect the tax savings from an increased basic personal amount. Source: Data compiled by the author. finances of the nation n 205

TABLE 8 Provincial and Territorial Personal Income Tax Brackets and Rates, 2019

Surtax (percentage of regular Province /territory Tax bracket Rate tax) and top combined ratea

dollars percent British Columbia . . . 0 to 40,707 5.06 over 40,707 to 81,416 7.70 over 81,416 to 93,476 10.50 over 93,476 to 113,506 12.29 over 113,506 to 153,900 14.70 over 153,900 16.80 Top combined rate of 49.80% Albertab ...... 0 to 131,220 10.00 131,220.01 to 157,464 12.00 157,464.01 to 209,952 13.00 209,952.01 to 314,928 14.00 over 314,928 15.00 Top combined rate of 48.00% Saskatchewanb . . . . 0 to 45,225 10.50 over 45,225 to 129,214 12.50 over 129,214 14.50 Top combined rate of 47.50% Manitoba ...... 0 to 32,670 10.80 over 32,670 to 70,610 12.75 over 70,610 17.40 Top combined rate of 50.40% Ontario ...... 0 to 43,906 5.05 Surtax equal to 20% of basic personal tax greater than $4,740 over 43,906 to 87,813 9.15 Additional surtax equal to 36% of basic personal tax greater than $6,067 over 87,813 to 150,000 11.16 over 150,000 to 220,000 12.16 over 220,000 13.16 Top combined rate of 53.53% Quebec ...... 0 to 43,790 15.00 over 43,790 to 87,575 20.00 over 87,575 to 106,555 24.00 over 106,555 25.75 Top combined rate of 53.31% New Brunswick . . . . 0 to 42,592 9.68 42,593 to 85,184 14.82 85,185 to 138,491 16.52 138,492 to 157,778 17.84 Over 157,778 20.30 Top combined rate of 53.30% Nova Scotiab . . . . . 0 to 29,590 8.79 29,591 to 59,180 14.95 59,181 to 93,000 16.67 93,001 to 150,000 17.50 over 150,000 21.00 Top combined rate of 54.00%

(Table 8 is concluded on the next page.) 206 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 8 Concluded

Surtax (percentage of regular Province /territory Tax bracket Rate tax) and top combined ratea

dollars percent Prince Edward Islandb ...... 0 to 31,984 9.80 Surtax equal to 10% of basic provincial tax in excess of $12,500 31,985 to 63,969 13.80 over 63,969 16.70 Top combined rate of 51.37% Newfoundland and 0 to 37,591 8.70 Labradorc . . . . . over 37,591 to 75,181 14.50 over 75,181 to 134,224 15.80 over 134,224 to 187,913 17.30 over 187,913 18.30 Top combined rate of 51.30% Northwest Territories . 0 to 43,137 5.90 over 43,137 to 86,277 8.60 over 86,277 to 140,267 12.20 over 140,267 14.05 Top combined rate of 47.05% Yukon ...... 0 to 47,630 6.40 47,631 to 95,259 9.00 95,260 to 147,667 10.90 147,668 to 500,000 12.80 over 500,000 15.00 Top combined rate of 48.00% Nunavut ...... 0 to 45,414 4.00 over 45,414 to 90,829 7.00 over 90,829 to 147,667 9.00 over 147,667 11.50 Top combined rate of 44.50% a The top federal rate, used to arrive at the top combined rate, is 33 percent. b Not indexed for inflation. Alberta’s personal income tax rates were indexed for inflation in 2019, but indexation will be suspended for 2020 and future taxation years. Saskatchewan’s personal income tax rates were frozen at 2018 levels for 2019 and 2020. c A deficit reduction levy will be phased out by end of 2019; effective July 1, 2016. Source: Based on provincial and territorial budget documents cited in the source notes for tables 12-16, 18-22, and 24-26. finances of the nation n 207

TABLE 9 Provincial and Territorial Sales Tax Rates, Percent, 2019

GST or Provincial federal portion portion of Province /territory of HST HST PST and QST Combineda

British Columbia ...... 5 7 12 Alberta ...... 5 5 Saskatchewan ...... 5 6 11 Manitoba ...... 5 8/7b 13/12 Ontario ...... 5 8 13 Quebec ...... 5 9.975 14.975 New Brunswick ...... 5 10 15 Nova Scotia ...... 5 10 15 Prince Edward Island . . . . . 5 10 15 Newfoundland and Labradorc . . 5 10 15 Northwest Territories . . . . . 5 5 Yukon ...... 5 5 Nunavut ...... 5 5

GST = goods and services tax; HST = harmonized sales tax; PST = provincial sales tax; QST = Quebec sales tax. a The rates shown do not yield comparable tax burdens for all jurisdictions. For example, GST and HST allow input tax credits for underlying taxes, eliminate sales tax on exports, and also cover a wider range of goods and services than PST. b Manitoba reduced its PST to 7 percent effective July 1, 2019, as announced in the 2019 budget. c Newfoundland and Labrador eliminated its sales tax on automobile insurance policies effective April 16, 2019. Source: Based on provincial and territorial budget documents cited in the source notes for tables 12-16, 18-22, and 24-26.

and Labrador increased their HST rate by 2 percentage points, and Prince Edward Island increased its HST rate by 1 percentage point. In 2017, there was only one sales tax rate increase—in Saskatchewan—out of 13 provincial and territorial jurisdictions; in 2018, there were none. In 2019, the Manitoba PST rate was reduced to 7 percent effective July 1, 2019. Newfoundland and Labrador also eliminated its retail sales tax on automobile insurance premiums effective April 16, 2019.

PROVINCIAL AND TERRITORIAL BUDGETS BY JURISDICTION Table 10 summarizes the various dates for the 2019 - 20 budgets in each province and territory, the name and title of the person who announced the budget, and the announced estimated surplus or deficit. Table 11 sets out the research and development (R & D) tax credits in each province and territory available in 2019. The 2019 Alberta budget eliminated the province’s R & D tax credit for all expenditures incurred after December 31, 2019; accordingly, the Alberta scientific research and experimental development (SR & ED) 208 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 10 Provincial and Territorial Surplus /(Deficit) Projections, Fiscal Year 2019-20

Projected surplus / Province /territory Budget date Finance minister (deficit)

millions of dollars British Columbia . . . February 19, 2019 Carole Jamesa 274 Alberta ...... October 24, 2019 Travis Towesb (8,704) Saskatchewan . . . . . March 20, 2019 Donna Harpauer 34 Manitoba ...... March 7, 2019 Scott Fielding (360) Ontario ...... April 11, 2019 Victor Fedeli (10,279) November 6, 2019c Rod Phillips (9,024) Quebec ...... March 21, 2019 Eric Girard 2,504 New Brunswick . . . . March 19, 2019 Ernie Steeves 23 Nova Scotia . . . . . March 26, 2019 Karen Caseyd 34 Prince Edward Island . . June 25, 2019 Darlene Comptone 2 Newfoundland and Labrador ...... April 16, 2019 Tom Osbornef 1,924 Northwest Territories . February 6, 2019 Robert C. McLeod 60 Yukon ...... March 7, 2019 Sandy Silverg (6) Nunavut ...... February 20, 2019 George Hickes (34) a Minister of finance and deputy premier. b President of the Treasury Board and minister of finance. c Ontario, Ministry of Finance, 2019 Fall Economic Outlook and Fiscal Review, November 6, 2019. Both the budget and the economic statement figures are listed in the Ontario summary, table 16. d Minister of finance and Treasury Board. e Minister of finance and chair of the Treasury Board. f Minister of finance and president of the Treasury Board. g Premier and minister of finance. Source: Based on provincial and territorial budget documents cited in the source notes for tables 12-16, 18-22, and 24-26. tax credit will no longer be available from 2020 onward. The table details rates and indicates whether the credit is refundable and otherwise eligible for a carryforward period. In some cases, the credit is also available to an individual. An article in this feature in 2017 focused on the policy behind these subsidies from an economics viewpoint.10 The second part of this article shows, for each province and territory, selected fiscal figures, highlights of tax changes, and a narrative summary of tax changes with accompanying tables. The figures for any particular jurisdiction are difficult to compare across jurisdictions. Where relevant, and where the information is accessible, notes that refer to differences in accounting and/or presentation are appended to the tables; it is beyond the scope of this article to analyze differing accounting practices of each jurisdiction and the differences in those practices between jurisdictions.

10 Daria Crisan and Kenneth J. McKenzie, “Tax Subsidies for R & D in Canada” (2017) 65:4 Canadian Tax Journal 951 - 81. finances of the nation n 209

TABLE 11 Provincial and Territorial Research and Development (R & D) Tax Credits, 2019a

Unused credits

R & D tax Carryback Carryforward credit rate Is credit (taxation (taxation Who can claim Province /territory (%) refundable? years) years) the credit?

Albertab ...... 10 ✓ na na Corporationc British Columbia . . . Qualifying CCPCd . . . . . 10 ✓ na na Corporation Other corporation . 10 ✗ 3 10 Corporation Manitoba ...... 15 ✓e/✗ 3 20 Corporation New Brunswick . . . . 15 ✓ na na Corporation Newfoundland and Labrador ...... 15 ✓ na na Corporation and individual Northwest Territories . na na na na Nova Scotia . . . . . 15 ✓ na na Corporation Nunavut ...... na na na na Ontario ...... Innovation tax creditf ...... 8 ✓ na na Corporation Business research institute tax creditg . . . . . 20 ✓ na na Corporation R & D tax credit . . 3.5 ✗ 3 20 Corporation Prince Edward Island . . na na na na Quebech ...... R & D wage tax credit i ...... 14 to 30 ✓ na na Corporation and individual University R & D tax credit j . . . . 14 to 30 ✓ na na Corporation and individual Private partnership pre-competitive tax credit k . . . . 14 to 30 ✓ na na Corporation and individual Tax credit on fees paid to a research consortium . . . . 14 to 30 ✓ na na Corporation and individual Saskatchewanl . . . . . Qualifying CCPCm . . . . . 10 ✓ na na Corporation Other corporation . 10 ✗ 3 10 Corporation Yukon ...... 15n ✓ na na Corporation and individual

(Table 11 is continued on the next page.) 210 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 11 Continued

CCPC = Canadian-controlled private corporation. a Provincial and territorial tax credits are government assistance for federal tax purposes and thus reduce expenditures eligible for the federal R & D deduction and federal tax credit. b Alberta’s R & D credit is 10 percent of the lesser of (1) eligible Alberta R & D expenditures and (2) the maximum expenditure level of $4 million (to a maximum annual credit of $400,000). In the 2019 budget, the Alberta government withdrew the R & D tax credit such that eligible expenses incurred after December 31, 2019 will no longer qualify for the credit. c When R & D is carried on by a partnership, the R & D credit can generally be claimed by corporate partners except in Newfoundland and Labrador, Quebec, and Yukon, where an individual partner can also claim the credit. However, the credit cannot ever be claimed from a partnership that carries on its R & D in other provinces, such as Alberta and Ontario (except for certain programs). d British Columbia’s refundable R & D tax credit is 10 percent of the lesser of (1) eligible BC R & D expenditures and (2) the federal R & D expenditure limit (to a maximum annual credit of $300,000). e Manitoba’s credit is (1) fully refundable for eligible R & D expenditures incurred in Manitoba by a corporation that has a Manitoba permanent establishment and a contract with a qualifying research institute, and (2) 50 percent refundable for in-house R & D expenditures. f The Ontario innovation tax credit is available on up to $3 million of expenditures for a corporation that has taxable income under $500,000 and taxable capital under $25 million (to a maximum annual credit of $240,000). A corporation is eligible for a partial credit if its taxable income is over $500,000 but less than $800,000 or its taxable capital is between $25 million and $50 million. All current expenditures are eligible. Taxable income and taxable capital thresholds are set in the previous year on a worldwide associated basis. g The Ontario business research institute tax credit applies to 20 percent of qualifying payments (up to $20 million annually on an associated basis) to an Ontario eligible research institute (to a maximum annual credit of $4 million). h For all Quebec R & D tax credits, the following rates and conditions apply: 1. Quebec Canadian-controlled corporations that have fewer than $50 million in assets can claim the 30 percent rate on up to $3 million of R & D wages and/or eligible R & D expenditures for each credit; if assets held are between $50 million and $75 million, the rate is gradually reduced to 14 percent, which is the rate for all other taxpayers. The rates are higher in certain cases. Asset thresholds are set in the previous year on a worldwide associated basis (consolidated). 2. The tax credit rate is 14 percent for Quebec corporations controlled by non-residents. Asset thresholds do not apply. 3. An exclusion threshold is allocated among the Quebec R & D tax credits proportionally to the amount of eligible expenditures of each R & D tax credit. For each R & D tax credit, the eligible R & D expenditures are reduced by the allocated exclusion, which varies depending on the company’s assets: the exclusion is a. $50,000 for a corporation whose assets are $50 million or less, b. an amount that increases linearly between $50,000 and $225,000 for a corporation whose assets are between $50 million and $75 million, and c. $225,000 for a corporation whose assets are $75 million or more. Asset thresholds are set in the previous year and are not on an associated basis. i A payment may be eligible for the Quebec R & D wage tax credit if the payment was made to (1) an arm’s-length subcontractor (up to 50 percent of the payment) or (2) a non-arm’s- length subcontractor (100 percent for wages paid and 50 percent of a payment to an arm’s-length subcontractor if the payment was made under the non-arm’s-length contract). (Table 11 is concluded on the next page.) finances of the nation n 211

TABLE 11 Concluded j Quebec’s university R & D tax credit may be available on 80 percent of a payment to an eligible entity such as a university, a public research centre, or a research consortium. k For the Quebec private partnership pre-competitive tax credit, a qualified expenditure may include (1) wages paid relating to R & D, (2) 80 percent of a payment to an arm’s-length subcontractor (generally excluding a university, a public research centre, and a research consortium contract), (3) payment for some materials, or (4) payment for an overhead (or proxy) amount. l Saskatchewan’s total refundable and non-refundable tax credits are capped at $1 million per taxation year. m Saskatchewan’s refundable R & D tax credit is 10 percent of the lesser of (1) eligible Saskatchewan R & D expenditures and (2) $1 million in qualifying expenditures (maximum annual refundable credit is $100,000). n Yukon’s rate is 20 percent for R & D expenditures made to Yukon College. Source: Based on table 11 in Vivien Morgan, “Survey of Provincial and Territorial Budgets, 2018 - 19,” Finances of the Nation feature (2019) 67:1 Canadian Tax Journal 81 - 160, at 105 - 7, updated by the author to include changes for 2019.

Notes to each table also refer to the jurisdiction’s significant resource revenue, if any. The “tax highlights” box at the beginning of each provincial/territorial section contains some of the more important tax changes and, where possible, lists them in order of precedence. The narrative summaries of tax changes are categorized under the following eight headings:

1. Corporate income tax: rates, credits, deductions, inclusions, reporting, business income matters, and other items. 2. Personal income tax: rates, credits, deductions, inclusions, and other items. This category may include the taxation of unincorporated businesses. 3. Sales tax: HST, GST, PST, QST. 4. Excise taxes: alcohol, tobacco, and cannabis taxes. 5. Resource-related matters: resource deductions, credits, royalties, and other items. 6. Real estate taxes: land transfer taxes and property taxes. 7. Pensions: includes proposed studies. 8. Other: a catchall category that includes corporate capital tax, general anti- avoidance rule (GAAR) and other anti-avoidance initiatives, partnership and trust matters not covered above, and other items.

These categories have been selected for organizational purposes and for ease of reference only. Some categories may overlap (for example, categories 1, 2, and 5). 212 n canadian tax journal / revue fiscale canadienne (2020) 68:1

British Columbia (Table 12)

Tax Highlights n No changes to corporate or personal income tax rates n Extension of various corporate and personal tax credits

Tax Changes 1. Corporate Income Tax The 2019 budget did not change corporate income tax rates. The training tax credit for employers was extended for one year, to the end of 2019. The farmers’ food donation corporate tax credit was extended for one year, to the end of 2020. The mining exploration tax credit for corporate income tax was made permanent. The shipbuilding and ship repair industry tax credit was extended for three years, to the end of 2022. The small business venture capital tax credit program has been enhanced. Effect- ive February 20, 2019, the maximum amount that eligible business corporations can raise through the program is increased from $5 million to $10 million. Advanced commercialization has also been added as an eligible business activity, but only for businesses outside the Metro Vancouver Regional District and the Capital Regional District. Eligible small businesses and eligible business corporations can engage in activities related to scaling up their business after two years in the tax credit program. Furthermore, companies that exit the program are eligible for a reduction in the amount that they are required to reimburse the government if they exit the tax credit program after two years, instead of after three years.

2. Personal Income Tax The 2019 budget did not change the personal income tax rates or brackets. The budget provides a reminder that medical services plan premiums will be fully eliminated effective January 1, 2020, as previously announced on December 27, 2017. On October 1, 2020, a new BC child opportunity benefit will come into effect, combining the existing BC early childhood tax benefit with expanded child-support measures. The new BC child opportunity benefit will provide a refundable tax credit of up to $1,600 for a family’s first child, $1,000 for a second child, and $800 for each subsequent child under the age of 18. The benefit is income-tested and will be reduced by 4 percent of family net income over $25,000. The new benefit begins to be phased out at a rate of 4 percent of family net income over $80,000. The $25,000 and $80,000 thresholds will be indexed to inflation in future years. The climate action tax credit has been enhanced effective July 1, 2019 and will increase from $135.00 to $154.50 per adult and from $40.00 to $45.50 per child. Fur- ther increases in the maximum annual climate action tax credit were also announced to be effective July 1, 2020 and July 1, 2021. finances of the nation n 213

TABLE 12 Projected Revenues and Expenditures, British Columbia, Fiscal Year 2019-20

millions of dollars Total revenues ...... 59,047 Total expenditures ...... (58,273) Reserve ...... (500) Surplus /(deficit) ...... 274 Revenue sources Personal income tax ...... 11,055 Corporate income tax ...... 4,192 Sales tax ...... 7,586 Other taxes ...... 10,899 Total tax revenue ...... 33,732 Federal transfers ...... 9,423 Other revenues ...... 15,892 Total revenues ...... 59,047 Expenditures Education ...... 14,609 Health ...... 22,983 Debt servicing ...... 2,797 Other expenditures ...... 17,884 Total expenditures ...... 58,273

Notes: Expenditure figures were estimated by function. Revenue included commercial Crown corporation net income. Source: British Columbia, Ministry of Finance, 2019 Budget, February 19, 2019.

The training tax credit for apprentices was extended for one year, to the end of 2019. The farmers’ food donation tax credit was extended for one year, to the end of 2020. The mining flowthrough share tax credit was made permanent, effective Janu- ary 1, 2019. The mining exploration tax credit for personal income tax was made permanent. The pension tax credit was expanded to apply in respect of certain retirement income security benefits paid to veterans effective for 2015 and subsequent tax years. The calculation of tax on split income was adjusted to allow the application of the disability tax credit effective for 2018 and subsequent tax years. The calculation of the income threshold for the medical expense tax credit was adjusted to allow the inclusion of split income effective for 2018 and subsequent tax years. The small business venture capital tax credit was enhanced, allowing individuals to claim a maximum annual credit of $120,000 (increased from $60,000) for any investments made after February 19, 2019. Furthermore, effective February 20, 214 n canadian tax journal / revue fiscale canadienne (2020) 68:1

2019, share transfers to a tax-free savings account (TFSA) are permitted, and equity purchases made within a TFSA are eligible for the tax credit. Effective March 2, 2019, investments in convertible equity of an eligible business corporation can also qualify for the tax credit.

3. Sales Tax Effective on royal assent, a principal and an agent can jointly elect to designate a single party to be responsible for tax collection, reporting, and remittance obligations for PST when a principal uses an agent to make a sale or lease, or when a billing agent is used to collect payments. For any sales made by auction, an auctioneer acting as an agent is automatically designated as the party responsible for collecting, reporting, and remitting PST unless the parties jointly elect to assign the obligations to the principal.

4. Excise Taxes No changes were announced.

5. Resource-Related Matters Effective July 1, 2019, the Motor Fuel Tax Act was amended to enable the Trans- Link service region to increase its motor fuel tax rates on clear gasoline and clear diesel from the current rate of 17 cents per litre to a maximum of 18.5 cents per litre.

6. Real Estate Taxes As announced in the 2018 budget, effective for 2019 and subsequent years, the school tax rate increased for high-value properties in the residential class including detached homes, stratified condominium or townhouse units, and most vacant land. The tax increase, which applies to residential assessed value exceeding $3 million, is 0.2 percent for property valued at over $3 million and up to $4 million, and 0.4 percent of the value over $4 million. The tax will be administered through the existing school tax system, with municipalities and the provincial surveyor of taxes being responsible for collection. Also announced in the 2018 budget and effective for 2019 and subsequent tax years, municipal revitalization property tax exemptions for eligible new purpose- built non-stratified rental housing (or substantially renovated with a minimum net gain of five units) will apply to provincial property taxes. The provincial tax exemption applies only for revitalization tax exemption certificates issued after February 20, 2018. The speculation and vacancy tax was introduced in 2018 and applied to specified owners of residential property in the province at a rate of $5 per $1,000 of the assessed value of the property. The tax was meant to target foreign and domestic homeowners who did not pay income tax in British Columbia, including owners of vacant property. For 2019 and future tax years, the tax rate has increased and will finances of the nation n 215 vary depending on the taxpayer’s place of residence and the jurisdiction where he or she pays income taxes. The rate in 2019 for residential property within specified geographic areas (including the Capital Regional District, Metro Vancouver Regional District, Abbotsford, Mission, Chilliwack, Kelowna, West Kelowna, Nanaimo, and Lantzville) is $20 per $1,000 of assessed value for foreign owners and satellite families or $5 per $1,000 of assessed value for British Columbians and other Canadian citizens or permanent residents who are not members of a satellite family. A satellite family is defined as an individual or spousal unit where the majority of the family’s worldwide income for the year is not reported on a Canadian tax return. Many exemptions from the speculation and vacancy tax are available, allowing 99 percent of British Columbians to be exempt from this tax.11 A non-refundable tax credit—the amount of which depends on the taxpayer’s residence—may be available to taxpayers who are subject to the tax to reduce their provincial income tax payable. The average residential class school property tax increased in 2019 by the province’s inflation rate in the previous year in accordance with longstanding policy in place since 2003. Rates were to be set when revised assessment roll data became available in the spring. Non-residential school property tax rates were increased for 2019 by inflation plus new construction, except for the rate for the industrial property classes, in accordance with longstanding policy in place since 2005. Rates were to be set when revised assessment roll data became available in the spring. Both the major and light industry classes of school property tax rates were set at the same rate as the business class tax rate, consistent with the policy announced in the 2008 budget. The single rural area residential property tax rate increased for 2019 by the previous year’s inflation rate, in accordance with longstanding policy. Similarly, rural area non-residential property tax rates increased by inflation plus the tax on new construction. Rates were to be set when revised assessment data became available in the spring.

7. Pensions No changes were announced.

8. Other Various technical amendments were made to provide for clarity and certainty. These include changes to various provincial statutes to provide for the sharing of information; for example, changes to the Income Tax Act allow taxpayer information to be shared with an official for the purposes of administering the Workers Compensation Act.

11 British Columbia, “Exemptions for Speculation and Vacancy Tax” (www2.gov.bc.ca/gov/ content/taxes/property-taxes/speculation-and-vacancy-tax/exemptions-speculation-and -vacancy-tax). 216 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Alberta (Table 13)

Tax Highlights n Substantial reduction of the general corporate rate phased in over four years n Indexation of personal income tax brackets and personal tax amounts suspended indefinitely n Elimination of various tax credits, including the SR & ED tax credit

Tax Changes 1. Corporate Income Tax Alberta’s new government tabled the Alberta Corporate Tax Amendment Act (“the Job Creation Tax Cut”) on May 28, 2019. This bill reduced Alberta’s general corporate tax rate from 12 percent to 11 percent effective July 1, 2019. The rate will be further reduced in the next three years: from 11 percent to 10 percent on January 1, 2020; from 10 percent to 9 percent on January 1, 2021; and from 9 percent to 8 percent on January 1, 2022. Manufacturing and processing corporations in Alberta pay tax at the general corporate tax rate and will benefit from the announced reductions. The 2019 budget confirms that the province has chosen to parallel changes to the capital cost allowance (CCA) regime introduced by the federal government in its 2018 fall economic statement12 that provide an increased CCA deduction for eligible depreciable property acquired after November 20, 2018 and available for use before 2028. Because of the reduction in Alberta’s general corporate tax rate, the 2019 budget eliminates various corporate tax credits. The SR & ED tax credit will be eliminated starting in 2020 in respect of previously eligible expenses incurred after Decem- ber 31, 2019. The Alberta investor tax credit (AITC), the community economic development corporation tax credit (CEDCTC), and the capital investment tax credit, which were introduced by the previous government on a temporary basis until 2021 - 22, are being eliminated, with no new approvals to be granted after October 24, 2019. The interactive digital media tax credit has also been eliminated, and no new approvals will be granted after October 24, 2019. Any businesses that were approved for the AITC or the CEDCTC prior to October 24, 2019 had until December 31, 2019 to raise capital for these credits.

2. Personal Income Tax The 2019 budget introduced the Alberta child and family benefit (ACFB) beginning in July 2020 to replace the Alberta family employment tax credit and the Alberta child benefit. The amount that families can receive will depend on the number of children under the age of 18 and the family’s employment income and net income. The new ACFB includes a base component and a working component that is phased in when

12 Canada, Department of Finance, Fall Economic Statement, November 21, 2018. finances of the nation n 217

TABLE 13 Projected Revenues and Expenditures, Alberta, Fiscal Year 2019-20

millions of dollars Total revenues ...... 50,016 Total expenditures ...... (56,540) Reserve for crude-by-rail and contingency /disaster assistance ...... (2,180) Surplus /(deficit) ...... (8,704) Revenue sources Personal income tax ...... 11,990 Corporate income tax ...... 4,177 Sales tax ...... na Other taxes ...... 5,766 Total tax revenue ...... 21,933 Federal transfers ...... 9,200 Other revenues ...... 18,883 Total revenues ...... 50,016 Expenditures Education ...... 8,580 Health ...... 22,105 Debt servicing ...... 2,265 Other expenditures ...... 23,590 Total expenditures ...... 56,540

Notes: The budget was presented on a fully consolidated basis, which includes school boards, universities and colleges, health entities, and the Alberta Innovates corporations. Source: Alberta, Ministry of Treasury Board and Finance, 2019 Budget, Budget Plan, October 24, 2019. family employment income exceeds $2,760. Both the base component and the working component are income-tested and start to phase out at $24,467 and $41,000 of family net income, respectively. The ACFB will be paid quarterly, and the amounts are non-taxable. The changes to the AITC and CEDCTC, discussed in the “Corporate Income Tax” section above, will also affect individual taxpayers in Alberta. As promised in the 2016 budget, income tax brackets began to be indexed as of 2017. However, the 2019 budget has suspended the indexation of non-refundable tax credits and tax bracket thresholds in 2020 and future tax years. Indexation will resume “once economic and fiscal conditions can support it.”13 The 2019 budget eliminated the Alberta education and tuition tax credit for 2020 and subsequent tax years, paralleling the elimination of the federal education and tuition tax credit. Any Alberta education and tuition tax credits earned prior to 2020 can continue to be carried forward and applied in a future tax year.

13 Alberta, 2019 Budget Plan, supra note 1, at 149. 218 n canadian tax journal / revue fiscale canadienne (2020) 68:1

To preserve tax integration, the 2019 budget proposed adjustment of the dividend tax credit for eligible dividends effective on January 1, 2021 and January 1, 2022, corresponding to the legislated reductions in the general corporate income tax rate. The dividend tax credit rates were not announced in the 2019 budget, but a reduction to the dividend tax credit is expected, which will increase the personal taxes payable on eligible dividends received after December 31, 2020.

3. Sales Tax No changes were announced with respect to a PST. Alberta does not impose a general tax on retail sales. Alberta does, however, impose a tourism levy of 4 percent on temporary accommodation rentals. The 2019 budget indicates that the government intends to bring forward legislation in the spring of 2020 to extend the tourism levy to short-term rentals (STRs) offered through online marketplaces such as Airbnb, HomeAway, and Vacation Rental by Owner. To facilitate collection of the tourism levy from STR operators, online marketplaces will be authorized to collect and remit the tourism levy to the government on their behalf.

4. Excise Taxes The 2019 budget increased the tobacco tax effective at 12:01 a.m. on October 25, 2019 as follows: tobacco tax on a carton of 200 cigarettes increased from $50 to $55 per carton; tobacco tax on loose tobacco increased from 37.50 cents to 41.25 cents per gram; and tobacco tax on cigars increased from 129 percent to 142 percent of the taxable price of the cigar, with the minimum and maximum tax per cigar increased to 27.5 cents and $8.61, respectively. The 2019 budget indicates that the government is exploring approaches to implement a tax on vaping products, with more details promised in the 2020 budget.

5. Resource-Related Matters No changes were announced. See the discussion regarding the carbon tax in the “Other” section below.

6. Real Estate Taxes The total education property tax requisition was frozen for 2019 - 20. The residential or farmland rate remains at $2.56 per $1,000 of equalized assessment, while the non-residential rate will remain at $3.76 per $1,000 of equalized assessment.

7. Pensions No changes were announced.

8. Other The government has indicated that it will begin issuing payments that support Alberta’s film industry through the income tax system beginning in the spring of finances of the nation n 219

2020. The Ministry of Economic Development, Trade and Tourism will be responsible for approvals and will issue certificates to corporations to be included when filing their corporate income tax returns. The 2019 budget also indicates that the government intends to reconfigure the Canada workers benefit in the future to align the phase-in income levels with the income support earnings exemption threshold of $2,760 and shift slightly more benefits to single individuals without children. Alberta’s new government repealed the Climate Leadership Act on May 30, 2019, thereby repealing the carbon tax and ending the Alberta climate leadership adjustment rebate. However, the government introduced the Emissions Manage- ment and Climate Resilience Act, which provides for technology innovation and emissions reduction (TIER) regulations effective January 1, 2020. The TIER regulations will apply to any facilities that emitted 100,000 tonnes or more of carbon dioxide (CO2) equivalent specified greenhouse gasesGHG ( s) per year in 2016 or a subsequent year. A facility can opt into the TIER regulations if it has less than

100,000 tonnes of CO2 equivalent specified GHG emissions and competes against a facility regulated under the regulations, or if it has 100,000 tonnes or more of such emissions and is in an emission-intensive, trade-exposed sector. The carbon pricing under the TIER regulations remains unchanged at $30 per tonne of emissions. The TIER regulations do not apply to consumers. As a result, the federal carbon tax will be imposed on consumers and any facilities not subject to TIER regulations starting on January 1, 2020. Alberta issued a court challenge against the federal carbon tax, and a decision is expected from the Alberta Court of Appeal in 2020.

Saskatchewan (Table 14)

Tax Highlights n No changes to corporate income taxes n Personal income tax rates continue to be frozen at 2018 rates

Tax Changes 1. Corporate Income Tax No changes were announced.

2. Personal Income Tax The 2018 budget temporarily froze tax rates before any deduction for 2019 and 2020; thus, personal tax rates were frozen at 2018 levels: 10.5, 12.5, and 14.5 percent. No changes to this freeze were announced in the 2019 budget. The 2019 budget and Saskatchewan Bill 171 introduced three new non- refundable tax credits for volunteer firefighters, search and rescue volunteers, and volunteer emergency medical first responders who perform at least 200 hours of eligible volunteer services in a year (as certified by the organization -manag ing the volunteer services). These individuals will be able to claim a $3,000 tax 220 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 14 Projected Revenues and Expenditures, Saskatchewan, Fiscal Year 2019-20

millions of dollars Total revenues ...... 15,025 Total expenditures ...... (14,991) Surplus /(deficit) ...... 34 Revenue sources ...... Personal income tax ...... 2,556 Corporate income tax ...... 729 Sales tax ...... 2,305 Other taxes ...... 1,999 Total tax revenue ...... 7,589 Federal transfers ...... 2,467 Other revenues ...... 4,969 Total revenues ...... 15,025 Expenditures Education ...... 3,283 Health ...... 5,888 Debt servicing ...... 694 Other expenditures ...... 5,126 Total expenditures ...... 14,991

Notes: Saskatchewan’s summary budget presentation includes government core operations, government service organizations (such as ministries, boards of education, and health regions), and government business enterprises (such as Crown corporations). “Other revenues” included non-renewable resource revenue of $1,827 million for fiscal year 2019-20. Debt servicing is for general debt. Source: Saskatchewan, Ministry of Finance, 2019 Budget, March 20, 2019. credit starting with the 2020 tax year. Consistent with rules for the federal volunteer firefighter tax credit, individuals who provide any of these services as a regular -em ployee of the organization will not be eligible for the tax credit. Individuals who receive honoraria for their volunteer emergency service duties can claim either the income exemption on the honoraria or the relevant tax credit, but not both. In the event that the taxpayer provides more than one type of volunteer service, only one of the three tax credits may be claimed.

3. Sales Tax No changes were announced.

4. Excise Taxes No changes were announced. finances of the nation n 221

5. Resource-Related Matters As of April 1, 2019, the Saskatchewan resource credit was eliminated for potash production, and Crown and freehold royalties will no longer be deductible in determining the base payment of potash production tax or the profit tax. This measure is intended to simplify the potash production tax calculation. See the discussion regarding the carbon tax in the “Other” section below.

6. Real Estate Taxes No changes were announced.

7. Pensions No changes were announced.

8. Other Since Saskatchewan has not implemented a provincial carbon tax, the federal carbon tax was imposed on Saskatchewan residents effective April 1, 2019. The government announced that it does not intend to apply Saskatchewan’s PST on top of the federal carbon tax.14 Saskatchewan launched a judicial challenge against the federal carbon tax. In May 2019, the Saskatchewan Court of Appeal ruled that the federal government has the constitutional power to implement a carbon tax in the province. Saskatchewan has appealed this decision to the Supreme Court of Canada, and the case is expected to be heard in the spring of 2020. Manitoba (Table 15)

Tax Highlights n Reduction in provincial sales tax n Extension of business tax credits

Tax Changes 1. Corporate Income Tax The small business deduction threshold was increased from $450,000 to $500,000 effective January 1, 2019 as announced in the 2018 budget. The small business provincial rate is 0 percent for active business income up to the threshold. In connection with the reduction in the PST, discussed below, the refundable portion of the manufacturing investment tax credit (MITC) is reduced from 8 percent to 7 percent for qualifying property acquired after June 30, 2019. Accordingly, the MITC is now an 8 percent tax credit, of which 7 percent is the refundable portion and 1 percent is the non-refundable portion.

14 Saskatchewan, “Provincial Sales Tax Will Not Be Applied to Federal Carbon Tax,” April 1, 2019 (www.saskatchewan.ca/government/news-and-media/2019/april/01/carbon-tax). 222 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 15 Projected Revenues and Expenditures, Manitoba, Fiscal Year 2019-20

millions of dollars Total revenues ...... 17,025 Total expenditures ...... (17,480) In-year adjustments / lapse ...... (95) Surplus /(deficit) ...... (360) Revenue sources Personal income tax ...... 3,744 Corporate income tax ...... 506 Sales tax ...... 2,293 Other taxes ...... 1,379 Total tax revenue ...... 7,922 Federal transfers ...... 4,815 Other revenues ...... 4,288 Total revenues ...... 17,025 Expenditures Education ...... 4,560 Health ...... 6,651 Debt servicing ...... 1,088 Other expenditures ...... 5,181 Total expenditures ...... 17,480

Notes: The summary budget’s government reporting entity included core government, Crown corporations, government business entities, and public sector organizations. The amount indicated as the health expenditure is for health, seniors, and active living expenditures. In-year adjustments / lapse may represent an increase in revenue and /or a decrease in expenditures. Source: Manitoba, Department of Finance, 2019 Budget, March 7, 2019.

The 2019 budget also extended several business tax credits. The film and video production tax credit, which was scheduled to expire on December 31, 2019, is now permanent with no fixed expiry date. The small business venture capital tax credit, which was scheduled to expire on December 31, 2019, was extended for three years, to December 31, 2022. The cultural industries printing tax credit, which was scheduled to expire on December 31, 2019, was extended by one year, to December 31, 2020, and the annual maximum tax credit was capped at $1.1 million per taxpayer. The book publishing tax credit, which was scheduled to expire on December 31, 2019, was extended for five years, to December 31, 2024.

2. Personal Income Tax Pursuant to the 2016 budget, the personal income tax brackets and basic personal amount were indexed to inflation starting in 2017. The 2019 budget confirms that indexation will continue in 2019 at a rate of 2.6 percent, and shows a forecasted indexation factor of 1.9 percent for 2020. The 2018 budget announced a large increase in the basic personal amount for the 2019 and 2020 taxation years, to $10,392 and $11,402, respectively. However, finances of the nation n 223 this measure was not implemented, and the basic personal amount only increased by the 2019 indexation factor of 2.6 percent, to $9,626 for 2019. The 2019 budget indicates that Manitoba intends to table amendments that will parallel the federal tax on split income (TOSI) rules, including rules related to various non-refundable tax credits. However, the government does not intend to harmonize the TOSI rules as they relate to various provincial refundable tax credits that would otherwise be affected. The 2019 budget included minor changes to various personal tax credits. First, the provisions for the paid work experience tax credit are being updated to reflect current legislative requirements. Second, the primary caregiver tax credit provisions are being amended to align the registration due date with the personal income tax filing due date. As a result, the registration due date will move from the calendar year-end (December 31) to April 30 of the following year. Third, the implementation of regulatory amendments relating to the small business venture capital tax credit has extended the share issuance registration period from 6 months to 12 months.

3. Sales Taxes The 2019 budget provided for a 1 percent reduction in the PST from 8 percent to 7 percent effective July 1, 2019. Accordingly, the reducedPST rate charged on electricity used in manufacturing, mining, and processing operations in Manitoba will also decrease from 1.6 percent to 1.4 percent effective July 1, 2019. The 2019 budget announced that the PST will not be applicable to the federal carbon tax that began on April 1, 2019. The 2019 budget also announced new administrative requirements for the payment of PST. Starting in 2020, larger businesses remitting or paying PST of $5,000 or more per month will be required to file, remit, and pay the tax electronically. Also, commissions will not be paid to any business filing monthly PST returns.

4. Excise Taxes No changes were announced.

5. Resource-Related Matters The 2019 budget announced that the fuel tax exemption for the forestry industry would be expanded to include mill site equipment used for log handling and processing, effective June 1, 2019. See the discussion regarding the carbon tax in the “Other” section below.

6. Real Estate Taxes No changes were announced.

7. Pensions No changes were announced. 224 n canadian tax journal / revue fiscale canadienne (2020) 68:1

8. Other The 2019 budget provided for new administrative requirements for businesses that are subject to fuel tax, tobacco tax, and the health and post-secondary education tax levy. Starting in 2020, any businesses subject to these taxes will be required to file, remit, and pay the tax electronically. The 2019 budget also indicated that enforcement and administration measures for taxes are to be enhanced under the Tax Administration and Miscellaneous Taxes Act. Manitoba had planned to implement a carbon tax, to be effective September 1, 2018, applied at a rate of $25 per tonne of GHG emissions to gas, liquid, and solid fuel products intended for combustion in Manitoba. However, the Manitoba government withdrew this plan unexpectedly on October 3, 2018 and announced that it would no longer willingly impose the previously announced carbon tax on its residents. Since Manitoba did not implement a provincial carbon tax, the federal carbon tax was imposed on Manitoba residents effective April 1, 2019. In early 2019, Manitoba launched a judicial challenge against the federal carbon tax, and a decision is still pending. Ontario (Table 16)

Tax Highlights n Small business rate to be reduced by 0.3 percentage points in 2020 n No changes to personal income tax rates and brackets; new credits introduced

Tax Changes 1. Corporate Income Tax The 2019 budget contained very few changes to corporate income tax. As promised in the 2018 fall economic outlook and fiscal review, the 2019 budget introduced the Ontario job creation investment incentive, which parallels the immediate writeoff measures and the accelerated investment incentive originally announced in the federal government’s 2018 fall economic statement.15 The Ontario job creation investment incentive will apply for eligible depreciable property acquired after November 20, 2018 and available for use before 2028. The 2019 budget also announced changes to the Ontario interactive digital media tax credit for digital game corporations. Previously, to qualify as a specialized digital game corporation, and thus qualify for the tax credit, the company must have spent at least $1 million in its taxation year on Ontario labour relating to eligible digital games. The 2019 budget reduces this minimum Ontario labour expenditure to $500,000 effective for taxation years commencing after April 11, 2019.

15 Supra note 12. finances of the nation n 225

TABLE 16 Projected Revenues and Expenditures, Ontario, Fiscal Year 2019-20

April 2019 November 2019

millions of dollars Total revenues ...... 154,165 155,761 Total expenditures ...... (163,444) (163,785) Reserve ...... (1,000) (1,000) Surplus /(deficit) ...... (10,279) (9,024) Revenue sources Personal income tax ...... 36,600 37,125 Corporate income tax ...... 15,171 16,107 Sales tax ...... 28,076 28,067 Other taxes ...... 26,291 26,445 Total tax revenue ...... 106,138 107,744 Federal transfers ...... 25,453 25,453 Other revenues ...... 22,574 22,564 Total revenues ...... 154,165 155,761 Expenditures Education ...... 31,550 31,702 Health ...... 63,511 63,831 Debt servicing ...... 13,335 12,905 Other expenditures ...... 55,048 55,347 Total expenditures ...... 163,444 163,785

Notes: The figures included those for government business enterprises. Expenditures were shown by ministry. Debt servicing is net of interest capitalized during construction of tangible capital assets of $489 million and $475 million for fiscal year 2019-20, as presented in the 2019 Budget and the 2019 Fall Economic Outlook and Fiscal Review, respectively. Sources: Ontario, Ministry of Finance, 2019 Budget, April 11, 2019, and 2019 Fall Economic Outlook and Fiscal Review, November 6, 2019.

The government acknowledged that there is a substantial backlog in the certification of applications for cultural media tax credits (which include the Ontario film and television tax credit, the Ontario production services tax credit, the Ontario computer animation and special effects tax credit, the Ontario interactive digital media tax credit, and the Ontario book publishing tax credit), such that the processing of some applications can take 19 months or longer. The government has agreed to undertake a review of the cultural media tax credit certification process in order to streamline administration; however, no further information about specific measures was provided in either the 2019 budget or the subsequent fall economic outlook and fiscal review. In November 2019, the fall economic outlook and fiscal review announced that the small business tax rate will be reduced from 3.5 percent to 3.2 percent effective January 1, 2020. This rate reduction was unexpected. 226 n canadian tax journal / revue fiscale canadienne (2020) 68:1

2. Personal Income Tax The 2019 budget contained few changes to personal income taxes in the province. The low-income individuals and families tax credit (“the LIFT credit”) that was initially announced in the 2018 fall economic outlook and fiscal review was implemented effective January 1, 2019. The LIFT credit is a non-refundable tax credit to eliminate or reduce the provincial income tax for low-income taxpayers with employment income. The maximum credit is the lesser of $850 and 5.05 percent of employment income, reduced by 10 percent of the greater of adjusted individual net income over $30,000 (up to $38,500) and adjusted family net income over $60,000 (up to $68,500), including a spouse’s or common-law partner’s income at year-end. The credit is limited to Ontario personal income tax payable for the tax year, excluding the Ontario health premium. The taxpayer must be a Canadian resident at the beginning of the tax year and an Ontario resident at year-end, and must not have spent more than six months in prison during the year. The 2019 budget announced a new refundable Ontario “child-care access and relief from expenses” tax credit (“the CARE credit”) effective for the 2019 and subsequent tax years. The CARE credit will be based on a taxpayer’s family income and eligible child-care expenses (both of which are defined to be the amounts used in determining the taxpayer’s child-care deduction). The credit is calculated as a percentage of the taxpayer’s eligible child-care expenses, the rate of which depends on the taxpayer’s family income, as shown in table 17. For the 2019 and 2020 tax years, families will claim the CARE credit on their tax returns. Starting in 2021, the government intends to provide families with the choice of either applying for regular advance payments throughout the year or receiving a single payment when filing their tax returns. The government’s 2018 fall economic outlook and fiscal review had promised to adjust the non-eligible dividend tax credit calculation to maintain the applicable rate at 3.2863 percent. However, given the reduction in the small business tax rate provided for in the 2019 fall economic outlook and fiscal review, a reduction in the non-eligible dividend tax credit was also announced in order to preserve tax integration. Effective January 1, 2020, the non-eligible dividend tax credit will be reduced from 3.2863 percent to 2.9863 percent.

3. Sales Tax No changes were announced.

4. Excise Taxes The 2019 budget announced that the government was introducing legislation to pause the previous government’s changes to the wine tax. The 2016 budget had previously provided for a 1 percentage point increase, to take effect on April 1, 2019, applicable to the ad valorem markup for wine products sold at Liquor Control Board of Ontario outlets and non-Ontario wine purchased at winery retail stores. The 2019 fall economic outlook and fiscal review indicates that the government is finances of the nation n 227

TABLE 17 Ontario Child-Care Access and Relief from Expenses (CARE) Credit Calculation

Family income Rate calculation

$0 to $20,000 ...... 75% Over $20,000 to $40,000 . . . . . 75% minus 2 percentage points for each $2,500 or part thereof above $20,000 Over $40,000 to $60,000 . . . . . 59% minus 2 percentage points for each $5,000 or part thereof above $40,000 Over $60,000 to $150,000 . . . . . 51% minus 2 percentage points for each $3,600 or part thereof above $60,000 Over $150,000 ...... 0%

Source: Ontario, Ministry of Finance, 2019 Budget, April 11, 2019, at 330. committed to reviewing the tax regime for beverage alcohol and will be proposing legislation to pause upcoming wine tax increases and beer tax increases as the review continues. As announced in the 2018 budget, the 2019 budget amends the raw-leaf tobacco provisions in the Tobacco Tax Act, which establish penalties and offences relating to the use of new track and trace bale markers issued by the Ministry of Finance and to failure to notify the Ministry of Finance of the destruction of raw-leaf tobacco. Amendments also remove “baling and packaging” from the definition of “producing” tobacco and require any raw-leaf tobacco certificate to permit “baling and packaging.” The 2019 fall economic outlook and fiscal review also indicates that the government remains committed to moving to an open allocation of cannabis retail store licences where the number of stores is limited only by market demand. In connection with this move, the government is proposing to introduce amendments to the legislation that will facilitate the establishment of retail stores by licensed producers related to their production sites and allow authorized retail stores to sell cannabis products online or over the telephone for pickup by the consumer in-store.

5. Resource-Related Matters The 2019 budget provides a reminder that relief from taxes under the Electricity Act, due to expire at the end of 2018, was extended by the 2018 fall economic outlook and fiscal review to the end of 2022. Relief applies to the transfer tax (reduced from 33 percent to 22 percent under the proposal’s time extension, and to 0 percent for transfers by municipal electrical utilities with fewer than 30,000 customers) and certain payments in lieu of taxes (PILs) payable on the transfer of electricity assets to the private sector. Capital gains from PILs deemed dispositions are also PILs- exempt. The 2019 fall economic outlook and fiscal review announced a reduction to the aviation fuel tax rate in northern Ontario from 6.7 cents per litre to 2.7 cents per 228 n canadian tax journal / revue fiscale canadienne (2020) 68:1 litre, effective January 1, 2020. The geographic area eligible for this reduction is defined as the districts of Algoma, Cochrane, Kenora, Manitoulin, Nipissing, Parry Sound, Rainy River, Sudbury, Thunder Bay, and Timiskaming. The 2019 fall economic outlook and fiscal review proposed an amendment to the Gasoline Tax Act to make the timeline for calculating interest on refunds under the Gasoline Tax Act consistent with that in the Fuel Tax Act. Accordingly, interest on refunds under the Gasoline Tax Act will be calculated from the date of the refund application to the date of issuance of the refund payment. The previous Ontario government proposed in the 2018 budget to no longer require First Nation individuals and band councils to apply for and use a certificate of exemption (an Ontario gas card) issued by the Ministry of Finance as proof of entitlement when purchasing gasoline on reserve, effective in 2019. The proposal would substitute a certificate of Indian status or secure certificate of Indian status card from individuals; band councils would use an identifier issued by the government. This initiative was not included in the new government’s 2018 fall economic outlook and fiscal review or in the 2019 budget; however, on May 23, 2019, the government announced that the initiative would proceed effective January 1, 2020.16 As a result, the Ontario gas card has been discontinued, and First Nation individuals can use their federally issued Indian status card as proof of entitlement to buy tax- exempt gas on reserves from 2020 onward. See the discussion regarding the carbon tax in the “Other” section below.

6. Real Estate Taxes No changes were announced. However, the 2019 budget indicated that the government is developing an action plan and conducting a review to explore opportunities to enhance the accuracy and stability of property assessments, support a competitive business environment, provide relief to residents, and strengthen the governance and accountability of the Municipal Property Assessment Corporation. The 2019 fall economic outlook and fiscal review reiterates that the government will be seeking input over the coming months for this review.

7. Pensions The 2019 budget announced forthcoming amendments to the Pension Benefits Act that will clarify the operation of the rules regarding contribution holidays.

8. Other In late 2018, the government passed Bill 4, Cap and Trade Cancellation Act, 2018, which ended the former government’s cap-and-trade carbon tax. Since Ontario

16 Ontario, Ministry of Finance, “Making It Easier for First Nation People To Buy Tax-Exempt Gas,” Bulletin, May 23, 2019 (news.ontario.ca/mof/en/2019/05/making-it-easier-for-first -nation-people-to-buy-tax-exempt-gas.html). finances of the nation n 229 did not implement a provincial carbon tax, the federal carbon tax was imposed on Ontario residents effective April 1, 2019. A constitutional challenge was filed by the province and was heard by the Ontario Court of Appeal in April 2019. In June, the Ontario Court of Appeal announced a majority decision that the federal carbon tax is constitutional. In late 2019, the government appealed the decision to the Supreme Court of Canada. The 2018 fall economic outlook and fiscal review indicated that the government was taking steps to review provincial agencies to ensure that they are relevant, efficient, and effective, and are providing value for money for taxpayers. The 2019 budget announced that the Agency Review Task Force has reviewed more than 60 of the province’s 190 agencies and has recommended the dissolution of the following 10: the Building Code Conservation Advisory Council, the Criminal Injuries Compensation Board, the Curriculum Council, the Forensic Advisory Committee, the Livestock Medicines Advisory Committee, the Local Planning Appeal Support Centre, the Ontario Honours Advisory Council, the Ontario Investment and Trade Advisory Council, the Ontario Immigrant Investor Corporation, and the Ontario Mortgage and Housing Corporation. Public consultation began in September 2018 on reform of the education system. The 2019 budget announced proposed changes to class sizes in Ontario’s publicly funded schools. Class sizes would remain the same from kindergarten to grade 3; however, for older students, class sizes would increase, subject to consultation with education stakeholders that would close at the end of May 2019. The government proposed to increase the average class size from 23.5 to 24.5 for students in grades 4 to 8 and from 22 to 28 for students in grades 9 to 12. In August 2019, the government announced that after consultations, the proposed increase for students in grades 9 to 12 would be reduced to an average class size of 22.5.17 The government maintained the proposed increase for students in grades 4 to 8, to an average class size of 24.5. As part of the education reform, the government also announced in November 2019 that Ontario students will be required to take two online credits to graduate from secondary school effective for the 2023 - 24 cohort.18 The 2019 budget also contained an unexpected reduction in the Ontario estate administration tax. This tax is charged on the value of an estate when an estate certificate is issued. Prior to the change, no estate administration tax was payable if the value of the estate was $1,000 or less; for all other estates, the tax was charged at a rate of $5 per $1,000 (or part thereof ) on the first $50,000 of the value of the estate and a rate of $15 per $1,000 (or part thereof ) on the value of the estate

17 Ontario, Ministry of Education, “Ontario Providing Stability for Students and Families,” News Release, August 22, 2019 (news.ontario.ca/edu/en/2019/08/ontario-providing-stability -for-students-and-families.html). 18 Ontario, Ministry of Education, “Ontario Brings Learning into the Digital Age,” News Release, November 21, 2019 (news.ontario.ca/edu/en/2019/11/ontario-brings-learning-into-the -digital-age.html). 230 n canadian tax journal / revue fiscale canadienne (2020) 68:1

exceeding $50,000. The 2019 budget eliminates the estate administration tax on the first $50,000 of the value of the estate for estate certificate applications made on or after January 1, 2020. The 2019 budget also proposed some administrative changes with respect to the estate administration tax information return to reduce the compliance burden. The deadline for filing the information return with the Ministry of Finance will be extended from 90 days to 180 days; and the deadline for filing an amended information return, when required, will be extended from 30 days to 60 days. These administrative changes are also to take effect on January 1, 2020. The 2019 budget also indicates that the government is exploring options to provide further estate administration tax relief, including additional tax relief in respect of charitable donations, but does not include any detailed proposed changes. The 2019 fall economic outlook and fiscal review does not specifically refer to this initiative. The 2019 budget discloses that the Ontario government has created a specialized unit of tax experts who are working with federal and provincial tax officials to find and address tax loopholes and abuse. The 2019 fall economic outlook and fiscal review provides insight with respect to changes in the funding of post-secondary education in the province. Strategic mandate agreements (SMAs) are negotiated between the Ministry of Colleges and Universities and Ontario’s publicly assisted colleges and universities. Under current SMAs, only a small portion of public funding has been linked to performance: 1.2 percent for colleges and 1.4 percent for universities. The government is proposing to move to an outcomes-based funding model whereby 60 percent of operating funding will be tied to performance by the 2024 - 25 academic year. The 2019 fall economic outlook and fiscal review included two new health-care initiatives in Ontario. Starting in the fall of 2019, the government intends to assist low-income seniors in accessing dental care. Seniors in Ontario aged 65 or older with an income of $19,300 or less and senior couples with a combined annual income of $32,300 or less who do not have dental benefits will qualify for a publicly funded dental-care program. The government also proposes to eliminate the co- payment of $2 per prescription for residents of long-term-care homes.

Quebec (Table 18)

Tax Highlights n New credits for businesses and individuals to encourage experienced workers to remain in the workforce longer n Additional contribution for child care to be gradually eliminated

Tax Changes 1. Corporate Income Tax The 2019 budget introduced a refundable tax credit for a small or medium-sized business to foster the retention of experienced workers. This tax credit will be finances of the nation n 231 granted to qualified corporations that employ individuals aged 60 or over and have a total payroll of $1 million or less for any taxation year that ends after December 31, 2018. The amount and rate of the credit will vary depending on the employee’s age and the corporation’s total payroll. For an employee aged 60 to 64, the tax credit will be calculated at a rate of up to 50 percent for a maximum amount of $1,250 annually. For an employee aged 65 or older, the tax credit will be calculated at a rate of up to 75 percent for a maximum amount of $1,875 annually. A qualified corporation for a taxation year is a corporation (other than an excluded corporation) that has a permanent establishment in Quebec, carries on a business with paid-up capital of less than $15 million for the year, and (unless the corporation is a primary and manufacturing sector corporation) has total remunerated hours for the year in excess of 5,000 hours. A corporation that carries out a large investment project in Quebec may claim a tax holiday in respect of the income from its eligible activities relating to the project and a holiday from employer contributions to the health services fund with respect to the portion of wages paid to its employees that is attributable to the time devoted to such activities. The tax holiday lasts 15 years. The 2019 budget proposes to reduce the capital investment threshold for a large investment project carried out in a designated region from $75 million to $50 million. The designated regions are the administrative regions of Abitibi-Témiscamingue, Bas-Saint-Laurent, Côte-Nord, Gaspésie – Îles-de-la-Madeleine, Nord-du-Québec, and Saguenay – Lac-Saint-Jean; the regional county municipalities of Le Granit, Le Haut-Saint-François, Mékinac, Pontiac, La Vallée-de-la-Gatineau, Antoine-Labelle, and Charlevoix-Est; and the urban agglomeration of La Tuque. The 2019 budget also proposes a change to the computation of eligible expenses for the purposes of the refundable tax credit for the reporting of tips. To take into account changes made to Quebec’s Act Respecting Labour Standards, the tax legislation will be amended to provide that the eligible expenses for the refundable tax credit for the reporting of tips will include the portion of the indemnities for days of leave to fulfill family obligations or days of leave for health reasons that is attributable to tips and that was paid in the taxation year or fiscal period. This amendment will apply to indemnities for days of leave to fulfill family obligations or for days of leave for health reasons paid after December 31, 2018. The 2019 budget eases the penalty for failure to attribute an amount as tips. To standardize the special penalty for attribution of tips with other existing penalties, the Tax Administration Act will be amended so that this special penalty is calculated on the basis of the amounts payable or remittable under tax law, and not based on the amount of the tips not attributed. The Tax Administration Act will also be amended to provide that a person cannot incur both the penalty for false statements or omissions and the penalty related to the attribution of tips for the same omission. These amendments will apply for any penalties imposed after March 21, 2019. The 2019 budget announced that Quebec will harmonize its legislation with certain measures announced in the 2018 federal fall economic statement to provide for an accelerated deduction for Canadian development expenses and Canadian oil 232 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 18 Projected Revenues and Expenditures, Quebec, Fiscal Year 2019-20

millions of dollars Total revenues ...... 115,638 Total expenditures ...... (113,034) Contingency reserve ...... (100) Surplus /(deficit) ...... 2,504 Revenue sources Personal income tax ...... 32,498 Corporate income tax ...... 8,516 Sales tax ...... 21,864 Other taxes ...... 8,149 Total tax revenue ...... 71,027 Federal transfers ...... 24,924 Other revenues ...... 19,687 Total revenues ...... 115,638 Expenditures Education ...... 24,436 Health ...... 45,433 Debt servicing ...... 8,996 Other expenditures ...... 34,169 Total expenditures ...... 113,034

Notes: The figures were presented on a consolidated basis, showing general fund plus consolidated entities. The figures shown for expenditures were by department, except for debt servicing. Source: Quebec, Department of Finance and the Economy, 2019 Budget, Budget Plan, March 21, 2019. and gas property expenses.19 The extension of the mineral exploration tax credit announced in the federal economic statement will not be included because the Quebec tax system does not have a similar provision. The amendments to the Quebec tax legislation will be adopted following royal assent to a federal statute implementing the federal government’s legislative proposals and will be applicable on the same dates as the application dates of the corresponding federal legislation.

2. Personal Income Tax The 2019 budget announced that the tax credit for experienced workers will be re- named the tax credit for career extension effective for the 2019 taxation year onward. To encourage more workers to remain longer in, or to re-enter, the workforce, the age of eligibility for the tax credit will be lowered from 61 to 60 years. For workers aged 60 to 64, the maximum amount of eligible work income on which the tax credit will be calculated is raised to $10,000. There is no change to the tax credit for

19 Supra note 12. finances of the nation n 233 workers aged 65 or over—the maximum amount of eligible work income on which the tax credit will be calculated remains at $11,000. The 2019 budget also announced that the additional contribution for child care will be eliminated gradually over four years. Prior to the change, Quebec taxpayers had to make an additional contribution for child care if their family income exceeded a specified threshold ($52,220 in 2019). The additional contribution is income-tested; in 2019, it varied between $0.70 per day and $13.90 per day when family income exceeded $166,320. The 2019 budget proposes to eliminate the additional contribution for families with an income below $78,320. Families with an income exceeding $78,320 will pay a lower contribution up to a maximum additional contribution of $13.20 per day. Furthermore, in 2020, families with an income below $108,530 (an estimated amount based on forecasts for indexation and subject to change) will not be subject to the additional contribution, and the maximum additional contribution will be reduced to $8.80 per day. In 2021, families with an income below $140,065 (again, an estimated amount based on forecasts for indexation and subject to change) will not be subject to the contribution, and the maximum additional contribution will be reduced to $4.40 per day. The additional contribution for child care is expected to be eliminated fully by the 2022 tax year. See the comments in the “Corporate Income Tax” section above related to the accelerated deduction for Canadian development expenses and Canadian oil and gas property expenses, which may also apply to individuals.

3. Sales Tax No changes were announced.

4. Excise Taxes No changes were announced.

5. Resource-Related Matters The 2019 budget introduced a sustainable development certification allowance in the Mining Tax Act. The 2019 budget proposes to amend the Mining Tax Act to allow an operator to deduct, in the calculation of its annual profit for a fiscal year, an amount on account of the sustainable development certification allowance, which may not exceed, for the fiscal year, the amount corresponding to the operator’s cumulative sustainable development certification expenses at the end of the fiscal year. Changes will also be made to the refundable duties credit for an operator that sustains an annual loss to take into account the sustainable development certification allowance. These changes will apply to any fiscal year of an operator ending after March 21, 2019.

6. Real Estate Taxes The 2019 budget indicated that the school tax system would be reformed to gradually establish a single tax rate applicable across the entire province of Quebec over 234 n canadian tax journal / revue fiscale canadienne (2020) 68:1 three years. The single rate will be based on the lowest effective rate in 2018 - 19 and is intended to eliminate regional disparities under the current system. To compensate the school boards for the reduction in their school tax revenues, the government will transfer $200 million in 2019 - 20. The government will determine the transfer amount for the subsequent years during each budget exercise. The 2019 budget proposes changes to be made to the tax on lodging system to require any person operating a digital accommodation platform to register with Revenu Québec for the purposes of collecting and remitting the 3.5 percent tax on lodging on the price of every overnight stay. Previously, registration was voluntary. This change will apply as of January 1, 2020.

7. Pensions No changes were announced.

8. Other The 2019 budget announced new initiatives and measures to counter tax evasion and abusive tax avoidance. Since 2009, a mandatory disclosure mechanism has been in place for transactions that result in a tax benefit or have an appreciable impact on a taxpayer’s income. This disclosure mechanism applies to any transaction involving conditional remuneration or contractual coverage. The government announced that it intends to amend the tax legislation to strengthen this disclosure mechanism and improve the rules governing the use of nominee contracts. Legislative amendments will be made so that businesses on which a penalty has been imposed for abusive tax avoidance, as well as the promoters of the transactions in question on whom a penalty has been imposed on the same basis, will be listed in the register of enterprises ineligible for public contracts (commonly known as “RENA”). The penalty will be considered when deciding whether the Autorité des marchés publics will allow a business to enter into contract with a public body or not. Since 2010, any business that wishes to enter into certain public contracts must have an attestation de Revenu Québec. The 2019 budget proposes extending the requirement to have an attestation de Revenu Québec to public-building cleaning contracts valued at $10,000 or more. The government has recognized that there is inconsistency in the information that securities dealers and brokers are providing to investors, which causes problems with tax compliance. The 2019 budget indicates that Revenu Québec will establish, in cooperation with the sector, a new tax slip that will make it easier to report financial market transactions. finances of the nation n 235

New Brunswick (Table 19)

Tax Highlights n No changes to corporate or personal income tax rates n Reintroduction of the tuition tax credit

Tax Changes 1. Corporate Income Tax The 2019 budget indicates that the government does not intend to parallel the 2018 federal budget with respect to a reduction on the business limit for the small business deduction when a corporation earns passive investment income.

2. Personal Income Tax The 2019 budget proposes the reintroduction of the New Brunswick tuition tax credit for 2020 and subsequent tax years, which was eliminated by the former government to parallel federal tax changes announced in 2016.

3. Sales Tax No changes were announced.

4. Excise Taxes No changes were announced.

5. Resource-Related Matters No changes were announced. See the discussion regarding the carbon tax in the “Other” section below.

6. Real Estate Taxes No changes were announced.

7. Pensions No changes were announced.

8. Other In 2018, New Brunswick was consulting to develop its own carbon-pricing policy to address federal government requirements. However, since the province failed to implement a provincial carbon tax by the federal deadline, the federal carbon tax was imposed on NB residents effective April 1, 2019. Initially, the province had opposed the federal carbon tax, and the government had announced that it would continue to be part of the judicial process challenging the constitutionality of the 236 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 19 Projected Revenues and Expenditures, New Brunswick, Fiscal Year 2019-20

millions of dollars Total revenues ...... 9,846 Total expenditures ...... (9,823) Contingency reserve ...... nil Surplus /(deficit) ...... 23 Revenue sources Personal income tax ...... 1,773 Corporate income tax ...... 381 Sales tax ...... 1,539 Other taxes ...... 1,098 Total tax revenue ...... 4,791 Federal transfers ...... 3,485 Other revenues ...... 1,570 Total revenues ...... 9,846 Expenditures Education ...... 1,341 Health ...... 2,828 Debt servicing ...... 677 Other expenditures ...... 4,977 Total expenditures ...... 9,823

Notes: Figures were shown on a main estimates basis. About $326 million of federal transfers was provided in the form of conditional federal grants. Expenditure figures were shown by department. “Other revenues” included $70 million in forest and mining royalties. Source: New Brunswick, Department of Finance, 2019 Budget, Budget Plan, March 19, 2019. federal carbon tax.20 However, after the Liberal win in the October 2019 federal general election, the province resumed negotiations with the federal government seeking approval of a provincial carbon tax plan. The federal government accepted New Brunswick’s carbon tax plan on December 11, 2019.21 On December 12, 2019, the provincial government introduced amendments to the Gasoline and Motive Fuel Tax Act to implement the NB carbon tax effective April 1, 2020.22 It has promised to provide more details about the provincial carbon tax plan in 2020.

20 New Brunswick, Office of the Premier, “Premier’s Statement on Today’s Decision by the Saskatchewan Court of Appeal,” News Release, May 3, 2019 (www2.gnb.ca/content/gnb/en/ news/news_release.2019.05.0282.html). 21 New Brunswick, Ministry of Environment and Local Government, “Federal Government Has Accepted the Provincial Carbon Tax Plan for Fuels,” News Release, December 11, 2019 (www2.gnb.ca/content/gnb/en/news/news_release.2019.12.0668.html). 22 New Brunswick, Ministry of Finance and Treasury Board, “Next Step Taken To Introduce a Made-in-New Brunswick Carbon Tax,” News Release, December 12, 2019 (www2.gnb.ca/ content/gnb/en/news/news_release.2019.12.0671.html). finances of the nation n 237

Nova Scotia (Table 20)

Tax Highlights n No changes to corporate or personal income tax rates n New tax credits for corporate and individual investors

Tax Changes 1. Corporate Income Tax The 2019 budget extends the innovation equity tax credit to corporations effective April 1, 2019. Corporations will be eligible for a 15 percent non-refundable tax credit to a maximum investment of $500,000. The tax credit was initially available only to individual investors and is discussed in the “Personal Income Tax” section below. The 2019 budget also proposes a new venture capital tax credit available to both individual and corporate investors that invest in a venture capital corporation or fund. The venture capital tax credit is a 15 percent non-refundable tax credit on qualifying investments available for investments made after March 31, 2019 and before April 1, 2024.

2. Personal Income Tax As announced in the 2018 budget, the innovation equity tax credit was introduced to encourage individual investors to make equity capital investments to support young, growing, and innovative businesses. This non-refundable tax credit for individuals came into effect on January 1, 2019. The maximum investment limit for individuals is $250,000. The tax credit rate is 45 percent for investments in corporations in eligible classifications within the oceans technology and life sciences sectors and 35 percent for all other approved corporations. Eligible investments now include common shares, preferred shares, and convertible debentures. Invest- ors must hold the eligible investment for a minimum of four years to avoid repayment of the tax credit. The innovation equity tax credit above was meant to replace the previous equity tax credit. Accordingly, the 2019 budget also phased out the equity tax credit as of December 31, 2019. The venture capital tax credit, discussed in the “Corporate Income Tax” section above, also applies to individuals.

3. Sales Tax No changes were announced.

4. Excise Taxes No changes were announced. 238 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 20 Projected Revenues and Expenditures, Nova Scotia, Fiscal Year 2019-20

millions of dollars Total revenues ...... 11,011 Total expenditures ...... (11,144) Reserve and consolidating adjustments ...... 167 Surplus /(deficit) ...... 34 Revenue sources Personal income tax ...... 2,811 Corporate income tax ...... 605 Sales tax ...... 1,896 Other taxes ...... 659 Total tax revenue ...... 5,971 Federal transfers ...... 3,456 Other revenues ...... 1,584 Total revenues ...... 11,011 Expenditures Education ...... 1,429 Health ...... 4,639 Debt servicing ...... 856 Other expenditures ...... 4,220 Total expenditures ...... 11,144

Notes: Revenue source figures were for general revenue fund only with adjustments for consolidation. Expenditure figures were shown by department, general revenue fund. Source: Nova Scotia, Department of Finance and Treasury Board, 2019 Budget, Budget Plan, March 26, 2019.

5. Resource-Related Matters No changes were announced. See the discussion regarding the carbon tax in the “Other” section below.

6. Real Estate Taxes No changes were announced.

7. Pensions No changes were announced.

8. Other On January 1, 2019, a cap-and-trade carbon-pricing program came into effect in the province. The program sets annual limits on the total amount of GHG emissions allowed in Prince Edward Island from any mandatory participants (as defined by thresholds established by the provincial government) for 2019 through to 2022. Voluntary participation in the cap-and-trade program is not currently allowed. finances of the nation n 239

Prince Edward Island (Table 21)

Tax Highlights n Small business tax rate reductions continue n Basic personal tax credit continues to increase

Tax Changes 1. Corporate Income Tax Prior to the introduction of the 2019 budget, the government announced tax relief for islanders and island businesses, which was made possible by an unexpected surplus balance. On November 6, 2018, the government announced that the small business corporate tax rate would be reduced from 4.0 percent to 3.5 percent effective January 1, 2019.23 The 2019 budget proposes to reduce the small business corporate tax rate by an additional 0.5 percentage points, lowering the tax rate to 3 percent effective Janu- ary 1, 2020.

2. Personal Income Tax Further to the unexpected reductions in the small business corporate tax rate announced on November 6, 2018 and discussed above, the government also announced an additional increase of $500 in the basic personal amount (on top of the $500 increase that was previously announced in the 2018 budget). The revised basic personal amount is $9,160 and applies retroactively to January 1, 2018. As a result of this announcement, the $500 increase to the basic personal amount that was to have come into effect on January 1, 2019 will no longer apply. Accordingly, the basic personal amount will remain at $9,160 for the 2019 tax year. The 2019 budget proposes to increase the basic personal amount from $9,160 to $10,000 for the 2020 tax year. Furthermore, the 2019 budget proposes to increase the tax threshold for the low-income tax reduction from $17,000 to $18,000 for the 2020 tax year.

3. Sales Tax No changes were announced.

4. Excise Taxes No changes were announced.

23 Prince Edward Island, Department of Finance, “Additional Tax Relief To Benefit Islanders, Small Businesses,” November 6, 2018 (www.princeedwardisland.ca/en/news/additional-tax -relief-to-benefit-islanders-small-businesses). 240 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 21 Projected Revenues and Expenditures, Prince Edward Island, Fiscal Year 2019-20

millions of dollars Total revenues ...... 2,201 Total expenditures ...... (2,199) Reserve and consolidating adjustments ...... nil Surplus /(deficit) ...... 2 Revenue sources Personal income tax ...... 420 Corporate income tax ...... 86 Sales tax ...... 316 Other taxes ...... 253 Total tax revenue ...... 1,075 Federal transfers ...... 860 Other revenues ...... 266 Total revenues ...... 2,201 Expenditures Education ...... 419 Health ...... 750 Debt servicing ...... 128 Other expenditures ...... 902 Total expenditures ...... 2,199

Notes: Revenue and expenditure figures were consolidated. Expenditure figures were shown by department. Source: Prince Edward Island, Department of Finance, 2019 Budget, Budget Plan, June 25, 2019.

5. Resource-Related Matters No changes were announced. See the discussion regarding the carbon tax in the “Other” section below.

6. Real Estate Taxes No changes were announced.

7. Pensions No changes were announced.

8. Other A provincial carbon levy that was approved by the federal government came into effect on April 1, 2019. Accordingly, the federal carbon tax that would otherwise have been imposed on the province in 2019 no longer applied. finances of the nation n 241

In July 2019, the PEI government had applied to be an intervenor in Saskatch- ewan’s judicial challenge of the federal carbon tax at the Supreme Court of Canada. However, on August 30, 2019, the government withdrew its notice of intervention.

Newfoundland and Labrador (Table 22)

Tax Highlights n No new tax or fee increases n Retail sales tax on automobile insurance eliminated

Tax Changes 1. Corporate Income Tax No changes were announced.

2. Personal Income Tax No changes were announced. The temporary deficit reduction levy was in force throughout 2019, as shown in table 23; however, the deficit reduction levy was scheduled to expire on Decem- ber 31, 2019.

3. Sales Tax The 2019 budget announced that the retail sales tax on automobile insurance would be eliminated in its entirety instead of the gradual reductions announced in the 2018 budget. Accordingly, any automobile insurance policies with an effective date of April 16, 2019 or later will not be subject to the tax.

4. Excise Taxes No changes were announced.

5. Resource-Related Matters No changes were announced. See the discussion regarding the carbon tax in the “Other” section below.

6. Real Estate Taxes No changes were announced.

7. Pensions No changes were announced.

8. Other The federal government accepted Newfoundland and Labrador’s carbon-pricing plan on October 23, 2018, and the plan came into effect in the province on January 1, 242 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 22 Projected Revenues and Expenditures, Newfoundland and Labrador, Fiscal Year 2019-20

millions of dollars Total revenues ...... 10,350 Total expenditures ...... (8,425) Oil revenue risk adjustment ...... nil Surplus /(deficit) ...... 1,924 Revenue sources Personal income tax ...... 1,587 Corporate income tax ...... 411 Sales tax ...... 1,187 Other taxes ...... 738 Total tax revenue ...... 3,923 Federal transfers ...... 3,871 Other revenues ...... 2,556 Total revenues ...... 10,350 Expenditures Education ...... 836 Health ...... 3,021 Debt servicing ...... 1,395 Other expenditures ...... 3,173 Total expenditures ...... 8,425

Notes: Offshore royalties and mining tax and royalties were previously included in tax revenue, but in 2019-20 were excluded from tax revenue. The total revenue figure includes net income of government business enterprises and partnerships. Federal transfers included $2,501 million from the new Atlantic accord. Expenditures were reported by department, except for debt- related expenses. Health expenditure covers “the health-care sector.” Debt servicing included “debt charges and financial expenses.” Expenditures were a combination of current and capital account expenditures by department in the government reporting entity. (Column may not add because of rounding.) Source: Newfoundland and Labrador, Department of Finance, 2019 Budget, Budget Plan, April 16, 2019.

2019.24 Under the province’s plan, consumers will not be taxed on home heating fuels. The 4.0 cent temporary gas tax was eliminated and replaced with a federally mandated 4.42 cent carbon tax. The 5.0 cent additional gas tax on diesel was eliminated and replaced with a federally mandated 5.37 cent carbon tax. The plan included exemptions from carbon tax for off-grid diesel electricity generation, aviation fuel, interprovincial marine transportation, and municipalities.

24 Newfoundland and Labrador, Department of Municipal Affairs and Environment, and Department of Finance and Department of Natural Resources, “Provincial Government Releases Federally-Approved Made-in-Newfoundland and Labrador Approach to Carbon Pricing,” News Release, October 23, 2018 (www.releases.gov.nl.ca/releases/2018/mae/ 1023n01.aspx). finances of the nation n 243

TABLE 23 Temporary Deficit Reduction Levy Amounts for 2019 (Based on Individual Taxable Income)

Temporary deficit Individual reduction levy taxable income Base +10% amount

dollars ≤ $50,000 ...... ≤ 50,000 na na 0 > $50,000 to ≤ $51,000 ...... 50,250 0 25 25 50,500 0 50 50 50,750 0 75 75 > $51,000 to ≤ $55,000 ...... 100 > $55,000 to ≤ $56,000 ...... 55,250 100 25 125 55,500 100 50 150 55,750 100 75 175 > $56,000 to ≤ $60,000 ...... 200 > $60,000 to ≤ $61,000 ...... 60,250 200 25 225 60,500 200 50 250 60,750 200 75 275 > $61,000 to ≤ $65,000 ...... 300 > $65,000 to ≤ $66,000 ...... 65,250 300 25 325 65,500 300 50 350 65,750 300 75 375 > $66,000 to ≤ $70,000 ...... 400 > $70,000 to ≤ $71,000 ...... 70,250 400 25 425 70,500 400 50 450 70,750 400 75 475 > $71,000 to ≤ $75,000 ...... 500 > $75,000 to ≤ $76,000 ...... 75,250 500 25 525 75,500 500 50 550 75,750 500 75 575 > $76,000 to ≤ $80,000 ...... 600 > $80,000 to ≤ $81,000 ...... 80,250 600 25 625 80,500 600 50 650 80,750 600 75 675 > $81,000 to ≤ $100,000 ...... 700 > $100,000 to ≤ $101,000 . . . . . 100,250 700 25 725 100,500 700 50 750 100,750 700 75 775 > $101,000 to ≤ $125,000 . . . . . 800 > $125,000 to ≤ $126,000 . . . . . 125,250 800 25 825 125,500 800 50 850 125,750 800 75 875

(Table 23 is concluded on the next page.) 244 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 23 Concluded Temporary deficit Individual reduction levy taxable income Base +10% amount

dollars > $126,000 to ≤ $175,000 . . . . . 900 > $175,000 to ≤ $176,000 . . . . . 175,250 900 25 925 175,500 900 50 950 175,750 900 75 975 > $176,000 to ≤ $250,000 . . . . . 1,000 > $250,000 to ≤ $251,000 . . . . . 250,250 1,000 25 1,025 250,500 1,000 50 1,050 250,750 1,000 75 1,075 > $251,000 to ≤ $300,000 . . . . . 1,100 > $300,000 to ≤ $301,000 . . . . . 300,250 1,100 25 1,125 300,500 1,100 50 1,150 300,750 1,100 75 1,175 > $301,000 to ≤ $350,000 . . . . . 1,200 > $350,000 to ≤ $351,000 . . . . . 350,250 1,200 25 1,225 350,500 1,200 50 1,250 350,750 1,200 75 1,275 > $351,000 to ≤ $400,000 . . . . . 1,300 > $400,000 to ≤ $401,000 . . . . . 400,250 1,300 25 1,325 400,500 1,300 50 1,350 400,750 1,300 75 1,375 > $401,000 to ≤ $450,000 . . . . . 1,400 > $450,000 to ≤ $451,000 . . . . . 450,250 1,400 25 1,425 450,500 1,400 50 1,450 450,750 1,400 75 1,475 > $451,000 to ≤ $500,000 . . . . . 1,500 > $500,000 to ≤ $501,000 . . . . . 500,250 1,500 25 1,525 500,500 1,500 50 1,550 500,750 1,500 75 1,575 > $501,000 to ≤ $550,000 . . . . . 1,600 > $550,000 to ≤ $551,000 . . . . . 550,250 1,600 25 1,625 550,500 1,600 50 1,650 550,750 1,600 75 1,675 > $551,000 to ≤ $600,000 . . . . . 1,700 > $600,000 to ≤ $601,000 . . . . . 600,250 1,700 25 1,725 600,500 1,700 50 1,750 600,750 1,700 75 1,775 > $601,000 ...... 1,800 finances of the nation n 245

Yukon (Table 24)

Tax Highlights n No changes to corporate or personal income tax rates

Tax Changes 1. Corporate Income Tax No changes were announced.

2. Personal Income Tax No changes were announced.

3. Sales Tax No changes were announced.

4. Excise Taxes No changes were announced.

5. Resource-Related Matters No changes were announced. See the discussion regarding the carbon tax in the “Other” section below.

6. Real Estate Taxes No changes were announced.

7. Pensions No changes were announced.

8. Other Since Yukon did not implement a carbon tax, the federal carbon tax was imposed on Yukon residents effective July 1, 2019. The Yukon government introduced a carbon price rebate to return carbon levy revenues back to individuals, non-mining businesses, placer and quartz mining operations, First Nations governments, and municipal governments. The carbon price rebate is a fixed amount for individuals. The carbon price rebate for businesses will vary based on the weighting of assets owned by the business. 246 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 24 Projected Revenues and Expenditures, Yukon, Fiscal Year 2019-20

millions of dollars Total revenues ...... 1,430 Total expenditures ...... (1,436) Reserve ...... nil Surplus /(deficit) ...... (6) Revenue sources Personal income tax ...... 75 Corporate income tax ...... 15 Sales tax ...... na Other taxes ...... 36 Total tax revenue ...... 126 Federal transfers ...... 1,058 Other revenues ...... 246 Total revenues ...... 1,430 Expenditures Education ...... 215 Health ...... 443 Debt servicing ...... 14 Other expenditures ...... 764 Total expenditures ...... 1,436

Notes: Expenditure figures for education and health were shown in consolidated and non- consolidated budgets by department. The health figure includes an amount for social services. Non-consolidated reporting was used to reflect the announced surplus /(deficit) figure; the consolidated surplus was reported as $4 million. Consolidated reporting includes territorial corporations. The debt-servicing figure shown represents expenditures on loan programs. Debt servicing is prorated. The Yukon government signed a devolution agreement with the federal government in 2003 to assume land and resource management responsibilities. Amendments to the resource revenue-sharing arrangement in 2012 ensured that more resource revenue generated in the Yukon would be available for use in the territory. Source: Yukon, Department of Finance, 2019 Budget, Budget Plan, March 7, 2019. finances of the nation n 247

Northwest Territories (Table 25)

Tax Highlights n No changes to corporate or personal income tax rates

Tax Changes 1. Corporate Income Tax No changes were announced.

2. Personal Income Tax No changes were announced.

3. Sales Tax No changes were announced.

4. Excise Taxes No changes were announced.

5. Resource-Related Matters No changes were announced. See the discussion regarding the carbon tax in the “Other” section below.

6. Real Estate Taxes Property and education mill rates were adjusted for inflation effective April 1, 2019.

7. Pensions No changes were announced.

8. Other The 2019 budget indicated that the government will need to find ways to grow the economy so that it can generate additional fiscal resources to continue to meet the challenge of maintaining existing assets, improving housing stock, and meeting legislative requirements. Because of the small territorial tax bases, increasing taxes would not provide significant new revenue, yet would raise the cost of living and the cost of doing business, discouraging investment in the Northwest Territories. The federal carbon tax came into effect in the Northwest Territories on Sep- tember 1, 2019. The tax will apply to various types of fuel sold in the territory but will not apply to aviation fuel. Territorial rates will increase gradually and annually from $20 per tonne of GHG emissions to $50 per tonne in 2022. In September 2019, the government announced an NWT cost-of-living offset,25 which is a tax-free

25 Northwest Territories, Department of Finance, “Northwest Territories Cost of Living Offset,” September 2019 (www.fin.gov.nt.ca/en/resources/nwt-cost-living-offset). 248 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 25 Projected Revenues and Expenditures, Northwest Territories, Fiscal Year 2019-20

millions of dollars Total revenues ...... 1,933 Total expenditures ...... (1,802) Infrastructure contribution, deferred maintenance, fund profit / loss . . . . (71) Surplus /(deficit) ...... 60 Revenue sources Personal income tax ...... 104 Corporate income tax ...... 23 Sales tax ...... na Other taxes ...... 133 Total tax revenue ...... 260 Federal transfers ...... 1,543 Other revenues ...... 130 Total revenues ...... 1,933 Expenditures Education ...... 332 Health ...... 496 Debt servicing ...... 11 Other expenditures ...... 963 Total expenditures ...... 1,802

Notes: Figures showed health and education expenditure by department; the education figure was a composite for the Department of Education, Culture, and Employment, and the health figure included social services. The stated surplus was on a non-consolidated basis. On April 1, 2014, the Northwest Territories took responsibility for the management of its land, water, and non-renewable resources. The Northwest Territories started to receive resource revenues under devolution in 2014-15; half is offset against federal territorial formula financing grants, up to 25 percent of the balance will be shared with aboriginal governments, and 25 percent of the balance will be saved in the Heritage Fund. The Northwest Territories and the federal government signed a devolution agreement on March 11, 2013. The debt-servicing amount is assumed to be expenditures classified as “interest” in the summary of expenditures. Source: Northwest Territories, Department of Finance, 2019 Budget, Budget Plan, February 6, 2019. benefit paid to individuals and families to help offset the cost of the carbon tax. For 2019 - 20, the annual benefit amounts are fixed at $104 per adult aged 18 or older and $120 per child under the age of 18. As the carbon tax increases, the annual benefits will also increase. finances of the nation n 249

Nunavut (Table 26)

Tax Highlights n Small business tax rate reduced by 1 percentage point n Increase in the basic personal amount for individuals

Tax Changes 1. Corporate Income Tax The 2019 budget did not introduce any changes to corporate income tax. However, Nunavut unexpectedly introduced Bill 2626 on May 28, 2019, which proposed to reduce the small business tax rate from 4 percent to 3 percent, effective July 1, 2019. The bill received royal assent on November 7, 2019.

2. Personal Income Tax The 2019 budget did not introduce any changes to personal income tax. However, in Bill 26, the government increased Nunavut’s basic personal amount from $13,325 to $16,000, effective January 1, 2019. Bill 26 also increased Nunavut’s cost-of-living tax credit from $1,200 to $1,500, effective January 1, 2019.

3. Sales Tax No changes were announced.

4. Excise Taxes No changes were announced.

5. Resource-Related Matters No changes were announced. See the discussion regarding the carbon tax in the “Other” section below.

6. Real Estate Taxes No changes were announced.

7. Pensions No changes were announced.

8. Other The federal carbon tax came into effect in Nunavut on July 1, 2019. The tax is levied on fuel, other than aviation fuel, and will not affect charges for electricity. In

26 Government of Nunavut, Bill 26, An Act To Amend the Income Tax Act; royal assent November 7, 2019. 250 n canadian tax journal / revue fiscale canadienne (2020) 68:1

TABLE 26 Projected Revenues and Expenditures, Nunavut, Fiscal Year 2019-20

millions of dollars Total revenues ...... 2,162 Total expenditures ...... (2,166) Supplementary requirements, revolving funds, and contingencies . . . . . (30) Surplus /(deficit) ...... (34) Revenue sources Personal income tax ...... 35 Corporate income tax ...... 20 Sales tax ...... na Other taxes ...... 81 Total tax revenue ...... 136 Federal transfers ...... 1,738 Other revenues ...... 288 Total revenues ...... 2,162 Expenditures Education ...... 235 Health ...... 467 Debt servicing ...... na Other expenditures ...... 1,464 Total expenditures ...... 2,166

Notes: Main estimates were prepared on a non-consolidated basis. Surplus /(deficit) was shown on a main estimates basis and not the public account basis, which funds revenues and expenditures. Expenditure figures appeared to be shown by department and include both operations and maintenance expenditures and capital expenditures. The budget does not present debt-servicing costs separately in the main estimates, and an amount that represents those costs cannot be reasonably determined. Nunavut is in the process of negotiating a devolution agreement with the federal government. The territory was officially established in 1999 and was formerly part of the Northwest Territories. Source: Nunavut, Department of Finance, 2019 Budget, Budget Plan, February 20, 2019.

2019, the government announced the Nunavut carbon rebate,27 which will apply a rebate at the point of purchase equivalent to half of the federal carbon tax levied. The government intends to reduce the Nunavut carbon rebate by 10 percentage points each year from 2023 to 2027, with the rebate being phased out completely in 2028.

27 Nunavut, Department of Finance, “Carbon Tax and the New Nunavut Carbon Rebate,” July 26, 2019 (www.gov.nu.ca/finance/news/carbon-tax-and-new-nunavut-carbon-rebate). canadian tax journal / revue fiscale canadienne (2020) 68:1, 281 - 312 https://doi.org/10.32721/ctj.2020.68.1.ptp

Personal Tax Planning Co-Editors: Brian J. Anderson,* Sonia Gandhi,** Dino Infanti,*** and Jim MacGowan****

DUE DILIGENCE DEFENCE TO LIABILITY FOR UNPAID STATUTORY REMITTANCES Wayne D. Gray*****

Several potentially onerous liabilities may be imposed on directors outside the provisions of the statute under which their corporation is incorporated or continued. In particular, some of the most common sources of personal liability for directors arise under statutes requiring the corporation to pay employee payroll source deductions (income tax, Canada Pension Plan contributions, and employment insurance premiums), withholding taxes owing by non-residents of Canada, and net goods and services tax and harmonized sales tax remittances. These statutory regimes all have certain features in common, including a statutory due diligence defence. This article examines the state of the law under the objective standard of care first adopted in the tax context by the Federal Court of Appeal in Buckingham. In particular, it examines the principles that guide jurisprudence on the due diligence defence, the factual circumstances that have met with success or failure for appellants, and how the defences apply differently depending on whether a director is an inside or outside director. KEYWORDS: DIRECTORS’ LIABILITY n REMITTANCES n DEFENCE n JURISPRUDENCE n PRINCIPLES n INSOLVENCY

* Of Deloitte LLP, Winnipeg (e-mail: [email protected]). ** Of KPMG LLP, Toronto (e-mail: [email protected]). *** Of KPMG LLP, Vancouver (e-mail: [email protected]). **** Of Deloitte LLP, Halifax (e-mail: [email protected]). ***** Of Gray, Whitley LLP, Toronto (e-mail: [email protected]).

281 canadian tax journal / revue fiscale canadienne (2020) 68:1, 313 - 49 https://doi.org/10.32721/ctj.2020.68.1.pfp

Planification fiscale personnelle Co-rédacteurs de chronique : Brian J. Anderson*, Sonia Gandhi**, Dino Infanti*** et Jim MacGowan****

DÉFENSE DE DILIGENCE RAISONNABLE RELATIVEMENT À LA RESPONSABILITÉ DES VERSEMENTS OBLIGATOIRES IMPAYÉS Wayne D. Gray*****

Un administrateur peut se voir imposer plusieurs responsabilités potentiellement onéreuses par d’autres dispositions que celles de la loi en vertu de laquelle la société au conseil de laquelle il ou elle siège est constituée ou prorogée. La responsabilité personnelle d’un administrateur est en particulier souvent établie par les lois qui exigent que la société paie les retenues à la source sur la paie des employés (impôt sur le revenu, cotisations au Régime de pensions du Canada, et cotisations d’assurance-emploi), les retenues à la source dues par les non-résidents du Canada et les versements nets de la taxe sur les produits et services et de la taxe de vente harmonisée. Ces régimes législatifs partagent tous certaines caractéristiques, notamment une défense de diligence raisonnable prévue par la loi. Cet article examine l’état du droit en vertu de la norme objective de diligence qui a été adoptée initialement dans le contexte fiscal par la Cour d’appel fédérale dans l’affaire Buckingham. Il s’attarde en particulier aux principes qui guident la jurisprudence sur la défense de diligence raisonnable, les circonstances de fait qui ont abouti ou échoué pour les appelants, et la manière dont la défense s’exerce différemment selon qu’un administrateur est un administrateur interne ou un administrateur externe. MOTS CLÉS : RESPONSABILITÉ DES ADMINISTRATEURS n VERSEMENTS n DÉFENSE n JURISPRUDENCE n PRINCIPES n INSOLVABILITÉ

* De Deloitte LLP, Winnipeg (courriel : [email protected]). ** De KPMG LLP, Toronto (courriel : [email protected]). *** De KPMG LLP, Vancouver (courriel : [email protected]). **** De Deloitte LLP, Halifax (courriel : [email protected]). ***** De Gray, Whitley LLP, Toronto (courriel : [email protected]).

313 canadian tax journal / revue fiscale canadienne (2020) 68:1, 351 - 90 https://doi.org/10.32721/ctj.2020.68.1.ctp

Corporate Tax Planning Co-Editors: Derek Alty,* Brian Carr,** Michael R. Smith,*** and Christopher J. Steeves****

GAAR: AN ECONOMIC TEST?—THE COURTS DIVIDE Brian R. Carr,** Brittany Finn,***** and Ryan Wolfe*****

The authors of this article review the history and development of the general anti- avoidance rule (GAAR) in section 245 of the Income Tax Act (Canada), for the purpose of assisting in the analysis of recent decisions of the federal and provincial courts of appeal. They discuss the inherent difficulty in construing section 245 and outline various tests that the courts could have employed to interpret its provisions. The authors then review three of the four decisions in which the Supreme Court of Canada interpreted GAAR— Canada Trustco, Mathew, and Copthorne. With that background, the authors contrast the different approaches to the provincial general anti-avoidance rules taken, on the one hand, by the Alberta Court of Appeal in Husky Energy and Canada Safeway, the Ontario Court of Appeal in Inter-Leasing, and the BC Court of Appeal in Veracity, and, on the other

* Of Couzin Taylor LLP, Edmonton (affiliated with Ernst & Young LLP) (e-mail: derek.g.alty @ca.ey.com). ** Of Thorsteinssons LLP, Toronto (e-mail: [email protected]). *** Of Deloitte LLP, Calgary (e-mail: [email protected]). **** Of Fasken Martineau DuMoulin LLP, Toronto (e-mail: [email protected]). ***** Of Davies Ward Phillips & Vineberg LLP, Toronto. We wish to thank Brian Arnold; Monica Biringer of Osler Hoskin & Harcourt LLP, Toronto; Ian Gamble of Thorsteinssons LLP, Vancouver; and Rebecca Potter and Matthew Williams of Thorsteinssons LLP, Toronto, for reviewing and providing comments on earlier drafts of this article. The reviewers have helped us to focus and review our thoughts. However, the opinions expressed in this article are ours alone. Some of the reviewers commented that the distinction between the interpretational approach and the economic approach may not be as clear as we suggest. However, an interpretive approach, no matter how liberal, may not reveal the purpose of a transaction. When we talk about an economic test, we are referring to the ultimate economic consequences of the whole transaction. To use 594710 British Columbia Ltd. (infra note 13) as an example, the Federal Court of Appeal applied section 245 because the legal documents allocated the income for tax purposes to one person but the income for economic purposes to another person. The court thought that this was abusive. We agree that, so far, the federal and provincial courts of appeal have not said that they are applying some form of economic test. The decisions of the Supreme Court of Canada would

351 352 n canadian tax journal / revue fiscale canadienne (2020) 68:1 hand, by the Quebec Court of Appeal in OGT Holdings and Iberville. They then compare and contrast those approaches with the pronouncements of the Supreme Court of Canada on how GAAR should be interpreted. The authors also discuss the approach taken by the Federal Court of Appeal in four recent GAAR decisions—Univar, Oxford Properties, 594710 British Columbia Ltd., and Birchcliff. They compare and contrast that approach with the approaches of the provincial courts, and consider whether the Federal Court of Appeal’s approach is consistent with the Supreme Court of Canada’s pronouncements on GAAR. Finally, the authors offer some advice for tax planners based on the recent GAAR decisions of the various courts of appeal. KEYWORDS: GAAR n STATUTORY INTERPRETATION n ECONOMIC TEST n SCHEME OF THE ACT n TAX PLANNING n COURTS OF APPEAL

preclude them from doing so. Ultimately, the courts are taking the economic consequences of a transaction into consideration in reaching their decisions, rather than basing those decisions only on an interpretation of the words of the relevant provisions. It may be that in some cases, the courts are interpreting the Income Tax Act on the basis that transactions that lack economic substance are not in accordance with Parliament’s intended purpose with respect to a particular provision. Whether they are interpreting the word “abuse” by looking at economic factors or are simply applying an economic test may be a moot point, since the result is the same in either case. canadian tax journal / revue fiscale canadienne (2020) 68:1, 391 - 408 https://doi.org/10.32721/ctj.2020.68.1.ctr

Current Tax Reading Co-Editors: Robin Boadway, Kim Brooks, Jinyan Li, and Alan Macnaughton*

Xavier Oberson, Taxing Robots: Helping the Economy To Adapt to the Use of Artificial Intelligence (Cheltenham, UK: Edward Elgar, 2019), 187 pages [H]umankind stands on the threshold of an era when ever more sophisticated robots, bots, androids and other manifestations of artificial intelligence (“AI”) seem to be poised to unleash a new industrial revolution, which is likely to leave no stratum of society untouched.1 As far as the tax system is concerned, robots are affecting how workers work and how many workers are needed to work, which indirectly affects the tax base. If the current trend continues, the taxable income of employers that replace humans with robots may increase, but the taxable income of displaced workers will disappear. As income disappears, workers’ consumption power will decrease, thereby reducing the tax base for consumption taxes and property taxes. As Oberson says, “Should human labour or taxable activities disappear or drastically decrease or change, the tax system would need to adapt.”2 This book provides a thoughtful examination of the potential impact of robots on the tax system and explores the possibility of robots becoming taxpayers. It even entertains the question of what would happen if, “one day, the robots might refuse to pay their taxes!”3 The book has 12 chapters. Chapters 1 to 3 consider the recent development of artificial intelligence (AI) and robots and the definition of “robots” for tax purposes. Chapters 4 and 5 discuss whether robots should be treated as new legal “persons,” similarly to corporate persons, and it covers the arguments for introducing a robot tax that could be imposed either on the user of robots or on robots themselves as taxpayers. Chapters 6 to 8 review the current income-tax and value- added-tax (VAT) treatment of robots and robot transactions. Chapters 9 and 10

* Robin Boadway is of the Department of Economics, Queen’s University, Kingston, Ontario (e-mail: [email protected]). Kim Brooks is of the Schulich School of Law, Dalhousie University, Halifax (e-mail: [email protected]). Jinyan Li is of Osgoode Hall Law School, York University, Toronto (e-mail: [email protected]). Alan Macnaughton is of the School of Accounting and Finance, University of Waterloo (e-mail: [email protected]). 1 At 1, quoting paragraph B of European Parliament, European Parliament Resolution of 16 February 2017 with Recommendations to the Commission on Civil Law Rules on Robotics (2015/2103(INL)). 2 At xii. 3 Ibid., at xi.

391 392 n canadian tax journal / revue fiscale canadienne (2020) 68:1 consider the general design of a robot tax and the international aspects of robot taxes (such as the definition of “agent” for the purpose of defining “permanent establishment”). Chapter 11 presents ideas on raising revenue to assist—through education, training, and a universal basic income (UBI) program for income support—workers who are replaced by robots. Chapter 12 summarizes the main findings and conclusion. According to the author, a robot tax can be justified on the basis of the ability- to-pay principle, the neutrality principle, and the rule of law. Robot users’ ability to pay is increased by the amount of imputed income derived from using robots. If treated as taxpayers per se, robots would have an objective ability to pay—that is, tax capacity. Taxing users of robots would put them on an equal footing with those who hire human workers. As to the legal uncertainties of a robot tax, the author argues that they should not prevent us from “analyzing and balancing the various possibilities right now, due to the important risks, largely identified, that the evolution of automation bears.”4 In the area of international taxation, the author sees recent developments in the taxation of the digital economy (such as digital services tax and digital permanent establishment) as precursors of a robot tax, given that one of the main features of the digital economy is the use of (1) the intelligent interconnection of machines, (2) computers that use AI, (3) robotics, and (4) big data. Although these new or proposed taxes on the digital economy do not tax robots per se, they are taxes on services that firms render through the use of algorithms or some kind of automated AI, and, in most cases, it is AI that performs the collection, analysis, and transfer of data. These taxes can be seen, in part, as an alternative tax on AI and robot activities that benefit from the value of data provided by “unconscious users.”5 The author proposes a robot tax as an additional level of taxation, given that robots per se and some activities of robots are already recognized in the tax system. For example, robots as part of assets contribute to the earning of the income of corporations that pay tax on that income; when robots in a warehouse process purchase orders or choose a book ordered by a customer online, the price that is subject to VAT or sales taxes reflects the services rendered by automation. A proposed robot tax may be imposed on robots or on users/owners of robots. Users of robots may be taxed in several ways, including (1) a usage tax on imputed salary (that is, on the amount equivalent to the salary that would have been paid to a human for similar activities), or (2) an automation tax, such as a tax on the use of software or an indirect tax through the limitation of deductions available for the cost of purchasing robots. A tax on robots as taxpayers would raise many legal and technical difficulties, but in the near future, when robots have sufficient autonomy in the decision- making process, they could be regarded as capable of automatically assessing, computing, and levying tax on the taxable activities they perform. Robots acquiring income could be subject to income tax. Robots could eventually become consumers

4 Ibid., at 42. 5 Ibid., at 85. current tax reading n 393 and pay VAT. The author suggests not only that robot taxes be introduced but also that changes be made to the existing tax regime—for example, increases in the corporate tax rate and the capital income tax rate, and the implementation of digital taxes in order to address the disruptions caused by automation. Given the speed at which robotic automation is being introduced, it is possible that increasing numbers of workers will lose their jobs to robots sooner than expected. In an environment of disappearing labour, it is important to figure out how to raise sufficient tax revenue to finance public spending. This book suggests that the UBI is an idea to consider. J.L.

Brian J. Arnold, “The Evolution of Controlled Foreign Corporation Rules and Beyond” (2019) 73:12 Bulletin for International Taxation 631 - 48 This article provides a masterful overview of the evolution of the controlled foreign corporation (CFC) rules, from their inception in 1962 to the Organisation for Eco- nomic Co-operation and Development/Group of Twenty (OECD/G20) base erosion and profit shifting (BEPS) project, and it makes a compelling case for extending the CFC rules, presenting them as a better alternative than the global minimum tax (pillar 2) proposed by the Inclusive Framework on BEPS to prevent base erosion by multinational enterprises (MNEs). Readers familiar with Arnold’s work will not be surprised by his candid and critical comments on some recent developments, such as action 3 of the BEPS project, pillar 2, and the anti-tax-avoidance directive (2016/1164) of the European Union (EU). The article has six sections. Following the introduction in section 1, section 2 describes the fundamental principles of international tax as a context for the review of the CFC rules. Arnold notes three fundamental principles—namely, (1) that taxing rights are shared on the basis of the source of income and the residence of taxpayers, (2) that the source country has the first right to tax the income, and (3) that the residence country has the residual right to tax and a corresponding obligation to provide relief from double taxation. He states that “it is unjustified revisionism to consider the prevention of double non-taxation to be a fundamental principle of the international tax system for the past 75 years.”6 The non-discrimination principle and the separate-entity principle are key subsidiary principles in the taxation of MNEs. Arnold points out that these general principles have been eroding from the outset. The CFC rules and the recently added article 12A of the UN Model (2017) are examples of such erosion. Sections 3 to 5 review the CFC rules in terms of their policy objectives, their basic operation and scope, their worldwide expansion, and their relationship with tax treaties. These rules, which originated in 1962 with the controversial subpart F rules in the United States, typically apply to a CFC’s non-business income that is

6 At 632. 394 n canadian tax journal / revue fiscale canadienne (2020) 68:1 taxed at a rate lower than the rate in the residence country of the corporate parent. The rules’ primary purpose is to prevent the erosion of the tax base of the residence country through tax deferral. CFC rules have since been adopted by most of the major capital-exporting countries, including several major developing countries, notably Brazil, China, Russia, and South Africa. There has been some disagreement about whether CFC rules are consistent with tax treaties, but the recent consensus is that they are consistent:

This remarkable journey of CFC rules, i.e., from unacceptable, to acceptable only if the scope of the rules was restricted, to unquestionably acceptable irrespective of the scope of the rules, reflects the rejection of the fundamental principle that non-resident corporations should be treated as taxable entities separate from their resident controlling shareholders. This shift also alters the allocation of taxing rights between source and residence countries.7

Section 6 of the article looks beyond the CFC rules, discussing their transition to a uniform worldwide minimum tax on CFCs. The transition was triggered by the United States’ “global intangible low-taxed income” (GILTI) and “base erosion and anti-abuse tax” (BEAT) rules, introduced in 2017. GILTI of CFCs falls outside the scope of the CFC rules, which use a “designated jurisdiction” approach, and thus the GILTI rules extend the CFC rules to global application and to non-passive income. The BEAT rules are, in effect, a minimum tax on base-eroding payments made to foreign related parties (that is, CFCs) by US companies. The GILTI and BEAT rules were the basis for the global anti-base erosion (GloBE) proposal under pillar 2, which was touted as a “comprehensive solution” to the problem of profit shifting to low-taxed entities, a “stop to a harmful race to the bottom,” and a “shield” for developing countries from the pressure to offer inefficient incentives.8 Arnold is critical of the GloBE on several grounds, including that it (1) is “not clearly articulated and does not stand up to scrutiny;”9 (2) “does not even attempt to prevent base erosion comprehensively” and, instead, “would implicitly legitimize base erosion to the extent of the difference between the agreed minimum tax rate and a country’s normal corporate tax rate”;10 and (3) adds complexity, given the duplication between the minimum tax rules and the CFC rules and the need to make changes to domestic laws and tax treaties. Also, “it appears to be fanciful to think that countries would be able to reach agreement on all the major features of a minimum tax.”11

7 At 641. 8 At 643. 9 At 644. It should be noted that the Inclusive Framework on BEPS released a public consultation document on November 8, 2019. See Organisation for Economic Co-operation and Development, Public Consultation Document Global Anti-Base Erosion Proposal (“GloBE”) — Pillar Two 8 November 2019 – 2 December 2019 (Paris: OECD, 2019). 10 At 645. 11 Ibid. current tax reading n 395

In section 7, Arnold criticizes the GloBE proposal from the perspective of a developing country:

Stripped down to its bare essentials, Pillar Two can be regarded simply as an ultimatum from a few powerful developed countries to the rest of the world to the effect that they must tax the income of resident companies at the agreed minimum tax rate, otherwise the capital-exporting residence countries would do it for them. The minimum tax would effectively limit the ability of developing countries to use tax incentives to attract investment by reducing their tax to an amount less than the minimum tax.12

Arnold advises developing countries to carefully consider the proposals and whether the countries themselves have the administrative capacity to handle the complexity that the proposals entail. In section 8, which concludes the article, Arnold argues that an extension of the CFC rules is preferable to the minimum tax proposals. The article makes a compelling case for extending the CFC rules. However, a key question remains: How are the CFC rules to be extended when action 3 of the BEPS project has been a “total failure”13 in extending the CFC rules? If the failure is caused by “the schizophrenic attitude of developed countries to the OECD/G20 BEPS Pro- ject,”14 what is needed to change this attitude? J.L.

Michelle Andrea Markham, “Arbitration and Tax Treaty Disputes” (2019) 35:4 Arbitration International 473 - 504 (https://doi.org/10.1093/arbint/ aiz023)

Michelle Markham, “The Comparative Dimension Regarding Approaches to Decision-Making in International Tax Arbitration,” in John H. Farrar, Vai Io Lo, and Bee Chen Goh, eds., Scholarship, Practice and Education in Comparative Law: A Festschrift in Honour of Mary Hiscock (Singapore: Springer Nature Singapore, 2019), at 115 - 35 The effective resolution of tax treaty disputes has been one of the priorities for the international tax community. Until the adoption of arbitration in the US-Germany tax treaty in 1998, tax disputes had been resolved only through a mutual agreement procedure (MAP) authorized by tax treaties. Since 1998, arbitration has gained increasing recognition: it was adopted by the European Community Arbitration Convention in 1990, included in the OECD Model Tax Convention in 2008, the UN Model Tax Convention in 2011, and the Multilateral Convention To Implement Tax Treaty Related Measures To Prevent Base Erosion and Profit Shifting (MLI),

12 At 647. 13 At 639. 14 Ibid. 396 n canadian tax journal / revue fiscale canadienne (2020) 68:1 which entered into force in 2018. In 2016, the United States revised its Model Income Tax Convention by making extensive reference to arbitration. In 2017, the European Economic and Social Committee adopted the council directive on tax dispute resolution and made arbitration mandatory. Close to 30 jurisdictions have opted to apply mandatory binding arbitration under part VI of the MLI. In these two papers, Markham examines the evolution and operation of tax arbitration. In “Arbitration and Tax Treaty Disputes,” she offers insights into the use of arbitration under the MLI. Since arbitration is part of the MAP mechanism, and transfer pricing has been a main area for disputes, she explores the potential for using bilateral advance-pricing agreements to prevent disputes, and she makes a special reference to recent practice in India. In “The Comparative Dimension Regarding Approaches to Decision-Making in International Tax Arbitration,” she compares the pros and cons of the two approaches to decision making: the traditional, “independent opinion style” arbitration and the “baseball style” arbitration under which the arbitrators pick one of two proposals made by the competent authorities. While noting the growing recognition of baseball arbitration, Markham points out that the actual practice of this style of arbitration is limited to dispute resolution under the Canada-US tax treaty. In theory, baseball arbitration offers the advantage of being speedy, and it is more suitable for specific cases involving numbers, such as transfer pricing, whereas the independent opinion approach is more suitable for resolving complex issues and establishing precedents. Therefore, there is a compelling case for flexibility, she maintains. As one of the leading researchers on tax dispute resolution, Markham offers valuable insights in these two papers. J.L.

Kim Brooks, “The Ethical Tax Judge,” in Robert F. van Brederode, ed., Ethics and Taxation (Singapore: Springer Nature Singapore, 2020) (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3485686) The Canadian Income Tax Act is a highly sophisticated and complex statute designed to raise revenue in a fair and efficient manner. It embodies fundamental principles and values. There is no doubt that the Act’s effective functioning is critical to Can- ada’s existence as a robust democratic state. Tax judges interpret the language in the Act in order to resolve disputes, thus performing a key function in the system. What can be expected of tax judges? What makes an ethical tax judge? These are among the questions tackled in this chapter. The chapter’s central claim is that “judges have an ethical obligation of competence that requires them to enhance their knowledge about language (in the context of statutory interpretation) and income tax law design and policy.”15 Since the meaning of words is understood through their use, the case for expecting tax judges

15 At 1. current tax reading n 397 to know something about language is evident. Competence about language goes beyond merely being able to understand the textual meaning of words. This chapter gives the comparative example of a grade 6 student reading the Act and a judge reading the Act:

[A very strong grade 6 reader] might be able to read every word of the statute, but one predicts would have no idea what it means, let alone how to apply it to a specific set of facts. The reason why judges even imagine they can do this exercise is because they bring to the exercise of reading the law a host of prior knowledge and assumptions— views about how legislation is drafted, views about the structure and design of the income tax law, views about the relationship between the judiciary and the legislature and so on.16

If judges knew more, they would likely make better and more ethical decisions. The author suggests that judges should be encouraged to know more about language and literature. Brooks maintains that competent judging requires insight into the higher-order objectives of income tax law. As she says, “Presumably the significance of any particular word in the text diminishes against the richness of the body of work that is the income tax law as a whole.”17 For example, since the purpose of the Act is to tax income, and “income” means a taxpayer’s economic income, the first question for a judge to address in reviewing a case that deals with income tax law is: Has the taxpayer received or earned something of economic value (or, in the case of expenses or losses, incurred a real economic cost)? If the taxpayer has received or earned something of economic value, it is likely that the amount received is taxable unless it is exempt under a tax-expenditure provision for social or economic reasons or owing to administrative hurdles. Judges should keep in mind that Parliament had a reason for exempting some receipts with economic value from tax. Taxpay- ers’ arguments that their income should be tax-exempt on the basis of some narrow application of the legal words used by Parliament ignore the realities of how words are used to convey meaning. The author suggests that there are three stages of statutory interpretation: (1) a rudimentary approach, which is primarily textual; (2) a functional approach, which is contextual; and (3) an enlightened approach, under which “the judge demonstrates clearly the ability to identify the type of provision (or provisions) in issue, can articulate their role in supporting the design of income tax law, and can assess the implications of alternative applications of the provision to the facts at hand,” and under which, “[w]here an interpretation would encourage tax avoidance, it is eschewed.”18 The higher-level competence not only is more ethical but also advances

16 At 3. 17 At 6. 18 At 9. 398 n canadian tax journal / revue fiscale canadienne (2020) 68:1 key societal goals fulfilled by the imposition of income tax. Brooks urges judges to build their knowledge and skills over the course of their careers to move up the competence hierarchy. She suggests that an ethical judge is a competent judge who adopts an enlightened approach to statutory interpretation. This chapter is delightful to read. It is a valuable contribution to the body of literature on tax ethics and on statutory interpretation. J.L.

James R. Repetti, “The Appropriate Roles for Equity and Efficiency in a Progressive Income Tax,” Florida Tax Review (forthcoming) (https://ssrn.com/abstract=3470360) Progressive income tax is a key instrument for redistributing social income and reducing inequality in Western democracies. Over the past 60 years, the level of progressivity has decreased. In the United States, for example, the top statutory tax rate dropped from 91 percent in 1956 to 37 percent in 2019.19 Tax policy debates during this period, because of concerns that a progressive system harms the economy by reducing labour supply and savings, came to focus more on efficiency than on equity. Meanwhile, inequality in the United States has worsened. This article argues that the emphasis on efficiency is misplaced and that, in the formulation of tax policy, equity should be given at least equal weight with efficiency. In the United States, given its high level of inequity and its low tax rates, equity should be given more weight. The author’s argument is supported by a review and analysis of a rich body of empirical and theoretical literature. The article explains the falsity of the argument that efficiency is preferable to equity as a focus of tax policy because predictions of efficiency gains from lower tax rates appear to be more certain than predictions of equity gains from progressive tax rates. The empirical evidence shows that individual tax rates have had little or no impact on labour supply and that no clear relationship exists between tax rates and savings in the United States. Furthermore, efficiency analysis, because it is rooted in assumptions about human behaviour and because the magnitude of the presumed efficiency gains or losses are quantified only by estimating behavioural changes, is inherently uncertain. Accordingly, the anticipation of efficiency gains is speculative. Equity gains might seem to be even less quantifiable: the costs that inequity imposes on the health, social well-being, and intergenerational mobility of citizens, as well as on the democratic process, were thought to be difficult to quantify. In fact, however, significant empirical analysis has quantified and corroborated equity gains. The article concludes that clear harms arise from inequality and uncertain harms arise from progressive tax rates. The article is composed of three substantive parts (parts II, III, and IV) that examine, respectively, (1) the evidence of rising inequality in the United States and its

19 At 3. current tax reading n 399 social and political impact, (2) the role of federal taxes in reducing inequality and in the decline of progressivity, and (3) the uncertainties involved in using equity to structure a tax and in using efficiency analysis in tax policy. In conclusion, the article maintains that the increased focus on efficiency at the expense of equity has exacerbated inequality and that the United States should give equity more weight in its tax policy. The problem of declining progressivity and increasing inequality is not limited to the United States. Canadian tax policy makers would be well advised to consider Repetti’s evidence and re-examine the proper role of efficiency and equity in the forthcoming tax reforms. J.L.

Jennifer Blouin and Leslie A. Robinson, “Double Counting Accounting: How Much Profit of Multinational Enterprises Is Really in Tax Havens?” (November 2019) (https://ssrn.com/abstract=3491451)

Estimates of the tax revenue lost to the BEPS practices of MNEs range from US $100 - 240 billion (the OECD estimate)20 to more than US $600 billion each year.21 The tax revenue losses in the United States alone are estimated to be US $57 billion to US$ 188 billion per year. However, no consensus exists on data and methodol ogies.22 The authors of this paper argue that these estimates are too high, owing to the accounting treatment of indirectly owned foreign affiliates in the Bureau of Economic Analysis’s (BEA’s) data on US international economic accounts. They explain how this accounting treatment leads to the double counting of foreign income and to misallocations to the incorrect jurisdiction. The BEA data is the source of the United States’ national statistics on inbound and outbound business activity, and it is often used in profit-shifting studies. For the purposes of BEA reporting, a foreign affiliate (parent) that owns another foreign affiliate (affiliate) will be required to report the income of the affiliate on its own income statement (referred to as the “equity income from investments”). Such equity income is not actual income, but only an accounting construct that is necessary because national statistics require MNEs to report affiliate-level information by jurisdiction. In 2016, two-thirds of foreign profits were reported in at least two different jurisdictions—once in the country of the parent affiliate and once in the

20 See Organisation for Economic Co-operation and Development, “What Is BEPS?” (www.oecd.org/tax/beps/about). 21 David Bradbury, Tibor Hanappi, and Anne Moore, “Estimating the Fiscal Effects of Base Erosion and Profit Shifting: Data Availability and Analytical Issues” (2018) 25:2Transnational Corporations 91 - 106 (https://unctad.org/en/PublicationChapters/diae2018d4a6.pdf ). 22 Organisation for Economic Co-operation and Development, Measuring and Monitoring BEPS, Action 11—2015 Final Report (Paris: OECD, 2015) (https://doi.org/10.1787/9789264241343-en), focuses on gathering and improving data and analysis, but provides for no definition quantitative assessment. 400 n canadian tax journal / revue fiscale canadienne (2020) 68:1 country of the affiliate that generated the profit from its underlying operations. The growth of equity income in tax havens is found to stem from locating foreign holding companies in tax havens. Once double counting is addressed, the correction reduces an estimate of the US tax revenue loss from 30 - 45 percent to 4 -15 percent of corporate tax revenues. The discovery of the double counting accounting issue in using BEA data has implications not only for the estimation of US tax revenue loss to BEPS but also for the comparison of US data with other countries’ data, given that the US national statistics have a unique accounting convention. At the time of writing, the claim in this paper has not been challenged by other researchers. J.L.

Rebecca M. Kysar, “Unraveling the Tax Treaty,” Minnesota Law Review (forthcoming) (https://ssrn.com/abstract=3420398) This article argues that the United States and other countries should unravel their jurisdictional provisions from tax treaties or even abandon tax treaties. The author suggests that the existing tax treaty network is “in upheaval in the face of globalization, technological advances, taxpayer abuse, and shifting political tides.”23 The literature has demonstrated that tax treaties cause tax revenue losses in developing countries, and this is likely the case in the United States, too. The purported purposes of tax treaties should be discarded: double taxation is a red herring and can be alleviated unilaterally, while double non-taxation is created, in part, by tax treaties. Furthermore, tax treaties “thwart reforms of the antiquated and broken international tax system.”24 For example, the destination-based cash flow tax proposal and domestic anti-abuse rules, such as the US BEAT, have been criticized for being inconsistent with tax treaties. This article states that “the treaty system hits the United States particularly hard, because, unlike other countries, politics have prevented the United States from adopting the type of destination-based tax that clearly falls outside the treaty system—a VAT.”25 This article adds to a growing body of literature that is critical of tax treaties. It identifies the provisions that allocate taxing rights between the contracting states as the most “damaging” aspects of tax treaties. It suggests that countries can abandon or scale back these provisions through the new MLI. J.L.

23 At 1. 24 Ibid. 25 At 51. current tax reading n 401

Richard Bird and Jack Mintz, “Sharing the Wealth: Article 82 of UNCLOS— The First Global Tax?” [2019] no. 4 British Tax Review 537 - 56 In this article, Bird and Mintz discuss article 82 of the United Nations Convention on the Law of Sea (UNCLOS), which imposes a levy on the exploitation of non-living resources in international waters and requires the revenue to be shared by the signatory states. The authors consider article 82 as, possibly, a first global tax: it is imposed under an international convention, and, although it is collected by national governments, the revenue is shared among countries. Since it is likely that article 82 will first be applied with respect to oil and gas in the North Atlantic near Canada, the implementation of this global tax is of practical importance for Canada. As the authors explain, article 82 has the attributes of a global tax because it answers key questions such as

1. Who sets tax rates? (Answer: the UN convention); 2. Who sets tax bases? (Answer: the UN convention); 3. Who pays? (Answer: the signatory country); 4. Who administers the tax? (Answer: the signatory country collects and the UN distributes revenues); 5. Who gets revenues? (Answer: unclear, but landlocked and poorer countries are to benefit more); 6. Who implements policies? (Answer: in theory, policy is carried out through amendment to the UN convention; in practice, collection is up to the coastal state; disbursement is up to the UN).

As the authors note, however, agreeing to share wealth on paper is one thing, especially when the time to deliver is safely in the future and the amounts involved are vague; the actual sharing of wealth is another thing: “[T]he main problem with Article 82 is less how to collect the money than how to deliver the proceeds in a way that will be broadly acceptable to both coastal states and recipients.”26 For article 82 to succeed, the UN (through the instrument of the International Seabed Authority [ISA]), “faces a major task in developing a feasible governance structure to provide a sound and transparent way of distributing funds in a way that will be broadly accepted as equitable.”27 Nevertheless, the authors suggest that the UNCLOS experience offers two important lessons for developing a global tax: start small and develop agreement in some specific area, and then, once agreement has been reached on scope and aim, move on to develop a few simple but broadly acceptable answers to widely recognized problems. They predict that the outcome of the article 82 experiment may have broader implications for international tax reform in general. J.L.

26 At 554. 27 Ibid. 402 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Joel Slemrod, “Tax Compliance and Enforcement” (2019) 57:4 Journal of Economic Literature 904 - 54 In the wake of the financial crisis of 2008, policy attention to tax evasion and enforcement has ramped up significantly in the developed countries, both in governments and in the general public. Perhaps in response to this attention, academic research in the area has vastly expanded and is showing no signs of abating. This article reviews the new wave of academic research, with a focus on its empirical rather than its theoretical contributions. Appropriately, it is written by an author who, both alone and with a range of collaborators, is probably the largest single contributor to this empirical research. The article adopts a “tax systems” framework in which a tax system is considered to comprise three elements: (1) tax bases and rates; (2) remittance rules (that is, rules specifying the entity or individual that must remit the tax liability and the time by which this must occur); and (3) enforcement rules—procedures for ensuring compliance, including third-party information reporting (that is, tax slips) and penalties for not remitting the tax. Slemrod focuses on remittance rules and, especially, enforcement rules. The article begins by reviewing a common theory of tax evasion, known as the Allingham-Sandmo model (or deterrence framework), which centres on the private costs and benefits to the person involved. Essentially, the choice of how much tax to avoid is approached like any risky decision or gamble; here, the risk is the possibility of the revenue authority’s auditing the taxpayer, detecting the evasion, and imposing a financial penalty. In the Allingham-Sandmo model, such penalties are treated the same as any other contingent cost; there is nothing per se about the illegality of the tax evasion that matters, and there is no intrinsic willingness to pay the tax owing (referred to in this literature as “tax morale”). In the Allingham-Sandmo model, the key parameter for research purposes is p —the probability that evasion will be penalized. This p is a combination of three things: the probability of audit, the probability that an audit will detect the evasion, and the probability that detected evasion will be penalized by the revenue authority. It is the perception of p by taxpayers that matters, regardless of the true situation. Much of the empirical work examined by Slemrod tries to measure the effect that communications from the tax authority have on taxpayer behaviour, presumably through the effect on the perception ofp . The parameter p is normally considered to vary with, among other things, the type of income—it is close to one for unreported employment income because of third-party reporting. On the other hand, it is much lower than one, and perhaps even close to zero, for unreported self-employment income (but increases with the magnitude of such income). Next to p, the most important parameter in the Allingham-Sandmo model is f, the penalty assessed per dollar of detected evasion. Much less research effort is devoted to this parameter because, although it is undeniably important, revenue authorities change this figure infrequently and are especially unlikely to change it on a temporary basis (or for certain individuals) for a research study. current tax reading n 403

The description above of the Allingham-Sandmo model is phrased in terms of a taxpayer who is an individual, since this has been the focus of most research to date. It would not be difficult, with some changes in phrasing, to apply this model to owner-managers, but its applicability to businesses with multiple owners, including public corporations, is less clear. The article next turns to the methodology used for measuring the amount of tax evasion and for measuring the success of various attempts to control it. Neither of these tasks is easy: the identification of tax evasion is challenging, given the threat of punishment and perhaps social shaming associated with it. Random audits are an essential starting point for measuring the amount of tax evasion, as the Canada Revenue Agency has emphasized repeatedly in its tax gap reports.28 Other methodologies used by academics include the following:

n Randomized controlled trials (RCTs). When a particular revenue authority action (A) is followed by a change in the level of tax evasion (B), did A cause B? Or were there other contemporaneous events that caused B? Maybe A’s effect was actually the opposite of what it appears. But if there are two statistically identical groups in the population, one of which is subject to the action from A and one that is not, then the basis for inferring causation is much stronger. This is the reason for using RCTs, in which each participant is randomly assigned to get treatment A or not. One might think that RCTs are impossible in the tax context, given that the random application of tax law seems inherently unfair, but opportunities to apply RCTs have been found in the context of the wording of letters from the revenue authority to taxpayers (discussed below).29 n Wider availability of administrative data. While previous research on tax evasion and enforcement was based on broad aggregates (for example, charitable donations by province for a number of years) or small samples (perhaps, for example, from taxpayer interviews, or from a small number of tax returns from participating taxpayers), many countries (including Canada) now allow researchers to use all tax returns for the country. To preserve taxpayer confi- dentiality, either the returns are anonymized (that is, identifying features, such as names and social insurance numbers, are removed) or statistical agency employees do the computations, and researchers see only the final statistical estimates (not the raw data). n Administrative data in which the tax rules have kinks, notches, and other points at which the rules change. The idea is that there is a threshold above or at which a particular tax treatment applies. Neighbouring observations on either side of the threshold can be thought to be similar in their economic aspects, but the researchers can infer that taxpayers have taken action in order to be on the tax-preferred side of the threshold.

28 See the CRA reports reviewed in this feature, (2019) 67:3 Canadian Tax Journal 893 - 96. 29 At 944. 404 n canadian tax journal / revue fiscale canadienne (2020) 68:1

n Traces of true income and evasion. In these studies, the researchers compare reported income with a measure of the true tax base. In one study, the researchers measured the ratio of food purchases to income for employees versus the self-employed; the higher ratio for the self-employed implied that they were underreporting their income (on the assumption that food expenditures were not truly higher for people with one type of income versus another).

So, what has the use of the Allingham-Sandmo model, as applied through the various methodologies noted above, taught us about tax evasion? Here are some of the highlights:

n Individuals earning types of income that are subject to third-party reporting are much more likely to report their income accurately. In particular, employees are much more likely than the self-employed to report their income accurately. This statement is unsurprising on its face, but in the details, there are three key conclusions. – First, this finding is a validation of the Allingham-Sandmo model; although some taxpayers would report their income accurately in the absence of an effective audit or penalty regime (in academic terms, they have “high tax morale”), many others would not. In terms of the parameters of the model defined above, we are learning how the parametersp and f affect evasion. – Second, it is perhaps the quantification that is interesting. One is from the US tax-gap measures, which are based on random audits: non-compliance is 7 percent when there is substantial information reporting but 63 percent when there is no third-party reporting.30 Other interesting findings emerge from traces-of-income studies. For example, the UK food-expenditure study referred to above concluded that self-employed taxpayers underreported their income by about one-third.31 A similar study, based on US charitable donations, reached the similar conclusion that the non-compliance rate of the self-employed was 35 percent.32 A third study, based on the supply of credit by banks in Greece to the self-employed versus employees, found that people in certain common professions were extended much more credit than were employees with the same income and the same credit history; the banks were apparently assuming that people in those professions reported less than half their true income.33

30 At 916. 31 Ibid. 32 At 917. 33 Ibid. current tax reading n 405

– Third, some people identifying as employees may also have found ways to underreport their income (perhaps through a second, part-time form of employment or some self-employment income), according to a Bank of Canada study comparing researchers’ imputations of expenditures to income reported in surveys and in income tax data.34 n Particular types of letters from the revenue authority to taxpayers, such as those giving audit rates and penalty rates, may substantially reduce evasion, at least in the short run. These findings emerge from the use ofRCT s that varied the wording of letters across randomly selected groups of taxpayers in Min- nesota, Detroit, Denmark, and Uruguay. Still, the differences in results across these studies suggest that much more work needs to be done; these studies may best be regarded as proof-of-concept of the use of RCTs, which had been thought to be inapplicable to tax issues. On the other hand, studies in Colom- bia and the United States show quite definitively that in-person contacts are more effective than letters.35 n Studies of the effects of audits have not led to results that can be generalized and applied to a variety of contexts. (That is, in methodological terms, the external validity of the studies is poor.) In particular, UK and Danish studies informed the taxpayer that he or she had been randomly chosen for audit, while another UK study did not; thus, taxpayers may have very different interpretations as to whether the revenue authority is “on to them.”36 Also, the taxpayers surveyed may not be representative of those normally chosen for audits.37 n Sometimes, increased enforcement can lead to less misreporting of the targeted type but more misreporting of a non-targeted type. For example, one study showed that requiring credit-card-issuing companies to report on payments to particular businesses caused better reporting of credit card receipts, but the overall effect on evasion was unclear because of a largely offsetting increase in less easily audited expenses associated with these receipts.38 n Remittance regimes matter. This is most easily observed through a comparison of evasion under VATs (in which remittance of the tax is widely diffused in the business community) with evasion under retail sales taxes (in which retailers alone remit the tax).39

34 At 918, citing Geoffrey Dunbar and Chunling Fu,Sheltered Income: Estimating Income Underreporting in Canada, 1998 and 2004, Bank of Canada Working Paper no. 2015 - 22 (Ottawa: Bank of Canada, 2015). 35 At 919 - 23. 36 At 925. 37 At 924 - 25. 38 At 928 - 29. 39 At 930. 406 n canadian tax journal / revue fiscale canadienne (2020) 68:1

n Public disclosure of tax liabilities, as in Nordic countries, has not yet been shown to have any significant effect in reducing evasion.40 n There is mixed evidence regarding whether better information reporting for charitable donations (in Canada, say) would reduce evasion. One study found that requiring taxpayers to attach the charitable receipts to returns in France in 1983 caused reported donations to fall by 75 percent (!). On the other hand, when Denmark moved to pre-populated returns that automatically placed charitable donations on peoples’ returns (replacing a system in which people simply declared the amount of their charitable donations), the amount of reported donations increased.41 A.M.

Natasha Sarin and Lawrence H. Summers, Shrinking the Tax Gap: Approaches and Revenue Potential, NBER Working Paper no. 26475 (Cambridge, MA: National Bureau of Economic Research, November 2019) This short paper presents some back-of-the-envelope calculations to support several interesting calculations about the US tax gap (the amount of revenue that would be raised under full compliance with the law less the amount of revenue actually raised). The authors make four quick points. First, the tax gap benefits primarily high- income earners. Second, Internal Revenue Service (IRS) financial resources for com- batting non-compliance have been declining over time, after adjustment for inflation. Third, the share of tax returns of all types that are audited has been declining over time, as has the extra revenue collected from audits; reversing these two trends would increase revenue, even after accounting for the required increase in the IRS budget. Finally, the authors show that the IRS budget for information technology (IT) has been decreasing over time, and they present particular facts to demonstrate that some parts of the IRS’s IT infrastructure are quite old. In particular, the IRS Individual Master File (IMF) and Business Master File (BMF) systems date back to 1960 and are the two oldest IT systems in the US federal government.42 The paper also contains some comments suggesting that the IRS could go farther in its use of analytics and third-party information reporting. A.M.

40 At 933. 41 At 927 - 28. 42 For this IT point, the paper, at 20, cites United States, Government Accountability Office, Information Technology: IRS Needs To Take Additional Actions To Address Significant Risks to Tax Procession, Report to Congressional Committees (Washington, DC: GAO, June 2018). current tax reading n 407

Miguel Almunia, Jarkko Harju, Kaisa Kotakorpi, Janne Tukiainen, and Jouko Verho, “Expanding Access to Administrative Data: The Case of Tax Authorities in Finland and the UK” (2019) 26:3 International Tax and Public Finance 661 - 76

Seán Kennedy, The Potential of Tax Microdata for Tax Policy, OECD Taxation Working Paper no. 45 (Paris: OECD, 2019), 46 pages As described in Joel Slemrod’s review article on tax compliance and enforcement (reviewed elsewhere in this feature), academic researchers are increasingly seeking to use government tax return data in their research, and governments are often complying with these researchers’ requests. Canada is no exception in this regard. The Kennedy paper explains that a key reason for this interest on the part of researchers is the low and continually declining response rate to surveys. Much of the governments’ interest stems from the demonstration by researchers that this data will help in shaping new policy insights. However, a lot of change is required for the use of this data to become widespread. In particular, researchers may need to develop new computing skills, and governments will need to document their data sets so that outside researchers can understand how to use them. Case studies involving Slovenia and Ireland illustrate the details of how to work with this data. The Almunia et al. paper uses the authors’ experience in doing such research with the Finnish and UK tax authorities to explain the details of how such a working relationship can be established and continued to the benefit of both parties, despite differences in the parties’ goals. A.M.

Robert Scherf and Matthew Weinzierl, “Understanding Different Approaches to Benefit-Based Taxation,” Fiscal Studies (forthcoming) The normative principle of taxing individuals according to the benefits they receive from government has a long history, and it is frequently invoked as a suitable principle for the provision of goods by local governments because it takes into account the varying preferences of the different people who live in each jurisdiction. How- ever, there is a fundamental uncertainty about the exact meaning of benefit-based taxation. This article sets out four different interpretations of this principle, ranging in time from Erik Lindahl’s 1919 interpretation to James Hines’s interpretation in 2000. One key question is whether those who demand more activities from the state should pay more for them or whether, instead, a common price for public goods should be charged to all. The paper uses graphs, analytic (mathematical) expressions, and a numerical simulation to illustrate the issues in the simplified context of a two-person economy. A.M. 408 n canadian tax journal / revue fiscale canadienne (2020) 68:1

Samara Gunter, “Your Biggest Refund, Guaranteed? Internet Access, Tax Filing Method, and Reported Tax Liability” (2019) 26:3 International Tax and Public Finance 536 - 70 What is the impact on the tax system of individuals filing tax returns electronically instead of by paper? Paper-based returns are largely a thing of the past, but it is useful to consider how this change to electronic filing has affected the tax system. Since the data needed to examine this problem directly appear to be unavailable, this article uses US data on the spread of high-speed Internet service as a proxy for the spread of electronic filing. Specifically, the author shows that when a zip code gains high-speed Internet, the use of itemized deductions (rather than the standard deduction) and the average value itemized in the zip code increases, and the tax- to-income ratio falls. Thus, it appears that high-speed Internet helps taxpayers to identify relevant deductions and reduce their tax liability. The fact that these results are driven by the availability of high-speed Internet in the filing year, and not in the tax year, suggests that the change in filing methods, from paper-based to electronic, is the cause of these results. A.M.

Office of the Auditor General of Canada, 2019 Spring Reports of the Auditor General of Canada to the Parliament of Canada, Report 3—Taxation of E-Commerce (Ottawa: Office of the Auditor General of Canada, 2019) Online purchases from vendors not carrying on business in Canada may result in the delivery of physical products or digital products (Netflix, music, and software, for example) to residents of Canada. Often, the appropriate goods and services tax/ harmonized sales tax (GST/HST) on such purchases is not received by the federal government. This can be a result of courier companies not collecting the appropriate amount of tax or the result of consumers not voluntarily declaring that they owed taxes and remitting them to the government. The report notes that of the 60 countries responding to an OECD survey in 2018, Canada was one of only two that relied on this voluntary declaration system.43 Further, the report notes that even though Statistics Canada estimated that two-thirds of adults in Canada purchased digital products from both foreign and domestic vendors from mid- 2017 to mid- 2018, only 524 GST/HST forms for purchases made from foreign and domestic vendors were filed in the federal government’s 2017 - 18 fiscal year.44 A.M.

43 At paragraph 3.23. 44 At paragraph 3.47.