Canada: Private Sector Consultants In The Tax Legislative Process

Last Updated: May 10 2013
Article by Thomas E. McDonnell QC

In my January 8, 2013 post ("My Name is Cliff, Drop Over Some Time"), I criticized parliamentarians for passing most tax legislation without much, if anything, in the way of informed debate. As a consequence, there is a lot of pressure on the Department of Finance (the group primarily responsible for drafting tax legislation) to "get it right" the first time. And, as we know, it doesn't always manage to do so, and we have to amend (and re amend) the original version to correct the initial mistakes. Input from outside experts could help here, but in Canada we lack an institutionalized approach to involving private sector experts in the tax legislative process. There used to be an informal executive interchange program that served this purpose, but I don't hear much of it these days.

I was reminded of this by a news article in the February 1, 2013 edition of the Belfast Telegraph." (Oliver Wright, "Top accountancy firms accused of exploiting tax laws they help to draft.") In the UK, senior employees of the big four accountancy firms are often seconded to the Treasury Department to assist officials in writing complex new rules. Noting this, the chairman of the House of Commons Public Accounts Committee described the practice as "shocking." She is quoted as saying "You're writing the technical stuff then you use the very stuff you've written to go away and advise your clients how they could use the new law to cut their tax bills." The chairman described the revolving door between Whitehall and the accountancy firms as an "abuse of process." To me, what's shocking here is the attitude underlying these remarks.

Let's acknowledge that the tax systems in the UK and Canada are complicated; woefully so in many respects. This is unlikely to change in any material way so long as we rely on an income based tax as our primary revenue source. Like it or not, the commercial world is complicated. Quite apart from addressing purely domestic arrangements, modern tax systems have to operate across borders in a rapidly globalizing world. Experience shows how really difficult it is to craft rules that accomplish their intended objectives without doing unintended harm. Expert input from the private sector can be a big help in getting the drafting closer to right the first time.

I don't buy the complaint that having worked on the drafting of some new rule, a private sector specialist acts improperly in later advising clients on how the new rule works. It is a telling commentary on the extent to which the parliamentarian quoted above misunderstands the tax legislative process. It is parliamentarians, not outside experts, who make the rules. If the parliamentarians don't like the way their rules work, they're to blame for not understanding what they're doing, not the consultants. What's really behind the complaint, I fear, is the idea that taxpayers generally should ignore the actual words of any tax rule and pay tax on the basis of some unexpressed moral principle. Putting it bluntly, I think complaints of this type are based on whatever the complainer feels the targeted taxpayer ought to pay, regardless of what the legislative words say it has to pay. The private sector expert is then demonized for explaining what the actual words of the rule say, even when the advice relates to legitimate tax planning. As I have said before, this kind of posturing by legislators is dangerous because it encourages the public to think that taxpayers who reduce their taxes by following the rules are in some way morally deficient. As the Belfast Telegraph article indicates, that opprobrium is now to be extended to those who temporarily lend their talents to the Treasury Department to assist in the drafting process.

In Canada, it used to be the practice for senior tax advisors to join Finance on a temporary basis to assist in the tax drafting process. Happily, it was not suggested that they were somehow acting improperly when they subsequently gave advice to their old clients on the operation of the rules with which they were involved. The practice of spending time at Finance seems to have declined in recent years. I don't think this is because of a change in attitude at Finance, but because nowadays it is difficult to persuade senior practitioners to do so. That being said, I'm grateful that we haven't yet heard here the kind of screams now emanating from the UK when a private sector specialist does provide input on proposed tax changes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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