Legal Requirements and Tax Planning 

Mason v The Queen, 2014 TCC 297

It has long been accepted that taxpayers are free to arrange their affairs, legally and factually, so as to lower their tax burdens – to tax plan.  Tax planning is the arrangement, by a taxpayer, of his or her affairs in a manner that leads to the same real outcome but in a way that secures a tax liability that is less than it would otherwise have been. In other words, it is the walking of a path that offers the least tax resistance.

This is based (some would argue incorrectly) on the statements made in the oft-quoted passage by Lord Tomlin in the case of IRC v Duke of Westminster,IRC v Duke of Westminster (1936) AC 1, at p 19,  where it was said:

Every man is entitled, if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it would otherwise be. If he succeeds in in ordering them so as to secure this result, then, however unappreciative the Commissioner of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax.

The Duke of Westminster principle, as this is commonly known as, has been adopted and approved by the Supreme Court of Canada in Melville v The Queen [1998], 1 SCR 770, where Justice Iacobucci stated:

[…] taxpayers can arrange their affairs in particular ways for the sole purpose of deliberately availing themselves of tax reduction devices in the Income Tax Act.

What this means in the simplest terms is that courts will respect the legal relationships and arrangements that taxpayers are a part of, and will allow tax liability to flow on the basis of the legal relationships and not the economic substance of the transactions and events.   There are some exceptions to this (including ineffective transactions doctrine; sham doctrine; fraud; and the application of GAAR).

In order to plan effectively the taxpayer or his advisors must ensure to abide by the legal niceties – to ensure that the legal relationships that are purported to have been created are in fact created.  This required deep knowledge of the law, meticulous attention to detail, and true execution of activities in accordance with the plan.

In this case we have a failure on the part of the senior accountant on all three fronts.

– Sas Ansari, JD LLM PhD (exp)

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