Taxing by Default

By Satterthwaite, Emily | McGill Law Journal, December 2013 | Go to article overview

Taxing by Default


Satterthwaite, Emily, McGill Law Journal


This paper is the first in the Canadian legal literature to address "tax elections", which bestow upon taxpayers the ability to choose among two or more available tax treatments for a single taxable event. I argue that policymakers should adopt a rebuttable presumption in favour of setting default treatments according to the preferences of a majority of eligible taxpayers, unless a "penalty default" structure can he shown to convey sufficiently valuable information to the government. To illustrate how such a presumption would work in practice, I apply it to two similar but inconsistently structured tax elections in the Income Tax Act relating to transfers of property to a spouse and to a corporation (subsections 73(1) and 85(1), respectively). I find that the design of subsection 73(1) is sound--its majoritarian default of tax-deferring "rollover" treatment avoids unnecessary transaction costs and squanders no information-forcing role. On the other hand, subsection 85(1) is counter-majoritarian, and the information disclosed jointly by taxpayers and corporations via the 85(1) election can be obtained at lower cost by requiring corporations to routinely report information about contributions of property. Mandatory reporting would also bolster the government's anti-avoidance efforts. Thus, amending subsection 85(1) to reverse its default treatment would make an important corner of the income tax less costly and, at the same time, more equitable.

Cet article est le premier dans la litterature juridique au Canada d'aborder la question des choix fiscaux, qui accordent aux contribuables la possibilite de placer un seul fait generateur de l'impot sous plusieurs traitements fiscaux. Je postule que les decideurs pohtiques devraient faire l'adoption d'une presomption refutable en faveur d'introduire des traitements fiscaux par defaut, selon les preferences de la majorite des contribuables admissibles, a moins qu'une structure << penalty default >> s'avere a meme de communiquer de l'information suffisamment importante au gouvernement. Pour demontrer la demarche pratique d'une telle presomption, j'applique cette derniere a deux types de choix fiscal dans la Loi de l'impot sur le revenu qui sont similaires mais structures de facon inegale : le transfert d'un bien en immobilisation a l'epoux et celui a une societe (paragraphes 73(1) et 85(1)). Je trouve que la conception du paragraphe 73(1) est valable : sa regle majoritaire par defaut, lequel consiste en un traitement de roulement a imposition reportee, evite d'ajouter des couts de transaction et d'obliger de l'information. En revanche, le paragraphe 85(1) est contre-majoritaire, et les informations declarees conjointement par les contribuables et par les societes sous le paragraphe 85(1) peuvent etre obtenues a moindre cout si on oblige les societes de faire des declarations habituelles concernant leur apport de biens. D'ailleurs, la declaration obligatoire renforcerait les efforts du gouvernement contre l'evitement fiscal. Donc, une modification du paragraphe 85(1) en vue de changer son traitement par defaut peut rendre cette procedure en droit fiscal moins couteuse et plus equitable.

Introduction

I.    The Transaction Cost Implications of Default Setting

II.   Setting Defaults to Reveal Information

III.  The Opposite Defaults of the Subsection 73(1) and
      85(1) Elections
      A.  Why Offer a Rollover in the First Place?
      B.  The Subsection 73(1) Rollover
          1.  Mechanics
          2.  Statutory History
      C.  The Subsection 85(1) Rollover
          1.  Mechanics
          2.  Statutory History
IV.   Evaluating Subsections 73(1) and 85(1)
      A.  Subsection 73(1)
      B.  Subsection 85(1)

Conclusion

Introduction

Even though most Canadians may not think of taxes as optional, there are over 230 provisions in Canada's Income Tax Act (the Act) (1) that give taxpayers a choice regarding how to calculate their taxes. …

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