Stop Hatin’ On Lawyers For The Panama Papers

Damon Wayans said it best on the epic sketch show, In Living Color. Donning grey beard and hair, Damon transformed into comedic legend Redd Foxx. At the time, Redd was still alive and facing some difficult tax problems with the Internal Revenue Service (he’s dead now, sadly, but probably still negotiating with the IRS). With that as the set-up, Damon opened the sketch, thusly:

“Hi, this is Redd Foxx with your 1990 tax tips. Tip number 1… pay ‘em. Tip number 2, if the IRS-man show up to your house, lie… about everything… especially who you is…”

Brilliant.

I agree with tip number 1. I’m not so sure about tip number 2…

But, here’s the question. When Redd Foxx says “pay ‘em”, what exactly is “‘em”?

That’s a tricky question. Taxes are not black and white. In fact, the Income Tax Act is one of biggest books I’ve ever had the pleasure of schlepping in a knapsack. It contains provision after provision designed to determine what “‘em” is, and to get you to pay the right amount of “‘em”.

Which leads me to the Panama Papers. They’re causing quite a stir, huh? World politicians are dropping quicker than Bernie Sanders’s mathematical chances of beating the former FLOTUS. And, of course, the whole schmozzle has put law firms on the defensive for facilitating nefarious offshore transactions. It’s seems like the automatic assumption is that people who use offshore vehicles are committing tax evasion, and the lawyers who help clients move assets offshore are unethical.

The fact is, offshore vehicles are a legitimate and legal way to do business… until they aren’t. There is a very sane reason to set up offshore. If done correctly, it can potentially save you taxes—legally. It’s called tax avoidance (not evasion). And, who doesn’t love avoiding taxes?

Additionally, moving your business offshore can help reduce red tape and cut certain administrative expenses. Who’s against reducing expenses?

In Cayman, for example, offshore exempt companies do not have to file annual forms with the government or meet any accounting standards. For a closely-held company that does business internationally, this can result in a significant cost savings versus Canada, where every company has to produce annual financial statements in order to determine how much tax to pay.

Still, I hear arguments that even if it’s not illegal to set up offshore, it’s still immoral.That’s B.S. Tax avoidance isn’t murder. It’s not coveting thy neighbour’s wife. I can’t remember the other eight commandments, but I’m pretty confident the word “tax” does not appear in any of them.

Moving funds offshore to evade taxes is legally wrong. It harms society. It takes away from the tax base we need to pay for schools and social programs and senators.

But, legal tax avoidance is neither wrong nor immoral, IMHO. It’s the system… until it isn’t.

I once sat with the late Wolfe Goodman, dean of Canadian tax lawyers. He told me back in the early days of his career he would devise a clever tax-reducing strategy for his client; the Canadian government would close the loophole in the next iteration of theIncome Tax Act. The cunning Wolfe would then devise a new strategy; the Canadian government would close that loophole too.

It is through this yin and yang of clever tax lawyers trying to outwit CRA that our hefty tax code developed.

Therein lies the answer. If we aren’t happy with Canadians moving money offshore, revise the Income Tax Act to make it illegal to move money offshore—or at least to certain offshore jurisdictions that lack transparency. Additionally, put more resources into enforcing the Income Tax Act. Compared to the IRS, Revenue Canada is notoriously lax with people who evade taxes or engage in aggressive tax planning. You can read “aggressive tax planning” as “probably tax evasion, but don’t worry about it because Revenue Canada is lax. You likely won’t get caught.”

Apparently the Canadian government is trying to change its image by budgeting more than $400 million over the next five years to crack down on tax evasion. Captain Obvious says this has two benefits. First, presumably Revenue Canada will find and collect a bunch of unpaid taxes (hopefully more than $400 million). Second, it may change the notion we are lax on tax cheats and, thus, actually create a deterrent for tax evasion and aggressive tax planning.

The other big concern people have about offshoring is “asset protection”. This is a nice way of saying creditor proofing. There is a perception that once you get your funds offshore you are safe from pesky creditors. That may be the case in some jurisdictions, but the world is a-changing. David Dinner, a Canadian lawyer who now practices in the Cayman Islands, says enforcing a Canadian judgement against a Cayman company is no more difficult or expensive than enforcing a Canadian judgement against a Canadian company. Thus, Cayman is not the place to domicile your funds if you have creditors chasing you around the globe.

To sum, tax evasion bad, tax avoidance fine… until it isn’t. Creditor-proofing bad (IMHO).

But none of it’s immoral in a biblical sense. And certainly not something people should be yelling at lawyers for if they’re helping their clients do things that are legal… until they aren’t.

If they’re helping clients evade taxes, that’s a different story.

But, helping you to navigate the tricky Income Tax Act and to pay every dime of tax required by the Act—and not a cent more—is exactly what you pay your overpriced lawyer for.

So don’t be hatin’ on good lawyers. And stop calling them unethical for doing their jobs (as long as they do them ethically).

That’s the View From Up North. Have a great week.

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