About that tax break

That’s some “routine.” When Brian Mulroney came cap in hand to Revenue Canada nine years ago, the federal agency agreed to tax only half of the $225,000 the former prime minister received from Karlheinz Schreiber in a now-infamous series of cash-stuffed envelopes. It was a bargain to die for—at least to anyone who has neglected to declare sizable amounts of income. In an appearance last week before the public inquiry into Mulroney’s dealings with Schreiber, Christiane Sauvé of the Canada Revenue Agency acknowledged that such reductions were “routine” at the time, but hastened to add the practice has been stopped.

Maybe. But Mulroney’s sweetheart deal has shone unwelcome light on a dark reach of the tax system, raising questions of basic fairness at a time when Canadians feel the taxman’s every pinch. The little-known “voluntary disclosures program” is supposed to offer amnesty to those with undeclared income, sparing them fines and criminal prosecution while allowing Ottawa to collect money it might otherwise never see. But the government’s information circulars on the program say nothing about whittling down the amount owing, and taxpayers might be forgiven for wondering why we’re giving tax laggards “amnesty” at all.

To Paul DioGuardi, an Ontario-based lawyer who handles voluntary disclosure cases for clients across the country, Mulroney’s deal was anything but standard. Yes, federal tax authorities in Quebec have been willing to bargain with those who came forward with undeclared income, he says, but only if they thought some or all of the money might be non-taxable (e.g. an inheritance from a relative who had kept his taxes up to date). In Mulroney’s case, the money was defined as payment for services to Schreiber, and as such should have been fully taxed, says DioGuardi. “I’m not saying Mr. Mulroney or his counsel did anything wrong,” he adds. “But in future negotiations with the CRA, I’m going to say, ‘Hey, you did this in the Mulroney case. How about giving our client a break?’ ”

In fact, the program has been rife with inequities and ad hoc policy throughout its 36-year history. For starters, the 50 per cent discount was available only in Quebec—a vagary the CRA’s spokespeople could not explain when contacted last week (the agency abruptly ended this sort of haggling last year, Sauvé told reporters at the inquiry, in the interest of creating “consistency across Canada”). Meantime, the World Bank has voiced doubts about the benefits of tax amnesty programs, warning they encourage evasion by sending the message that enforcement measures are weak. “Unless an excellent and inarguable reason can be found for an amnesty,” the bank advises governments on its website, “don’t declare one.”

David Rotfleisch, a Toronto-based lawyer who specializes in voluntary disclosure, disagrees, noting that many people fail to declare income out of honest neglect. To him, the voluntary disclosure is “a win-win” program that brings in revenue while allowing otherwise law-abiding citizens to unburden their consciences. It’s a degree of optimism others might not share. If last week’s revelations are any guide, after all, “winning” the tax game means knowing the government’s routine is a whole lot more important than the rules.