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Illegal Tax Protester Schemes

March 14, 2012

On Feb. 28, Winnipeg chiropractor Rosalie Chobotar was sentenced in the Provincial Court of Manitoba to six months in jail and fined $162,513. Chobotar's offense: tax evasion. She is what Canada Revenue Agency (CRA) refers to as a "tax protester,” someone who believes income taxes are unconstitutional, optional or easily averted using certain interpretive techniques.

The justification tax protesters most commonly use for not paying taxes is the "natural person” vs "legal person” dichotomy. As the CRA explains, a tax protester treats him- or herself as two people for income tax purposes. The natural person is the individual who performs the labour required to earn income while the legal person is the entity the federal government creates by issuing a social insurance number. Tax protesters acknowledge that the legal person has to file an income tax return — which Chobotar did — but contend that income received as a natural person is not subject to Canadian income taxes. For example, Chobotar reported "nil” income on the tax returns she filed for the years 2002 to 2007; when she signed the returns, she included the phrase "to the best of my knowledge without understanding".

But, as Chobotar discovered, the courts do not accept this argument. (Go to And Chobotar isn't alone in paying the price. An Ontario tax protester was recently fined $522,000, representing 150% of the federal taxes evaded. The taxpayer was also given a one-year conditional sentence, ordered to remain in Ontario and surrender his passport, and perform 180 hours of community service.

A little history. Canada's income taxes were instituted to pay for the First World War. Prime Minister Sir Robert Borden introduced federal income taxes on business profits in 1916 and on personal income in 1917. At the time of introduction, the minister of finance stated: "I have placed no time limit upon this measure; a year or two after the war is over, the measure should certainly be reviewed.” Thirty-two years later, on January 1, 1949, income taxes were declared permanent.

The authority to tax. From where does the authority to impose taxes derive? Income taxes must have a constitutional basis that defines and legitimizes their implementation and administration. Canada's legal system is based largely on the common law of the United Kingdom and the rule of no taxation without representation extends back to the Magna Carta of 1215.

Although Canada's constitution now comprises many documents, section 52 of the Constitution Act 1982 provides that the Constitution of Canada is the "supreme law of Canada” and any law inconsistent with it has no force or effect. Included in section 52's non-exhaustive list of documents comprising the supreme law of Canada is the original British North America Act of 1867, written in London for the new dominion. This Act divides the authority to impose taxes between the federal and provincial governments. Under subsection 91(3) of the Act, Parliament has the power to raise money by any mode or system of taxation. Subsection 92(2) permits the provinces to impose income taxes but only through direct taxation within the province and only for raising revenue for provincial purposes. By organizing the power to tax in such a way, the federal government has considerable power over the national economy and the distribution of wealth amongst the provinces.

Courts confirm constitutional validity. Courts analyze the "pith and substance” of laws to determine their constitutional validity. The division of powers between Parliament and the provincial legislatures offers a hurdle for laws seeking validation. If, for example, a provincial legislature enacts a law that the courts construe as pertaining to another province, the court will strike the law down as ultra vires or outside the jurisdiction of the legislature. Other than this jurisdictional safeguard, Parliament and the provincial legislatures are almost unconstrained in their ability to impose and reform income taxes.

Conclusion. Tax protesters have no legal basis for their claims and, as Chobotar found out, there are serious consequences — interest costs and penalties and, possibly, jail time — for pursuing this course.

So, long story short: pay your taxes — you are legally obligated to do so.

See also the CRA's "Debunking Tax Myths.”

Greer Jacks is updating jurisprudence in the EverGreen Explanatory Notes, an online research library of assistance to tax and financial professionals in working with their clients.