Having just gone through tax filing season, Canadians can breathe a sigh of relief, at least temporarily, as they wait for the Canada Revenue Agency to determine whether it accepts their returns as filed. Those whose returns are not accepted will learn the meaning of living hell in tax litigation. The CRA does not forgive individuals for being overwhelmed by the Byzantine maze of tax rules. Taxpayers are presumed to know and understand almost 2,700 pages of tax law. The source doctrine is the rule most responsible for the intrinsic structural complexity of the tax statute.
The Income Tax Act divides income into categories known as “sources” of income: office, employment, business, property, and capital gains. Each is taxed at different rates and according to different rules. The sources are silos and cannot be co-mingled. Each source is determined separately according to complex rules that apply only to that source. For example, a capital loss cannot be applied against employment income, but a capital gain is added to income and taxable. All of which baffles taxpayers, and leads to expensive disputes with the CRA.
We inherited our source doctrine from the United Kingdom, which introduced the concept of a scheduler system in Addington’s Act (1803), which was used to finance the Napoleonic wars. The purpose of the scheduler system was to ensure taxpayer privacy by placing the responsibility for each of the schedules in the hands of different commissioners of taxation, so that no one Commissioner would have a global picture of an individual’s financial affairs. The system was not popular, but it eventually gained patriotic support. Some said that it was wiser to declare part of one’s profits to the income tax commissioners, rather than give up all it to Napoleon.
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