A Winnipeg social activist (George Harris) is suing the feds in a class-action lawsuit because Revenue Canada (in 1991) allowed a rich Canadian family to move almost $2 billion in assets out of the country without paying capital gains taxes.

It is reported that the family in question is the Bronfmans and they avoided paying up to $700 million in taxes when they moved two family trusts out of the country.

To start, it must be noted that the Bronfmans did nothing wrong. Before moving their assets, they applied to Revenue Canada for a ruling (an interpretation) on how such a move would be treated by the taxman. Individuals and companies seek rulings from Revenue Canada each year based on the complexity and inconsistencies found in the Income Tax Act (the Act).

The Bronfman's lawyers, in arguing their case, took advantage of a loophole in the Act which ensured that taxes would not have to be paid when the assets were moved. After some discussion, Finance and Revenue officials agreed and "ruled" in favour of the Bronfmans.

Back to the lawsuit, Mr. Harris is suing the feds because he believes they made a decision (the Bronfman ruling) that violates various principles of the Act. And a recent Federal Court decision has upheld his right to pursue this lawsuit. Remarkably the government's defense was that Mr. Harris had no right to bring the lawsuit forward. Consider the following extract from the Federal Court decision.

"The defendants' (the government) attitude - and indeed, argument - is that the citizen and taxpayer is a nobody. By that medieval, aristocratic cast of thinking this free and democratic society founded on equality of civil rights and the rule of law belongs not to the people - the electorate and the taxpayers - but to the mandarins and the bureaucracy. They would have the plaintiff just pay his taxes and be quiet."

To his credit, the Minister of Finance, Paul Martin, has taken steps to close the loophole that was exploited. One of the main objectives of tax policy is to produce a sense of justice and fairness and by closing the loophole, he has attempted to restore a balance of fairness.

But Mr. Martin and the Revenue Minister, Herb Dhaliwal, shouldn't stop there. They should simplify the Income Tax Act which now runs over 1,400 pages plus another 700 pages of amendments and technical notes. It contains more words than the Bible for heaven's sake (pardon the pun). Simplification of the Act's language would almost eliminate the need for "rulings" in the first place. In this sense, Mr. Harris' case against the feds is a wake-up call for action.

That said, retroactively dinging them for $700 million in taxes would be extremely dangerous. It would be like making millions of Canadians pay taxes on income they have sheltered through RRSP contributions for the past 40 years. Such a move, in either case, wouldn't be just. So for those who say "make the rich pay", they should be fearful of the Pandora's box they would be opening, not only for the Bronfmans, but also for 15 million taxpayers.