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Normal Bacal's Book and Cooperate Tax Law


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StephenToast
  • Law School Admit

(I asked the same question on the Discord a few days ago, but I'm hoping to get even more responses here)

 

I'm starting law school in a few months. I'm trying to get a sense of different areas of law and I recently read Norman Bacal's book, Breakdown: The Inside Story of the Rise and Fall of Heenan Blaikie.

I'm trying to keep an open mind about all areas of law, but his account of cooperate tax lawyering pissed me right off. His portrayal of the field seems to be that all he and his firm did was to exploit loopholes in the tax code to divert taxpayers' money to their clients, which violently disagree with my personal sense of morality.

Leaving my personal persuasions aside, I'm sure there are more nuances both in his characterization of the field and its interaction with our government and society. So, can anyone here tell me their take on the field and tell me to stop getting so riled up?

A brief excerpt of his book,

Spoiler

"I was responsible for every aspect of the deal; I was a veritable one-man band. For the first time in my career, I was in charge: responsible for the tax opinion, the offering document, all the contracts, and the closing. The experience had me working around the clock with Claudette Bellemare, whom I had feared as a junior lawyer. Her role was to review all my work that was not tax related. In my career I never worked with a lawyer with greater endurance for all-nighters or with a greater ability to catch typos at four in the morning.

The plan itself was not all that complicated, but it was revolutionary enough to change the face of film finance in Canada. The original premise had not changed. The tax plan I had learned from Don Johnston worked brilliantly for Canadian movies that failed financially. But now we lived in a world where investors would likely recover most of their investment, so we came up with a new plan that would work whether or not the film made money.

The core of the new scheme was a buyback option. If you invested $100 in a film through a limited partnership, the producer would promise to buy back your investment within two years for $85. If the film was a success you could keep the partnership unit. If not, you could exercise the buyback option and limit your loss to $15.

That does not sound very good—until you factor in the magic of the Canadian tax system. Capital gains tax was one-half the ordinary tax rate, so this was an arbitrage. You saved tax on the purchase at a 60 percent tax rate, but you paid tax on the sale at a 30 percent rate. If you were a high-income earner, after counting the tax savings and capital gains tax, you ended up with a profit of $13, or over 20 percent of your after-tax cost, regardless of whether the film made any money. Who would not want an investment like that? The tax system made the whole investment risk-free."

 

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Chambertin
  • Lawyer

What is there to get riled up? Norm didn't make the rules, Finance does. With the exception of Kurrika, the smartest people people practicing tax aren't working for the government because they don't pay enough and devote enough resources to it and even if they could, the politicians mangle up all any good legislation. 

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StephenToast
  • Law School Admit
1 hour ago, Chambertin said:

What is there to get riled up? Norm didn't make the rules, Finance does. With the exception of Kurrika, the smartest people people practicing tax aren't working for the government because they don't pay enough and devote enough resources to it and even if they could, the politicians mangle up all any good legislation. 

Sure Norman Bacal did not write the legislation, but he nevertheless devised a scheme to exploit the legislation in a way that I personally find amoral. I do recognize that it is just my own opinion and it's perfectly legal. I'm not here trying to start a witch-hunt against Norm. I'm riled up because he described a situation where the rich exploits the tax code, with the aid of tax lawyers (albeit legally), for their own gain while the taxpayers foot the bill. Like you said, there's a mismatch of resources between private and government tax lawyers that contributed to this whole situation. It is this entire situation that riled me up.

I suppose a better way to phrase my question is, is there any other perspective to look into these kinds of tax schemes beyond "well we didn't write the rules, but the rules are the rules so we might as well make the most out of it?"

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BlockedQuebecois

I don’t really understand what’s immoral about paying the least taxes possible within the bounds of the law. That’s what I do every year. I don’t refuse to claim my tuition tax credits just because I’m better off than many Canadians.

If anyone was acting immorally here, it was the government. If the government wanted to shut down the scheme, it easily could have. 

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meandtheboys
  • Law Student
2 hours ago, StephenToast said:

the rich exploits the tax code, with the aid of tax lawyers (albeit legally), for their own gain while the taxpayers foot the bill

But what about the poor exploiting the tax code?  And how do you even define "rich"?

MaximumBob had a great example from a while ago.  The premise was that tax avoidance schemes, at their core, were just legal ways to structure transactions so as to avoid unnecessary tax.  So a working class person earning minimum wage, who is by no means rich, could go to a grocery store and deliberately buy all their cake ingredients separately rather than buying a whole cake to avoid paying GST.  By definition, this is a tax avoidance scheme since it's just a legal way to structure their transaction to avoid tax.  Is this less immoral than the tax avoidance scheme you gave as an example?  I don't see why one is less or more immoral than the other when ultimately, at their core, they are the same thing.

That aside, like BQ, I don't see what's immoral about paying the least amount of tax possible as long as you're doing it legally.  There's no legislation that sets a "moral" amount of tax to pay.  

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LMP
  • Law Student

I can certainly see why you find this aspect distasteful but at the end of the day this firm was simply providing the best possible legal advice to their clients. 

Which, to me, is the mark of a good lawyer.

But I'd equally respect someone who refused to work in a role (like the ones talked about in Bascal's book) where they had to violate their own morales to help a client. 

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StephenToast
  • Law School Admit
Posted (edited)

First off, thank you so much to everyone who replied to the thread. After reading your comments, I think I have better grasp on why I reacted to Norm's book in such a way and my own underlying believes about taxation in general.

I think the quote from Maximumbob sums it up quite well, "tax avoidance schemes, at their core, were just legal ways to structure transactions so as to avoid unnecessary tax." Maximunbob and everyone else in this thread's define "unnecessary tax" as the tax that you are not legally obligated to pay, while I understood it as the money not needed by the government to funnel back into social programs. I personally believe that we as members of society own each other beyond the legal minimum, and those that makes more ought to pay more (which is a fairly easy position to take when I'm at the moment, income-wise, pretty close to the bottom of the rung). For these reasons, I believe it is our moral duty to pay our tax in accordance to both the letter and the intent of the relevant tax laws.

So, when I read that some highly trained lawyer inventing a "revolutionary tax scheme," I assumed that they managed to find loopholes in the tax code to bend the rules in a way that was not intended by their drafters, which allowed them to get away with not paying (my definition of) the necessary tax. Hence my use of the word "exploit," all the moralizing talk, and my visceral reaction to the book.

Still, I recognize that my definition of "necessary" is just my own and I have neither the right nor the authority to hold others to my hoity-toity socialist-utopian standard. To sum it up, thank you so much to @Chambertin, @BlockedQuebecois, @meandtheboys, and @LMP for helping me understand the logic behind tax avoidance schemes. That being said, I think I can safely cross "advanced tax planning" off the list of my potential areas of practice, purely as a personal choice.

Edited by StephenToast
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Psmith
  • Lawyer

Private practice involves tax avoidance maybe more than you realize. A simple estate plan for a couple will involve putting the house in joint tenancy to avoid probate tax. In civil lit or family, you will structure a settlement to minimize the tax consequences. I'm not in big law but I can only imagine a major deal will involve working with Bacal-like tax specialists.  You have a duty to act in your client's interest, and you'll breach it if you don't do this.

Clients pay your high hourly rates because you are either protecting their capital or increasing it. Yes, this is capitalist. You can either reconcile yourself to this or stick to the practice areas that are exceptions - criminal, immigration, government work, etc.

I won't tell you what to believe. But when you've earned a higher income or run a business yourself (which in crim or immigration you likely will!), I don't think you'll be saying so blithely that money you've earned, which you have a legal right to keep, is somehow "taxpayers' money".

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LMP
  • Law Student
4 minutes ago, Psmith said:

Private practice involves tax avoidance maybe more than you realize. A simple estate plan for a couple will involve putting the house in joint tenancy to avoid probate tax. In civil lit or family, you will structure a settlement to minimize the tax consequences. I'm not in big law but I can only imagine a major deal will involve working with Bacal-like tax specialists.  You have a duty to act in your client's interest, and you'll breach it if you don't do this.

Clients pay your high hourly rates because you are either protecting their capital or increasing it. Yes, this is capitalist. You can either reconcile yourself to this or stick to the practice areas that are exceptions - criminal, immigration, government work, etc.

I won't tell you what to believe. But when you've earned a higher income or run a business yourself (which in crim or immigration you likely will!), I don't think you'll be saying so blithely that money you've earned, which you have a legal right to keep, is somehow "taxpayers' money".

Would you say that taking a tax course in law school is highly recommended? Given how many areas of practice it seems to touch on?

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StephenToast
  • Law School Admit
25 minutes ago, Psmith said:

I won't tell you what to believe. But when you've earned a higher income or run a business yourself (which in crim or immigration you likely will!), I don't think you'll be saying so blithely that money you've earned, which you have a legal right to keep, is somehow "taxpayers' money".

Fair enough. I honestly am looking forward to finally make it out of the bottom income tax bracket and see if I'll make a hard right turn!

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5 hours ago, LMP said:

Would you say that taking a tax course in law school is highly recommended? Given how many areas of practice it seems to touch on?

Yes, even just so you can recognize when you need to get some advice.

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6 hours ago, Psmith said:

 A simple estate plan for a couple will involve putting the house in joint tenancy to avoid probate tax.

For StephenToast -  and government felt like it, they could tax this.  But they don't. So the Probate Fee Act never gets changed.  But they also don't care enough about exempting a transfer of a house to a spouse via probate to make it not taxed under the probate fee act.

 

someone should do something...

Edited by Kurrika
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