The RSM Canada National Tax Centre is pleased to present a five-part series on the role of taxation in promoting economic gender equity. This series focuses on consideration of gender bias in taxation and its potential impact on both individuals and the economy, highlighting key challenges amid the COVID-19 pandemic, the path forward, and what we as tax practitioners can do to assess and check our own gender biases in the tax system.
A search for “sexism” on Taxnet Pro returns three hits: Symes v. R., a 1993 case on the deductibility of child care expenses; another case from 1993 on the constitutionality of a child tax credit; and Canada Revenue Agency guidance on permissible activities of registered charities. The same search on TaxFind returns no direct hits and two passing references to sexism in fiscal policy, both relegated to footnotes.
These limited search results might lead a tax professional to believe gender parity is of little concern beyond the policy-making phase. Once the rules are enacted, regardless of whether they’re based on equitable policies, their application by tax professionals is gender-blind—right?
Wrong. A more insidious and far-reaching source of bias gets significantly less airtime than tax policy: the judgment of tax professionals in applying policy. The Income Tax Act provides both objective and subjective tests for determining taxability. The use of bright-line, or objective, rules like formulas is generally more likely to support equitable taxation. Many other rules, however, require subjective weighing of various factors in the context of precedents, administrative guidance, and that amorphous yet all-encompassing concept: reasonableness.
The Income Tax Act has 281 sections, in which “reasonable” appears more than 170 times. In addition, countless provisions turn on elastic and sometimes unquantifiable concepts such as degree of activity, involvement, control or relationship—all requiring subjective judgment in their application. The general anti-avoidance rule, known as a “smell test” to identify potential tax evasion, is further evidence of the outsize role of subjective judgment in the application of Canadian tax rules.
Leading case law describes reasonableness for tax purposes as “what a reasonable business man” would do in a given set of circumstances. While general references to men are understood to include women and vice versa, business decision-makers—corporate boards of directors, C-suite executives and entrepreneurs—are overwhelmingly male in Canada. Therefore, actions assessed for reasonableness versus tax avoidance are more often than not benchmarked against a predominantly male perspective.
For example, one cornerstone Canadian income tax rule prevents the deduction of a business expense from taxable income “except to the extent that it was made or incurred by the taxpayer for the purpose of gaining or producing income from the business or property.” Application of this purpose test to outlays related to stereotypically female concerns (e.g., care of dependants, relationship building, mental health) is inevitably shaped by the dominant business population: men. As the dissenting opinion in Symes presciently stated: “The traditional interpretation of business expenses in the Income Tax Act was shaped to reflect the experience of business men. Because the present world of business increasingly includes both men and women, the meaning of ‘business expense’ must account for the experience of all the participants.”
At first glance, some types of Canadian tax may appear less susceptible to gender bias—corporate cross-border tax, for example. Surely application of the tax rules governing the dealings between foreign corporations is gender-neutral? Maybe. But those taxpayers are legal fictions, and their controllers are often men. Section 247 of the Income Tax Act requires dealings between multinational enterprises to be conducted at “arm’s length,” which usually involves market pricing. But is market pricing alone an adequate gauge of neutrality, without consideration of the so-called softer, female-oriented aspects of a business transaction, such as community consequences, environmental impacts or social mores?
The tides may be changing. Take the case of Penate v. R., quietly decided in 2020. That case determined a female business owner’s inability to pay taxes was justified due to an “exceptional circumstance”: Sexual harassment and racial discrimination by her clients rendered her unable to collect the payments needed to fund her tax obligations.
Unfortunately, sexual harassment of female business owners is a tale as old as time. What is new, and noteworthy, is that the judge in Penate considered sexual harassment a legitimate, or reasonable, “exceptional circumstance” that excused the taxpayer’s fiscal delinquencies.
Through heightened awareness and positive action, tax professionals can help transform the shifting tides into a sea of change. Taking a cue from the inclusive thinking exemplified by Penate, we must recognize our unique role in promoting gender equity in taxation. Given the benefits of economic equity for both individuals and the country, it would be unreasonable not to.