Sorry, incomes taxes are legal
Every so often someone will follow my work and post links about how income tax is "really" illegal or unconstitutional. Most people probably know this claim is conspiracy-theory bunk, but this notion keeps re-appearing anyway. And people who follow such advice end up in trouble with the CRA or IRS. Below is an excerpt from Tax Me I’m Canadian (the 2013 edition) where I try and dispel the myth.
Mark Milke, National Post, December 30, 2013
If I had a buck for every time someone emailed or called to insist that “the federal government cannot legally collect income tax,” I would have long ago retired to sip red wine in an expensive villa in southern Italy. Out of any question (or assertion) that I have received in two decades of work on tax-and-spend issues, the bizarre claim that federal income tax is illegal or unconstitutional ranks right up there with “Truther” myths about 9/11 and claims from my dentist that “this won’t hurt a bit.” Want to give accountants and lawyers plenty of money, and judges plenty of work, in the years ahead? Try not paying income tax for a season or two; the courts will not come to your aid.
Like any conspiracy theory, it is impossible to track every strand in the origin of the belief that income tax is unconstitutional. It appears, however, that Canadian myths are mutations of similar American tales. South of the border, there was in fact a ruling that some income tax was illegal. In an 1895 Supreme Court decision, Pollock v. Farmers Loan & Trust Company, a divided court found that the previous year’s attempt by Congress to tax incomes (derived from property) was unconstitutional. That meant the ability of the federal government to uniformly tax incomes throughout the United States was in doubt. Some forms of income tax were constitutional, for example, that which came from labour as opposed to income derived from property (i.e., rent). But the court voided the entire 1894 law on the grounds that Congress never intended to permit the entire “burden of the tax to be borne by professions, trades, employments or vocations” after real estate and personal property were exempted.
Oddly, just 15 years earlier, the court unanimously upheld the right of Congress to levy a similar tax during the American civil war. Regardless, the Sixteenth Amendment to the U.S. Constitution was passed in 1913, and that amendment cleared up any confusion and explicitly provided for federal income taxes to be levied. Thus, after 1913, the federal government could levy a tax on income anywhere in the United States of America and promptly did so.
Despite the Sixteenth Amendment, some Americans who wished to lighten their tax load have variously argued that: to pay tax is voluntary; federal reserve notes (i.e., U.S. currency) do not count as income; the actual territory of the United States consists only of the District of Columbia and federal territories (such as Puerto Rico and Guam) and therefore only those areas are subject to federal tax. Then there is the claim that a taxpayer is not a “person” as defined by the Internal Revenue Code and thus not subject to federal tax laws.
All of the above errant beliefs have been defeated in American courts, but the income-tax-is-illegal myth just keeps on going. But if some of those claims sound familiar, it is because a mini-industry mushroomed in Canada with similar tall tales.
In Canada, the myth that income tax is illegal and unconstitutional likely originated with the American tales and then grew unique Canadian versions. In the late 1990s, back when I was employed by the Canadian Taxpayers Federation, all the staff were regular recipients of letters (it was the 1990s), faxes, calls and emails about some “de-tax” movement. These “de-taxers” offered seminars and informed paying attendees income tax was the result of either a conspiracy, or an uninformed public that did not know its legal and constitutional rights.
De-tax seminars appear to have been well attended in western Canada where they ripped through like prairie wildfire. They also popped up in Ontario. But errant beliefs about the legality of taxes were not restricted to in-person events. A Quebec-based publication by the name of the Michael Journal came across my desk and proclaimed that “Canada’s Federal Income Tax is Unconstitutional.”
The money racket
One reason the income-tax-is-illegal movement took off was that great money could be made. Most myth makers charged people for their de-tax manuals or seminars. One pamphlet listed a $25 fee for the first night. That climbed to $100 by the third evening. An entire seminar plus guide would cost over $700. Another de-tax organization offered a swell deal for information on how to “cut your tax bill by 50%!” The price was $600 payable via a money order.
The courts have heard the income-tax-is-unconstitutional shtick multiple times and thumped it multiple times, though those who make such claims at least provide entertainment for bored court clerks. Those who fall for the claim that income tax is an unjust invention of nefarious forces most often end up with heavy fines or in jail.
In 1999, Richard and Denise Rosenberg challenged the validity of the Income Tax Act and claimed that under common law “Canadians have control of their own affairs and the federal government has no authority to collect taxes.” Revenue Canada seized the couple’s Winnipeg house, cabin and even their canned food and toys due to an unpaid $1.2-million bill in back taxes.
In 2001, Sir Daniel Lear, whose real name was Ralph Swim, was convicted in the largest case of tax evasion in Manitoba history. With over $8.4-million in income from various pyramid schemes, and $2.4-million in taxes evaded, Swim accumulated a sprawling estate on the Red River, luxury cars and antique furniture for his home. In his defence, he cited the King James Bible, the “doctrine of Philadelphia,” the “Tokyo rules,” the constitution of Ceylon, and the British North America Act to support his claim that Canada’s laws and the Income Tax Act did not apply to him.
God, Swim asserted, allowed him to create wealth without paying tax. He also claimed not to be a legal person, called the judge treasonous and testified that “destiny has brought flesh against the infidel.” The infidel judge didn’t buy it. He instead levied a $2.4-million fine against Swim/Sir Lear and sentenced him to five years and eight months in prison.
Calling yourself a “natural person” and other myths
In Saskatchewan, in 2003, Douglas Amell, his common-law wife Heidi Keyzer and Robert Amell (Douglas’ father) arranged to have their employer, Arnell’s naturopathic clinic in Moose Jaw, declare them contract employees after September 2003. At that point, the family declared themselves “natural persons,” and argued such persons were not subject to income taxes, nor to the jurisdiction of the CRA and the Income Tax Act. By 2010, when the three were in court, Judge D.J. Kovatch of the Provincial Court of Saskatchewan cited 14 cases where the “natural person” argument and defence had already been rejected the courts. He then rejected the “natural person” assertion a 15th time.
If participants in the various seminars received innocuous and perhaps potentially useful tips when dealing with federal tax collectors, it would be nothing more than what any good accountant or tax lawyer might offer. Instead, many groups that promote the extreme tax avoidance methods offer to “expose” secrets of the federal government, and thus enter the realm of conspiracy theories.
There are too many false claims about income tax to list them all, but to note one example, that federal income tax is “unconstitutional.” In Canada at least, this argument is perhaps the one that is at the heart of many misunderstandings, and perhaps what allows the unscrupulous to ensnare others in the belief they can ignore the taxman. The belief stems from the misunderstanding over what is written in the Constitution. Some argue that because Section 92 of the Constitution gives the power of “Direct Taxation within the Province in order to the raising of Revenue for Provincial Purposes,” then only the province can levy direct income tax.
The error in that argument is best deconstructed by the late Melvin H. Smith, Q.C., a onetime constitutional adviser to four British Columbia premiers. He once wrote that of how people misread the Constitution on this point:
“The argument saying the federal income tax is illegal goes something like this. Since each level of government is afforded under the constitution exclusive jurisdiction on the subject matter listed to the exclusion of the other (true) and since income tax is direct taxation (true), then only provinces can impose income tax (false). The fallacy lies in not reading fully what the provincial taxing powers section says. It does not say the provinces have the exclusive right to impose direct taxation. What it does say is that the provinces have exclusive right to impose direct taxation to raise ‘revenues for provincial purposes.’ By contrast, when the federal government imposes an income tax it does so for federal purposes (obviously) and therefore it cannot be said to be infringing upon the provincial taxing power … [T]he federal government cannot impose direct taxation (including income tax) ‘for provincial purposes,’ but why would it want to?”
All of the conspiracies miss a useful, critical point. If some court somewhere in Canada magically declared federal income tax unconstitutional tomorrow, the federal government would simply raise the Goods and Services Tax to 25% to obtain the same amount of revenue. Want to shrink government and your tax bill? An incantation in front of judge about how federal income tax is unconstitutional will not do it.
Excerpted from Tax Me I’m Canadian! A taxpayer’s guide to your money — and how politicians spend it. Thomas & Black