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Law Times • February 8/15, 2010 Samsung deal generates controversy, opportunities T hey say the wheels of government, and by extension justice, grind slowly. But that doesn't seem to be the case with the Ontario government's newly inked $7-billion deal with a South Korean consortium to push wind and solar power. The deal was set up by George Smitherman, who's run- ning for mayor in Toronto. The file now becomes the responsibil- ity of newly minted Energy and Infrastructure Minister Brad Du- guid, whose boss, Premier Dalton McGuinty, is hailing the deal "as a landmark agreement." Any time you can float a head- line boasting of creating 16,000 new jobs, it's a good day. Here's the thing, however: while this green deal may have some merit, all that glitters is not gold. The devil, as usual, is in the details. On the surface, Ontario will kill two birds with one stone in that it desperately needs to replace the manufacturing jobs draining from the southwestern "rust belt" and at the same time kill off our coal-fired electrical generating plants for political reasons. It will pay the Korean consor- tium — whose main constitu- ents are corporate giants Sam- sung and Korea Electric Power Corp. — a guaranteed feed-in tariff rate of 13.5 cents per kilo- watt hour for wind power and 44.3 cents for each kilowatt hour of solar power over a 25- year term. If the consortium meets additional goals of build- ing manufacturing plants and creating some 1,440 jobs by a series of deadlines stretching to 2013, there's another $437 mil- lion in subsidies on the table. The consortium seems to be moving at light speed already, an- nouncing it has started negotiat- ing with established wind- and solar-power manufacturers to hasten the development of four facilities to build and assemble wind towers, solar inverters, solar modules, and wind blades. The hook for the consortium players is that getting a helping hand to establish a beachhead in Ontario puts them in a good po- sition to go after the massive U.S. market off our back porch. The problem, say critics, is that not a lot of existing Ontario or Canadian wind and solar play- ers will be called into the inner circle and may find themselves competing against a giant foreign player receiving subsidies from their own tax dollars. Already, the consortium has signed a memorandum of un- derstanding with wind-tower maker Dongkuk S&C to build a plant in Ontario and is also in talks with Canadian solar inverter manufacturer Satcon Technology Corp. Overall, some 4,000 jobs will be permanent while 7,800 will be construction-related. At the Inside Queen's Park By Ian Harvey same time, 5,660 spinoff jobs will provide work for lawyers, architects, software developers, truckers, steel plants, and finan- cial services. That's attractive in a province where the recession has decimat- ed quality jobs, and certainly the financial services sector and cor- porate law departments at some of the big towers downtown are going to be racking up billable hours by pulling financing and contracts together as the ripple effects spread. What is not being talked about, since we're discussing a done deal rather than a pend- ing deal, is the long-term cost of turning over one-tenth of the electrical system to a private for- eign entity for a generation. For the Society of Energy Pro- fessionals, two-thirds of whose 7,800 members work for On- tario Power Generation Inc., the sticking point is the way the parties put the deal together, says spokesman Brian Robinson. "Samsung is what is referred to in Korea as a chaebol, a family- owned business aggressively sup- ported, financed, and promoted internationally by the govern- ment of South Korea. Ontario seems to lack faith in its own in- vestors, entrepreneurs, and pub- lic enterprises to get the job done, while Samsung comes in with the full support of their govern- ment," he says. It's not the concept of green power or the feed-in tariff that's the concern, he adds, noting the big issue is with the process. "First, we're going to have a market, then we're not. Then we're going to cap the price, then we're going to have a hy- brid market. Then we're going to set up a procurement agency [the Ontario Power Authority], then the plan the OPA pro- duces isn't good enough. Then were going to have feed-in tar- iffs, then the premier goes out and signs a direct agreement with Samsung over and above the feed-in tariffs, despite that there's a host of people left in the lurch still trying to cope with the OPA's requirements. "Think what that kind of instability does for the invest- ment climate in Ontario and to companies like [green-power players] Linamar and Saunders Power." LT Ian Harvey has been a journalist for 32 years writing about a diverse range of issues including legal and political affairs. His e-mail address is ianharvey@rogers.com. make up — and have done so for 10 years — about 65 per cent of first-year classes. Senior male members of both professions are quick- ly approaching retirement. The demographic landscape by the end of this decade requires fresh thinking of basic tax principles. A fundamental prin- T COMMENT Adapting tax law to changing society he demographics of Canada's profes- sional community are changing rap- idly. In law and medicine, women ciple of tax law is that an expense is deductible only if someone incurs it to earn income. The purpose of the rule is to obtain an accurate measure of net income. Per- sonal and consumption ex- penditures are not deductible unless the Income Tax Act specifically authorizes their deduction. Hence, the line that divides deductible and non- deductible expenses should provide an accurate and fair measure of income based upon principles that the authorities can administer with certainty. Some expenses are clearly of a purely busi- ness nature, meaning there is no serious issue of their deductibility. For example, business salaries, rent, utilities, and operating costs are deductible (subject only to quantum limita- tions) as routine expenses without the need for specific authorization. At the other end of the continuum, we find expenses of a purely personal nature. For example, a taxpayer isn't entitled to deduct everyday costs for personal meals, clothing, cosmetics, and grooming. As in most tax law, however, the difficult dis- tinctions lie not at the extremes of the contin- uum but in the middle where the expenditure has both business and personal attributes. It is here that we look at the primary and predomi- nant purpose of the expenditure. We can break down grey-zone expenditures into two broad categories: first, the hybrid costs of a person engaged in business, such as child- care and commuting; and personal-gratification costs that give pleasure in the pursuit of profit, such as meals, travel, and entertainment. Tax law deals quite clearly with both categories of expenditures for employees. Employees cannot deduct any expenses from income unless the statute specifically authorizes the deduction. Thus, in effect, we tax employees on their gross income. This rule emphasizes preserving the tax base. Withholding payroll taxes at source is easy. Employment source deductions provide a stable and predictable flow of revenue. The problem is more difficult, however, for business expenditures, where the rule is the opposite. A taxpayer can deduct any expense incurred for earning profit unless the act spe- cifically prohibits the deduction. Thus, people generally prefer independent contractor status for tax purposes because they have greater flex- ibility with business deductions. Conversely, they prefer to be employees under labour laws because they get greater workplace protection. We decide the purpose of an expenditure by determining the predominant reason for incur- ring it. This is a positive test that's quite differ- ent from asking the opposite question: "What would have happened if the taxpayer hadn't in- curred the expense?" Thus, the purpose test is different from the "but for" test that asks: "But for this expense, could the taxpayer have earned the income?" But that test is too broad and one that completely obliterates the distinction be- tween business and personal expenses. Hybrid expenditures are expenses incurred partly for profit and partly for personal con- sumption. Childcare expenses are the classic hybrid. Parents with infant children can't go out to work without care for them. The courts, www.lawtimesnews.com Financial By Vern Krishna Matters however, don't allow childcare as business ex- penses on the theory that their deduction would open the floodgates to doing so for all sorts of other personal expenses. The U.S. board of tax appeals captured the prevailing sentiment in a 1939 American case: "The fee to the doctor, but for whose healing service the earner of the fam- ily income could not leave his sickbed; the cost of the labourer's raiment, for how can the world proceed about its business unclothed; the very home which gives us shelter and rest; and the food which provides energy, might all by an extension of the same proposition be con- strued as necessary to the operation of business and to the creation of in- come. Yet these are the very essence of those 'personal' expenses, the deductibility of which is expressly denied." Pre-war America expected women to stay at home and look after their children. Thus, courts didn't look for the predominant purpose of women working in business. Within the next decade, women in the legal and medical profes- sions will outnumber an aging male population that is coming up to retirement age. There is an important distinction between expenses incurred primarily for personal pur- poses and expenses incurred predominantly for earning income but that have incidental and ancillary personal elements. Certain expen- ditures are clearly common to everyone. The basic personal expenditures for food, shelter, clothing, and the everyday necessities of life are clearly not deductible regardless of working sta- tus. People don't incur such expenses primarily for the purposes of earning income. Childcare expenses, however, pose a differ- ent conceptual problem. If we start with the premise that one parent must stay at home to look after the child, childcare expenses are pri- marily a personal consumption expenditure. Yet if we start with the opposite premise that it's necessary or desirable for both parents to work, childcare expenses take on a different hue. Thus, the perspective on childcare expenses de- pends upon where the analysis begins. The deductibility of such expenses also raises issues of fairness if some taxpayers can get tax- free childcare while we deny others the same treatment. An employer, for example, is entitled to deduct the cost of childcare that it provides at its facilities. The expenses are for the purposes of earning business income. Parents with young children who are being well-cared for on the employer's premises are likely to work longer and with less anxiety than parents who need to dash off in a frenzy to pick up their kids at a spe- cific time. Since the employer needs the services of its employees, the cost of providing childcare on its premises directly relates to them. We can say the same of nanny care. The ineq- uity arises because a person who pays for childcare services to get to work is severely limited in deduct- ing those costs. We sometimes explain this dispar- ity on the basis that the employer incurs its cost after its employees are on the business premises while parents incur their expenses to get to work in the first place. This invites salary arbitrage. Tax law must keep up with social and demo- graphic changes if it is to be socially relevant and economically productive. It's time to legislate a principled solution for tomorrow's society. LT Professor Vern Krishna is tax counsel with Borden Ladner Gervais LLP and executive director of the CGA Tax Research Centre at the University of Ottawa. He can be reached at vkrishna@blg canada.com. PAGE 7