From the Revenue Rule to the Rule of TheRevenuer: A Tale of Two Davids and Two Goliaths

Domestic courts have traditionally refused to enforce tax claims of foreign governments, under doctrine known as the revenue rule. With accelerating pace of international trade in late 20th century and proliferation of cross-border tax evasion strategies, countries found it mutually advantageous to include provisions in their bilateral tax treaties allowing each treaty partner to assert certain domestic tax claims in other country's courts. At a time when, as a result of global trade, reciprocal recognition of foreign laws in domestic courts has become routine, revenue rule is increasingly perceived as a relic of a bygone era. Such reciprocity only reinforces international nature of law enforcement. Formal and informal partnerships of law enforcement officials operate to their mutual advantage in same way that international trade enhances domestic economies. Given that scope of domestic legislation has broadened to point where virtually every cross-border transaction implicates a variety of domestic and foreign laws, law enforcement officials who are frustrated by revenue rule have relied on breaches of criminal or quasi-criminal laws and regulations in an effort to thwart tax evasion. In two cases involving widely differing circumstances, David McNab and David Pasquantino were prosecuted in American courts under US criminal statutes for alleged breaches of foreign laws; Pasquantino case involved alleged evasion of Canadian tax laws. These cases have shown that Canadian tax law enforcement officials can now circumvent revenue rule by asking American law enforcement officials to lay charges for criminal fraud or conspiracy, even though Canadian tax evasion is predicate illegal activity that forms underlying basis of charge and no finding of tax evasion has been made in a Canadian court. To engage American criminal law, enforcement officials only have to show that there was a wire transfer of funds through an American bank, or some other tenuous connection to United States, as part of what may otherwise be a transaction between Canadians or other nationals. Since there is some difference of opinion as to where line between lawful tax avoidance and illegal tax evasion should be drawn, Canadian tax advisers and their clients should be concerned about American criminal courts interpreting Canadian revenue laws. This article examines historical reasons for judicial recognition of revenue rule, recent case law that has signalled its erosion, and public policy reasons for and against continued recognition of rule in a world of globalized trade, e-commerce, and widespread international tax treaties. The author concludes, contrary to recent trend in academic and judicial opinion, that there remain strong policy reasons to maintain revenue rule with all its force and vigour.

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