Autumn arrives: TEI urges house of commons to shed LCT tax, U.S. and California not to codify economic substance doctrine: also recommends narrowing tax shelter filters, addresses Virginia initiatives.

• Position: Recent Activities

Although John Keats waxed poetic about Autumn as the "season of mists and mellow fruitfulness," the change of seasons at TEI brought a not-so-mellow flurry of technical activities. During the waning days of summer, the Institute's committees focused on Canada's pre-budget deliberations, challenged the proposed codification of the economic substance doctrine at the federal and state levels, recommended a narrowing of the filters in the corporate tax shelter disclosure regulations, and offered comments on a variety of several tax initiatives in the Old Dominion state.

In a written statement filed with the House of Commons Standing Committee on Finance in early September, the Institute urged Canada to accelerate the phase-out and repeal of the Large Corporations Tax. Calling the tax "counterproductive," TEI endorsed the government's position that capital taxes, including the LCT, are a significant impediment to investment in Canada. TEI recommended that the LCT tax rate for 2004 for all corporations be reduced to 0.1 percent and that the tax be eliminated in 2005.

The Institute also urged the Finance Committee to abandon the draft legislation in respect of Foreign Investment Entities and Non-Resident Trusts. If perceived abuses of the Income Tax Act cannot be addressed by Canada Customs and Revenue Agency under current law, TEI stated, narrower, more targeted remedies should be adopted.

"The Government has been fine-tuning the proposed legislation for more than three years," the Institute observed. "Given its mind-numbing complexity, taxpayers need time to digest and understand the legislation and, where possible, modify company information systems to capture and report the additional required information." TEI thus urged that the proposed January 1, 2003, effective date be postponed to give compliant taxpayers the opportunity to understand the provisions and ensure that legitimate business operations are not inadvertently caught up in the legislation.

The Institute also recommended the adoption of a loss transfer system (or group loss relief rules) for corporate groups and recommended other improvements in the administration of the Income Tax Act, such as repealing the withholding tax imposed on cross-border services, including binding arbitration provisions in Canada's tax treaties, and streamlining the reporting obligations of Canadian taxpayers in respect of their foreign affiliates.

TEI's written statement formed the basis of oral...