Canada's 2008 pre-budget consultations.

• Author: Bergen, Rod

August 15, 2008

On August 15, 2008, TEI President Vincent Alicandri submitted a written statement to the Canadian House of Commons Standing Committee on Finance in connection with its Fall 2008 Pre-Budget Consultations. TEI also requested the opportunity to testify before the Standing Committee about its recommendations for changes in the Canadian tax system. The submission to the Standing Committee was prepared under the joint aegis of TEI's Canadian Income and Commodity Tax Committees whose chairs, respectively, are Rod Bergen of The Jim Pattison Group and Phil W. Riley of ArcelorMittal Dofasco Inc.

Tax Executives Institute (TEI) is pleased that the Standing Committee on Finance has scheduled prebudget consultations to gather input from across the country. TEI offers the following recommendations to foster economic growth and job creation, promote a favourable business environment for investments in Canada, and ensure a high level of innovation and productivity. We believe the implementation of our recommendations will spur economic efficiency, improve tax administration, and enhance the competitiveness of Canada's business tax system.

Background

Tax Executives Institute is the preeminent association of business tax professionals. TEI's 7,300 members work for 3,200 of the largest companies in Canada, the United States, Europe, and Asia. TEI's membership includes representatives from a broad cross-section of the business community, with members employed in all major industries and sectors of the economy. In that sense TEI is unique--we do not represent a particular group or industry. Canadians make up approximately 10 percent of TEI's membership, with our Canadian members belonging to chapters in Montreal, Toronto, Calgary, and Vancouver. In addition, many non-Canadian members work for companies with substantial Canadian operations, investments, and employees.

Executive Summary of Recommendations

As its most important recommendation, TEI urges the Standing Committee to monitor and review the international competitiveness of Canada's business tax structure, including the corporate income tax rates. The competitiveness of Canada's business tax structure will be enhanced by:

* Repealing section 18.2 of the Income Tax Act, Canada (hereafter "the Act") and replacing it with a narrowly targeted provision that will not undermine the competitiveness of Canadian businesses by impeding legitimate commercial operations and financing arrangements.

* Eliminating withholding taxes on intercompany dividends in the Canada-U.S. tax treaty.

* Eliminating withholding taxes under Regulations 102 and 105 for cross-border services.

* Adopting a broader exemption system for earnings of foreign affiliates (FAs).

* Increasing the incentives to the provinces to eliminate capital taxes as soon as possible; encouraging the provinces to review and revise their tax policies to enhance the overall competitiveness of the Canadian business tax system; and promoting the benefits of harmonization of the provincial retail sales tax systems with the GST.

* Implementing a corporate loss transfer system or group loss relief mechanism.

Corporate Income Tax Rate Reductions

The government has enacted legislation to (1) reduce the corporate income tax rate from 21 percent to 15 percent by 2012 and (2) eliminate the corporate surtax for tax years beginning after 2007. TEI commends the government for enacting these measures because business tax rate reductions increase the attractiveness of Canada for both foreign and domestic investors. Increased capital investment in Canada, in turn, spurs productivity, promotes employment, and enhances the prospects for sustainable economic growth. The implementation of the phased corporate income tax rate reductions and the elimination of the corporate surtax send a strong signal to the capital markets about the government's commitment to enhancing the competitiveness of the Canadian business tax system.

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