Canadian 2010 pre-budget consultations.

August 6, 2010

On August 6, 2010, TEI filed the following recommendations for next year's Canadian Budget message with the Standing Committee on Finance of the Canadian House of Commons. The submission was prepared under the aegis of the Institute's Canadian Income and Commodity Tax Committees, whose chairs, respectively, are Carmine A. Arcari of Royal Bank of Canada, Inc., and Diana Spagnuolo. Jeffery P. Rasmussen of TEI's legal staff coordinated the preparation of the comments.

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 worldwide association of business tax professionals. Founded in 1944, TEI's 7,000 members work for 3,000 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

TEI urges the Canadian Government to maintain or enhance the competitiveness of Canada's business tax structure by:

* Staying the course on the scheduled corporate income tax rate reductions.

* Reviewing the study by the Department of Finance on corporate loss transfers and implementing a workable group loss-transfer or consolidation system.

* Implementing the recommendations of the Advisory Panel on Canada's System of International Taxation, including--

** Eliminating withholding taxes for direct dividends, especially under the Canada-U.S. Tax Treaty, and under Regulations 102 and 105 for cross-border services;

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

** Urging the Department of Finance to review the scope of the base erosion and investment business rules to ensure they are properly targeted and do not impede bona fide business transactions.

* Continuing to facilitate the harmonization of the federal and provincial tax bases and administrative systems.

Maintain or Enhance the Marginal Effective Income Tax Rate Advantage Canada Achieved during the Past Decade

By enacting legislation to reduce the federal corporate income tax rate from 21 percent to 15 percent by 2012, Canada has made great strides during the last decade to improve competitiveness of its corporate tax system. TEI commends the government for this action because the business tax rate reductions have increased the attractiveness of Canada for both foreign and domestic investors. Increased capital investments in Canada, in turn, have spurred productivity, promoted employment, and enhanced the prospects for sustainable economic growth. By staying the course with the scheduled rate reductions through the global recession, the government sent a strong signal to the capital markets about its commitment to enhancing the competitiveness of the Canadian business tax system, thereby blunting the severity of the recession on Canada and promoting a recovery more rapid than any other G-7 nation. (1)

Finance Minister James Flaherty has said that Canada "must establish a meaningful, marginal effective tax rate advantage ... that goes beyond the statutory tax rate itself and takes the overall impact of the business tax system on investment decisions into account." TEI concurs. Indeed, Canada must remain vigilant about maintaining its advantage as other countries review their fiscal positions. Consequently, TEI believes that delaying the scheduled rate reductions or reversing course--as some have...