Canadian foreign affiliate draft legislation.

• Position: Tax Executives Institute

On November 21, 1994, Tax Executives Institute filed the following comments with the Canadian Department of Finance in respect of the draft legislation concerning foreign affiliates. TEI's comments were prepared under the aegis of its Canadian Income Tax Committee, whose chair is John J. Marczynski of Abitibi-Price Inc. Contributing substantially to the development of TEI's comments was Hugh D. Berwick of Alcan Aluminium, Ltd.

Tax Executives Institute, Inc. is pleased to submit the following comments to the Department of Finance in respect of the February 22, 1994, budget proposals and the June 23, 1994, draft amendments to Canada's Income Tax Act relating to the taxation of foreign affiliates.

I. Background

The Institute is an international organization of approximately 5,000 professionals who are responsible--in an executive, administrative, or managerial capacity--for the tax affairs of the corporations and other businesses by which they are employed. TEI's members represent more than 2,800 of the leading corporations in Canada and the United States.

Canadians make up approximately 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our nine geographic regions. In addition, a substantial number of our U.S. members work for companies with significant Canadian operations. In sum, TEI's membership includes representatives from most major industries, including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial; telecommunications; and natural resources (including timber and integrated oil companies). The comments set forth in this submission reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

TEI has historically been concerned with issues of tax policy and administration and is dedicated to working with government agencies in Ottawa (and Washington), as well as in the provinces (and the states), to reduce the costs and burdens of tax compliance and administration to our common benefit. We are convinced that the administration of the tax laws in accordance with the highest standards of professional competence and integrity, as well as in an atmosphere of mutual trust and confidence between business and government, will promote the efficient and equitable operation of the tax system. In furtherance of this principle, TEI supports efforts to improve the tax laws and their administration at all levels of government.

Among TEI's principal objectives are the gathering and dissemination of information on tax issues of wide concern and the development of responsible positions that reflect not only the diversity and professional training of our members but also an appreciation for the practical aspects of tax administration and business decisions. In addition, we strongly believe that tax legislation should be fully consistent with the goals of economic growth, clarity, and competitiveness.

II. Comments on Foreign Affiliate Proposals

1. Effective Date

   The draft amendments to the Income Tax Act relating to foreign affiliates are generally proposed to be effective as of the end of the current taxation year (December 31, 1994, for calendar-year taxpayers). The proposed amendments are dauntingly complex and will prove difficult to understand and difficult to comply with. In addition, the proposed amendments will have substantial effects on ordinary day-to-day operating and investment decisions of multinational groups--effects entirely unrelated to the tax policy concerns motivating the adoption of the proposed amendments. As a result, companies will be compelled to reconsider their current methods of financing affiliate operations, sourcing inventory supplies for foreign purchasing and sales distribution companies, and insuring foreign operations generally. Indeed, the proposals will so profoundly affect the manner in which large, multinational groups conduct business that many will substantially restructure their business operations to mitigate their harsh and unintended effects.

   For the foregoing reasons, we recommend that the effective date of the foreign affiliate legislation be delayed, at a minimum, for one year to permit taxpayers to comprehend its scope, and, if prudent, restructure their operations to avoid the unintended operating and administrative costs imposed by the legislation. The delay will also permit the Department to consider the comments of TEI and other interested parties on the various provisions.

2. Subsection 95(1): Definition of Income from an Active Business

   The definition of income from an active...