Canadian corporate loss transfer system.

October 6, 2010

On October 6, 2010, TEI submitted the following recommendations to the Canadian Department of Finance for the development and implementation of a corporate group loss transfer mechanism. The comments were developed under the aegis of TEI's Canadian Income Tax Committee, whose chair is Carmine Arcari of RBC, Inc. Contributing substantially to the development of TEI's comments was Rodney C. Bergen of The Jim Pattison Group, Inc. Jeffery P. Rasmussen, TEI Tax Counsel, serves as liaison to the Institute's Canadian Income Tax Committee.

In its 2010 budget message, the Government stated that it "... will explore whether new rules for the taxation of corporate groups--such as the introduction of a formal system of loss transfers or consolidated reporting--could improve the functioning of the tax system. Stakeholder views will be sought prior to the introduction of any changes." (1)

On behalf of Tax Executives Institute (TEI), I am writing to urge the government to introduce a formal system to permit the sharing and utilization of tax losses and other tax attributes among groups of related corporations. A formal tax loss-transfer or group tax loss relief mechanism has been a matter of discussion in Canada for nearly 60 years. The government eliminated the previous loss consolidation system in 1952 and a debate, which continues to this day, ensued about developing and implementing a replacement system. In May 1985, the Department of Finance advanced the debate by issuing a discussion paper entitled A Corporate Loss Transfer System for Canada, outlining a proposal to remedy this deficiency in Canada's tax system. TEI commented on the Department's 1985 paper and has subsequently raised the issue in multiple forums and in liaison meetings with representatives of the Department of Finance.

We urge the Government to move forward to implement a loss transfer system.

Background

TEI is the preeminent international association of business tax executives. The Institute's 7,000 professionals manage the tax affairs of 3,000 of the leading companies in North America, Europe, and Asia. Canadians constitute 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, and must contend daily with the planning and compliance aspects of Canada's business tax laws. Many of our non-Canadian members (including those in Europe and Asia) work for companies with substantial activities in Canada. The comments set forth in this letter reflect the views of TEI as a whole, but more particularly those of our Canadian constituency.

TEI concerns itself with important issues of tax policy and administration and is dedicated to working with government agencies to reduce the costs and burdens of tax compliance and administration to our common benefit. In furtherance of this goal, TEI supports efforts to improve the tax laws and their administration at all levels of government. We believe that the diversity and professional training of our members enable us to bring a balanced and practical perspective to the issues raised by the implementation of a loss-transfer system.

To Be Globally Competitive, Canada Should Implement a Formal Loss-Transfer System

Recent federal budgets have focused on aligning Canada's tax rate structure to become one of the most competitive jurisdictions in the world. To accurately assess the competitiveness of the Canadian tax system and its relative tax burden, though, the government must consider not only the tax rate but also the tax base. Indeed, the government must consider all aspects of the tax system and, in respect of tax loss utilization for corporate groups, TEI regrets the Canadian system is too restrictive and subject to considerable administrative uncertainty.

Canada is currently one of the few developed countries in the world, and the only G7 nation, that does not have tax rules that provide some form of tax consolidation or loss transfer relief for a related group of companies. (2) Clearly, Canada's tax system is lagging most developed countries in this respect. (3) In evaluating the merits of a formal loss-transfer mechanism in the legislation (including its potential short-term revenue effect), the government should bear in mind that a formally legislated system will simplify, or obviate entirely, many loss transfers that are carried out routinely, though inefficiently, today.

Specifically, the current informal ad hoc system for...