Canadian pre-budget consultations.

On October 26, 2006, Tax Executives Institute submitted a series of recommendations in connection with the Canadian House of Commons Standing Committee on Finance's Fall 2006 pre-budget consultations. The comments were prepared under the aegis of TEI's Canadian Income and Commodity Tax Committees, whose chairs are David M. Penney of General Motors of Canada Limited and Natalie St-Pierre of BCE Inc., respectively.

Tax Executives Institute (TEI) commends the Standing Committee for holding pre-budget consultations again this year. The consultations provide an important avenue for the Committee to gather input from across the country. TEI is pleased to offer its 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 6,200 members work for 2,800 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.

Summary of Recommendations

The Institute urges the Standing Committee to adopt the following recommendations in its next budget:

* Review the competitiveness of the Canadian corporate income tax structure, especially the tax rates, and encourage the provinces to follow suit with a review of their income, capital, and sales tax regimes; encourage the provinces to harmonize their sales tax systems with the GST, as well.

* Abandon altogether or substantially narrow the Reasonable Expectation of Profit (REOP) test included in draft legislation clarifying the deductibility of interest and other expenses.

* Expeditiously negotiate and implement a new provision in the Income Tax Convention with the United States eliminating withholding on all dividends and interest for payments to both related and unrelated parties.

* Abandon 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 Revenue Agency (CRA) under the current provisions of the Income Tax Act, adopt narrower, more targeted remedies than this Draconian legislation.

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

Corporate Income Tax Rate Reductions, Elimination of the Surtax and Large Corporation Tax.

In budget legislation announced last May, the Government introduced proposals to (1) reduce the corporate income tax rate from 21 percent to 19 percent over a period of years through 2010 and (2) eliminate the corporate surtax by 2008. TEI commends the Government for implementing these measures because business tax reductions increase the attractiveness of Canada for both foreign and domestic investors. (1) 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 maintaining and enhancing the competitiveness of the Canadian business tax system. Moreover, since the LCT is a job-killing tax on capital, the acceleration of its demise to January 1, 2006, has already improved the competitiveness of the Canadian business tax system.

Finance Minister James Flaherty said recently, "[Canada] must establish a meaningful, marginal effective tax rate advantage ... one 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 and notes that a recent study questions the competitiveness of Canada's business tax system, (2) calling for additional tax rate reductions by 2010. As a result, TEI recommends that the Standing Committee continue to review and monitor the competitiveness of the Canadian corporate income tax system, especially corporate tax rates, to ensure that Canada remains an attractive environment for business investments.

In addition, we recommend that the Standing Committee encourage the provincial governments to review their corporate income, sales, and capital tax systems and make corresponding rate reductions and tax base changes to ensure the competitiveness of Canada's tax environment. Finance Minister Flaherty observed recently that "Canada stands out as one of four OECD countries that still impose capital taxes and one of three that impose retail sales taxes on investment. If provincial governments eliminated these taxes and harmonized their sales taxes with the GST, Canada would actually have the lowest marginal effective tax rate among G7 nations." Tax Executives Institute has long supported elimination of capital taxes...