Canadian government's response to TEI's tax certificate of deposit proposal.

• Author: Loiselle, Gilles
• Position: Tax Executives Institute

On May 25, 1993, Tax Executives Institute recommended to the Canadian Department of Finance and Revenue Canada that it implement a "tax certificate of deposit" regime in order to ameliorate the harsh effects of Canadian's interest rules. (The Institute's proposal is reprinted in the July-August 1993 issue of The Tax Executive.) On September 16, 1993, Minister of Finance Gilles Loiselle sent the following letter to the Institute.

I am writing in response to the letter of May 25, 193, from Robert H. Periman of Tax Executives Institute to my predecessor, the Right Honourable Don Mazankowski, suggesting that a system of "Tax Certificates of Deposit" (TCDs) be instituted in this country. It is apparent from your submission that considerable thought has gone into this proposal, and I am pleased to have this opportunity to reply.

Your submission suggests that several deficiencies exist in the current law and administrative practice with respect to tax overpayments and liabilities. These include limitations on the Government's payment of interest, the inability of taxpayers to offset interest payable and interest earned, and the requirement that a taxpayer making an advance payment specify the taxation year to which that payment applies. Taken together, you argue, these rules make it difficult for taxpayers to meet their tax liabilities without either incurring non-deductible interest charges or forgoing interest on prepaid amounts.

To address these problems, you propose the issuance by the Bank of Canada of interest-bearing instruments which could be used to meet any liability under the Income Tax Act (and perhaps other taxing statutes). This would give taxpayers the flexibility to make payments toward their taxes at any time, without specifying in advance the taxation year involved. Interest would accrue on a TCD from the date it was issued, unless the TCD were applied against a liability due on or before the issue date. Since both the principal and interest of a TCD could be applied against outstanding liabilities, taxpayers would no longer have to watch non-deductible interest on taxes due and taxable interest credits on overpayments accruing simultaneously.

Let me begin my response by noting that I share your view that this area of the law could benefit from...