Comments on Canada's system of international taxation.

On July 15, 2008, Tax Executives Institute submitted the following comments to the Advisory Panel on Canada's System of International Taxation to enhance the competitiveness and fairness of Canada's international tax policy and administration. The comments were prepared under the aegis of TEI's Canadian Income Tax Committee, whose 2008-2009 chair is Rod Bergen of The Jim Pattison Group.

In November 2007, the Government of Canada created an Advisory Panel on Canada's System of International Taxation (hereafter "the Panel") to study and recommend measures to improve the competitiveness, efficiency, and fairness of Canada's international tax system. The Panel released a consultation paper, Enhancing Canada's International Tax Advantage (hereafter the "Consultation Paper"), in April 2008 framing the debate with a series of questions, providing the Panel's initial views on some issues, and inviting public comment. On behalf of Tax Executives Institute, I am pleased to provide the following comments.

Background

Tax Executives Institute is the preeminent association of business tax executives. The Institute's 7,300 members manage the tax affairs of 3,200 of the leading companies in Canada, the United States, Europe, and Asia and must contend daily with the planning and compliance aspects of Canada's business tax laws, including its inbound and outbound international tax provisions. 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. Many of our non-Canadian members (including those in Europe and Asia) work for companies with substantial activities in Canada.

TEI's membership includes representatives from most major industries including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial services; telecommunications; and natural resources (including timber and integrated oil companies). The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

TEI is concerned with issues of tax policy and administration and is dedicated to working with government agencies in Ottawa (and around the world), 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 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.

Introduction

The last comprehensive review of the Canadian tax system occurred more than forty years ago when the Royal Commission on Taxation (generally known as the Carter Commission) issued a six-volume report with comprehensive recommendations for improving the efficiency and fairness of the tax system. More limited reviews took place in the 1980s (Tax Reform) and the 1990s (The Technical Committee on Business Taxation report). Hence, TEI welcomes the government's decision to establish the Panel to review the framework and administration of Canada's international tax regime, which has been in effect in its current form since 1976.

The Supreme Court of Canada has commented that the tax laws should aim for consistency, predictability, and fairness so that taxpayers can manage their affairs intelligently. (1) We agree. Where those objectives guide the development of tax policy and the administrative environment, Canadian economic activity is likely to be optimized. An alternative approach that seeks to maximize government revenues is less likely to be successful given the mobility of international capital and the complexity of the international tax environment.

Although the Consultation Paper and TEI's analysis are divided generally between the taxation of inbound and outbound investments, the demarcation between the two is not always clear. For example, Canadian multinationals may wish to have their foreign subsidiaries access the Canadian market for technical, administrative, marketing, or management support but face many tax disincentives to doing so. On the other hand, many foreign-owned Canadian taxpayers exercise substantial stewardship activities over outbound investments, which should be encouraged.

In addition to recommending a substantive policy and administrative framework for Canada's system of international taxation, the Panel should urge the government to adhere to a legislative process that encourages confidence in the fairness and stability of the Canadian legal environment. To ensure that Canada's tax laws are not only fair, but perceived to be fair, Parliament should:

1. Refrain from enacting retroactive legislation, except where absolutely necessary and in accord with principles previously articulated by the Department of Finance;

2. afford reasonable consultation periods for proposed legislation;

3. return to the historical practice of providing reasonable transition periods or grandfather rules or delaying the effective date of legislative initiatives that overturn longstanding rules; and

4. ensure that legislative action is prompt and that the effective date either follows the enactment date or is deferred until legislation receives Royal Assent.

   Tax Policy Environment

   To optimize international activity, the Canadian tax system should be modern, fair, and predictable. Decisions to invest over the long term are influenced as much by the perceptions of stability and fairness as by the technical details of the rules. Canada has much going for it in this respect: It enshrines the rule of law in its constitution, possesses an independent and accessible judicial system, and has a long and vibrant tradition of democracy. Its tax administrators have a tradition of fairness rather than an addiction to Morton's fork. (2) It has a relatively uniform tax system from coast to coast with much common administration. Indeed, the list of Canadian positives is too long for this submission. No matter how strong the advantage, though, there are opportunities for improvement.

   1. Legislative

1. Policy Clarity

   TEI urges the Panel to recommend that Parliament articulate an overriding policy that lends predictability to current and, especially, future legislative and administrative policy developments.

   We believe that Canadian international tax policy should--

   1. support the development of strong Canadian-based multinational companies, especially in their ability to compete globally;

   2. encourage long-term foreign investment into Canada; and

   3. ensure that Canadian source income is taxed fairly, regardless of whether earned by Canadian- or foreign-based companies.

2. Policy Development

   Canada's tax and budget policy development can be improved by greater transparency. It is unclear, for example, what purpose is served by the secrecy that currently shrouds the development of Canada's annual budget. A more open budget development process may forestall public outcries that follow surprise Budget announcements, such as occurred with the March 2007 interest deductibility proposal and the changes to the thin capitalization rules proposed in the February 2000 Budget. Consultations should begin before the government is committed to a particular result and, although time limited, should be open long enough to permit reasonable public participation. A three-week period between the release of draft legislation and its introduction in Parliament, as happened with the far-reaching October 2007 proposal curbing interest deductibility, is insufficient. To provide effective, transparent budget consultations with affected taxpayers, the resources of the Department of Finance devoted to business taxation may need to be enhanced. While Department officials are knowledgeable and committed, they may need assistance to satisfy the government's needs. (3)

3. Anti-Abuse Rules

   Attempts to correct abuses in the tax system should be addressed through targeted legislation rather than broad anti-abuse rules. Broad anti-abuse rules create uncertainty that hinders legitimate commercial activity and often inflict harm worse than the perceived problem the legislation is designed to curb. TEI recommends that any anti-abuse rules proposed by the Panel--or by the government itself--be subject to extensive consultation with affected taxpayers before the Department of Finance drafts legislation. Such a process will minimize the harm to Canada's business environment and its international competitiveness.

4. Retroactivity

   Taxpayers must be able to rely on the legislation and regulations in effect when business transactions take place, expenditures ate incurred, and other taxable events occur. That is, taxpayers should be able to structure their investments and plan their affairs within the law both to comply with its requirements and to minimize their tax liability. Consequently, except in rare and extreme circumstances, tax legislation should be prospective in scope. Although the government may possess the raw authority to change the tax laws retroactively, the power should be exercised sparingly. Since retroactive legislation that adversely affects taxpayers detracts from the fairness of the Canadian tax system, Canada's competitiveness vis-a-vis its trading partners suffers. Regrettably, federal and provincial governments have increasingly relied upon retroactive provisions, especially to overturn court rulings with which they do not agree. We urge the Panel to recommend that the government eschew retroactive legislation and recommit itself to the principles espoused in the Comprehensive Response of the Government of Canada...