Comments on pending Canadian income tax issues, December 20, 1989.

• Author: McFall, James A.

Comments on Pending Canadian Income Tax Issues

December 20, 1989

I. Background

Tax Executives Institute is an international organization of approximately 4,300 professionals who are responsible--in an executive, administrative, or managerial capacity -- for the tax affairs of the corporations and other businesses that employ them. TEI's members represent almost 2,000 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, or are otherwise affiliated with, companies with significant Canadian operations. In sum, TEI's membership includes representatives from most major industries, including manufacturing, distribution, wholesaling, and retailing; real estate; transportation; financial; and resource (including mining, pulp and paper, and petroleum). 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 equiptable operation of the tax system. In furtherance of this principle, TEI is dedicated to supporting 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 international competitiveness.

II. Increasing Complexity and Burden of the Canadian Income Tax System

In his August 13, 1989, response to TEI's June 13 submission on the tax provisions of the Government's April budget, the Minister of Finance states that, "in terms of incentive to invest in productive capacity, there is strong evidence that Canada has maintained or increased its relative position. A recent international survey has placed Canada among the leaders in international competitiveness." We respectfully suggest that several facets of the Canadian tax system mark it as decidedly not "user-friendly" and, indeed, as increasingly burdensome for its domestic and international users. We come to this conclusion through comparison of the Canadian system to international standards on a number of elements:

* Tax Depreciation, Investment Tax Credits, and Other Incentives: Whereas Canada once possessed the overall advantage vis-a-vis the United States with respect to tax depreciation, investment tax credits, and other capital formation incentives, the results of Canadian tax reform have tempered the Canadian system's advantage. Today, the two countries maintain roughly equivalent systems.

* Legislative Complexity: With respect to business taxpayers, there can be little doubt that the United States leads Canada in legislative complexity. Such "faint praise" for the Canadian system should not be overemphasized, however, for the Canadian system is far from simple in any objective sense and, on a comparative basis, has achieved greater complexity in certain discrete areas (discussed below).

* General Anti-Avoidance Rule: In our submission of October 12, 1987, we advised that the General Anti-Avoidance Rule (GAAR) is more stringent than generally prevailing international standards and, in particular, is harsher -- and undeniably more fraught with ambiguity and uncertainty -- than the anti-avoidance deterrents in place in the United States (by virtue of a combination of legislation and jurispudence). We recognize that the disruptive nature of GAAR may be tempered by subsequent administrative and judicial developments in Canada, but suggest that the policy underlying the statutory rule remains one of legitimate concern.

* Application of Other Taxes: Canada has enacted a number of levies outside the scope of the income tax imposed under Part I. The list includes taxes on corporations under Parts I.3, II.1, IV.1, VI, And VI.1

The Cumulative effect of these taxes has been a significant increase in the overall effective tax rate on corporations. Moreover, in certain cases, these taxes have been purposely designed to be noncreditable in foreign jurisdictions. Few countries can boast such an array of taxes outside the scope of the normal income tax. In addition to raising the effective rate of taxation on Canadian business, these taxes inject additional confusion and complexity into an already confusing and complex tax system. Thus, they undermine what should be a guiding principle of a self-assessment tax system: the ability of taxpayers to conduct business affairs with certainty based on their knowledge of the Income Tax Act.

* Consolidated Tax Returns: The list of countries that permit corporate groups to file consolidated returns, or otherwise provide broad-based group relief, runs from Australia to Venezuela. Regrettably, however, it does not include Canada. (1)

* Necessity of Administrative Sanction: The Canadian system vests Revenue Canada-Taxation with considerable discretion and too frequently requires confirmation by Revenue Canada-Taxation that a proposed acquisition or restructuring does not contravene either GAAR or subsection 55(2), or that the taxpayer does not have term preferred shares acquired in the ordinary course of business, or taxable preferred shares, or taxable RFI shares, or short-term preferred shares, or guaranteed shares, or collaterized loss preferred shares. This makes it difficult to conduct affairs in a prudent, expeditious manner.

In previous submissions and during previous meetings, TEI has discussed the trend toward "zero tolerance" drafting -- the effort to ensure that all possible offenders are caught and that all possible revenue is garnered from the economy. Such an approach, however, not only produces an inordinately complex set of tax rules, but also forces prudent taxpayers to seek rulings from Revenue Canada on virtually all transactions. It thus unduly complicates the process of obtaining positive rulings as requested from Revenue Canada-Taxation on entirely business-driven transactions.

We respectfully submit that, the Minister's statements to the contrary notwithstanding, the combined effect of these elements is to place Canada at a material competitive disadvantage, rather than in the position to which countries should aspire.

TEI has previously recommended that the Department of Finance modify the GAAR provisions to conform to international standards (see submission of October 12, 1987) and, further, that the Department evince a more practical approach to drafting. For example, a major improvement would be to redesign the Part VI.1 distribution tax to make it creditable in foreign jurisdictions. We also recommend that the Minister should, at the time of announcing a budget measure, table the related legislation, thereby ensuring that the structure and the underlying complexity of the proposal can be appreciated and, indeed, addressed in a timely manner.

Finally, we understand that the Joint Committee of the Canadian Institute of Chartered Accountants and the Canadian Bar Association has ear-marked the preferred share rules for a major simplification effort. TEI heartily supports this objective, believing there is both the need and a constituency for simplification. (2) We would be pleased to participate in a simplification project designed to bring the Joint Committee's recommendations to fruition.

III. Environmental Taxation Policy

1. Overview. The Government of Canada has committed itself to making the preservation of the environment a top priority. Obviously, the business community as a whole shares the Government's goal. To this end, corporations are making significant capital expenditures on air and water quality-control processes as well as on the development of new recycling processes. They are also devoting considerable resources to creating safer and healthier work environments and to developing new products to replace hazardous products. In some cases, this involves closing down the plants and processes involved and building new plants to produce environmentally friendly products as substitutes, whereas in others it involves substantial "retrofitting" of existing plants and equipment to achieve an environmentally desirable result. Finally, businesses are designing consumer products to make them both safer for the consumer and the environment.

   The financial commitment required from industry to engage in these salutary activities is substantial. We submit that for Canadian business to remain competitive internationally, the federal government, in conjunction with the provinces, should develop taxation policies that encourage business to undertake environmental projects. The overall goal should be to accelerate investment on environmental projects rather than to punish corporations through the imposition of environmental tax levies. In other words, government and industry should work together in partnership to achieve common environmental goals. Our specific recommendations in this regard are set...