Comments to Canadian government on establishing a corporate loss-transfer system.

April 8, 2011

On April 8, 2011, Tax Executives Institute submitted the following comments to Canada's Department of Finance with recommendations for establishing a loss-transfer system to improve the taxation of corporate groups. TEI's comments were prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is Carmine A. Arcari of the Royal Bank of Canada. Contributing substantially to the development of TEI's comments was Rodney C. Bergen of The Jim Pattison Group, TEI's Vice President for Canadian Affairs. Also contributing to the submission were Vincent Alicandri of Hydro One Networks, Inc.; David V. Daubaras of GE Canada, Bonnie Dawe of Finning International, Paula H. Gardner of Investors Group, Inc., Marvin E. Lamb of Imperial Oil Limited, Grant L. Lee of HSBC Canada, Carolyn Mulder of Wal-Mart Canada Corp.; Sandra Periera of GE Canada, Steve Perron of CGI Group, and Winston C. K. Woo of AGS Automotive Systems. Jeffery P. Rasmussen, TEI Tax Counsel, serves as staff liaison to the Canadian Income Tax Committee and coordinated the preparation of the Institute's comments.

On November 23, 2010, the [Canadian] Department of Finance launched a public consultation on the taxation of corporate groups because of concerns expressed by the business community and the provinces about the current transaction-based approach for using tax losses within corporate groups. The consultation will "explore whether changes to the tax system can be made to improve its efficiency and to support economic growth."

On behalf of Tax Executives Institute (TEI), I am pleased to submit the following comments in response to the questions and issues raised in the consultation paper and to urge the Government to revise the taxation of corporate groups by implementing a loss- or attribute-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 consultation on the taxation of corporate groups.

Executive Summary

Under the Income Tax Act, Canada, each incorporated business is required to file tax returns and pay its tax liability separately. Since some members of a corporate group may be in a loss position while others are profitable, the group overall may pay taxes even where the combined group's taxable income is zero or a loss. The consultation paper raises myriad questions about the taxation of corporate groups, inviting stakeholder views about the appropriate design of a group taxation system in Canada.

The Canadian tax regime has many favourable features that should be preserved, but the system for utilizing losses within commonly controlled corporate groups is inefficient and impedes business investments by Canadian and foreign investors. Hence, TEI urges the government to adopt a group taxation regime with an annually elective, loss- or attribute-transfer mechanism. Attributes that should be part of the system include non-capital losses, capital losses, carryovers of such amounts, and--either immediately or a phased-in basis as revenue considerations permit--investment and other tax credits. Other important design parameters for a group taxation system that TEI recommends include: establishing a threshold for common ownership for eligible groups of more than 50 percent but no greater than 80 percent; requiring a common parent corporation; and requiring that members be part of a group throughout the taxation year in order to transfer losses or attributes among eligible members. TEI would be pleased to meet with the government to discuss our recommendations for the system design features.

Finally, the consultation paper raises numerous questions about the provincial income allocation system. TEI agrees that the current formulas for allocating corporate taxable income among the provinces deserve study. Extensive consultation with stakeholders will likely be required before any changes in the provincial allocation formula can be adopted and TEI would be pleased to meet with the Department of Finance and provincial officials to discuss alternative allocation approaches. Tile implementation of a group taxation system, however, should not be delayed pending negotiations with the provinces because, while the provincial allocation formulas can likely be revised and simplified, the application of the current allocation formulas to a loss-transfer regime will not likely produce significant income shifting per se. Consequently, the Government should permit group members to determine their allocable provincial income (and corresponding provincial income tax liability) as they do currently by applying Part IV of the current Income Tax Regulations and then electively applying any resulting losses allocated to a province against the taxable income of profitable group members allocated to a province.

TEI's responses to the questions raised by the consultation paper (as summarized in Annex 1 to the consultation paper) follow.

1. Policy Objectives

   The Government is interested in stakeholders' views regarding the most important benefits that they expect would be obtained from a new system for the taxation of corporate groups.

   Recent federal budgets have focused on making Canada's tax rate structure one of the most competitive in the world. To a large extent, the Government has succeeded. But to accurately assess the competitiveness of the Canadian tax system and its relative tax burden, 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, the current system is deficient. We believe adoption of a simplified group taxation system with loss and attribute transfers will increase the competitiveness of the Canadian tax system, increase corporate liquidity, promote tax equity and neutrality, and reduce administrative costs.

   1. Increase the Competitiveness of Canadian Businesses and Attract Increased Domestic and Foreign Investment. Implementing an efficient system of group taxation will provide a more competitive tax environment for businesses in Canada, thereby fostering economic growth and generating additional employment. More than two thirds of OECD countries--including major Canadian trading partners such as the United States, the United Kingdom, Australia, and Germany--provide some form of group taxation or loss-transfer regime. Canada is currently the only G7 country that does not have such a feature. By implementing a group taxation system, the effective tax rate for corporate groups can be more easily reduced to the statutory rate, improving the competitiveness of the Canadian system and attracting increased domestic and foreign direct investments.

   2. Liquidity. Under the current corporate tax system, profits and losses are taxed asymmetrically: profits are fully taxed when earned but losses are monetized only to the extent they can be carried back to offset a corporation's prior taxable income. Where a carryback is unavailable, a loss can be carried forward to reduce a future income tax liability, but the economic value of the loss is diminished by the time value cost of the deferral. Concededly, Canadian corporate groups can structure transactions or make use of Canada Revenue Agency's (CRA's) administrative concessions to transfer a loss to a profitable group member. Implementing such tax planning techniques, however, requires corporate groups to incur significant administrative costs and also delays utilization of the loss. Moreover, regulatory or business constraints can prevent groups from structuring a loss transfer or making use of the administrative concessions thereby resulting in a permanent inability to utilize the loss. Permitting corporate groups to immediately offset profits and losses (and share other tax attributes) among group members will improve corporate liquidity and reduce borrowing costs for funding the payment of profitable group members' tax liabilities. Improving corporate liquidity is especially critical in a tight credit...