Misrepresentation of a tax matter by a third party.

May 3, 2000

Th following letter to the Canadian Department of Finance was prepared under the aegis of the Canadian Income Tax Committee, whose chair is John M. Allinotte of Dofasco, Inc. The comments were prepared following a meeting in Ottawa on March 9, 2000, between representatives from TEI and the Department of Finance. The purpose of the meeting was to discuss TEI's January 14, 2000, submission relating to draft legislation that would impose a civil penalty in certain circumstances on corporate employees for understatements of corporate tax liability. (The previous submission is reprinted in the January-February 2000 issue of The Tax Executive, beginning at page 64). Representing TEI at the March 9 meeting with the Department of Finance and contributing to the development of TEI's comments were, in addition to Mr. Allinotte, David V. Daubaras of GE Capital Canada Inc., J.A. (Drew) Glennie of Shell Canada Limited, David M. Penney of General Motors of Canada Limited, Gary G. Penrose of TransCanada Pipelines Limited, and Alan Wheable of Toronto-Dominion Bank.

On January 14, 2000, Tax Executives Institute submitted comments to the Minister of Finance expressing serious objections about draft legislative provisions captioned Misrepresentation of a Tax Matter by a Third Party. Specifically, draft section 163.2 of the Income Tax Act and draft section 285.1 of the Excise Tax would add parallel penalty provisions that would expose corporate employees to a risk of enormous personal penalties for corporate tax understatements. In response to an invitation from the Department, members of TEI's Canadian Income Tax Committee met with representatives from your office on March 9, 2000, to discuss TEI's concerns. This letter summarizes various issues that were discussed at the meeting and elaborates on TEI's continuing concerns about the draft provisions, especially the onerous penalty amount and the potential for improper administration of the penalty -- whether through widespread assertion to unintended targets or as a potential lever for improperly extracting company tax settlements.

Tax Executives Institute is the preeminent association of business tax executives. The Institute's 5,000 professionals manage the tax affairs of the leading 2,800 companies in Canada, the United States, and Europe and must contend daily with the planning and compliance aspects of Canada's complicated business tax laws. 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 recognizes that the Department faces considerable pressure from many sources to prescribe legislation to curb tax shelter -- and especially tax shelter promoter -- activity. Even though we agree with the Department's goals of enhancing the fairness of the tax system and curbing activities that challenge the efficacy of its administration, TEI stands by its previous comments. The aim and scope of the draft provisions are overbroad and will have unintended consequences that will undermine compliance with, and administration of, both the Income and Excise Tax Acts. Under the draft provisions, all corporate employees whose job duties affect financial and tax reporting could be liable to Draconian penalties as a result of acts or omissions involving "indifference" -- whether collectively or individually -- that are beyond the volition of the penalized individuals. We continue to recommend that draft section 163.2 of the Income Tax Act and draft section 285.1 of the Excise Tax Act be revised to clarify that they will not apply to corporate employees acting within the scope of their employment at the direction of the employer. The current civil and criminal penalty regimes provide adequate safeguards to deter misconduct by company employees. At a minimum, TEI strongly urges the Department to ensure that the penalty will only apply to wilful misconduct of employees and not to acts or omissions involving "indifference."

At the conclusion of the March 9 meeting, the Department and TEI representatives agreed that TEI would consider, and provide additional comment on, three specific issues. Our comments on those matters follow.

TEI Representation on Penalty Guideline Committee

The Department stated that Canada Customs and Revenue Agency (CCRA) will establish an advisory committee to assist in developing guidelines governing the assertion of the proposed penalty. TEI's representatives noted that our members work with CCRA on a daily basis and...