Pending Canadian income tax issues: December 11, 1996.

December 11, 1996

On December 11, 1996, Tax Executives Institute held its annual liaison meeting with the Canadian Department of Finance on pending income tax issues. (TEI held a separate meeting on issues relating to the Goods and Services Tax and other commodity tax issues.) The Institute's agenda for the income tax meeting is reprinted below. The agenda was prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is Alan Wheable of Canada Trust. J.A. (Drew) Glennie of Shell Canada Limited, the Institute's Vice President-Region 1, coordinated plans for the liaison meeting

Tax Executives Institute, Inc. welcomes the opportunity to present the following comments on several pending tax issues, which will be discussed with representatives of the Department of Finance during TEI's December 11, 1996, liaison meeting. If you have any questions about these comments, please do not hesitate to call either J.A. (Drew) Glennie, TEI's Vice President for Canadian Affairs, at (403) 691-4900, or Alan Wheable, chair of the Institute's Canadian Income Tax Committee, at (519) 6631623.

Background

Tax Executives Institute is an international organization of approximately 5,000 professionals who are responsible -- in an executive, administrative, or managerial capacity -- for the tax affairs of the corporations and other businesses by which they are employed. TEI's members represent more than 2,700 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 companies with significant Canadian operations. In sum, TEI's membership includes representatives from most major industries, including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial; telecommunications; and natural resources (including timber and integrated oil companies). The comments set forth in this submission reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

Consolidated Tax Returns

In 1985, the Minister of Finance issued a White Paper on consolidated tax returns for affiliated groups of companies (which was referred to as the "corporate loss transfer system"). At that time, TEI supported a proposal to permit consolidation of wholly-owned, or nearly wholly-owned, group members, urging that Canada alter its unique position among major trading countries in not permitting consolidation. More than ten years later, little has changed; indeed, the rules governing corporate groups may be even less competitive now compared with the rest of Canada's trading partners. Notwithstanding that "loss transfer" mechanisms exist for federal income tax purposes, effectuating such transfers involves substantial transactional costs; moreover, the losses remain unavailable for provincial income tax purposes. In addition, the attendant compliance costs associated with filing separate returns for subsidiaries remains as high as ever. Recent reports by Professor Mintz's Technical Committee on Business Taxation and the Auditor General acknowledge these economic and tax policy inefficiencies. Hence, we urge the government to "just do it" and implement a regime to permit consolidated income tax return filing for corporate groups. We invite the Department's views and comments.

Part I.3 Tax -- Deduction for Surtax Credits

Under current rules, the capital deduction claimed in the computation of the Part I.3 Tax on Large Corporations must be allocated among associated companies. Would consideration be given to revising the rule to apply the excess surtax credits over Part I.3 tax to other corporations within the same associated group in respect of which the capital deduction allocation was made?

Leasehold Improvements--Simplification Proposal

Determining the amount of the capital cost allowance (CCA) on Class 13 assets is very complicated. Each asset that forms a part of a leasehold improvement must be accounted for on a separate basis even though all the assets remain in a single class for purposes of the terminal loss and recapture rules. To simplify the system and permit both taxpayers and Revenue Canada to reduce the amount of resources devoted to the calculation and verification of CCA on such assets, we recommend that the Department of Finance adopt the same diminishing balance aggregate pool system for leasehold improvements as exists for most other assets. In addition, a transitional rule should be adopted permitting taxpayers to elect either to maintain the current rules for existing leasehold improvements or to transfer the balance into the new class of assets subject to the diminishing balance computation. We believe that the new rule and the transitional rule for existing leasehold improvements can be implemented in a revenue-neutral fashion. We would be willing to work with the Department to craft such a rule and invite the Department's comments.

Harmonization

There is currently much discussion at the federal and provincial levels about simplifying the tax system and improving the efficiency of Canada's revenue administration. The Minister signalled his commitment to those goals with the announcement of the Canada Revenue Commission (hereinafter, "the Commission") in the last budget message.

One of the objectives of the Commission is to develop a closer partnership with provinces in revenue administration. TEI believes that the federal and provincial governments as well as business taxpayers have much to gain from the increasing trend toward harmonized tax bases where similar taxes are imposed by different jurisdictions. Consequently, we appreciate the active and substantial leadership of the federal government in developing a harmonized sales tax system across Canada. Regrettably, no government body has yet assumed the leadership mantle in respect of harmonizing capital taxes. Consequently, we believe the Commission would serve as a catalyst for promoting such an initiative because the capital tax is another area where harmonization will be beneficial. Once a common capital tax base is agreed upon, federal and provincial rates should be reviewed in order to maintain revenue neutrality for both taxpayers and the respective tax authorities. Harmonization of capital taxes would facilitate compliance by taxpayers, lower the risk of double taxation, minimize audit disputes, and thereby reduce compliance and administrative costs for taxpayers and tax authorities alike. We invite the Department's comments on our proposal to make capital tax harmonization a goal of the Commission.

Notwithstanding the substantive goals that evolve for the Commission, we urge that the Government, in its efforts to harmonize business tax systems, adhere to certain key principles that we believe are fundamental to sound tax policy and administration. Among the core principles are revenue neutrality, simplification of the tax system, minimizing the burden of compliance, promoting common or uniform administration and tax regimes without material exceptions, fostering extensive taxpayer consultations, providing timely, prospective legislation and form release, and ensuring adequate transitional rules. With the announcement of such guiding principles, harmonization efforts would enlist TEI's active participation.

Provincial Allocations -- Netting of Interest Charges

Where the taxpayer's provincial allocation is revised on audit, and assuming that the proper correlative adjustments are made in all other jurisdictions, the taxpayer will owe additional tax in some jurisdictions and be entitled to refunds in others. In addition, the taxpayer will be assessed interest on tax underpayments and be entitled to receive interest on overpayments. In total, the amount of tax and interest will likely entirely offset. The interest on the refund amounts, however, is taxable whereas interest charges on income taxes is not deductible. As an administrative concession, will the Department of Finance permit taxpayers to net the interest payable and refundable from all jurisdictions and only treat the net amount as either taxable (in the case of net refund interest) or nondeductible (in the case of net arrears interest)?

Interest Charges and the Competent Authority Process

The purpose of the competent authority process is to prevent double taxation in respect of cross-border transactions. Owing to the complexity of the issues involved, taxpayers must invest substantial time and resources to resolve competent authority issues. Even where the process ultimately results in the elimination of...