Pending income tax issues: December 5, 2001.

• Position: Canadian Department of Finance

On December 5, 2001, Tax Executives Institute held its annual liaison meeting with officials of the Canadian Department of Finance on peding income tax issues. Reprinted below is the agenda for the meeting, which was prepared under the aegis of the Institute's Canadian Income Tax Committee whose chair is David M. Penney of General Motors of Canada Limited. A full report on the meeting will be published in a future issue of The Tax Executive.

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Tax Executives Institute welcomes the opportunity to present the following comments on pending income tax issues, which will be discussed with representatives of the Department of Finance during TEI's December 5, 2001, liaison meeting. If you have any questions about these comments, please do not hesitate to call either Alan Wheable, TEI's Vice President for Canadian Affairs, at 416.982.8003, or David M. Penney, Chair of the Institute's Canadian Income Tax Committee, at 905.644.3122.

Background

Tax Executives Institute is an international organization of approximately 5,300 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 2,800 of the leading corporations in Canada, the United States, and Europe.

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 eight geographic regions. In addition, a substantial number of our U.S. and European 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.

1. Withholding Taxes: Canada--U.S. Treaty

   TEI supports the elimination of withholding taxes through the negotiation of reciprocal tax treaties and many countries have entered into, or are actively considering, such agreements. For example, during the past year the United States announced modifications to its income tax conventions with the United Kingdom and Australia that will eliminate withholding taxes on most dividends and interest payments. In addition, in June 2001, the United States Assistant Treasury Secretary for Tax Policy released a letter to the Organization for International Investment that states "there are strong tax and economic policy reasons for the United States and Canada to eliminate withholding taxes" thereby reducing barriers to cross-border investments to the benefit of both countries. Moreover, the letter continues, the United States has "urged Canada to agree to modify the treaty to eliminate such withholding taxes." Would the Department please provide an update on the status of these discussions and specifically whether Canada, like Australia and the United Kingdom, will support an agreement with the United States to eliminate withholding taxes?

2. Large Corporations Tax

   During last year's liaison meeting, TEI advocated the elimination of the Large Corporations Tax (LCT) levied under Part 1.3 of the Income Tax Act (hereinafter "the Act"). This recommendation is premised on the tax regime's insensitivity to profits and the disproportionate burden thereby imposed on capital-intensive companies and industries. Canada is currently implementing a number of significant reductions in the corporate income tax rate and modifications to the income tax base that will enhance the international competitiveness of the tax system. The LCT, however, discourages incremental capital investment by domestic and, especially, foreign businesses and investors because it is perceived as a direct tax on capital. This is at odds with the goal of making Canada a more attractive environment for global business investment.

   In its response last year, the Department noted that provincial governments rely more heavily on corporate capital taxes than the federal government. Since that meeting, however, British Columbia has announced a phased elimination of its capital tax over a two-year period, Alberta has eliminated its only remaining capital tax (on financial institutions), and Ontario has increased its capital deduction. Clearly, the provinces are moving toward reducing the capital tax burden. In addition, we understand that the Conference Board of Canada is preparing a study, which may be released before the liaison meeting, that will advocate the elimination of taxes that are insensitive to profits. Taxes on capital have a negative effect on economic growth because of the increased cost of capital, which deters business investment--a key driver of productivity growth. TEI reiterates its recommendation that the Department of Finance should introduce legislation to repeal Part 1.3 of the Act. We invite the Department to discuss whether, in view of the continuing developments in the provinces and calls for repeal by other groups, it will reconsider its view on eliminating the LCT.

3. Payroll Cost Duplication

   As a result of corporate reorganizations, employees often terminate employment with one legal entity and become employees of another, related legal entity. In many cases, the employees and the new employer must commence Employment Insurance and Canada Pension Plan premium payments anew without regard for the contributions previously made during the year. Excess premiums contributed by an employee are recoverable upon filing the individual's annual income tax return. The employer, however, is not entitled to obtain a similar recovery. At the Department of Finance's suggestion at last year's liaison meeting, TEI wrote to the Deputy Minister on July 25, 2001, outlining our concerns and urging amendments to the Act to permit employers to recover excess contributions. We would appreciate a status report on the Department's deliberations on this matter.

4. Disclosure of Comfort Letters issued to Taxpayers

   Increasingly, the Department of Finance is issuing "private" "comfort letters" that acknowledge anomalies in the Income Tax Act and explain the technical changes under consideration to address them. Some of the letters are made available for publication in tax services (such as CCH, Carswell, etc.), whereas others are seemingly never released. TEI believes that, in an ever-changing tax environment, the letters represent an efficient way to rapidly communicate information about much-needed amendments to the Act. Hence, we wish to understand the policy and process the Department follows in determining which letters to release and when. More important, we encourage the Department to implement a formal and speedy process to make these letters available to the entire tax community as soon as they are issued (e.g., through a technical news update). We invite the Department's response.

5. Provincial Allocations

   TEI understands that a committee consisting of federal and provincial officials is currently reviewing myriad issues related to the allocation of provincial income. TEI believes that any changes to the provincial allocation rules should be undertaken on a consultative basis and, as substantially affected parties, we would like to participate. Is this committee currently active? We invite the Department to provide an update on the status of the committee's deliberations and recommendations.

6. Partnership Information Returns T5013

   Where a partnership has not filed a partnership information return, CCRA's position is that subsection 152(1.4) permits the Minister of Revenue to determine or redetermine the income or loss of the partnership at any time. (See CCRA Document Numbers 9726115 and 2000-0010935.) This is so even where a corporate partnership with fewer than five partners has availed itself of CCRA's published administrative position in Information Circular IC 89-5R, Partnership Information Return, and has not filed the partnership information return. TEI believes that CCRA's interpretation will ultimately result in significant additional administrative burden for both taxpayers and CCRA because taxpayers will be required to file additional partnership information returns (and related objections to CCRA re-assessments) simply to ensure that the corporate partner's taxation year becomes statute barred within the normal time period.

   To minimize the additional compliance and attendant administrative burdens, would the Department of Finance consider making technical amendments to subsection 152(1.4) to exempt partnerships with five or fewer corporate partners from its application? Alternatively, would the Department consider amending subsection 152(1.4) to include (as a trigger for the beginning of the period for the determination of the statute-barred date) the day the income tax return for each partner is filed?

7. Consequential ITA Amendments to Reflect Tax Rate Changes

   In last year's liaison meeting agenda, TEI requested that the Department review a number of areas where, because of pending changes to the income tax rates, appropriate amendments should be made to the Act because the amounts of certain deductions, credits, etc., are based notionally on the taxpayer's tax rate. Since the tax rate reductions have now been legislated, the consequential adjustments to the relevant amounts should also be made with effect from the date of the rate changes. We invite the Department's comments on the following examples of TEI-recommended adjustments.

   1. Part VI.1 Tax

      Under paragraph 110(1)(k) of the Act, a corporation is entitled to a deduction from income equal to 9/4 of the tax payable under Part VI.1. At the time this gross-up factor was enacted, it was...