TEI-Canadian Department of Finance liaison meeting (income tax issues).

• Position: Tax Executive Institute's December 11, 1996 meeting

Introduction

On December 11, 1996, a delegation from Tax Executives Institute met in Ottawa with representatives of the Canadian Department of Finance. The meeting was chaired by Len Farber of the Canadian Department of Finance and Alan Wheable, chair of Tax Executives Institute's Canadian Income Tax Committee. The Chairs introduced the participants. James Murray, President of TEI, expressed his appreciation of the close relationship between Finance Canada and TEI.

The participants discussed the items previously submitted. [Editor's Note: The Department's responses are summarized by the TEI members who participated in the meeting; the Department of Finance has reviewed and approved the summaries for distribution.]

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 comments.

Finance response and discussion: There was general agreement that a form of group relief/consolidated return or loss transfer system would be appropriate for Canada. TEI emphasized that the Provincial and indeed Revenue loss concerns are not as significant as perhaps they were once thought to be. Even a federal-only system would be better than nothing.

Finance said that TEI should not expect to see this subject in the next Budget, but might see it in the medium term. There are "revenue" and provincial concerns. Finance is sympathetic to a loss transfer system.

Other issues that Finance said must be addressed before adopting a loss-transfer system:

* Should Finance adopt it with or without the provinces or certain provinces?

* How high should the ownership threshold be set to permit consolidation?

* What if there is a revenue loss for the provinces.

* How will a higher or lower percentage of ownership create other problems.

Finally, the subject of loss transfers is apparently being considered by the Mintz Commission.

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?

Finance response: The base issue here is loss transferability. The Department is not prepared to change this aspect of the legislation before changing the other.

TEI counter-response: An unfair result can occur where a company has high capital and a low return.

Finance counter-counter-response: Yes, this is understood.

Leasehold Improvements

Simplification Proposal

Determining the amount of the capital cost allowance (CCA) on Class 13 assets is excessively 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 views and comments on the topic.

Finance response: Finance stated that they were not previously aware of any Class 13 administrative problems. The Department is willing to consider a TEI brief on the subject. The brief should address a suggested rate; winners and losers; profile of a typical lease; lease term; and renewal period.

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 signaled 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 the active participation of TEI.

Finance response: This issue has been raised at the Assistant Deputy Minister level, which meets with provincial counterparts twice a year, as well as at the "working" level on a more regular basis. Certain provinces have shown some interest. Owing to resource constraints, this has not been a priority. Certain provinces have moved their capital tax base closer to the LCT. Finance suggested that taxpayers (through TEI or others) try to give a higher priority of this issue at the provincial level so that the issue is on everybody's agenda the next time there is a meeting.

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)?

Discussion: This issue was withdrawn because Revenue Canada has indicated that it will permit the offset as an administrative accommodation.

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 double taxation, the denial of a deduction for interest levied on tax deficiencies on one of the affected taxpayers will produce a result economically equivalent to double taxation where interest on the tax refund is taxable to the related party. Such a result is inconsistent with...