TEI liaison meeting with Canadian Department of Finance on pending income tax questions.

• Position: Tax Executives Institute

December 7, 2011

On December 7, 2011, Tax Executives Institute held its annual liaison meeting on income tax issues with officials of the Canadian Department of Finance. The agenda for the meeting, which is reprinted below, was prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is Carmine Arcari of The Royal Bank of Canada. Jeffery P. Rasmussen, TEI Senior Tax Counsel, serves as legal staff liaison to the committee.

Tax Executives Institute welcomes the opportunity to present the following comments on income tax issues, which will be discussed with representatives of the Department of Finance during TEI's December 7, 2011, liaison meeting. If you have any questions about these comments, please do not hesitate to call either David V. Daubaras, TEI's Vice President for Canadian Affairs, at 905.858.5309, or, Carmine A. Arcari, Chair of the Institute's Canadian Income Tax Committee, at 416.955.7972.

Background

Tax Executives Institute is the preeminent professional organization of business executives 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 7,000 members represent more than 3,000 of the leading corporations in Canada, the United States, Europe, and Asia.

Canadians make up approximately 10 percent of TEI's membership, with our Canadian members belonging to chapters in Montreal, Toronto, Calgary, and Vancouver, which together make up one of our nine geographic regions. In addition, a substantial number of our U.S., European, and Asian 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.

Update on Pending Projects and Carryover Issues

1. Advisory Panel on Canada's System of International Taxation

   In its August 19, 2011, press release announcing the draft foreign affiliate legislation (hereinafter "the August 19 Proposals"), the Department said that "the Government remains committed to continuing its review and analysis of all [the] recommendations" made by the Advisory Panel on Canada's System of International Taxation (hereinafter "the Panel"). We invite a discussion of the following points.

   1. The August 19 proposals seemingly deviate from the Panel's recommendations to (i) broaden the existing exemption system to cover all foreign active business income earned by foreign affiliates and (ii) extend the exemption system to capital gains and losses realized on the disposition of shares of a foreign affiliate that derive all or substantially all their value from active business assets. In explanation of the August 19 proposals, the press release states that "the priority of the Government is to encourage countries to enter into Tax Information Exchange Agreements with Canada and to provide exempt surplus treatment as an incentive to those which choose to do so." If the goal remains a broader exemption system, does the Department consider the August 19 proposals transitory and, if so, has it considered the burdens of multiple foreign affiliate transition rules on taxpayers and CRA?

   2. The Panel made a number of recommendations that have not yet been acted upon. Which Panel recommendations does the Department consider a priority to implement? Has a timeline for evaluation and action been developed in respect of the remaining recommendations? Specifically, has the Department evaluated the Panel's recommendations for (i) adopting safe harbours for low-value services in documenting transfer pricing and (ii) eliminating withholding tax requirements related to services performed and employment functions carried on in Canada where the non-resident certifies the income is exempt from Canadian tax because of a tax treaty? What are the prospects for changes in those areas?

2. Loss Transfer System

   We invite the Department to provide an update on the status of its consultation on the Taxation of Corporate Groups and the prospects for implementation of a loss- or attribute-transfer system.

3. Functional Currency Reporting Rules

   The technical notes to subsections 261(20) and (21) state that the provisions are intended to prevent abuses of the functional currency tax reporting regime. As recommended in Question 3 of last year's agenda, we submit that subsections 261(20) and (21) should include an exception to the anti-avoidance rule for transactions undertaken for bona fide business purposes. The impetus for a taxpayer to make a functional currency election for tax purposes is that International Financial Reporting Standards or Canadian generally accepted accounting principles may require a taxpayer to maintain one or more (but not all) of its corporate accounts in a foreign currency. By making the election, the taxpayer is endeavouring to save the time and expense of maintaining two sets of books of original entry for the affected accounts. In response to Question 3 last year, the Department stated that it would consider developing narrow legislative changes to address bona fide intercorporate financing arrangements such as that cited in TEI's question. Would the Department provide an update on its review of the issues?

   Calculation of Amount under Subparagraph 247(3)(b)(ii)

   Pursuant to TPM-07 Referrals to the Transfer Pricing Review Committee (August 2, 2005), "the application of penalties under subsection 247(3) must be considered in all cases where the total of transfer pricing capital and...