TEI liaison meeting with Canadian Department of Finance on pending income tax issues: December 5, 2012.

On December 5,2012, Tax Executives Institute held its annual liaison meeting with Canadian Department of Finance on income tax issues. The agenda for the meeting, which is reprinted below, was developed by the Institute's Canadian Income Tax Committee, whose chair is Bonnie Dawe of Finning International, Inc. TEI Senior Tax Counsel Jeffery P. Rasmussen, who serves as liaison to the committee, coordinated the preparation of the agenda.

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 5, 2012, liaison meeting. If you have any questions about these comments, please do not hesitate to call either Kim N. Berjian, TEI's Vice President for Canadian Affairs, at 403.614.8572, or, Bonnie Dawe, Chair of the Institute's Canadian Income Tax Committee, at 604.331.4864.

Background

Tax Executives Institute is the preeminent professional organization of in-house 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 nearly 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.

1. Update on Pending Projects and Carryover Issues

   1. Functional Currency Reporting Rules

      In response to question 1(c) in the 2011 liaison meeting agenda (and question 3 of the 2010 agenda) relating to the Functional Currency Reporting Rules, the Department said it had received a number of comments and submissions, including TEI's. Since there are many interrelated issues, the Department said further study was required before moving forward. We invite the Department provide an update of its review of the issues and prospects for legislative changes and clarification.

   2. General Legislative Update

      On October 24, the Department released a 945-page Notice of Ways and Means Motion consolidating eleven years' worth of proposed legislative changes. In addition, on October 15 the Department released its 2012 budget legislative package, including the foreign affiliate provisions. Both packages comprehensively address longstanding technical and policy issues in the Income Tax Act. TEI commends the Department for its impressive and prodigious output. Although we are still assessing the changes, the legislation should generally increase taxpayer certainty, especially for financial statement reporting purposes. Does the Department anticipate releasing additional legislative packages in the coming months? In other words, in addition to developing the government's 2013 Budget Message, "What's next?" on the Department's priority list?

   3. Tax Consolidation 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 in Canada. Have any policy decisions been made about the scale and scope of a system, e.g., between a full consolidated tax return system and a system permitting transfers of specific tax attributes within a related group? Has progress been made in negotiations with the provinces? What are the next steps in the process?

2. Part VI.1 Tax and 110(1)(k)

   Paragraph 110(1)(k) of the Act affords taxpayers a deduction from regular taxable income in order to offset the Part VI.1 tax liability. The policy rationale for the offset is to ensure tax neutrality for profitable taxable Canadian corporations. In July 2010 the Department of Finance released draft legislation proposing a change to the deduction factor to address the reduction in corporate tax rates. Regrettably, based on the currently scheduled federal and provincial tax rates, the proposed factor does not provide a full offset. For example, an Ontario company's tax rate is approximately 26.5 percent, but the proposed factor of 3.5 times for 2011 and subsequent taxation years assumes a corporate tax rate of 28.5 percent. (To fully offset the Part VI.1 tax, the deduction factor should be approximately 3.8 times the Part VI.1 tax.)

   At the 2010 liaison meeting, the Department said the provinces were expected to continue to reduce their income tax rates and thus it was unreceptive to increasing the Part VI.1 deduction factors. Since the provinces have not scheduled additional tax rate reductions (indeed, Ontario recently increased its tax rates), would the Department reconsider adjusting the Part VIA deduction factors to more closely align the offset?

3. Subsection 93(2)

   The stop-loss rule in subsection 93(2) limits the loss on dispositions of shares of foreign affiliates even where the realized capital loss is attributable to foreign exchange fluctuation rather than the receipt of exempt dividends. Subsection 93(2), however, is not applicable to losses on debt investments. Since Canadian companies can finance foreign affiliates with either debt or equity and since debt instruments and preferred shares possess similar...