TEI liaison meeting with Canada Revenue Agency on income tax questions.

• Position: Tax Executives Institute

On November 18-19,2014, representatives from Tax Executives Institute, led by 20142015 President Mark C. Silbiger and 2014-2015 Vice President for Canadian Affairs Paul T. Magrath, met with officials from Canada Revenue Agency and the Canadian Department of Finance to discuss tax policy and administrative matters. The agendas for the meetings on income tax matters were prepared by the Institute's Canadian Income Tax Committee, whose 2014-2015 chair is Grant L. Lee of HSBC Bank Canada. Jeffery P. Rasmussen of the Institute's legal staff coordinated the preparation of the comments. The agendas for the meetings on commodity tax matters were prepared by the Institute's Canadian Commodity Tax Committee, whose 2014-2015 chair is Richard Taylor of Rogers Communications Inc. Daniel B. De Jong of the Institute's legal staff coordinated the preparation of the comments. The minutes from the meeting with the Department of Finance will be published in early 2015.

Tax Executives Institute welcomes the opportunity to present the following comments and questions on income tax issues, which will be discussed with representatives of the Department of Finance during the November 19, 2014, liaison meeting. If you have any questions about the agenda in advance of the meeting, please do not hesitate to call Paul T. Magrath, TEIs Vice President for Canadian Affairs, at 905-804-4930 or, Grant L. Lee, Chair of the Institute's Canadian Income Tax Committee, at 604-641-2502.

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. TEIs 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 15 percent of TEIs 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, TEIs 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. Legislative Update and Tax Policy Discussion

   1. Legislative Agenda TEI invites an update on the Department's legislative priorities over the coming months.

   2. Tax Policy

   1. TEI invites a discussion of the Department's current views on the direction of Canadian tax policy as well as the Canadian perspective on the effect of the OECD's BEPS initiative on those policies.

   2. There has been substantial discussion about how best to encourage innovation in Canada and whether the Scientific Research & Experimental Deduction incentive is sufficient or as effective as it can be. Moreover, questions have arisen whether the administration of the program by Canada Revenue Agency enhances the incentive's efficacy. TEI invites the Department's view in respect of the tax policy direction in this area.

2. Carryover Issues

   1. Bilateral Safe Harbours In last year's meeting with the Department of Finance, TEI expressed interest in implementing bilateral safe harbours for transfer pricing of common, routine, or low-risk transactions as recommended by the OECD in its May 2013 revisions to Chapter IV of the OECD Transfer Pricing Guidelines (the "Guidelines"). Specifically, TEI recommended the Department begin by adopting rules for two of the most common transfer pricing transactions, limited risk distribution and routine management services.

      The Department agreed with the content of the Guidelines but expressed a desire to proceed cautiously and on a coordinated basis with CRA. The Department also noted that a preliminary analysis of safe harbours was in process. TEI understands and concurs with a cautious and coordinated approach. We invite an update on the progress of its analysis.

      The Department also posed two questions to TEI, as follows;

   1. What is meant by low-risk distribution?

      TEI is not aware of any tax authority that has defined the term "low risk distribution." Consequently, we believe the first responsibility of the safe harbour negotiators would be to define the term (the "First Phase"). We understand that a distribution transaction is one for which there is a high degree of comparability available for reference purposes. We note that the transfer-pricing negotiations become bogged down because of the perception that some aspect of a covered distribution transaction does not align exactly with a comparable (the "Difference"). We believe that unless a Difference is unique (i.e., having no comparable such as a one-of-a-kind intangible property), all Differences for low-risk distribution should be able to be accommodated in the First Phase of negotiation.

   2. What areas should be prioritized? For example, low-risk distribution or management services?

      TEI believes there would be fewer "Differences" in respect of routine management services and thus recommends giving priority to developing a safe harbour for such services. (1)

   2. Regulation 102

      During the Department of Finance update at TEIs 48th Annual Canadian Tax Conference in May 2014, Department representatives said they are aware of taxpayers' concerns about Regulation 102, especially the regulation's application to non-resident employees who spend short periods of time in Canada (in the course of their employment by a non-resident employer) but who are ultimately not taxable in Canada.

      The Department stated that it was reviewing the matter.

      The 2008 report on Enhancing Canadas International Tax Advantage (2) recommended as follows:

      Eliminate the 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. (3)

      TEI member companies continue to be burdened by the onerous administrative requirements imposed by Regulation 102 as well as its stringent administration by CRA. The 2014 agenda for CRA includes questions relating to the administration of Regulation 102, but CRA has advised previously that its hands are tied by the current legislative framework.

      Concededly, reform of these rules may not be simple, but the...