December 8, 2010
On December 8, 2010, 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 Tax Counsel, serves as legal staff liaison to the committee. The minutes of the meeting will be posted to TEI's website when they become available. Note: The May 4, 2009, submission on Salary Deferral Arrangements that is included in Appendix 1 of the agenda is reproduced in the May-June 2009 issue of The Tax Executive, beginning at page 237.
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 8, 2010, liaison meeting. If you have any questions about these comments, please do not hesitate to call either Rodney C. Bergen, TEI's Vice President for Canadian Affairs, at 604.488.5231, or, Carmine A. Arcari, Chair of the Institute's Canadian Income Tax Committee, at 416.955.7972.
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 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.
Update on Pending Projects and Carryover Issues
Advisory Panel on Canada's System of International Taxation
In December 2008, the Advisory Panel on Canada's System of International Taxation recommended numerous changes to improve Canada's system for taxing international income and businesses. TEI commends the Department of Finance for undertaking to implement some of those recommendations. What are the next steps in evaluating the current system and responding to the remaining recommendations?
TEI Comments on Salary Deferral Arrangements
In May 2009 TEI submitted comments recommending changes to the legislation governing salary deferral arrangements (SDAs). (A copy of the letter is attached as Appendix 1.) We invite the Department's reactions to TEI's recommendations and an update on the prospects for changes to the SDA provisions.
Foreign Accrual Property Income (FAPI) on Intercompany Services--Paragraph 95(2)(b)
Question 6 of the 2008 liaison meeting agenda between the Department and TEI noted that paragraph 95(2)(b) of the Income Tax Act, Canada (hereafter, the Act) creates a competitive disadvantage for Canadian-based multinationals with foreign subsidiaries performing services outside Canada for related Canadian companies. In order to be competitive, Canadian multinational companies must be able to respond to the globalization of customer markets and perform many services outside of Canada. If a foreign subsidiary provides services to its Canadian parent (or related Canadian companies), then to the extent that the amounts paid or payable are deductible (or can reasonably be considered to relate to amounts that are deductible) in computing income from a business carried on in Canada, the subsidiary's service fee income may be characterized as FAPI even where the subsidiary is in an active business providing services principally to arm's length parties. Foreign-owned competitors, of course, can deliver services similar to those provided by foreign subsidiaries of Canadian companies without regard to the FAPI rules.
In its 2008 response, the Department of Finance said that the overall objective of this policy is to protect the Canadian tax base, but added that a reexamination of the base-erosion rules would be appropriate in light of the concerns expressed. Would the Department provide an update of its review of the area?
Large Corporation Notices of Objection
Objections Invalidated by Reassessments
Large company tax returns are frequently reassessed multiple times, whether as a result of consequential adjustments arising from other taxation years, completion of specialty audits (e.g., international) after the regular large file audit team has completed its audit, or taxpayer-requested adjustments. Taxpayer objections to earlier reassessments are often still pending at the time of a subsequent reassessment. Upon reassessment, any previous notice of objection is invalidated and taxpayers must prepare and file a new notice of objection restating all previously pending objections and adding any new objections. It is time consuming for taxpayers to prepare, and for CRA to administer, multiple objections for a taxation year. The requirement to refile objections also increases the risk that taxpayers will miss filing deadlines or make mistakes that limit the amount of potential relief. Would the Department of Finance consider amending the Act to provide that, with respect to each issue for which a valid notice of objection has been filed, the objection stands until the Minister considers the issue and notifies the taxpayer of the Minister's action?
Requirement to State the "Maximum Relief" in Notices of Objection
Question 3 of the 2008 agenda for the liaison meeting with the Department of Finance noted that, for each issue raised in a Notice of Objection, paragraph 165(1.11) (b) of the Act requires large corporations to specify the amount of relief sought. That provision, together with paragraph 165(1.13)(b), effectively caps the amount of relief available to the taxpayer. Because of the limiting...