TEI meets with Canadian Department of Finance on income tax issues.

• Author: Bergen, Rodney C.
• Position: Tax Executives Institute

December 10, 2008

On December 10, 2008, Tax Executives Institute held is 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 Rodney C. Bergen of The Jim Pattison Group. Minutes of the meeting will be posted to TEI's website after they become available.

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 10, 2008, liaison meeting. If you have any questions about these comments, please do not hesitate to call either Sherrie Ann Pollock, TEI's Vice President for Canadian Affairs, at 416.955.7373, or Rodney C. Bergen, Chair of the Institute's Canadian Income Tax Committee, at 604.488.5231.

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 3,200 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

   During previous years' liaison meetings, the Department of Finance has agreed to follow up on certain issues and meet with groups of TEI members to discuss a range of solutions or recommendations expressed by TEI. Would the Department provide an update on the status of the following issues or projects?

   * Subsection 17(8). In the 2005 liaison meeting, TEI requested that the exemption in subsection 17(8) be expanded to permit loans by a taxpayer to a controlled foreign affiliate to purchase shares (qualifying as excluded property shares) of another non-resident corporation which, subsequent to the acquisition, is a controlled foreign affiliate. At the Department's request, TEI submitted a letter in March 2006 clarifying its recommendations. At the 2007 liaison meeting the Department said that no conclusion had been reached because staff shortages hampered a review of the issue. We invite the Department to provide an update.

   * Foreign Mergers. The Canada Revenue Agency's current view is that a foreign forward absorptive merger is a fully tax able transaction in Canada. In response to question 8 of the 2006 liaison meeting agenda, the Department said there was no policy reason for treating the three specified forms of foreign mergers differently and that it would consider providing a rollover for all three transactions. At the 2007 liaison meeting, the Department said that it planned to look at this matter. We invite the Department to provide an update.

   * Treatment of Payments for Reductions in Greenhouse Gas Emissions. With the enactment of Alberta's Climate Change and Emissions Management Act (and the prospects for similar federal legislation), taxpayers require clarification of the income tax treatment of costs incurred to comply with such legislation. Under the Alberta rules, taxpayers that fail to achieve specified targets for reductions in greenhouse gas emissions intensity must either pay a charge of $15 per ton of excess emissions into a technology fund (the Climate Change and Emissions Management Fund), purchase emissions credits from facilities that reduced their emissions below required targets, or invest in qualifying offsets within Alberta. At the November 2005 Canadian Tax Foundation meeting, CRA provided its preliminary views on the treatment of various payments related to greenhouse gas emission reductions, suggesting that the payments to the fund would be deductible period costs.

   Even if CRA confirms that the payments are currently deductible, TEI recommends that the Department of Finance consider legislation to confirm the treatment of various environmental costs. In 2005, the Department established a project to consider whether additional legislation was necessary to clarify the treatment of various environmental costs. Are the Department's deliberations ongoing? Has the Department reached any conclusions or recommendations that can be discussed?

   In respect of Alberta's greenhouse gas legislation specifically, TEI recommends that the Department amend Income Tax Regulation 7309 to refer to the $15 per ton contribution to the Climate Change and Emissions Management Fund and thereby confirm that the payments are fully deductible. (1) In addition, amounts paid for capital expenditures to reduce emissions targeted by the legislation should be characterized without regard to whether the expenditures were made to comply with the legislation. Thus, the expenditures should be eligible for accelerated capital cost allowance (under either the transitional or the grandfathering provisions) if the assets acquired otherwise fit within Class 41 paragraph (a). We invite the Department's response.

   At the 2007 liaison meeting, the Department indicated that discussions with CRA were in process to assist in understanding the new regime and that there would be something forthcoming by the spring of 2008. We would appreciate an update on the Department's assessment of the need for additional legislation.

   * Exemption--Pension Corporation. In 2007, TEI inquired whether the Minister would clarify that subsection 248(26) does not apply in the interpretation of paragraph 149(1)(o.2). The Department acknowledged that it is aware of the issue and that an amendment in the next Technical Bill is a possibility. We invite a discussion of the prospects for and potential timing of a Technical Bill and whether a clarification will be provided.

2. Appeals by Large Corporations

   TEI has frequently questioned the additional requirements imposed on large taxpayers under the Notice of Objection rules because they create an uneven playing field with an advantage for CRA. A recent procedural decision involving subsection 152(9) in the case of The Toronto-Dominion Bank v. The Queen illustrates TEI's concerns. (2) In the case, the Minister of Revenue refused for more than a decade--despite repeated requests from the taxpayer--to describe the legal basis for the reassessment. When the Minister finally stated a basis, he immediately abandoned it and advanced new grounds for a reassessment. The taxpayer objected to the revised grounds for reassessment, arguing that key witnesses relevant to proving the taxpayer's position were now deceased. Despite the manifest prejudice to the taxpayer and the explanation of legislative intent set forth in the Technical Notes to the legislation, the Court held that it had no authority to prohibit the Minister's assertion of new grounds for the reassessment.

   In TEI's view, a better case for the application of subsection 152(9) is difficult to imagine. As important, the lack of any requirement for the Minister to state a legal basis in support of the reassessment and the now seemingly unfettered ability to revise the basis of a reassessment combined with the requirements imposed on large taxpayers in subsections 165(1.11) and 169(2.1) to provide detailed Notices of Objections to the Minister's reassessments make the playing field far from level. We recommend that the rules and procedures governing large taxpayer Notices of Objection be amended, as follows:

   1. The Minister should be required to timely provide a legal basis (or bases) for his assessment or reassessment in sufficient detail to permit large taxpayers to comply with subsections 165(1.11) and 169(2.1). Requiring the Minister to develop and timely assert a sound legal basis for reassessments would enhance the efficient administration of the Act and enable taxpayers, CRA, and the Department of Justice to develop the evidence and records necessary to support their respective legal positions.

   2. Where taxpayers can demonstrate that there is no prejudice to the Minister, they should be permitted, with the leave of the court, to add new grounds for objections.

   3. Subsection 152(9) should be amended to permit courts to consider whether the Minister's introduction of new grounds for a reassessment prejudices the taxpayer and, where necessary to prevent prejudice to the taxpayer, deny the assertion of the new grounds.

   In addition, in 2006 a working group of representatives from the Department of Finance and TEI met to review the issues and concerns arising from the Notice of Objection rules. At the conclusion of the meeting, the Department said that it would consider TEI's recommendations to improve the efficacy of the rules. We invite an update on the status of the Department's review as well as the Department's reactions to TEI's recommendations. We would be pleased to reconvene the working group for additional discussions and to consider the suggested amendments to the Income Tax Act (hereafter "the Act").

3. Notices of Objection for Large Corporations

   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...