TEI's recommendations to the new Canadian government for its 2006 Budget Legislation.

• Position: Tax Executives Institute

On April 18, 2006, TEI submitted a series of recommendations for improvements to Canada's tax legislation to the newly elected Canadian government. The recommendations came in response to an invitation for pre-budget consultations by the government in advance of its 2006 Budget message. TEI's statement was prepared under the aegis of its Canadian Income and Commodity Tax Committees, whose chairs are David Daubaras of General Electric Canada and Natalie St-Pierre of BCE, Inc., respectively. Contributing substantially to the development of TEI's recommendations were Vince Alicandri of Hydro One Networks, Inc. (and TEI's 2005-2006 Treasurer), and Monika M. Siegmund of Shell Canada Limited (and TEI's Vice President for Canadian Affairs).

Tax Executives Institute (TEI) commends the new Government for holding pre-budget consultations in advance of its first budget message. The consultations provide an important avenue to gather input from Canadians across the country. TEI is pleased to offer several recommendations to foster economic growth and job creation, promote a favorable business environment for investments in Canada, and ensure a high level of innovation and productivity. We believe the implementation of our recommendations will spur economic efficiency, improve tax administration, and enhance the competitiveness of Canada's business tax system.

Background

Tax Executives Institute is the preeminent association of business tax professionals. TEI's 6,000 members work for 2,800 of the largest companies in Canada, the United States, Europe, and Asia. TEI's membership includes representatives from a broad cross-section of the business community, with members employed in all major industries and sectors of the economy. In that sense TEI is unique--we do not represent a particular group or industry. Canadians compose approximately 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver. In addition, many non-Canadian members work for companies with substantial Canadian operations, investments, and employees.

Summary of Recommendations

The Institute urges the Government to adopt the following recommendations in its 2006 budget message:

* Implement phased corporate income tax rate reductions and eliminate the corporate surtax as soon as practicable and accelerate the effective date of the elimination of the Large Corporation Tax (LCT) to January 1, 2006.

* In connection with the reduction of the Goods and Services Tax rate, afford businesses sufficient time and transitional rules to update their information and recordkeeping systems in order to facilitate orderly implementation while minimizing their costs and administrative burdens.

* Expeditiously negotiate and implement a new provision in the Income Tax Convention with the United States eliminating withholding taxes on all dividends and interest for payments to both related and unrelated parties.

* Abandon or substantially narrow the Reasonable Expectation of Profit test in draft legislation clarifying the deductibility of interest and other expenses.

* Abandon draft legislation in respect of Foreign Investment Entities and Non-Resident Trusts and if perceived abuses of the Income Tax Act cannot be addressed by Canada Revenue Agency (CRA) under the current provisions of the Income Tax Act, adopt narrower, more targeted remedies.

* Implement a corporate loss transfer system or group loss relief mechanism.

Implement Phased Corporate Income Tax Rate Reductions, Eliminate the Corporate Surtax, and Accelerate Elimination of the Large Corporation Tax

In its November 14, 2005, Economic and Fiscal Update, the previous Government re-announced proposals to reduce the corporate income tax rate from 21 percent to 19 percent over a period of years through 2010 and eliminate the corporate surtax by 2008. In addition, the Update announced a proposal to accelerate elimination of the Large Corporation Tax (LCT) effective as of January 1, 2006. In its election platform, the Conservative Party said that it would "make good ... on the business tax relief' and "deliver" the promises made by the previous Government. TEI agrees that the adoption of these three policy measures will attract investment, generate economic growth, and create well-paying jobs for Canadians. Hence, we urge the new Government to include these proposals in its first budget message. Business income tax reductions will substantially increase the attractiveness of Canada for both foreign and domestic investors. Increased capital investment in Canada, in turn, will spur productivity, promote employment, and enhance the prospects for sustainable economic growth. The announcement of phased corporate income tax rate reductions and a scheduled date for elimination of the corporate surtax will send a strong signal to the capital markets about the Government's commitment to maintaining and enhancing the competitiveness of the Canadian business tax system. Moreover, since the LCT is effectively a job-killing tax on capital, accelerating the LCT's demise to January 1, 2006, would immediately improve the competitiveness of the Canadian business tax system.

Afford Businesses Time to Implement Proposed GST Rate Reductions and Provide Appropriate Transition Rules

In her April 4, 2006, Speech from the Throne, the Governor General announced...