TEI's Testimony before Canadian House of Commons Standing Committee on Finance on pre-budget consultations: September 6, 2005.

• Author: Daubaras, David V.
• Position: Tax Executives Institute

On September 6, 2005, Tax Executives Institute filed written comments with the Canadian House of Commons Standing Committee on Finance on the 2005 pre-budget consultations. The comments were prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is David V. Daubaras of General Electric Canada.

Tax Executives Institute (TEI) commends the Standing Committee for holding pre-budget consultations again this year. The hearings provide an important avenue for the Committee to gather input from Canadians across the country. TEI is pleased to participate again this year to discuss a number of recommendations in respect of taxation measures to foster economic growth and job creation, promote a favourable business environment for investments in Canada, and ensure a high level of innovation and productivity. Implementation of our recommendations will spur economic efficiency and improve tax administration.

Background

Tax Executives Institute is the preeminent association of business tax professionals. TEI's 5,400 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 make up 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 Standing Committee to adopt the following recommendations:

* Implement as soon as practicable the 2005 budget announcement calling for phased corporate income tax rate reductions as well as the elimination of the corporate surtax.

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

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

* Abandon draft legislation in respect of Foreign Investment Entities and Non-Resident Trusts; 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 than this draconian legislation.

* Adopt simpler and broader GST relief provisions for transfers of property among affiliated companies in connection with corporate restructurings and reorganizations.

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

Implement the Corporate Income Tax Rate Reductions and Eliminate the Surtax

In its 2005 budget message, the Government announced proposals to (1) reduce the corporate income tax rate from 21 percent to 19 percent over a period of years through 2010 and (2) eliminate the corporate surtax by 2008. The proposals were removed, however, from the 2005 budget bill (Bill C-43) prior to Parliament's consideration. At the time of the budget's Royal Assent, Finance Minister Goodale reiterated the Government's commitment to introduce legislation at the earliest opportunity to follow through on its promise to eliminate the corporate surtax and reduce the corporate income tax rate. "These measures," he said, "will ... attract investment, generate economic growth, and create well-paying jobs for Canadians." TEI concurs and urges the Standing Committee to recommend prompt action to implement, as soon as practicable, the phased reduction of the corporate income tax rate and elimination of the surtax. As demonstrated by the income tax rate reductions implemented from 2001 through 2004, business tax reductions increase the attractiveness of Canada for both foreign and domestic investors. (1) Increased capital investment in Canada, in turn, spurs productivity, promotes employment, and enhances the prospects for sustainable economic growth.

Draft of Proposed Legislation Relating to Interest Deductibility and Other Expenses--Abandon the Statutory Reasonable Expectation of Profit Test

In October 2003, the Department of Finance released draft amendments that would add section 3.1 to the Act for the purpose of clarifying that (1) "income" for purposes of the Act is "net" income, in accordance with the generally accepted understanding of the Act before the Supreme Court of Canada's decision in Ludco Enterprises Ltd. v. Canada, (2) and (2) "net income" excludes "capital gains and losses." In addition, the Department of Finance said that draft subsection 3.1(1) should be introduced in order to institute a statutory "reasonable expectation of profit" (REOP) test.

Although the Department's goals are clear, circumscribed, and supportable in principle, the proposed amendment to add subsection 3.1(1) to the Act relating to limits on losses, is broader than necessary to achieve those goals. The emphasis of the proposed legislation on establishing a "cumulative profit" and requiring taxpayers to trace expenditures to a source of business or property income in order to ensure their deductibility raises a number of administrative and policy concerns. Specifically, the proposed changes would modify the longstanding treatment of interest and other commercial expenses that taxpayers and...