Canadian government's response to TEI's tax certificate of deposit proposal.

On May 25, 1993, Tax Executives Institute recommended to the Canadian Department of Finance and Revenue Canada that it implement a "tax certificate of deposit" regime in order to ameliorate the harsh effects of Canadian's interest rules. (The Institute's proposal is reprinted in the July-August 1993 issue of The Tax Executive.) On September 16, 1993, Minister of Finance Gilles Loiselle sent the following letter to the Institute.

I am writing in response to the letter of May 25, 193, from Robert H. Periman of Tax Executives Institute to my predecessor, the Right Honourable Don Mazankowski, suggesting that a system of "Tax Certificates of Deposit" (TCDs) be instituted in this country. It is apparent from your submission that considerable thought has gone into this proposal, and I am pleased to have this opportunity to reply.

Your submission suggests that several deficiencies exist in the current law and administrative practice with respect to tax overpayments and liabilities. These include limitations on the Government's payment of interest, the inability of taxpayers to offset interest payable and interest earned, and the requirement that a taxpayer making an advance payment specify the taxation year to which that payment applies. Taken together, you argue, these rules make it difficult for taxpayers to meet their tax liabilities without either incurring non-deductible interest charges or forgoing interest on prepaid amounts.

To address these problems, you propose the issuance by the Bank of Canada of interest-bearing instruments which could be used to meet any liability under the Income Tax Act (and perhaps other taxing statutes). This would give taxpayers the flexibility to make payments toward their taxes at any time, without specifying in advance the taxation year involved. Interest would accrue on a TCD from the date it was issued, unless the TCD were applied against a liability due on or before the issue date. Since both the principal and interest of a TCD could be applied against outstanding liabilities, taxpayers would no longer have to watch non-deductible interest on taxes due and taxable interest credits on overpayments accruing simultaneously.

Let me begin my response by noting that I share your view that this area of the law could benefit from a thorough review. I am sure you appreciate that I cannot speak for my colleague, the Minister of National Revenue, whose responsibility for tax administration is also involved here, but for my own part I would consider any change that could make the rules governing tax payments and interest simpler, more flexible and more evenhanded worth pursuing.

Where there may be some difficulty is in choosing the mechanism to accomplish those goals. A system of TCDs does, as you point out, operate in the United Kingdom, where the certificates may be used in payment of a wide variety of taxes, royalties and duties. While the U.K.'s experience appears to show that TCDs are workable in that country, a number of important questions would have to be answered before I would be prepared to recommend adopting such a system in Canada. There is, for example, the issue of administrative burden--the costs and benefits for the Government, as well as for taxpayers, would have to be evaluated carefully. Another factor, which would be relevant under any system but arises most acutely where something akin to a banking function is proposed, is the inappropriateness of casting the Government as either a lender of last resort or a deposit-taker. These and other questions will, as I have said, require further consideration as part of any effort at refining the Income Tax Act's rules with respect to payments and interest.

The improvement of the administrative aspects of the tax system is something I, and the Government as a whole, consider an important priority. You have identified particular leatures of the system that deserve attention, and I have directed my officials accordingly. A complete analysis of TEI's proposal will of course take some time, but I can assure you that it has my full support. In this regard, I hope that you and other members of your organization will be available for consultation by the Department as the need arises.

Again, thank you for your helpful submission.