Creditability of Canada's proposed large corporations tax in foreign jurisdictions.

Creditability of Canada's Proposed Large Corporations Tax in Foreign Jurisdictions

On October 31, 1989, Tax Executives Institute submitted the following comments to Frederick W. Gorbet, Deputy Minister of the Canadian Department of Finance, concerning the Canadian Government's proposed Large Corporations Tax. The Institute's submission, which supplements TEI's June 13 comments on the tax provisions of the Government's April 1989 budget, was prepared under the aegis of the Institute's Canadian Income Tax Committee, whose chair is James A. McFall. The submission took the form of a letter from TEI President William M. Burk.

On behalf of Tax Executives Institute, I wish to again express our appreciation for your participation in the Annual Conference in Toronto on October 16th. Your comments on the Goods and Services Tax and other pressing tax and fiscal issues were illuminating and well-received by conference registrants.

Following your luncheon address, Jim McFall of Xerox Canada, who is the chair of the Institute's Canadian Income Tax Committee, raised with you the issue of the creditability of the Large Corporations Tax (LCT) in foreign jurisdictions (including the United States). As you requested, this letter reviews the issue as well as TEI's proposed solution. Incidentally, our views were initially set forth in the brief we filed with the Minister of Finance and the House of Commons' Finance Committee on June 13.

The LCT operates as a form of a capital tax and consequently will not be creditable in foreign jurisdictions (including the United States) as an income tax, or a tax in lieu of any income tax, for foreign tax credit purposes. Moreover, to the extent the LCT paid may be deducted from the amount of Canadian surtax payable under Part I of the Income Tax Act (draft section 125.3, as set out in clause 29 of Bill C-28), a creditable tax (for foreign law purposes) will be reduced.

By inverting the LCT/Part I surtax crediting mechanism, the Government could preserve the creditability of the tax for foreign law purposes with no loss of revenue to Canada. Specifically, we recommend that a deduction be allowed from the LCT payable to the extent the Part I surtax is paid under section 123.2 of the Income Tax Act.

As currently framed, the LCT will compel Canadian taxpayers to bear an unnecessary foreign tax burden without benefitting the Canadian fisc. Department of Finance officials have advised that such a change in design would "exacerbate excess foreign tax credits," thereby encouraging taxpayers to devise a means of utilizing such excess credits through tax planning schemes. We do not accept this explanation and, indeed, submit that the Department's concern is exaggerated at best and chimerical at worst.

In accordance with the spirit of cooperation between TEI and the Department of Finance, and in furtherance of the goals of tax reform to maintain a fair and internationally competitive tax system, Tax Executives Institute urges the Department of Finance to accept its LCT recommendation.