June 19, 1992, notice of Ways & Means motion ("Income Tax Technical Amendments Bill").

On January 26, 1993, Tax Executives Institute submitted the following comments to the Canadian Department of Finance on a pending Income Tax Technical Amendments Bill that was submitted to the Canadian Parliament on June 19, 1992. The comments were prepared under the aegis of the Institute's Canadian Income Tax Committee whose chair is Vincent Alicandri of Xerox Canada Limited.

Tax Executives Institute welcomes the opportunity to provide the Department of Finance with comments on proposed legislation. TEI supports the concept of separating "technical" and "policy" amendments to the Income Tax Act. We recommend that the drafting of an annual technical amendment bill become a fixed part of the tax system, thereby facilitating the timely correction of the anomalies and inequities that inadvertently arise in the Income Tax Act.

Background

Tax Executives Institute is an international organization of approximately 4,700 professionals who are responsible -- in an executive, administrative, or managerial capacity -- for the tax affairs of the corporations and other business by which they are employed. TEI's members represent more than 2,400 of the leading corporations in Canada and the United States. Canadian make up approximately 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our nine geographic regions. In addition, a substantial number of our U.S. 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; and resource (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.

Subclauses 37 (2) and 37 (9): Losses on Amalgamation with Wholly Owned Corporation

Section 87 treats an amalgamated corporation as a continuation of its predecessor corporation for many purposes. This is necessary to ensure that various provisions of the Act operate properly, consistent with the intent of the provision and the general scheme of the Act. These provisions are generally ones which span more than one taxation year. One of the major existing exceptions to this general scheme is the inability to carryback losses incurred by the amalgamated corporation to prior taxation years of a predecessor.

We commend the Department for making amendments to address this problem. We offer the following comments to make the amendments more effective.

1. Where a predecessor parent corporation and one or more of its subsidiary, wholly owned corporations are amalgamated, new subsection 87(2.11) permits losses of the amalgamated corporation to be carried back to the predecessor parent. In many organizations, however, operations are carried out in subsidiaries, with the parent being purely a holding company. In these cases, the parent will not have taxable income against which losses may be utilized. Consequently, the proposed amendment will not provide any meaningful relief to corporate groups structured in this manner.

To overcome this problem, we recommend the proposed new subsection 87(2.11) be amended to also permit the losses of the amalgamated corporation to be carried back to the predecessor subsidiaries.

2. The amendments apply with respect to amalgamations occuring after 1989. To realize the full benefit of these amendments, we believe that the three-year carryback should be equally available for losses incurred after the announcement of the amendments. There does not appear to be any tax policy reason why corporations that amalgamated in December 1989 should be denied the benefit of these amendments while those amalgamating in January 1990 are permitted to enjoy those benefits. Consequently, we suggest these amendments be made effective with respect to amalgamations occurring after 1987.

3. The proposals would have a greater degree of consistency among all corporate groups if the provision were expanded to apply to amalgamations of wholly owned affiliates, not just parent and subsidiaries.

Subclause 37(6)

New paragraph 87(2)(j.91) allows a new corporation formed on an amalgamation and, through paragraph 88(1)(e.2), a parent corporation, to deduct from its Part 1.3 and Part VI tax liability any undeducted surtax or Part I tax payable by its predecessors or its wound-up subsidiaries in any of the seven taxation years preceding the amalgamation or wind-up.

To fully treat the amalgamated corporation as a continuation of its predecessors, we recommend that the predecessors also be able to deduct from their Part I.3 and Part VI taxes payable any undeducted surtax or Part I tax payable by the amalgamated corporation in the three years following the amalgamation. Similarly, a subsidiary that has been wound up should be able to deduct the carryforward surtax and Part I tax payable by its parent in the three years following its wind-up.

Clauses 65 and 66

TEI's U.S.-based members have long been concerned about the structure of the Large Corporations Tax imposed under Part I.3 and its interaction with the corporate surtax owing under Part VI. Specifically, the original crediting mechanism impaired the creditability of a firm's Canadian tax liability for U.S. foreign tax credit purposes. In response to such concerns and pursuant to the Department of Finance's February 21, 1992, Press Release No. 92-016, the Technical Bill reverses the order of crediting so that the Part I.3 and the Part VI taxes are reduced by the corporate surtax and the Part I tax, respectively, rather than the other way around. The February press release stated this change is being made to provide relief to Canadian operations of foreign-based multinationals by ensuring that the characterization of income-based taxes as such is preserved for foreign tax credit purposes.

Although TEI has recommended this change, we are very much concerned with what appears to be an inadvertent and unintended result of the proposed changes. Specifically, the system that had allowed excess LCT/Part VI tax to be carried forward seven years and back three has been changed to a system that instead provides for the same carryover in respect of excess corporate surtax/Part I tax. In effect, excess capital taxes of a particular year can now be recovered only in the subsequent three years rather than the previous seven years. The change therefore operates to the detriment of corporations having excess LCT/Part VI tax.

Under current business conditions, an extended carryover period for creditable amounts is generally desirable. The effect of this measure, however, is to substantially reduce the carryforward period for excess Part I.3 and Part VI taxes. Because this result appears to be quite unintended -- and certainly goes beyond the scope of the problem that was to be addressed -- we ask that amendments be made to assist corporations that would be adversely affected by the change. This could be achieved by extending the current three-year carryback of excess surtax and Part I tax to seven years.

This is a significant matter for a number of major Canadian corporations, and the Institute requests action at the earliest opportunity to remedy the adverse effect of this proposed change.

Subclauses 97(1)

Subclause 97(1) requires so-called large corporations to pay 50 percent of disputed tax liability when they file a Notice of Objection. TEI opposes this proposal, which singles out "large corporations" for harsher treatment than other taxpayers, as supporting no legitimate tax policy. Indeed, the proposal insinuates that large corporations may not pay their fair share of taxes at the conclusion of the appeals process (if the liability is upheld) -- an inference that has precious little basis in fact.

TEI recommends the deletion of the proposal to require large corporations to pay disputed taxes earlier than other taxpayers. The proposal undoes one of the significant reforms of the early 1980s -- the elimination of the "guilty until proven innocent" approach to tax administration -- and, in our view, is unnecessary in light of the sanctions currently available to the Government where a taxpayer files a frivolous appeal.

Conclusion

Tax Executives Institute thanks the Department for the opportunity to provide our comments on the proposed legislation. If there are any questions about this submission, please do not hesitate to call either J. Lawrence Martin, TEI's Vice President for Canadian Affairs, at [phone] or Vincent Alicandri, Chair of the Institute's Canadian Income Tax Committee, at [phone].