Ontario Retail Sales Act: transfer of assets between related corporations and partnership rules: September 20, 2004.

On September 20, 2004, the Institute's Toronto Chapter provided the following comments regarding Ontario's proposed changes to Regulation 1013 of the Ontario Retail Sales Tax Act. The letter was prepared under the aegis of the Toronto Chapter's Ontario Tax Committee, whose chair is Robert G. Westlake of General Electric Canada Inc., and the Institute's Canadian Commodity Tax Committee, whose chair is Sherrie Ann Pollock of Royal Bank of Canada.

On behalf of the Toronto Chapter of Tax Executives Institute, I am pleased to provide comments on the proposed changes to Regulation 1013 of the Ontario Retail Sales Tax Act modernizing the rules in respect of transfers of assets between related corporations and partnerships. TEI commends the Ministry for undertaking this review.

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, and Europe. 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 N 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 Toronto Calgary, Montreal, and Vancouver. In addition, many U.S. and European members work for companies with substantial Canadian and, specifically, Ontario operations.

Comments

TEI applauds the Ministry's effort to modernize the retail sales tax rules relating to exempt transfers of assets between related corporations. The proposed changes will bring the regulation into greater alignment with present-day corporate restructuring transactions. Often, Retail Sales Tax is imposed on assets that are moved from one entity to another within a group even though there has been no effective change in the ownership of those assets. The changes will alleviate this problem. Also, TEI supports the alignment of the tax treatment on the transfer of assets between corporations with that for the transfer of assets between partnerships. The move to codify the current administrative policy regarding transfers of assets to partnerships is a positive step.

The changes in respect of beneficial ownership will permit a tax-free transfer of eligible assets between corporations where the ownership of the two may be held by different entities in the same group. This proposal recognizes the reality of current corporate structures and addresses a long-outstanding source of frustration with respect to related-party transactions. TEI notes, however, that the definition of Parent and Subsidiary in section 12 of the Corporations Tax Act (Ontario) refers to Section 88 of the Income Tax Act (Canada). The federal statute sets out a 90-percent ownership threshold for windup purposes, which TEI suggests is more appropriate than the proposed 95 percent.

TEI seeks clarification of the following points:

1. Are warrants, rights, options, and convertible securities considered "beneficial ownership" either in whole or in part?

2. Figure 3, reproduced below, relates to transfers of assets between related corporations. The explanation says that property can be transferred among A, B, C, D, E, F, and H without attracting tax because of the chain of 95-percent beneficial ownership. It also states that G can transfer property to each of A, B, C, D, E, F, and H without attracting tax. Can each of A, B, C, D, E, F, and H transfer property to G without attracting tax?

3. Figure 4, reproduced below, relates to transfers of assets between unrelated corporations. In this case, A transfers property to G, which is 30-percent owned by a subsidiary of A. The explanation indicates that tax will be payable on 70 percent of the value of the eligible assets transferred to G (D owns only 30 percent of G). Does this also apply on the transfer of eligible assets from G to A, B, D, and F (i.e., A, B, D, or F would pay tax on 70 percent of the value of the eligible assets transferred from G because D owns only 30 percent of G)?

4. The explanation for Figure 4 describes a two-step transfer from A to D, then from D to G. Could the same result be achieved via transfer directly from A to G?

5. Figure 5, reproduced below, is a modification of Figure 3. Please confirm that B, D, E, F, and H can transfer eligible property to G without attracting tax.

6. Assuming that A in Figure 6, reproduced below, wishes to transfer eligible assets to D, would D have to pay tax on 37 percent [100 D (90 x 70)%] of the value? If not, what is the taxable base? If D subsequently transferred the same assets to G, would the tax base be 48 percent [100--51%]? If not, what is the taxable base? What would be the tax base if the assets were transferred directly to G from A? Would it be 67 percent [100 - ((90 x 70 x 51) + 1)%]? If not, what is the taxable base?

Conclusion

The Toronto Chapter of Tax Executives Institute appreciates this opportunity to submit questions to the Ontario government. The agenda was prepared under the aegis of the Toronto Chapter's Ontario Tax Committee, whose chair is Robert G. Westlake. If you should have any questions about this agenda, please do not hesitate to call Mr. Westlake at 905.858.5379, or Mary T. DiBattista, the Chapter's President, at 905.528.2511, ext. 4644.