Pre-budget deliberations of House of Commons Standing Committee on Finance: September 8, 2003.
Tax Executives Institute (TEI) commends the Standing Committee on Finance 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 and TEI is pleased to have the opportunity to participate. TEI has a number of recommendations in respect of taxation measures in order to foster economic growth and job creation, to promote a business environment favourable to investments in Canada, to ensure a high level of innovation and productivity, and to simplify the tax laws and improve their administration. We believe our recommendations will diminish compliance and administrative costs and spur economic efficiency and prosperity for all Canadians to share.
Tax Executives Institute is the preeminent association of business tax professionals. (1) 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--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 U.S. and European members work for companies with substantial Canadian operations.
Summary of Recommendations
The Institute urges the Standing Committee to incorporate the following recommendations in its report on the pre-budget consultations:
* Should Federal budgetary constraints permit, accelerate the phase-out and repeal of the Large Corporations Tax.
* Abandon the 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 Customs and Revenue Agency (CCRA) under the current provisions of the Income Tax Act, adopt narrower, more targeted remedies.
* Adopt a loss transfer system (or group loss relief rules) for corporate groups.
* Recommend other improvements in the administration of the Income Tax Act, including repealing the withholding tax imposed on cross-border services, urging the Department of Finance to include binding arbitration provisions in Canada's tax treaties, and urging the Department of Finance and CCRA to streamline the reporting obligations of Canadian taxpayers in respect of their foreign affiliates.
Large Corporations Tax
Last November, TEI testified before the Standing Committee in Calgary. At that hearing, we (along with other groups) urged the Committee to recommend the elimination of the Large Corporations Tax (LCT) levied under Part 1.3 of the Income Tax Act. In February, the Government's 2003 Budget Message announced legislation to implement a phased reduction, and ultimate elimination, of the LCT. We commend the Committee for its leadership role in facilitating the repeal of the LCT.
In a recent letter to Minister of Finance John Manley, a copy of which is attached as Appendix 1, TEI endorsed the Government's policy statement that capital taxes, including the LCT, are a significant impediment to investment in Canada. (2) Indeed, because the tax is so counterproductive, we encouraged the Government to consider accelerating the reduction and repeal of the LCT. Specifically, should Federal budgetary constraints permit, we urge the Committee to recommend that the LCT tax rate for 2004 for all corporations be reduced to 0.1 percent and that the tax be eliminated in 2005. Accelerating LCT's repeal will hasten investment in Canada by Canadian and foreign firms and thereby spur job growth.
Foreign Investment Entities and Non-Resident Trusts
TEI is concerned about the Notice of a Ways and Means Motion tabled in the House of Commons in October 2002 that would implement legislation in respect of Foreign Investment Entities (FIEs) and Non-Resident Trusts (NRTs). The proposed legislation was originally released in June 2000, revised in August 2001, and revised again in connection with the October 2002 Notice of the Ways and Means Motion. TEI is pleased to have participated in consultations with the Department of Finance on this legislation and a copy of our most recent May 2003 comments and recommendations to the Department of Finance is attached as Appendix 2.
Fundamentally, the draft legislation remains unworkable and we again urge the Government to withdraw it because:
* It would apply to numerous, compliant taxpayers that are not attempting to avoid Canadian tax by "transferring funds to offshore trusts or accounts."
* The proposed legislation is overbroad, confusing, extraordinarily complex, overlaps the foreign affiliate regime as well as section 17, and catches many legitimate commercial transactions. In addition, the proposed FIE rules simply do not mesh well with the proposed NRT rules.
* The information necessary to comply with the proposed legislation's myriad reporting requirements is either (1) unavailable generally or (2) likely unavailable to a Canadian taxpayer where, as will generally be the case, it is a minority investor and lacks the requisite control of the entity in order to obtain the necessary information.
* The information that would permit taxpayers to take advantage of one or more of the relieving provisions or elections in the proposed legislation is either (1) unavailable generally or (2) likely unavailable to a Canadian taxpayer where, as will generally be the case, it is a minority investor and lacks the requisite control of the entity in order to obtain the necessary information.
* The government resources required to audit compliance with the proposed rules would be substantial and out of all proportion to the policy goals served. (3)
Finally, we note that the Government has been fine-tuning the proposed legislation for more than three years. Given its mind-numbing complexity, taxpayers need time to digest and understand the legislation and, where possible, modify company information systems to capture and report the additional required information. Thus, the proposed January 1, 2003, effective date for the proposed legislation is unreasonable. If the legislation is not withdrawn, the effective date must be postponed substantially in order to give compliant taxpayers the opportunity to understand the provisions and ensure that their legitimate business operations are not inadvertently caught in the maw of this legislation.
Implement a Loss Transfer System or Group Loss Relief Mechanism
Recent federal budget legislation has focused on aligning Canada's tax rate structure to be competitive with that of other jurisdictions. To assess the competitiveness of the Canadian tax system and its relative tax burden, the Government must consider not only the tax rate but also the tax base. Indeed, the Government must consider all aspects of the tax system as a whole and, in respect of tax loss utilization for corporate groups, TEI regrets the Canadian system is too restrictive and subject to considerable administrative uncertainty. (4)
The Government eliminated the previous loss consolidation system in 1952 and a debate, which continues to this day, ensued about developing and implementing a replacement system. In 1985, the Department of Finance joined the debate by proposing a system to allow transfers of losses between subsidiaries and their parents or between subsidiaries within a group. We believe the time for debate has ended and the time for action has come. To be globally competitive, Canada should implement a formal Loss-Transfer System--or otherwise provide for group tax loss relief.(5) The adoption of a formal loss-sharing mechanism in the Income Tax Act would complement the administrative concessions and provide much needed clarity, certainty of result, and greater stability in the law.
In a recent letter to the Minister of Finance (a copy of which is attached as Appendix 3), TEI urged the Department of Finance to review its 1985 proposal, revise and update it as necessary, and release draft legislation by early next year. Similarly, we urge the Standing Committee to recommend that a formal system be introduced to permit the sharing and utilization of tax losses and other tax attributes among groups of related corporations. The introduction of a formal loss-sharing system would bring the Canadian tax system in line with that of other countries in the world.
Administration of the Income Tax Act
There are several areas where the administration of the Income Tax Act has not kept pace with changes in the global economy and for which the cost of compliance for taxpayers is excessive. In the past few years' liaison meetings with CCRA and the Department of Finance, TEI has made a number of recommendations to streamline the administration of the Act and reduce taxpayer compliance costs. Of the many recommendations made, TEI wishes to highlight three for the Standing Committee: (1) elimination of withholding taxes under Regulation 105; (2) the negotiation and adoption of a binding arbitration procedure in Canada's tax treaties; and (3) streamlining of the reporting for foreign affiliates.
First, withholding taxes imposed on the provision of business services by non-residents (under rules currently set forth in Income Tax Regulation 105) should be eliminated. In many cases, as a result of an indemnification requirement imposed by the non-resident service provider as a condition for providing the service, the economic cost of the withholding tax under Regulation 105 is ultimately borne by the Canadian service recipient. The added withholding tax cost borne by Canadian companies imposes a substantial economic disadvantage compared with their competitors in the United States and elsewhere. (A copy of TEI's letter to the Department of Finance explaining why the regulation should be repealed is attached as Appendix 4.) We urge the Standing Committee to recommend that Regulation 105 be repealed. (6)
Second, cross-border trade is an important component of the Canadian economy and sound rules that expedite cross-border trade contribute to Canadian prosperity. Among the myriad, complex rules governing international trade are Canadian and foreign governments' international tax rules. In addition, the tax treaties that Canada has negotiated with its trading partners supplement those rules and provide a mechanism for resolving tax disputes that arise from time to time. Specifically, Canada and foreign governments frequently assert taxing authority over the same income from a particular transaction. To resolve such cross-border tax disputes--i.e., cases where the taxpayer is a mere stakeholder for tax amounts eventually owing either to Canada or a foreign government--the tax treaties provide for a mutual agreement procedure (MAP). Under MAP, the competent authorities for Canada and the applicable foreign government "endeavour" to negotiate and resolve their disputes, but there is no certainty for the taxpayer that double taxation of the income will be eliminated. To ensure that double taxation is eliminated, TEI has recommended inclusion of a binding arbitration provision in Canadian treaties whereby, subject to the taxpayer's consent to the procedure, the competent authorities would agree, if they are otherwise unable to resolve a matter, to submit a case for binding arbitration. (7) We urge the Standing Committee to recommend that the Department of Finance incorporate binding arbitration provisions in Canada's tax treaties.
The final area where taxpayers' costs of compliance are excessive relates to the rules for reporting the activities of foreign affiliates of Canadian-based companies. We believe these rules are extremely burdensome and have submitted detailed recommendations to CCRA and the Department of Finance for improvements.
Tax Executives Institute appreciates the opportunity to participate in the hearings held by the House of Commons Standing Committee on Finance in respect of pre-budget consultations. TEI's representatives at the hearing will be pleased to respond to your questions as well as follow up in writing on any item addressed.
1. Members of TEI are responsible for managing the tax affairs of the businesses by which they are employed and must contend daily with the provisions of the Income and Excise Tax Acts. As a professional association of in-house tax executives, TEI is concerned with issues of tax policy and administration and is dedicated to working with government agencies in Ottawa (and in Washington D.C.), as well as in the provinces (and states), to reduce the costs and burdens of tax compliance and administration to our common benefit. We are convinced that the administration of the tax laws in accordance with the highest standards of professional competence and integrity will promote the efficient and equitable operation of the tax system. In furtherance &this principle, TEI supports efforts to improve the tax laws and their administration at all levels of government. We meet often with the Canada Customs and Revenue Agency, the Department of Finance, and their counterparts at the provincial level, to discuss important tax developments and ways to improve tax policy and administration for the benefit of both government and taxpayers alike.
2. See Chapter 5 and Annex 9 of the 2003 budget paper.
3. From both compliance and administrative perspectives, the rules would be vastly improved if they were more limited in scope and focused solely on remedying perceived abuses. To the extent that the Government can identify specific abuses, it should propose narrower, targeted solutions. Otherwise, the compliance challenges posed by the proposed legislation will spawn inadvertent, unavoidable non-compliance by otherwise compliant taxpayers.
4 Even though CCRA permits related parties to transfer losses through various techniques, the tax result in any particular case depends upon the agency's exercise of administrative discretion and that engenders a degree of uncertainty for taxpayers.
5. Of 30 OECD countries surveyed in 2001, Canada was one of only four countries that did not provide group tax loss relief directly through its legislation. See Donnelly & Young, Policy Options for Tax Loss Treatment, 50 CANADIAN TAX JOURNAL 429 (2002).
6. As an alternative to eliminating the withholding tax, the administrative process for obtaining waivers of the withholding tax should be substantially streamlined in order to reduce taxpayer compliance costs. TEI has submitted detailed recommendations to the Department of Finance and CCRA on ways to streamline the waiver approval process. Although TEI prefers repeal of the withholding tax, a recommendation from the Standing Committee that the Government streamline the process for waivers of withholding would be beneficial.
7. A full description of TEI's proposal to the Department of Finance was included in question 4 of the December 4, 2002, TEI-Department of Finance liaison meeting agenda, which is reprinted as Pending Income Tax Issues, 54 THE TAX EXECUTIVE 550, 552 (November-December 2002).