Proposed changes to Canadian Excise Tax Act.

On May 1, 1992, Tax Executives Institute filed the following with the Canadian Department relating to proposed changes to the Canadian Excise Tax Act. The comments were prepared under the aegis of the Institute's Canadian Commodity Tax Committee whose chair is D. John Nichol of Petrol-canada Inc. James A. McFall of Xerox Canada Limited contributed materially to the preparation of the comments, whose submission was coordinated by Andrew G. Kenyon of the Canadian Imperial Bank of Commerce, the Institute's Vice President-Region I.

Tax Executives Institute, Inc. is pleased to submit the following comments on two issues arising from pending amendments to the Excise Tax Act.

Background

Tax Executives Institute is an international organization of approximately 4,800 professionals who are responsible - in an executive, administrative, or managerial capacity - for the tax affairs of the corporations and other businesses by which they are employed. TEI's members represent nearly 2,000 of the leading corporations in Canada and the United States.

Canadians 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.

Federal Sales Tax 

Inventory Rebate

Under section 120 of the Excise Tax Act (the Act), a Federal Sales Tax Inventory Rebate could be claimed in respect of inventory held for sale on January 1, 1991, which had been subject to the Federal Sales Tax (i.e., "taxpaid") of 13.5 percent. The general claim rate for the rebate, as established by regulation, was 8.1 percent. The intent of this rebate was to eliminate the double taxation of inventory held at the time of transition from the Federal Sales Tax (FST) regime to the Goods and Services Tax (GST) regime. The FST component of tax-paid inventory would be refunded to the person holding the inventory at January 1, 1991, with the benefit being passed on to customers through lower pricing. The customers would be charged GST on purchases on or after January 1, 1991, of such inventory.

On March 10, 1992, the Minister of Finance announced that certain changes will be made to section 120 of the Act, with retroactive effect to January 1, 1991, to "clarify" the eligibility of inventory for the Federal Sales Tax Inventory Rebate. First, section 120 is to be amended to require that FST must have been imposed on the price or volume of those particular goods. This change is designed to eliminate claims on inventory that had borne FST only indirectly on inputs to the inventory in question. Secondly, section 120 is to be amended to require that inventory must be held for sale separately for a price. This change is designed to exclude incidental supplies and maintenance or service parts from qualifying for the FST inventory rebate, even though such supplies and parts are tax-paid.

Although Tax Executives Institute appreciates the policy reason underlying the first retroactive amendment - to prevent an unanticipated result - it must strenuously object to the second amendment as representing flawed and inequitable tax policy. Stated simply, retroactive tax legislation, when it is applied to the taxpayer's disadvantage, represents an unacceptable departure from the certainty of result that taxpayers require and deserve.

Concededly, there may be some circumstances where this principle may be abandoned, but the second pending amendment is clearly not such a circumstance. Unlike the result forestalled by the first amendment (the payment of an FST inventory rebate even where the FST was never imposed), the second amendment does not further the policy underlying the inventory rebate mechanism. Indeed, the intent e,f the original legislation would not be contravened by the claiming of a Federal Sales Tax Inventory Rebate in respect of the tax-paid inventory of incidental supplies and maintenance! or service parts. Revenue Canada-customs & Excise has; chosen to deny such claims on the hypertechnical basis that ownership of such goods is transferred by virtue of accession rather than sale. The legal question, however, is far from clear and, in all likelihood, would not be resolved absent litigation. In this instance, we believe the use of retroactive changes to tax legislation to sustain a contentious and potentially suspect administrative position is entirely improper.

In Summary, TEI opposes the enactment of retroactive legislation to taxpayers' detriment. We urge the Minister to reconsider the use of such legislation in this instance, where the benefits of such FST inventory rebates have been or would be passed on to customers, and the rebates are consistent with the intent of the original legislation.

Treatment of an Allowance in

Respect of an Automobile

Under paragraph 174(a) of the Excise Tax Act, an employer is deemed to have paid an amount of tax equal to the tax fraction of the amount of a reasonable allowance paid to the employee for the use of a motor vehicle by the employee. The employer may then claim an Input Tax Credit in respect of the deemed paid tax. Under section 253 of the Act, employees may claim a rebate calculated, as follows:

A x (B-C)

where

A is the tax fraction;

B is eligible claims and expenses

deducted under

the Income Tax Act in

computing the individual's

income; and

C is any allowances or reimbursements

received by

the individual in respect

of amounts claimed in B.

In the March 27, 1991, announcements, it was specified that the deemed paid tax under paragraph 174(a) would be limited to the tax fraction of an amount that does not exceed a reasonable allowance for income tax purposes. It was also specified that section 253 would be expanded to allow a rebate in respect of payments for the lease of an automobile. The amount under section 253 to which the tax fraction would be applied would continue to be reduced by any amounts received by the individual as an allowance (i.e., "C" in the foregoing formula). These changes are retroactive to January 1, 1991, and are consistent with Form GST-370E, as used in conjunction with income tax returns filed by employees in respect of 1991.

The November 5, 1991, Notice of Ways and Means Motion states that section 253 will be amended to eliminate the previous reduction of the "base amount" by an allowance received by the individual if the individual includes such amount in his or her income for income tax purposes (i.e., "C" would be eliminated from the formula set forth on the preceding page). This change was apparently designed to allow employees in receipt of an unreasonable allowance (such as a non-accountable allowance) to claim the GST rebate on deductible expenses. Again, these changes are retroactive to January 1, 1991.

In view of the original provisions and subsequent retroactive amendments, there now appears to be three categories of employees:

* The employee who receives an

"unreasonable" allowance,

which is included in his or her

T4. The employee is entitled to

claim a rebate under section

253 on an amount that will not

be reduced by the allowance

received, and the employer,

based on statements attributed

to Revenue Canada, is not entitled

to claim an input tax credit

(ITC) under paragraph

174(a). (The eligibility of the

employer will not be clear until

draft legislation is released, but

it follows logically that only one

claim is allowable.)

* The employee (other than a

sales person) who receives a

"reasonable" allowance within

the meaning of paragraphs

6(l)(b)(vii) and (vii. 1) of the

Income Tax Act, with such

amounts not being included in

his or her T4. The employer

may claim the ITC under paragraph

174(a) of the Excise Tax

Act, and the employee will not

claim a rebate allowance.

* The sales person who receives

an allowance that in and of itself

is "reasonable" within the

meaning of paragraph

6(i)(b)(v) of the Income Tax Act

and, therefore, not included in

his or her T4. A sales person

may, however, take the position

that when other expenditures

are taken into account, the allowance

as a whole is unreasonably

low. The sales person

may then include the allowance

in his or her income and deduct 

his or her expenses. (See Inter-

pretation Bulletin 522, p. 49.)

In the last circumstance, the

employer may claim the ITC

under paragraph 174(a), believing

it has paid a reasonable allowance

and being unaware of

the filing position of the employee.

The employee will

claim the rebate under section

253 on an amount that would

not be reduced by the allowance.

Tax Executives Institute believes changes are necessary in this area to avoid confusion and an unadministrable result. Specifically, we recommend that the definition of "c" in section 253 be amended to read, as follows:

C is any allowances received by

the individual, other than allowances

that are unreasonable

within the definition of paragraphs

6(l)(x) and 6(l)(xi) of

the Income Tax Act.

Thus, if an employer pays an amount as an allowance that by itself meets the requirements of paragraphs 6(l)(b)(x) and (x), then such amount would continue to reduce the "base amount" under section 253.

The implementation of this proposed change would be governed by the employee's T4 and the T2200 provided by the employer. If an allowance is included in the employee's T4 as income (i.e., those amounts set out in box 8 of the T2200), then it would not be deducted on line 8 of Form GST- 370E; the amount to be deducted on line 8 of Form GST-370E would be the amount in box 7 of the T2200 less the amount, if any, in box 8 of the T2200.

TEI believes that this change, while facially somewhat complicated, would ensure certainty of result to both employer and employee.

Conclusion

Tax Executives Institute appreciates this opportunity to present its comments. If you should have any questions, please do not hesitate to call either Andrew G. Kenyon, TEI's Vice President for Canadian Affairs, at [phone] or D. John Nichol, chair of the Institute's Canadian Commodity Tax Committee, at [phone].