Quebec capital tax: November 21, 2003.

On November 21, 2003, the Montreal Chapter of Tax Executives Institute submitted the following letter to Minister of Finance Yves Seguin to express concern over a proposed delay in the reduction of the Quebec capital tax burden. The letter was prepared by the Montreal Chapter, whose president is Jean-Pierre Morier of GE Canada Equipment Financing.

On behalf of Tax Executives Institute (TEI), I am writing to voice our concern about a proposed delay in the reduction of the Quebec capital tax burden.

Tax Executives Institute is the preeminent association of business tax executives. The Institute's 5,400 professionals manage the tax affairs of 2,800 of the leading companies in Canada, the United States, and Europe and must contend daily with Canada's business tax laws. The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency who constitute 10 percent of TEI's membership. TEI is concerned with issues of tax policy 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, as well as an atmosphere of mutual trust and confidence between business and government, will promote the efficient and equitable operation of the tax system. TEI's Montreal Chapter has held regular liaison meetings with both the Minister of Finance Quebecand Quebec Minister of Revenue for many years. These meetings have fostered a mutually beneficial relationship between the Institute and the Quebec Government and we look forward to our next round of meetings.

On June 12, 2003, the government released its 2003 budget proposals and announced its intention to defer the reduction in capital tax rates that was scheduled for calendar years 2004 and thereafter. The budget proposal also announced an increase in the general paid-up capital reduction to $600,000 effective January 1, 2004.

TEI commends the Quebec government for increasing the general paid-up capital deduction, but we urge it to reconsider the decision to defer the implementation of the capital tax rate reduction. TEI recognizes and appreciates the government's concern about the potential revenue effect of the elimination of the tax, but capital taxes discourage business capital investment and destroy jobs. Moreover, capital taxes are extremely onerous for capital-intensive industries and punitive for companies in loss positions. We believe that any short-term revenue loss from the repeal of the capital tax will be offset by corporate and individual income taxes as well as payroll taxes from increased employment that will result from increased business capital investment.

TEI has consistently advocated the elimination of all capital taxes at the federal and provincial levels. Indeed, repeal of the Federal Large Corporations Tax was one of the principal recommendations that TEI and others made during the 2002 Pre-Budget Discussions held by the House of Commons Standing Committee on Finance. TEI has subsequently urged the federal government to accelerate the elimination of its capital tax. In a similar vein, the previous government in Ontario announced a phased reduction in its capital tax that parallels the federal government's capital tax reductions. We will urge the new Ontario government to maintain that course.

Accordingly, we recommend that the Quebec Government reinstate the planned reduction of the capital tax rates, with the ultimate objective of eliminating the capital tax in concert with the federal and Ontario governments. By adopting this approach, Quebec's tax base will remain consistent with the federal government's tax base and its competitiveness with the Ontario government's tax base will be enhanced.

In the interim, in order to ameliorate the capital tax's effect, we recommend that the Quebec government harmonise the definition of its capital tax base with that of the Federal Large Corporations Tax, at least to the extent of the investment allowance deduction. Currently, the Quebec investment allowance is prorated based on total assets rather than being fully deductible against the capital tax base. The proration of the investment allowance results in a double tax, which is difficult to justify under any circumstances.

TEI's Montreal Chapter appreciates this opportunity to present its comments on Quebec's capital tax. If you should have any questions about the submission, please do not hesitate to call me at 514.397.5311, Peter Sorenti, the chair of the Montreal Chapter's Income and Capital Tax Committee, at 514.288.4545, or Monika M. Siegmund, chair of TEI's National Income Tax Committee at 403.691.3210.