TEI testimony on pre-budget discussions: November 6, 2002.

On November 6, 2002, TEI President J.A. (Drew) Glennie testified before the House of Commons Standing Committee on Finance at the Committee's hearing on pre-budget discussions. Accompanying Mr. Glennie were Glenn G. Wickerson of BP Canada Energy Company, TEI's Vice President for Canadian Affairs; Monika M. Siegmund, chair of TEI's Canadian Income Tax Committee; and Timothy J. McCormally, TEI Executive Director The testimony was prepared under the aegis of TEI's Canadian Income Tax Committee.

Good morning. My name is Drew Glennie. I am the General Manager-Tax & Insurance for Shell Canada Limited in Calgary. I am here today to testify on behalf of Tax Executives Institute in my capacity as TEI's International President. With me today are Glenn Wickerson of BPP Canada Energy Company, who is TEI's Vice President for Region I Canada, Monika Siegmund, also of Shell Canada, who is Chair of TEI's Canadian Income Tax Committee, and Timothy McCormally, TEI's Executive Director, from Washington, D.C.

Background

Tax Executives Institute is the preeminent association of business tax professionals. TEI's 5,300 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 we are 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.

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, as well as in the provinces, 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 of 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.

TEI last testified before the Standing Committee on Finance in May of 2000. We commend the Committee for holding these hearings at various locations throughout the country, and are pleased to have the opportunity to testify today on the pre-budget discussions. We have a number of recommendations that we believe will foster a high level of innovation and productivity, promote a business environment favourable to economic growth, and assure greater levels of economic efficiency and prosperity for all Canadians to share.

Reduced Corporate Income Tax Rates

In 2001, the government began a phased reduction of the corporate income tax rates for most sectors of the economy. Regrettably, the resource industry did not benefit from the reduced tax rates. Lower tax rates are extremely beneficial to the economy because they enhance the attractiveness of Canada to both foreign and domestic investors. Increased capital investment in Canada, in turn, increases productivity, provides added employment, and promotes sustainable growth. Indeed, the wisdom of the government's course can already be seen in the expansion of the Canadian economy even as the U.S. economy proceeds with slow or no growth. As Finance Minister Manley pointed out recently, for the first time in more than 20 years the Canadian economy outperformed the U.S. in an economic downturn. We believe Canada's competitive tax rates are one reason, and we urge the government to "stay the course" of reducing the corporate income tax rates for all sectors of the economy, including resources. Indeed, we say "full speed ahead."

In connection with the reduced corporate income tax rates, TEI supports a number of consequential technical amendments to the Act where the amount of a deduction, credit, or other adjustment depends on the taxpayer's notional tax rate. A detailed description of the necessary technical amendments was provided to the Department of Finance last December and includes amendments to (1) the deduction for the Part VI.1 tax, (2) the definition of "Relevant Tax Factor" in subsections 95(1) and 113(1) of the Income Tax Act, and (3) the Part VI Tax payable rate. TEI looks forward to working with this Committee and the Department of Finance to ensure that the intended benefits of tax rate reductions are fully implemented with the necessary amendments.

Repeal of the Large Corporations Tax

Next, TEI urges the government to eliminate the Large Corporations Tax (LCT) levied under Part I.3 of the Income Tax Act. The LCT, as with all capital taxes, is regressive, insensitive to profits and, by its nature, imposes a disproportionate burden on capital-intensive companies and industries. While the scheduled reductions in the corporate income tax rate and modifications to the income tax base will enhance the international competitiveness of the Canadian tax system, the LCT is counterproductive to that goal and discourages incremental capital investment by domestic and, especially, foreign businesses and investors. As important, the economic cost of the LCT is greatest when corporate income and cash flow are diminished during recessions. Thus, the LCT can perversely exacerbate an economic downturn.

Even though the provinces are more dependent on capital taxes as a source of revenue than the federal government, British Columbia announced a phased elimination of its capital tax over a two-year period. Similarly, Alberta eliminated its only remaining capital tax (on financial institutions), Ontario has increased its capital deduction as a first step toward elimination of the tax, and Quebec has committed itself to a 50percent reduction in the capital tax. Clearly, the provinces are moving toward reducing the capital tax burden. We believe the federal government should follow suit and accordingly urge the Committee to repeal Part 1.3 of the Act.

Foreign Investment Entities and Non-Resident Trusts

Another area of special concern to TEI is the Notice of a Ways and Means Motion that was tabled in the House of Commons in early October. The Notice introduces legislative proposals to address Foreign Investment Entities (FIEs) and Non-Resident Trusts (NRTs). The proposed legislation was originally released in June 2000, revised in September 2000, further revised in August 2001, and revised yet again in connection with the October 2002 Notice of the Ways and Means Motion. TEI is pleased to have participated in the consultations on this important legislation by submitting written comments to the Department of Finance in February 2001 and again in October 2001 and by meeting with representatives from the Department at various times to discuss our concerns.

Although we are still analyzing the details of the October 2002 draft of this complex legislation, we have four high-level observations:

First, although proposed the legislation includes important and substantial revisions from the three previous drafts, the legislation remains extraordinarily complex, confusing, and, in the case of the FIE provisions, overlaps and conflicts with the entire foreign affiliate regime. As a result, the provisions will likely interfere with legitimate business operations.

Second, although the latest version of the draft legislation helpfully reduces the number of instances where a non-resident corporation operating an active business could qualify as an FIE, TEI continues to believe that, once an entity is trapped in the labyrinth of the FIE rules, taxpayers will be unable to comply with them.

Third, the proposed non-resident trust rules will make it very difficult for Canadian-headquartered multinationals to use, or contract with, foreign-based trusts for legitimate business activities.

Fourth, TEI questions whether auditors from Canada Customs and Revenue Agency (CCRA) will, anymore than taxpayers, have the resources and wherewithal to be able to properly administer these rules. From both a compliance and administrative perspective, these rules would be vastly improved if they were more limited in scope, simplified, and focused solely on remedying the perceived abuses.

In summary, we regrettably conclude that the draft proposals remain unworkable and we urge the government to withdraw the legislation.

Finally, we note that the government has been fine-tuning the proposed legislation for more than two years. Given its mind-numbing complexity, taxpayers will need time to digest and understand the legislation and to modify company information systems to capture and report the additional required information. Thus, the proposed January 1, 2003, effective date is unreasonable. If the legislation is not withdrawn, the effective date should be postponed at least a full year 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.

Administration of the Income Tax Act

Finally, there are several areas where the administration of the Income Tax Act has not kept pace with changes in the global economy and the cost of compliance for taxpayers is excessive. In the past few years' liaison meetings, TEI has made a number of recommendations to CCRA and the Department of Finance to improve the administration of the Act and reduce taxpayer compliance costs. I wish to highlight two recommendations that TEI believes should be implemented immediately.

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. 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.

The second area where taxpayers' cost of compliance is 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.

Conclusion

On behalf of TEI, thank you for the opportunity to participate in the Committee's hearings on pre-budget discussions. I will be pleased to answer your questions as well as follow up in writing on any item addressed here today.