TEI-Department of Finance liaison meeting agenda: income tax issues.

December 8, 1999

On December 8, 1999, Tax Executives Institute held its annual liaison meeting with Department of Finance on pending income tax issues. The Institute's agenda for the meeting was prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is John M. Allinotte of Dofaseo, Inc. Marlie R.M. Burtt, the Institute's Vice President-Region I, coordinated preparations for the liaison meeting.

Tax Executives Institute, Inc. welcomes the opportunity to present the following comments on pending income tax issues, which will be discussed with representatives of the Department of Finance during TEI's December 8, 1999, liaison meeting. If you have any questions about these comments, please do not hesitate to call either Marlie R.M. Burtt, TEI's Vice President for Canadian Affairs, at [phone], or John M. Allinotte, chair of the Institute's Canadian Income Tax Committee, at [phone], extension 6821.

I. Background

Tax Executives Institute is an international organization of approximately 5,000 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 more than 2,800 of the leading corporations in Canada, the United States, and Europe.

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 eight geographic regions. In addition, a substantial number of our U.S. and European 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; telecommunications; and natural resources (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.

II. Foreign Affiliates -- Definition of Investment Business

A. Pursuant to subsection 95(1), to be considered "active" an "investment" business conducted by a foreign affiliate must, among other requirements, employ more than five persons full time in the conduct of its business. The definition of an investment business encompasses a number of different commercial activities, including banks, trust companies, securities brokerage, etc., each of which has fundamentally different operations and staffing requirements. Hence, the five-employee rule is arbitrary because it fails to reflect the commercial reality of what is required to operate the business. Where an "investment business" can be conducted by fewer than six employees, Canadian-owned foreign affiliates may likely be uncompetitive with local businesses in a foreign country. Moreover, the arbitrary rule could lead to the loss of Canadian-based jobs. As a result, TEI recommends that subsection 95(1) be revised. Specifically, we recommend that the "more than five employees" test be recast as a safe harbour. Taxpayers with foreign affiliates that conduct investment businesses should be accorded the opportunity to demonstrate that their commercial activities are substantive enough to be deemed active without regard to an arbitrary five-employee rule. We invite the Department's views on our proposal.

B. Increasingly, businesses must consider alternative, flexible work arrangements to meet their staffing requirements, including contracting out for essential administrative functions. In view of this trend, TEI recommends that services provided to a foreign affiliate by non-residents of Canada on a contract basis that are equivalent to a full-time position be counted as a full-time position regardless of whether those services are provided by a corporation related to the affiliate. We invite the Department's views on this proposal as well.

III. Non-Residents Carrying On Business In Canada

As the world economy becomes increasingly integrated, Canadian industries are required to adapt quickly to global competition for customers, employees, and suppliers. Inefficient businesses that do not streamline on a global scale quickly lose competitive advantages. To meet the challenges, successful Canadian businesses are reorganizing their international operations and in some cases centralizing functions in Canada to eliminate duplicative expenditures. Where services are provided from Canada for related parties outside Canada, section 247 requires that arm's-length service fees be charged and included in income thereby increasing the Canadian income tax base. An additional benefit to the Canadian economy and tax base that arises from providing centralized services in Canada is the employment of highly skilled, higher-paid, professionals exporting services from Canada.

Operations carried on by a foreign affiliate of a Canadian taxpayer sometimes require that limited authority be delegated to a related-party Canadian service provider. For example, when the foreign affiliate is located in Central Europe, Asia, or similarly distant regions, the nonresident may not be able to act on the advice of the Canadian service provider on a real-time basis. One pragmatic solution is for the non-resident to grant limited authority to the Canadian service provider to contract on behalf of the foreign affiliate. If that authority is exercised on a regular basis, however, the non-resident would likely be considered to have a permanent establishment (PE) in Canada or be considered carrying on a business in Canada. As a result, the non-resident would be required to file a Canadian income tax return and allocate profits to the business carried on in Canada. Generally, the income attributable to the Canadian activity of the non-resident will be equivalent to the value of the services provided and charged to the foreign affiliate by the Canadian service provider. Consequently, the net income of the PE will likely be nil, yielding no net tax benefit to Canada, whereas the foreign affiliate will be required to bear significant administrative costs to comply with the tax laws. As a result, TEI recommends that the rules be clarified to provide that the provision of services by a Canadian to a nonresident related party will not lead to the non-resident being considered as carrying on business in Canada so long as the charges for services provided by the Canadian resident comply with section 247. We invite the Department's views on our proposal.

IV. Barbados Exempt Insurance Companies

Will the Department please provide an update on current developments on discussions with the Government of Barbados concerning the Canadian taxation of dividends distributed by a Barbados resident insurance company?

V. "Foreign Content" Rules

Registered plans are currently permitted to invest no more than 20 percent of total assets in non-Canadian companies. Recommendations have been made that the limit on the percentage of so-called foreign content be increased or, even better, abandoned. Will the Department comment on whether it is considering raising or eliminating the foreign-content limit?

VI. Arbitration Procedures

In a report on fiscal 1998, the United States Internal Revenue Service said that only 87 percent of competent authority cases were resolved with full relief from double taxation. Since most U.S. competent authority cases likely involve Canada as the counterpart, this represents a significant and troubling decline from fiscal year 1997 when 99 percent of cases were fully resolved. (We invite the Department to comment on whether its statistics are consistent with the U.S. report.) While the competent authority process resolves most cases, relief from double taxation is necessary in all cases to prevent excessive taxation from impeding international trade and investment. We believe that arbitration should be employed where the competent authorities cannot reach full agreement.

Paragraph 6 of Article XXVI of the Canada-United States Income Tax Convention (1980), provides for arbitration subject to notes being exchanged between Canada and the United States to establish such procedures. TEI recommends that Canada initiate discussions with the United States with a view to exchanging such notes and establishing a working arbitration procedure. Has Finance discussed this issue with the United States? If not, would Finance consider raising it in the next round of treaty negotiations? More broadly, would the Department consider establishing an arbitration procedure in tax treaties with other countries as well?

VII. Tax-Free Rollovers

In Income Tax Technical News No. 11, Revenue Canada commented on its position with respect to spin-offs (divestitures) under U.S. tax law that are effected by means of dividends in kind. In these transactions, the U.S. parent company typically distributes shares of a subsidiary to the shareholders of the parent company in order to permanently separate the ownership and operations of the subsidiary from the parent. For U.S. tax purposes, the transactions are generally tax free to the shareholders. For Canadian purposes, however, the shareholders are considered to have received taxable dividends in kind even though the transactions are not pro-rata distributions of corporate profits.

Since spin-off transactions by widely held U.S. public corporations (1) cannot be controlled (or even influenced) by Canadian resident individual shareholders and (2) are not in substance dividends but rather reorganizations of capital, would the Department of Finance consider legislation providing for a tax-deferred rollover treatment for Canadian-resident shareholders that mirrors the U.S. tax treatment? Such treatment would be consistent with the proposed rollover provisions for shares of foreign corporations that were announced in April 1999 and would also be consistent with the remission order granted to AT&T in 1985 (see PC 1985-1476). More broadly, would Finance consider providing for a tax-free rollover where a Canadian corporation distributes all of its shareholdings in a wholly owned subsidiary to its shareholders? Finally, TEI believes that tax-free rollover treatment should be available to Canadian resident shareholders of a publicly traded U.S. corporation that is acquired by a publicly traded Canadian corporation in an exchange of shares. Would the Department consider this as well and provide its views?

VIII. T5 Requirements Between 100-Percent Owned Companies within a Corporate Group

Would the Department please explain the rationale for the current requirement that T5 Forms be prepared and issued to report interest payments between 100-percent owned companies within a corporate group? In the United States, interest paid to any corporation is exempt from information reporting under Internal Revenue Code section 6049(b)(4)(A). Moreover, we understand that Revenue Canada rarely, if ever, uses the T5 information in audits of corporations. Would the Department of Finance consider issuing regulations to eliminate the requirement to issue T5 Forms to corporations, especially where the payment is made by one member of a corporate group to another related member? At a minimum, the requirement should be eliminated for payments between companies within a corporate group that are 100-percent owned.

IX. Computer Software Royalties and Regulation 202

During treaty negotiations with other countries, the Department of Finance is opportunistically negotiating the elimination of withholding on software payments. Even where a payment is tax exempt under a treaty, however, Regulation 202(d) requires information reporting on cross-border royalty payments. Moreover, the reportable information (including applicable withholding tax) is rarely captured in a fashion that is easily reported since practically all computer software royalties are treated similarly to the purchase of goods or services. Since cross-border computer software royalty payments do not raise issues different from those related to cross-border purchases of goods and services, would Finance consider amending Regulation 202 to eliminate the reporting requirements where the payments are exempted by treaty? Electronic commerce will likely cause the volume of software royalties to expand dramatically in the future, hence the burden of reporting information whose value is questionable will only increase.

X. Corporate Loss-Transfer System

The Report of the Technical Committee on Business Taxation commented extensively on Canada's treatment of business losses and unused deductions and credits. The Committee suggested:

   [t]hat the government undertake a review of loss transferability and the
   restrictions on loss carryovers to see if the rules could be changed to
   reduce administration and compliance costs. In particular, the Committee is
   of the view that the tax system should provide a more straightforward means
   of transferring losses within a group of companies with common ownership.

Is Finance studying this issue and has it had any substantive discussions with the provinces?

XI. Retroactive Legislation

In our submission dated September 10, 1999, relating to draft legislation affecting the treatment of resource expenditures, TEI explained its concerns about the imposition of new taxes through retroactive legislation. Our submission also explains that, while the draft legislation is narrow in scope and affects a limited number of taxpayers, the broader tax policy and administrative issue of retroactive application affects all taxpayers. In his October 5, 1999, response to TEI's submission, Minister Paul Martin enumerated five factors that are relevant in the decision whether to make the specific amendments apply retroactively. In order to give TEI a better perspective and understanding on how those factors weigh in the decision-making, would the Department please clarify how the five factors were applied in respect of the retroactive legislation on resource expenditures?

XII. Change of Employer Due to Corporate Reorganization

Transfers of employees from one entity to another within a corporate group (including partnership entities) as a result of an intra-group reorganization frequently results in additional employer contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI) for the transferred employees. Examples of commonly recurring business reorganizations include a transfer of a division (including employees) from a parent to a subsidiary, a transfer between subsidiaries, a transfer from a partnership to a related corporation, and even a transfer between two divisions (separate "employers") of the same corporation.

The employee is generally made whole on his or her excess contributions when filing his or her personal tax return for the year and claiming the applicable relief. But the corporate group -- i.e., the two or more separate "employers" whose aggregate contributions to the CPP or EI funds for the affected employees exceeds the amount otherwise payable annually by a single employer -- generally has no mechanism to recover the excess payments. Other jurisdictions (e.g., Quebec) have addressed this problem by granting broader relief than the Federal system, which only accords relief for amalgamations and liquidations of a subsidiary into a parent. Would the Department of Finance consider eliminating the added employer payroll tax burden that arises from intra-group reorganizations?

XIII. Acquisition of Control of a Publicly Traded Parent

Where an acquisition of control of a company occurs, the Income Tax Act currently imposes significant restrictions on the deductibility of a company's capital losses, non-capital losses, and resource expenses (under sections 65, 66, 66.1, 66.2, and 66.4). These anti-abuse restrictions were introduced in 1981 to prevent companies from being acquired primarily for the value of their built-in tax deductions and losses. In TEI's view, the rules are overbroad because the restrictions apply wherever control of a company is acquired regardless of whether the acquisition-of-control transaction is motivated or enhanced by the value of the target company's deductions or losses. For example, there have been recent transactions involving public companies where the value of the Canadian tax deductions was less than one percent of the market capitalization of the acquired company.(1) Despite the nominal value of the deductions, the acquiring and acquired companies have incurred significant costs to comply with rules that are targeted at tax-motivated acquisitions. In some cases, the largest possible enhancement in the value of the available Canadian tax deductions is less than one-tenth of one percent of the market capitalization of the acquired company. Consequently, these acquisitions are clearly not motivated by Canadian tax benefits.

TEI believes that such cases will become far mere frequent because the consolidation of industries increasingly involves cross-border mergers and acquisitions. In such business combinations, the acquisition of the Canadian operations may be incidental to the global transaction. TEI recommends that the Department consider two amendments. First, the Minister of National Revenue should be given the authority to issue rulings waiving the application of the acquisition-of-control rules where the Canadian taxpayer can establish that the acquisition-of-control transaction is not motivated by Canadian tax considerations. Alternatively, the rule could be that such transactions will be subject to the acquisition-of-control restrictions only where it is reasonable to conclude that such transactions were motivated by the accelerated deductibility of Canadian tax deductions. Second, subsequent to the change in control of a Canadian parent company, the deduction of pre-acquisition capital losses, non-capital losses, and resource expenses should, after the acquisition, be permitted to the extent of income derived from any businesses or properties that were owned by the Canadian parent or any of its subsidiaries at the time of the acquisition of control.

XIV. Loss Carryforward Period

The current rule restricting the carryforward of losses to seven taxation years has been part of the Act for many years. Meanwhile, a number of provisions have been added to the Act that trigger short-year tax returns (e.g., a change of control or a company's becoming or ceasing to be a financial institution). Short-year returns effectively truncate the carryforward period, thereby increasing the likelihood that the losses will expire unused. In contrast to Canada's restricted rules, key trading partners, including the United Kingdom, Germany, Austria, and Australia, have unlimited loss carryforward periods. Moreover, the United States recently lengthened its carryforward period to 20 years. Would the Department of Finance consider extending the Canadian carryforward period? TEI recommends a term of at least 10 years, which would be consistent with the current investment tax credit (ITC) carryforward period.

XV. Interest Component of New Tax Computation

Lump-sum payments received during a year are taxable in the year received even though a significant portion of the payment might be attributable to work performed in prior years. Sections 110.2 and 120.31 set forth in the Department's Special Release of Draft Legislation (September 10, 1999) prescribe a new tax computation mechanism that permits taxpayers to compute their taxes on lump-sum settlement payments as though the payment were received over a period of years and taxed accordingly. Among the forms of income that qualify for the tax-relief mechanism is income received from an office or employment or income received pursuant to the terms of a court order or judgment, an arbitration award, or in settlement of a lawsuit in respect of the termination of an office or employment. The new tax computation mechanism mitigates the effect of progressive tax rates on the lump-sum payment, but the regime also includes an interest component that diminishes that tax relief. The interest charge reflects an assumption that a time-value-of-money charge should be imposed for the hypothetical delay in the payment of the tax.

Since the payment was not available to the individuals in the prior years (indeed, the amount was likely subject to a substantial dispute), there is no delay in the payment of tax liability. Hence, it seems unfair to include an interest component in the tax computation. TEI believes that the sole issue that the alternative tax computation should address is relief from the steeply progressive tax rates. By contrast, section 120.3 of the Income Tax Act (Canada) and section 766.2 of the Taxation Act (Quebec), which address taxation of similar payments, do not include a hypothetical interest component diminishing the tax relief. We recommend that the Department consider revising the provision to eliminate the deemed interest component of the tax computation. We invite the Department's views.

XVI. Section 17 -- Interaction with the Foreign-Affiliate Rules

The recent amendments to section 17 of the Act were seemingly made without considering their interaction with the provisions governing the taxation of foreign affiliates set forth in sections 90 to 95, section 113, and the related regulations. As a result there may well be numerous instances of double taxation that arise from the imputation of income under section 17 unless appropriate correlative adjustments or offsets are permitted under the foreign-affiliate rules. Some simple and, very likely, commonly recurring situations where double taxation of the imputed income will occur include:

* Repatriation of Exempt Surplus to Canada. In this case, the underlying foreign tax on the earnings and the withholding tax on the dividend amount are not available as a foreign tax credit against Canadian tax on the imputed income. Consequently, double taxation of this income will result to the extent of the underlying foreign tax and withholding tax on the interest income earned by the related corporation that is not a controlled foreign affiliate of the Canadian taxpayer.

* Repatriation of Taxable Surplus to Canada. Here, double taxation will result to the extent that the income has been imputed by section 17 and Canadian tax is payable on dividends paid from taxable surplus of the non-controlled foreign affiliate.

The foregoing examples are hardly a comprehensive list of examples of double taxation that arise, but they do illustrate classes of common transactions where double taxation will occur. As a result, we recommend that the Department of Finance consider withdrawing the latesT revisions to the section 17 rules as unworkable. Alternatively, appropriate adjustments to the foreign-affiliate rules should be made to ensure that double taxation does not result. The latter, however, will likely add substantial complexity to the Act. We invite the Department's comments.

XVII. Effect of the Parthenon Decision on the Definition of Control

In Parthenon Investments, Ltd. v. Minister of National Revenue, 97 DTC 5343 (FCA), the court held that control of a subsidiary rests with the ultimate parent company. In order to clarify the application of the court's decision, TEI invites the Department's views about the following:

ParentCo, a Canadian company, is engaged solely in a manufacturing business. Subsidiary A is 100-percent directly held by ParentCo, is in the business of lending money, and is a restricted financial institution (RFI) within the meaning of paragraph (e) of subsection 248(1). Subsidiary B is 100-percent directly held by Subsidiary A and is engaged solely in the business of manufacturing.

1. Is Subsidiary B, by virtue of Subsidiary A's direct ownership interest, also deemed an RFI pursuant to paragraph (f) of the definition of an RFI in subsection 248(1)?

2. Alternatively, does the Parthenon decision stand for the proposition that Subsidiary B is not an RFI since ParentCo has ultimate control of Subsidiary B, i.e., one looks through intermediate owners to the ultimate parent?

XVIII. Investment Tax Credit Recapture

New section 127 of the Act requires the taxpayer to increase its tax liability in the year of the sale or conversion of research property. In addition, the provision accords the taxpayer a deduction in the year following such sale or conversion in an amount equal to the amount of the ITC recaptured in the prior year. The deduction in the subsequent year, however, may not benefit the taxpayer because of losses or other credits. To illustrate the issue: assume the following facts:

Year 1      Original SR&ED expenditure                  $ 500
            Original ITC Earned                         $ 100

Year 2      Tax paid on ITC Income                         45
            Net ITC Benefit Received                    $  55

Year 5      Proceeds or conversion                      $ 500
            (assume no change in value)
            ITC recapture                               $ 100

If in Year 6 the taxpayer has taxable income, it will have a deduction for the $100 recapture and reduce its Year 6 tax liability by $45. If there are losses, however, the recapture will exceed the net ITC benefit originally received. This will, in turn, prejudice shareholders and creditors in the event the taxpayer is in financial difficulty. Where a taxpayer is not taxable at the time of the ITC recapture, would the Department of Finance consider providing an election to permit the taxpayer to pay a recapture tax of, say, 55 percent of the ITC for a large corporation or, say, 80 percent of the ITC for a Qualifying Small Business in lieu of the recapture and income-deduction mechanism?

XIX. Transfers to Other Scientific Research Organizations

The language of section 127 of the Act is broad enough to trigger recapture of ITC on donations of Scientific Research & Experimental Development (SR&ED) equipment to educational institutions that carry out scientific research activities. The policy of requiring ITC recapture on the donation of research property to educational institutions, however, is questionable. TEI believes that such donations should be exempt from ITC recapture in order to promote research activities by universities and colleges. Would the Department consider an amendment to the Act providing that such property transfers are exempt from the SR&ED ITC recapture provisions?

XX. All or Substantially All

With the enactment of the ITC recapture rules, would the Department consider eliminating the intent test in subsection 37(8)? In other words, with rules now in place that trigger a recapture tax on conversion of an asset from use "exclusively" or "solely" for SR&ED activity to a different use, what purpose is served by retaining the requirements in subsection 37(8) that a capital asset must be acquired for use for "all or substantially all" of its expected useful life in SR&ED activity, or that "all or substantial all" of the asset's value will be consumed in SR&ED activity? We invite a discussion of this provision.

XXI. Large Corporations Tax -- Surtax Credit Utilization

Large corporate taxpayers employ complex legal entity structures for a variety of commercial reasons, including regulatory requirements, exposure to financial or legal risks, and minority shareholder interests. Frequently, these structures do not permit the group to make optimum use of available surtax credits against the large corporation tax (LCT). Since loss transfers among members of a related corporate group are generally not offensive from a policy perspective, would Finance consider introducing legislation to provide for sharing of un-utilized surtax credits? If not, please explain the tax policy rationale.

XXII. Transfer Pricing

In the 1999 agenda filed with Revenue Canada, TEI asked for Revenue's comments on the manner in which the transfer-pricing provisions contained in section 247 will apply with respect to a long-term agreement entered into between parties that, at the time of entering into the agreement, are at arm's length, but at a subsequent time become related and therefore not at arm's length.

Specifically, we requested that Revenue Canada assume the following facts:

   A taxpayer enters into an agreement to supply products to a U.S. customer
   for a term of 15 years. Assume further that such long-term agreements are
   customary in the industry and that prices during the term of the agreement
   are adjusted by way of an agreed formula that employs posted benchmark
   market prices. Following, say, six years, the taxpayer -- by way of an
   arm's-length merger or acquisition -- becomes related to the customer, but
   the terms of the supply agreement are unchanged and continue in force for
   the duration of the original agreement.

We asked Revenue Canada whether the transfer-pricing provisions apply to this arrangement at the time the parties become related (i.e., after year 6). In the event that Revenue Canada's answer is that subsection 247(2) applies immediately when the relationship ceases to be arm's length, would the Department consider providing a presumption (or safe harbor) that the prices established in such negotiated agreements, unless modified or terminated, satisfy the requirement of being arm's length under a recognized method (e.g., CUP) for the balance of the term of the original agreement?

At a minimum, it seems improper that companies that carefully negotiated an arrangement under arm's-length circumstances with bona-fide pricing should be subject to the rigorous contemporaneous documentation requirements immediately following an acquisition-of-control transaction. In other words, the formerly arm's-length pricing agreement should provide evidence of arm's-length pricing during some minimum transition period following the acquisition of control. In the circumstances described, would the Department consider providing relief from the six-month rule (i.e., that documentation is considered "contemporaneous" only where created within six months of the end of the year in which the transactions occur)? The global consolidation of industry, both within and, increasingly, across borders, ensures that this issue will recur with greater frequency.

XXIII. Status of Prior-Year Questions

In reviewing the responses to questions raised in last year's meeting, we note that the Department said that it would follow up on or consider certain issues and questions raised. We would appreciate a status report in respect of the following issues that the Department said that it would consider. (Copies of the entire questions and the Department's responses are attached as Appendix A.) In summary, TEI would appreciate obtaining an update on the status of the following items (the numbering corresponds to the 1998 agenda and responses):

* Question IV -- Section 85 "Triangular Mergers" with A Foreign Target Company. The Department said that no study or other work in respect of this matter was currently underway, but that a review of the issue may be undertaken. Has such a review commenced or is one planned for the near future?

* Question XI -- Foreign-Affiliate Reporting. The Department said that, as a result of the consultative process, it had reduced the number of reporting forms to two. The Department said that it would review the effectiveness and utility of these forms two years hence. Can the Department advise (1) when during the year 2000 a study will commence, (2) the form of the study, and (3) whether TEI will be asked to participate in the review?

* Question XII (A) -- Part VI.I Tax Creditable Against Part I and Part VI Tax. The Department said that it would consider the possibility of changing the required relationship for transfers of the Part VI.I liability. Has the Department completed its consideration and will it propose amendments to the legislation in order to permit such transfers?

* Question XIV -- Contingent Interest. The Department said that it was prepared to consult with Revenue Canada about the practice of accepting refiling for prior years for purposes of claiming contingent interest when ultimately paid in a subsequent year. Will the Department provide an update on the results of the consultations with Revenue Canada?

* Question XVII -- Rollover Treatment on Foreign-Currency Debt. The Department said that it would be necessary to conduct an extensive review and analysis of the issues in this area in order to develop a comprehensive, consistent system. Has the Department undertaken a review and analysis or is one still planned?

* Question XIX -- Deductions at Source. The Department said that it would consult with Revenue Canada about the issues posed in the question. Revenue Canada in its response to Finance suggested that the following response be given: "The Department is aware of the issue concerning the application of paragraph 100(3)(c) and subsection 100(3.2) of the Regulations and, in response to concerns from employers and employees, amendments to the Regulation are being considered." TEI would appreciate a status report on whether the Department has made progress in developing amendments to rectify the issue that was submitted in the 1998 question.

XXIV. Conclusion

Tax Executives Institute appreciates the opportunity to present its comments in respect of pending income tax issues. We look forward to discussing our views with you during the Institute's December 8, 1999, liaison meeting.

(1) For example, assume that control of a large foreign corporation is acquired by another large foreign corporation. Solely because of the acquisition of control, a relatively small Canadian subsidiary of the acquired corporation would be subject to significant compliance costs as well as punitive tax effects from the restrictions on the deductibility of unused tax deductions. Moreover, for tax purposes, a year-end is triggered for the Canadian subsidiary by the acquisition of control, which may effectively eliminate a year of carryforward availability in respect of non-capital losses. The possible enhanced deductibility of unused tax deductions was likely an insignificant economic factor in the acquisition.