TEI-Revenue Canada liaison meeting (income tax issues).

On December 10, 1996, a delegation from Tax Executives Institute met in Ottawa with representatives of Revenue Canada to discuss pending income tax issues. The participants discussed the items as submitted.

Canada Revenue Commission

We shall be pleased to hear a brief update and progress report on the activities of the Canada Revenue Commission.

The following is an outline of the comments provided by Mr. Bill McCloskey, the Executive Director of the Canada Border and Revenue Services (now named Canada Customs and Revenue Agency) Implementation Team.

There are two main objectives in support of the agency initiative:

* Getting government right

-- through establishing faster/

alternative service delivery

mechanisms and human

resources and an administrative

regime that allows more

flexibility than that imposed by the

public service constraints/

conditions.

* Strengthening the federation

-- through establishing a

single tax collector for all

provinces which is an extension of

the current practice (via tax

collection agreements) and by

giving the provinces a greater

voice.

The idea is to promote one level of tax administration in Canada. Provinces are already spending in excess of $500 million a year. Major savings could be realized with a single administration and harmonization.

Revenue Canada has been working on the design of the structure of the Agency. It looks as though it will be a federal (not co-owned) agency designed to handle revenue administration, border services, trade administration, social benefits delivery.

How will the agency be governed/ accountable? This is a critical issue at this time. A team has visited all the provinces. The hope is to give the provinces a voice. Results have been inconclusive to date and there are differing views on important issues of who will direct and lead the agency -- provincial representatives, federal ones, or a mix.

Models exist and are being developed -- something like Food Inspection Agency. They turn on how arm's length or not this organization will be from the government, e.g.. a Department, a Crown Corporation, or something else. The form of structure is the first thing to be settled upon and action on this score is expected to be taken early in 1997.

Legislation on the formation of the Agency is expected to be presented in the House of Commons in late spring/early summer of 1997.

Mr. McCloskey was very interested to learn from James Murray of TEI about the U.S. National Commission on the Restructuring of the IRS and of TEI's interaction of it. Mr. McCloskey indicated that he would like to get more information from TEI on this score.

Audit Protocol

Commencing with the 1995 liaison meeting and throughout the ensuing year, there have been a number of discussions between representatives of Revenue Canada and business taxpayers concerning the Department's audit protocol initiative. As a part of the consultation process, the Institute submitted formal written comments on the Draft Audit Protocol Reference Manual (hereinafter, "the protocol") on September 27, 1996. In order to advance the consultation process and elaborate on the issues raised in our written submission, we invite Revenue Canada's comments concerning the following.

(1): The protocol sets forth a framework for managing the audit process on a prospective basis. The speed with which taxpayers and Tax Services Office Auditors alike embrace the cooperative approach envisioned in the protocol, however, may depend upon the resolution of significant, pending audit issues in open taxation years. Has Revenue Canada developed any measures to expedite the resolution of pending audit issues and cases before, or in connection with the implementation of the audit protocol? For example, the backlog of taxpayer Scientific Research and Experimental Development (SR&ED) claims is significant in scope and magnitude. Is expedited review of these claims envisioned? Are there other "back-year" issues that may impede the transition to an audit framework governed by the protocol?

Response: Revenue Canada recognizes that there are a number of pending audit issues in many large corporations which require expedient resolution. Because of this, and to address different needs of different corporations, all protocols will be developed through a consultative process and each corporation will have its own protocol.

To ensure that all outstanding issues are addressed up-front, "Guidelines for developing an audit plan," which is a key element of the Audit Protocol, require that both parties describe the process to resolve outstanding compliance issues from previous audits. The audit plan prepared under the Protocol also requires that Revenue Canada auditors provide a commitment and a time frame to resolve any outstanding issues from previous audits.

With respect to becoming current in our large case audits, our objective is to have the 1993 year and all prior years completed by March 31, 1997.

Regarding the Scientific Research and Experimental Development (SR&ED) claims, Revenue Canada is committed to completing the backlog of taxpayer requested adjustments by March 31, 1997. The Department has also taken steps to ensure that current SR&ED claims are completed without any undue delay. However, we do not expect that any outstanding "back year" issues such as SR&ED claims will impede the transition to an audit framework governed by the protocol.

(2): One underlying purpose of the protocol is to engender greater openness and trust between Revenue Canada and taxpayers. That trust may be undermined where significant decisions affecting the disposition of the taxpayer's case are made without direct input from and representations by the taxpayer. To allay taxpayer concerns, we recommend that instructions be given to Tax Services Offices that the taxpayer be apprised of all issues affecting it that are under study by Revenue Canada. In other words, where the facts, circumstances, or legal interpretations affecting a taxpayer's issues are under study by the Head Office or other branches within Revenue Canada, we recommend that steps be undertaken to assure that (I) the taxpayer is apprised that personnel outside of the Tax Services Office are involved in the taxpayer's case and (ii) the taxpayer's position on the issues is fairly presented to the Revenue Canada decisionmaker by, for example, inviting the taxpayer to make the presentation. We invite the Department's comments.

Response: The model audit protocol requires that Revenue Canada auditors keep the corporation regularly informed about the status of the Department's queries, proposed audit adjustments, and findings. In addition, the large file case manager and the tax manager will meet regularly to discuss the progress of the audit.

Where applicable, Revenue Canada auditors will ask corporations to review referrals to Headquarters to ensure that they have clearly and correctly stated the facts.

(3): Building a cooperative audit relationship between Revenue Canada and large-file taxpayers will depend in part on the continuity of personnel assigned to the case by the taxpayer and Revenue Canada alike. Consequently, we recommend that Revenue Canada emphasize in its directions to the filed offices the importance of assigning staff for a minimum of one complete audit cycle. In addition, we recommend that part of the audit team carryover from one cycle to the next thereby providing continuity. We invite the Department's comments.

Revenue Canada agrees that there must be a continuity of personnel in audits. Instructions to the field will be issued shortly, emphasizing the need for continuity of auditors during an audit cycle as well as carryover to another audit cycle. Where replacements are required from one cycle to the next, it is expected that one senior Large Business Auditor will remain in the new audit team to provide continuity.

(4): The Real-Time Audit section of the draft Reference Manual includes statements to the effect that (i) "when a settlement is reached on any agreed issue, the corporation signs a waiver of objection...." and (ii) "each issue filed in accordance with an agreed position...will not be subject to further audit..." Notwithstanding the assurance that the issue will not be subject to further audit, Revenue Canada clearly retains the power to reassess in respect of the issue while the taxpayer is equally clearly precluded by its waiver from changing its position. We believe that the position espoused in the draft significantly diminishes the principal benefit of a real time audit -- certainly of tax liability at the time of filing a return. In addition, the lack of symmetry between taxpayer's and Revenue Canada's ability to reopen issues erodes taxpayer confidence that a protocol represents a consensual arrangement. Specifically, we believe the lack of mutual undertakings in respect of future reassessments is an impediment to the execution of protocol agreements and invite Revenue Canada's comments on whether it will reconsider the matter.

Response: The Real Time Audit (RTA) envisages the auditing of issues (emphasis added) prior to a corporation's filing of the T2 return. There is certainty of tax liability on each RTA issue filed in accordance with an agreed position and with complete disclosure. The signing of a waiver of objection relates only to that issue which is resolved on a settlement basis.

The current policy for opening prior years applies to all corporations. Before adjusting an issue which was not audited previously, Revenue Canada will ensure the issue is significant and material. The corporation can help by identifying audit issues for which it wants certainty regarding its tax liability.

(5): In the interest of promoting more efficient audits and the execution of protocols with taxpayers, has Revenue Canada considered encouraging its Tax Service Offices to agree not to pursue reassessments that fall below a de minimis threshold? The magnitude of a de minimis threshold might vary depending on such factors as the size, complexity, and risk profile of the taxpayer entering into protocol.

Response: Auditors are encouraged to concentrate their audit efforts on significant issues. Any de minimis threshold may be addressed by both parties in the individualized protocol. Any such threshold should take into consideration the Department's policy on a particular issue.

Advance Pricing Agreements

Advance Pricing Agreements (APA) represent a substantial innovation in tax administration to minimize disputes about transfer pricing. Consequently, TEI has supported the APA initiative in both Canada and the United States. We are concerned, however, that the time required to complete an APA is so daunting that taxpayers may be discouraged from initiating the process or become frustrated and withdraw from it. We invite Revenue Canada's comments on whether it is satisfied with the time required to complete individual APAs or whether process improvements have been identified to expedite achieving agreements. Are there common errors that taxpayers should avoid in order to expedite processing of their APA requests?

Response: Enthusiasm for BAPAs is growing among tax administrations and taxpayers operating in the international arena although certain countries have indicated a reluctance to become committed to formal BAPA programs. More and more tax administrations now appreciate the underlying concepts of BAPAs and recognize the value of such a process in resolving transfer pricing disputes. Many are endeavouring to incorporate such a service, either formally or informally, within their current tax administrative services as another option to resolving transfer pricing issues.

Revenue Canada appreciates TEI's support of the BAPA concept and the initiatives taken here in Canada, the USA and elsewhere. Revenue Canada continues to work with interest groups, such as TEI, as well as with our taxpayers directly involved in the BAPA process to improve our BAPA program. We welcome TEI's comments and suggestions.

When considering the "time" aspects of BAPAs one needs to keep in mind what the BAPA process replaces: the transfer pricing audit, appeal procedures, and potential litigation or competent authority consideration (sometimes year after year). These usual transfer pricing resolution channels are often conducted in a combative environment, commonly span an exceedingly protracted period of time, and do not provide the certainty of tax treatment available under the BAPA program. Revenue Canada believes that those taxpayers which are well-versed in the difficulties associated with transfer pricing matters, the time and effort needed to resolve them, and the benefits afforded by the BAPA process are not daunted by the time required to reach an acceptable BAPA. To date we have had no taxpayer withdraw from the process because they felt "frustrated" with the length of the process. Generally, our experience with our taxpayers has been more than favourable.

We believe that our organizational structure and "core" team approach with which we launched our BAPA program continues to be effective in minimizing the time required and time frame associated with BAPA requests. While our field staff participate in all requests the process is managed and directed on a national basis through the Transfer Pricing & Competent Authority Division of our International Tax Directorate. They are also in charge of the negotiation phase.

We continue to strive to complete the key terms and conditions of a BAPA within 12-18 months after we receive all necessary information. The amount and type of information required in a BAPA will vary with each case, depending on the particular facts and circumstances. Taxpayer information provided under a BAPA request is limited to a review with the verification of such information being left to be done under our audit program at a later date.

However, because of the popularity of our BAPA program, we are now faced with a caseload level which does not permit us to schedule and complete cases in as timely a fashion as we would like. Presently, we are looking to bolster our staff levels to better deal with the current workload.

Further, to help us identify what areas of the BAPA process we might be able to streamline when dealing with smaller companies (e.g., information requirements) we have agreed to take on two smaller companies as pilot "fast-track" cases. We expect to work closely with the taxpayers and their representatives on this aspect as we move through the various case phases. In addition, we invited one of our key BAPA clients to share with us their comments, observations, and suggestions as a result of their participation in our BAPA process. We look forward to receiving their comments.

As for common errors taxpayers might avoid, a few come to mind:

* The process was designed to be an open and co-operative problem resolution forum, distinctively different than the usual confrontational environment of the audit, appeals, and competent authority processes. Some taxpayers appear to hold a contrary approach and limit the extent and nature of information they provide to us, preferring to wait for Revenue Canada to request additional material. Also, our information requests are often challenged. This results in the Department having to deal with incomplete submissions and identify and ask for missing information. This consumes a great deal of our time and unnecessarily lengthens the time frame required to complete a BAPA.

* Taxpayers often provide important financial schedules that do not tie into published financial statements or other related internal documents and financial information. Some taxpayers provide only aggregate financial information and do not provide adequate segmented/detailed financial data indicated by the BAPA request.

* Some clients propose an "Other Method" (e.g., profit split) transfer pricing methodology without thoroughly exploring a transactional method that would usually be applied in the particular circumstances.

* Some taxpayers do not provide a functional analysis or provide one that is superficial and inadequate.

* Some taxpayers, when preparing their BAPA requests and submissions, fail to appreciate that Revenue Canada representatives lack the depth of business-knowledge and industry-insight that they have accumulated. Revenue Canada officials must become familiar with the scope and nature of the taxpayer's operations and industry to enable them to conduct a proper evaluation of a BAPA request and submission.

* Taxpayers fail to take an objective view of their BAPA package before submitting it to the tax administrations. They should review the package and anticipate what key concerns, issues and information requirements may be raised by the participating tax administrations and modify the BAPA package accordingly. This may be best handled through consultation with the tax administrations after the prefiling meeting but before the package is formally submitted.

* Some taxpayers do not appear to be committed to the process. Taxpayers do not always dedicate the necessary level of resources and funding to their BAPA request, causing unnecessary delays.

Transfer Pricing

In determining the proper charge for cross-border services rendered by a parent (or other controlled affiliate) to other members of a multinational group of companies, a taxpayer must weigh a number of factors including the value-added by the service, whether the service provider is engaged in providing similar services to third parties in connection with its principle business activities and whether the costs involved in providing the services are "shared" costs of the corporate group. In addition, where the same service is provided to affiliate conducting business in various countries, the taxpayer must consider whether the charge for the services is determined in a sufficiently uniform fashion to satisfy the multiple competent authorities that may ultimately review the service charges.

In the case of services rendered by a related foreign parent company to a Canadian subsidiary, will Revenue Canada permit the Canadian service recipient a deduction for the amount of a reasonable mark-up over the parent's actual cost of providing the intercompany service charges? In answering the posed question, assume that the parent company (service provider) is not rending comparable services to third parties, it applies a uniform mark-up on costs for services rendered to all group members, and that the service is not a principle business activity of the provider.

In a case where the service provider is a Canadian-based company, will Revenue Canada require the Canadian company to add a reasonable mark-up over the cost of providing services to related foreign subsidiaries in order to establish that the charge is a proper arm's-length charge?

Response: Revenue Canada's policy remains that no mark-ups are allowed on services rendered by a related foreign company to a Canadian subsidiary unless that foreign company is in the business of rendering such services to third parties.

Our policy does not change because other tax jurisdictions allow mark-ups. Canada has agreed in its tax treaties to allow deductions for expenses incurred outside Canada on behalf of a Canadian permanent establishment.

Revenue Canada does not require a mark-up on outbound services to related parties unless the Canadian provider is in that business.

Auditor General's Report

The Auditor General issued a report recently concerning the advance ruling process. TEI is concerned that the report may diminish the ability of taxpayers to seek advance guidance and attain certainty in respect of the tax effects of their transactions. Does Revenue Canada foresee the report affecting the ruling process in any fashion?

Response: Impact of Auditor Generals Report on Tax Rulings Process -- Revenue Canada is continuing to make the process of providing advance income tax rulings more transparent to the public. As previously announced, Revenue Canada is making all tax rulings public once taxpayer specific information is removed, thereby reducing the need to address the similar issues more than once. No changes to the advance income tax ruling process are expected as a result of the release of the Auditor General's Report. Revenue Canada would be interested in any evidence that TEI had observed of actual changes.

Part XIII Non-Resident

Tax Issues

A. Statute of Limitations: Should a payer fail to withhold Part XIII tax for amounts paid to a non-resident recipient, there is seemingly no statue of limitations for assessing the Part XIII tax against the payer for its secondary liability. That is to say, if the payer fails to withhold tax and file the proper forms, there appears to be no provision that triggers an assessment that starts the statue of limitation. In such cases, does Revenue Canada adhere to an administrative policy against issuing assessments following a certain period of time?

Response: Part XIII of the Act requires that a non-resident pay a withholding tax on passive types of income derived from within Canada. The non-resident does not have to be, and usually is not, present at anytime in Canada in order to be taxed under Part XIII of the Act. For example, an interest payment to a nonresident from investments in Canada would normally be subject to withholding tax under Part XIII of the Act.

The required withholding tax pursuant to subsection 212(1) of the Act must be withheld by the payer from the aforementioned payments paid or credited to the non-resident. The payer is required to deduct the required Part XIII withholding taxes pursuant to section 215 of the Act. These amounts are to be remitted to the Receiver General on behalf of the non-resident's tax liability. The rate of withholding is normally 25 percent of the gross amount(s) paid or credited to the non-resident. This withholding tax may be reduced by the provisions of a reciprocal tax Convention which Canada has with the non-resident's country of residence. The nonresident is not normally required to file tax returns and no further tax liability exists.

There is no statue of limitations which applies to potential assessments against a payer of amounts which are subject to Part XIII withholding tax under the Act. Revenue Canada does not adhere to any administrative policy against issuing such assessments following certain periods of time. Revenue Canada's environment is to enhance compliance and to administer the Act on a just and equitable basis. Therefore, a decision on the period of assessment for Part XIII withholding tax can only be made on a case by case basis, after considering the facts in each case.

B. Leases: In a technical interpretation dated March 28, 1991, Revenue Canada recommended that, when certain lease transactions are treated as financed purchases for the purposes of paragraph 18(1)(b) and subsection 16(1) of the Income Tax Act, the same assessing policy should be applied for all purposes of the Act, including Part XIII. Please provide an update on the status of the Department's recommendation. Has the recommendation been approved? If so, what is its effective date?

Response: The letter in question refers to a proposed amendment to IT-233R. As stated in July 28, 1995, Income Tax Technical News No. 5, the revision to IT-233R has been deferred since several cases involving issues pertinent to this bulletin are currently before the courts. For this reason, the recommendation referred to in the question has not yet been acted on.

As soon as a decision is reached by the courts, it is expected that we will be in a position to complete our review of this bulletin.

C. Discrepancy Notices: Some members report that their responses to Non-Resident Tax Discrepancy Notices have not forestalled the issuance of Notices of Assessments even though the response was submitted within the 30 days stated on the Discrepancy Notice. Moreover, collection actions have apparently commenced on such assessments immediately. Please comment on the controls the Department has established to ensure that responses to Discrepancy Notices are reviewed and evaluated before Notices of Assessment are issued. Does the Department routinely contact the taxpayer submitting a response on the Discrepancy Notice prior to issuing a Notice of Assessment?

Response: Discrepancy Notices are automatically issued by the Non-Resident System (NRES) after the posting of the NR4 forms. Even though we are requesting a reply within a 30-day time frame, the Non-Resident System will not issue an automatic assessment before 60 days from the issuance of the Discrepancy Notice. Also, the NRES provides a Stall facility to inhibit NR4 difference enforcement action in order to avoid the unwarranted assessment of an NR4 debit difference. This Stall facility must be coded by a non-resident officer.

Collection enforcement starts 30 days after the Notice of Assessment has been raised. After this time frame, the NRES issues a first Collection letter requesting the payment. The NRES does follow-up and if the balance is still outstanding after 30 days, a second Collection Letter will be issued if the balance is less than $500 or the account will be sent to Revenue Collection of the respective Tax Services Office.

In order to avoid unwarranted assessment and any similar problem in the future, we have asked management at the International Tax Services Office to ensure that non-resident officers use the Stall facility as soon as a reply to a Discrepancy Notice is received. This will inhibit automatic NR4 difference assessments generated by NRES until the reply is reviewed by an officer.

Normally, non-resident officers contact the taxpayer submitting a response if the reply does not provide adequate explanation on the discrepancy.

Harmonization and

Provincial Issues

A. Provincial Allocation

Formula: Simplification

Proposal

The formula for allocating income and capital tax for taxpayers conducting business through more than one permanent establishment is uniform among the provinces and territories. (The formula will also be used for allocation of Harmonized Sales Tax (HST).) The allocation computation, however, is audited separately by each jurisdiction. In some cases, adjustments proposed by certain jurisdictions (i.e., Ontario, Quebec, and Alberta) are accepted automatically by some, but not necessarily all, other jurisdictions. This process of individual audits and separate determinations by the provinces of a uniform rule for allocation of income and capital frequently results in delays in the issuance of reassessments to taxpayers by the provinces. More important, the separate audits can result in double taxation where other provinces fail to make (or accept) corresponding adjustments for any reason (e.g., the year of adjustment is statute-barred in other provinces by the time an audit and appeal in another is concluded). Finally, legal challenges to the separate provincial adjustments to the allocation computation must be pursued in provincial rather than federal courts.

We believe that the process for audits, appeals, and legal challenges to the proper allocation of taxes among the provinces should be modified because the allocation is pursuant to an ostensibly uniform formula agreed upon by all the provinces. Specifically, we recommend that Revenue Canada assume the responsibility for interpreting the application of the allocation formula and verifying taxpayers' allocation computations on audit. In addition, Federal Courts should be given jurisdiction to resolve taxpayer challenges to a reallocation. We believe that our proposal should be advanced as part of the simplification and rationalization agenda of the Canada Revenue Commission. If our proposal is adopted, the process for resolving disputes about the proper allocation of provincial taxes will be substantially simplified, thereby mitigating double taxation and permitting scarce taxpayer and provincial government resources to be more efficiently redeployed. We invite the Department's comments on this and other approaches to simplification or harmonization of provincial allocation.

Response: In order for Revenue Canada to assume the responsibility for interpreting the application of the allocation formula and verifying taxpayers' allocations on audit, the agreement of the non-agreeing provinces would be required. In discussions with the provinces, they indicated that a unilateral type of approach to settle allocation disputes was not acceptable. In Revenue Canada's view, the Memorandum of Understanding for the Avoidance of Double Taxation with Alberta Treasury and Ontario Finance together with the resolution procedures that have been put in place, should satisfactorily address the issue.

B. Administrative Issues

(1) Allocation Committee. We understand that, sometime late in 1995, Revenue Canada became a participating member on a provincial allocation committee together with representatives from Ontario, Quebec, and Alberta. We invite the Department's comments on the committee's objectives as well as guidance about the manner in which taxpayers may bring issues to the committee's attention. For example, has the committee considered addressing the issue whether audit changes affecting the taxpayer's allocation computations should be eliminated unless the recomputed allocation is accepted by all jurisdictions?

Response: In May of 1995, Revenue Canada entered into a Memorandum of Understanding for the Avoidance of Double Taxation with Alberta Treasury and Ontario Finance. The purpose of the MOU is to create procedures and guidelines to resolve disputes between the parties with respect to the allocation of taxable income between provinces that could lead to double taxation of a taxpayer and to establish a process to identify future potential disputes. Procedures and guidelines, in this regard, have been adopted by the parties to the MOU.

A party to the MOU that proposes to adjust a taxpayer's provincial allocation of taxable income or taxable capital must provide the affected parties with the information that gave rise to the adjustment in order to permit a review of the proposal. Proposed adjustments are not normally processed until the review process is completed. Most, if not all, allocation issues will be considered by using this procedure.

Negotiations for a similar MOU are in progress with Revenue Quebec and an MOU is expected to be finalized in the near future.

(2) Central Paymaster Rules. In its 1993 Budget, Ontario announced Central Paymaster Rules that are to be employed for provincial allocation purposes. Draft regulations to implement the legislation have also been developed. Will Revenue Canada amend its allocation regulations in order to incorporate and parallel the Ontario changes? If Revenue Canada's regulations are not to be amended, how will taxpayers be assured that the allocation rules will be implemented and administered uniformly by the different taxing jurisdictions?

Response: Revenue Canada understands that the regulation is intended to act as a deterrent and will only be applied if a corporation uses a central paymaster arrangement to unduly reduce Ontario taxes. The Department of Finance is aware of the issue. In the meantime, Revenue Canada plans to monitor the situation and deal with any cases of double taxation on a case-by-case basis.

C. Provincial Allocations:

Netting of Interest

Charges

Where the taxpayer's provincial allocation is revised on audit, and assuming that the proper correlative adjustments are made in all other jurisdictions, the taxpayer will owe additional tax in some jurisdictions and be entitled to refunds in others. In addition, the taxpayer will be assessed interest on tax underpayments and be entitled to receive interest on overpayments. In total, the amount of tax and interest will likely entirely offset. The interest on the refund amounts, however, is taxable whereas interest charges on income taxes is not deductible. As an administrative concession, will Revenue Canada permit taxpayers to net the interest payable and refundable from all jurisdictions and only treat the net amount as either taxable (in the case of net refund interest) or nondeductible (in the case of net arrears interest)?

Response: Where a taxpayer's provincial allocation is revised on audit, resulting in an assessment of additional taxes in one provincial jurisdiction offset by a reduction in taxes in another, Revenue Canada will, as an administrative concession, allow the taxpayer to net the interest payable against the interest refundable.

Audit of SR & ED Claims

The manner in which Revenue Canada's auditors are applying the "13 September 1994" cut-off and the 18-month period for claims of qualified SR & ED expenditures continues to puzzle TEI members. When the 1994 (and 1995) budget legislation limiting the period for claiming SR&ED expenditures was introduced, Revenue Canada officials assured taxpayers that auditors would be flexible and fair when reviewing affirmative claims for qualified expenditures omitted from previously filed tax returns. The experience of our member, however, suggests that SR&ED claims are being examined with an unusual degree of stringency, and that only adjustments decreasing the amount of qualified expenditures have been made.

For example, assume a taxpayer incurred qualified expenditures for scientists' salaries for clearly qualified projects for which claims were properly and timely filed. Assume further that expenditures for scientist A's salary were associated with, and reported in connection with, a timely claim for project 1, scientist B's salary was reported in connection with a timely claim for project 2, and salary expense for scientist C, who worked on both projects, was inadvertently omitted from the calculation of the claim for both projects 1 and 2. Finally, assume that A actually worked on project 2, while B actually worked on project 1. Would the taxpayer be permitted to correct its SR&ED claim for project 1 and 2 in order to claim the proper amount of salary expenditure for scientist A, B, or C on audit? Reports suggest that salary expenditures for all three scientists will be disallowed by auditors because taxpayers are not being permitted to correct errors in, and omissions from, their claims.

Where it is clear that expenditures (I) qualify for the SR&ED credit and (ii) relate to a previously identified project for which a timely filed claim was made -- but for which the amounts were erroneously omitted (or misreported) on the taxpayer's claim -- there is seemingly no good policy reason for denying the taxpayer's corrected claim, Hence, please comment on the instructions that have been issued to auditors in respect of audits of SR&ED claims. Are auditors precluded from accepting affirmative claims or adjustments to claims beyond the 18-month claim period, even to correct clerical errors related to misreporting of clearly qualified expenditures related to a claim for a previously - and properly - identified SR & ED project? We believe Revenue Canada can - and should - be more balanced in its approach to audits of SR&ED claims without opening the door to abuses. A one-way, "trap door" approach to audits of SR&ED expenditures will not enhance the perception of fair and equitable treatment of taxpayers.

Response: Taxpayers claiming the Scientific Research and Experimental Development (SR&ED) tax incentives should file a Form T661 and Form T2038 providing all the prescribed information required, within the time period provided for in paragraph (e) of the definition of "qualified expenditure" in subsection 127(9) of the Income Tax Act (the "Act").

Revenue Canada's policy with respect to reclassification of SR&ED expenditures per subsection 127(11.4) of the Act is stated in Application Policy SR&ED 96-01 dated January 12, 1996.

Taxpayer requested adjustments to SR&ED expenditures: Revenue Canada will allow misclassified expenditures between eligible and ineligible projects, if the expenditures were identified before the filing deadline and it is reasonable to conclude that the misclassification is due to an oversight.

The criteria for determining whether or not a misclassification resulted from an oversight should include the following:

* the misclassified expenditure unquestionably relates to the particular eligible project;

* evidence of normal care being exercised in the preparation of the SR&ED claim;

* indications of retroactive tax planning whereby it is evident that the taxpayer is seeking to revise the basis on which the SR&ED expenditures are claimed. For example, where the claimant revises the basis on which the expenditures were allocated between projects on initial filing of the claim and wishes to revise the basis on which the costs were allocated with a view to offsetting part of the expenditures disallowed due to ineligible project(s);

* the claimant's knowledge of SR&ED related tax matters, as demonstrated by the types of expenditures claimed in previous years; and

* the claimant's previous dealings with the Department.

Any omissions of SR&ED expenditures that are identified after the filing deadline will not be allowed even if the projects have been identified on time and are eligible.

Subsection 15(2): Loan to Shareholders

The decision in The Queen v. Silden, 93 DTC 5362 (FCA), interpreting subsection 15(2) surprised many and resulted in proposed legislation to revise section 15. Taxpayers have expressed concerns to the Department of Finance about the scope of relief set forth in proposed subsection 15(2.3). In particular, the relief provision may not be adequate because of the addition of the phrase "bona fide arrangements were made for repayment of the debt or loan within a reasonable time" to that section. Financial institutions make substantial loans, including credit cards, personal lines of credit, business lines of credit, and other forms of revolving credit, that do not require the borrower to repay the entire amount by a fixed date. In addition, a number of individuals, either themselves or through a connected person (such as a parent or a child), have made investments in companies related to financial institutions. As a result, these individuals may inadvertently and inappropriately be subject to tax under subsection 15(2) unless the relief exception of proposed subsection 15(2.3) applies.

Taxpayers have requested that the Department of Finance delete the quoted phrase. The Department of Finance has demurred making the requested change because Finance believes that Revenue Canada interprets the minimum payment amount required on credit cards and other revolving lines of credit as sufficient to meet the statute's test for "repayment" and, more generally, that subsection 15(2) does not apply in the "shareholder loan" circumstances described above. Please confirm whether the Department of Finance is correct in its understanding of Revenue Canada's interpretation of both the existing and proposed sections.

Response: Generally, Revenue Canada is in agreement with the Department of Finance's understanding of its interpretation relating to bona fide arrangements for repayment, for the purpose of subsection 15(2.3) of the Act, in the manner outlined above. However, it is always a question of fact as to whether a bona fide arrangement is made, at the time a loan was granted, for repayment of the indebtedness within a reasonable period of time.

In considering the reasonableness of the terms of repayment attached to a loan made in the ordinary course of the creditor's business, a major consideration is the terms and conditions attached to similar loans offered to the public at large. When a loan is made to a shareholder in the ordinary course of the creditor's business with the same terms and conditions as offered to the public at large, the terms of repayment will normally be considered reasonable for the purpose of proposed subsection 15(2.3) of the Act. In particular, the minimum payments required under the terms of most commercial revolving credit sources will be considered to meet the requirement that bona fide arrangements be made for repayment of the debt or loan with a reasonable time for the purposes of proposed subsection 15(2.3) of the Act.

However, with respect to a loan which is excluded from a shareholder's income by reason of proposed subsection 15(2.4) or (2.5) of the Act, Revenue Canada expects that the specific terms of repayment for the full amount of the indebtedness will be set out at the time the loan is made. As a result, a demand loan or a revolving credit source will not ordinarily be accepted as a reasonable term of payment for the purposes of 15(2.4)(f) or 15(2.5)(d) of the Act.

Mortgage Interest Subsidy

Question XI of [the 1995] liaison meeting agenda, posed [a series of questions related to mortgage interest subsidies and several court cases, including the Hoefele decision.] The Department subsequently sought leave to appeal the Hoefele, et al., decisions to the Supreme Court. In light of the Supreme Court's denial of leave to appeal, will Revenue Canada advise [whether its response in 1996 differs from 1995 and, if so,] how employers should report mortgage interest subsidies?

Response: Revenue Canada's position is that if a taxpayer's situation is substantially and materially the same as that found in Hoefele, no taxable benefit is required to be reported. The case of "Siwik" was discussed, but Revenue Canada is appealing this case and if the facts are similar to those in this case, a benefit must be reported.

Revenue Canada was requested to provide guidance as to the characteristics that are necessary to fit within the Hoefele rule. In this regard, a benefit under paragraph 6(1)(a) will be assessed unless all of the following conditions are met:

* the subsidy is limited to only that portion of the mortgage charges which relates to (a) the increase in interest charges on the costlier home in the new location up to the maximum allowed by a valid market price differential and (b) any increased interest charges stemming from increased mortgage interest rates for the remaining term of the previous mortgage (as established in Splane). The market price differential must be predicated on the difference in market values between similar homes in the two locations.

* no amount of mortgage principal is reimbursed or subsidized.

* there is no change in the employee's equity in the residence (dollar equity in new residence is the same as that which was held in the old residence)

If the employee receives a mortgage because of or as a consequence of employment, then an assessment under subsection 80.4(l) and subsection 6(9) may still be applicable.

Change of Control: Loss Company

Assume that A contributes property with a fair value at the time of contribution significantly in excess of its adjusted cost base to B Company, a loss corporation, in exchange for shares in B company pursuant to section 85. Prior to three years' elapsing, C acquires control of B Company in an independent, unrelated transaction and B Company elects under paragraph 111(4)(e) to revalue all of its properties (including the property originally contributed by A) to fair value. Assume further that any gain arising to B Company on the deemed disposition of the contributed asset would be offset by B's loss. In such a case, although B Company continues to own the property, will the paragraph 111(4)(e) election be considered a disposition for purposes of applying subsection 69(11) to A?

Response: Revenue Canada's answer is "Yes." Simply put, this means that Revenue Canada takes the view that a deemed disposition is equivalent to a disposition. Therefore, the type of circumstance described in the question could cause subsection 69(11) to apply to upset the original rollover. Revenue Canada additionally pointed out that it was not necessary for the subsequent disposition (or deemed disposition) to be part of the series of transactions that includes the original rollover for subsection 69(11) to apply. In summary, in the particular fact situation given, it is the Department's view that subsection 69(11) would apply if the tax benefit purpose test in the subsection is met.

Decontamination Costs

We invite Revenue Canada's views concerning the deductibility of land decontamination costs under the following three situations:

1. A company acquires contaminated land that will be used in its business operations. For book purposes, an estimate of the decontamination costs is added to the cost of the land, together with an equivalent reserve on the other side of the balance sheet. In the following taxation year, clean-up costs are incurred and the payment is charged against the reserve. The income statement of the financial statements is not charged for the clean-up costs incurred.

2. Same situation as in 1 except that additional contamination occurs as a result of the taxpayer's ordinary business operations and, hence, additional clean-up costs are incurred during the 15 years following acquisition of the land. The additional costs are treated as expenses and charged against current operations in the income statement.

3. Same as 2 except the additional clean-up costs are added to the cost of the land for book purposes.

Response: In general, if the deduction is made in the ordinary course of business, it is deductible. In question 1, the decontamination costs are on account of capital, because the costs would presumably be reflected in a lower purchase acquisition cost. In questions 2 and 3, the additional decontamination costs are probably deductible.

Replacement Property

Proposed amendments to paragraph 13(4.1)(a) of the Act in the June 20, 1996, Notice of Ways and Means Motion will add the condition that in order for a particular depreciable property to qualify as a replacement property it must be "reasonable to conclude that the property was acquired by the taxpayer to replace the former property." Will the Department consider a particular depreciable property qualified replacement property where the original intention for the acquisition was that the property be for expansion purposes but that, as a result of unforeseen circumstances, it is used a replacement property?

Consider the following example. A corporate taxpayer receives approval from its board of directors to expand its packaging operations, which currently consists of one packaging machine, by acquiring a second packaging machine. The new machine is under construction at the taxpayer's business by the equipment supplier when the existing packaging machine is partially destroyed by fire. Title and ownership of the second machine passes to the taxpayer shortly after insurance proceeds for the destroyed first machine are received but subsequent to the end of the taxpayer's taxation year in which the recaptured capital cost allowance on the disposition of the first machine was reported in income. Will the Department confirm that, when the second machine is acquired, it qualifies as a "replacement property" with respect to the first machine even though the second machine was originally ordered and intended for expansion of the business?

Response: Proposed amendments to paragraph 13(4.1)(a) of the Income Tax Act will add the condition that in order for a particular depreciable property to qualify as a replacement property, it must be 'reasonable to conclude that the property was acquired by the taxpayer to replace the former property." The question was asked whether equipment which was ordered for expansion purposes could qualify as replacement property where the original equipment is destroyed prior to the second machine being received. Revenue Canada's view is that the second machine would not qualify as a replacement property since the property was acquired for expansion purposes and not to replace the equipment which was destroyed. Accordingly, it may be prudent for taxpayers to document their intention where property is being acquired as replacement property.

Subsection 91(4)

Please confirm that under subsection 91(4) of the Act, where an amount has been included in income in year 1 under subsection 91(1), a deduction may be taken in year 1 in respect of accrued foreign tax related to year 1 that is paid in year 2.

Response: To the extent the amount is paid by the time of filing the corporate income tax return for year one, Revenue Canada will allow the deduction in year one, otherwise it will be deductible in the year paid (provided the foreign accrual tax is paid within five years of the year in which the FAPI income to which it relates was incurred).

Large Corporation Tax Hedged Debt

Section 3860 of the Canadian Institute of Chartered Accountants (CICA) Handbook summarizes the financial statement presentation and disclosure for financial instruments, including corporate debt denominated in a foreign currency that is hedged or otherwise combined with a foreign currency swap or forward contract. The net result of the guidance in the Handbook (subsection 3860.34, paragraph 3860.41(a), subsection 3860.09, and paragraphs 3860.05(a), (b), and (c)) is that, where there is no legal right of offset, foreign denominated debt must, for fiscal years beginning on or after January 1, 1996, be translated at the foreign exchange rate in effect at the date of the balance sheet. In addition the "net principal value" of the currency swap or forward contract must be reflected as an asset or liability (referred to below as a "hedge asset" or "hedge liability") at the presentation date. Prior to 1996, the net principal value of the foreign currency swap or forward contract was netted against (or combined with) the debt.

Example 1 illustrates the financial statement presentation under the new rules.

Example 1

On January 1, 1996, Canco issues a US$100 M denominated debt when the exchange rate is Us$1 = CAN$1.30. The debt matures on January 1, 1999. On the same date, Canco enters a currency swap transaction ("the hedge") under which it agrees to exchange its US$100 M liability for a CAN$130 M liability to be reexchanged on the maturity date.

1. On December 31, 1996, the exchange rate is Us$1 = CAN$1.40.
   The financial statement presentation at that date is:

    Asset                                Liability
    Hedge asset        $10 M             Debt              $140 M

2. On December 31, 1997, the exchange rate US$1 = CAN$1.20.
   The financial statement presentation at that date is:

    Asset                               Liability
                                        Debt               $120 M
                                        Hedge liability     $10 M

3. On December 31, 1998, the exchange rate is Us$1 = CAN $1.30.
   The financial statement presentation at that date is:

    Asset                               Liability
                                        Debt            $130 M

Under the rules in effect until 1995, the financial statements would have reflected a net debt of $130 M every year. What is Revenue Canada's position on the treatment of the amounts presented as a hedge asset and a hedge liability in the example above for the purpose of computing taxable capital under section 181.2 of the Act?

Response: Revenue Canada's position is that the full amount of the debt disclosed in accordance with Section 3860 must be considered to be the amount of the debt, with no offset for a related hedge asset. In a situation where the disclosed debt amount is less than its principal amount, but the reduction is matched with a hedge liability, Revenue Canada expressed the view that the hedge liability might be a reserve includible in taxable capital. Thus, in the example given, the amount of taxable capital in the example provided would be $140M in 1996, $130M in 1997, and $130M in 1998.

It was noted that the Handbook recommendations in Section 3860 may be subject to change, and that changes to Section 1650 in the outstanding Exposure Draft might also affect disclosure and the tax result.

Large Corporation Debt: Unrealized Foreign Exchange Gain or Loss

New paragraphs 181.2(3)(b.1) and (k) introduced in the June 20, 1996, Notice of Ways and Means Motion, apply to 1995 and subsequent taxation years. Will Revenue Canada confirm that its assessment policy for the years ending prior to 1995 will be to exclude unrealized foreign exchange gains and losses from the calculation of capital?

Response: It is Revenue Canada's position that prior to 1995, unrealized foreign exchange gains had to be included in the capital base while losses were not deductible. However, upon reassessment, the Department includes unrealized foreign exchange gains net of losses in computing the capital of a corporation for a particular year prior to 1995.

Large Corporation Tax: Outstanding Cheques

At the May 1995 TEI Annual Conference in Hull, Revenue Canada commented that outstanding cheques must be included in determining the amount of a corporation's bank overdraft for purposes of computing the tax on large corporations under Part I.3 of the Act. In October 1995, the court in, The Grocery People Ltd. v. The Minister of National Revenue (1996 ETC 90), commented as follows: I'm prepared on the basis that no liability exists between the bank and its customer, the taxpayer in this case, until such time as the bank accepts the cheque for payment and allows the account to go into overdraft -- the mere presentation of a cheque by the taxpayer to its creditor does not create a bank indebtedness and using the plain meaning of the words "loans and advances," there is no loan or advance until the bank says there is and the bank has not done so in this case. Will the court's comment affect Revenue Canada's position that outstanding cheques be included as a bank overdraft liability for purposes of computing Part I.3 tax?

Response: Revenue Canada's position is that the court's decision is of no precedential value. Overdraft balances arising from outstanding cheques will continue to be included in taxable capital as a bank loan.

Overseas Credit

In a technical interpretation dated April 18, 1995 (document number 9500997), Revenue Canada stated that an employer will not be considered to be carrying on business in another country with respect to one of the specified types of activities set forth in clause 122.3(1)(b)(i)(B) of the Act unless the activity is the principal activity of the employer. Please clarify the basis for Revenue Canada's position since the Act does not specify that the required activity be a principal activity.

Response: Revenue Canada advised that this technical interpretation relates to a unique circumstance. The reference to the "principal activity of the employer" is specific to this set of facts only; no new precedent or change in policy is intended.

Permanent Establishment

Consider the following situation. Canadian Company A has permanent establishments in Ontario and Quebec. The Company has a maintenance contract to service Customer 1 at locations in province X and province Y (other than Ontario and Quebec) and Company A maintains between 5 and 10 employees at each customer location. The employees report to work daily at the customer's premises. There is a Company site supervisor at each location who reports to a Company Project Manager in Ontario.

Customer 1 provides the office area, spare parts, supplies, assembles, test equipment, calibration services, and janitorial services. The test equipment at each Customer location is worth in excess of $100,000. The Customer's equipment being serviced at each location is worth in excess of $1,000,000. Company A's employees do not have the authority to contract on behalf of the Company at these locations. A computer and fax machine, owned by Company, are kept at each Customer location for use by Company's employees. Of the Company's aggregate gross revenues, 2.5 percent and 1.5 percent are derived from the Customer contract for work performed in Provinces X and Y respectively. Does Company A have a permanent establishment in Province X and Province Y if the Company's 5 to 10 employees are on site at each location for 1 month? 6 months? Or more than 12 months?

Response: It would be a question of fact whether Company A would have a "permanent establishment" in province X or province Y within the preamble of subsection 400(2) of the Income Tax Regulations (the "Regulations") or whether the company would be deemed to have a permanent establishment with the provisions of paragraphs (b) to (e) of that subsection.

It is Revenue Canada's view that Company A is clearly carrying on business in both province X and province Y. Furthermore, the activities carried on by those employees are such that it would be essential that Company A have a contractual or implied right to the "use of space" at each customer location in order for it to carry out those activities. One must then consider whether Company A carries on those activities and has the "use of space" for a sufficient length of time so as to be considered as having a fixed place of business' in the provinces concerned. While carrying on activities at a customer's location for less than one month might not be considered as being a sufficient period of time, a longer period, in Revenue Canada's view, would be indicative of Company A having a fixed place of business. Company A may also be considered to have a fixed place of business where the facts indicate that it entered into a series of short term visits to those locations under the same contract.

Even if it is determined that Company A does not have a fixed place of business in province X or Y, the company may still be deemed to have a permanent establishment in either province if it satisfies any of the criteria listed in subsection 400(2) of the Regulations. In this regard, and as stated in paragraph 6 of IT-177R2, it is Revenue Canada's position that Company A need not own the machinery or equipment that it uses at each customer location in order to be deemed to have a permanent establishment in a province by virtue of the "substantial equipment" test in paragraph 400(2)(e).

Employer CPP & EI

Employer provides a short-term disability program for the benefit of its employees. In order to facilitate the timely delivery of cheques to the employee, the Employer will occasionally pay the short-term disability benefit directly to the employee and then seek reimbursement from Employer's Insurer. Under such circumstances --

1. Is Employer required to pay the employer portion of Canadian Pension Plan and Unemployment Insurance (CPP & EI) on these benefits?

2. If the Insurer provides the T4 slip for the earnings to the employee, is the Employer required to pay the employer portion of CPP & EI?

Responses: 1. The employer is not required to pay the employee's portion of CPP or EI on these benefits since the amounts paid are not to be included in the calculation of insurable earnings or pensionable earnings as they are not paid as a result of the contract of employment as such but by virtue of an insurance policy contract.

2. The employer is not required to pay even where the insurer provides a T4 slip to the employee. In fact no deductions for EI or CPP should be made by anyone and the insurer should be reporting using T-4A not a T-4.

Transfer of Pay By Employer to RRSP

Where an employer makes a lumpsum payment, such as a bonus or payment in lieu of notice, please confirm that the employer is not required to withhold income tax on amounts that are transferred directly to a registered retirement savings plan (RRSP).

Response: Bonuses or payments in lieu of notice do not qualify as retiring allowances and are not eligible for transfer to an RRSP under ITA 60(j.l).

However, where an employee asks the employer to transfer regular salary, bonuses, or payments in lieu of notice to an RRSP the following steps must be taken. The employer will make the applicable CPP/QPP and EI deductions on the gross amount of the payment. Once these deductions are made, the net amount of the payment can be transferred to the employee's RRSR The employer can then reduce the employee's remuneration by the amount transferred before calculating the tax to be withheld on future payments.

Offshore Finance Companies

Comments made by representatives of Revenue Canada at the 1995 Canadian Tax Foundation Conference implied that a Canadian corporation that is controlled by non-residents, will be subject to a "GAAR attack" should the corporation establish an offshore finance company. In this respect, we would appreciate your commenting on the following questions:

1. What is the technical support for this position?

2. Are there any circumstances under which a non-resident controlled Canadian corporation will be permitted to establish an offshore finance company?

Response: At the 1995 Canadian Tax Foundation Conference, representatives of Revenue Canada were specifically referring to a series of transactions that, in the Department's view, was intended to circumvent the application of subsection 15(2). Where a Canadian subsidiary of a non-resident corporation incorporates a company in a tax haven country for the purpose of having its equity investment lent to the non-resident parent or subsidiaries of that parent located in other countries, the Department is challenging the transactions as a misuse of subsection 15(8) and an abuse of the Act read as a whole. Subsection 15(8) is not intended as a means to avoid the application of subsection 15(2) where the source of the funds is from a Canadian company. Using the GAAR, Revenue Canada will recharacterize the transactions determining tax results as if the loan had been made directly. In the cases that Revenue is challenging, the 'injected" tax haven company normally has no other source of funds other than the funds from the Canadian company, there are no employees, no offices, etc., in the tax haven, and the question of residency and agency are also considered.

Revenue Canada will not normally challenge equity investments by a non-resident controlled Canadian corporation in bona fide offshore financing corporations unless it is able to establish that the funds invested, or a substituted amount, have been lent back to that Canadian company or another related company in Canada or to a partnership of which the Canadian company or a related Canadian company is a partner. Whether the offshore finance company is bona fide is a question of fact. Normally that determination will be governed by factors such as the sources of the funds, the volume and size of the transactions and the number of employees.

Paragraph 85(1)(e.2) Issues

Consider the following situation. Company A owns 75 percent of the issued and outstanding share capital of Company B and 80 percent of the issued and outstanding share capital of Company C. Company C owns the remaining 25 percent of the share capital of Company B. Company B owns the remaining 20 percent of the issued and outstanding share capital of Company C.

Company A transfers to Company B a capital property in exchange for Company B common shares. The fair market value of the capital property of $1 million significantly exceeds the adjusted cost base of $100. Company A and B intend that the property be transferred at fair value. A valuation of Company B is undertaken to determine the proper number of shares to issue to A in the exchange. Moreover, the asset transfer agreement between A and B includes a provision requiring an adjustment of the number of shares to be issued to A should the fair value of the contributed property vary significantly (up or down) from the appraised value determined by A and B. Company A and B jointly elect to have the Provisions of subsection 85(1) of the Act apply to the transfer. The agreed amount of the joint election is the adjusted cost base of the property at the time of the transfer.

Please comment on the following questions concerning the transaction:

1. Does Revenue Canada consider Company B to be a "wholly-owned corporation" of Company A so that paragraph 85(1)(e.2) will not apply?

2. If Company B is not considered a "wholly-owned corporation" within the meaning of subsection 85(1.3) and Revenue Canada subsequently determines that Company B did not issue enough common shares on the initial transfer of the property, would Revenue Canada consider that a benefit has not been conferred on a related person (as contemplated in paragraph 85(l)(e.2)) solely on the basis of the companies' intentions in undertaking the transaction?

3. If the answer to question 2 is no, could the taxable transaction be remedied by Company B issuing additional common shares to A pursuant to the price adjustment clause in the asset transfer agreement?

Response: Since 85(l)(e.2) is a relieving provision, it must be interpreted narrowly. In the example, B would not be considered a "wholly owned corporation."

It is a question of fact, but if the parties can demonstrate that it was their intention to transfer the asset at fair market value and had taken appropriate steps to do so, there would not be a benefit. The existence of a price adjustment clause would not be sufficient. It is not likely that a benefit will be considered to have been conferred if reasonable efforts have been made to issue an appropriate number of shares.

There must be an amended election in order to remedy the situation. Therefore, the requirements for filing an amended election must be satisfied. In accordance with paragraph 18 of IC 76-19R3, the correction will be accepted, subject to filing of an amended election.

Administrative Issues on Amalgamation

Short-form vertical amalgamations are frequently employed by Canadian corporations as a means of eliminating unneeded wholly-owned subsidiary corporations. With the introduction of the Single Business Registration Number, TEI members are being advised that one result of the amalgamation is that the amalgamated corporation must obtain a new Business Number even where it retains the name and structure of the parent corporation. On the other hand, a new Business Number is not required where the subsidiary is wound up into the parent corporation even though the tax effect is the same in nearly all respects.

When the GST registration number was not linked to the corporate tax account number, it was possible to obtain permission to retain the parent corporation's GST number following the amalgamation. Under the new system, however, a new GST number, payroll account number(s), and corporate tax account number are assigned as a result of the requirement of obtaining a new Business Number. In the case of the GST number, many forms (invoices especially) must be replaced, computers reprogrammed, or both every time an amalgamation occurs. Can the Department explain why a new Business Number is required following a short-form vertical amalgamation when all of the account balances and tax attributes of the parent corporation will transfer to the amalgamated corporation?

Response: The Business Number is a numbering system that is based on the concept of one legal entity, one number. Before the introduction of BN, where a corporation amalgamated it was assigned a new corporate income tax number as a new legal entity. This principle has been applied to all of the programs participating in BN. This means that amalgamated corporations may no longer retain the GST number of one of the predecessor corporations.

Since the amalgamated corporation is considered a separate legal entity from its predecessors (except in prescribed circumstances), it must register for a new BN.

Revenue Canada is aware of the financial burden this policy imposes on corporations, and is currently reviewing the application of the policy to vertical and horizontal amalgamations. As any changes in this policy are far-reaching and affect all BN stakeholders, the Department is consulting with the provincial incorporating ministries and Industry Canada.

Conclusion

The meeting adjourned.