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Electronic commerce and Canada's tax administration.

On September 17, 1998, Tax Executives Institute submitted the following comments regarding Canada's tax administration of electronic commerce. The comments took the form of a letter from TEI President Lester D. Ezrati to Canadian Minister of National Revenue Herb Dhaliwal. The comments were prepared under the joint aegis of the Institute's Canadian Commodity Tax Committee, chaired by Munir A. Suleman of The Bank of Nova Scotia, and the Electronic Commerce Task Force of TEI's Canadian Income Tax Committee, chaired by Vincent Alicandri of Xerox Canada Ltd. Contributing substantially to the development of TEI's comments were Carol Felepchuk of IBM Canada Ltd., Glen S. Pye of Northern Telecom Ltd., and Alan Wheable of Canada Trust.

In April 1998, the Minister's Advisory Committee on Electronic Commerce released its report on Electronic Commerce and Canada's Tax Administration. The report examines the growth of electronic commerce in commercial and financial activities, summarizes tax policy and administrative issues that arise from electronic commerce, and makes a number of recommendations to address those issues. The report's recommendations, together with the private-sector comments they generate, will help shape the policy positions that the Government expects to announce in advance of the Organisation for Economic Cooperation and Development ministerial conference in October 1998. Tax Executives Institute is pleased to participate in the consultative process. We especially appreciate the opportunity to meet with representatives from Revenue Canada on August 18, in Toronto in order to discuss TEI's preliminary views. On behalf of TEI, I am pleased to submit the following comments confirming and clarifying the views expressed at that meeting.

Background

Tax Executives Institute is the principal association of corporate tax executives in North America. The Institute's 5,000 professionals manage the tax affairs of the leading 2,800 companies in Canada and the United States and must contend daily with the planning and compliance aspects of Canada's business tax laws. Canadians make up 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 sum, TEI's membership includes representatives from most major industries including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial services; telecommunications; and natural resources (including timber and integrated oil companies). The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

TEI is concerned with issues of tax policy and administration and is dedicated to working with government agencies in Ottawa (and Washington), as well as in the provinces (and the states), to reduce the costs and burdens of tax compliance and administration to our common benefit. We are convinced that the administration of the tax laws in accordance with the highest standards of professional competence and integrity, as well as an atmosphere of mutual trust and confidence between business and government, will promote the efficient and equitable operation of the tax system. In furtherance of this principle, TEI supports efforts to improve the tax laws and their administration at all levels of government. We are pleased to respond to the invitation to comment on the recommendations set forth in the report to the Minister on Electronic Commerce and Canada's Tax Administration.

Introduction

Prefatorily, the report notes that a dramatic, global transformation of economic and commercial activity is underway, enabled by the convergence of computer and communications technology. That transformation, coupled with other emerging trends and collectively referred to under the rubric of electronic- or e-commerce, poses challenges to traditional principles of Canadian tax policy and administration. Indeed, the voice, data, and other digital telecommunications networks that comprise the Internet (as well as linking private networks) and enable e-commerce are global phenomena transcending jurisdictional boundaries. Hence, the tax policy and administrative issues arising from commercial exploitation of that worldwide network cannot be addressed unilaterally by any national or subnational jurisdiction. Governmental and private-sector cooperation are necessary in order to address the issues comprehensively without stifling the impetus and opportunity for growth in international trade that electronic commerce presents.

Hence, TEI is pleased that the Advisory Committee examined and summarized the studies of e-commerce conducted by other national governments and international organizations. More important, the report aptly summarizes the emerging international consensus on the tax treatment of electronic commerce:

The national governments

and international organizations

that have studied electronic

commerce issues acknowledge

that the global

range and implications of

electronic commerce require

broad international cooperation

and consensus on taxation

policies and principles.

The novel context of these

activities does not demand

novel tax treatment; rather,

it is generally agreed that

existing taxation concepts

and principles should be applied

and, if necessary,

adapted before they are replaced

by new concepts and

principles. It is also agreed

that tax systems should ensure

or achieve tax neutrality

and equity between traditional

and electronic commerce

activities, should be

simple to administer and

comply with, and should

avoid the imposition of multiple

taxation. Finally, it is

agreed that new or additional

taxes should not impede

the development of electronic

commerce.

TEI commends this summary to Revenue Canada and encourages the Government to adhere to these principles. We also encourage Revenue Canada to continue to work with business representatives and governmental organizations such as the OECD (as well as Canada's principal trading partners) to achieve international consensus on policies governing electronic commerce that are consistent with this general approach.

Before addressing the recommendations in the report, we have three overarching comments: the first is a caveat; the second, an offer; the third, an explanation of the form our comments follow. As a general caveat, there are a number of instances in the comments that follow where TEI expresses agreement with the recommendations set forth in the Advisory Committee's report. Our agreement with the report's recommendation, however, must be understood in the context in which it is made: a very high-level overview. Indeed, as detailed proposals are developed to address concrete issues, the opportunity for, and scope of possible, disagreement may increase. Moreover, in instances where we express agreement with a recommendation, TEI may already have expressed substantial disagreement with either current tax policy or the administration of a particular provision of the Income or Excise Tax Acts. Hence, our agreement with a recommendation in the report should not be viewed as con ceding prior objections or withdrawing previous comments. For example, TEI agrees in principle that the transfer-pricing rules applicable to the cross-border sale and delivery of goods through wholly digital means should be consistent with the rules for cross-border sale and delivery of tangible goods. Express agreement with the principle of consistent application of the transfer-pricing rules regardless of the form of the transaction, however, should not be construed as either tacit or implied agreement with the many technical uncertainties and administrative burdens to which taxpayers are subject as a result of the 1997 revision of Canada's transfer-pricing rules.

Next, in a number of places, the report recommends that Revenue Canada develop technical interpretation bulletins in order to provide guidance to taxpayers and Revenue Canada's auditors. TEI agrees that future guidance will be necessary and we shall be pleased to participate in the development of such interpretation bulletins.

Finally, as a matter of form, TEI's comments follow the order of presentation in the Advisory Committee's report. In other words, our letter restates the General Recommendations, comments upon them, then restates the enumerated Detailed Recommendations set forth in Chapter 6 of the report and, in turn, comments upon those specific recommendations. For the sake of convenience, the enumerated recommendations in the Advisory Committee's report are set forth in italics.

6.1 General Recommendations

6.1.1 Develop a Strategy for Electronic Commerce

The report recommends that the Government reaffirm its commitment to the goal of Canada becoming a world leader in electronic commerce and acknowledge the central role of the private sector in accomplishing this objective. TEI agrees.

The report also recommends that the Federal Government cooperate with the provincial and territorial governments to assist Canadian business in its pursuit of electronic commerce activities by providing a Canadian tax and commercial law environment that would be viewed as a model of cooperation throughout the world. TEI encourages the Government to adopt this recommendation because uniform laws, consistently applied, will permit electronic commerce to flourish in Canada.

6.1.2 Develop and Adopt Guiding Principles on Electronic Commerce

In order to provide greater confidence and security regarding the development of electronic commerce, the report recommends that the Government's policies governing electronic commerce be guided by the following principles:

* The management, promotion, and development of electronic commerce should be led by the private sector.

* Governments should create a favourable policy and legal environment for the growth of electronic commerce, and should recognize that speed in resolving issues and removing impediments to the development of electronic commerce is vital. The primary drivers of policy should be choice, individual empowerment, privacy, and confidentiality.

* Electronic and non-electronic transactions that are functionally equivalent should be taxed the same regardless of their form.

* Governments should avoid placing undue regulation and restrictions on, and should avoid undue taxation of, electronic commerce.

* Governments should recognize the unique qualities of the Internet and be model users of the Internet and electronic commerce.

* Electronic commerce over the Internet should be facilitated on a global basis with nationally and internationally coordinated and compatible government policies.

TEI agrees with the foregoing principles. In seeking to tax functionally equivalent transactions in the same fashion regardless of form, governments must also consider (i) ease of administration of the rules, (ii) burdens imposed on taxpayers, and (iii) the costs of compliance and enforcement. In balancing these occasionally conflicting demands, governments should consider expanding the number of functionally equivalent "non-electronic transactions" that are subject to a "zero rating." In other words, rather than seeking to achieve tax equivalence solely through the imposition of a tax on the electronic version of transactions, governments should consider eliminating the tax burden on non-electronic versions of transactions.

6.1.3 to 6.1.6 Other General Recommendations

TEI agrees with the remaining general recommendations of the Committee that --

* The Government of Canada should ensure that requirements for electronic commerce figure prominently in its policies and programs, giving special attention to the capacity and interoperability of networks, access for the business community on a nationwide basis, and the needs of rural and remote areas.

* Government, industry, and other key players in the private sector must work together to build trust in the electronic marketplace.

* All levels of Canadian government should work to develop the necessary legal framework for electronic commerce to ensure effective intellectual property protection in the digital environment; clear rules on jurisdiction, applicable law, and enforcement and on liability and contractual obligations involved in electronic commerce; and a fair, equitable, and transparent tax regime for electronic commerce.

* Canada should continue to play a leadership role within international for a such as the OECD, APEC, and the G7 nations in order to ensure the development of a clear set of international rules for transnational electronic commerce.

In respect of the first listed recommendation, TEI recommends that the Government adopt a broader role in prompting Canadian institutions to "produce the skills and expertise needed to use information technology effectively." The job market for employees possessing "the skills and expertise needed to use the information technology effectively" is highly competitive and the people possessing such skills are extremely mobile. In addition, the intellectual property that companies accumulate in developing or using information technology is also extremely mobile. Moreover, as other nations seek to close the gap on information-technology skills, they may offer companies or individuals direct or indirect tax incentives to relocate. Hence, the Government should study the personal and corporate tax structures in Canada to assess whether the overall tax structure is competitive with other countries, and, as important, monitor that structure to ensure that it continues to promote the development and retention of information-technology companies and skilled personnel in Canada.

6.3 Income Tax Issues

6.3.1 Reporting Issues

6.3.1.1 Intentional Non-Reporting

Recommendation 1. Revenue Canada should extend its active campaign to locate non-filers to include electronic commerce activities. It should consider programs to identify businesses conducting Internet commerce, such as: (a) accessing the domain registry and identifying domain names for Canadian businesses; (b) establishing a system that identifies Canadians doing business over the Internet; (c) developing compliance programs based on the population and results of previous audits of businesses with a presence on the Web (risk management); and (d) developing Webcrawler software to trace non-filers to complement existing programs.

Recommendation 2. Revenue Canada should review current penalties for non-compliance under the Income Tax Act to ensure that they are a sufficient deterrent to non-reporting opportunities that may be created through electronic commerce. These penalties should apply equally to promoters and intermediaries who knowingly participate in non-compliance schemes.

In general, TEI agrees with these recommendations. In respect of recommendation 2, however, TEI does not support the introduction of new or increased penalties. Regrettably, the Government has demonstrated an increasing propensity to engraft ad hoc penalty provisions on new legislative proposals. While targeted penalties are a proper tool to deter tax evasion and encourage timely compliance and payment of tax liabilities, we believe that penalty provisions are being used increasingly by the Government as a source of revenue. For example, the GST wash-transaction rules, the new transfer-pricing regime, and the foreign-affiliate reporting rules are laden with traps that can engender penalties disproportionate to the taxpayer's culpability or tax liability. Moreover, the differential treatment of interest on tax assessments (higher rates imposed on assessments than is paid on refunds; nondeductiblity of interest paid on assessments and taxability of interest received on refunds; etc.) represents, in effect, an added "penalty" for noncompliance. As a result, TEI recommends that before any new penalties are proposed, the overall penalty and interest structure in the Income, Excise, and Customs Tax Acts be carefully reviewed and restructured.

A more specific concern arising from recommendation 2 is that the terms "promoter" and "intermediary" are extremely broad and vague. Unless the definitions are sufficiently narrow, a service provider (e.g., a financial institution, Internet service provider, or telecommunications company) might be considered an "intermediary" through which a non-compliant taxpayer conducts its non-compliance "scheme." Under current rules, where a customer of a service provider engages in nefarious conduct, the service provider is not strictly liable for the service user's noncompliance; neither is the service provider liable for penalties absent a showing that the service provider knowingly "aids and abets" the conduct of the user or financially participates in the scheme. For example, a telephone service provider is not generally liable for the acts or statements made by telephone users nor is the service provider liable for penalties simply because it "knows" that some bad actors use the telephone to en gage in fraudulent activity. Likewise, penalties should not be imposed on "electronic commerce" service providers simply because a service "user" engages in a non-compliance scheme. In other words, a review of the rules affecting electronic commerce activities should not justify an expansion of a service provider's liability for the acts of others. Although the recommendation's use of the term "knowingly participate" seems to address the issue, we believe the matter requires clarification.

Recommendation 3. Financial institutions should be required to report to Revenue Canada cash or equivalent transactions over a prescribed limit.

TEI supports measures to ensure that Revenue Canada receives relevant information to detect and deter non-compliance. To that end, the Office of the Superintendent of Financial Institutions (OSFI) has promulgated detailed rules relating to money laundering (Guidelines for Deterring and Detecting Money Laundering, issued August, 1996). Unless those rules are inadequate, we do not believe a legislative proposal to add an independent information reporting requirement will improve tax compliance. TEI recommends that the Government pursue alternative means to ensure that existing information is properly shared within the Government. If there are barriers impeding the exchange of information between different departments and agencies, we recommend that those barriers be examined and removed before redundant and costly compliance and reporting burdens are imposed on Canadian companies.

Recommendation 4. Revenue Canada should study, with other interested tax authorities, the benefits of an international organization designed to assist countries (most likely those that are signatories of tax treaties) in the exchange of information in order to minimize tax evasion.

TEI questions the need to establish an umbrella international organization to pursue exchanges of information. Much or all of the information likely to be sought should already be available under the exchange-of-information provisions in current tax treaties. Moreover, in order to effect the information-exchange regime contemplated by the recommendation, additional reporting requirements would likely be imposed on Canadian taxpayers. Largefile corporations -- those subject to continuing audits and from which such information is generally available on audit -- would certainly bear an added reporting burden without producing a foreseeable benefit to the Government. TEI believes that all levels of governments in Canada should seek ways to reduce the compliance burden rather than increase it. Imposing added reporting burdens on Canadian companies will not resolve -- or even mitigate -- the fundamental challenge that foreign privacy laws create for Canadian tax authorities.

On the other hand, TEI would support a more targeted recommendation to expand exchange-of-information provisions. For example, should the Government successfully prosecute a non-compliant taxpayer in Canada, Revenue Canada should be able to supply the relevant information voluntarily to the revenue authorities of the country (or countries) on the other side of the transaction(s) in order to permit such authorities to investigate whether their domestic laws have been broken. Other governments should, likewise, be encouraged to adopt mirror provisions enabling Revenue Canada to obtain such information concerning noncompliance.

6.3.1.2 Unintentional Non-Reporting

Recommendation 5. Revenue Canada should develop a communications strategy to educate taxpayers on the tax implications of doing business on the Internet or over private networks.

Recommendation 6. Revenue Canada should use its Web site to advertise to residents and non-residents of Canada the implications of doing business in Canada on the Internet and e-mail information to interested parties. Revenue Canada also should link its Web site to Industry Canada's Web site, where information on the implications of doing business in Canada on the Internet already exists.

Recommendation 7. Revenue Canada should approach appropriate organizations (e.g., the CICA/AICPA and similar organizations) to arrange electronic links to the Revenue Canada Web site to provide users with information on the tax implications of doing business on the Internet.

TEI agrees with these recommendations. Indeed, TEI will modify its public Web page to include appropriate links. Moreover, Revenue Canada should implement an electronic "communications strategy" for informing and educating taxpayers through electronic media for all transactions and taxes, irrespective of whether the transactions or taxes are related to the Internet or electronic commerce.

In addition, the recommendations should not be limited to informing taxpayers of their tax compliance obligations. Revenue Canada auditors must also be informed and trained on the tax implications of doing business on the Internet or over private networks.

6.3.2 Interjurisdictional Issues

6.3.2.1 Residence of a Corporation

Recommendation 8. Revenue Canada should consider, in cooperation with tax treaty partners, ways to shorten the competent authority process in order to eliminate, or minimize, the impact of double taxation on taxpayers.

Recommendation 9. Revenue Canada should consult with the Department of Finance as to methods for ameliorating the potential adverse effects of the competent authority process for Canadian SMEs entering international trade.

Recommendation 10. Revenue Canada should issue an interpretation bulletin addressing the significance of modern telecommunications technology on the concept of residence (including central mind and management).

TEI agrees with these recommendations. Indeed, in respect of recommendation 8, Revenue Canada should do more than just "consider, in cooperation with treaty partners, ways...to shorten the competent authority process...." We recommend that Revenue Canada identify the sources of delay in the competent authority process and, where adoption of unilateral procedural changes or resource reallocations within Revenue Canada will expedite the process, implement such changes as rapidly as possible. Where the sources of delay require modification of bilateral processes, we recommend that Revenue Canada prioritize discussions with treaty partners based on the volume of cross-border transactions.

In respect of recommendation 10, TEI is willing to assist Revenue Canada in the development of a draft interpretation bulletin addressing the effect of modern telecommunications technology on the concept of residence (including central mind and management).

6.3.2.2 Carrying on Business In Canada

Recommendation 11. Revenue Canada should issue an interpretation bulletin to clarify its position on the circumstances in which electronic commerce activities may constitute carrying on business in Canada.

Recommendation 12. Revenue Canada should examine the appropriateness of the definition of "carrying on business" under the Income Tax Act in an electronic commerce environment, including addressing the roles of various electronic commerce elements (the file server's location, the transaction manager's role, etc.), and, if necessary, convey its concerns to the Department of Finance.

TEI agrees generally with these recommendations. In our view, the existence of a file server in a country should not, standing alone, be considered as "carrying on business" in that country. Moreover, the existence of a file-server (or Web page or Web site) should not, without other facts and circumstances, constitute a permanent establishment. If a file server (Web page, etc.) were deemed to be a permanent establishment, a taxpayer could simply and easily move the file server to avoid adverse tax consequences. Indeed, a taxpayer might exploit a bright-line test to its advantage. Threshold issues such as what constitutes a "permanent establishment" or "carrying on a trade or business" underline the necessity and importance of worldwide consistency on the tax legislation governing electronic commerce.

6.3.2.3 Carrying on Business Outside Canada

Recommendation 13. Revenue Canada should issue an interpretation bulletin addressing the significance of modern telecommunications technology on the concepts of residence (including central mind and management) and carrying on business outside Canada.

TEI agrees with this recommendation.

6.3.2.4 Permanent Establishment Under Tax Treaties

Recommendation 14 Revenue Canada should continue to be active in the workings of the OECD to address electronic transactions. Priority should be given to considering and applying existing concepts to electronic commerce before choosing to pursue alternative or new concepts.

Recommendation 15. Revenue Canada and the Department of Finance should liaise on an urgent basis as soon as the OECD recommendations with respect to changes to the model tax treaty are known. Revenue Canada and the Department of Finance need to address the taxation of electronic commerce, including prompt renegotiations of or negotiating protocols to existing treaties.

Recommendation 16. Revenue Canada should convey to the Department of Finance and other interested departments the Committee's view that government departments should consult with regard to the implications and ramifications to Canada of any change in the existing balance between source and residence taxation.

Recommendation 17. Revenue Canada should continue to participate in the OECD discussions on the status of file servers (e.g., as virtual offices, or virtual employees) and transaction managers for permanent establishment purposes. Revenue Canada should consult with other interested government departments on the ramifications to Canada's tax base.

TEI agrees with these recommendations generally, but in respect of "permanent establishment" issues raised by the presence of, or activity conducted through, file servers, we refer you to our comments on recommendation 12.

6.3.2.5 International Allocations

Recommendation 18. Revenue Canada should convey to the Department of Finance the Committee's view that Finance should monitor income-sourcing rules for foreign tax credit purposes to ensure that they continue to provide appropriate relief as electronic commerce grows.

TEI agrees with this recommendation.

6.3.2.6 Interprovincial Allocations

Recommendation 19. Revenue Canada should convey to the Department of Finance the Committee's view that Finance and the provinces should review the regulations to the Income Tax Act and the provincial allocation formula to ensure that electronic commerce transactions are fairly allocated. Consideration could be given to allocating taxable income between provinces based on more than two criteria (e.g., salaries, revenues, and assets deployed within the province). Such an approach would affect more than electronic commerce transactions and must be considered in the context of neutrality.

Recommendation 20. Revenue Canada, the Department of Finance, and provinces with their own allocation systems should establish a policy related to file servers and whether these file servers would constitute a permanent establishment for the purposes of the Income Tax Act and the allocation of provincial taxable income.

TEI believes that the interprovincial allocation rules should be consistent with the rules in Canada's treaties with its most important trading partners. As a result, TEI sees no justification for establishing a special rule deeming the presence of a file server as constituting a permanent establishment for provincial tax determinations. In addition, the presence (or absence) of a file server should be irrelevant in the allocation of provincial taxable income.

In addition, TEI strongly recommends against the implication in the recommendation that the interprovincial allocation rules be revised to include an allocation factor based on the tax value or location of tangible or intangible assets. For valid business reasons, there is a wide variety of methods through which companies hold and manage the assets used in their trades or businesses (e.g., ownership vs. leasehold vs. outsourcing of the services requiring the use of tangible assets). In order to address equitably the wide variety of facts and circumstances, allocation rules governing such assets would likely be complex. Indeed, the introduction of an added allocation factor will spawn additional anti-avoidance rules to prevent taxpayers from using the allocation rules to shift or reduce their overall provincial tax liabilities. Moreover, while the reporting costs for businesses will substantially increase should the recommendation be pursued (the cost of initially identifying the location and gross or net tax value of all business assets upon the adoption of such a proposal, along with the attendant cost of changing information systems, would be especially onerous), TEI believes that neither the accuracy nor the neutrality of the allocation formula will be materially improved.

Finally, during previous liaison meetings with the Department of Finance and Revenue Canada, TEI recommended that the process for resolving interprovincial allocation issues be improved. In particular, the process for resolving disputes among the provinces will be substantially enhanced by permitting the affected taxpayer (or its representatives) to participate directly in the consultative process and by publishing summaries of the decisions of the committee charged with resolving such allocation issues.

6.3.2.7 Transfer Pricing

Recommendation 21. Revenue Canada should examine the application of the transfer-pricing rules to electronic commerce transactions (in consultation with Canadian business). Guidelines developed as a result of its study should be published.

Through informal consultations, TEI members have expressed concerns about the transfer- pricing rules introduced last year. Some of those concerns were addressed by revisions to the draft legislation. TEI has deferred formal comment pending release of the draft Information Circular on transfer pricing. Notwithstanding TEI's reservations about the revised transfer-pricing rules, the rules governing electronic commerce transactions should be consistent with these rules to the maximum extent possible. Indeed, we believe it is unlikely that new transfer-pricing rules will be necessary for electronic-commerce transactions. Hence, we commend to the Government the report's guiding principle that" . . . existing taxation concepts and principles should be applied and, if necessary, adapted before they are replaced by new concepts and principles. It is also agreed that tax systems should ensure or achieve tax neutrality and equity between traditional and electronic commerce activities."

Recommendation 22. Revenue Canada should convey to the Department of Finance the Committee's view that Finance should pursue stronger exchange-of-information and audit agreements and mutual collection agreements with Canada's trading partners.

In response to recommendation 4, TEI expressed concern about the increased compliance costs and administrative burdens that business taxpayers would face should the scope of exchange-of-information provisions be expanded. Our reservations would be confirmed if expanded exchange-of-information provisions were to result in expanded "audit" and "mutual collection" agreements. TEI member companies are generally subject to continuing audit by Revenue Canada and to frequent audits by provincial authorities and, hence, are among the most compliant of all taxpayers. As a result, we suggest that Revenue Canada would glean little additional information from expanded audit, mutual collection, and exchange-of-information agreements. On the other side, foreign tax authorities may obtain information from Canadian business taxpayers pursuant to exchange-of-information provisions in existing tax treaties. In the absence of more information concerning the scope of the "exchange-of-information and audit agreements and mutual collection agreements" to which business taxpayers would be subject, TEI does not support this recommendation.

Recommendation 23. Revenue Canada should convey to the Department of Finance the Committee's view that Finance should consider the potential difficulties for taxpayers arising from the inconsistent use and acceptance of the comparable profits method between Canada and the United States and the need to resolve this inconsistency.

TEI agrees with this recommendation. Indeed, we believe that the comparable profits method should be recognized as being equivalent to the transactional net margin method, thereby permitting taxpayers to avail themselves of the method for all transactions between related parties.

6.3.2.8 Tax Havens

Recommendation 24. Revenue Canada should continue to participate in the ongoing OECD work on unfair tax competition.

Recommendation 25. Revenue Canada should continue to identify tax-avoidance transactions that erode the Canadian tax base and, jointly with the Department of Finance, should take actions to counteract such transactions.

Subject to the comments that follow, TEI agrees in general with the recommendation that Revenue Canada should continue to participate in the ongoing OECD work on unfair tax competition and also continue discussions with Finance regarding the identification of transactions that erode the Canadian tax base.

First, the scope of activities prohibited by the general anti-avoidance rule (GAAR) has always been nebulous, creating confusion and uncertainty for taxpayers. Because of the chilling effect on legitimate business transactions engendered by that uncertainty, TEI supports additional guidance from Revenue Canada and the Department of Finance on the scope of GAAR.

Second, in respect of "unfair tax competition," the Government should be mindful that defining "unfair tax competition" is not an easy task. For example, if Country X offers a taxpayer-favourable provision (or tax structure) in order to induce taxpayer behavior that advances an important social policy goal within Country X (e.g., reduced unemployment or increased charitable contributions), Country Y may view the tax provision (or overall tax structure) as constituting "unfair tax competition." Country X, however, may rightfully disagree, and taxpayers availing themselves of such tax provisions should not be tarred with the brush of "tax evaders."

Finally, tax havens per se would not exist but for the disparities in tax burdens (tax base and tax rates) among the different nations of the world. To say that a tax-haven country is engaging in "unfair tax competition" is to presume that there is an "ideal" level of tax to which all income should be subject and, furthermore, that any country that taxes less than the ideal amount is engaging in "unfair" competition with countries that tax at a higher rate. Moreover, the flip side of the pejorative label "unfair tax competition" is the equally pejorative "excessive tax burden." The more important issue is whether the Canadian tax structure overall is competitive in the global economy. Hence, the Government must take care that it not overtax Canadian business enterprises relative to other jurisdictions with comparable economies.

6.3.2.9 Tax-Haven Financial Institutions

Recommendation 26. Revenue Canada should be proactive, in cooperation with international tax administration organizations and Canadian financial institutions, in reviewing the legitimacy of transactions involving tax-haven financial institutions.

TEI believes that the legitimacy of transactions involving tax-haven financial institutions is a matter that is better addressed by OSFI.

6.3.3 Characterization and Withholding Tax Issues

6.3.3.1 Characterization of the Transaction: Withholding Taxes

Recommendation 27. Revenue Canada and the Department of Finance should examine the appropriateness of revising part XIII of the Income Tax Act so as not to require withholdings on payments for the use for electronic subscriptions, and similar transactions, where those transactions are treated as the equivalent to the purchase of tangible goods.

TEI agrees with this recommendation because it will help maintain tax neutrality in respect of similar transactions. In addition, where the withholding exemption is attributable to treaty protection, we recommend that such payments not be subject to a reporting requirement.

6.3.3.2 Characterization of Income: Active versus Specified investment Business and the Small Business Deduction

Recommendation 28. Revenue Canada should clarify the status of receipts from the exploitation of intellectual property in view of the definitions of specified investment business income" and "active business income."

TEI agrees with this recommendation. In addition, the definition of "active business income" for purposes of the manufacturing and processing tax credit should be reviewed to ensure that such income continues to be treated as active business income.

Recommendation 29. Revenue Canada should convey to the Department of Finance the Committee's view that Finance should consider revising the definitions of "specified investment income" and "active business income," and review the propriety of a people-based (five-employee) test in the light of electronic commerce and the need to keep Canadian SMEs competitive.

TEI agrees with the thrust of this recommendation. Indeed, the thorny issues arising from the use of independent contractors and part-time employees in the context of the identified statutory phrases is not confined to electronic commerce. Hence, we recommend that the recommendation be expanded. Revenue Canada should convey to the Department of Finance the view that the Department of Finance "should review the propriety of [retaining] a people-based (five-employee) test" in all circumstances.

6.3.3.3 Provision of Services: Withholding Taxes

Recommendation 30. Revenue Canada should issue an interpretation bulletin clarifying the circumstances in which withholdings are applicable under regulation 105 of the Income Tax Act as a result of nonresidents providing services through electronic means into Canada.

Regulation 105 sets forth a process through which non-residents may apply for and obtain a waiver of withholding taxes on payments by Canadian-based payers. In respect of residents of Canada's treaty partners, TEI submits that the Regulation 105 process is fundamentally flawed and should be totally revised. Indeed, consideration should be given to eliminating the withholding and reporting requirements entirely in respect of services performed in Canada by residents of treaty partners.

In the event that Revenue Canada and the Department of Finance conclude that current withholding rules should be retained and adapted to services rendered "in connection with" or "pursuant to" electronic commerce transactions, a fundamental threshold requirement for imposing a withholding obligation should be that services are physically performed within Canada. TEI is willing to meet with Revenue Canada and the Department of Finance to discuss alternatives to the existing regulation (and waiver process) generally as well as its application to electronic commerce specifically.

6.3.4 Disintermediation

6.3.4.1 Change of Tax Base

Recommendation 31. Revenue Canada and the Department of Finance should, on an ongoing basis, evaluate the effect of electronic commerce on the tax revenue base.

TEI agrees with this recommendation. Where, following such evaluation, Revenue Canada and the Department of Finance determine that legislative or administrative changes are warranted, such changes should be entirely prospective. In addition, because the proposed changes will likely require substantial modifications to business processes or information systems, taxpayers should be afforded ample transition periods.

Recommendation 32. Revenue Canada and the Department of Finance should seek to achieve more spontaneous exchange of information with foreign tax authorities in order to ensure that Canadian residents properly report their foreign source income.

To the extent this recommendation is predicated on government-to-government exchanges, TEI agrees in principle. To the extent this recommendation is premised on the imposition of additional reporting requirements on Canadian corporations, we urge the Government to reject it.

6.3.5 Foreign Activities of Canadian Residents

6.3.5.1 Foreign Active Business Income

Recommendation 33. Revenue Canada should clarify, through interpretation bulletins or otherwise, the definition of active business, and should clarify to what extent income arising from activities that may be done by computers (e.g., taking orders, executing sales, and invoicing) is considered active business income regardless of the absence of human involvement in the process.

TEI believes that the scope and degree of human activity should not be the primary test for determining whether a business is considered "active." Increasingly, automated processes can produce tangible products as well as intangible information or services. For example, the use of robotics has substantially diminished the number of workers required on assembly lines. In many cases, dangerous and hazardous jobs have been eliminated from the assembly lines entirely. In the context of services, fax-on-demand services and wholly automated telephone voice-response units can supply important information and services without human intervention except for periodic reprogramming of the content. If the current five-person test is retained and applied to electronic commerce, then, at a minimum Revenue Canada and the Department of Finance must be vigilant in monitoring cases for anomalous facts and circumstances and correcting the legislation where such cases produce unintended tax consequences.

6.3.5.2 Active Versus investment Income

Recommendation 34. Revenue Canada should convey to the Department of Finance the Committee's view that, where appropriate, Finance should consider the possibility of excluding from the definition of passive income receipts from the exploitation of intellectual property.

TEI agrees with this recommendation. Indeed, the Department of Finance should do more than just "consider the possibility of excluding" receipts from the exploitation of intellectual property from the definition of passive income. We recommend that the Department of Finance treat such income as active income.

6.3.5.3 Five-Employee Exemption

Recommendation 35. Revenue Canada should convey to the Department of Finance the Committee's view that Finance should consider an appropriate phase-in of the existing five full-time employee rule for startup situations to allow for a period of time (e.g., 24 months) before the five-employee test applies. This phase-in provision will need a related amendment to defer royalties from being investment income during this time period.

Recommendation 36. Revenue Canada should convey to the Department of Finance the Committee's view that Finance should consider the appropriateness of the current people-based exemption form investment income categorization in an electronic commerce environment.

If the five-employee test is retained, TEI agrees with recommendation 35 that the requirement be phased in for start-up situations.

In respect of recommendation 36, please refer to our comments on recommendation 33 where we question whether the five-person test should be retained at all, let alone applied to electronic commerce.

6.4 Consumption Tax Issues

6.4.1 Shift in Collection Points

Recommendation 37. Even if faced with loss of GST revenues due to the failure of consumers to self-assess GST on their purchases over the Internet, the Government of Canada should avoid the temptation to react by imposing additional onerous collection and registration requirements on electronic commerce vendors.

TEI agrees with this recommendation. Indeed, the growth of electronic commerce and the consumption tax issues that arise from it should be used by the Department of Finance to advance negotiations with non-harmonized provinces on a joint federal-provincial national consumption tax. Electronic commerce likely poses greater challenges to a provincial retail sales tax base than to value-added tax regimes such as the GST or HST. In addition, a fully harmonized national consumption tax will -

* reduce the need for consumer education on electronic commerce tax issues because of simplified compliance;

* ease the administrative burden for tax collectors;

* facilitate collection of sales tax on sales by non-residents; and provide an improved tax structure to help build a global leadership position for Canada in electronic commerce.

These and other benefits may encourage the non-harmonized provinces to reconsider their resistance to harmonization. On a number of occasions TEI has made submissions to the provincial finance ministers and the Department of Finance voicing support for harmonization.(1) We encourage the Department of Finance to redouble its efforts to persuade the non-harmonizing provinces to join the HST system. In its efforts to harmonize business tax systems, we urge the Government to adhere to key principles that are fundamental to sound tax policy and administration. Among the core principles are revenue neutrality, simplification of the tax system, minimizing the burden of compliance, promoting common or uniform administration and tax regimes without material exceptions, fostering extensive taxpayer consultations, providing timely, prospective legislation and form release, and ensuring adequate transitional rules.

Recommendation 38. Revenue Canada should consider the feasibility of developing a communication strategy to make small businesses and consumers aware of their obligations to self-assess GST in situations where it will not be collected by the vendor or Customs.

TEI agrees with this recommendation. Indeed, rather than simply "consider the feasibility" of developing such a communication strategy, we encourage Revenue Canada to develop and implement such a strategy.

Recommendation 39. Revenue Canada should develop a communication strategy for non-resident vendors to encourage them to register to collect and remit GST. A description of the benefits of registration should be included, along with a commitment from Revenue Canada that registration, in itself, will not be considered to result in Canadian income tax obligations for the vendor.

TEI recommends that any strategy to communicate with non-residents regarding the benefits of GST registration be focused on medium and larger-sized businesses. The costs of a comprehensive communications strategy focused on small non-resident businesses, which are unlikely to be persuaded to the benefits of registration for GST in any event, will substantially exceed the benefits of the program.

Moreover, in order to encourage registration for GST by non-resident businesses, the potential adverse implications of registration must be identified and either eliminated or clarified. For example, a registered non-resident receiving royalties from Canada may be required to pay GST on the royalties whereas an unregistered non-resident would not. We recommend that such anomalies be identified and corrected.

In addition, Revenue Canada should clarify that GST registration, in and of itself, does not result in the non-resident's having a permanent establishment. Alternatively, a mechanism should be established that will enable unregistered non-residents that do not have a permanent establishment in Canada to obtain refunds of GST.

Recommendation 40. Revenue Canada should consider the feasibility of developing a new consumer self-assessment process that would make it easier to collect small amounts of tax from a large base of taxpayers.

In order to ensure a level playing field, we recommend that any new consumer self-assessment strategy be developed in consultation among the GST, Customs and Excise, and provincial sales tax authorities in the non-harmonized provinces.

Recommendation 41. Revenue Canada, in consultation with the Department of Finance, should explore the role transaction intermediaries could play in the collection and remittance of tax.

In the discussion underlying the recommendation, a scenario is suggested in which transaction intermediaries would be responsible for the sales tax obligations currently imposed on either the supplier or purchaser of goods or services. As the report notes, this approach "would represent a fundamental shift in the legal liabilities for tax collection and remittance." Indeed, the report understates the radical nature in the shift in tax collection responsibilities. Consider this analogy. Telecommunications companies currently enable catalog mail-order transactions, yet we doubt seriously whether telecommunications companies would be willing, or should even be asked, to accept the sales tax liability associated with telephone orders. Similarly, "transaction intermediaries" should not be required to undertake such obligations in electronic commerce.

From a practical perspective, it is unlikely the recommendation can feasibly be implemented by an intermediary because it would have to know the location of the supplier and the purchaser, the place of supply, whether tax had already been collected by the supplier, the tax status of the purchaser, and the nature of the product or service sold. Hence, while exploring the roles that transaction intermediaries play in electronic commerce may assist in identifying and remedying the sources of disintermediation of the tax system that may arise from electronic commerce, Revenue Canada and the Department of Finance should exercise restraint in proposing or imposing new compliance and reporting requirements on intermediaries. In addition to the practical administrative issues raised, the proposal depends in large part on the development and maintenance of sophisticated software that will permit the intermediary to track the relevant sales information as well as collect and remit the tax. Such software is yet to be developed. Finally, before such a proposal is seriously considered, the attendant legal liability of the intermediary must be thoroughly examined and addressed. What, for example, is the intermediary's legal liability for erroneous withholding or an erroneous failure to withhold? What are the remedies of the purchaser and supplier?

In the event that financial intermediaries are to assume a role in the collection and remittance of taxes for electronic commerce, they should be compensated for their services at market-based prices. Adapting the "collection fee" model employed in provincial sales tax systems would not only constitute a huge hidden tax on the financial intermediaries, but would also limit the resources applied to develop such services.

Recommendation 42. Revenue Canada, in cooperation with the Department of Finance, should consult with industry to evaluate the burden that would be imposed on industry by the mutual enforcement of consumption tax collection obligations between jurisdictions before entering into such international agreements.

TEI agrees with this recommendation. Moreover, TEI is willing to meet with representatives of Revenue Canada and the Department of Finance to discuss such issues.

6.4.2 Shift in GST Results

Recommendation 43. Revenue Canada should convey to the Department of Finance the Committee's view that supplies of intangibles that are provided electronically to non-residents should be zero-rated when no or limited use will be made of these products in Canada.

TEI agrees with this recommendation.

Recommendation 44. Revenue Canada, in consultation with the Department of Finance, should monitor the GST place-of-supply rules, the tax-relieving rules, and the self-assessment rules to ensure that services and intangibles that are provided to Canadian residents for use in Canada continue to be part of the GST base.

Although TEI agrees with the premise that all intangibles and services provided to Canadian residents for use in Canada should likely be subject to GST, the recommendation will be very difficult to enforce in practice. Canadian residents may be able to obtain services and intangibles from non-residents via electronic means without paying GST. If GST (or other taxes such as PST and customs duties) cannot be collected from non-residents (or from the Canadian consumer), Canadian-based suppliers will be subject to a substantial competitive disadvantage. Hence, the Department of Finance may be required to pursue multilateral agreements with Canada's major trading partners to provide zero-rating for cross-border services and intangibles. In that event, the zero-rating should be extended to domestic suppliers of services and intangibles to ensure that a level playing field between Canadian and foreign suppliers.

Recommendation 45. Revenue Canada, in consultation with the Department of Finance, should monitor the use of electronic commerce to ensure that the place-of-supply and self-assessment rules continue to operate in a manner such that only those services and intangibles that are consumed or used in Canada are included in the tax base.

TEI agrees with this recommendation.

6.5 Customs Duties and Tariffs

6.5.1 Accessibility and Reliability

Recommendation 46. Revenue Canada should work with importers and other interested third parties to understand and have input into standards being developed for electronic commerce, especially those standards that establish verifiable data-storage formats and certification authorities.

TEI agrees with this recommendation. In addition, TEI is willing to meet with Revenue Canada to discuss the issues and to lend assistance in the development of such standards.

6.5.2 Transformation of "Tangible Goods"

Recommendation 47. Revenue Canada should convey to the Department of Finance the Committee's view that the government should state that customs duties and tariffs will not apply to tangible goods transformed into electronic products or services and, in particular, to transactions conducted through the Internet.

TEI agrees with this recommendation because its implementation will ensure tax neutrality on equivalent "goods or services."

Recommendation 48. Revenue Canada should convey to the Department of Finance the Committee's view that Finance should zero-rate tangible goods that are equivalent to those that can be delivered electronically.

TEI agrees that tangible goods equivalent to goods those delivered electronically should be zero-rated in order to provide a level playing field and to minimize the economic distortions related to electronic commerce.

6.6 Issues Common to Income Tax, Consumption Tax, and Customs Duties and Tariffs

6.6.1 Identity and Location of the Parties to a Transaction

Recommendation 49. Revenue Canada should design and implement programs to test the compliance of businesses conducting commerce over the Internet.

In respect of businesses that supply products and services through the Internet that Revenue Canada determines are GST registrants and filers, the recommended compliance tests should be conducted in the course of GST audits of the taxpayer rather than as an independent or separate compliance check.

6.6.2 Records Maintained

Recommendation 50. Revenue Canada should convey to the Department of Finance the Committee's view that Finance should add to all treaties (through negotiation)provisions comparable to the new exchange-of-information and enforcement rules contained in the current Canada-U.S. tax treaty.

Recommendation 51. The Committee is of the view that the current and proposed record-retention provisions of the Income Tax Act and the Excise Tax Act are sufficient to deal with electronic commerce activities. Existing legislation should be reviewed to assess the impact of new technologies on the law. However, given the pace at which technology develops, amendments to existing legislation should not be worded so as to be applicable to any particular technology.

Recommendation 52. Revenue Canada should work with accounting bodies to understand and have input into auditing standards being developed by those bodies.

Recommendation 53. Revenue Canada should participate in the development of standards to establish verifiable data-storage formats and certification authorities.

Recommendation 54. Revenue Canada should convey to the Department of Justice the Committee's view that Justice should proceed quickly with, and should continue to work with provincial counterparts on, legislation governing the admissibility of electronic records as evidence.

TEI agrees with these recommendations.

6.6.3 Location of Records

Recommendation 55. Revenue Canada should promote the negotiation of international agreements regarding rights of inspection and audit for business records located in foreign jurisdictions as well as assistance in the case of suspected tax evasion.

In respect of companies operating in Canada, Revenue Canada currently has sufficient access to the relevant business records of the company and any of its controlled foreign subsidiaries. Unless a Canadian taxpayer provides adequate documentary support for its treatment of items of income, expense, credit, etc., for itself and its controlled subsidiaries, Revenue Canada can deny the taxpayer's claimed treatment of the item on the return. Hence, it is generally in the taxpayer's interest to supply the books and records supporting the treatment of an item. In respect of foreign-based records of foreign companies, Canada can generally obtain access to relevant information through the exchange-of-information provisions in the tax treaties.

In the event that Revenue Canada pursues this recommendation, foreign governments will likely request, as a quid pro quo, access to the records of Canadian-based companies. TEI does not believe that Canadian companies should be subjected to a stream of auditors from foreign jurisdictions. If foreign tax authorities require information from Canadian companies, foreign governments should, consistent with current practice, be encouraged to employ the exchange-of-information provisions of tax treaties and route the request through Revenue Canada.

A different, but related issue, arises from the increasingly frequent practice whereby Canadian companies avail themselves of a related company's information and accounting systems to prepare and maintain records. In such cases, TEI recommends that Revenue Canada consider permitting such information, if it is readily accessible on-line from a location in Canada, to be considered to be books and records maintained in Canada.

6.6.4 Encryption of Records

Recommendation 56. If decryption is not undertaken for Revenue Canada, either by the original party decrypting the documents for Revenue Canada or by providing the decryption key to Revenue Canada, then Revenue Canada may consider that records do not exist, issue assessments, and pursue judicial remedies on this basis.

We agree in principle with this recommendation. In order to ensure that decrypted information is not disclosed to a taxpayer's competitors, however, substantial and adequate safeguards must be maintained by Revenue Canada.

Recommendation 57. Revenue Canada should clarify what a business must do if it sends, receives, or stores encrypted electronic documents.

We are uncertain what this recommendation would address beyond what is already covered by recommendations 51 and 56. Nonetheless, in prescribing rules that business must follow in order to send, receive, or store data in encrypted formats, Revenue Canada must be mindful that businesses must ensure and protect the confidentiality of their critical competitive business data.

6.6.5 Digital Signatures

Recommendation 58. Confidence in the identity of an unknown trading partner is important for domestic and international electronic commerce. It depends on public confidence in certifying authorities. In the absence of any legislation or other requirements, Revenue Canada should publish the criteria it requires to accept digital signatures.

TEI agrees that Revenue Canada should participate in the development of legislation concerning the requirements for digital signatures, but given the broader implications (beyond the tax field), we do not believe Revenue Canada should be the government agency charged with primary responsibility for developing such criteria. Either the Ministry of Justice or Commerce should take the lead role in developing legislation.

6.6.6 Transaction Managers

Recommendation 59. Revenue Canada should consult with transaction managers to develop search- and-seizure practices that will minimize the disruption of the business operations of the transaction managers or business operations of other taxpayers who use the transaction managers and who are not under investigation or audit by Revenue Canada. Transaction managers should be required to provide Revenue Canada with the electronic records (or a copy of the records) of a taxpayer being audited.

Recommendation 60. Revenue Canada should consult with transaction managers on the nature and extent of records they must maintain in respect of transactions involving their clients.

TEI agrees with these recommendations.

6.6.7 Digital Cash

Recommendation 61. Revenue Canada should participate with provinces and with other interested parties and international organizations in developing standards for the issuance and use of e-cash.

TEI agrees that Revenue Canada should participate in discussions leading to the development of standards for electronic cash. As a result of Revenue Canada's limited budgetary resources as well as its general lack of expertise in this area, however, we recommend against Revenue Canada's leading such discussions.

6.7 Model-User Issues

6.7.1 Convenient, Client-Focused, Cross-Jurisdictional Services

Recommendation 62. Revenue Canada should strive to lead in interdepartmental and interjurisdictional initiatives involving the use of electronic commerce in the delivery of convenient, client-centered, single-window services for Canadians and Canadian businesses. In so doing, Revenue Canada should consider how its projects can both speed the development of Canada's electronic commerce infrastructure and enhance Canadian capability in this field.

TEI agrees with this recommendation.

6.7.2 Safety-Net Measures

Recommendation 63. Revenue Canada should articulate principles and standards of service to guide the development of safety-net provisions for electronic service delivery and electronic commerce initiatives.

TEI agrees with this recommendation. The principles and standards of service that are articulated, however, should relate solely to Revenue Canada's operations.

6.7.3 Electronic Commerce and Process Redesign

Recommendation 64. Revenue Canada must continue to redesign and re-engineer its business processes in combination with electronic commerce initiatives for program and service delivery. The result may be fundamentally new approaches to delivery in some areas.

TEI agrees with this recommendation.

6.7.4 Strategic Approach to Electronic Delivery Channels

Recommendation 65. Revenue Canada should consider developing program and service delivery design principles that promote the strategic use of electronic deliver channels, and should promote the acquisition of skills and competencies in selecting and using electronic delivery channels strategically.

Recommendation 66. Revenue Canada should consider focusing first on Internet-based channels, which have been identified as particularly promising for Revenue Canada throughout this report.

TEI agrees with these recommendations.

6.7.5 Enhancing Tax Compliance

Recommendation 67. Revenue Canada should continue to explore the strategic use of the Internet and other emerging technologies and techniques to enhance tax compliance. At the same time, Revenue Canada should maintain a current awareness of software available to ease the burden of tax compliance, particularly on small businesses.

Recommendation 68. Revenue Canada should articulate a policy on and an approach to the distribution of its own software products and the use of third-party software for the purposes of compliance burden reduction.

Recommendation 69. Revenue Canada should explore the development of standards for software that could calculate and possibly remit the tax of multiple jurisdictions as transactions occur, consistent with the discussion in section 4.3.1.

TEI agrees with these recommendations. In respect of recommendation 69, we encourage Revenue Canada to conduct this activity in coordination with other countries because consistent application will be vitally important.

6.7.6 Increasing Revenue Canada's Operating Efficiency

Recommendation 70. Revenue Canada should extend its use of electronic commerce on the Internet and its intranet, and should extend this use to routine operating and processing transactions and to routine intra-and intergovernmental exchanges.

Recommendation 71. Revenue Canada should seek to reduce its dependence on paper both in its processing and in its exchanges with clients.

Recommendation 72. Revenue Canada, in consultation with financial institutions and the Receiver General, should examine options to create dramatically higher (as opposed to merely gradual) uptakes in the use of electronic payments and receipts.

TEI agrees with these recommendations. Nonetheless, rather than impose directives compelling taxpayers to use electronic transmission of data, payments, and receipts, Revenue Canada should explore developing market-based incentives and approaches in order to induce changes in taxpayer behavior.

Conclusion

TEI's comments were prepared under the joint aegis of the Institute's Commodity Tax Committee and the Electronic Commerce Task Force of the Canadian Income Tax Committee. The chair of the Institute's Commodity Tax Committee is Munir Suleman and the chair of the Task Force is Vincent Alicandri. If you should have any questions about the submission, please do not hesitate to call Mr. Suleman at (416) 866-4698, Mr. Alicandri at (416) 733-6762, or Pierre M. Bocti, TEI's Vice President for Canadian Affairs, at (905) 206-3399.

(1) In October 1994 and again in October 1996, TEI sent letters to the various provincial ministers of finance urging them to harmonize their provincial sales tax systems with the GST. In addition, TEI encouraged the Minister of Finance to continue his efforts to persuade the provinces to harmonize their provincial sales tax systems with the GST. Notwithstanding our general support for harmonization, in a letter to Senior Assistant Deputy Minister of Tax Policy Don Drummond in respect of the April 23, 1996, GST Technical Bill, TEI objected to several provisions implementing the Harmonized Sales Tax regime in the Atlantic provinces. The requirement for tax-included pricing, for example, poses substantial and unnecessary administrative difficulties for national retailers.
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