Limiting retroactive legislation in Canada.
On December 5, 1995, a delegation from Tax Executives Institute met with representatives from the Department of Finance to discuss a number of income tax issues. At the meeting, TEI expressed concern about certain trends in the development of Canadian income tax policy. Specifically, we commented on (i) the increasing tendency to introduce major policy changes in the guise of technical amendments bills, (ii) the introduction of legislative amendments retrospectively changing the tax treatment of completed transactions, and (iii) the use of hypertechnical changes to extend taxing jurisdiction to non-residents of Canada. We were invited to express our views and elaborate on our concerns through a separate submission.
Tax Executives Institute (TEI) is an international organization of approximately 5,000 professionals who are responsible - in an executive, administrative, or managerial capacity - for the tax affairs of the corporations and the other businesses by which they are employed. TEI's members represent more than 2,800 of the leading corporations in Canada and the United States.
Canadians make up approximately 10 percent of TEI's membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our nine geographic regions. In addition, a substantial number of our U.S. members work for companies with significant Canadian operations. In sum, TEI's membership includes representatives from most major industries. The comments set forth in this submission reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.
TEI has historically been 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 in 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.
Among TEI's principal objectives are the gathering and dissemination of information on tax issues of wide concern and the development of responsible positions that reflect not only the diversity and professional training of our members but also an appreciation for the practical aspects of tax administration and business decisions. In addition, we strongly believe that tax legislation should be fully consistent with the goals of economic growth, clarity and competitiveness.
II. Introduction of
Substantive Changes in
Technical Amendment Bills
On the whole, businesses and citizens in Canada are cognizant of, and take special interest in, the government's tax policy announcements. The government generally undertakes to ensure that taxpayers are informed of policy changes sought by the government. In contrast, technical amendment bills have traditionally been used to implement limited and narrow changes in order to correct anomalies, clarify the meaning or intent of statutory provisions, and provide legislative support for assessing practices that are fair and beneficial. Such bills are not widely publicized. As a result, TEI is concerned that significant policy changes are being included in technical amendment bills, thereby eluding the public scrutiny and debate that such policy changes might deserve.
In particular, certain provisions in the draft legislation presented on April 26, 1995, go far beyond the scope of routine and non-political changes generally contained in technical tax bills. Two changes appear to overturn decisions of the courts retroactively. Specifically, the proposed amendment to paragraph 12(1)(x) of the Income Tax Act appears to be a reaction to the Federal Court of Appeal decision in The Queen v. Johnson & Johnson Inc., 94 DTC 6125. In addition, the amendment to paragraph 62(3)(f) directly overrules an unpublished decision in Randy Mann (Appellant) v. The Queen (Respondent), Tax Court of Canada. Such changes are not properly viewed as merely technical in nature. No one challenges the government's power to change the laws. We submit, however, that amending the law retroactively to override a court's reasonable interpretation of an ambiguous provision, and doing so without proper consultations about the proper scope and application of a provision engendering controversy - is both unfair and an abuse of the government's legislative power.
TEI is concerned about the trend toward introducing major policy changes through technical amendment bills and urge the government to refrain from doing so. At a minimum, the government should inform the public of the policy changes contained in technical amendment bills and ensure that proper consultations and debate over those issues is not precluded.
III. Effective Date of
Historically, legislative changes have been effective from the date of their announcement. For example, policy changes introduced in the Minister's Budget Message are generally effective as of the date of the Budget's release. For changes announced by way of Press Release, the effective date of the modified laws is generally the Press Release date. In recent years, the frequency and scope of changes to the Income Tax Act have increased substantially. One facet of the instability engendered by frequent law changes has been a greater level of taxpayer uncertainty about the effective date of the law. Moreover, the typical delay between the introduction and final passage of a proposal has increased and now extends to six to nine months. Such delays compound the difficulty of preparing a complex corporate tax return, which often requires several months, since taxpayers are uncertain whether to comply with the "old" or the "new" and modified laws for returns filed after legislation is introduced but before final assent. To avoid imposing unnecessary tax filing burdens upon taxpayers, we recommend that the government consider delaying the effective date of tax legislation to the date of Royal Assent.
IV. Retroactive Legislation
Should Be Eschewed
For a tax system to be fair and, as important, to be perceived as fair, taxpayers must be able to rely on the extant legislation and regulations at the time that business transactions or other taxable events occur. Consequently then, legislation should be generally prospective in effect. Retroactive effective dates represent an extreme remedy for a defective legislative process. Retroactive legislation should, therefore, be reserved only for extreme cases. TEI believes that the government bears a heavy burden to overcome the strong policy presumption against retroactive effective dates penalizing taxpayers. Ex post facto legislation significantly altering the tax treatment of good faith transactions will heighten public cynicism about the Canadian income tax system.
These policy concerns underlie our objection to the date of application of some of the technical amendments released on April 26, 1995, because the modified laws apply to transactions occurring before the legislation was released. We highlight three specific instances where the retroactive change seems particularly unwarranted.
A. Inducement Payments
The proposed amendment to paragraph 12(1)(x) will broaden its application to certain refunds. Although the Department has not explained the types of refunds to which the modified provision is directed (seemingly a deposit returned by a government or an income tax refund could now be taxable), the amended paragraph applies to all amounts received after 1990. TEI believes that a provision requiring an income inclusion should never be retroactive.
B. Moving Expenses
Paragraph 62(3)(f) currently provides that the definition of "moving expenses" includes, inter alia, "any taxes imposed on the transfer or registration of title to the new residence." In 1995, the Tax Court of Canada decided that the term "taxes" includes payments for Goods and Services Tax (GST). The proposed amendment to paragraph 62(3)(f) would exclude any amounts paid on account of GST. The proposal is to be applicable retroactively to taxation years after 1990. TEI recommends that the Department reconsider this retroactive proposal. We submit that the matter is not significant enough to overcome the general policy against retroactive legislation.
C. Replacement Properties
Proposed amendments to subsections 13(4), 13(4.1), 14(6), 14(7), 44(1), and 44(5) would add an intention test to the replacement property rules. Consequently, in order for a property to qualify as "replacement property," the taxpayer must demonstrate that, as of the time the replacement property was acquired, it was with the intent to replace a former property. These changes are applicable for dispositions occurring after the 1993 taxation year. As a result, the change will adversely affect taxpayers who made substantial business decisions and filed valid tax elections based on the legislation as it existed when the properties were acquired. Again, TEI does not believe there is a compelling reason to justify a retroactive effective date.
V. Extending the Taxing
Proposed amendments to subparagraph 115(1)(b)(v) set forth in the April 26, 1995, bill would expand the definition of "taxable Canadian property" to include shares of non-resident, non-Canadian corporations and interests in trusts where, at any time during the 12 months preceding a disposition of such shares or interests, more than 50 percent of the value of the assets of the corporation or trust consists of other taxable Canadian property. TEI has no comment regarding the propriety of the expanded definition. Nonetheless, we are concerned that the reach of the Income Tax Act has been extended by means of a Technical Amendment Bill rather than through a Budget or Tax Policy Act.
TEI is pleased to have the opportunity to raise our concerns about the process for developing tax policy legislation in Canada. We stand ready to discuss how we can assist the government in resolving these matters to improve tax legislation in Canada. TEI's comments were prepared under the aegis of its Canadian Income Tax Committee, whose chair is J. A. (Drew) Glennie of Shell Canada Limited. If you should have any questions about TEI's comments, please contact either Mr. Glennie at (403) 691-4900 or Vincent Alicandri, of Xerox Canada, Ltd., TEI's Vice President for Canadian Affairs, at (416) 733-6762.
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|Date:||Mar 1, 1996|
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