Proposal to establish Canadian Tax Certificates of Deposit.
On behalf of Tax Executives Institute, I am writing to highlight the problems experienced by taxpayers with the financing of tax payments and the nondeductibility of interest paid on tax deficiencies, and to propose a solution that TEI believes properly balances the legitimate interests of both government and taxpayers.
Tax Executives Institute is an international organization of approximately 4,800 professionals who are responsible - in an executive, administrative, or managerial capacity - for the tax affairs f the corporations and other businesses by which they are employed. TEI's members represent more than 2,400 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, including manufacturing, distributing, wholesaling, and retailing; real estate; transportation; financial; and resource (including timber and integrated oil companies). The comments set forth in this submission reflect the views of the Institute as a whole but more particularly those of our Canadian constituency.
Tax Certificate of
Current law generally provides for payment of interest by the federal government on overpayments of income tax. Applicable interest rates are adjusted quarterly and approximate prevailing market rates. There are, however, limitations on the payments of interest, and these limitations - coupled with the complexities and uncertainties inherent in both the tax system and the business world - effectively compel taxpayers, through no fault on their part, to make large interest-free deposits with the government.
Where interest accrues on overpayments of tax, it is taxable in the year in which it is received by the taxpayer. Net instalment credits, however, are not paid to the taxpayer at all, and interest payable by the taxpayer on any shortfall of tax payments is not deductible for tax purposes. Administratively, Revenue Canada does not allow offsetting of interest on tax overpayments against interest due on underpayments. Rather, the interest income is taxable to the taxpayer while the interest expense remains non-deductible.
The combined effect of the current statutory and administrative rules is that it is extremely difficult for many corporate taxpayers to avoid paying significant amounts of non-deductible interest every year despite their best endeavors to comply with the law.
TEI understands that the non-deductibility of interest paid on tax underpayments is not intended to be revenue-raising in itself, but rather simply to encourage timely payment of tax to the payment. The taxpayer's hardship would be ameliorated if (i) interest on tax overpayments accrued from the date of payment in all cases, (ii) transferability and offsetting of payments were permitted without restriction, and (iii) prepayments of tax were permitted whenever the taxpayer concludes he making of such payments is prudent.
A recent amendment of Information Circular 81-11R3 provides that payments toward an anticipated reassessment will now be accepted, but even under the amendment Revenue Canada will require designation of the taxation year involved. In addition, the Information Circular does not state that an overpayment of tax in these circumstances will earn interest. Thus, although representing an improvement over the previous situation, the revised Revenue Canada policy does not eliminate the problem; it only tempers it. As a general policy, then, Revenue Canada apparently remains reluctant to assume responsibilities akin to those of a banker.
We believe a practical, administrative solution is within reach. Specifically, TEI recommends that Canada adopt a mechanism similar to that in place in the United Kingdom and issue Tax Certificates of Deposit (TCDs) analogous to those issued by Inland Revenue. The TCD would have the following characteristics:
* The TCD would be issued by the Bank of Canada as agent for Revenue Canada.
* The TCD would earn interest at two percent less than the rate of interest prescribed under Income Tax Regulation 4300.
* The TCD could be purchased at any time.
* The TCD could be redeemed on presentation.
* The TCD could be used to meet any liability under the Income Tax Act.
* If used to satisfy a liability due on or before the date of purchase, no interest would be paid on the TCD and the original purchase would be deemed to be a payment of tax on the date of purchase.
* If used to satisfy a liability accruing after the date of purchase, interest would be paid, on application, up to the due date of the designated tax liability and would be deemed to be a payment of the designated tax on that date.
* Interest on the TCD would be includible in income on a cash-received basis.
TEI believes that the adoption of the Tax Certificate of Deposit mechanism would offer numerous advantages to both the government and to taxpayers. From the government's perspective, the introduction of the TCD would likely boost government revenue as taxpayers attempt to minimize potential exposure to non-deductible interest for open years of assessment - for instance, as the result of an unexpected Court decision for an earlier year that affects all subsequent years. In addition, the "banking" aspect of such instruments would be managed by the Bank of Canada, thereby simplifying Revenue Canada's role. Moreover, the availability and use of TCDs would probably reduce the balance of unpaid taxes and improve collections since funds to meet taxpayers' liabilities would already be on deposit with Ottawa.
From the taxpayer's point of view, too, the TCD mechanism offers benefits. First and foremost, the new procedure would remove the financial penalty from incorrectly estimating their tax liability - for example, where taxpayers are uncertain early in a year whether they will ultimately have any tax liability for the year or additional tax is assessed as a result of a Revenue Canada audit. Thus, the TCD mechanism would provide greater equity and simplification with respect to interest calculations.
Finally, although these comments have focused on overpayments and underpayments of income taxes, we believe the TCD mechanism could beneficially be expanded to encompass a wide spectrum of taxes. To illustrate how the TCD mechanism could work on a system-wide basis, we enclose a copy of a U.K. prospectus, which lists all the taxes to which a TCD deposit could be applied.
For the foregoing reasons, Tax Executives Institute recommends that Finance and Revenue Canada give favourable consideration to the introduction of a Tax Certificate of Deposit mechanism. If there are any questions about the Institute's recommendation, please do not hesitate to call either J. Lawrence Martin, TEI's Vice President for Canadian Affairs, at (403) 260-7991 or Vincent Alicandri, chair of our Canadian Income Tax Committee, at (416) 733-6762.
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|Date:||Jul 1, 1993|
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