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Retroactive legislation - Press Release 99-067 announcing clarifying amendments regarding the tax treatment of resource expenditures.

September 10, 1999

On September 10, 1999, Tax Executives Institute submitted the following comments to Minister of Finance Paul Martin concerning the Department of Finance's July 23 announcement of retroactive legislation "clarifying" the tax treatment of resource expenditures. The Institute's comments, in the form of a letter from TEl President Charles W. Shewbridge, III, were prepared under the aegis of TEI's Canadian Income Tax Committee, whose chair is John M. Allinotte of Dofasco, Inc. Contributing to the development of TEI's comments were Monika M. Siegmund of Shell Canada Limited and David M. Penney of General Motors Corporation.

On behalf of Tax Executives Institute, Inc., I am writing to express TEI's concern about, and objection to, the retroactive effective dates in the draft income tax legislation announced by the Department of Finance on July 23, 1999. While in this case the substantive amendments detailed in Press Release 99-067 affect only a segment of Canadian business taxpayers and TEI members (i.e., those in the oil and gas industry with resource expenditures), retroactive legislation generally engenders unpredictable and unfair results. Consequently, the government's actions implicate much broader policy concerns. Indeed, we believe the government's actions will undermine confidence in the Canadian self-assessment tax system.


Tax Executives institute is the preeminent association of business 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 belongin to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our eight geographic regions. Our non-Canadian members (including those in Europe) work for companies with substantial activities in Canada. 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.


On July 23, 1999, the Department of Finance released draft legislation that purports to clarify the tax treatment of resource expenditures under the Income Tax Act (hereinafter "the Act"). The amendments include two separate effective dates that affect taxation years 1987 and 1988, respectively, as well as all subsequent years to which the substantive provisions relate. Hence, the legislation affects expenditures incurred or transactions completed more than 11 years prior to the introduction of the legislation.

Regrettably, this is not the first instance where the Department has introduced extensive substantive tax provisions with retroactive effective dates. Indeed, TEI previously expressed its concerns during its December 1995 liaison meeting with the Department of Finance and, in response to an invitation extended at the meeting by the Department's representatives, we elaborated on our views in a letter dated February 16, 1996. [Editor's Note: TEI's earlier letter is reprinted at pages 77-78 of the March-April 1996 issue of The Tax Executive.]

A self-assessing tax system relies fundamentally on the principle that taxpayers know, or are capable of knowing, the rules to which they are subject. In addition, 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 investments are made, business transactions take place, expenditures are incurred, or other taxable events occur. That is, taxpayers should be able to structure their investments and plan their affairs within the law both to comply with its requirements and to minimize their tax liability. Consequently, legislation should generally be prospective in effect.

Because retroactive legislation upends settled expectations, retroactive effective dates represent a drastic remedy for a defective legislative process that should be reserved for extreme cases. TEI believes that the government bears a heavy burden to overcome the strong policy presumption against retroactive effective dates. Ex post facto legislation significantly altering the tax treatment of completed transactions will only spawn public cynicism about the Canadian tax system. Moreover, retroactive legislation that adversely affects taxpayers will affect the competitiveness of the Canadian tax system vis-a-vis its trading partners. In the case of the July 23, 1999, amendments, TEI does not believe the government has met its burden to justify retroactive legislation.

The press release characterizes the amendments as "clarifying" the tax treatment of resource expenditures, but the reach of these provisions is extensive and represents a substantial change in the Act. Indeed, the provisions are seemingly directed at overturning two recent court decisions that the government litigated -- and lost. Specifically, these "clarifying" amendments overturn Resman Holdings Limited and Dex Resources Limited v. Her Majesty the Queen (98 DTC 1999), and Robert Phenix v. Her Majesty the Queen (97 DTC 1228). Rather than changing the Act prospectively

to overturn these decisions, thereby ensuring consistent treatment of all taxpayers for prior and subsequent taxation years, the Department of Finance has issued significant retroactive legislative changes in the guise of clarification. If applied broadly to other interpretative disputes between taxpayers and the government, this form of remedial action by the government is extremely inequitable and one-sided. In other words, "Heads, the government wins (in litigation); tails, taxpayers lose (by "clarifying" amendments)!"

The Department's press release states beneficially that "necessary action will be taken to ensure that the right of parties involved in outstanding court cases to make arguments on the basis of the existing income tax law is not affected." (Emphasis added.) But there are a number of taxpayers affected by the retroactive change whose disputes are pending at the Appeals level of Revenue Canada and, hence, have not yet reached the courts. Moreover, some taxpayers may not have yet even been reassessed under the government's interpretation, and, consequently have had no occasion to file an appeal, let alone a lawsuit. Indeed, even the taxpayers involved in the decisions may themselves have subsequent taxation years open for assessment that are not part of "outstanding court cases." Under any of these circumstances, taxpayers would be denied the opportunity to have their disputes reviewed in an independent forum. At a minimum, such taxpayers may be subject to the competitive disadvantage if a different tax regime is applied to the successful litigants in the aforementioned cases. Equally important from a tax administration perspective, introducing retroactive legislation routinely to overturn court decisions with which the government disagrees will perversely encourage more litigation as taxpayers seek the protection from retroactivity that the courthouse provides. At a minimum, the administrative dispute resolution mechanism accorded by Revenue Canada's Appeals Branch will be undermined.

To ensure an effective tax system in Canada, the government should refrain generally from making retroactive legislative changes, especially where taxpayers are adversely affected. As a step in this direction, TEI urges the government to withdraw the draft legislation and, should it be necessary, reintroduce it with a prospective effective date.


TEI's comments were prepared under the aegis of the Institute's Canadian Income Tax Committee, whose chair is John M. Allinotte. If you should have any questions about the submission, please do not hesitate to call Mr. Allinotte at (905) 548-7200 (ext. 6821), or Marlie R.M. Burtt, TEI's Vice President for Canadian Affairs, at (403) 269-8736.
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Title Annotation:Canada Dept. of Finance Press Release concerning retroactivity of tax provisions
Publication:Tax Executive
Geographic Code:1CANA
Date:Sep 1, 1999
Previous Article:Section 355(e): corporate spinoffs.
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