Comments on pending Canadian income tax issues: November 14, 1991 - submitted by Tax Executives Institute to Canadian Department of Finance; includes letter on proposed legislation on prepaid interest bonds, November 11, 1991

Tax Executive, The, Jan-Feb, 1992

On November 14, 1991, Tax Executives Institute submitted the following comments to the Canadian De in connection with TEI's December2,1991,liaison meeting with Finance Officials. The comments were pr of the Institute's Canadian Income Tax Committee, whose chair is Hugh D. Berwick of Alcan Aluminium participating in the development of the comments was Andrew G. Kenyon of the Canadian Imperial Bank is the Institute's Vice President-Region I.

I. BACKGROUND

Tax Executives Institute welcomes the opportunity to present the following comments on several pending tax issues, which will be discussed with representatives of the Department of Finance during TEI's December 2, 1991, liaison meeting. In the meantime, if you have any questions about these comments, please do not hesitate to call either Andrew G. Kenyon, TEI's Vice President for Canadian Affairs, at (416) 980-3305 or Hugh D. Berwick, chair of the Institute's Canadian Income Tax Committee, at (514) 848-8235

TEI's an international organization of nearly 4,600 professionals who are responsible -- in an executive, administrative, or managerial capacity -- for the tax affairs of the corporations and other businesses that employ them. TEI's members represent almost 2 000 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, or are otherwise affiliated with, companies with significant Canadian operations. In sum, TEI's membership includes representatives from most major industries, including manufacturing, distribution, wholesaling, retailing, real estate, transportation, financial, and resource (including mining, pulp and paper, and petroleum). These comments reflect the views of the Institute as a whole but more particularly those of our Canadian constituency, which is principally responsible for their preparation.

II. PART I.3 TAX

A. Creditability of the Large Corporations Tax

The Large Corporations Tax (LCT) is biased against corporations in capital-intensive industries for several reasons. Their rate of return on capital investments is usually not sufficiently high to absorb the LCT paid over the seven-year carryforward period. Therefore, those corporations bear a disproportionate share of the burden of LCT. The increase in the LCT rate from 0.175 percent to 0.2 percent effective January 1, 1991, has further exacerbated those concerns. This is of particular concern given the independent effect of the proposed disallowance of a deduction for provincial payroll and capital taxes, which will also adversely affect that sector of the economy.

TEI recognizes that not every change in the tax laws can or will affect all taxpayers equally. Nevertheless, from a tax policy perspective, we believe the Government should take steps in designing any tax legislation to minimize the distributional effect of the change. The LCT was introduced as a new levy on the corporate sector to raise additional revenues to help reduce the federal deficit. Under the circumstances, we believe the anti-capital intensive bias of the LCT is unjustified.

Accordingly, TEI recommends that the following changes be adopted to make the distribution of the additional tax revenues raised from the corporate sector with the Part I.3 tax more equitable:

* The corporation's Part I tax, including

the surtax, should fully

offset the corporation's LCT.

(See Comment II.C below concerning

the ordering of creditability.)

* The carryforward period of the

unused Part I.3 tax credit

should be extended indefinitely.

B. Transfer of the Part I.3 Tax Credit Between Related Corporations

TEI recommends that the transfer of the Part I.3 credit within a related corporate group should be allowed. Allowing such a transfer would be a minor move to tax consolidation on a federal-only basis, which would not be accompanied by the problems that a loss transfer system for Part I taxes would have. (See Comment XV below.)

C. Part I Tax Creditability Against the Large Corporations Tax

During last year's liaison meeting, TEI recommended that the LCT be changed to allow the surtax to be fully creditable against the large corporations tax. This inversion would render the LCT eligible for the foreign tax credit treatment for U.S. income tax purposes without affecting a company's aggregate liability for Part I and Part I.3 taxes.

At that time, the Department expressed reluctance to adopt TEI's proposal because of a latent concern that such a change might create an opportunity for foreign controlled companies, particular U.S. companies, to obtain a tax benefit by shifting income out of Can ada. We fail to understand how a company would be encouraged to shift income out of Canada simply because its Part I income tax could be reduced by its LCT. Has the Department undertaken to confirm whether its concern is valid? If the concern cannot be supported by further analysis, we urge the Department to reconsider TEI's proposal.