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

There is a demand in Canada for foreign currency denominated leasing, particularly U.S. dollar leases, so that exporters can obtain financing at the same rates as their foreign competition. Many Canadian lessors are, or wish to be, involved in the offering of U.S. dollar leases. Rates based on Canadian prime can lead to reduced capital cost allowances compared to the amount that would be available if the actual rate of interest were used in computing the deemed principal. This results in accelerated taxation. We recommend that the prescribed interest rate for foreign currency denominated leases be based on comparable foreign bond rates, such as United States Treasury bonds, with terms to maturity from three to five years.

C. Conflict between Capital Cost Allowance Policy and the Leasing Regulations

Department of Finance Release Number 90-17, pertaining to the revised draft leasing regulations, also included a special incentive of a 100-percent write-off of new point of sale (POS) equipment, such as cash registers. This rule was designed to assist retailers in acquiring new equipment capable of handling the Goods and Services Tax (GST). Since no exemption from the leasing restrictions was provided for POS equipment, however, the GST-related incentive is not available to retailers who lease their equipment unless it is part of a lease totalling 25,000 or less. Once again, this reduces the financing choices of Canadian business. TEI believes that targeted incentives such as the one for POS equipment should be neutral as between a purchase and a lease.

D. Lessee's Election

By making an election under section 16.1 of the Income Tax Act, a lessee is permitted to assume some of the tax attributes of leasing that are denied to lessors on specified leasing property. The election must be made by both the lessee and the lessor and must be filed by the due date of each party's tax returns for the year in which the lease is executed.

TEI does not believe that a lessee's entitlement to the benefits of the section 16.1 election should be held hostage to the lessor's failure to file a copy of its election. This is so because filing a leasing company's tax return has been complicated by the requirement for an asset-by-asset CCA calculation, as well as a myriad of elections and other matters under federal and provincial tax laws. Non-filings might occur because the election forms originate in remote offices of many lessors and must be collected at the head office.

To ensure that a lessee will not be penalized on account of the lessor's oversight TEI recommends that only the lessee be required to file the completed election form. Alternatively, the late filing of the election by the lessor should be permitted (with any appropriate penalties). If the section 16.1 election is not one of the elections so far identified in the "Fairness Package" of May 24, 1991, it should be included.

IV. PENSION PLAN WITH SURPLUS: SECTION 147.2(2) CONFLICT WITH PROVINCIAL LEGISLATION

The promulgation of new rules for pensions creates the likelihood that, in the future, the specific rules of the Income Tax Act will frequently contradict the requirements of provincial pension legislation. One example is subsection 147.2(2), which limits the deduction for contributions made to a pension plan where an actuarial surplus in excess of two years' current service contributions exists.