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

and Federal Governments,

though a tax base predicated

on taxable income could be

made just as administrable as

one predicated on federal tax

payable. Indeed, taxable income

may well be a preferred

base, since provincial revenues

would not be automatically

affected by changes in

federal tax rates.

3. In order to achieve unity and

neutrality and thereby remove

tax considerations from

economic decisions, significant

variations in the tax burden.

From one Province to another

should not be encouraged;

nevertheless, the Provinces

should be accorded some

flexibility for minor differences

to accommodate the Provinces'

respective economic and

social objectives.

Adherence to these principles (and hence a common taxable income base) should increase the taxpayers' awareness of what is being paid in terms of provincial taxes. This in turn should increase the Provinces' level of accountability In addition, the use of a common taxable income base would allow the Provinces greater flexibility to achieve their economic and social goals. Accordingly, TEI believes that moving toward a common definition of income while maintaining a single collection system would be the least disruptive alternative to the present system. In contrast, a system that permitted different tax bases in the Provinces from that at the federal level would engender complexities and cost burdens that the Canadian economy can ill afford.

X. SUBSECTION 66.1(2)

Over the past several years, the Department of Finance has successfully, eliminated many tax biases that previously existed between different industries. There remains, however, a tax bias that continues to disadvantage the resource industry. Specifically, subsection 66.1(3) of the Income Tax Act permits; a taxpayer to deduct any amount of Canadian exploration expenditures that are available to the taxpayer, and subsection 66.1(2) stipulates that it principle business corporation must deduct the maximum amount permissible, subject only to the availability of income. TEI recommends that this bias be removed by deleting the subsection 66.1(2) limitation for a principle business corporation.

XI. RESEARCH PROTOTYPES

Paragraph 37(7)(c) defines expenditures for scientific research and experimental development (SR&ED) as expenditures incurred for, and all or substantially all of which are attributable to, the prosecution of SR&ED. In the case of prototypes, Revenue Canada has interpreted paragraph 37(7)(c) to apply only to laboratory prototypes, i.e., experimental models to prove out a technology.

Although Revenue Canada's interpretation of paragraph 37(7)(c) may make sense where the prototype is a new model of a product that will be manufactured or sold, it is not realistic where the prototype is equipment designed to improve the production process. In the latter case, Revenue Canada apparently believes that where a successful prototype may be incorporated into t he production line, it should not qualify as SR&ED equipment. (See paragraph 21 of Interpretation Bulletin IT-151R3.) This interpretation is wrong because it effectively says to a company contemplating such an expenditure that it will qualify as SR&ED only if it is unsuccessful. It thus inhabits research in Canada.