TEI-Canadian Department of Finance liaison meeting - income tax issues - Tax Executive Institute's December 11, 1996 meeting

Tax Executive, The, May-June, 1997

Introduction

On December 11, 1996, a delegation from Tax Executives Institute met in Ottawa with representatives of the Canadian Department of Finance. The meeting was chaired by Len Farber of the Canadian Department of Finance and Alan Wheable, chair of Tax Executives Institute's Canadian Income Tax Committee. The Chairs introduced the participants. James Murray, President of TEI, expressed his appreciation of the close relationship between Finance Canada and TEI.

The participants discussed the items previously submitted. [Editor's Note: The Department's responses are summarized by the TEI members who participated in the meeting; the Department of Finance has reviewed and approved the summaries for distribution.]

Consolidated Tax Returns

In 1985, the Minister of Finance issued a White Paper on consolidated tax returns for affiliated groups of companies (which was referred to as the "corporate loss transfer system"). At that time, TEI supported a proposal to permit consolidation of wholly-owned, or nearly wholly-owned, group members, urging that Canada alter its unique position among major trading countries in not permitting consolidation. More than ten years later, little has changed; indeed, the rules governing corporate groups may be even less competitive now compared with the rest of Canada's trading partners. Notwithstanding that "loss transfer" mechanisms exist for federal income tax purposes, effectuating such transfers involves substantial transactional costs; moreover, the losses remain unavailable for provincial income tax purposes. In addition, the attendant compliance costs associated with filing separate returns for subsidiaries remains as high as ever. Recent reports by Professor Mintz's Technical Committee on Business Taxation and the Auditor General acknowledge these economic and tax policy inefficiencies. Hence, we urge the government to "just do it" and implement a regime to permit consolidated income tax return filing for corporate groups. We invite the Department's comments.

Finance response and discussion: There was general agreement that a form of group relief/consolidated return or loss transfer system would be appropriate for Canada. TEI emphasized that the Provincial and indeed Revenue loss concerns are not as significant as perhaps they were once thought to be. Even a federal-only system would be better than nothing.

Finance said that TEI should not expect to see this subject in the next Budget, but might see it in the medium term. There are "revenue" and provincial concerns. Finance is sympathetic to a loss transfer system.

Other issues that Finance said must be addressed before adopting a loss-transfer system:

* Should Finance adopt it with or without the provinces or certain provinces?

* How high should the ownership threshold be set to permit consolidation?

* What if there is a revenue loss for the provinces.

* How will a higher or lower percentage of ownership create other problems.

Finally, the subject of loss transfers is apparently being considered by the Mintz Commission.

Part I.3 Tax Deduction for

Surtax Credits

Under current rules, the capital deduction claimed in the computation of the Part I.3 Tax on Large Corporations must be allocated among associated companies. Would consideration be given to revising the rule to apply the excess surtax credits over Part I.3 tax to other corporations within the same associated group in respect of which the capital deduction allocation was made?

Finance response: The base issue here is loss transferability. The Department is not prepared to change this aspect of the legislation before changing the other.

TEI counter-response: An unfair result can occur where a company has high capital and a low return.

Finance counter-counter-response: Yes, this is understood.

Leasehold Improvements

Simplification Proposal

Determining the amount of the capital cost allowance (CCA) on Class 13 assets is excessively complicated. Each asset that forms a part of a leasehold improvement must be accounted for on a separate basis even though all the assets remain in a single class for purposes of the terminal loss and recapture rules. To simplify the system and permit both taxpayers and Revenue Canada to reduce the amount of resources devoted to the calculation and verification of CCA on such assets, we recommend that the Department of Finance adopt the same diminishing balance aggregate pool system for leasehold improvements as exists for most other assets. In addition, a transitional rule should be adopted permitting taxpayers to elect either to maintain the current rules for existing leasehold improvements or to transfer the balance into the new class of assets subject to the diminishing balance computation. We believe that the new rule and the transitional rule for existing leasehold improvements can be implemented in a revenue-neutral fashion. We would be willing to work with the Department to craft such a rule and invite the Department's views and comments on the topic.