Response of Canadian Department of Finance to questions posed at TEI liaison meeting on income tax issues - Tax Executives Institute

Tax Executive, The, July-August, 1994

On December 8, 1993, representatives of Tax Executives Institute met with officials of Canada's De to discuss pending income tax issues. (A separate meeting was held on issues related to the goods an liaison meeting, the Institute submitted a series of questions, which formed the agenda for the meet the responses TEI received from the Department of Finance. (The questions were reprinted in the Nove issue of The Tax Executive and should be reviewed in conjunction with these answers.

Benchmarking Canada's Tax System with the United States and Mexico

The 1992 suggestion from TEI, comparing North America to Europe, was deemed premature by the Department of Finance, since the European Community is attempting to form a union or commonwealth, whereas Canada and the United States are just creating a Free Trade zone. There was no acknowledgment that a similar "tax regime convergence" would inevitably be needed here, if North America is to avoid seeing one jurisdiction competing with another with ever-richer tax incentives for business.

TEI's specific 1993 suggestion for an annual benchmark report was rejected, but Department officials did agree that benchmarking already takes place informally. They recognize that the Canadian tax burden, at least for corporations, cannot get too far away from what it would be if a business relocated to the United States. They stated that numerous private studies were available, and those were reliable enough; the Department had no intention of commenting on those, let alone issuing a publicly available, formal benchmark-type analysis.

The Federal Government Role of Leadership and Harmonization with the Provinces

Although the Department of Finance agreed with all the issues raised by TEI [concerning the desirability of harmonizing the federal and provincial systems], the Department does not have the authority to compel the provinces to harmonize. A mechanism does exist, however, to review "irritants." Specifically, there is a committee at the Assistant Deputy Minister level that meets to discuss issues, though no meeting has been held recently. It is hoped that the committee start meeting again soon.

A formal body may not be any more effective. Department officials did identify, however, issues that they are currently seeking to resolve. These included provincial allocation, sales taxes, the provincial reclamation fund tax, personal tax, and the deductibility of payroll and capital taxes.

Part 1.3 -- Large Corporations Tax

A. Capital Taxes - Harmonization of Federal and Provincial Systems

Finance advised that, if the federal and provincial systems were harmonized, the provincial systems would likely be adapted to the federal system. It was suggested that TEI take a leadership role in advocating the benefits of harmonization to the provinces.

B. Investment Allowance - Debts Owed By One Partnership To Another

In principle, Finance would not object to tiered-partnership debts' qualifying for the investment allowance if there is an actual need. Department officials, however, are interested in finding out why two partnerships are required.

C. LCT Relief for Companies in Loss or Minimal Profit Position

Finance was not receptive to this recommendation. The LCT is regarded as a source of revenue by the government.

Deductibility of Provincial Business Taxes

The existing system provides an incentive for provinces to increase capital and payroll taxes at the expense of the Federal government. Action is required on this issue as those provinces which have not imposed significant payroll, business, and capital taxes are precluded from doing so by the current grandfathering provisions.

Expense Deductibility Relating to Real Estate

The current provisions in the Income Tax Act result in a matching of carrying costs of real property with the reporting of revenue derived from its sale. Consideration could be given to increasing the upper threshold level of interest expense deductible from the present $1 million times the prescribed rate to some higher level.

Non-Resident Withholding Taxes

As a follow-up to the 1993 Budget when the government announced its intent to pursue reductions in the rates of withholding tax on intangibles, we were advised that this is currently being negotiated with the United States. Negotiations of other treaties/protocols are currently being pursued only in response to requests from other treaty partners.

TEI made the suggestion, that with the enactment of NAFTA, Canada and the United States should strive to achieve the European model of virtually no withholding taxes between member states.

TEI was advised that there is not a target date for renegotiation of either the U.S. or the U.K. treaty.

It was suggested that if the Institute were eager to see the Canada-U.S. treaty renegotiated, it could be in TEI's interest to pursue the issue with the government of the United States as well.

Butterfly Transactions

A. Refinancing Prior to a Divisive Corporate Reorganization