Pending Canadian income tax issues - includes response from Canadian Department of Finance

Tax Executive, The, Nov-Dec, 1992

IV. Class 24 and 27

For the purposes of classes 24 and 27, clauses 17 and 18 of the draft regulations released on December 23, 1991, deem an amalgamated corporation or a parent of a wound-up corporation to be the same corporation as, and a continuation of, the predecessor corporation or the wound-up subsidiary.

This approach corrects the problem whereby a reorganization involving an amalgamation " wind-up places a taxpayer "offside." The proposed amendments, however, do not address the situation where the problem is caused by a reorganization that does not involve either an amalgamation or wind-up.

TEI recommends that further amendments be made to classes 24 and 27 to provide that where a taxpayer has acquired operations from a person with whom the taxpayer was not dealing at arm's length, then the taxpayer shall be deemed for the purposes of these classes to be the same person as the transferor.

V. Recycling

There are many situations where large manufacturers of certain types of products cannot recycle their products themselves in an economical manner. These large manufacturers, however, may be willing to assist smaller, independent enterprises in establishing recycling centers that are economical (assuming financial support from larger companies). To encourage this type of recycling program, consideration should be given to establishing a tax mechanism to permit the larger manufacturers to assist the smaller enterprises in purchasing the recycling equipment on a tax-deductible basis.

For example, the Province of British Columbia has established a program whereby it enters into "partnerships" with industry to encourage recycling. Although laudable, there is clearly a limit to the amount of public monies available to fund such programs directly. One alternative would be to permit a corporation that is willing to assist with recycling for its products to make a "gift" to the Crown, in right of the province. The Province would then direct these funds to the recycling enterprise chosen by the donor. Such a mechanism would allow the Province to ensure that the money will be spent on a bona-fide recycling project. Under current law, there would be some question whether such a directed donation to the Crown would constitute a gift for tax purposes because the funds would be earmarked for a special project. Enactment of a specific provision to permit a deduction in these circumstances would encourage more recycling in Canada and should be considered.

VI. Deductibility of Financing Costs

A. Draft Legislation, Tax Treatment of Interest Expense

TEI iterates the position outlined in its May 1, 1992, submission on the Draft Legislation on the Tax Treatment of Interest Expense. TEI supports the Government's decision to legislate the tax policies on interest deductibility contained in the June 2, 1987, Notice of Ways and Means Motion. We believe, however, that the December 20, 1991, draft legislation fails to accomplish its intended purposes. We continue to have concerns that the draft legislation will create serious problems for many corporations, including --