Thank you, Mr. Chairman.
My name is Eric Wilson. I am the chair of the finance and taxation team for the Surrey Board of Trade. The Surrey Board of Trade is the second largest board of trade in British Columbia.
Thank you for allowing us to speak today.
Specifically we're asking the government to consider two areas of tax policy for revision and introduction. One concerns the availability of the small business deduction to companies that have taxable capital in excess of $10 million. The second is to consider the introduction of legislation allowing for consolidated corporate tax filings among companies under common control and ownership.
By way of background, subsection 125(5.1) of the Income Tax Act reduces the ability of a company to claim the small business deduction based solely on its taxable capital. It begins to erode once the capital exceeds $10 million, and it disappears entirely at $15 million. This has a significant impact on businesses that are capital intensive. For example, the Automobile Dealers Association has highlighted this many times.
Prior to 2004, the $10 million threshold also served as the level at which a company would incur what's referred to as a corporate capital tax, which is a static tax based solely on its capital structure. Once you incurred a $10 million limit, you paid a certain degree of tax on the excess. In 2004, that level, for purposes of the large corporations tax sections, was increased to $50 million, but the $10 million threshold for the erosion of the small business deduction did not change. We are requesting either that subsection 125(5.1) be repealed or that the $10 million threshold referenced therein be increased to $50 million to at least bring it into harmony with the level at which a company will incur large corporations tax.
With respect to allowing consolidated tax returns to companies under common ownership and control, it is very common for a business to have its individual units split into various subsidiary or sister corporations for purposes of liability, competitive insulation, succession, or variable compensation patterns. It's not unusual for one facet of a business to operate at a loss whereas another facet operates at a profit. An example might be a manufacturing business that also does its own distribution. The distribution end of a manufacturing business sometimes does incur losses. If for competitive or legal liability purposes this company chooses to maintain its business units in separate legal entities, it has to go through an enormous amount of professional expense, complexity, and, to a certain degree, uncertainty to access the losses of the distribution company with the manufacturing end.
We believe that Canada is one of the only countries in the G7 that does not allow consolidated corporate filings.
Within the package that was submitted prior to my appearance here, there is a discussion of various techniques and strategies that are embraced by the CRA in allowing consolidation of losses within a related group or a group under common control. But as I said earlier, it's unwieldy and unnecessarily expensive, and at the end of the day, the amount of tax revenue that would be realized by the government would functionally be unchanged in the event that consolidated filings were allowed.
In 1985 the Technical Committee on Business Taxation recommended that the federal government review the Department of Finance's 1985 discussion paper, “A Corporate Loss Transfer System in Canada”, which acknowledged there were problems with the current loss utilization techniques, specifically legal and accounting costs, administration and compliance costs, and uncertainty regarding the utilization of the tax planning techniques. It argued that a group reporting system would improve the equity and neutrality of the income tax systems as between economic entities; enhance the response of business to tax incentives provided by the federal government; and increase the freedom of managers of business organizations to structure business operations in the most desirable way from a business point of view, with less concern about adverse or uncertain tax consequences.
Thank you.