Good afternoon, everybody.
My name is Sherrie Ann Pollock. I'm head of tax for RBC Dexia Investor Services. I'm here today on behalf of Tax Executives Institute as its vice-president for Canadian affairs.
With me is David Penney of General Motors of Canada, the institute's secretary.
The Tax Executives Institute is the pre-eminent global association of business tax professionals, with 7,000 members working for 3,000 of the largest companies in Canada, the U.S., Europe, and Asia. My comments today are informed by both TEI's Canadian members and others whose firms have significant operations and investments in Canada.
We believe TEI's recommendations for tax policy and administrative changes will maintain or improve the competitiveness of the Canadian tax system, thereby fostering economic efficiency, growth, and job creation.
During the past eight years, the federal government has increased Canada's competitiveness in the global marketplace by reducing business tax burdens from a high of 29.12% in 2000, to 18% this year, to 15% by 2012. Canada's federal corporate income tax rate is on course to be the lowest among the major industrialized nations. Although Canada is not immune to global recessions, the scheduled reductions in the corporate rate, combined with the elimination of burdensome capital taxes such as the federal capital tax and corporate surtax, have mitigated business cutbacks in Canada and tempered the severity of the downturn for Canadians.
We urge the government to stay its course or accelerate the schedule of corporate income tax rate reductions. The standing committee should ensure that other countries do not leapfrog the Canadian timetable.
TEI commends the federal government for undertaking initiatives to encourage the provinces to promote Canada's competitiveness and improve the administrative efficiency of the provincial tax systems. Many provinces have followed the federal lead, reducing income tax rates and eliminating or reducing their capital taxes. We urge the standing committee to continue working with the provinces to eliminate the last vestiges of provincial capital taxes.
In addition, TEI supports harmonization of the provincial and federal sales tax systems. Substituting a value-added tax system for provincial retail tax systems promotes a more neutral and competitive business tax environment by eliminating cascading taxes on business inputs. Hence, we are pleased that Ontario and British Columbia are substituting a federally harmonized VAT system for the retail sales tax regime, but we oppose the proposed temporary restrictions on large corporations for claiming input tax credits for the provincial component of certain expenses.
Moreover, to be fully effective, we recommend that financial services be zero-rated under the federal and provincial systems, just as they are under the Quebec sales tax regime. Thus, TEI encourages the government to work with the provinces to expedite the implementation of a fully harmonized system.
To this end, we've consulted with the Ontario and British Columbia governments about the implementation of the harmonized system. We remain ready to consult further with the standing committee, the Department of Finance, and the non-harmonizing provincial governments about crafting a workable, fully harmonized system.
Finally, to enhance the competitiveness, efficiency, and fairness of Canada's tax system, the government created the Advisory Panel on Canada's System of International Taxation. The advisory panel released its final report on December 2008 and endorsed several TEI recommendations. We highlight three for the committee's consideration.
First, TEI supports the elimination of all withholding taxes. Thus, we applaud the January 1, 2008, elimination of withholding taxes on all outbound interest payments on arm's-length debt and the provision, in the protocol to the Canada-U.S. treaty, for eliminating withholding taxes on non-arm's-length interest payments by next January.
More is needed, however, to ensure that Canadian businesses have access to global capital markets at the lowest possible cost. Since 2003 the United States has negotiated a nil withholding rate for dividends to group companies with several countries. TEI believes the standing committee should ensure that Canadian residents have the same benefits that residents of other U.S. treaty partners have so that they can effectively compete for increased capital investment, exports, and jobs.
To reach the government's goal of having the lowest effective tax rate among the G-7 group, we urge the standing committee to embrace the advisory panel's recommendation to eliminate withholding taxes and dividends to related group companies through bilateral negotiations, beginning with the U.S. treaty.
Second, to improve access to skilled services, the government should repeal the withholding tax requirement under regulations 102 and 105, especially in respect of payments to U.S. service providers. The advisory panel report discusses the pros and cons of the withholding regimes and recommends that the current system be replaced with a system whereby non-residents self-certify their eligibility for reduced withholding taxes. As important, the advisory panel recommends that the requirement to withhold taxes on services be eliminated where the non-resident service provider certifies that it is exempt under a treaty, such as the Canada-U.S. treaty. We urge the standing committee to implement the advisory panel's recommendations.
Finally, TEI urges the government to consider a broader, or even a full, exemption system for dividends from active business income from foreign investments. A broader exemption would enhance the inherent economic advantages of foreign investments at significant savings to taxpayers, because the cost of complying with complex foreign-affiliate tracking and reporting rules would be eliminated or substantially reduced.
In conclusion, TEI commends the standing committee for holding pre-budget consultations.
On behalf of TEI, thank you for the opportunity to participate. Mr. Penney and I will be pleased to respond to any questions you may have about our recommendations.