Thank you, Madam Chair.
I am the tax director for Finning and am here today as chair of the Canadian Income Tax Committee for the Tax Executives Institute. TEI is the pre-eminent association of business tax professionals worldwide. Our 7,000 members work for 3,000 of the largest companies in Canada, the U.S., Europe, and Asia. My comments are endorsed by both TEI's Canadian members and others who have significant operations and investments in Canada.
During the past decade, the government has focused on making Canada's business tax structure more competitive. By reducing the federal corporate income tax rate, the government has confirmed its commitment, enhanced the prospects for sustainable economic growth, and increased the attractiveness of investments in Canada, but Canada must remain vigilant, especially as other countries restructure their tax systems and lower marginal effective tax rates.
Thus, TEI welcomed the opportunity to participate in the government's consultation on the taxation of corporate groups and subsequently submitted comments explaining that implementing such a system will improve competitiveness and better align Canada with the rest of the world. More than two-thirds of OECD countries provide explicit legislative or regulatory regimes for loss transfers, with Canada being the only G-7 country that lacks such a feature.
History shows that economic stagnation may occur following a financial crisis as credit markets tighten. Permitting corporate groups to offset profits and losses and share other tax attributes in an efficient, straightforward fashion will temper these effects by improving corporate liquidity, reducing borrowing costs, and eliminating transaction costs. As important, CRA will no longer have to devote resources to issuing advance income tax rulings.
TEI provided detailed recommendations for a group loss transfer system to the Department of Finance. An annually elective tax loss or attribute transfer system similar to that in the U.K. will be the simplest and most flexible to adopt, requiring the fewest modifications to the Income Tax Act. Attributes that should be part of the system include non-capital losses, capital losses, carry-overs of such amounts, and investment in other tax credits.
Next, in December 2008, the advisory panel on Canada's system of international taxation issued a report with recommendations for enhancing Canada's tax system. Some recommendations have been implemented, but one significant area has not yet been addressed. Specifically, the current process for obtaining waivers of withholding taxes imposed under regulations 105 and 102 should be repealed and replaced with a self-certification system. In respect of regulation 105, the advisory panel found that “service providers commonly gross-up their fees to offset the withholding tax”, which raises costs for Canadian businesses; compliance costs are “significant”; and “the waiver process is cumbersome and so it is not used as often as it should be”.
The advisory panel also determined that regulation 102 places “significant” administrative burdens on non-residents in Canadian corporations. The advisory panel recommended replacing the current advance waiver requirement with a system for non-residents to self-certify eligibility for reduced withholding taxes, especially when the non-resident is exempt under a treaty such as the Canada-U.S. treaty. A certification system based on current information reporting requirements will maintain CRA's enforcement capability but shift compliance costs to the certifying party, minimize tax withholding refunded to exempt parties, reduce tax gross-up costs, and minimize administrative burdens for CRA and taxpayers. TEI urges the adoption of the panel's recommendations.
The 2012 budget included a proposal to curtail foreign affiliate dumping transactions, and draft legislation to implement meant the proposal was released in August. TEI fully supports the government's targeting of abusive tax-motivated foreign affiliate dumping transactions, but regrets that the proposed legislation will diminish Canada's attractiveness in the competition for global capital and investors.
Fundamentally, there is no abuse of the Canadian tax system when cash generated by a Canadian resident business is invested downstream in the common shares of a controlled foreign affiliate, and Canada is entitled to both the growth potential of the downstream investment and future cash repatriations. Ultimately, the economic return from a downstream common share investment will flow back to Canada.
TEI's June and September 2012 submissions provide many recommendations for technical changes, expanded grandfathering relief, and additional relieving measures. We will be pleased to work with the Department of Finance and the committee to narrow the legislation.
In conclusion, TEI thanks the committee for the opportunity to participate in the pre-budget consultations. I'd be happy to answer any questions you may have.