Tax Executive Institute, Inc. - The preeminent association of tax professionals worldwide

TEI concerns itself with important issues of tax policy and administration and is dedicated to working with government agencies to reduce the costs and burdens of tax compliance and administration to our common benefit.  In furtherance of this goal, TEI supports efforts to improve the tax laws and their administration at all levels of government.  We believe that the diversity and professional training of our members enable us to bring a balanced and practical perspective to the issues raised by the consultation on the taxation of corporate groups.

Executive Summary

Under the Income Tax Act, Canada, each incorporated business is required to file tax returns and pay its tax liability separately.  Since some members of a corporate group may be in a loss position while others are profitable, the group overall may pay taxes even where the combined group’s taxable income is zero or a loss.  The consultation paper raises myriad questions about the taxation of corporate groups, inviting stakeholder views about the appropriate design of a group taxation system in Canada.

The Canadian tax regime has many favourable features that should be preserved, but the system for utilizing losses within commonly controlled corporate groups is inefficient and impedes business investments by Canadian and foreign investors.  Hence, TEI urges the government to adopt a group taxation regime with an annually elective, loss- or attribute-transfer mechanism.  Attributes that should be part of the system include non-capital losses, capital losses, carryovers of such amounts, and — either immediately or a phased-in basis as revenue considerations permit — investment and other tax credits.  Other important design parameters for a group taxation system that TEI recommends include: establishing a threshold for common ownership for eligible groups of more than 50 percent but no greater than 80 percent; requiring a common parent corporation; and requiring that members be part of a group throughout the taxation year in order to transfer losses or attributes among eligible members.  TEI would be pleased to meet with the government to discuss our recommendations for the system design features.

Finally, the consultation paper raises numerous questions about the provincial income allocation system. TEI agrees that the current formulas for allocating corporate taxable income among the provinces deserve study.  Extensive consultation with stakeholders will likely be required before any changes in the provincial allocation formula can be adopted and TEI would be pleased to meet with the Department of Finance and provincial officials to discuss alternative allocation approaches. The implementation of a group taxation system, however, should not be delayed pending negotiations with the provinces because, while the provincial allocation formulas can likely be revised and simplified, the application of the current allocation formulas to a loss-transfer regime will not likely produce significant income shifting per se.  Consequently, the Government should permit group members to determine their allocable provincial income (and corresponding provincial income tax liability) as they do currently by applying Part IV of the current Income Tax Regulations and then electively applying any resulting losses allocated to a province against the taxable income of profitable group members allocated to a province.

TEI’s responses to the questions raised by the consultation paper (as summarized in Annex 1 to the consultation paper) follow.

1.         Policy Objectives

The Government is interested in stakeholders’ views regarding the most important benefits that they expect would be obtained from a new system for the taxation of corporate groups.

Recent federal budgets have focused on making Canada’s tax rate structure one of the most competitive in the world.  To a large extent, the Government has succeeded.  But to accurately assess the competitiveness of the Canadian tax system and its relative tax burden, the Government must consider not only the tax rate but also the tax base.  Indeed, the Government must consider all aspects of the tax system and, in respect of tax loss utilization for corporate groups, the current system is deficient. We believe adoption of a simplified group taxation system with loss and attribute transfers will increase the competitiveness of the Canadian tax system, increase corporate liquidity, promote tax equity and neutrality, and reduce administrative costs.

A. Increase the Competitiveness of Canadian Businesses and Attract Increased Domestic and Foreign Investment. Implementing an efficient system of group taxation will provide a more competitive tax environment for businesses in Canada, thereby fostering economic growth and generating additional employment.  More than two thirds of OECD countries — including major Canadian trading partners such as the United States, the United Kingdom, Australia, and Germany — provide some form of group taxation or loss-transfer regime.  Canada is currently the only G7 country that does not have such a feature.  By implementing a group taxation system, the effective tax rate for corporate groups can be more easily reduced to the statutory rate, improving the competitiveness of the Canadian system and attracting increased domestic and foreign direct investments.

B. Liquidity. Under the current corporate tax system, profits and losses are taxed asymmetrically: profits are fully taxed when earned but losses are monetized only to the extent they can be carried back to offset a corporation’s prior taxable income. Where a carryback is unavailable, a loss can be carried forward to reduce a future income tax liability, but the economic value of the loss is diminished by the time value cost of the deferral.  Concededly, Canadian corporate groups can structure transactions or make use of Canada Revenue Agency’s (CRA’s) administrative concessions to transfer a loss to a profitable group member. Implementing such tax planning techniques, however, requires corporate groups to incur significant administrative costs and also delays utilization of the loss.  Moreover, regulatory or business constraints can prevent groups from structuring a loss transfer or making use of the administrative concessions thereby resulting in a permanent inability to utilize the loss.  Permitting corporate groups to immediately offset profits and losses (and share other tax attributes) among group members will improve corporate liquidity and reduce borrowing costs for funding the payment of profitable group members’ tax liabilities.  Improving corporate liquidity is especially critical in a tight credit environment.

C. Equity and Neutrality. Domestic and multinational businesses are often organized along lines of business and operated through multiple separate legal entities.  Such structures afford companies the opportunity to differentiate and segment markets, products, customers, suppliers, and workforces in order to manage each line of business efficiently.  In addition, different businesses have different cash-flow cycles that significantly influence their equity and debt financing costs as well as their overall investment and business risk profiles. These risks can often be managed more efficiently by segregating them in separate legal entities and accounting reporting units.  Regardless of the business reasons for a particular structure, most corporate groups are commonly managed and controlled.

An equitable and neutral tax system will be indifferent about the structures and forms of doing business.  In the absence of a group taxation system, commonly controlled corporate groups with profitable entities and loss-generating entities suffer a higher overall tax burden than they otherwise would if they carried on business as a single entity.  Moreover, high-risk or new business ventures or projects with longer payback periods are often better managed in legal entities separated from low-risk or stable businesses.  The inability to immediately offset the losses or investment costs from high-risk activities (i.e., without using a statutory reorganization transaction or employing CRA’s administrative concessions) deters investments because companies often measure returns on investment and internal rates of return on an after-tax, present-value basis.  Consequently, to improve the neutrality and equity of the tax system in respect of corporate groups and business investments, TEI supports treating corporate groups as an economically integrated unit with free transferability of profits, losses, and other tax attributes.

D. Reduce Administrative Costs.  Adoption of a formalized corporate group taxation system will also reduce administrative costs for governments and taxpayers alike.  Specifically, taxpayers will be able to use the group taxation mechanism to efficiently and effectively transfer losses and other attributes in a straightforward fashion.  Transaction costs and legal and accounting fees incurred solely to implement loss-utilization transactions will be substantially reduced.  In addition, CRA will be able to redirect many of the resources currently devoted to issuing advance income tax rulings and auditing transactions undertaken for loss-utilization purposes.

2.         Loss Utilization in Canada Currently

The Government invites stakeholders to comment on the current approach, and the most significant types of costs and benefits related to this approach.

A variety of tax-planning techniques are currently used to transfer losses or share expenses among members of corporate groups.  Some techniques are straightforward, such as intercompany loans, management fees, and asset leasing.  Others require more time and substantially greater legal and administrative costs to implement.  For example, preferred shares might be issued by a loss-making company in return for either an intercompany loan or for the transfer of a profitable business.  In addition, corporate restructuring transactions involving statutory amalgamations and liquidations can be used to formally transfer a tax loss from one legal entity to another.

Each of the techniques has advantages and disadvantages in specific circumstances.  Collectively, they afford considerable flexibility to Canadian corporate groups to structure their affairs to match income and expenses and to minimize the amount and scope of unused losses or other attributes.  Not all the techniques, however, are available to every corporate group.  For example, some reorganizations or loss-transfer techniques cannot be implemented because of regulatory or contractual restrictions.  In other cases, it may take years for the restructuring or reorganization to effectively transfer the loss, with losses expiring before being fully utilized.  Finally, a group may not have access to the requisite financial resources or the right mix of assets to engage in any particular tax-planning technique, transaction, or arrangement.  Hence, the non-uniform nature of the current informal loss-transfer system creates an uneven playing field among businesses.

Moreover, the techniques require companies to incur costs — often substantial — and to engage in transactions or arrangements solely for tax reasons.  Transactions or arrangements undertaken solely for tax reasons are generally inefficient, divert management time and attention from other projects, and may draw CRA scrutiny, thereby engendering uncertainty.  Even though CRA has developed an administrative concessions policy with respect to many commonplace tax planning techniques, uncertainty is unavoidable where the tax result depends upon the agency’s exercise of discretion.  Moreover, CRA’s administrative concessions policy is always subject to review and revision.  Indeed, judicial decisions occasionally prompt a pause in the issuance of CRA’s advance rulings on reorganizations and loss-transfer arrangements while the guidelines for administrative concessions are reviewed. As important, the Auditor General of Canada has expressed reservations about a system of loss transfers that depends upon administrative discretion. [1]

TEI believes a formal group taxation system will be more cost effective, permit more timely and uniform access to, and utilization of, losses (and other attributes), and level the playing field across corporate groups.  Indeed, a formally legislated system will simplify, or obviate entirely, many loss transfers that are carried out routinely, though inefficiently, today.

3.         Provincial/Territorial Considerations

The Government invites stakeholders to comment on whether a new system of group taxation should incorporate changes to the method of determining provincial income allocation, and if so, how this could be accomplished.

The rules for allocating corporate taxable income among the provinces and territories are a central, longstanding feature of Canada’s tax system.  Since most provinces — apart from Alberta and Québec — have entered into corporate tax collection agreements with the federal government (and thus employ the same tax base as the federal government), changes in the federal tax base, including adoption of a group taxation system, will affect provincial revenues, but the scope and amount of the effect on the provinces in general or on any specific province is unclear.[2]

The current provincial allocation method requires taxpayers to identify whether there is a permanent establishment (PE) in a province.  Where a corporation has a PE in more than one province, allocation formulas are used to apportion taxable income among the provinces.[3] Since the factors for the allocation are currently calculated for each corporation for each province in which the corporation has a PE, the provinces are concerned that income or losses may shift under a group taxation regime.

Although TEI supports the concept of a single allocation formula and single tax base for all provincial income allocation, we agree that the provincial allocation formula merits study. We submit, however, that a broad revision of the provincial allocation formula should be undertaken separately from the implementation of a group taxation system.  Thus, while the provinces may have legitimate concerns about the fiscal effects of a group taxation system, it is unclear in what direction loss shifting may occur.  Indeed, in the aggregate, losses shifted into a province may well be offset by losses shifted out of a province.  In addition, at the risk of redundancy, it is critical to remember that implementation of a group taxation system will formalize loss transfers and other interprovincial tax effects that occur today.  Indeed, by moving forward with a formal group taxation system, the revenue effects will become more transparent to the federal and provincial governments.  TEI submits that obtaining that transparency — especially at the provincial level — is an indispensable step toward obtaining reliable revenue estimates.  With those estimates, the governments will be in a better position to assess whether different allocation formulas should be developed.

For purposes of the group taxation consultation, we believe that the current provincial allocation system can be adapted and applied to the new regime.  Specifically, the Department of Finance should permit group members to determine their allocable provincial income (and corresponding provincial income tax liability) as they do currently by applying Part IV of the current Income Tax Regulations and then electively applying any resulting losses allocated to a province against the taxable income of profitable group members allocated to a province.  In the event that the Government determines that different formulas should be considered, TEI would be pleased to discuss various alternatives with the Department of Finance and with the provincial governments.

4.         Possible Approaches

The Government is interested in stakeholders’ views on:

a.         How the efficiency and competitiveness of Canada’s current loss utilization rules compares to more explicit, but often less flexible, rules in other countries;

b.         How a new system of taxation for corporate groups would improve the efficiency and competitiveness of Canada’s tax system; and

c.         The approach Canada should take for a new system for the taxation of corporate groups.

TEI’s views are, as follows:

a.         One hallmark of the current Canadian approach to loss utilization that should be preserved is its flexibility.  The challenge under the current system of transaction-based loss utilization is for taxpayers to undertake the required arrangements or transactions in a timely and efficient manner given other management and business demands as well as the limitations of designing an efficient post-restructuring corporate structure and financing arrangements.  Formal loss- or attribute-transfer rules will minimize the importance of a corporate group’s legal entity structure and create uniform access to a loss-sharing mechanism.  Hence, revising Canada’s current loss utilization rules will improve their efficiency and provide a more globally competitive tax system.

b.         A statutory framework for group taxation should provide a transparent, effective, low-cost, uniform, and efficient means of transferring losses and other attributes while preserving, as much as possible, other aspects of the current corporate income tax system.  With a new system, a corporate group should be able to use losses to the extent of the group taxable income and utilize other tax attributes quickly and efficiently.  A new system will increase liquidity, minimize stranded losses, and minimize the scope and number of restructuring transactions necessary to utilize losses while maintaining an efficient corporate structure for management purposes.

c. TEI believes that a loss- (or attribute-) transfer system similar to the system used in the United Kingdom will be the simplest and most flexible to adopt and will require the fewest modifications to the Income Tax Act to implement.[4] Thus, the group taxation system should permit an annual, elective, year-by-year determination of the entities to (and from) which losses (and other included attributes) are surrendered.[5] Such a system will achieve the goal of permitting group losses and profits to be offset while affording businesses the flexibility to structure their corporate groups based on business objectives rather than tax criteria.  In addition, under such a regime there will be fewer future tax compliance or administrative consequences as a result of a decision to surrender a particular loss or attribute during a year.  In an ever-changing global business environment, such a system provides flexibility that other systems lack.

By contrast, a tax consolidation regime, similar to those implemented in Australia or the United States, would be far more complex and impose considerably more compliance costs and administrative burdens on taxpayers and governments.  Indeed, the implementing legislation or regulations for Australia and the United States, respectively, require multiple volumes of special rules to build the consolidation system as well as other special provisions to accommodate the consolidation regimes.  To avoid introducing undue complexity into the Act, TEI recommends against a tax consolidation system.  TEI also recommends avoiding the German organschaft approach, which requires the adoption of formal profit and loss absorption agreements among group members.  That approach is too rigid, which is one reason the German government is considering simplifying it.

5.         Design Parameters: Eligible Groups: Degree of Common Ownership

The Government is interested in stakeholders’ views regarding:

a.         The appropriate threshold of common ownership for a corporation to be included in a corporate group; and

b.         The appropriate meaning of ownership to be applied for determining if a corporation meets the ownership threshold (e.g., votes, value, or both).

TEI’s views are, as follows:

a.         The consultation paper invites a fresh look at the key issue of the degree of common ownership required for membership in a group, noting that a higher degree of common and cross ownership implies greater economic integration among group members while acknowledging that a lower threshold will permit more corporate groups to use the system.  In addition, any group taxation regime with a threshold less than 100 percent will affect minority shareholders, raising the question whether explicit tax rules are needed to facilitate compensation for minority shareholders.  Finally, the consultation paper observes that the ownership threshold will affect federal and provincial government revenues.

In TEI’s October 2010 letter urging the Government to issue a proposal for a group taxation regime, we reiterated our longstanding objection to the 95-percent ownership threshold set forth in the Department of Finance’s 1985 proposal for group taxation.  A 95-percent threshold would exclude far too many groups that are operating under common control and direction.  More important, the consultation paper acknowledges that current rules permit two “related” corporations to employ loss utilization strategies.  Thus, as long as there is more than 50-percent common or cross ownership among corporations, losses can be transferred to a profitable entity.  In turn, under a new group taxation regime, an ownership threshold requiring direct or indirect ownership of more than 50 percent for group eligibility will —

o        Be consistent with the current rules defining when taxpayers are considered related;

o        Recognize that majority-owned corporate groups exhibit economic integration notwithstanding the presence of minority shareholders; and

o        Be generally consistent with the ownership and control threshold required for issuing consolidated financial statements for corporate groups.

We appreciate, however, that the federal and, especially, the provincial governments are concerned about the potential revenue effect arising from the adoption of a group taxation regime.  One means of limiting the amount of eligible losses in the system is to control the eligibility of corporations to participate.  Thus, a 50-percent ownership threshold will expand the number of corporate groups eligible to use the formal system beyond the number eligible under a 100-, 95-, 80- (or other) percentage threshold.  The statistics in Table 3 of Annex 3 of the consultation paper, however, show that the total amount of non-capital losses that will become eligible in a group system by lowering the ownership threshold from 100 percent to 50 percent will be less than six percent of total incurred but unused systemic losses as of 2008.  Hence, we disagree that the ownership threshold is a significant design parameter in limiting provincial losses.  Clearly, the ownership threshold should be more than 50 percent in order to ensure common legal control, but in no event should it be higher than 80 percent.

Finally, TEI concurs with the consultation paper’s observation that protection of minority’s interests is a matter of corporate rather than tax law.  Hence, while lowering the ownership threshold for eligibility for group taxation to a more-than-50-percent test will increase the number of minority shareholders affected by a new regime, we do not believe additional tax rules should be prescribed to address the treatment of minority shareholders.[6]

b.         An ownership test based solely on the percentage of voting stock held by a corporate group will be relatively simple to administer and comply with.  The only requirement will be to confirm the legal voting rights of each shareholder as a percentage of the total of all classes of stock eligible to vote. A simple ownership test would also allow companies to implement capital structures, and raise necessary funds with maximum flexibility. Adding a value test for affiliation would complicate the measurement of whether an affiliation test is satisfied, but it would also ensure that the corporate group satisfies a minimum level of economic integration.  Hence, we recommend that the ownership threshold be based on satisfying the requisite ownership threshold by votes and value.

Finally, we note that the controlled foreign affiliate regime prescribe rules for attributing indirect ownership up, down, and across tiers and chains of connected corporations.  Similar attribution rules will likely be necessary to determine the members of a taxable domestic Canadian corporate group. For example, the “affiliated person” rules in section 251.1 could be used.

6.         Design Parameters: Eligible Groups: Non-Corporate

Entities and Non-Resident Corporations

The Government is interested in stakeholders’ views regarding how trusts or other non-corporate entities and the Canadian branches of non-resident corporations that are part of a Canadian corporate group should be treated in a group taxation system.

Theoretically, trusts, non-corporate entities, and Canadian branches of non-resident corporations should be eligible for a group taxation regime, but their inclusion would complicate the rules governing the system considerably.  Hence, TEI is continuing to study the issues raised by this question and will supplement its comments as appropriate.

7.         Design Parameters: Eligible Groups: Common Parent Corporation

The Government is interested in stakeholders’ views regarding whether eligible groups of corporations should have a common parent corporation, and if not, how groups without a common corporate parent should be treated in a group taxation system.

TEI recommends that the system require a common domestic or foreign parent corporation for eligibility to make a loss or attribute transfer.  Even though some taxpayers would benefit from omitting a requirement for a common corporate parent requirement, we believe such a rule will provide a clear, unambiguous determination of the composition of the corporate group and better align the unit of taxation with the economically integrated entities.  As noted above, attribution rules may be needed to ensure that indirectly owned Canadian corporations are eligible for the loss-transfer system.

8.         Design Parameters: Range of Attributes

The Government is interested in stakeholders’ views regarding the most important attributes which should be considered with respect to a new system for the taxation of corporate groups.

Theoretically, in order to maximize the economic efficiency of group taxation, the full range of each corporate group member’s tax attributes should be available to every other member of the group.  Thus, in addition to non-capital losses, the group’s capital losses and investment and other tax credits should be freely transferable among members of the group.[7] We recognize, though, that the economic efficiency gained by expanding the group taxation rules to a broader range of eligible tax attributes must be balanced against the potential (1) for increasing the complexity of the system’s design and (2) fiscal effect on federal and provincial revenues.  Thus, if fewer attributes are eligible for transfer, the number and scope of the rules governing the group taxation system can be minimized, thereby reducing administrative and compliance costs.  In addition, the more attributes that are eligible for transfer, the more immediate the potential effect on government revenues.

TEI believes that the best approach for implementing a group taxation regime is through incremental change to the current system.  Thus, a loss- or attribute- transfer system (rather than a consolidation system) should be adopted.  The attributes that should, at a minimum, be part of the system include current-year non-capital losses, current-year capital losses, and carryovers for each type of loss incurred by a member of the group after introduction of loss transfer system.  Additional tax attributes that should be considered for inclusion in the system are unused tax credits (e.g., investment and foreign tax credits).  Should the complexity of incorporating unused tax credits in the system impede or delay the introduction of a group taxation system for loss transfers, a phased-in approach could be adopted to permit those attributes to be integrated into the system at a later time.[8]

9.         Design Parameters: Elective Components

The Government is interested in stakeholders’ views on the extent to which participation in a group taxation regime should be voluntary or mandatory for the group and/or individual group members, and to what extent corporate groups should have flexibility in determining which attributes to transfer or consolidate.

Given the complexity and diversity of domestic- and foreign-owned multinational corporate structures and the wide range of international taxation regimes each faces, TEI believes that flexibility is an essential feature in the design of a group loss- or attribute-transfer system.  Thus, participation in the group taxation regime should be voluntary rather than mandatory.  In addition, corporate groups should have the flexibility to annually determine which attributes to transfer, when, and how much of any given attribute to transfer.  In other words, as long as the minimum threshold ownership requirements are satisfied (i.e., the required degree of “relatedness”), the group itself should determine on an annual, elective basis the amount, timing, and types of attributes to transfer from among all eligible attributes.[9] TEI’s recommended approach is analogous to the U.K. system of group-loss relief.  The U.K. system has worked well for many years and can be modified as necessary to adapt to the Canadian system or minimize erosion of the Canadian corporate tax base.

Mandatory participation in a group taxation regime or requiring a mandatory transfer of attributes could lead to unforeseen results, especially in the home country of a foreign-owned group, a result at odds with making Canada more competitive internationally.  For example, where the home jurisdiction of a foreign-owned group has a foreign tax credit regime but does not permit group consolidation of foreign affiliates when determining the amount or timing of foreign tax credit relief, the attractiveness of the Canadian system would be undermined. For domestically-owned groups, the flexibility of annual loss or attribute transfers among eligible group members is similarly essential in order to maintain a level playing field, especially among domestic groups with multiple business lines.  A voluntary, fully elective system would also afford companies the most flexibility in addressing minority ownership issues.  Hence, participation in the attribute-transfer system should be based on an annual election.

10.       Design Parameters: Pools of Unused Tax Attributes

The Government is interested in stakeholders’ views on what constraints would be appropriate on the use of existing pools of losses when an eligible group is formed, when a corporation enters or exits the group, and on a year-to-year basis.

TEI appreciates that, as in other countries with loss-transfer systems, it will likely be necessary to limit the use of pre-existing attributes when a corporation (or group) joins or exits a group (or another group).  Such limits curb tax-motivated transactions and prevent trafficking in losses or other attributes. Thus, we recommend limiting eligibility for loss or attribute transfers to corporations that are members of an eligible group (or subgroup) for an entire taxation year.[10]

In addition, the current acquisition-of-control rules in section 111 of the Act have been effective in curbing unwarranted transfers of tax attributes.  These “streaming” rules should be retained in order to prevent pre-acquisition losses (or other attributes) of a corporation from becoming available to members of a new corporate group under the new system.  Similarly, pre-existing losses and other attributes should be restricted to the corporation (or any continuing corporation after wind-up or amalgamation) in which the attributes originated.  Finally, when a corporation exits a group, unused tax attributes of that corporation that were not shared with or used by another member of the group should exit the group and follow the company in which the attribute originated.

11.       Design Parameters: Existing Approach

The Government is interested in stakeholders’ views about the impact of combining the introduction of a formal group taxation system with a restriction on the ability to undertake loss utilization transactions amongst corporate group members outside of the formal system.

Rather than introduce a wholly new legislative regime for consolidations, we believe that the group taxation system should hew as closely as possible to the current provisions of the Income Tax Act.  Thus, the existing legislative provisions permitting losses and other attributes to be transferred pursuant to amalgamations and liquidations should be retained.  Other transactions that serve dual business and tax purposes, such as intercompany lending and intercompany management fees to share costs or services, should also be permitted under the new group taxation system because they facilitate ordinary day-to-day commercial operations and management.  Finally, CRA’s current administrative concessions should be retained.  To be sure, transactions undertaken solely for tax purposes under the administrative concessions policy, such as intra-group preferred share issuances in return for intercompany loans, will diminish if a group taxation system is adopted and companies use the straightforward loss transfer mechanism.  The administrative concessions policy, however, will be needed to permit utilization of pre-regime-change losses and for entities that are not eligible to join a tax group, especially if the ownership threshold for the group taxation regime is greater than 50 percent.[11] We see no reason to introduce complex anti-abuse legislation to curb transactions among related parties that were not previously offside.  Indeed, anti-abuse rules are often overbroad and impede ordinary commercial transactions.  Finally, as noted in the previous section, section 111 of the Act is effective in preventing unwarranted loss transfers and would likely be similarly effective in a group taxation regime.

12.       Design Parameters: Use of Previously Accumulated

Tax Attributes in a New System

The Government is interested in stakeholders’ views regarding what restrictions in a new system of group taxation would be appropriate regarding the use of losses and other attributes accumulated by corporate groups prior to the introduction of such a system.

TEI believes that the group taxation system should generally be prospective in effect.  Hence, losses and other unused attributes accumulated by corporations prior to the introduction of a group taxation system should not be eligible to be transferred to “new” group members under the new loss- or attribute-transfer approach.  Any existing losses (and other unused eligible attributes) at the transition date, however, should not expire.  Such amounts should remain available to offset future income earned (or tax payable) by the member incurring the loss or other attribute (as well as other members that were part of the group at the transition date).  For example, assume Corporation A is part of an eligible group along with Corporations B, C, and D; the effective date of the loss-transfer system is January 1, 2013; and each corporation employs a calendar taxation year.  Corporation A incurs a non-capital loss in 2012.  Corporation A should be able to surrender the 2012 loss to Corporations B, C, or D in 2013 because it could undertake a transaction under the current administrative concessions to allow any corporation in the related group to utilize the loss.  If Corporations E and F (both profitable) join the A, B, C, D group after December 31, 2012, A’s 2012 loss would not be eligible for surrender to E or F under the new regime, but A, E, and F should be able to structure a transfer of A’s loss to either E or F under the administrative concessions policy.

Conclusion

TEI believes that the implementation of a corporate loss-transfer system has been delayed far too long and represents progressive and competitive tax policy.  Following the conclusion of public consultations, we urge the Department to release its findings and draft legislation quickly

TEI’s comments were prepared under the aegis of the Institute’s Canadian Income Tax Committee, whose chair is Carmine Arcari.  If you should have any questions about the submission, please do not hesitate to call Mr. Arcari at 416.955.7972 (or carmine.arcari@rbc.com), or Rodney C. Bergen, TEI’s Vice President for Canadian Affairs, at 604.488.5231 (or Bergen@jp-group.com).

Respectfully submitted,

Paul O’Connor
International President

cc:        Louise Levonian, Assistant Deputy Minister, Tax Policy Branch

Brian Ernewein, General Director, Tax Policy Branch

Gérard Lalonde, Director, Tax Legislation