On August 29, 2011, Tax Executives Institute submitted the following recommendations to Canada Revenue Agency for establishing priorities for updating CRA’s to income tax technical publications. The comments, which took the form of a letter from TEI President David M. Penney to Renée Shields, Manager in the Income Tax Technical Publications Section of the Canada Revenue Agency’s Income Tax Rulings Directorate, were prepared under the aegis of TEI’s Canadian Income Tax Committee, whose chair is Carmine A. Arcari of The Royal Bank of Canada. Contributing substantially to the development of TEI’s comments was Grant L. Lee of HSBC Bank Canada. Also contributing were Pierre Bertrand of CN Railways; Denise Couture of Suncor Energy Services, Inc.; Diana M. Morrone of Unilever Canada; and Carolyn Mulder of Wal-Mart Canada Corporation. Jeffery P. Rasmussen, TEI Senior Tax Counsel, is staff liaison to the Canadian Income Tax Committee and coordinated the preparation of the comments.
Original Submission
Magazine Article
In response to your letter of June 30, 2011, to Rodney C. Bergen, the 2010-2011 Vice President for Canadian Affairs for Tax Executives Institute, I am pleased to submit the following recommendations to Canada Revenue Agency (CRA) for establishing priorities for updating its Income Tax Technical Bulletins and other guidance.
Background on Tax Executives Institute
Tax Executives Institute is the preeminent international association of business tax executives. The Institute’s 7,000 professionals manage the tax affairs of 3,000 of the leading companies in North America, Europe, and Asia. Canadians constitute 10 percent of TEI’s membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our nine geographic regions, and must contend daily with the planning and compliance aspects of Canada’s business tax laws. Many of our non-Canadian members (including those in Europe and Asia) work for companies with substantial activities in Canada. The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.
Discussion
The dissemination of timely guidance is a critical CRA service for taxpayers and practitioners as well as for CRA’s own auditors and other personnel. By summarizing and publicizing legislative, administrative, and judicial developments in Income Tax Interpretation Bulletins (ITs) and Income Tax Circulars (ICs), CRA assists taxpayers in understanding and complying with their tax reporting and payment obligations and affords tax professionals the information necessary to tailor advice to their clients facts and circumstances.
TEI understands that CRA has made a commitment to the House of Commons Standing Committee on Public Accounts to improve the manner in which it communicates technical tax information and, to this end, is consulting with stakeholders to develop a priority list of critical and high priority ITs and ICs to update. We commend CRA for devoting resources to this endeavour. To assist CRA in establishing its priorities, Tax Executives Institute has reviewed all extant interpretations and circulars and developed the attached guidance priority list for large business enterprises.
As requested, TEI divides its recommendations for guidance into the following categories:
- Five ITs with a critical priority for immediate update and revision, including the reasons we believe the update is critical;
- An additional ten ITs to which CRA should assign a high priority for update and revision as CRA’s resources permit, including the reasons for the high priority;
- Recommendations for the development of new publications or guidance; and
- Other recommendations for guidance.
In developing our lists we have been guided by the following principles:
- The underlying law is complex, with myriad new rules, regulations, or interpretative positions affecting the analysis;
- The jurisprudence has evolved substantially since the interpretation or circular was last updated; and
- The issues addressed in the interpretation or circular affect broad groups of business taxpayers.
We would be pleased to meet with you to discuss TEI’s recommendations for prioritizing the guidance.
TEI’s comments were prepared under the aegis of the Institute’s Canadian Income Tax Committee, whose chair is Carmine A. Arcari. If you should have any questions about the recommendations, please do not hesitate to call Mr. Arcari at 416.955.7972 (or carmine.arcari@rbc.com) or David V. Daubaras, TEI’s Vice President for Canadian Affairs, at 905.858.5309 (or david.daubaras@ge.com).
Respectfully submitted,
Tax Executives Institute
David M. Penney
International President
cc: Rodney C. Bergen, 2010-2011 Vice President for Canadian Affairs
David V. Daubaras, 2011-2012 Vice President for Canadian Affairs
Carmine A. Arcari, 2011-2012 Chair of TEI’s Canadian Income Tax Committee
Priority List of Updates to Information Bulletins and Information Circulars A. Five ITs of critical priority for immediate update and revision
IT# |
Last Updated |
Topic |
Reason for Priority |
95R |
December 16, 1980 |
Foreign exchange gains and losses |
Significant period of time has elapsed and myriad developments have occurred since the last update in 1980. Transactions with foreign exchange ramifications are frequent, even daily, for most taxpayers and market volatility significantly affects taxpayers’ operations. |
293R |
July 16, 1979 |
Debtor’s gain on settlement of debt |
There have been significant statutory changes to the debt parking and debt forgiveness rules since the IT was updated 32 years ago. In addition, because of the debt crisis and economic slowdown, there have been a large number of debt forgiveness transactions. |
59R3 |
September 26, 1984 |
Interest on debts owing to specified non-residents (Thin Capitalization) |
CRA has issued a significant body of rulings and interpretations since 1984. The IT should summarize and reflect those developments. |
113R4 |
August 7, 1996 |
Benefits to Employees - Stock Options |
There have been a number of significant statutory changes in law since the
1996 update. Stock options represent a substantial component of employee compensation for many large companies. |
67R3 |
May 15, 1992 |
Taxable dividends from corporations resident in Canada. |
Substantial changes in the legislative scheme. |
B. Ten ITs with a high priority for update and revision
IT# |
Last Updated |
Topic |
Reason for Priority |
169 |
August 6, 1974 |
Price Adjustment Clauses |
Most commercial taxable and tax deferred transactions include a price adjustment clause. The frequency and commonality of their use suggests that an update to this decades old guidance should be a high priority. |
177R2
(Consolidated) |
May 4, 1984 (Consolidated with Special Release to IT177R2 dated August 25,1995) |
Permanent Establishment of a Corporation in a
Province |
With the recent harmonization of the Ontario income tax base with the federal rules, there are significant gaps in the rules addressing the sourcing of income for non-manufacturing operations. |
99R5 (Consolidated) |
December 11, 1998 (for the portion of the consolidated guidance relevant to large business taxpayers) |
Legal and Accounting Fees |
Supplemental guidance needed on fees relating to the termination of businesses, unsuccessful takeover costs, business expansion costs, integration costs, and the costs incurred by a target company to defend against or participate in a takeover. |
448 |
June 6, 1980 |
Dispositions - Changes in Terms of Securities |
The IT applies broadly to corporate securities but the lack of an update since 1980 raises questions about its scope and continuing validity, especially for many new forms of corporate securities and financial innovations. |
468R |
December 29, 1989 |
Management or administration fees paid to non-residents |
Myriad global changes in transfer pricing guidance in Canada, the United States, and the Organisation for Economic Co-operation and Development. In addition, Form T106 Information Return of Non-Arm's Length Transactions with Non-Residents has spawned many questions and issues. The IT should be expanded to discuss the transfer pricing implications and deductibility of these fees. |
231R2 |
March 3, 1986 |
Partnerships - Partners not dealing at arm’s length |
Over the years, a significant body of case law has developed on unreasonable partner allocations. |
346R |
November 20, 1978 |
Commodity Futures and Certain Commodities |
In addition to being very old, the guidance does not address hedging transactions. |
365R2 |
May 8, 1987 |
Damages, Settlements, and Similar Receipts |
Out of date guidance on common business transactions. |
154R |
February 19, 1988 |
Special Reserves |
A significant number of important rulings and interpretations on the treatment of contingent liabilities have been issued since the last update. |
176R2 |
April 23, 1993 |
Taxable Canadian Property - Interests in and Options on Real Property and Shares |
The definition of TCP has been changed to exclude certain unlisted private shares provided not more than 50% of the value is not derived directly or directly from real property, Canadian resource property, etc. |
C. Recommendations for New Publications
1. As noted in the recommendations above for updates to IT-448 Dispositions - Changes in Terms of Securities and IT-346R Commodity Futures and Certain Commodities, there have been a number of developments relating to, and affecting the tax treatment of, innovative financial instruments and transactions, especially in connection with hedging transactions. CRA should address the issues comprehensively.
2. In view of recent interpretation 2011-0403641E5 (April 28, 2011), CRA should provide guidance summarizing when taxpayers may deviate from Canadian Generally Accepted Accounting Principles when filing tax returns based on Canadian dollar financial statements.
3. The rules, regulations, interpretations, and jurisprudence on functional currency elections and issues should be summarized in one publication.
4. The rules, regulations, interpretations, and jurisprudence affecting the safe income including the safe income determination date should be summarized in one publication.
5. The rules, regulations, interpretations, and jurisprudence affecting the determination of foreign accrual property income and exempt surplus calculations should be summarized in one publication.
6. The rules, regulations, interpretations, and jurisprudence on the many stop-loss rules should be summarized in one publication.
D. Other Recommendations for Guidance
1. CRA should update IC-88-2 General Anti-Avoidance Rule - Section 245 of the Income Tax Act (October 21, 1988). There have been numerous rulings, interpretations, and court decisions since the circular was published.
2. The various Transfer Pricing Memorandums issued by CRA should be incorporated into IC-87-2R Transfer Pricing (September 27, 1999) (and to the extent relevant, IC-94-4 International Transfer Pricing: Advance Pricing Arrangements (APAs) (March 16, 2001) and IC-06-1 Income Tax Transfer Pricing and Customs Valuation (October 2006).)
3. IT-361R3 Exemption from Part X111 Tax on Interest Payments to Non-Residents (February 12, 1996) as well as other ITs dealing with withholding tax on interest (IT-155R3 Exemption from Non-Resident Tax on Interest Payable on Certain Bonds, Debentures, Notes, Hypothecs or Similar Obligations (June 16, 1989) and IT-360R2 Interest Payable in a Foreign Currency (December 8, 1989)) should be revised to take into account the domestic legislative changes that came into force on January 1, 2008, affecting payments of interest to non-residents.