TEI Makes Recommendations For Pre-Budget Report Consultations

by Mike Godfrey, for LawAndTax-News.com, Washington

13 August 2008

The Tax Executives Institute (TEI) has this week welcomed the Canadian Standing Committee on Finance's scheduled pre-budget consultations to gather input from across the country on tax and business matters, and has put forward a series of recommendations for consideration by the government.

According to a paper issued by the TEI this week, six proposals have been put to the Canadian government which will help to maintain the international competitiveness of the economy. These included calls for the elimination of withholding tax on intercompany dividends in the Canada-US tax treaty, the introduction of a participation exemption for foreign dividends, and the establishment of a system that would allow for loss transfer or group loss relief.

In brief, the TEI has recommended:

• Repealing section 18.2 of the Income Tax Act, Canada and replacing it with a narrowly targeted provision that will not undermine the competitiveness of Canadian businesses by impeding legitimate commercial operations and financing arrangements;
• Eliminating withholding taxes on intercompany dividends in the Canada-US tax treaty;
• Eliminating withholding taxes under Regulations 102 and 105 for cross-border services;
• Adopting a broader exemption system for earnings of foreign affiliates (FAs);
• Increasing the incentives to the provinces to eliminate capital taxes as soon as possible; encouraging the provinces to review and revise their tax policies to enhance the overall competitiveness of the Canadian business tax system; and promoting the benefits of harmonization of the provincial retail sales tax systems with the GST; and
• Implementing a corporate loss transfer system or group loss relief mechanism.

On the topic of corporate tax reduction, the TEI noted that:

"The government has enacted legislation to (1) reduce the corporate income tax rate from 21% to 15% by 2012 and (2) eliminate the corporate surtax for tax years beginning after 2007. TEI commends the government for enacting these measures because business tax rate reductions increase the attractiveness of Canada for both foreign and domestic investors."

It continued: "Increased capital investment in Canada, in turn, spurs productivity, promotes employment, and enhances the prospects for sustainable economic growth. The implementation of the phased corporate income tax rate reductions and the elimination of the corporate surtax send a strong signal to the capital markets about the government’s commitment to enhancing the competitiveness of the Canadian business tax system."

The Institute recommended that the Standing Committee continue to monitor the competitiveness of the Canadian corporate income tax system, including the corporate tax rates.

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