THE TAXATION OF CORPORATE GROUPS

Transcription

1 THE TAXATION OF CORPORATE GROUPS Submission to the Department of Finance Canada february 2011

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3 Table of Contents Executive Summary Toward Simplicity, Flexibility and Breadth of Scope The Case for Change Intra-Group Loss Transfers: The Simplest and Broadest Approach Addressing Provincial Concerns Design Parameters Degree of Common Ownership Eligible Groups: Common Canadian Parent Corporation Eligible Groups: Trusts and Canadian Branches of Non-Resident Corporations Range of Attributes Elective Components Elimination of Current Ability to Transfer Losses Use of Previously Accumulated Attributes in New System Conclusion Appendix CICA Tax Policy Committee Members i

4 Executive Summary Canada s Chartered Accountants are pleased to put forward recommendations to the Department of Finance Canada on the design of a new system for the taxation of corporate groups. This submission responds to questions and concerns raised in the consultation paper 1 issued by Finance Canada on November 23, In this submission, we offer our views on how the competitiveness of Canadian businesses could be enhanced by implementing a group taxation system. The ability to transfer losses within a corporate group would reduce administrative and compliance burdens, improve cash flow within a group, and increase the harmonization of the federal and provincial tax systems. With more than two-thirds of OECD member countries now offering group taxation, adopting this approach would improve the competitiveness of Canadian businesses globally. To maximize the benefits of such a system to Canadian governments and businesses alike, we recommend pursuing the simplest, most flexible approach with the broadest application. To this end, we believe that Canada should adopt a group loss transfer system that formalizes most aspects of the existing system. In our view, such a loss transfer system should incorporate the following features: Membership within an eligible corporate group should be determined under the current legislative and administrative practices for affiliated persons (as defined under the Income Tax Act). Canadian branches of non-resident corporations should be allowed to participate in the system on a voluntary basis with affiliated Canadian corporations. The participation of certain trusts in such a system would require further study. Tax attributes eligible for the group taxation treatment should include all types of losses and investment tax credits, with appropriate rules to avoid duplication of tax attributes. Participation in the loss transfer system should be elective. The system should continue to allow loss utilization techniques that are currently allowed legislatively (i.e., through amalgamations and wind-ups). The new system should allow for the utilization of previously accumulated losses and investment tax credits (perhaps subject to a transitional phase-in period). Our views were developed in consultation with members of the CICA Tax Policy Committee, which is composed of senior tax professionals with some of Canada s leading tax organizations and professional services firms. The CICA Tax Policy Committee conducted informal consultations and a round table forum to engage with businesses, industry groups, professional associations, and other stakeholders and solicit their ideas on the need for and optimal design of a group taxation system. The views expressed in this submission represent the position of the CICA. While our recommendations reflect our consultations with the CICA Tax Policy Committee and external stakeholders, our views do not necessarily represent those of the individual Committee members or stakeholders. We thank these individuals for contributing their insights to this important debate. Toward Simplicity, Flexibility and Breadth of Scope The Case for Change Canada s current tax system already allows corporate groups to offset the profits and losses of group members through certain intra-group transactions and restructurings. However, the required transactions and reorganizations are usually time-consuming, complex and expensive to undertake. They may also entail a degree of risk and uncertainty. Regulatory, business and legal considerations can make such planning inappropriate or complex to achieve. Corporations are often required to structure such transactions for tax planning rather than business reasons, and they must incur substantial administrative, legal and advisory costs to 1 Department of Finance Canada, The Taxation of Corporate Groups: Consultation Paper, November 23, 2010 (referred to herein as the November 2010 consultation paper ). 1

5 do so. Many small and medium-sized companies in Canada may not have the time, expertise or resources to undertake the complex transactions or restructurings required to take advantage of existing loss transfer opportunities. The legislative complexity and administrative uncertainty inherent in the current informal system increases the potential for tax disputes. Canadian companies of all sizes would benefit from the certainty and simplicity of a more formal group taxation system. For these reasons, Canada s Chartered Accountants recommend the adoption of a more formal system for the taxation of corporate groups. We urge the federal government to proceed quickly in this endeavour to ensure Canada s competitiveness in the global marketplace. Intra-Group Loss Transfers: The Simplest and Broadest Approach Finance Canada s November 2010 consultation paper suggests that the options for a new system of group taxation range between two extremes. At one extreme is a consolidation (or fiscal unity) system that taxes corporate groups as if they were a single entity. At the other extreme is a loss transfer system (or group relief system), which preserves the members separate identities but allows for intra-group loss transfers that serve to reduce the corporate group s total tax liability. In determining which type of system Canada should adopt, we believe that the simplest, most flexible system with the broadest application would offer the most benefits. We also recommend that any new system should preserve the benefits of the existing system. Finance Canada s November 2010 consultation paper acknowledges that a full consolidation system is the more complex approach and that complexity decreases as one moves along the spectrum toward loss transfers. We agree with Finance s view that a full consolidation approach would involve the most complexity, and we therefore do not recommend its adoption. In Canada, added complexity would arise from the need to accommodate both federal and provincial levels of taxation. Most countries with loss consolidation systems have only one level of corporate taxation, with the United States being the significant exception. We believe that the introduction of a loss transfer system would be the most beneficial approach. Many businesses are satisfied that the current, informal system meets their needs. A flexible system that formalizes some or most aspects of the existing system would be easier to design, administer and comply with than a full consolidation system. For these reasons, Canada s Chartered Accountants believe that pursuing a loss transfer system offers the best route for achieving the objectives of simplicity, flexibility, breadth of application and global competitiveness. Addressing Provincial Concerns Canada s longstanding federal and provincial rules for allocating corporate taxable income among the provinces comprise a well-accepted system. In the past, Canada s provincial governments have appeared reluctant to consider adopting a group taxation system due to concerns over the potential impact on provincial tax bases and the interprovincial allocation of income. The concerns of the provinces will need to be substantiated. We believe it will be important to analyze the significance of any potential problem to ensure that the provinces concerns are addressed. As provincial tax rates across Canada converge, one possible concern of the provinces over potential income shifting should be abating. By 2014, Ontario s target provincial tax rate will match the 10% rates of Alberta, British Columbia and New Brunswick, while Quebec s provincial tax rate will be only slightly higher at 11.9%. As Canada s largest provinces get closer to tax rate parity, provincial concerns related to tax planning that shifts income among provinces and the related provincial revenue impact should cease to be an issue. A formal loss transfer system would benefit the provinces by making the system more transparent. Currently, the provinces are often unaware of many loss transfers. A formal transfer system would give the provinces more data to monitor interprovincial loss transfers and their revenue impact. Further, if it can be demonstrated that provincial revenues would be materially affected by the new system, the system could be designed to mitigate the effect. For example, the system could provide for a consolidation approach in which loss transfers would factor into the allocation of a corporate groups income among the provinces. Alternatively, the system could require the recapture, for provincial purposes, of losses transferred by a corporate group member that becomes profitable in later years. A more 2

6 transparent system would open opportunities to address the issue through other means. We recognize that federal and provincial tax revenues would decline temporarily as corporate taxpayers gain access to otherwise unused tax losses. Finance Canada s 2010 consultation paper points out, however, that both levels of government share an interest in ensuring that the tax system is economically efficient in order to encourage investment and increase living standards for Canadians. A one-time reduction in federal and provincial tax revenues on the system s introduction would represent an investment in a more efficient and competitive tax system. To preserve the fairness, efficiency and harmony of the existing system and avoid additional complexity, the significance of the province s concerns about any ongoing impact on provincial income allocations and tax revenues should be evaluated before any mitigating measures are considered. Design Parameters Canada s Chartered Accountants are pleased to offer our views on the new system s key design features. As with the overall approach to corporate group taxation, the details of how a loss transfer system would operate should be developed with an eye to creating the simplest, most flexible system with the broadest application. Our recommendations below assume that, for reasons already noted, Canada would adopt a loss transfer system rather than a full consolidation system. Further, as also discussed above, we believe that any new system should retain the benefits of the current formal and informal systems for loss transfers. Degree of Common Ownership In designing a new loss transfer system, a key feature is the threshold of common ownership required for determining membership within an eligible corporate group. Finance s 2010 consultation paper acknowledges that the complexity of a group taxation system increases as the percentage of outside minority investors within the group rises. For example, lower common ownership thresholds would increase the need for complex rules to accommodate corporate groups that want to compensate minority shareholders for their loss of value resulting from loss transfers within the group. Canada s administrative approach currently allows loss transfers among affiliated persons, generally determined on the basis of a >50% ownership threshold. In our view, using the same threshold to determine membership in a corporate group for loss transfer purposes would help improve the tax system s simplicity. To remain consistent with current rules and administrative practices, the affiliated person rules should be the basis for determining a control group. Moreover, Finance s own analysis suggests that adjusting the threshold from 100% to >50% would not materially increase the amount of losses that are available for transfer. Eligible Groups: Common Canadian Parent Corporation As discussed under Degree of Common Ownership above, simplicity and certainty could be provided by conforming to the well-established concept of affiliated person for determining membership in an eligible corporate group. Further, many existing corporate groups do not have a common parent corporation. Requiring one as a condition of group membership would not retain the current system s benefits or achieve the simplicity and breadth of application desired. Eligible Groups: Trusts and Canadian Branches of Non-Resident Corporations In keeping with the objective of designing a flexible system with broad application, we believe that branches of nonresident groups should be allowed to participate in a group taxation system on an elective basis. Whether trusts should be allowed to participate is a matter for further study. Due to the differences in how trusts and corporations are taxed, allowing trusts to transfer losses within a corporate group would add considerable complexity to the system. Such complexity should be avoided unless it can be shown that the presence of unused losses within trusts in common corporate structures is a significant issue. Range of Attributes In determining which attributes beyond non-capital losses should be integrated in a group taxation system, we acknowledge that the incorporation of additional attributes would increase the system s complexity. In our view, non-capital losses and investment tax credits should be available for transfer. 3

7 In addition, we do not believe that there is any conceptual reason to exclude capital losses from the system, provided rules are put in place to prevent the replication of corporate losses up a corporate chain due to adjustments in the cost base of shares. Elective Components In order to maximize the system s flexibility, we believe that participation in the loss transfer system should be voluntary. The decision as to whether such an election should be annual or irrevocable for a set term may be more problematic for the provinces. Allowing corporate groups to transfer losses voluntarily on an annual basis would maximize the system s flexibility, but the provinces may be concerned that this approach could create opportunities for tax avoidance and volatility in provincial tax revenues. Nevertheless, a voluntary system would accord with current administrative loss transfer arrangements and allow corporate groups to accrue all of the system s economic benefits. Elimination of Current Ability to Transfer Losses Currently, Canadian corporations can transfer losses through statutory means (for example, via amalgamations or windups) or through administrative concession (by obtaining an advance income tax ruling). Although the statutory loss transfer mechanisms are quite complex, they are well established, offer certain results, and would retain their usefulness in parallel with a more formalized system for loss transfers. The administratively sanctioned mechanisms (for example, involving intercompany loans and preferred share issuances) are equally complex but provide less certain results; these mechanisms would no longer be required if a more formal loss transfer system were adopted. As noted, we believe that the current legislative systems for loss transfers should remain in place. However, with the adoption of a formal loss transfer system, the existing informal system for loss transfers should be eliminated, subject to an appropriate transitional period. Use of Previously Accumulated Attributes in New System In its November 2010 consultation paper, Finance Canada expresses concern over the potential revenue impact of allowing corporate groups immediate access to existing pools of losses (and any other eligible attributes). While these practical concerns are valid, there is no conceptual reason why a new loss transfer system should exclude previously accumulated losses, especially where both companies party to the loss transfer were part of the affiliated group when the losses arose. We believe that a new loss transfer system should encompass previously accumulated losses and investment tax credits. If the federal government believes that the revenue impact of doing so is too significant, it could consider phasing in the ability to transfer existing losses over a period of years. Given the current 20-year carryforward for existing non-capital losses, however, Canadian companies and the tax authorities would have to cope with the considerable complexity of a dual system for new and previously accumulated losses for the duration of phase-in period. Conclusion Canada s Chartered Accountants applaud the federal government s renewed investigation into the potential benefits of adopting a system of corporate group taxation in Canada. We believe that such a system can be designed in ways that enhance the overall tax system s simplicity, fairness and efficiency, without significantly affecting government revenues or provincial income allocations. To this end, we believe that Canada should adopt a group loss transfer system that formalizes aspects of the existing system in the immediate term. Further, because such a system stands to enhance the efficiency, productivity and international competitiveness of Canadian businesses, we urge the federal government to proceed quickly on this important initiative. 4

8 Appendix CICA Tax Policy Committee Members Bruce P. Flexman, MBA, FCA Gabe Hayos, FCA Bruce Ball, CA, CFP, TEP Larry F. Chapman, FCA Danny Cisterna, BMATH, CA Kevin J. Dancey, FCA James J. Barnett, FCA Gary Dent, CA Andrew W. Dunn, MAcc, FCA, CMA John A. (Jay) Hutchison, CA Murray A. Mikulak, FCA Saul Plener, FCA Wayne Tunney, FCA Greg Wiebe, FCA Chair, CICA Tax Policy Committee President, International Financial Centre British Columbia Incoming Chair, CICA Tax Policy Committee Incoming Vice President, Tax, CICA (April 1, 2011) Co-Chair, Canadian Bar Association-CICA Joint Committee on Taxation National Tax Partner, BDO Canada LLP Executive Director and Chief Executive Officer, Canadian Tax Foundation Chair, CICA Commodity Tax Committee Partner Indirect Tax, Deloitte & Touche LLP President and CEO, CICA Director, School of Accounting & Finance, University of Waterloo National Tax Leader and International Tax Services Partner, Grant Thornton LLP Canadian Managing Partner Tax, Deloitte & Touche LLP Managing Partner, Tax, Ernst & Young LLP Partner, Mikulak & Hill LLP National Tax Leader, PricewaterhouseCoopers LLP Senior Vice-President Taxation, Bell Canada Canadian Managing Partner Tax, KPMG LLP 5