April 15, Dear Mr. Trueman: Re: Submission on the Taxation of Corporate Groups

Transcription

1 I Investing on Solid Grouncf D. BLAIR NIXON, Q.C., FCA, ICD.D Chief Financial Officer Direct: Fax: April 15, 2011 Mr. Geoff Trueman Business Income Tax Division Department of Finance L'Esplanade Laurier 17th Floor, East Tower 140 O'Connor Street Ottawa, ON KIA 005 Dear Mr. Trueman: Re: Submission on the Taxation of Corporate Groups We provide this submission in response to the Department of Finance's invitation for comments on the November 20 I 0 Consultation Paper "The Taxation of Corporate Groups". Walton is very supportive of the adoption of a corporate loss transfer system for the Canadian tax regime. Overview ofthe Walton Group Walton Global Investments Ltd. ("Walton") is a privately held Canadian company that operates in Canada and six other countries: Singapore, Hong Kong, Malaysia, Japan, Germany and the United States. Over the past 30 years, Walton has grown to be one of North America's leading real estate investment groups, creating land-based investments for individual and institutional investors worldwide. Walton and its group of companies employ over 300 people in Canada, and over 850 people worldwide. Currently, Walton has over 50 corporations and more than 55 partnerships within its business structure in Canada. It also has more than 20 corporations in other countries and over 30 partnerships in those countries. Many of those countries currently have a loss transfer regime, as summarized below: 2411> Floor, 60S S Avenue SW Calgary, Alberta T2P 3H5 Main: ' Fax:+l ,31B4

2 (J) Singapore: Tax losses, depreciation and current year donations are ahowed to be transferred to another company in a corporate group as long as there is a 75% ownership relationship between claimant and transferor, and the participant companies have the same year-end. This transfer of tax attributes does not include capital losses and there is an "order of priority" where a claimant company must claim fully all possible deductions before any balance is transferred to the next claimant company. (2) Malaysia: A maximum of 70% of the adjusted losses for the year may be transferred to one or more related companies if the transferor and transferee companies each have the same taxation year ends, each have paid-up capital of ordinary shares in excess of MYR 2.5 million at the beginning of the year and the companies are related for that period and the 12 months prior to that period. The related company test in Malaysia is based on a 70% ownership test (or common ownership by another company of 70% of each of the transferor and transferee). (3) Japan: Japan has a full group consolidation regime amongst corporations that are who\ly-owned. Taxable income is computed on a consolidated basis, and gains or losses on certain intra-group transfers are deferred. Pre-consolidation losses brought into the group may generajly be used only to offset the income of the subsidiary to which the losses apply. Corporate consolidated tax paid is allocated back to each member of the group. This consolidation regime is only available for national tax purposes; local corporate taxes paid by each member company are paid on an entity by entity basis. (4) Germany: The Organschaft system in Germany allows parents of subsidiaries that are owned 50% or more to participate in a five-year court registered profit pooling agreement. This regime effectively allows an offset of losses against profits within a related group of companies. (5) United States: The U.S. maintains a fuil consolidation regime as its group taxation model where an affiliated group is defined as more than 80% ownership. Adjustments are required for sales, dividends and other intercompany transactions. Each state has its own approach to either a consolidated or combined return regime as well. (6) Hong Kong: Hong Kong does not have a group taxation regime. 24"' Floor. 60S so. Avenue WI Calgary. Alberta T2P 3H5 Walton Investments Ltlt Main: ' FaJC:

3 Three of the countries within which Walton operates are both G8 and G20 members (Germany, Japan and the United States). Every member of the 08 has adopted or is planning to adopt a regime of either tax consolidation or tax attribute transfer, and many of the other 020 countries have also implemented a consolidation or transfer regime. Although they are not currently members of the G8 or G20, Singapore and Malaysia are significant economic leaders in Asia and both have shown their ability to adopt best practices ofother countries by implementing a form oftax attribute transfer. Canada's Current Regime The current regime for the transfer of tax losses and other attributes between related entities in Canada is inefficient and cumbersome. The resources needed to maintain the practice of planning for tax loss utilization alone is staggering because it typically requires the involvement of tax specialists and legal personnel In particular, personnel from those two groups are usually required to document the steps involved. Further, commercia) groups that provide support for valuations of assets and shares are also typically required. The inefficiency caused by the current informal Joss transfer regime in Canada affects the overall efficiency of the companies involved. Instead of spending time dealing with business issues, many resources need to be engaged to simply deal with the appropriate utilization of tax losses and other tax attributes. Productivity of companies is negatively affected because of these types of corporate requirements. When competing on an international level, this complexity can be a true detriment to a company when its international competitors are benefitting from their home country tax consolidation regime. A further concern with the current regime is the uncertainty with which it is administered. Although there are published administrative positions from the CRA on certain planning techniques, it is uncertain how the CRA will assess a situation where the exact steps outlined in the administrative position were not implemented. Although the intention of the plan may be the same and there was no intended abuse, there is a potential for the CRA to assess differently if the exact scenario identified in the administrative position is not carried out in the exact same way. A more formal system governed by law is, therefore, preferred. Since Canada seeks to attract international investment, it is very important to be competitive in the area of corporate taxation. Continued reduction in corporate tax rates and the implementation of incentives such as the SR&ED program are important to attract this investment. However, it is equally important to accommodate a form of group taxation given the importance it has in many other countries that are not only our trading partners but also our competitors when attempting to attract international capital investment. 24'" Floor, 60S 56Avenue SW Calgary. Alberta T2P 3H5 Main: ~ FalC

4 Loss Consolidation/Attribute Transfer in Canada There arc two principal theories that are generally advanced with respect to taxation of corporate groups, as seen above in the discussion of regimes in other countries: (i) consolidation of taxable income and losses and (ii) the transfer of tax attributes. The consolidation methodology would combine all eligible entities together in the calculation of taxable income. Although this could add significant complexity into an already complex corporate tax regime, it allows losses and other tax attributes to be used more efficiently by a corporate group. There are complexities to this system, but there are also some excellent examples of this system in other countries that could be studied. The adoption of a full consolidation regime would be highly complex and likely would require significant changes to many sections of the Income Tax Act; therefore, it could fundamentally change the nature ofhow corporations are taxed in Canada. The attribute transfer regime likely would be somewhat more straight-forward than a consolidation regime. This is because it should provide more flexibility as to when and how companies can move tax attributes. In our view, a loss transfer regime would be far more flexible and "user-friendly" than a consolidation regime, and may allow for changes to be implemented over time as the need for amendment arises. The changes to the legislation would likely be far less invasive. The tax attribute transfer system likely will garner more support because of its simplicity. It also should be the least disruptive for most taxpayers. This type of regime could work very well from a federal tax perspective. That said, provinces may express some concern unless appropriate anti*avoidance rules are implemented at the same time. Provincial Concerns Based on the history that the Department of Finance has with the provinces, the biggest challenge will not be the choice of group taxation methodologies, but will be the acceptance of the chosen methodology by the provinces. Therefore, before determining which type of regime to potentially implement, significant discussion needs to occur with the provinces. The most critical issue a province will have with respect to any group taxation method is the possible erosion of its tax base. In a straight-forward attribute transfer system, this is a valid concern as it would be possible for a corporate group to allocate attributes to higher-tax provinces. However, this could be countered by also implementing some strict guidelines regarding which companies can be "transferee" companies. For example, it may be appropriate to restrict the transfer of tax attributes to another company where the provincial auocation in that company is substantially different. This could be measured in various ways such as ranges of provincial allocation percentages in previous years. The issue will be to assure the provinces that the intention is not to erode their tax bases with losses from companies that do not have (or did not have) a permanent establishment in that province Floor. 605 S" Avenue Wi Calga~ Alberta T2P 3H5 Main: " Fax:

5 Another approach to the provincial issue is to adopt the consolidation method of group taxation. As noted above, this likely would be the more complex option, but it may also be the most acceptable method for the provinces as a company's total salaries and revenues are consolidated into one calculation and tax is paid by a group of companies based on all of their activities across the country. The disadvantage to this approach is its overall complexity. However, if it is a priority to include the provinces in the decision, this is something that should be explored. A further option is to implement the group taxation regime that is considered to be the most effective and straight-forward and then have the provinces propose how to incorporate that system into the provincial allocation methodologies. The provinces may choose to completely disallow that regime for provincial tax purposes, in which case the current methodology of having each separate company allocate income to the provinces based on salaries and revenue in that province would continue. It is not unusual to have different tax bases for federal and provincial purposes as this is currently the situation for many taxpayers. Although it would be preferable to have a harmonized system, it may not be possible or practical for the provinces at this time. However, the implementation of a group taxation system at a federal level should not be delayed by provincial resistance. We are available to discuss the above at your convenience. Yours very truly, WALTON GLOBAL INVESTMENTS LTD. ~~ +1 D. Blair Nixon. Q.C., FCA, ICD.D Chief Financial Officer Lynn Moen, C.A. VP International Tax 24'" Floor, 605 Sill Avenue SW' Calgary, Alberta T2P 3H5 Main: » Fax: