The Taxation of Corporate Groups Consultation Paper November 2010

Transcription

1 April 15 th, 2011 Department of Finance L Esplanade Laurier 17 th Floor, East Tower 140 O Connor Street Ottawa, ON K1A 0G5 Attention: Mr. Geoff Trueman, Business Income Tax Division Dear Sirs and Mesdames, The Taxation of Corporate Groups Consultation Paper November 2010 The Canadian Life Association ( CLHIA ) is pleased to submit its comments and recommendations in response to The Taxation of Corporate Groups, a consultation paper issued by the Canadian Government. Established in 1894, the CLHIA is a voluntary association whose member companies account for 99% of Canada s life and health insurance business. The life and health insurance industry protects more than 26 million Canadians, paying them almost $60 billion in benefits in 2009 (the most recent data available). The life and health insurance industry is one of the largest in the Canadian economy, with total assets of $975 billion and over 130,000 Canadians earning some or all of their income from the industry. Many highly-skilled and well-paying industry jobs are situated in Canada because the head offices of the major Canadian life insurers are located here. Canada s major life and health insurers are global leaders, with the three largest Canadian life and health insurers among the top 15 in the world. The industry has significant and growing operations in the United States and Asia with over half of its worldwide business outside Canada. The CLHIA and its members support the Government s initiative to explore the range of possible approaches for a new system of corporate group taxation. The system for the taxation of corporate groups is of particular significance for our industry due to the 1 Queen Street East Suite 1700 Toronto, Ontario M5C 2X9 Tel: (416) Fax: (416) , rue Queen Est Bureau 1700 Toronto (Ontario) M5C 2X9 Tél.: (416) Fax: (416) Toronto Montreal Ottawa

2 highly regulated nature of the financial services sector, which results in the need for certain business activities to be conducted in separate corporations. To attract more head offices and investment to Canada, Canada s system for the taxation of corporate groups must be competitive with major developed countries around the world. Guiding Principles Our responses to the specific questions raised in the consultation paper are set out in greater detail in the appendix to this letter and reflect certain guiding principles. The CLHIA believes that, in developing an improved system for the taxation of corporate groups, the Department of Finance should be guided by three main principles: The new system should be simple and flexible. It should be elective and available to all corporate members of a related group who are subject to taxation in Canada. The new system should include the provinces, ideally, with Canada and the provinces participating in a common (or substantially similar) system to minimize complexity and compliance and administrative costs. The range of attributes that may be transferred under the new system should include, at a minimum, capital and non-capital losses but may be extended to other attributes if that can be done without undue complexity and delay. Conclusion We appreciate the opportunity to make this submission. We would be pleased to respond to any questions or requests for clarification of our comments. We look forward to working with the federal and provincial governments and other interested participants from the business community in developing a new system for the taxation of corporate groups. Yours truly, Peggy McFarland, C.A. Director, Corporate Taxation 2

3 Appendix To CLHIA s Submission to the Department of Finance on the Taxation of Corporate Groups 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. Many businesses operate through separate corporate entities for commercial or regulatory reasons, for example, to: comply with financial institutions regulations that require separation of certain types of business operations protect one part of a business from any liabilities of the other parts allow one part of a business to operate independently of the other parts allow one operation to access capital through a top holding company (based on the financial strength and diversity of the entire group s operations) allow one operation to access capital from a minority investor who does not want to invest in other parts of the group s operations. Without a corporate group taxation system, there is a disincentive to operating through separate corporations (even if there are bona fide business reasons for doing so) because of the potentially increased tax costs. The current system imposes costs and risks (see below) that lead to inefficiency and lost value simply because the business does not operate through a single entity. To that extent, corporate groups may be subject to an unfair competitive disadvantage, including with respect to non-canadian competitors. 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. The current system is an informal transaction based system. Under the current system, corporate groups are required to enter into transactions that have the effect of shifting income or losses between members of the corporate group provided that the results are considered to be in accordance with the scheme of the Act and the administrative policies of the Canada Revenue Agency. 3

4 The principal (and, perhaps, only) advantage of such a system is flexibility: a corporate group may choose which group member s income is offset by losses of another group member (and when that happens). The current system relies to a significant extent on the administrative policies of the Canada Revenue Agency. As a result, the current system imposes the following needless costs and risks on corporate groups: Transactions costs (including legal, accounting, and regulatory compliance costs) Transaction execution risks Transaction tax risks (including costs of mitigating such risks by obtaining advance income tax rulings) Costs of implementation delays because regulatory approvals (including advance income tax rulings) are necessary or desirable Costs arising out of an inability to implement transactions because of tax or nontax reasons. The current system may also be inherently unfair to smaller businesses because the costs and risks of transactions may be prohibitive relative to the potential tax savings. 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. A new system that includes the provinces is desirable, ideally, with Canada and the provinces participating in a common (or substantially similar) system to minimize complexity and administrative costs. A federal only system, or one that does not include most of the larger provinces, would not be as efficient, and would likely not be effective, for groups that operate in more than one province. The advantages of a federal only system would also be outweighed by the costs of compliance with different provincial tax systems. Whether changes to the method of determining the provincial income allocation are necessary will depend upon the form of the new system and the expected impact the new system will have on provincial tax revenues. 4

5 Possible Approaches The Government is interested in stakeholders views on: * How the efficiency and competitiveness of Canada s current loss utilization rules compares to more explicit, but often less flexible, rules in other countries; * How a new system of taxation for corporate groups would improve the efficiency and competitiveness of Canada s tax system; and * The approach Canada should take for a new system for the taxation of corporate groups. A new system should have two key attributes: simplicity and flexibility. It should be elective and should have no effect on corporate taxpayers that do not opt in to the system. All corporate taxpayers who are subject to taxation in Canada (whether large or small, and regardless of the type of business or investment activity carried on) should be eligible to opt in to the new system. A full consolidation system will inevitably lead to complexity in the implementing legislation. Complexity, in turn, will make compliance with, and administration of, such a system costly and inefficient (as evidenced by the US system). It would not be an improvement over the current system. Moreover, the transition to a full consolidation system from the current system will be fraught with difficulty. The complexities and administrative burdens introduced by a full consolidation system are unnecessary if a more limited consolidation can be achieved with respect to the most important tax attributes that can be transferred within a corporate group under the current loss utilization rules: current and prior year capital and non-capital losses. We believe that an elective loss transfer system should be sufficient to achieve such a limited consolidation. It would be neither complex nor difficult to implement. It should be more cost efficient and effective because it will not require taxpayers to undertake transactions to effect the loss transfer. Because such a system approximates the current system, it should be the least disruptive to the structure of the existing tax system and its administration. The Part VI.1 transfer system has some appeal as a model for an elective loss transfer system. 5

6 Design Parameters: Eligible Groups: Degree of Common Ownership The Government is interested in stakeholders views regarding: * The appropriate threshold of common ownership for a corporation to be included in a corporate group; and * The appropriate meaning of ownership to be applied for determining if a corporation meets the ownership threshold (e.g. votes, value, or both). The current threshold of common ownership for acceptable loss transfers in the Act and under the current system is relatedness. If this threshold were raised to a higher level of common ownership under a new system, it would not materially affect the CLHIA s member companies. However, we believe that raising the threshold will unfairly exclude, from the new system, many taxpayers who are eligible to benefit from the current system. This will make it more difficult to implement a new system without retaining the current system for the excluded taxpayers. Design Parameters: Eligible Groups: Non-Corporate Entities and Non-Resident Corporations The Government is interested in stakeholders views regarding how trusts or other noncorporate 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. To avoid undue complexity and delay, we recommend that non-corporate entities be excluded from the new system. However, for regulated financial institutions, the ability to transfer losses within a group could facilitate access to the markets through new innovative Tier One capital structures. This may make it desirable that certain trusts approved by the financial institutions regulator be included in the new system for that limited purpose. We also recommend that a non-resident corporation that has a Canadian branch be included in the new system with respect to the Canadian branch. If participation in the new system is not elective, it may be necessary to provide for a one-time election allowing a non-resident corporation to opt out (because of adverse implications under applicable foreign tax systems). Branch tax implications of participation by a Canadian branch will also need to be considered. 6

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. Under an elective loss transfer system with a relatedness threshold, a common parent corporation is not necessary. 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. To avoid complexity and delay in implementing a new system, we recommend that the range of attributes be limited, initially, to current and prior year capital and non-capital losses. If prior year capital and non-capital losses are not eligible under the new system, taxpayers may be deprived of the ability to use the current system in respect of those losses in which case, an appropriate transition period should be provided for such losses (which would add complexity). 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. We recommend a voluntary annual election for participation in the new system. This reflects the current system. However, we acknowledge that a minimum participation period may be desirable in response to concerns about the interprovincial allocation of income. Any such minimum period should be capable of being abridged with the approval of the Minister in the appropriate circumstances. 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. 7

8 Existing pools of losses should be eligible for transfer between two corporations under the new system to the extent that such losses are eligible for transfer between those two corporations under the current system. The emergence of income and losses is often subject to timing differences and may straddle taxation years. Losses may arise in years prior to the years in which the income arises, for example, because of start up expenses or ordinary business cycles. Limiting loss transfers to current year losses imposes inappropriate restrictions. 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. If the new system is an elective loss transfer system with a relatedness threshold, it is unlikely that taxpayers will need to rely on the current system (unless it is a federal only system). However, to the extent that the new system is more restrictive than the current system, taxpayers should not be deprived of the ability to use the current system. 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. As noted earlier, the use of losses and other attributes accumulated by corporate groups prior to the introduction of the new system should be permitted to the extent that such losses are eligible for transfer under the current system. However, we acknowledge that a transition period may be appropriate to minimize the impact on revenues. 8