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Ottawa, November 5, 1996
1996-081

Martin Grants Extension to Technical Committee on Business Taxation

Related documents:

• Letter to Minister Martin from Jack Mintz, Chair, Technical Committee on Business Taxation (November 1, 1996).
• Technical Committee on Business Taxation Completed Research Studies.
• Letter from Minister Martin to Professor Jack Mintz, Chair, Technical Committee on Business Taxation (November 5, 1996).

Finance Minister Paul Martin has granted the Technical Committee on Business Taxation an extension to complete its report. The Committee asked for the extension so that it could deal in greater depth with a number of important issues within its broad mandate. The Committee, which was established following the March 1996 federal budget to consider ways in which Canada's business taxation system could better contribute to the creation of jobs, was originally scheduled to report at the end of this year. That has now been extended to the end of 1997.

In granting the extension, Minister Martin reminded the Committee to give particular attention to three objectives. The first was ensuring that the business tax system promotes the creation and retention of jobs in Canada. The second was ensuring that multi-national companies pay the intended level of tax on their business activity in Canada. And the third was ensuring effective tax compliance while seeking ways in which compliance costs for taxpayers could be reduced.

"The Committee has identified a number of key areas which require more detailed analysis and consideration of policy options," Mr. Martin said. "Given their significance, I have decided to give the Committee more time to explore these issues thoroughly."

Among the areas in which further work will be concentrated are: the employment impact of payroll taxes; the structure of corporate income and capital taxes, including the tax treatment of corporate losses; the taxation of income earned from international investment, both inbound and outbound; the integration of corporate and personal taxes, particularly improving the way integration functions and including the role played by tax exempt institutions in the financing of corporations; and issues relating to the cost-effective enhancement of tax compliance.

In the course of its work to date, the Committee has commissioned a number of studies from outside experts to provide background analysis of some of the issues being considered under its mandate. These studies, which reflect the views of their authors and not necessarily those of the Committee, are being prepared for publication and will be released in the near future.

The letter of Committee Chair Jack Mintz to Minister Martin outlining the Committee's progress to date and requesting an extension of time is attached, as is Mr. Martin's response.

____________________
For further information:

November 1, 1996

The Honourable Paul Martin, P.C., M.P.
Minister of Finance
Government of Canada
Ottawa, Ontario
K1A 0G5

Dear Minister Martin:

I am writing on behalf of the Technical Committee on Business Taxation to provide you a report on the status of our progress and to raise an issue with respect to the implementation of the mandate of the Committee and the timing of the completion of its work.

Our terms of reference, released March 6, 1996, called for the Committee to review corporate income, capital and payroll taxes paid by businesses, and taxes paid by individuals on income derived from investments. Three objectives were to be considered in evaluating the business tax structure:

1. (I) promoting job creation and economic growth in a global economy,
   (II) reducing compliance and administrative costs faced by taxpayers and
   governments, and
   (III) enhancing fairness so that all businesses share in the financing of public services.

Recommendations for changes to the business tax structure were to take account of the shared responsibility of federal and provincial governments and the fiscal constraints faced by governments in Canada. The report was to be submitted by the end of 1996 with consultations to follow soon thereafter.

The Committee has been meeting monthly since February 1996. In addition to our regular meetings, the Committee held roundtables of technical experts on four major topics: international tax issues, tax integration issues, tax simplification, and other issues in the taxation of business income and employment.

The Committee's work has been assisted by a secretariat, the Department of Finance and Revenue Canada. The Committee has commissioned a number of studies from outside experts to provide background analysis of many of the issues being considered as part of its mandate. A list of completed studies is attached.

The Committee has been working diligently to fulfil its mandate within the specified timeframe, but has identified a number of areas where fuller examination and development of policy options would seem desirable. As we did our work, we identified broader issues that should be reviewed in order that we could fully satisfy our mandate. The areas that we have identified that would benefit from additional consideration include the following:

• Employment: As we were asked to assess how the tax system could be changed to improve job creation, the Committee has spent considerable time examining the impact of the tax system on employment. The investigations have included a consideration of general policy changes that would enhance job creation as well as specific employment incentives that are intended to alleviate certain problems that arise in the operation of labour markets.

  In its examination of the impact of taxes on job creation, the Committee has found that its ability to analyse payroll taxes paid to federal and provincial governments requires analyses that go beyond what would be possible if the Committee is to report before the end of this year. Certain federal and provincial payroll taxes are levied to pay for the cost of social programs. An assessment of their effect on job creation must also consider the benefits received. The Committee needs to undertake analysis that would allow for a more detailed consideration of how payroll taxes affect job creation.

• The Structure of Corporate Income and Capital Taxes: Federal and provincial governments assess corporate income and capital taxes on businesses in Canada. In the mid-1980s, Canada pursued a general policy of broadening tax bases coupled with lower tax rates on corporate profits while increasing the amount of corporate tax collected. This strategy has been pursued to encourage greater business efficiency that can lead to more jobs as well as protect the corporate income tax base.

  The combined federal-provincial corporate income top tax rate averages about 43% with reduced rates for manufacturing companies and small businesses. The federal and provincial government also levies capital taxes on large corporations and deposit-taking and insurance companies. Relative to other large industrialized countries, Canada's corporate income tax rate on non-manufacturing companies is high. Our Committee is examining whether the current corporate income and capital tax regime in Canada can be improved in a manner that would create jobs, promote economic growth, reduce compliance and administrative costs, and increase fairness, without any reduction in the total amount of tax raised.

  One of the many complex issues relevant to the corporate income tax is the treatment of losses for tax purposes. Several witnesses appearing before the House of Commons Standing Committee on Finance during its summer hearings on the economic and compliance costs of the tax system, expressed interest in the development of a system which would allow a corporate group to consolidate profits and losses for tax purposes. The Technical Committee has not had the time to examine the tax treatment of corporate losses in depth.

• Taxation of Income earned from Inbound and Outbound Investment: Given the extent of global economic integration and the impact that this has on job creation, an assessment of the tax system in relation to inbound and outbound investment is appropriate. Many other countries have been reconsidering their approaches to taxation in this area.

  Approaches to the taxation of foreign-source income earned by businesses vary across countries. The principle widely used, in tax legislation and tax treaties, is to avoid double taxation whereby both foreign and domestic taxes might be levied on the same source of income without recognition of their interaction. One approach is to tax fully some sources of income with foreign taxes credited against domestic taxes owing on such income. Another is to exempt certain sources of foreign-source income from domestic taxation since such income may be taxed in foreign jurisdictions. Countries also vary in terms of the degree to which expenses incurred for foreign investments are deductible from domestic corporate income and in the approach taken to current taxation of investment income. Often countries desire that income from the domestic and foreign investments of their corporations be taxed at similar rates and that their multinationals operate on a "level playing field". At the same time, countries need to protect their revenue base.

  As for inbound investment, Canada imposes withholding taxes on income remitted to non-residents. It also restricts the deduction of interest paid on a non-arm's length basis to non-residents.

  Transfer pricing issues have also become more important especially with the adoption of new rules by the United States and of new guidelines by the OECD in the 1990s. An evaluation of Canada's current transfer pricing regime is in order.

  The tax treatment of income earned from inbound and outbound investment is important to Canada. Although the Committee has conducted new studies in this area and has reviewed general policy approaches, these studies suggest that additional research would be needed to complete an assessment of this area of tax policy.

• Integration of Corporate and Personal Taxes: The integration of corporate and personal taxes on investments has provided some recognition of double taxation. This has been particularly effective at the small business level. It has been implemented by the provision of the dividend tax credit under the personal income tax, the exemption of inter-corporate dividends, the partial exclusion of capital gains from taxation and special rules for the taxation of investment income earned by private corporations. In some circumstances, the integration measures do not fully relieve income from double taxation. In other instances over-integration can occur, as in the case where corporations pay less corporate income tax on profits distributed to shareholders than the value of the dividend tax credit. The Committee is examining whether the current system of integration of corporate and personal income taxes could be improved.

  In our investigation of the relationship between corporate and personal income taxes on investments, we have been struck by the important role that tax exempt institutions play in the financing of corporations. However, a full assessment of the implications of this financing for the efficiency of capital markets and for the corporate income tax requires a fuller examination of the interaction of tax exempt investment decisions and business financing.

• Compliance: Costs of compliance with the tax system are an important matter for both taxpayers and governments. This point was well articulated by witnesses at the summer hearings held by the House of Commons Standing Committee on Finance. When compliance and administration are unnecessarily complex, businesses and governments expend resources unproductively. Moreover, when some taxpayers are not complying with the tax system, unfairness results for all.

  As confirmed by studies, simplifications such as the harmonization of federal and provincial taxes can improve compliance and reduce costs. The Committee is assessing the most important causes of compliance costs with the aid of surveys conducted in association with the Tax Executives Institute and the Canadian Federation of Independent Business. It is also looking at methods by which compliance with the tax system can be enhanced.

In summary, I wish to bring to your attention the Committee's view that more time is required if it is to deal adequately with the broad range of issues that you asked the Committee to address under its mandate. On behalf of the Committee, I recommend that consideration be given to extending the deadline for the Committee's report to no later than the end of 1997.

The Committee wishes to release the research studies it has commissioned as soon as they are prepared in an appropriate format. These studies have been written by outside tax experts and the views expressed are solely the authors' and not necessarily those of the Committee.

Sincerely,



Jack Mintz
Chair
Technical Committee on Business Taxation

Technical Committee On Business Taxation Completed Research Studies

Brian Arnold (University of Western Ontario)
"A Comparison and Assessment of the Tax Treatment of Foreign Source Income in Canada, Australia, France, Germany, and the United States"

Richard Bird (University of Toronto)
"Why Tax Corporations"

Ben Cherniavsky (Technical Committee Research Analyst)
"Tax Policy and Job Creation-Literature Survey of Employment Incentive Programs"

Jason Cummins (New York University)
"The Effects of Taxation on U.S. Multinational Companies and their Canadian Affiliates"

Michael Devereux (Keele University)
"The Integration of Corporate and Personal Taxes in Europe: The Role of Minimum Taxes on Dividend Payments"

Andrew Lyon (University of Maryland)
"International Implications of U.S. Tax Reform"

Ken McKenzie (University of Calgary) and Aileen Thompson (Carleton University)
"The Economic Effects of Dividend Taxation"

Peter McQuillan (KPMG Toronto)
"Capital Tax Issues"

Robert Plamondon (Ottawa)
"Compliance Issues: Small Business and the Corporate Income Tax System"

Robert Turner (Ernst and Young, Toronto)
"Study on Transfer Pricing"

Marianne Vigneault (Bishop's University) and Robin Boadway (Queen's University)
"The Interaction of Federal and Provincial Taxes on Business"

Gordon Williamson (Arthur Andersen, Toronto)
"Taxation of Inbound Investment"

November 5, 1996

Professor Jack Mintz
Clifford Clark Visiting Economist
Department of Finance
Ottawa, Ontario
K1A 0G5

Dear Professor Mintz:

I wish to respond to your letter of November 1, 1996 on behalf of the Technical Committee on Business Taxation, requesting that the Committee be provided additional time in order to deal adequately with the broad range of issues in its mandate, and identifying the areas in which further work would be concentrated.

After consideration of the importance and complexity of the issues identified in your letter, I share the view that it is essential for the Committee to be in a position to address these issues in depth. I thus agree to an extension, and ask that the Committee submit its report before the end of 1997.

In pursuing its further work, I trust that the Committee will give particular attention to the following areas:

• ensuring that the business tax system promotes the creation and retention of jobs in Canada;
  
• ensuring that multi-national companies pay the intended level of tax on their business activity in Canada. In this regard, I encourage the Committee to consider not only measures that Canada can take on its own to achieve this result, but also measures that might be taken in cooperation with other countries.
  
• ensuring generally that legislative provisions and the approach to enforcement assure effective tax compliance, while at the same time considering ways in which costs that compliance imposes on taxpayers may be reduced.

I know that the House of Commons Finance Committee, which has already held preliminary hearings on a number of areas in the Technical Committee's mandate, will be interested in the extension of your Committee's mandate. I intend to write to the Chairman of the House Committee, suggesting that he invite you to discuss with that Committee the areas you intend to examine in greater depth.

I welcome the Technical Committee's intention to release research studies it has commissioned as they become available, recognizing that the views expressed in these studies are solely the authors' and not necessarily those of the Committee.

I wish to thank you and the other members of the Technical Committee on Business Taxation for your work to date, and encourage you to pursue your further work with continued vigour and creativity. We are expecting your report to serve as a basis for public consideration of how this crucial instrument of government policy can best be used to further the creation of employment and improvement in the standard of living of Canadians.

Sincerely,



The Honourable Paul Martin, P.C., M.P.