1999 Canadian budget proposal for offsetting of interest on corporate tax overpayments and underpayments

1999 Canadian budget proposal for offsetting of interest on corporate tax overpayments and underpayments

June 2, 1999

On June 2, 1999, Tax Executives Institute submitted the following comments to the Canadian Department of Finance relating to the 1999 Federal Budget proposal for offsetting of interest on corporate tax overpayments and underpayments. TEI’s comments, which took the form of a letter from TEI President Lester D. Ezrati to The Honourable Paul Martin, Canadian Minister of Finance, were prepared under the aegis of its Canadian Income Tax Committee, whose chair is John M. Allinotte of Dofasco Inc. David M. Penney of General Motors Corporation and Alan Wheable of Canada Trust contributed substantially to the development of the Institute’s comments.

As President of Tax Executives Institute, Inc. (TEI), I am writing to commend the government for including a proposal in the February 16, 1999, Federal Budget that will permit the offsetting of interest on over- and under-payments of corporate tax liabilities. When implemented, the proposal will recalibrate the balance between taxpayers and the government in respect of the proper measure of interest on tax re-assessments and thereby foster taxpayer confidence in the equity and fairness of the corporate income tax system.

TEI is the preeminent association of business tax executives in North America. The Institute’s 5,000 professionals manage the tax affairs of the leading 2,800 companies in Canada and the United States and must contend daily with the planning and compliance aspects of Canada’s business tax laws. Canadians make up 10 percent of TEI’s membership, with our Canadian members belonging to chapters in Calgary, Montreal, Toronto, and Vancouver, which together make up one of our eight geographic regions. Our non-Canadian members (including those in Europe) work for companies with substantial activities in Canada. The comments set forth in this letter reflect the views of the Institute as a whole, but more particularly those of our Canadian constituency.

In the past, TEI has been a vocal critic of the inequitable features of the interest assessment regime in Canada. Specifically, the combined effect of the nondeductibility of interest levied on tax underpayments and the taxable nature of interest on overpayments is highly punitive and that penalty is heightened by the interest-rate differential between over- and under-payments of tax. Moreover, the lack of a consolidated tax return system in Canada for corporate groups exacerbates the unfairness since frequently there are situations where one member of a corporate group is subject to disallowance of a deduction (or the inclusion of an item in income), while a corresponding — and offsetting — adjustment is made to the taxable income of another group member. In such situations, the tax on the company with the underpayment is subject to additional nondeductible interest assessment while the group member with the overpayment receives taxable interest. While the budget proposal will not remedy all the deficiencies in the interest assessment regime, it will substantially temper the unfairness.(1)

Hence, the government is to be commended for including this salutary proposal in the 1999 Federal Budget. It is only right that, where a taxpayer owes one amount to the government and the government owes an offsetting amount to the taxpayer, interest should be imposed only on the net amount of the over- or underpayment. When fully implemented for taxable periods subsequent to 1999, the measure will restore balance to the system.

In addition, we believe the procedures for invoking the relief accorded by the provision are both administrable and fair. Hence, TEI supports the requirement that a taxpayer apply in writing for relief within 90 days of the date of the Notice of Assessment, 90 days after the date of Notice of Confirmation, or 30 days after the date of a final court decision, whichever applies under the circumstances.

TEI respectfully suggests, however, that the proposed effective date for the provision is, at best, confusing and recommends that it be clarified. Under one interpretation of the proposal’s effective date, the inequity of the current system would be perpetuated for years as corporate taxpayers would continue to incur excessive interest costs under the current regime until all tax liabilities associated with their pre-2000 taxation year returns are finally determined.(2) We do not believe that interpretation is consistent with the intent of the proposal, but the effective date provision is sufficiently ambiguous that it requires clarification. We believe that the intent of the new relieving provision is to accord the benefit of offsetting of over- and under-payments of tax liability in respect of all taxable periods that are open for assessment or reassessment for amounts owed by, or refundable to, taxpayers as of and after December 31, 1999. We recommend that the coming-in-to-force provision be so clarified.

TEI’s comments were prepared under the aegis of the Institute’s Canadian Income Tax Committee, whose chair is John M. Allinotte. If you should have any questions about the submission, please do not hesitate to call Mr. Allinotte at (905) 5487200 (ext. 6821), or Pierre M. Bocti, TEI’s Vice President for Canadian Affairs, at (905) 206-3399.

(1) During TEI’s 1997 annual liaison meeting with representatives of the Department of Finance, detailed calculations were forwarded to the Department demonstrating how taxpayers can incur a substantial interest charge even where a re-assessment is made whose purpose is to wholly reverse a prior erroneous assessment by Revenue Canada. In other words, there are cases where the taxpayer will incur an interest charge on re-assessments even though the re-assessment is made to rectify errors by the Minister and the purpose of the second re-assessment is to restore the taxpayer to the status quo before the erroneous re-assessment. Regrettably, the budget proposal seemingly does not address such situations and we recommend that the Department of Finance develop legislative language for technical amendments that will address these inequities. (Upon request, additional copies of the 1997 TEI submission and calculations can be supplied.)

(2) TEI’s members prepare the most complex corporate tax returns filed in Canada and those returns are subject, on a continuing basis, to rigorous audit scrutiny by Revenue Canada. Because of the complexity of the issues involved as well as the amount of information examined during audits of large company returns, Revenue Canada auditors frequently require several years to conclude their examinations and issue re-assessments. Hence, as a result of delays in the audit process, company tax returns in respect of pre-2000 taxation years will remain open for re-assessment for a substantial period beyond 1999.

COPYRIGHT 1999 Tax Executives Institute, Inc.

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