2013 Federal and Provincial Budgets - Opportunities Lost or Deferred?

By: Nick Pantaleo

We are almost through the late winter / early spring ritual of federal and provincial governments bringing down their annual budgets – actually, Quebec’s budget was in November following the election of the PQ minority government – except for Ontario, which will be releasing their budget on May 2nd.

With the governments contending with a still fragile global economy, slow economic growth and generally high deficits, many weren’t expecting to receive a lot of goodies – and they weren’t disappointed.

What PwC said and what governments did

PwC’s federal budget submission cautioned about relying on measures governments have typically relied on in the past to raise revenue; namely, increasing corporate and personal income, capital and payroll-type taxes, all of which have a negative impact on economic growth and job creation. The federal government listened to that message and did not raise income tax rates.

We also recommended that the government work with the provinces to re-evaluate the efficiency and sustainability of the current mix of revenue generating measures, including conducting a review of the personal income tax and GST/HST systems (in particular, the inefficiency of the myriad of tax expenditures embedded in the system), to improve the way Canada raises tax revenue while protecting those who are most vulnerable. Unfortunately, they have not heard that message – at least not yet.

As for the provincial budgets, most continue to break ranks around rates.

Personal tax rates were raised for high income earners in B.C. - the NDP promises to impose a further increase if they win next month’s election - and Quebec and across all tax brackets in New Brunswick.

As for corporate tax rates, New Brunswick raised the main rate by 2 percent to 12 percent – disheartening because they have been one of the provincial champions of low corporate tax rates. New Brunswick made no mention of its 2011 promise to lower the small business (SB) rate to 2.5% by 2015, while Nova Scotia decreased its SB rate to 3% and PEI increased its rate to 4.5%. Meanwhile, B.C. stepped up its 1% corporate tax increase by one year with the NDP promising another 1 percent increase and the reinstatement of a capital tax on financial institutions if they win the next provincial election. Saskatchewan has deferred further corporate tax decreases, no longer committing to a 2015 implementation date and Manitoba will raise the capital tax rate on financial institutions from 4 to 5 percent. Ontario is the last big province to be heard from but its fiscal situation remains dire – it has a new Premier and a minority government that has already promised to defer further reductions, so all bets are off.

The upshot of all this, as shown in the table below, is that we are not close to seeing that uniform, across-the-country general corporate tax rate drop to 25%, something federal Finance Minister Jim Flaherty was seeking. If anything, the gap will widen. 

Of course, not shown in the table are the many tax credits provinces have to entice businesses to set up shop in their province. It all makes for a confusing and pretty inefficient corporate tax structure for Canada with each of the provinces doing what they think they must and because they can. On the other hand, it also means continued opportunities for provincial tax planning.

More disappointment

Many businesses were hoping that the government’s initiative to consider a formal system of group taxation would help make the tax system more efficient for corporate groups. However, the federal government announced in their budget that “feedback from the consultation exercise and discussions with provincial and territorial officials have not produced a consensus regarding how the Government could move forward in a way that would improve the tax system………[hence t]he Government has determined that moving to a formal system of corporate group taxation is not a priority at this time.”

Cynics will see this as another example of the federal and provincial governments’ failure to steer the boat in a single direction for the good of the country. Regardless, businesses have a right to be disappointed with this decision.

Two years have passed since a number of companies and business organizations made submissions to the government (see PwC’s submission), all mostly in favour of a formal system. Moreover, while the budget papers noted the provincial and territories’ concerns over the potential of reduced revenues and the likely upfront costs for all governments, as PwC noted in our budget submission, this was something that many businesses were sensitive to and were prepared to help the government resolve.  

One of the lessons learned from the consultation process is that the provinces and territories are not happy with the current “informal” system of group taxation because they do not know what it is costing them. The government promises to work with them on that – hopefully with the input from businesses. Hopefully, as well, provinces will not take unilateral action in the meantime.

Now what?

No easy answer. Corporate tax is an enigma.

It has the highest marginal cost in terms of raising government funds and its burden for the most part fall ultimately on labour. It isn’t an insignificant part of a province’s total tax revenue stream, but it is the most volatile, other than perhaps resource royalties. For example, Ontario’s corporate tax revenue prior to the financial crisis in 2007-8 was about $13 billion (19% of total tax revenue) and immediately dropped to under $6.7 billion the year after. What government can tolerate such a decrease in one year?

In many respects, the corporate tax challenge we face in Canada is similar to that being experienced globally, most recently manifested in the OECD’s report on Base Erosion and Profit Shifting, except ours is self-inflicted.

Makes one wonder why the provinces are in the corporate tax game. Wouldn’t they be better off leaving that to feds in exchange for a greater share of GST/HST revenue? It would also make life easier for corporations carrying on business in different provinces.

Maybe in a perfect world that would happen, but as a former colleague told me early in my career, “it’s not a perfect world”.

PwC Canada's Budget Memo

On March 21, 2013, the Federal Minister of Finance, Jim Flaherty, presented the majority government’s budget. This Tax memo discusses the tax initiatives proposed in the budget.

Aggressive Tax Planning on a global scale

While corporations face increasing pressure to be more profitable and move risk, functions and assets to different locations around the world in order to gain tax efficiencies and be more competitive, tax administrations are looking to raise revenues. As a result, governments around the world are becoming more aggressive with respect to tax avoidance, risk assessments and auditing. International norms of tax behaviours are beginning to be challenged.

In this panel discussion at the PwC / Tax Executives Institutes International Tax Day opening plenary session on November 21, 2012, John Preston, PwC’s global Tax Policy leader, David Swenson, PwC’s global leader of Tax Controversy and Dispute Resolution (TCDR) and Marc Vanasse, leader of PwC Canada’s TCDR team discuss global tax controversy and tax policies.

Tax Policy and Carpentry Have much in Common

By: Nick Pantaleo

In October, the Department of Finance released almost 2000 pages of draft legislation and technical notes affecting many areas of the Income Tax Act, but principally the foreign affiliate area. Most reflect technical changes – some are relieving and simplifying but many tighten existing provisions. Others, most notably the foreign affiliate dumping (FAD) rules, reflect policy changes.

Going through this stuff, I found myself thinking about a former Deputy Minister of Finance who once compared setting tax policy to screwing together two or more pieces of wood: if you use too few screws or do not tighten the screws enough, the structure will be weak and unsteady and will ultimately collapse. On the other hand, if you use too many screws or tighten them too much, the wood will crack and you will get the same result.

There is no doubt that setting tax policy and drafting legislation to deal with deficiencies in the law is an inexact science. It’s never easy to know “how far to go”.

Using more “screws” than needed or screwing them in too tightly can result in overly broad, complex legislation that makes it difficult for taxpayers to understand and comply with and for the CRA to administer, ultimately compromising the integrity of the system. It can also compromise the competitiveness of the system and have a negative impact on how and where business transactions are carried out.  

Take the FAD rules – please!!

As a member of Finance Minister Flaherty’s Advisory Panel on Canada’s System of International Taxation, I am constantly asked whether the FAD rules go farther than what the Panel recommended (see PwC’s recent summary).

As I have written previously, under the terms of its mandate, the Panel focused on foreign affiliate debt dumping. The phrase foreign affiliate dumping clearly indicates that the FAD rules are intended to go farther than the Panel’s recommendation; no doubt to ensure the rules are not susceptible to planning that would defeat their purpose.

I don’t have a problem with this. After all, the Panel did recommend that any change be “robust”. 

What’s more, the FAD rules are also intended to deal with inappropriate surplus stripping transactions, something the Panel did not specifically address - although if we did, I doubt we would have been fussed by planning to defer Canadian withholding tax, unless it facilitated debt dumping.

Critics, though, argue that the “more closely connected” exception is too restrictive and will give rise to considerable uncertainty as to how it can and will be administered and complied with – an example, if you wish, of using more screws or tightening the screws more than needed.

In Finance’s defense, they had the difficult challenge of determining the circumstances of when the Canadian tax system should not subsidize foreign investments by a foreign controlled Canadian company because of the perceived lack of significant economic benefit to Canada. The test is not perfect, but it should capture the abusive type of planning the Panel believed should be stopped, while the paid-up-capital offset and re-instatement rules and the new elective 17.1 regime should provide taxpayers with alternatives for many situations that are not abusive or that are not intended to erode the Canadian tax base.

Going too far

Still, the critics have a point – the FAD rules are far reaching. Two areas in particular come to mind.

The first is the indirect acquisition rule, which applies when a non-resident corporation acquires a Canadian company, directly or indirectly, if the latter has investments in foreign affiliates that exceed 75% of the value of the Canadian company.

Increasing the threshold from 50%, as initially proposed just two months earlier in August, is a big change and suggests that the rule is arbitrary and the targeted abuse unclear. More importantly, while the resulting structure following such acquisitions looks similar to the structures that the FAD rules are intended to catch, it should be relevant that in these circumstances the structure is not the result of abusive tax planning.

Other government policies and legislation encourages inbound foreign investment, including the acquisition of Canadian companies where there is a net benefit to Canada. Invariably, such targets will have foreign affiliates because, as the Panel noted, business expansion into foreign jurisdictions is something that Canadian companies do sooner than most of their global competitors because of the smaller Canadian market. It seems inappropriate for the tax rules to impose a penalty on such acquisitions just because foreign affiliates account for 76% instead of 74%, or 80% instead of 10% of the value of the Canadian target.

I am not convinced these acquisitions need to be targeted, absent some clear abuse post acquisition.  At the very least, the rules should provide for generous grandfathering, especially where an acquisition occurred prior to the FAD rules coming into force.

The second area involves the impact the FAD rules have on companies listed on Canada’s stock exchanges ostensibly to raise capital to invest in foreign businesses. This is particularly prevalent in the mining industry, where hundreds of mining companies seek to be listed in Canada even though many do not have Canadian operations. There are clearly non-tax reasons for these structures because Canada is not the poster boy holding company jurisdiction for tax purposes, except where there’s the ability to leverage Canadian operations.

It seems unnecessary for the FAD rules to go this far, especially if there is a risk of jeopardizing Canada’s well deserved reputation of being a good place to raise capital, not to mention the economic benefits such activity brings to Canada’s banking and investment community, Canadian stock exchanges, professional advisors, etc. Raising capital, public listings…these are mobile activities. It is reasonable to ask if it is necessary to give mining executives and others a reason to take their business elsewhere.

If there is concern about possible abuse in the future, by facilitating inappropriate leveraging if Canadian operations are acquired, then the focus should be to deal with that issue by allowing some safe harbor level of Canadian investment or even to restrict borrowings to something that is tied to the level of Canadian assets. Having said that, if such structures do result in Canadian investment, isn’t that a good thing, consistent with what the government says it wants?

Final thoughts

By including the indirect acquisition rule and public companies, the FAD rules seem to go farther than they need to. To extend the carpentry analogy, the rule is “measure twice, cut once”; Finance may have been too hasty in reaching for the saw.   

Bringing back the income trust with PwC's Foreign Asset Investment Trust (PwC FAIT)

The number of Initial Public Offerings (or IPOs) in the last while has been quite low. And, as such, there might be some capital in the public market just waiting to be tapped into.

In the video below, I talk about how the original income trust structure that was used to tap into those public markets was killed in 2006 but has been brought back to life through PwC FAIT. I also talk about how the structure takes into consideration cross-border issues, how it's worked so far, and other issues to consider when going through an IPO. 

 

What do you think? Could this be something that might apply to you and your organization? Leave your thoughts and comments below.

 For those attending the Canadian Tax Foundation's Annual Conference in Calgary on November 26th, I look forward to seeing you there (and to talking more about this in detail)! 

 

About Murray Lee:

Murray Lee is a Tax Services partner in the firm’s Calgary office. He has assisted both large and small clients in all aspects of Canada-U.S. taxation including reorganizations, mergers and acquisitions and cross-border financings. Murray has written several articles and made numerous presentations on various U.S. and cross border issues.

Dispelling Myths and Moving Forward

By: Nick Pantaleo

In August, the federal government launched consultations on the impact of contingency fees on the effectiveness of Canada’s scientific research and experimental development (SR&ED) tax incentive program.

For those unfamiliar with the practice, a contingency fee is a charge, in this case, for services to help companies identify and file claims for tax benefits under the SR&ED program, which is only payable if the claims are approved by the government.

This type of service arrangement has existed for years. Why is the government so concerned now?

What’s the fuss?

The SR&ED program has been under scrutiny in recent years. It is the largest federal program supporting business R&D in Canada, providing more than $3.6 billion in tax assistance in 2011. Still, recent studies show that Canada continues to lag many countries in business R&D spending, rates of commercialization of new products and services, and productivity growth.  

The 2011 report of the Independent Panel on Federal Support to Research and Development (the Jenkins Report) made recommendations to improve the program. It also observed that the SR&ED program is criticized for its complexity and high compliance costs, which forces companies to retain consultants on contingency fee arrangements.

The government, in announcing the consultations, stated that it has heard concerns about the prevalence and magnitude of contingency fee arrangements – it has been reported that such fees might be as high as 30% of total SR&ED benefits – and it is worried contingency fees may be diminishing the benefits of the SR&ED program to Canadian businesses and the economy.

What is the government looking for?

The consultation sought input to better understand:

• Why third-party preparers are hired on a contingency-fee basis;
• Why these preparers charge contingency fees;
• The prevalence of this practice and the amounts charged; and
• The impact of this practice on the effectiveness of the SR&ED program.

Submissions from stakeholders were due October 1st.

What has the government heard?

A number of professional firms and associations, including PwC, the Canadian Institute of Chartered Accountants and the Tax Executive Institute, have made submissions. Although the Department of Finance has not yet made any public, the consensus seems to be that contingency fee arrangements enhance the effectiveness and efficiency of the SR&ED program.

PwC notes that limiting such arrangements would not reduce compliance costs and that “Canadian businesses use contingency arrangements to reduce actual and perceived risks associated with claiming SR&ED benefits.”

The CICA agrees, arguing that “[a]ny action to target contingent based fees directly would only serve to eliminate a valuable avenue for obtaining claims assistance and potential financing for small and medium sized businesses.” Its conclusion is based on a survey it conducted within its membership. Among the other survey results:

• Fees paid under all types of arrangements are nominal, less than 4% of the total program costs.
• Contingency fees are comparable to fixed or hourly rate fee engagements suggesting that contingency fees do not increase compliance costs.
• Almost 50% of respondents who paid contingency fees would not likely to have made SR&ED claims under some other fee arrangement.

TEI maintains that contingency arrangements are important to taxpayers who desire to have SR&ED benefits identified at the lowest cost and properly structured contingency fee arrangements result in no higher costs than per hour or per diem fee billing methods. In fact, TEI contends that a per hour fee arrangement can be very inefficient. Moreover, there is generally no immediate “hit” or expense for the incremental cost of performing the study because the cost and tax benefit will be accounted for at the same time.

TEI also disagrees that claims filed on a contingency fees basis are less reliable or more aggressive than claims filed using traditional billing methods.

Was the consultation a wasted effort?

I don’t think so.

Sometimes you have to take a half step backward in order to take one step forward. The government wanted to find out how contingency fees impact the SR&ED program and they received some great insight.

The consultation provided an opportunity for tax preparers and SR&ED performers to be transparent and build trust with the government and to dispel some of the myths. That is important, particularly when the integrity of the program and its players are essentially being questioned.

Let’s now take that one step forward and re-focus on reducing complexity within the program, improve its administration and think about how other initiatives (for example, a patent or innovation box) might help to reduce Canada’s innovation deficit.

Hours and hours processing joint tax elections

For a number of years, I was the Director of Taxation for Canfor Corporation. Canfor is one of Canada’s largest producers of lumber, pulp and paper and is listed on the TSX. 

In 2006, Canfor reorganized three of its pulp mills into an income trust and at the same time allowed its shareholders a tax deferral through the filing of a joint tax election. Whilst it was the shareholder’s responsibility to prepare the forms, my guess was that between calls from shareholders and reviewing the submitted forms prior to signing would take something in the order of an hour or so of my time. One hour does not sound like a lot of time – until you start thinking of it in the context of hundreds of shareholders.   While necessary, it was not essential, strategic work, and, in any event, in the context of thousands of shareholders, it was just not possible to tackle this task in-house.

As it turned out, Canfor’s advisors, PricewaterhouseCoopers, had just finished developing their first version of an online tax election service. And I was happy to sign on and be their first live test. The tax filings went smoothly and I had time to focus on work that was of more value to the business.

Fast forward to today, where PwC continues to offer a comprehensive Tax Election Service based on secure and more user-friendly second generation proprietary software and staffed by knowledgeable and experienced people. The service allows clients to outsource the joint tax election process with their shareholders or unitholders and allows clients to focus their time and efforts on their business.

What are your thoughts about the tax election process? Have you had to file a joint tax election with your shareholders? Leave your comments below.

 

About Bob McDonald:

Bob works with the Mergers and Acquisition Tax Group in PwC’s Vancouver office where he assists clients on matters such as filing tax elections. Previously, Bob was the Director of Taxation for Canfor Corporation.

If You are Given Lemons, Make Lemonade

By: Nick Pantaleo

The Expert Panel on BC’s Business Tax Competitiveness issued its report to the Minister of Finance in late August (see http://www.fin.gov.bc.ca/experts_panel_tax.htm).  Relative to the circumstances that resulted in the creation of the Panel, the report’s release did not seem to generate a lot of fanfare.

The Panel was established by the BC government in early 2012 after the referendum decision last year to abandon the Harmonized Sales Tax (HST) and bring back the Provincial Sales Tax (PST).

You remember that fiasco, don’t you?

The BC government, following the lead of Ontario and almost every country in the world (except the US), introduced the HST in 2010. A huge protest ensued within BC, lead by former premier Bill Vander Zalm. The protesters successfully petitioned that a referendum be held. Notwithstanding that under the relevant legislation a referendum decision needed 50% plus 1 of registered voters in order to pass, then BC Premier Gordon Campbell announced, perhaps to placate opponents or perhaps because he thought it would be easier to win, that the BC government would respect the decision of the majority of actual voters.

The result? With only about 52% of registered voters voting, 55% (or a little more than a quarter of all registered voters) decided to kill the HST. True to the promise to respect the outcome of the referendum, the province plans to reintroduce the PST effective April 1^st, 2013.

In the wake of the referendum loss, the Panel was established to “generate ideas and provide recommendations for a business taxation system for British Columbia that balances the principles of competitiveness, fairness and simplicity.” However, under the guidelines given by the government, the Panel had to respect the referendum result and its recommendations had to be revenue neutral. The BC government in effect said, “Hey, we couldn’t make Plan A work, so give us Plan B to mitigate the damage to our competitiveness.” A pretty tall order, to say the least.

Bravely, the Panel did not hold back in its assessment of the effect of abandoning the HST, saying at the outset of its report that “[t]he return to the PST will significantly increase the cost of businesses making the capital investments needed to remain competitive. Unless addressed, BC’s businesses will face the highest effective tax rate on new investments among the provinces in 2013.” These comments are repeated throughout the report, along with a somewhat gloomy assessment of BC’s recent economic and productivity performance.

The Panel came up with an impressive list of 38 recommendations, most of which are directed at reducing “the PST burden on investments BC businesses must make to remain competitive” (ed. note: this is what the HST was intended to help do) and making “the PST fairer in its distribution, more neutral in its application across industries, simpler to administer and easier to comply with.”

Its key recommendation is to introduce a refundable investment tax credit equal to the PST paid on machinery and equipment, claimable over two years. This sounds like something similar to an input tax credit under a HST system, but it would not be nearly as efficient.  Still, the Panel believes that a refundable investment credit would substantially reverse the increase in the marginal effective tax rate on new investment resulting from the return to the PST.

The Panel’s second main recommendation is a bit of an eyebrow raiser: it recommends a task force be appointed to explore and fully develop the design of a Business Transfer Tax (BTT), something that, conceptually, is similar to a value-added tax, like the HST and GST. Many might say that a BTT is inferior to a GST from an operational perspective. In fact, the grey haired practitioners will remember that a BTT was one of the alternatives discussed in the 1980’s before the federal government settled on the GST.

It is not clear why a BTT would be more acceptable to BC voters than a HST or why businesses would welcome a “made in BC” VAT system that is different from that of most of the rest of the country. Perhaps the Panel hopes for a similar outcome to that of the 1994 Peterson Committee, which was struck to “fulfill” the federal Liberal’s 1993 election promise to scrap the GST. That committee’s primary recommendation was harmonization. In other words, keep the GST.

To offset the reduction in revenue from the recommendation to refund the PST on machinery and equipment, the Panel proposes that the exemptions for school supplies, certain foods, and telephone and cable services be eliminated (partially offset by increases in the sales tax credit for lower income individuals and families). As well, the Panel recommends an increase in the tobacco tax, a surcharge on provincial mining, oil and gas revenues sufficient to offset the investment tax credit these industries would receive, and an increase in the corporate income tax rate to 11.5%.

All in all, the Panel performed admirably under difficult circumstances in a very short time frame.

Time will tell how and when the BC government will react. This much is certain – Canada needs a thriving BC economy, for which the HST was intended to be a powerful boost.  As long as uncertainty surrounds such fundamental things such as taxation, in particular, taxation of business investment, that goal will be more difficult to achieve.

Enhancing the Competitiveness of Canada’s International Tax System (Part 10)

By: Nick Pantaleo

Yes, Virginia, there is FAPI

“Nick, there is no such thing as FAPI.”

That was the surprising reaction I got from an unimpressed partner a number of years ago when, as a young practitioner, I rushed into his office with the news that I thought one of our clients had a “FAPI” issue.

But that was a long time ago. My girls were still just a twinkle in my eyes; hockey season started on time; Septembers were still exciting for Blue Jay fans; Canada Trustco referred to a FAPI, not a GAAR case; and I was younger than Nat Boidman.

Then came the 1995 changes which tightened and expanded the FAPI regime by adding to the base erosion rules and introducing the investment business definition. Suddenly, foreign affiliate planning and compliance became a lot more challenging and complicated.

In his last post Wally argued that Canada’s base erosion rules have really not stood the test of time and like certain other countries have done, they need to be carved back to ensure that they do not adversely affect today’s global operations of Canadian companies. But, what about the investment business definition – has it stood the test of time?

Looking back

As a refresher, in 1991, the Tax Court of Canada in Canada Trustco Mortgage Company v. The Minister of National Revenue, concluded that a business carried on by a foreign affiliate for the purpose of earning interest income was an active business. Hence, the interest was income from an active business and not FAPI. In response, this is what was defined as an investment business: a business where the principle purpose of which is to derive income from property (such as interest, rents, royalties and dividends from non-foreign affiliates), as well as income from the insurance or reinsurance of risk, the factoring of accounts receivable, or the disposition of certain properties known as investment properties. Income from an investment business is FAPI.

There is an exception in the definition for a business of regulated financial institutions (including insurers, and traders and dealers in securities or commodities), real estate developers, leasing and licensing companies and money lenders provided the business is conducted principally with persons dealing at arm’s length with the foreign affiliate and employs more than 5 full-time employees.

The Advisory Panel on Canada’s System of International Taxation, of which I was a member, heard a lot about the complexity of the FAPI system generally and, in particular, the difficulties taxpayers have in meeting the exception to the investment business definition. For example, although it parallels the domestic investment business test, the more than 5 full-time employee requirement is somewhat arbitrary and perhaps not as suitable for foreign affiliates. The Panel also referred to difficulties meeting the test when activities such as real estate development, leasing, and the management of global businesses are carried out for non-tax reasons through more than one foreign affiliate.

The definition has gone through various amendments, mostly relieving, but the changes have not eliminated some of the inherent certainties such as, for example, whether royalties or licensing fees derived from intangible and other property are caught if the affiliate has created or developed the underlying property.

Is there a better alternative to the investment business definition?

Brian Arnold in his book, Reforming Canada’s International Tax System: Toward Coherence and Simplicity, recommends that the definition be dropped and that the FAPI definition be expanded to include specific sources of passive income. The Advisory Panel did not go that far, instead recommending that the scope of the definition be more properly targeted and clarified to eliminate the above problems and uncertainties to ensure it does not impede bona fide business transactions.

Part of the challenge is that the Canadian FAPI regime applies to all foreign affiliates, regardless of where they are located or the level of foreign tax they are subject to; the CFC regime for many other countries is restricted to income earned in low-tax jurisdictions. Arnold suggests that a “designated jurisdiction approach” should be considered to, among other things, simplify the regime and he offers a couple of approaches.

Conceptually, I like our system.

At its core, the Canadian tax treatment of income earned abroad by foreign affiliates as FAPI or as active business income is not dependent on the level of foreign tax the income is subject to. This is an important competitive feature of the Canadian system. To do otherwise would mean limiting, for example, the application of paragraph 95(2)(a), something that would ignore how Canadian companies conduct their global operations. It is why section 18.2, since repealed, made no sense.

However, this comes at a cost. We need to deal with more complexity in the FAPI rules because they need to be robust, especially so if Canada moves to a full exemption system. More on this topic in my next post.

Thoughts? Comment? Leave them below.

Reflections on the Summer of "O" Twelve

By: Nick Pantaleo

It has been awhile since my last posting. Can you blame me? It has been a great summer!

But, the opening of the Canadian National Exhibition, the start of the U.S. Tennis Open, Labour Day and seeing kids getting ready for school are signs that summer is coming to an end.

Time for a brief look back and some reflections.

Summer heroes

For many, the summer focus was on the Games and the many incredible athletic performances including those of Phelps and Bolt (again) and the Canadian women’s soccer team.

Not being a super summer Games fan, I was content with taking more time off to play more golf than in previous summers, taking some short road trips with Lori and the girls and making what has become for me an annual trip to Wimbledon in June. Unfortunately, my presence this year did not help the Canadian pros. Nestor, Raonic, Wozniak – saw them all play and they all lost. Fortunately, I stayed away from watching Felip Peliwo and Eugenie Bouchard and they went on to claim the Boys and Girls Championships – quite the feat for Canadians to hold these titles in the same year!!

I loved seeing Federer walk away with the Gentlemen’s title for the seventh time and reclaiming the number one ranking – I guess all veterans like to see other veterans do well. But, was Lori peeved when he announced that he would pass on the Rogers Cup. She still bought me a Federer cap though – black, with white lettering.

Rain and Canadian efficiency

Speaking of the Rogers Cup, I got rained on there as well as at Wimbledon.

There isn’t much to do during rain delays at a tennis match except drink and watch the rain fall.

At Wimbledon you get to experience their ritual for keeping the grass courts dry, which consists of about 7-8 teenagers at each court quickly scurrying to remove the net, posts and chairs and then rolling a tarp across the court. It takes about 5 minutes at most. It takes the same number of people about 10-15 minutes to reverse everything once word is given from some higher authority to get the matches going again.

In contrast, when it began to rain on the asphalt court of the semi-final match at the Rogers Cup, the court was cleared in no time. However, when the rained stopped, it took 30-40 minutes for about 40 people, using towels and 13 large blow dryers on wheels, to dry the court!!

Foreign Affiliate dumping proposals (round two) and contingency fees

I thought Finance was quick in getting out another version of the proposed FA dumping proposals following the June 1st deadline for comments (see PwC’s commentary).

In a previous posting and an article for the Tax Executive Institute’s June newsletter, I was critical that the proposals announced in the March budget were overreaching and lacked clear alternatives and safe harbours. In particular, original proposed subparagraph 212.3(5) was the only way out of the rules and its application would have caused considerable administrative and compliance issues for the CRA and taxpayers.

The revised proposals are better, I believe. The paid-up-capital offset and re-instatement rules and the new elective 17.1 regime should provide taxpayers with clearer alternatives for many situations. Also, there is less riding on new proposed 212.3(12), which replaced proposed 212.3(5) and although it is suppose to offer a practical exception where the Canadian resident corporation is the base for the strategic business expansion, I suspect there will be some uncertainty as to its application, at least initially.

Finance was also busy launching consultations on Contingency Fees and the Scientific Research and Experimental Development tax incentive program. It will be interesting to see how this one develops. Professional firms as well as taxpayers have an important stake in the outcome. I expect to have more to say on this in a future posting.

However, the promised “Hoover” bill of foreign affiliate amendments has yet to be seen.

About Time You Say?

The CRA’s Rulings Directorate is (finally) taking the task of replacing outdated Interpretation Bulletins and will be reaching out to the entire tax community for help. The CRA is planning to make the bulletins available online as folios and has already updated some of them.  

This is the right thing for the Agency to do. In a 2011 submission, PwC urged the CRA to put processes and resources in place to update all bulletins on a regular basis so that all taxpayers would have greater certainty in complying with the Income Tax Act (see our submission). Kudos to new Director General, Mickey Sarazin for leading this herculean task.

And finally.....

After almost 5 years with PwC and 26 years at the Department of Finance, Wally Conway decided to retire. Yes, he is giving all of this up to enjoy and work on his properties in Quebec!!

Wally brought to PwC and our clients a deep knowledge and history of recent and past legislative developments that extended into almost every area of the corporate income tax landscape. In doing so, Wally helped us to better understand Canadian tax policy and to engage Finance officials about legislative changes.

I benefitted most from Wally’s advice, insight and friendship. I will miss our road trips, his desire for “early” lunches and dinners and his hearty laugh that could be heard at the other end of the floor!

Wally has left behind some more thoughts on how to improve, in particular, the Canadian international tax system. I will do my best to continue with his multi-part series.

Wally, many thanks for your years of service and all the best for a long, happy and healthy retirement!