You can never be too rich, too thin or too competitive. And while the federal government has taken steps to improve the competitiveness of Canada’s tax system, businesses would like to see the feds do more.

When the Advisory Panel on Canada’s System of International Taxation (headed by Peter Godsoe, former CEO of Toronto-based Bank of Nova Scotia) delivered its final report at the end of 2008, the world was preoccupied with matters other than the minutiae of tax policy — calamity in the global financial system had seemingly just been averted, although a crippling recession had not. In other words, 2008 was hardly an ideal time for the government to preoccupy itself with tax reform.

That said, the feds did act on a couple of the Godsoe panel’s recommendations in the subsequent federal budget, and promised to study the rest of them. Since then, there has been a bit more action on some of the panel’s proposals.

The government reiterated its commitment to reviewing the report’s recommendations in the 2010 budget, which also specifically addressed one of the issues raised in the Godsoe panel’s report by announcing consultations on possible changes to the tax laws dealing with foreign investment entities and non-resident trusts.

And, in late August, the feds released a package of draft legislative changes covering a wide range of topics, including the FIE and NRT proposals and the rules dealing with the taxation of shareholders in foreign affiliates.

The consultation period on those proposals closed at the end of September. As Investment Executive went to press in early October, details had yet to be finalized.

The other significant measure concerning international tax competitiveness that was addressed in the 2010 budget is a move to boost the appeal of the Canadian venture-capital industry to foreign investors by narrowing the definition of “taxable Canadian property” and eliminating the need for tax reporting for many investments. The budget estimated the value of the tax relief provided by these measures at $30 million in 2010–11, and $25 million in 2011–12 and in each year thereafter.

So, although there has been some effort to improve the system’s competitiveness, there’s no question that progress hasn’t been as dramatic as some would like. (A favourable tax treatment is, after all, a simple way to drive investment.) And a competitive international tax system is particularly important in a relatively small, open economy such as Canada’s.

Enhancing that competitiveness may not have been the top priority in the depths of the recession, and any aggressive steps to create a tax advantage would have been politically tricky at a time when the governments of the G20 were preaching co-operation and harmonization among countries.

Moreover, it’s also not easy for governments to give away too much corporate tax revenue at a time when deficits have been growing and the prospect of greater fiscal austerity looms. But, as the economic recovery tries to take hold, the need for a competitive tax system gains importance.

Canadian banks, for example, would like to be capitalizing on their strengths relative to some of their rivals in the U.S. and Europe. To that end, the banks, in particular, may be primed for more foreign expansion — and they would like a more favourable tax framework to work within.

Indeed, in a submission to the standing committee on finance as part of consultations in preparation for next year’s budget, the Toronto-based Canadian Bankers Association points out that the current system may still pose some barriers to Canadian companies looking for international expansion. The CBA’s paper calls on the government to dismantle some of those barriers and to continue implementing the rest of the Godsoe panel’s recommendations.

For example, the CBA submission says the current rules covering income generated by foreign affiliates impedes investment and growth: “The current rules do not generate tax revenue in Canada but deter expansion and reduce the global competitiveness of Canadian institutions.”@page_break@Similar concerns have arisen within the insurance industry. In a pre-budget submission, Toronto-based Canadian Life and Health Insurance Association Inc. also stresses the need for reform. The CLHIA’s submission says that access to capital and liquidity is critical for businesses in the current economic environment: “Many Canadian companies with successful foreign operations have significant liquidity available in jurisdictions outside Canada. However, they are hampered in repatriating this cash by tax rules that are outdated and out of step with other developed nations, including the U.S.”

Although it will take time to adopt the Godsoe panel’s recommendations, the CLHIA paper argues that in the meantime, the federal government should be taking steps to facilitate access to capital available in foreign jurisdictions. The paper recommends interim measures to improve access to capital by allowing loans from foreign subsidiaries to Canadian parent companies without adverse tax consequences and by allowing tax-free repatriations of surpluses. The submission suggests that these measures could be adopted for three years or until the government adopts the Godsoe panel’s recommendations on the treatment of foreign affiliates.

In addition, the government should introduce new rules for the taxation of corporate groups — such as a formal system of loss transfers or consolidated reporting, the CLHIA submission says: “This would improve the country’s international tax competitiveness, as Canada is the only country within the G8 without a statutory group tax relief mechanism.”

The CLHIA’s submission also argues that the tax system in Canada also weighs against the development of “centres of excellence” because an organization that provides services to non-residents could cause those clients to be considered to be carrying on business in Canada and, therefore, subject to the Canadian tax regime. The CLHIA’s paper calls on the feds to alter the rules to dismantle these sorts of barriers, too.

The CBA’s submission echoes the CLHIA’s position on international tax competitiveness, noting that liquidity and the international competitiveness of Canadian corporations are negatively impacted by the current tax system. Furthermore, the CBA paper maintains that allowing some form of consolidated reporting would not have a big impact on tax revenue, as it primarily affects the timing of the recognition of losses.

In addition, the Canadian Insti-tute of Chartered Accountants says in its submission that the ability to transfer losses to other corporations within a group “would reduce administrative and compliance burdens, improve cash flow within a group and increase the harmonization of federal and provincial tax systems.”

(The feds did acknowledge this concept in the 2010 budget, pledging to explore the idea.)

The CICA’s submission also highlights another couple of areas that were addressed by the Godsoe panel, suggesting the government should follow the panel’s advice.

For one, the CICA paper recalls that the panel heard plenty of complaints about the way the withholding regulations work for non-residents — including the cost of compliance, the “cumbersome waiver process” and the fact that Canadian businesses are stuck with the administrative responsibility for another person’s tax liability. The paper calls on the government to adopt a system similar to the one in the U.S., which shifts the compliance bur-den to the non-resident from the company (as recommended by the Godsoe panel) — thereby reducing the administrative bur-den on Canadian companies and Canadian tax authorities while generating cost savings.

On a less technical note, the CICA’s submission points out that the Godsoe panel’s report also called on the government to improve the working relationship between the business community and the Canada Revenue Agency in order to keep the self-assessment system functioning. Although this issue doesn’t further the goal of competitiveness as directly as some of the other recommendations, an increasingly adversarial relationship between the tax authorities and taxpayers eventually leads to a costlier, less efficient tax system. As a result, the CICA’s paper supports the Godsoe panel’s recommendation that the government endeavour to improve dialogue among the tax authorities, taxpayers and their financial advi-sors.

There’s no question that the business community would like to see Canada become a more competitive jurisdiction on the tax front. But it’s much less clear how far the government is willing — and able — to go, given that the true state of the new economic and geopolitical climates remains to be seen.

IE