Late last year, a feder-al advisory panel recommended measures to improve the fairness, efficiency and competitiveness of Canada’s international tax system. However, the global financial crisis and the subsequent recession appear to have taken top priority since.

In late 2008, a federal Finance Department committee created to study Canada’s international tax system recommended 17 changes that the panel (chaired by former Bank of Nova Scotia CEO Peter Godsoe) believed should be made to Canada’s system of international business taxation to make the system more competitive, reduce compliance costs and make the system’s administration and enforcement easier for the tax authorities.

The advisory panel’s final report was handed down just in time for January’s federal budget, and Ottawa addressed a handful of the report’s recommendations in that budget.

In particular, the budget announced that a recently introduced section of the Income Tax Act that prevented companies from deducting the interest they pay on money borrowed to invest in foreign companies was being repealed.

The budget also included pledges to reconsider a couple of ongoing legislative initiatives — proposed legislation dealing with the treatment of non-resident trusts and foreign investment entities, as well as pending technical changes concerning foreign affiliates — in light of the panel’s recommendations. As for the rest of the report, the government promised to study the remaining recommendations for possible future action.

LONGER-TERM ISSUES

Since then, not much has been heard from the feds on these issues. Although Ottawa surely hasn’t lost interest in making Canada more competitive, in terms of its international tax system, the reality is that these issues appear to have been overtaken by the immediate need to deal with the fallout from the global financial crisis and subsequent worldwide recession.

That task has occupied policy-makers in Canada and around the world, as co-ordinated fiscal policy efforts have been a primary tool used to fight the effects of the recession.

Federal Finance Minister Jim Flaherty “has been focused on the stimulus plan, and longer-term issues have gotten very little attention since other pressures are more immediate,” says Jack Mintz, director and chairman of the University of Calgary’s School of Public Policy.

The panel’s work was well underway before the recession really hit. The panel got its marching orders in late 2007 as the financial crisis was emerging; it carried out consultations in the spring of 2008, before the depth of the crisis became clear. So, while the panel’s conclusions were highly anticipated, it is hardly surprising that Ottawa hasn’t acted on most of them right away.

The one item that Ottawa did seize upon almost immediately in its budget was the issue of interest deductibility. The panel’s recommendation, and the government’s response, were both conditioned, in part, by the crisis.

Although the panel’s report noted that short-term market conditions shouldn’t drive tax policy, it also stressed that with the world in economic turmoil, Ottawa should not be doing anything to hamper Canadian firms’ competitiveness: “To hobble their ability to compete and invest in the future at the worst of times would not be consistent with the principles guiding our analysis.”

The report added that many of Canada’s trading partners aren’t restricted in their ability to deduct interest expenses incurred to invest in foreign affiliates.

The feds agreed with that conclusion and moved immediately to deal with the interest-deductibility issue in the budget. A Finance Department official explained that the department took fast action “because of the conclusions of the panel on the potential effects of the provision on foreign investment by Canadian multinational firms, particularly in the context of the current global financial environment.”

Clearly, most of the panel’s other recommendations are viewed as being less critical in the current environment.

“To [Finance Canada’s] credit, they dealt with the [interest deductibility] legislation quite quickly after the release of the recommendations,” says Albert Baker, a partner with Deloitte & Touche LLP in Vancouver. “I suspect that the other recommendations are simply lower down on their priority list.”

NON-RESIDENT TRUSTS

Of those other recommendations, Ottawa flagged a couple of items as higher-priority concerns in the budget because there are existing legislative efforts in the works in these areas.

For one, the Finance Department will reconsider the draft legislation that aims to crack down on Canadians’ use of foreign investment entities and non-resident trusts to avoid taxation. These proposals were first announced in the 1999 budget and have been through a long-running drafting process, but have yet to make it into law.

@page_break@Nevertheless, in anticipation of those rules eventually taking effect, the panel had made several recommendations calling for the feds to ensure that all the components of the anti-deferral regime (including the proposed foreign investment entities and non-resident trusts rules) are consistent and that they do not impede genuine business transactions.

In light of both the panel’s recommendations and other submissions that the Finance Department has continued to receive about these proposed rules, the department has pledged to review these proposals. However, a Finance official stresses that the government “supports the fundamental policy objective of ensuring that Canadian taxpayers should not be able to avoid paying their fair share of taxes through the use of foreign intermediaries.”

Moreover, a promise to review proposed legislation doesn’t necessarily mean that it will be changed, Baker points out. He notes that there haven’t been any new public consultations on these proposed rules, nor has the Finance Department “indicated publicly where they are” in reconsidering that legislation.

The other bit of prospective legislation that the government says it plans to review are technical amendments designed to prevent certain inappropriate transactions between affiliates; these are changes that Ottawa proposed in 2004.

The panel’s report had suggested those proposals “will add significant complexity” to certain computations, “increasing the compliance and administrative burden for taxpayers and the Canada Revenue Agency.” IE