April 15, 2011
Reforming Canada’s Taxation of Corporate Groups — A Step in the Right Direction
KPMG strongly endorses the government’s consultations on moving towards a more formalized system of loss transfers within corporate groups. This change would dramatically alter the taxation of most corporate groups in Canada, helping to make Canada more competitive in the global economy. We are pleased to have the opportunity to contribute to the consultation.
To help ensure that KPMG’s views properly recognize various competing interests, KPMG queried a wide range of corporate stakeholders via a web-based survey. This edition of TaxNewsFlash-Canada summarizes KPMG’s recommendations on some of the key questions raised in the November 2010 consultation paper The Taxation of Corporate Groups, based on the survey results and our analysis of the relevant issues.
Canada, unlike many other countries, does not have a formal system to consolidate the tax reporting of corporate groups or to otherwise offset the profits and losses of the members of a corporate group. Although it is often possible for corporate groups to offset the profits and losses of group members through intra-group transactions and restructurings, Canada’s system taxes corporations on a stand-alone basis.
For a summary of the consultation paper, see TaxNewsFlash-Canada 2010-39, “Canada Launches Review of Taxation of Corporate Groups”. A copy of our submission is available on the KPMG Canada web site.
To contribute another dimension to this important initiative, KPMG queried several hundred corporate stakeholders via a 23-question survey on the key issues of the consultations.
Half of the respondents are Canadian privately held organizations, 24% are Canadian publicly traded, and 18% are Canadian subsidiaries of foreign-owned entities. Further, 50% of the organizations have between one and 10 subsidiaries or affiliated companies within their corporate group, 15% are stand-alone corporations, and the remaining organizations (other than 2%) have 11 or more subsidiaries or affiliated companies.
Respondents’ companies have revenues across a wide spectrum. In particular, 26% of companies have revenues in excess of $1 billion, and 17% had revenues of less than $10 million.
KPMG also queried senior tax professionals in several of our member countries for their views on the taxation of corporate groups in their own countries to gauge their level of satisfaction with the effectiveness of their own particular corporate group relief systems.
KPMG’s submission to Finance includes the following recommendations, along with more details on the survey results and 10 KPMG member countries’ views on their countries’ taxation system for corporate groups.
Canada should adopt a new system of group taxation
KPMG submits that changes to the system for the taxation of corporate groups are overdue and that Finance’s consultation process should result in a new system.
An overwhelming majority of respondents to the KPMG survey (92%) indicated that a new system is required for the taxation of corporate groups. Also, 84% of respondents indicated that Finance should give high or medium priority to its review of Canada’s system of corporate group taxation.
KPMG submits that a Group Relief System (or tax loss transfer system) is the most appropriate system for the taxation of corporate groups.
The majority of respondents to the KPMG survey (56%) indicated that a loss transfer system (Group Relief System) would benefit Canadian businesses the most. A consolidation system (Fiscal Unity System) was viewed as the most beneficial system by 36% of respondents, and 7% indicated that the current system is the most appropriate.
In our view, a Group Relief System would be much simpler to apply and adapt to our existing tax system. By contrast, a consolidation system would almost certainly result in a major overhaul of Canada’s corporate tax system. A Group Relief System should also be easier for taxpayers to comply with and for tax authorities to administer than a full-fledged new consolidation system.
Of the KPMG member countries who responded to KPMG’s questionnaire, KPMG UK appears to be the most satisfied with its system for the taxation of corporate groups. As Finance indicated in its consultation paper, the UK has a Group Relief System. It is KPMG UK’s informal view that their system is globally competitive as well as relatively easy to administer. “The system works and everyone understands it,” according to KPMG UK, and thus there is no significant reason to consider modifying it.
KPMG submits that, to provide the greatest flexibility, a new system for the taxation of corporate groups should be an elective system.
Our KPMG survey indicates that respondents overwhelmingly favour (77%) an elective system for the participation in a group taxation regime rather a mandatory system. Only 22% of respondents indicated that the system should be mandatory for all corporate groups and their members based on a specific ownership percentage.
Of the 10 KPMG member countries that responded to our questionnaire, only one country (Denmark) has a mandatory system.
KPMG submits that any currently available loss utilization techniques should be preserved and codified in Canada’s Income Tax Act. Thus, if a system were introduced requiring a 100% ownership threshold for participation in the corporate group taxation, existing loss utilization techniques should continue to be permitted for affiliated/related groups.
The majority of respondents to the KPMG survey (69%) indicated that if Canada were to adopt a new elective system of corporate group taxation, then currently available loss utilization techniques should be preserved for corporate groups that do not opt into the new system.
Given that one of the policy objectives for changing the taxation of corporate groups in Canada is global competitiveness, KPMG submits that restricting the use of existing unused tax loss balances would not be appropriate if a new system is introduced. Thus, existing tax loss balances should be available for use in the new system.
More than half (56%) of KPMG survey respondents indicated that their corporate group currently has unused tax loss balances from prior years. Further, almost three-quarters (73%) indicated that they would not want Finance to restrict the use of losses accumulated by corporate groups prior to the introduction of a new system.
KPMG submits that a Group Relief System should allow for the transfer of various tax attributes in addition to tax losses.
Just over three-quarters (76%) of respondents to the KPMG survey indicated that Canada should adopt a group taxation system that incorporates tax attributes other than current year non-capital losses. In particular, almost all respondents (94%) indicated that capital losses should be included.
Further, over 50% of respondents indicated that investment tax credits, scientific research and experimental development expense pools, capital cost allowance pools, foreign tax credit carryovers, refundable dividend tax on hand and capital dividend account balances should be available for transfer.
Although only 47% of total respondents indicated that general rate income pool (GRIP) amounts should be an attribute eligible for transfer, a majority of private companies indicated that GRIP should be eligible for transfer in a new Group Relief System.
We recognize, however, that it may not be possible to easily accommodate some or all of these tax attributes in a new corporate tax system and more complexity may be an unavoidable consequence.
KPMG submits that the appropriate ownership threshold for a new group relief system should be more than 50% because this level would produce results consistent with codifying current loss utilization techniques, which generally permit loss utilization within affiliated groups. This threshold should also minimize complexity and make it easier for the current system to be preserved in tandem with the new system.
The majority of respondents (60%) indicated that the threshold of common ownership that should be mandated in a new system should be less than 100%. In particular, 21% indicated a threshold of 75% or more, 20% a 95%+ threshold, and 19% a 51%+ threshold.
It is important to note, however, that despite the varied responses, the majority of respondents to the KPMG survey (69%) indicated that if Canada were to adopt a new elective system of corporate group taxation, then currently available loss utilization techniques should be preserved for corporate groups that do not opt into the new system.
It is not known what the responses to the KPMG survey would have been on this ownership threshold question if the respondents were told to assume that current loss utilization techniques would no longer be available in a new system.
Notwithstanding the survey results, KPMG submits that since we recommend the “affiliated” test for determining members of an eligible group, the degree of common ownership threshold would generally be based on having more than 50% of the votes. This recommendation is consistent with keeping the new regime relatively simple since a votes test currently applies for purposes of the Income Tax Act, jurisprudence and administrative practice. We do not recommend introducing a new test as this will unduly complicate matters and be inconsistent with the current income tax regime.
KPMG submits that, while corporate entities should clearly be able to participate in a new system, a definitive position on whether other types of entities should be able to participate can only be made once more details of a system have been framed. In the context of a new system, it may then make sense to determine to what extent it may be possible for the new system to accommodate certain types of non-corporate entities. We recognize, for example, that issues related to flow-through entities may unduly increase a new system’s complexity. As a result, this issue should be revisited once details of a proposed system become clearer.
KPMG acknowledges and accepts that some provinces are concerned that the utilization of tax losses within corporate groups in a new system may affect provincial tax bases and the interprovincial allocation of income. However, certain answers in the KPMG survey suggest that the effects of a new system may not be as significant as the provinces are concerned that they will be.
A clear majority of respondents (78%) that operate in multiple provinces indicated that they would be indifferent about transferring losses from one province to another or less inclined to do so. In this regard, 35% said they would be indifferent (without giving a reason), 24% were indifferent because they could avail themselves of current loss utilization techniques, 12% said they were indifferent because profits and losses occur in the same province, 4% said that they would be less inclined to transfer losses (no reason given) and 3% were indifferent because they were currently in a loss position. The remaining 21% of respondents said they would be more inclined to transfer losses from one province to another.
Interestingly, 46% of the respondents to a KPMG survey question about how provincial tax liabilities should be determined in a new system suggested that it may be appropriate to develop new interprovincial income allocation rules. Also, 36% of respondents suggested that they favour the status quo (i.e., the existing interprovincial income allocation rules should be applied to the corporate group members who actually pay tax in the new group relief or loss consolidation system).
While more work and study will clearly be required in this area, we hope that provincial concerns do not derail or delay the introduction of a new corporate group relief system for Canada. If the provinces can get comfortable with the conceptual design of a new system, any future changes to the interprovincial allocation rules can be studied in the new environment and over time the provinces can determine what changes, if any, may be warranted.
A decision on what type of system is best for the taxation of corporate groups cannot be isolated from the accounting implications for financial statements that may arise from implementing a new system. Details of a new system must be framed before any definitive conclusions can be made in this regard.
KPMG’s submission to Finance provides high-level comments on the policy objectives and conceptual design parameters of a new system. If such a new system is proposed as a result of this consultation, it will be critical for stakeholders to be able to review and comment on the specific details included in the proposals before Finance implements a new system.
We can help
Your KPMG adviser can help you keep up with developments in this area as the consultations progress and help you bring any concerns you may have to the attention of the Department of Finance. For details, contact your KPMG adviser.
Information is current to April 13, 2011. The information contained in this TaxNewsFlash-Canada is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.
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