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Over two-thirds of countries that belong to the Organization for Economic Co-operation and Development allow some sort of formal group taxation system |
On November 23, 2010, the Department of Finance released a tax policy paper to solicit input from taxpayers and other stakeholders regarding the possibility of changing Canada’s corporate tax system to allow some form of tax loss sharing amongst companies in a corporate group.
The stated policy objective is to increase the efficiency of the tax system — over time the view has developed that the lack of a formal system to consolidate tax reporting or to offset profits and losses within corporate groups is considered an impediment to Canada’s international competitiveness. The observation is made in this policy paper that over two-thirds of countries that belong to the Organization for Economic Co-operation and Development (OECD) allow some sort of formal group taxation system, including the US, UK, France, Australia, Germany, and the Netherlands.
Although there is no common approach used in these OECD countries, there are two main schools of thought — the first being a “group consolidated system”, also called “fiscal unity” and the second being a “loss transfer system”, also called “group relief”. Within each of these systems, there are varying approaches. At the extreme end of the fiscal unity system, legal entities are disregarded, and one consolidated return would be filed to reflect the consolidated entity, in a manner similar to financial statement consolidation. Other methods of fiscal unity may calculate tax liabilities for separate legal entities within the group, and consolidation would aggregate the tax liabilities on a group reporting basis.
On the other hand, a group relief method maintains recognition of separate legal entities and allows tax losses (and possibly other attributes, such as Investment Tax Credits) to be transferred between companies in the group, perhaps by a surrender of tax attributes from one member in favour of another, or by a taxable payment from one member to another.
The consultation paper asks that interested parties making comments direct such comments to twelve specific questions — for example:
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What are the most important attributes which should be considered with respect to a new system for the taxation of corporate groups?
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What is the appropriate threshold of common ownership, and what is the meaning of ownership — e.g. votes, values, votes and values?
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What constraints would be appropriate on the use of existing pools of losses when an eligible group is formed, when a corporation enters or exits the group, and on a year-to-year basis?
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What restrictions in a new system of group taxation would be appropriate regarding the use of losses and other attributes accumulated by corporate groups prior to the introduction of such a system?
The responses to these and the other eight questions will help the Department of Finance determine if there is sufficient support to create a more comprehensive loss transfer system. The responses will be posted on the Department of Finance website, with the consent of the submitting party.
If there is sufficient support for a change in the Canadian tax loss transfer system for Canadian corporations, there will be further consultations with taxpayers and other stakeholders before finalizing the new proposals. One large issue that will have to be dealt with is the impact of a loss transfer system on provincial corporate tax revenue and securing the approval of the provinces. A full list of questions and the consultation paper can be found at http://www.fin.gc.ca/activty/consult/tcc-igs-eng.asp.
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