Key elements:
- A Tax Policy for Canada
- Competing for Global Talent
- Attracting World-Changing Research
- Financing our Innovation Ecosystem
- Enhancing Certainty
Access the vision here.
Deloitte’s Open Letter to the Honourable Jim Flaherty, Canada’s Minister of Finance:
Dear Minister Flaherty,
Budget 2011 – Tax policy issues for consideration
As the nation’s largest tax practice, Deloitte is committed to helping shape the tax policy that will create a globally competitive and innovation-friendly economy. We see first-hand the impact of tax policy on our nation’s most mobile resource: high-calibre professionals and entrepreneurs. We strongly feel that the tax system must be globally competitive for both companies and individuals. Our Future of Tax initiative is our vehicle for developing our tax policy vision and communicating this vision with our clients and the Canadian community at large.
We are writing to outline our recommendations for you to consider in your upcoming 2011 federal budget. We would appreciate the opportunity to discuss any of these elements with you personally or with anyone that you suggest from the Ministry of Finance.
Canada has weathered the economic storm of the past two years better than most G20 countries. We commend the Government of Canada for its leadership and willingness to maintain its efforts to create a competitive climate for businesses operating in Canada, despite the economic headwinds it has faced. We understand too that the strength and sustainability of the recovery remain uncertain and the current level of the deficit leaves the government with continuing fiscal challenges.
We recognize that the objectives driving tax policy can sometimes conflict. However, our view is that in the long term, creating a competitive environment for business and highly mobile professionals and entrepreneurs will have the greatest positive impact on Canada’s fiscal health.
Each of the following measures has strengthened the competitiveness of Canadian companies and, in doing so, the long term stability of Canada’s economy:
- the gradual reduction in the corporate tax rate that is in progress;
- the repeal of the interest deductibility restrictions related to foreign investments;
- the change in the definition of “taxable Canadian property” which encourages and facilitates foreign investment in Canada;
- the significant modifications to proposed offshore fund legislation;
- the announced intent to explore consolidated reporting for tax purposes; and
- the implementation of the harmonized sales tax (HST) in British Columbia and Ontario.
In shaping our recommendations, we observe that Canada has a truly diverse and welcoming culture, a great work ethic, and a supportive, nurturing environment for individuals and for business. Canada also faces an aging population and productivity growth more reliant on hours worked than innovation. As well, shifting global trading patterns suggest that many countries will outgrow our major trading partner to the south.
In response, we see the need to attract and retain the most highly productive and innovative individuals, who are also the most globally mobile, and to stimulate businesses and individuals to invest more in innovation than they do today. These priorities, which will ensure Canada’s global competitiveness, have also been identified by the Coalition for Action on Innovation in Canada in its recent report, An Action Plan For Prosperity.
Recommendations for Budget 2011 and beyond
1. Take steps to make the personal tax system more globally competitive
While the moves to increase the competitiveness of Canadian business are a major step in the right direction and should continue, we believe that the time has come to focus on enhancing the competitiveness of the personal tax regime. As the speed of change in business continues to increase, attracting and retaining the individuals most likely to drive innovation in the economy must be a key focus.
We recognize that attracting and retaining globally mobile and highly productive individuals depends upon many factors, not just economic drivers. Canada is a wonderful place to live and a stable environment in which to raise a family. These factors are already a powerful source of attraction to Canada. We believe, however, that more individuals would stay in Canada or move to Canada if it lowered personal tax rates, starting with an increase to the threshold at which the top rate of tax begins and also reducing the top rate of tax.
We would suggest that personal tax measures to raise the income threshold at which the top rate applies and to reduce the top marginal tax rate can be scheduled over the next four to six years, in much the same manner as the reductions to corporate tax rates were phased in over a number of years. The benefit of the lower rate drove corporate behaviour before those reductions were complete and we believe that this same effect will apply to individual behaviour, attracting and retaining the most productive, innovative and mobile individuals to Canada.
We believe that reducing the tax rate in this way, combined with a focused and targeted immigration strategy (discussed below), should increase the total amount of personal tax collected. However, if the government believes that it must offset these reductions with increases elsewhere in the tax system, we believe that there is room to do so with consumption taxes, which are low by global standards.
2. Focused immigration – meeting Canada’s future needs
The future of Canada’s competitiveness is intrinsically tied to individuals with the vision, drive and qualifications to contribute to the growth of new economies. Not only does half of Canada’s tax revenue come from personal tax, which is a high reliance compared to most other countries, but business growth and productivity are closely linked to attracting and retaining highly educated and entrepreneurial individuals in Canada. Especially in light of Canada’s aging population, Canada’s human capital needs should be articulated in a reasoned and practical multi-year plan aimed at increasing immigration to fill gaps in the Canadian workforce and to support a sound knowledge base.
Increased immigration to Canada by individuals who are educated, productive and innovative will not only enhance Canada’s ability to compete globally by ensuring the success of Canadian enterprises, but will also enhance government revenues from corporate and personal taxation. A larger population of well paid, skilled individuals will contribute significantly to an increase in the overall amount of personal taxes collected, even with recommended personal tax rate reductions.
We therefore support the development of an immigration vision with a long term perspective. In addition to increasing overall targets, we believe there is room to sharpen existing programs. For example, the federal skilled worker program should be refined to target desired immigrants – appropriate attention must be given to all sectors including blue collar workers who build Canada’s infrastructure. Provinces could be further encouraged to also seek these same immigrants, within a local and regional process which complements the federal skilled worker program.
3. R&D incentives – key to innovation, job creation in Canada
Canada has historically led the way in tax policies that encourage innovation, primarily through its research and development (R&D) incentive regime. The concept of these incentives is well founded and sophisticated, and can be seen as an efficiently targeted government expenditure. It is recognized as a role model upon which new regimes have been based in many countries.
The Minister has repeatedly acknowledged the importance of innovation for the Canadian economy, as a driver of productivity and ultimately employment and business success. The 2010 federal budget announced a broad based review of SR&ED. In our view, the current framework has served Canada and Canadian taxpayers well and we recommend that the current SR&ED framework be retained.
However, we applaud the government for looking for ways to stimulate innovation further. In the last few years, the competition for attracting global businesses to focus their research efforts in any particular country has intensified. The number of countries providing incentives for R&D has doubled during that period. Countries such as France and Brazil have increased their incentives for research efforts dramatically.
For Canada to stay competitive and maintain existing and create new quality employment opportunities for an educated work force, it is essential that we enhance the delivery of our SR&ED incentives. For one, we would like to see the investment tax credit become partially refundable as it is in many countries. Refundability, for many US-based multinationals, means the difference between the incentive being a permanent tax savings or a tax deferral, which can be a powerful distinction in perceived value.
Currently, only Canadian-controlled private corporations (whose income does not exceed the specified limit) may claim a refundable credit. Expanding the refundable credit to all corporations would appropriately reward the risks inherent in carrying out SR&ED in Canada. This would send a strong message to foreign companies seeking new investment opportunities.
Global organizations value stability in making long-term investment decisions. The more predictably and consistently our SR&ED program is administered, the higher its value is to any large organization choosing between jurisdictions in which to invest. We encourage working with industry groups to identify points of anxiety and uncertainty to provide a more stable planning horizon for organizations considering Canada as a place in which to invest.
4. Fostering investment in innovation
Budget 2011 should contain measures to support an innovation-friendly industry strategy. Knowledge-based industries will contribute significantly to Canada’s economic growth. This sector will develop exponentially in the near future as well as in the long term and Canada has an opportunity to claim global leadership in industries such as life sciences, alternate energy, clean technology, digital media, and other areas of technology and innovation.
The tax system can play an important role in securing Canada’s leadership in these fields. In addition to tax incentives for specific activities (including the SR&ED incentives noted above), support for financing is essential. In particular, consideration should be give to targeted credits, specifically for venture capital investors: an angel tax credit to support early stages of innovation industry development, when risks are higher, and a later stage credit for corporate venture investors. We recommend that priority be given to an angel tax credit as it is the logical starting point for the renewal of Canada’s innovation initiative and it is the incentive that can have the greatest impact on growing our economy.
In addition to tax incentives, the government should consider other ways to finance ventures in innovation, including direct investment or matching grants.
5. The GST as a source of Government revenue
While we do not advocate increasing Canada’s goods and services tax (GST) rate, we note that this rate is low compared to that of other value added tax jurisdictions; therefore, the GST rate provides the most fertile ground for a potential rate increase, perhaps with a deferred implementation date, in order to accelerate spending decisions in the interim.
We support the Government’s plan to conduct a comprehensive review of the application of the GST/HST to financial services. We encourage consultation with financial services industry representatives and their advisors, with a view towards ensuring that Canada’s financial service providers are able to compete in the global market. In this regard, we urge the Government to reconsider the definition of financial service. Notwithstanding the Government’s reliance on the Explanatory Notes and administrative policy of the Canada Revenue Agency, the current legal definition is, in our view, potentially much broader than intended and may ultimately encompass activities that the Department of Finance has already agreed should be excluded. Similarly, in the event that the GST rate is increased, we encourage relieving measures to the financial services industry so as not to burden that industry disproportionately with the resulting change in tax mix.
6. Retirement savings – planning for tomorrow’s economy
The Government has recently recognized the importance of encouraging retirement savings today in order to forestall an economic crisis in the future. Statistics indicate that current tax policy initiatives have not adequately effected the desired level of savings among Canadians. As noted by Andrew Dunn and others before the Standing Senate Committee on Banking Trade and Commerce, creative strategies are required. Strategies to encourage savings could include an enhanced up-front income deduction, higher savings plan thresholds, reduced taxation when savings are withdrawn from plans and an increase in the pension credit. A specific proposal that we put forward to the Committee for consideration was a flow-through of the tax benefit of certain forms of income (e.g., dividends paid by Canadian corporations) when withdrawn from Canadian retirement vehicles. The Final Report of the Standing Senate Committee on Banking, Trade and Commerce, Canadians Saving for their Future: A Secure Retirement, contained good recommendations to enhance savings by Canadians. We strongly encourage the Government to introduce measures in order to ensure that appropriate incentives are in place to encourage savings.
7. Enhancing certainty
We commend the Department of Finance for the progress made in advancing outstanding pending tax legislation, following the comments made by the Auditor General in her Fall Report to Parliament in November 2009. Certainty in tax law is in the best interest of the tax community as a whole – revenue authorities, taxpayers and tax advisors all benefit from a clear understanding of the law at any point in time. In furtherance of this important tax policy objective, we respectfully offer a number of recommendations:
– Comfort letters are welcome. Their issuance by the Department of Finance is an effective and efficient stop-gap measure when unintended tax results are identified. However, as noted by the Auditor General in her Fall Report, a significant number of comfort letters have not yet resulted in corresponding legislative amendments. This has created uncertainty on two fronts. First, while taxpayers can and do arrange their tax affairs in accordance with information contained in comfort letters, the letters are administrative in nature and are not law – this is cause for concern. Second, for financial reporting purposes, comfort letters are not treated as statutory proposals and, as such, cannot be considered in the preparation of audited financial statements. Thus, transactions are at times deferred or executed in a less than optimal manner under existing enacted legislation. This results in increased cost and complexity which impacts the competitiveness of Canadian companies. We therefore encourage the timely enactment of legislation in support of amendments approved in comfort letters.
– Tax proposals should be introduced and advanced through the legislative process within a reasonable timeline, having due regard for the need to consult with the public on many matters, particularly those that involve a significant policy shift, before finalizing legislative amendments. Detailed explanatory notes should accompany proposals at the earliest opportunity in order to ensure that the pending changes are well understood. Explanatory notes provide the Department of Finance with a unique opportunity to set out the context and purpose of legislative amendments. They are most helpful to the public when they go beyond a mere summary or repetition of the text of the legislation.
– Legislative amendments should be prospective unless they are merely corrections or clarifications of existing law. Retroactive or retrospective legislation that negatively alters the consequences of tax planning or reporting that has already taken place causes confusion and inefficiency and may also be costly and unfair to taxpayers. One recent example of a retrospective amendment viewed by many to have had unfair results is the proposed change without grandfathering in respect of the tax deductibility of so-called stock option “cash outs”. While we fully appreciate the need, at times, to act swiftly to close down an unintended “loophole”, where a particular tax policy is well known and understood, appropriate grandfathering is warranted. Taxpayers must be able to make business decisions with confidence and certainty as to the tax consequences.
8. Consultation – a best practice for complex proposals
There are a number of examples where the Department of Finance has sought outside advice regarding pending legislative changes. We would encourage this consultative approach for any significant changes to complex legislation. At a minimum, this assists in identifying unintended consequences of the proposals. For example, we understand that the Department of Finance is currently considering the issue of “debt-dumping”, as discussed by the Advisory Panel on Canada’s System of International Taxation in its final report issued in December 2008. We encourage the Department of Finance to follow the Advisory Panel’s recommendation “that further study and consultation should be undertaken to assess the effectiveness of potential options for addressing the objectionable debt-dumping situations”. As such, we would strongly encourage the formation of an advisory panel to review any proposed legislative changes in this area before any amendments are released.
While, as noted above, much progress has been made in terms of clearing the backlog of draft legislation, certain international tax proposals are still outstanding. We encourage the Department of Finance to move forward in issuing the draft legislation. Due to the complexity of the international tax regime, we recommend strongly that the proposals be released for consultation before they are tabled for first reading in the House of Commons.
We sincerely hope that you will consider the issues raised in this letter as you move forward with Budget 2011. We would be happy to meet with you to discuss any of these matters further.
Yours truly,
Deloitte & Touche LLP
Andrew W. Dunn, FCA Managing Partner
Albert Baker, FCA, Tax Tax Policy Leader
About Deloitte
Deloitte, one of Canada’s leading professional services firms, provides audit, tax, consulting, and financial advisory services through more than 7,600 people in 57 offices. Deloitte operates in Québec as Samson Bélair/Deloitte & Touche s.e.n.c.r.l. Deloitte & Touche LLP, an Ontario Limited Liability Partnership, is the Canadian member firm of Deloitte Touche Tohmatsu Limited.
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