Loss Consolidation – Provincial Tax
At the 2003 Canadian Tax Foundation annual conference, the CRA commented that, provided that all of the transactions are legally effective and otherwise comply with the technical provisions of the Act, it would not ordinarily apply GAAR to the transfer of income or deductions among an affiliated group of corporations.
Question 1
Has there been any change in these basic parameters of loss consolidation transactions?
Response 1
No. As mentioned in 2003, our position that loss consolidation transactions are not subject to the GAAR is based on the statement in the Department of Finance’s technical notes for the GAAR that the transfer of income or deductions within an affiliated group of corporations is usually not considered to result in a misuse or abuse of the Act.
Question 2
Is it correct that the CRA has become more concerned about the provincial tax implications of loss consolidation transactions?
Response 2
We recognize that these types of transactions can have the effect of shifting income and losses between provinces with a resulting increase or decrease in provincial tax revenue. Consequently, we require that an analysis of the provincial tax implications of the transactions be included in loss consolidation ruling requests. In addition, issued loss consolidation rulings provide no comfort as to the application of the GAAR of the affected provinces. However, we are not aware of any instances where a province has sought to have the provincial GAAR applied to loss consolidation transactions on which we have ruled favourably.
Question 3
Do you consult directly with provincial tax authorities prior to issuing a loss consolidation ruling affecting their provinces?
Response 3
If the loss consolidation materially affects a province with which we have a tax collection agreement (“TCA”) we will consult with that province prior to issuing a ruling on the proposed transactions. If the impact on a province with which we have a TCA is minimal, or if the ruling affects a province with which we have not entered a TCA, we will normally not consult prior to issuing the ruling but we will forward a copy of the issued ruling to the affected province. In our view, when a loss consolidation transaction affects a province with which we do not have a TCA, it may be advisable for the taxpayers involved to obtain a provincial ruling.
Question 4
The fact that a loss consolidation transaction, which is the subject of a favorable ruling from the CRA, could still conceivably be subject to provincial GAAR puts taxpayers in an awkward situation. Is the CRA taking any steps to cause provinces with which it has a TCA to agree that their GAAR should not be applied to loss consolidation transactions on which the CRA has provided a favorable ruling?
Response 4
A working group is currently being created to review transactions that affect provincial tax bases, including the use of loss consolidation arrangements. The group will have representatives from the provincial finance and revenue departments, the Department of Finance and CRA’s Legislative Policy Directorate.
Vancouver Olympic Games
Many domestic and international tax issues arise when major events are held in Canada. In particular, we thought it appropriate that since Vancouver is hosting the 2010 Winter Olympic Games (the “Games”) that we should address this at this year’s CTF annual conference.
Question
What is the CRA doing in preparation for these Games?
Response
The Government of Canada is a proud partner in hosting the Games, and will continue to collaborate with the Games organizers and other partners to build a Canadian 2010 legacy and help make the Games the best ever. In view of these commitments, the CRA is dedicated to provide services responsive to the importance and scale of the event.
From a tax administration perspective, making the Games a success requires ensuring that people involved with the Games benefit from the services offered by the CRA and comply with the laws it administers. In view of these objectives, the following preparations are underway.
The CRA looks forward to continued cooperation with Games organizers to ensure that the Games and the activities that forerun them unfold smoothly from a tax perspective. Outreach to date has been fruitful in that points of contact have been established through which service can be delivered and tax administration streamlined. In this regard, the Vancouver Tax Services Office is, and will continue, to play a leading role.
The CRA is undertaking a review of the commitments Canada has made in connection with the Games with a view to advising the Department of Finance of any potential conflicts or concerns from a tax administration perspective.
Work has been initiated to enhance the CRA website with dedicated information aimed at non-residents unfamiliar with Canadian tax issues and others that might experience tax issues new to them as a result of their taking part in the preparations for the Games or the celebration in 2010. These efforts aim to promote an environment in which those connected to the Games are aware of and benefit from our services, a respect for the tax and regulatory environment in Canada, and the program entitlements we administer.