November 23, 2010

Archived - The Taxation of Corporate Groups Consultation

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Consultations Documents:

Note: A consultation is not a poll. Please do not send multiple or duplicate submissions.

Who may respond:

The Government invites comments from stakeholders regarding any element of this paper by April 15, 2011 – Amended – Submission deadline extended.

Comments may be submitted to TCG-consultation-IGS@fin.gc.ca.

Also, written comments can be forwarded to:

Geoff Trueman
Business Income Tax Division
Department of Finance
L’Esplanade Laurier
17th Floor, East Tower
140 O’Connor Street
Ottawa, Canada K1A 0G5

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The Taxation of Corporate Groups 

Table of Contents

1. Introduction

2. Policy Objectives

3. The Unit of Corporate Taxation

4. Loss Utilization in Canada Currently

5. Provincial/Territorial Considerations

6. Possible Approaches

7. Design Parameters

7.1 Eligible Groups

7.1.1 Degree of Common Ownership

7.1.2 Non-Corporate Entities and Non-Resident Corporations.

7.1.3 Common Parent Corporation

7.2 Range of Attributes

7.3 Elective Components

7.4 Pools of Unused Tax Attributes

7.4.1 Entry To and Exit From an Eligible Group

7.4.2 Use of Carry Overs Within an Eligible Group

7.5 Existing Approach

7.5.1 Grandfathering Provisions

7.6 Use of Previously Accumulated Tax Attributes in a New System

8. Consultative Process

Annex 1:  Summary of Questions

Annex 2:  Federal and Provincial Revenue Considerations

Unused Losses and Other Tax Attributes

Use of Losses Over Time.

Provincial Revenue Considerations

Annex 3:  Statistics on Corporate Groups

Annex 4:  Group Taxation and Loss Utilization in Other Countries

Overview of Group Taxation Regimes in Other Countries

Treatment of Sub-National Jurisdictions

Loss Carry-Overs


1. Introduction 

Over the last several years, the Government has taken significant steps to improve the competitiveness of the tax system for Canadian businesses, and followed through on the Economic Action Plan and Advantage Canada commitments to reduce taxes on business investment. The Government is committed to continuing on this track.

Unlike many other countries, Canada 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. Currently, Canada’s tax system taxes corporations on a stand-alone basis, although it is often possible for corporate groups to offset the profits and losses of group members through intra-group transactions and restructurings.

The Government has heard various concerns from the business community and from the provinces[1] regarding the current transaction-based approach for using tax losses within corporate groups. As a result, Budget 2010 indicated that the Government is exploring whether new rules for the taxation of corporate groups – such as a more formalized system of loss transfers or some form of consolidated reporting – could improve the functioning of the tax system. This could be achieved if a new system leads to increased economic efficiency by better aligning the unit of taxation with the economic reality of economically integrated corporate groups.

This examination of corporate group taxation builds on a number of policy developments over the last 25 years:

  • In 1985, a Ministerial discussion paper entitled “A Corporate Loss Transfer System for Canada” recommended the adoption of a system allowing losses to be transferred between members of a corporate group. While the proposal was never adopted, the paper outlined a number of considerations which remain relevant today, including many that will be discussed in greater detail below.
  • In 1996, the Auditor General of Canada suggested that complex loss utilization strategies should not be necessary to allow loss transfers between affiliated corporations.
  • In 1997, the Technical Committee on Business Taxation recommended that the federal government consider, in consultation with the provinces, a formal system for transferring losses between members of the same corporate group, starting with the 1985 proposal.
  • In December 2008, the Advisory Panel on Canada’s System of International Taxation suggested that the federal and provincial governments should work together to consider how a tax consolidation system could operate in Canada.

These important policy references will be considered by the Government as the review of group taxation progresses.

The introduction of a new system for the taxation of corporate groups would constitute a fundamental change to the Canadian corporate tax system. The intention of the current consultation process is to explore a wide range of possible approaches. Accordingly, this paper outlines a variety of topics about which the Government is seeking to gather information and views from stakeholders; questions about these topics are posed throughout the paper, and are also summarized in Annex 1 for convenience. Stakeholder responses will help the Government to gauge the importance of various issues and the breadth of support for a new system of group taxation, to better define the issues such as the type of group taxation system favoured by stakeholders, and to increase understanding of some of the possible implications of a new system of group taxation.

The Government will use the responses from this consultation to evaluate whether new rules for the taxation of corporate groups have the potential to broadly address the concerns of stakeholders, including the provinces and the business community. Because of the challenges involved in fully satisfying both levels of government and the business community, participants are encouraged to recognize competing interests and provide input about their most important priorities.

Stakeholders will be consulted again if a new system of group taxation is proposed as a result of this exercise.

2. Policy Objectives 

The Canadian corporate tax system is designed to raise revenues in an economically efficient manner. An efficient tax system allows resources to be allocated to their most productive uses, without distorting corporate decision making.

In the context of corporate groups, efficiency is enhanced when the unit of taxation more closely matches the economic reality of a corporate group that is an economically integrated unit. Distortions could occur if the system for taxing corporate groups creates a conflict between efficient tax and business structures or if it provides different treatment for corporate structures that are functionally equivalent. Distortions can also arise if the system for taxing corporate groups leads to structures and transactions that distort market signals. For example, differences between the economic, legal and tax treatment of profits and losses could result in an inefficient allocation of resources.

An efficient tax system also contributes to providing a more competitive environment for businesses, making Canada a preferred investment location compared to other countries. While Canada has the lowest effective tax rates on new business investment in the G7, it may be possible to further enhance competitiveness by improving the efficiency of the tax system with respect to its treatment of corporate groups. At the same time, it is important to take into consideration the entire corporate taxation system and not examine specific components of the system in isolation – for example, the ability of corporations to use losses also needs to consider their ability to carry losses over to offset against profits in other years, or to take certain deductions (such as capital cost allowance) on a discretionary basis.

The principle that corporate groups with similar or equivalent structures should be taxed in a similar way is important for making the tax system fairer as well as more efficient. Fairness also requires looking at different types of corporate groups. For instance, smaller corporate groups may have different needs and fewer resources for managing their tax burdens than larger corporate groups.

A new system of group taxation may also address concerns expressed by stakeholders that the current approach is unduly complex. A new system could potentially reduce compliance costs for taxpayers and the cost the Government incurs in administering the system by making the rules clearer and more transparent, and by reducing the number and cost of loss utilization transactions undertaken by corporate groups. However, at the same time, a new system for the taxation of corporate groups could introduce new rules for complying with the system, or consequential changes to ensure the integrity of the tax system, which could increase complexity.

In addition to these policy objectives, the Government must carefully consider any potential revenue impacts of a system of group taxation for both the federal and provincial governments before moving ahead with an explicit proposal. This will include an evaluation of the effect that a lower tax base could have on the Government’s commitments for returning to fiscal balance and on the income of provinces. (The potential revenue effects are discussed in greater detail in Annex 2.) An additional consideration will be the impact that a new system of group taxation could have on federal-provincial tax arrangements, which will be further discussed in Section 5.

In assessing what approach could be taken in developing a formal system of group taxation, it will be important to consider the competing priorities of the various objectives.

The Government is interested in stakeholders’ views regarding the most important benefits that they expect would be obtained from a new system for the taxation of corporate groups.

3. The Unit of Corporate Taxation 

Under Canada’s corporate income tax system, the basic unit of taxation is the corporation as a stand-alone entity. There are several rationales for this approach: it is a simple definition; the entity can be clearly identified; the definition corresponds to the legal definition of the entity; and it respects legal concepts such as the limited liability of a corporation. The separate-entity approach implies that income from one part of a corporation can be offset by losses from other activities within the same corporation, while losses by one corporation may not be used directly against the income of another corporation, even where the other corporation is in the same corporate group.

Other possible choices for the tax unit are the establishment or activity unit within a corporation, or the group of corporations which are economically integrated. The activity unit approach would treat each line of business as a separate source of income and tax each such source independently. Such an approach would be rigid and complex in practice, as the dividing lines between a corporation’s different activity units would in many cases be unclear, and would not reflect that a corporation’s ability to pay tax depends on the overall results of all the corporation’s income-earning activities. The corporate group approach recognizes these cross-over effects from different lines of business and extends the principle beyond the confines of the legal entity.

Where the corporate group consists of an economically integrated unit, moving to a larger unit of taxation has the potential to better reflect the economic unit and thus improve the efficiency of the tax system. This suggests that the tax system ought to provide at least some recognition of the relationships between the members of a corporate group. An important first question is how to identify an economically integrated corporate group in this context.

One could start by considering wholly-owned corporate groups. Within these groups, the economic and legal interests of the owners in each member are essentially the same. It can be expected that the members of such corporate groups will not interact with each other out of self-interest but with regards to the best interests of the overall group. There may also be synergies from the coordinated actions of group members, the returns to which may be difficult to allocate between the members of a corporate group.

Corporate groups whose members have significant common ownership but which also have minority shareholders are somewhat different. In particular, the economic and legal interests of the owners are no longer necessarily fully aligned. The divergence of these interests may become more significant as the proportion of the corporation owned by minority shareholders increases. At the same time, majority-owned groups may exhibit high economic integration, despite the presence of minority shareholders, when the degree of common- or cross-ownership leads to common control of all the group members. In such cases, the economic interests between member corporations can lead to coordinated activity with many of the same behaviours as are seen in wholly-owned groups. Thus a focus on corporations under common control would provide a broader recognition of economically integrated units than considering only wholly-owned groups.

There can be situations where a focus on common ownership or control would overstate the integration of the interests of the members of a corporate group. For example, a corporate group may choose to undertake its activities through separate corporations in order to make use of legal entity protections such as limited liability. Additionally, despite having common ownership, a corporate group may decide for business reasons to decentralize decision-making or encourage business units to actively compete against each other in the marketplace. Nevertheless, a focus on common ownership or control would appear to be a reasonable way to identify economically integrated units. The alternative – subjective tests of integration of management, decision-making, and other similar criteria – would likely be more difficult to apply in practice.

The relevance of corporate groups is already reflected to a certain extent in the Income Tax Act. In particular, there are express provisions in the Act which recognize the integration of the interests of members of a corporate group. At the same time, the mechanisms used to determine whether a corporate group exists can vary depending on the provision and their specific purposes. This helps to illustrate that the determination of the most appropriate way to apply income tax rules to corporate groups is not straightforward, even if the corporate group, however defined, more closely corresponds to the economic unit than either the separate entity or activity unit bases of taxation.

4. Loss Utilization in Canada Currently 

As mentioned in Section 3, the Income Tax Act has express provisions which recognize the integration of the interests of members of a corporate group. In 1988, the Government noted that explicit exceptions in certain rules, including the corporate loss limitation rules, “are intended to apply with respect to transactions that would allow losses, deductions, and credits earned by one corporation to be claimed by related corporations”, and stated that “the scheme of the Income Tax Act as a whole, and the expressed object and spirit of the corporate loss limitation rules, clearly permit such transactions between related corporations where these transactions are otherwise legally effective and comply with the letter and spirit of these exceptions”.[2]

Corporate groups are currently often able to make use of the flexibility, described above, that at present effectively exists within Canada’s income tax system to transfer income or losses between group members. Some of the techniques which corporate groups are able to use include:

  • Financing arrangements, under which money is borrowed by one member of a corporate group to invest in preferred shares of another member (with the interest deduction reducing income in the first corporation’s hands, and generating additional interest or other income in the second);
  • Amalgamations or wind-ups of a group member with loss carry-forward pools into another group member that is profitable; and
  • Transfers of property between group members on a tax-deferred basis, in order to shift income-producing activities to, or to realize a gain on the final disposition of the property in, a particular group member.

However, business and legal restrictions or considerations can preclude the straightforward use of such techniques. Accordingly, in some cases loss utilization transactions are relatively straightforward; in other cases corporate groups must undertake highly complex transactions in order to achieve a form of loss utilization. There may also be situations where the flexibility in the system is not sufficient to permit corporate groups to utilize losses.

The Government invites stakeholders to comment on the current approach, and the most significant types of costs and benefits related to this approach.

5. Provincial/Territorial Considerations 

The federal and provincial governments have a shared interest in ensuring that the Canadian tax system, at both the federal and provincial levels, is economically efficient in order to encourage investment and increase living standards for Canadians. An efficient, harmonized tax system is a key component of Canada’s economic union.

The rules for allocating corporate taxable income among provinces are a long-standing feature of Canada’s tax system. These common rules, combined with the development of similar tax bases across the country, have contributed to creating a system that is highly harmonized and generally avoids double or under taxation of income[3]. However, some provinces have raised concerns about the utilization of tax losses within corporate groups, which may affect provincial tax bases and the interprovincial allocation of income. The extent to which these concerns can be addressed will be an important consideration in the Government’s examination of new rules for the taxation of corporate groups.

Under the interprovincial taxable income allocation rules, which are applied at the corporate entity level, if a corporation has a permanent establishment in a particular province and has no permanent establishment outside that province, the whole of its taxable income is allocated to that province. If a corporation has a permanent establishment in more than one province, its taxable income is apportioned among those provinces according to an allocation formula[4]. Often, in the case of a corporate group, the allocations calculated for provincial taxation purposes are different for each group member. As a result, changes in the income of various group members due to intra-group transactions may result in a shifting of taxable income (or losses) between provinces.

Under the current approach to loss utilization, transactions between members of a corporate group which operate in multiple provinces can also result in changes to the allocation of income. The net result of such shifts is unclear, as the direction of loss shifting will vary from group to group.

A formal system of group taxation should further the economic union by helping to increase the efficiency of the tax system. However, it is difficult to ascertain the net impact that such a system would have on the revenues of particular provinces. Depending on the design of a new system of group taxation, the provincial tax base could become larger or smaller than it is under the current approach. If a new system were to permit a greater utilization of losses overall, there could be a somewhat lower provincial tax base overall, mirroring the potential impact on the federal tax base. There could also be impacts on particular provinces if the introduction of a formal system were to change the allocation of income and losses between provinces. (Annex 2 provides more information on provincial revenue implications.)

The method of allocation of taxable income between provinces under a formal group taxation system would depend on the design of the system, and on how the income allocation formula would be applied to corporate groups. As noted previously, corporate groups can currently engage in certain loss utilization transactions. As a result, the potential revenue impact of a formal system may be less than it otherwise would be. In considering whether to develop a formal system of group taxation in Canada, it will be important to consider whether changes to the provincial income allocation formula would be appropriate, and what shape any such changes should take.

Given the potential impact on provincial tax bases and the interprovincial allocation of taxable income, the federal government will consult the provinces prior to the introduction of any new system for the taxation of corporate groups, including whether any consequential changes to the income allocation formula would be required.

The Government invites stakeholders to comment on whether a new system of group taxation should incorporate changes to the method of determining provincial income allocation, and if so, how this could be accomplished.

6. Possible Approaches 

There is a range of options that the Government could consider for a new system of group taxation. These options represent different approaches to recognizing the economic integration of corporate groups in the tax system. In exploring what approach to take, the Government will consider the tradeoff between the economic efficiency of better recognizing corporate groups as integrated economic units versus the complexity that could come with departing from the current approach of taxing corporations on a separate-entity basis, in addition to other considerations discussed in this paper.

The range of approaches is often described as a spectrum of options, with a consolidation system at one end and a loss transfer system at the other:

  • A consolidation system (sometimes called a fiscal unity system) taxes the members of a corporate group as if they were a single entity. Such systems effectively combine the profits and losses of the corporate group, provide consolidated treatment for other tax attributes (e.g. investment tax credits), and generally ensure there are no immediate tax implications from intra-group transactions (e.g. dividend payments and asset transfers).
  • A loss transfer system (sometimes called a group relief system) generally preserves the separate identities of the members of a corporate group while allowing a member of the corporate group with a loss to transfer part or all of that loss to one or more profitable members of the same group. By applying one corporation’s loss against another’s profits, the total tax liability of the corporate group is reduced.

By treating a group of corporations as a single entity, a consolidation system would most closely correspond to the theoretically efficient objective of reflecting the integrated economic unit. A loss transfer system does not go as far as a consolidation system in treating the corporate group as a single entity; it is therefore further from the corporate group approach and closer to the separate-entity approach. As one moves along the spectrum from consolidation to loss transfer, the system can be expected to involve less complexity but it could also reduce the connection between the unit of taxation and the integrated economic unit.

The placement of an approach to group taxation along the spectrum between consolidation and loss transfer depends on the policy choices made with respect to a number of design parameters. For example, a consolidation system that provides flexibility to a corporate group to decide which eligible group members participate in the consolidation system, and for what period of time, would not treat the integrated corporate group as a single entity in all circumstances, and would therefore represent an intermediate point along the spectrum. Similarly, a transfer system that applies to other tax attributes in addition to losses (e.g. investment tax credits) would come closer to treating the group as a single economic unit, and would move a system along the spectrum closer to a consolidation system.

As outlined in greater detail in Annex 4, there are substantial variations in the actual implementation of group taxation policies across countries. These differences can reflect policy choices regarding the degree to which group members should maintain their separate identities, as well as the specifics of each country’s corporate tax system, and other factors such as corporate or constitutional law.

The range of variations shows that it is possible to achieve a particular degree of integration in the tax system through various means. For example, consolidation can be achieved by disregarding the separate identities of subsidiary corporations, with each item of revenue or expenditure of the subsidiaries being attributed to a parent corporation. Such an approach would be complex, and would require substantial modifications to basic structures and concepts in the corporate tax system, including those related to inter-company transactions. Another method of consolidation would see each subsidiary retaining its identity for tax purposes, with accounts reported on either financial statements or tax statements being aggregated on a consolidated tax return. A third consolidation technique would be to retain the identities of each member of the group and have each member calculate its income separately, following which the profits and losses of all group members would be transferred to the parent corporation. Similarly, there are various approaches to implementing a loss transfer system: some systems require a taxable payment from one member of a corporate group to another, while other systems require a loss corporation to surrender its tax loss to be used by another member of its corporate group.

The following examples of other countries’ group taxation systems demonstrate the range of potential approaches on the spectrum between a pure consolidation system and a loss transfer system:

  • Australia has a consolidation system which eliminates the separate identities of subsidiary members of a corporate group for tax purposes. There is no recognition or reporting of income or losses at the level of the subsidiary. Instead, any external transactions undertaken by group members are taxed as if the transaction was undertaken by the corporate parent. The system is optional for the parent corporation; however, once elected, it is irrevocable and mandatory for all wholly-owned subsidiaries.
  • The United States employs a consolidation system whereby each member completes its own federal tax return, and then a consolidated return is prepared for the group, reporting the income, expenses, and balance sheet items of each group member. This approach preserves recognition of the separate legal entity on which tax rules are based, while still taxing the corporate group as an integrated economic unit by combining the tax results of group members. The system is optional for the parent corporation; however, once elected, it is mandatory for all subsidiaries meeting an 80 percent ownership threshold and is generally irrevocable. Group taxation provisions in the U.S. at the state level vary considerably, and are described in more detail in Annex 4.
  • Denmark requires domestic corporate groups, generally with greater than 50 percent common ownership, to participate in a mandatory consolidated reporting system, which maintains the separate identity of group members prior to a consolidation of tax attributes.
  • France offers a domestic consolidation system, also known as a “tax integration regime”. It is further from reflecting an integrated economic unit than the above examples, as it provides more flexibility to the corporate group. The tax integration regime is an optional system and the parent company decides each year which subsidiaries to include within the group, provided that the parent holds 95% or more of these subsidiaries. Elections to participate are valid for a renewable five-year period.
  • Germany’s “Organschaft” system requires that both the income and losses (but not other tax attributes) of participating subsidiaries be rolled up to the parent corporation after the income or loss of the subsidiary is determined. The parent must sign a multi-year profit/loss transfer agreement with each subsidiary with which it wishes to use this system; eligibility is determined using a 50 percent ownership threshold. This system would represent an intermediate point along the spectrum.
  • Finland’s “group contribution” or “subvention payment” system permits the shifting of taxable income using intra-group payments (e.g. cash transfers) which are tax deductible for the profitable payer and included in taxable income by the recipient. Membership in the group is determined using a 90 percent ownership threshold. This approach would be close to a loss transfer system on the spectrum.
  • The “group relief” system in the United Kingdom allows certain losses and other tax attributes of one group member to be surrendered to a profitable member of the same group. Membership in the group is determined using a 75 percent ownership threshold.

In addition, there are other less common approaches to group taxation. In the past, when the Canadian government has considered the issue of corporate group taxation, other systems have been discussed which could substitute for consolidation or loss transfers. For example, the 1985 Ministerial discussion paper suggested that refunding tax losses up to the value of profits in other members of a corporate group could be seen as a variation of a loss transfer system.

The Government is interested in stakeholders’ views on:

  • How the efficiency and competitiveness of Canada’s current loss utilization rules compares to more explicit, but often less flexible, rules in other countries;
  • How a new system of taxation for corporate groups would improve the efficiency and competitiveness of Canada’s tax system; and
  • The approach Canada should take for a new system for the taxation of corporate groups.

7. Design Parameters 

There are a number of issues relating to the design of a group taxation system which will need to be considered as the Government explores whether new rules could improve the functioning of the corporate tax system. How these issues are addressed in the design of a group taxation system could have implications for the relative effectiveness of a new system and for the policy and other considerations discussed in this paper.

While consideration of many design issues would best be done in the context of developing a detailed proposal, stakeholder views on the key design issues discussed below will be essential in determining whether a new system has the potential to respond to the concerns of the business community and the provinces with respect to the utilization of tax losses within corporate groups. The Government will also consider the potential impact of these design issues on corporate tax revenues and on the integrity of the tax base.

Stakeholders are invited to comment on additional design aspects which they think would be important to highlight at this stage.

7.1 Eligible Groups 

Under the current approach (described above in Section 4), loss utilization strategies are generally permitted among related corporations. As such, losses can be utilized between two corporations if there is common control. Common control can mean, for example, that two corporations can be considered related if there is more than 50 percent common- or cross-ownership of each corporation. This threshold for loss utilization is substantially lower than the thresholds of common ownership found in the formal group taxation systems in many other countries. In addition, the use of a test based on common control means that loss utilizations can currently take place when the parties to the utilization do not have a common corporate parent.

Implementing a group taxation system that is simple to comply with and administer would require having clear rules defining membership in a corporate group for the purposes of the system. For example, it may be desirable that the composition of a unique corporate group can be easily determined, which would suggest that it may be preferable to use objective tests of common ownership and control (if these were to be factors in determining the composition of a group), or both, as opposed to subjective tests.

7.1.1 Degree of Common Ownership 

A key question for any group taxation regime is the degree of common ownership which would be used as the threshold for determining membership in an eligible corporate group. To simplify compliance and administration, a new system of group taxation could be based upon a straightforward test of the percentage of common ownership required for a subsidiary to participate in the system, which could be further augmented by an additional requirement for common control.

As discussed earlier, it can be argued that economic efficiency could be enhanced by ensuring that the definition of an eligible corporate group reflects corporate groups which operate as an integrated economic entity, and that this would be best implemented by identifying corporations with common- or cross- ownership. A higher level of common ownership may be reasonable if such groups are more likely to be economically integrated entities. However, specifying a lower level of common ownership would allow more corporate groups to participate. Many, but not all Canadian corporate groups with common control also have high degrees of common- and cross-ownership (see Annex 3).

A lower required threshold of common ownership for participation in a group taxation system would increase the number of minority shareholders affected by the system. Issues related to the rights of minority shareholders in corporate groups are more properly the subject of corporate law than tax law, but consideration should be given to, for example, whether rules would be appropriate to accommodate corporate groups that want to compensate minority shareholders for any loss of value they might suffer as a result of the group’s participation in a formal system of group taxation.

An additional consideration would be the effect that the threshold of common ownership would have on the fiscal impact of moving to a formal system of corporate group taxation.

A clear understanding of the meaning of “ownership” will be required to apply any threshold of common ownership. For example, in Canadian corporate groups there can be a significant difference between the percentage of votes a corporate parent holds in a subsidiary and the percentage of the value of the corporations’ equity to which it is entitled. Where there is a significant difference between the percentage of votes and value held (for example, because of dual-class common shares), issues relating to the efficiency and integrity of the tax system may arise. Many other countries define their ownership thresholds in terms of both votes and value.

The Government is interested in stakeholders’ views regarding:

  • The appropriate threshold of common ownership for a corporation to be included in a corporate group; and
  • The appropriate meaning of ownership to be applied for determining if a corporation meets the ownership threshold (e.g. votes, value, or both).

7.1.2 Non-Corporate Entities and Non-Resident Corporations 

In some countries, trusts and similar non-corporate entities are eligible for inclusion in a group taxation system, sometimes with the caveat that the non-corporate entities must be taxed under the same rules as corporations.

In considering which group members would be eligible to participate in a formal system of group taxation, the role of trusts and other non-corporate entities as intermediate tier entities in a corporate group would need to be considered. For example, the structure of trusts could be substantially different than those of corporations. It could therefore be complex to determine whether or not such entities satisfy criteria for membership in a corporate group, or if the existence of such an entity should prevent the corporate parent and the corporate subsidiary of the entity from being treated as members of the same group.

A new system of group taxation in the Canadian context would generally be expected to apply to taxable Canadian corporations, including foreign branches of these corporations, but would not be expected to include foreign affiliates or foreign parents. Corporate groups can include other types of entities, however, such as Canadian branches of non-resident corporations, which can also earn income taxable in Canada. Consideration will be given to whether Canadian branches of non-resident corporations could form part of a corporate group in Canada.

The Government is interested in stakeholders’ views regarding how trusts or other non-corporate entities and the Canadian branches of non-resident corporations that are part of a Canadian corporate group should be treated in a group taxation system.

7.1.3 Common Parent Corporation 

Some corporate groups are structured with one corporate parent, which directly or indirectly controls one or more subsidiary corporations (see Example 1 below).

Example 1 - Group with a common corporate parent

In other Canadian corporate groups, subsidiaries are not controlled by a common parent corporation at the top tier. For example, some corporate groups consist of multiple top-tier corporations, which could be controlled by the same individual or by various related individuals (see Example 2 below). Currently, the corporate members of such related groups may be able to engage in loss utilization transactions.[5]

Example 2 - Group without a common corporate parent

There are also situations where a group of individuals, corporations, etc. that are not necessarily related may form a “group of persons” that control several corporations (see Example 3 below). These structures occur, for example, where unrelated persons act together to form a group of persons in control. The corporations in such structures may be considered related corporations under the current definitions in the Act, and could thus currently be allowed to undertake loss utilization transactions.

Example 3 - Group of unrelated owners

Ownership structures without a common corporate parent, such as those illustrated in Examples 2 and 3, are not typically permitted under the group taxation systems of other countries, and accommodating them in a formal system of group taxation would raise issues. For instance, consideration would have to be given to whether such groups demonstrate a sufficient degree of economic integration or common- or cross- ownership in their ownership structure which would justify tax treatment as a single economic entity.

More practically, under a formal system, the rules for determining the eligibility of the group or of particular group members would need to be clear, simple, and of general application. Without a common parent corporation, it may be difficult to develop a clear test to determine membership in a corporate group, or to identify a unique corporate group. Also, a designated corporate parent would be required for some of the possible approaches to a group taxation system (for example, if profits and losses of participating subsidiaries are to be rolled up to the parent). There would likely be other complexities as well.[6]

The Government is interested in stakeholders’ views regarding whether eligible groups of corporations should have a common parent corporation, and if not, how groups without a common corporate parent should be treated in a group taxation system.

7.2 Range of Attributes 

The use of current-year non-capital losses should clearly be incorporated into a group taxation regime. However, there are a variety of other tax attributes which could possibly be integrated into such a regime. These include other types of losses, investment tax credits, and deduction pools (e.g. capital cost allowance, expenditures on scientific research and experimental development).

The inclusion of a wider range of tax attributes into a group taxation system would more closely equate the unit of taxation to the economically integrated corporate group. A pure consolidation system would likely feature consolidation of all tax attributes. However, other approaches to group taxation would allow options for the scope of attributes subject to the regime. For example, a transfer system could be narrowly focused on loss transfers, or could encompass a broader range of attributes. While many existing transfer systems do not extend beyond transfers of income and losses, extension to other attributes would clearly be possible. A transfer system which allowed the transfer of a wide range of attributes could potentially approximate the effects of a consolidation system.

Approaches to group taxation based on a formal system of attribute transfers may be simpler where fewer tax attributes are eligible for transfer, as fewer rules would be required. With respect to some tax attributes, it could be complex to design transfer rules that would respect existing limitations regarding their use. Given that the overall value of non-capital losses in the tax system is higher than that of other tax attributes (see Annex 2), the efficiency gains from extending a transfer system to more attributes would have to be balanced against the potential for increased complexity if more tax attributes were to be included in a group taxation system. Limiting the range of attributes could also help to constrain the fiscal impact for federal and provincial governments.

Another consideration is the extent to which certain attributes are a means to an end. For example, it is unclear whether corporate groups would want to transfer deduction pools for their own sake, or whether transferring losses or investment tax credits would allow adequate utilization of such attributes.

The Government is interested in stakeholders’ views regarding the most important attributes which should be considered with respect to a new system for the taxation of corporate groups.

7.3 Elective Components 

An important element in designing a group taxation system is the extent to which participation is voluntary or mandatory, and the discretion that a group has in deciding which members to include and which attributes to transfer or consolidate.   Under the current approach, a corporate group has a high degree of flexibility in deciding whether to engage in a loss utilization transaction, which members of the group should be involved, and how to do so.   While this approach allows for considerable flexibility in tax planning, such planning can be complex, opaque, and may contribute to the concerns raised by the provinces about the use of loss utilization transactions to shift income between provinces.

In general, a group taxation system with more elective components would likely afford greater opportunities to taxpayers to manage their tax burdens. On the other hand, requiring participation of all eligible members and the transfer of all eligible attributes would be more efficient as it would better align the unit of taxation with the economically integrated corporate group. In addition, implementing a group taxation system with less flexibility could be a straightforward approach to reducing the ability of corporate groups to engage in interprovincial tax planning by transferring income between different group members.

These advantages could be further enhanced with a requirement that elections to participate continue for a minimum number of years, or indefinitely. Such a requirement would also increase the stability and predictability of the group taxation system for both taxpayers and governments, and could alleviate issues related to the use of carryover tax attributes by corporate groups (discussed below).

The type of elections which could be incorporated into a group taxation system would depend in part on the type of system under consideration. In a consolidation system, a corporate group would likely have no discretion on which tax attributes to consolidate, but there can be discretion in terms of membership in the system.   In most (but not all) countries with a consolidation system, participation is voluntary, but varying degrees of discretion are allowed once a corporate group elects to participate: some countries do not allow for deconsolidation, while others require participation for a minimum number of years, or for only a single year. Also, some countries require all members of a corporate group to join (i.e. an “all-in” rule), while others allow discretion as to which members of a corporate group participate.

An attribute transfer system typically provides a wider range of design options, in terms of both the attributes that are included in the system (as discussed above) and the participation of members of the corporate group. Most such regimes allow corporate groups to decide on a year-to-year basis whether to participate and, if so, which group members should be involved. However, some systems (such as the one used by Germany) require participating group members to transfer income and losses to the parent corporation, and to commit to the system for a certain time period. The development of an attribute transfer system would therefore require consideration of the same elective components as a consolidation system, in addition to consideration of which attributes could be transferred.

The Government is interested in stakeholders’ views on the extent to which participation in a group taxation regime should be voluntary or mandatory for the group and/or individual group members, and to what extent corporate groups should have flexibility in determining which attributes to transfer or consolidate.

7.4 Pools of Unused Tax Attributes 

Canada’s corporate tax system generally allows corporations to carry over[7] unused tax attributes (particularly losses and investment tax credits) to offset taxable income or tax payable of other taxation years. At the same time, the Act generally limits the ability of corporations to carry over such attributes following an acquisition of control. In considering a system of group taxation, consideration will need to be given to whether or not an eligible corporate group should have access to the unused attributes of its group members from other years. This issue arises in two contexts – first, when a corporation enters into, or exits from, an eligible group for purposes of a group taxation system, and second, on a year-to-year basis within the eligible group.

Issues associated with the current approach and the use of previously accumulated tax attributes in a new system are discussed in Sections 7.5 and 7.6.

7.4.1 Entry To and Exit From an Eligible Group 

A decision would be needed regarding whether a formal system of group taxation should allow a corporate group to utilize the tax attributes of a corporation that were accumulated prior to the corporation’s joining the eligible group and participating in the group tax system, and if so, to what extent. Depending on the specifics of the system design, such entries could occur, for example, when a corporation meets the qualifying criteria to participate in the system as part of a particular group, or because a formal election to participate is made.

Countries with consolidation systems generally quarantine the attributes earned prior to a corporation’s entry into a group for purposes of the consolidation system. Usually, such attributes can only be used to offset income earned in the corporation in which the attribute originated. Another approach, followed in at least one country, is to limit the proportion of these attributes that can be used in a given year. Countries with transfer systems generally similarly restrict the transfer of attributes accumulated while parties to the transfer did not meet the eligibility requirements for the group tax system.

If placing restrictions on the use of pre-entry attributes, and particularly losses, is appropriate, consideration would be given to the type of new rules that would be needed in order to quarantine or otherwise restrict these attributes. Such rules would likely be in addition to any necessary modifications of current tax rules such as the continuity of ownership test or the same business test, or new rules which would test to ensure that the transferor and the transferee are part of the same corporate group both in the year in which the attributes are incurred or earned, and the year in which they are used.  The Act already contains rules regarding the utilization of many tax attributes following an acquisition of control. Consideration will be given to making use of these or similar rules.

Similarly, rules may also be needed regarding the utilization of tax attributes accumulated within a group when a corporation leaves a group for purposes of the group taxation system, or otherwise is no longer participating in the group taxation system. For example, it would need to be decided whether the corporation’s unused losses and other attributes incurred while the corporation was part of the group should stay with the corporate group or with the exiting corporation. This may be of more relevance for a consolidation system which facilitates pooling of tax attributes than for an attribute transfer system where tax attributes remain with the originating corporation even while the group exists.

7.4.2 Use of Carry Overs Within an Eligible Group 

With respect to corporations that are part of the same eligible corporate group for purposes of the group taxation system on a year-to-year basis, it would need to be decided whether a corporate group would be able to offset losses or other tax attributes accumulated in one member corporation during one taxation year with income earned by other members during a different taxation year, during which years each is a member of the same corporate group.

Example:  Two corporations, LossCo and ProfitCo, meet the requirements to form a group. If LossCo were to incur losses of $100 per year and ProfitCo were to earn income of $100 per year, they would be able to offset their losses and income each year. However, if LossCo were to incur $200 of losses in year one, and none in year two, while ProfitCo were to earn no income in year one and $200 in income in year two, the ability of LossCo and ProfitCo to offset the year one losses against year two income would depend on the rules related to the group’s use of losses carried forward.

Allowing the offset of carried-over attributes would be beneficial to corporate groups that are sometimes unable to use all losses or attributes of a group member against profits of other group members in the taxation year in which they arise. Such an approach would more closely correspond to treating the corporate group as an economically integrated unit. It would also reduce the incentive for corporate groups to attempt tax-planning strategies to move income streams so as to make use of these tax pools.

However, unconstrained flexibility in the use of carried-over attributes is not always seen in other countries’ formal group taxation systems. Many countries with an attribute transfer system only permit the transfer of current taxation year attributes (i.e. current year losses are only allowed to be offset against current year profits of another group member). Since under an attribute transfer system, it may only be necessary to determine if particular corporations are actually members of a common group at the time of a transfer, such limitations could reduce the potential for loss trading transactions and the complexity of related rules. Within consolidation systems, the ability to effectively transfer carried-over attributes is typically allowed.

The Government is interested in stakeholders’ views on 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.

7.5 Existing Approach 

If the Government were to introduce a formal system of group taxation, an important consideration would be what, if anything, to do about the existing approach to loss utilization. Despite its limitations, the existing approach has evolved over the years and provides corporate groups with considerable flexibility. Allowing the existing approach to continue to exist would help to ensure that all corporate groups have access to at least some form of loss utilization, particularly groups that are not eligible to participate in a formal system because of particular corporate structures. The benefit of allowing the current approach to continue to exist would therefore depend on whether the criteria for determining whether members of a corporate group would be able to participate in the new system differ markedly from the current approach for determining whether a group may undertake a loss utilization transaction.

However, it is unclear if retaining the current approach in parallel with a new formal system would be consistent with the principles underlying a new system. Elimination of the current approach in favour of a formal system should serve to increase the transparency and predictability of the tax system, while maintaining two systems in parallel would further complicate taxpayer strategies for managing corporate tax burdens. It is possible that replacing the existing approach with one that encompasses a new approach to the provincial allocation of income earned in corporate groups could address provincial concerns about income and loss shifting. Also, retention of the existing approach may not be necessary to maintain competitiveness.

For these reasons, it may make sense for the introduction of a formal system of group taxation to be accompanied by an elimination of the ability of corporate groups to effectively transfer losses outside of this system.

7.5.1 Grandfathering Provisions 

If the introduction of a formal system of group taxation were to be accompanied by an elimination of the ability of corporate groups to effectively transfer losses outside of the system, there would need to be consideration of mechanisms to ensure that corporate groups are not unduly negatively affected by such a transition.

Consideration could be given to providing a transitional period during which groups could continue to employ the current approach for transactions that were set in motion prior to the introduction of a new system.

The Government is interested in stakeholders’ views about the impact of combining the introduction of a formal group taxation system with a restriction on the ability to undertake loss utilization transactions amongst corporate group members outside of the formal system.

7.6 Use of Previously Accumulated Tax Attributes in a New System 

There are currently significant pools of unused losses and other similar tax attributes within corporations taxable in Canada, a large proportion of which is related to the activities of corporate groups (see Annex 2 and Annex 3). An important consideration is whether there should be additional restrictions on the use of these attributes in a new system beyond those discussed in Section 7.4.

Many corporate groups may have based their current corporate planning on the eventual use of existing pools of tax losses and other attributes, including the possibility of undertaking transactions to utilize these attributes under the existing rules. A new system which does not accommodate utilization of the existing pools that would otherwise be used could to some extent represent a loss to these corporate groups, particularly if the ability of corporate groups to undertake loss utilization transactions outside of the system were to be eliminated.

However, corporate groups have accumulated the current pools of tax attributes under the current approach and have therefore expected to face the costs and limitations associated with the current approach. If corporate groups were able to immediately take advantage of the benefits associated with a new approach for these existing attributes, the benefits to corporate groups would to some extent represent windfall gains.

In addition, if the introduction of a group taxation regime were to allow immediate access to a sizeable portion of the existing pools of losses and other attributes within eligible groups, the resulting reduction in revenues could be significant and of a magnitude that would be inconsistent with the Government’s fiscal plan, as well as being a concern for the provinces. Accordingly, the ability to access existing pools of losses and other attributes in a formal group taxation system would likely need to be constrained in some manner, in addition to rules that may be developed for entry to an eligible group (as discussed in Section 7.4).

The Government is interested in stakeholders’ views regarding 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.

8. Consultative Process 

As stated in the Introduction, the intention of this consultation is to explore a wide range of possible approaches for a new system of corporate group taxation. Stakeholder responses will help the Government to gauge the importance of various issues and the breadth of support for a new system of group taxation, to better define the issues such as the type of group taxation system favoured by stakeholders, and to increase understanding of some of the possible implications of a new system of group taxation. The Government will use the responses from this consultation to evaluate whether new rules for the taxation of corporate groups have the potential to broadly address the concerns of stakeholders, including the provinces and the business community.

Stakeholders will be consulted again if a new system of group taxation is proposed as a result of this exercise.

The Government invites comments from stakeholders regarding any element of this paper by April 15, 2011 – Amended – Submission deadline extended.

Comments may be submitted to TCG-consultation-IGS@fin.gc.ca.

Also, written comments can be forwarded to:

Geoff Trueman
Business Income Tax Division
Department of Finance
L’Esplanade Laurier
17th Floor, East Tower
140 O’Connor Street
Ottawa, Canada K1A 0G5

To add to the transparency of the consultation process, the Department of Finance will post submissions on the Department of Finance website, with the consent of the submitting party. We ask that, in providing your submission, you state whether you consent to posting your submission on the Department of Finance website. If you make a submission, please clearly indicate if you would like the Department of Finance to:

  • Post your submission on the Department of Finance website, and
  • Include your name and/or the name of the organization which you represent with your submission when posting it on the Department of Finance website.

We also request that submissions which are to be posted on the Departmental website be provided electronically in PDF format or in plain text.

The Department of Finance will not post submissions that do not clearly indicate a preference to be posted on our website.

Once received by the Department of Finance, all submissions will be subject to the Access to Information Act (ATI Act) and may be disclosed in accordance with its provisions. If a request pertaining to your submission is received under the ATI Act, you will be consulted under Section 27 of the ATI Act.

Annex 1: Summary of Questions 

Policy Objectives

The Government is interested in stakeholders’ views regarding the most important benefits that they expect would be obtained from a new system for the taxation of corporate groups.

Loss Utilization in Canada Currently

The Government invites stakeholders to comment on the current approach, and the most significant types of costs and benefits related to this approach.

Provincial/Territorial Considerations

The Government invites stakeholders to comment on whether a new system of group taxation should incorporate changes to the method of determining provincial income allocation, and if so, how this could be accomplished.

Possible Approaches

The Government is interested in stakeholders’ views on:

  • How the efficiency and competitiveness of Canada’s current loss utilization rules compares to more explicit, but often less flexible, rules in other countries;
  • How a new system of taxation for corporate groups would improve the efficiency and competitiveness of Canada’s tax system; and
  • The approach Canada should take for a new system for the taxation of corporate groups.

Design Parameters: Eligible Groups: Degree of Common Ownership

The Government is interested in stakeholders’ views regarding:

  • The appropriate threshold of common ownership for a corporation to be included in a corporate group; and
  • The appropriate meaning of ownership to be applied for determining if a corporation meets the ownership threshold (e.g. votes, value, or both).

Design Parameters: Eligible Groups: Non-Corporate Entities and Non-Resident Corporations

The Government is interested in stakeholders’ views regarding how trusts or other non-corporate entities and the Canadian branches of non-resident corporations that are part of a Canadian corporate group should be treated in a group taxation system.

Design Parameters:  Eligible Groups:  Common Parent Corporation

The Government is interested in stakeholders’ views regarding whether eligible groups of corporations should have a common parent corporation, and if not, how groups without a common corporate parent should be treated in a group taxation system.

Design Parameters: Range of Attributes

The Government is interested in stakeholders’ views regarding the most important attributes which should be considered with respect to a new system for the taxation of corporate groups.

Design Parameters: Elective Components

The Government is interested in stakeholders’ views on the extent to which participation in a group taxation regime should be voluntary or mandatory for the group and/or individual group members, and to what extent corporate groups should have flexibility in determining which attributes to transfer or consolidate.

Design Parameters: Pools of Unused Tax Attributes

The Government is interested in stakeholders’ views on 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.

Design Parameters: Existing Approach

The Government is interested in stakeholders’ views about the impact of combining the introduction of a formal group taxation system with a restriction on the ability to undertake loss utilization transactions amongst corporate group members outside of the formal system.

Design Parameters: Use of Previously Accumulated Tax Attributes in A New System

The Government is interested in stakeholders’ views regarding 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.

Annex 2: Federal and Provincial Revenue Considerations 

A new system of group taxation could reduce federal and provincial government revenues if it were to enhance the ability of corporate taxpayers to access otherwise unused corporate losses, investment tax credits or other tax attributes. Any such reduction in tax revenues would immediately impact the governments’ fiscal positions.

It has been suggested that a portion of any reduction in revenues would simply represent an acceleration of the use of losses and other attributes. However, a change in the timing of tax collections has a real impact on the fiscal position of governments. Another fiscal impact on governments would be the use of tax attributes that would, in the absence of a formal system of group taxation, expire or remain unutilized. The extent of the potential impact of a new group taxation system would depend upon the parameters ultimately adopted for the system.

Estimates of potential revenue impacts will be developed as policy options emerge and are refined.

Unused Losses and Other Tax Attributes 

A new group taxation system could potentially allow members of a corporate group access to various types of unused tax attributes originating with other members of the same corporate group. Depending on the type of system under consideration, the range of tax attributes that could be accessed could be limited (for example, only to non-capital losses), or could encompass all tax attributes of a corporation (for example, investment tax credits and capital cost allowances).

Table 1 presents statistics on some of the more important types of losses, investment tax credits and discretionary deductions available to corporations. Non-capital losses are the largest portion of these, and have increased significantly from 2007 to 2008. In 2008, the amount of non-capital losses incurred by corporations was $103.8 billion, while the balance of unutilized non-capital losses was $206.0 billion (up from 2007 values of $66.2 billion and $175.0 billion, respectively). Capital losses are, in general, the second largest category:  in 2008, capital losses incurred amounted to $27.7 billion and the amount of unutilized capital losses amounted to $77.8 billion. Other tax attributes (including investment tax credits and unused deductions) are much smaller, but their amounts remain significant. It is also worth noting that the accumulation and use of corporate losses and other similar tax attributes can fluctuate with the business cycle.

Table 1
Corporate Losses and Other Selected Tax Attributes
  2005 2006 2007 2008 Average
  $ billion
Taxable Income 165.0 190.6 203.1 208.9 191.9
Non-Capital Losses          
   Incurred in year 42.5 50.1 66.2 103.8 65.6
   End of year closing balance 150.4 157.1 175.0 206.0 172.1
Capital Losses          
   Incurred in year 12.7 12.3 30.5 27.7 20.8
   End of year closing balance 73.8 72.0 82.6 77.8 76.6
Investment Tax Credits: Scientific Research and
 Experimental Development
         
   Earned in year 3.7 3.7 3.7 3.8 3.7
   End of year closing balance 7.2 8.0 7.9 9.0 8.0
Investment Tax Credits: Other          
   Earned in year 0.4 0.4 0.5 0.4 0.4
   End of year closing balance 0.8 0.9 1.0 1.1 0.9
Unused Capital Cost Allowance Deductions          
Difference between what could
 have been claimed and the actual
 amount claimed
19.7 21.4 20.3 20.1 20.4
Unused Scientific Research and
 Experimental Development Deductions
         
   End of year balance 21.4 19.4 19.9 22.3 20.7
Notes: Other investment tax credits include the Atlantic Investment Tax Credit, the 10-per-cent Corporate Mining Exploration and Development Tax Credit, the Apprenticeship Job Creation Tax Credit (from 2006) and the Investment Tax Credit for Child Care Spaces (from 2007). The data in the table exclude tax-exempt corporations.
Source: Department of Finance

The actual fiscal impact associated with allowing corporations access to such unused tax attributes would depend on the extent to which these attributes could be used by other members of a corporate group (i.e. those group members in a taxable position), and, for losses and deductions, the tax rates applicable to such corporations.

Use of Losses Over Time 

In general, corporations use the majority of their tax losses over time. However, some of these losses expire or otherwise remain unused.

An analysis of non-capital losses incurred in 2000, presented in Table 2, provides an indication of the potential for a group taxation system to accelerate the use of tax attributes. Of these losses, 19 percent were carried back, allowing for an immediate refund of taxes previously paid. Another 45 percent were carried forward, and used in one of the subsequent seven taxation years. On average, these tax losses were utilized after 3.1 taxation years. If these tax losses could be used more rapidly under a group taxation system, this would negatively affect the Government’s finances and the current deficit.

Finally, 36 percent of year 2000 tax losses remained unused after seven years, either because the tax loss expired (11 percent), or because of a dissolution of the corporation incurring the loss or another restriction on the use of losses (25 percent).

In 2000, the maximum non-capital loss carry-forward period was seven years and the maximum investment tax credit carry-forward period was 10 years. Although the extension of loss and investment tax credit carry-forward periods to 20 years in 2006 is reducing the proportion of expiring tax attributes, some will still remain unused. To the extent that the introduction of a new group taxation system could allow additional usage of expiring or otherwise unusable tax attributes, there would be fiscal impacts for the Government, independent of potential timing effects.

Table 2
Analysis of Non-Capital Losses Incurred in 2000
Total Non-Capital Losses Incurred 100%
Percentage used:  
  Carried Back and Refunded in year of loss 19%
  Carried Forward  
    1 Tax Year 9%
    2 Tax Years 9%
    3 Tax Years 8%
    4 Tax Years 6%
    5 Tax Years 6%
    6 Tax Years 4%
    7 Tax Years 3%
Percentage unused:  
  Loss expired after 7 tax years 11%
  Loss unused because of dissolution of taxpayer
   (or other restriction on use)
25%
Note: In 2000, the maximum non-capital loss carry-forward period was seven years.
Source: Department of Finance
 

Provincial Revenue Considerations 

Provincial revenues would be affected in a manner similar to federal revenues if there were to be a reduction in the taxable income base. Because of the generally harmonized approach to corporate income taxation in Canada, the statistics presented above on unused losses and other tax attributes as well as of the use of losses over time can give a sense of the magnitude of the issue to the provinces overall.

Provinces have an additional revenue consideration in that a formal system of group taxation could also result in a change in the distribution of taxable income between the provinces. Under the current approach of taxing separate legal entities, between 2005 and 2008, an average of 45 percent of corporate taxable income and 40 percent of corporate losses related to corporations that had permanent establishments in more than one province. The remaining 55 percent of income and 60 percent of losses related to corporations that were taxed in only one province. However, it is not known to what extent these statistics reflect income shifting or loss utilization that may already be occurring under the current approach.

Annex 3: Statistics on Corporate Groups 

This section presents tax statistics on corporate groups for illustrative purposes. The statistics are not intended to replicate any specific proposal for a group taxation system; instead they provide an indication of the number of corporations and the value of tax activity which could potentially be affected by a group taxation system.

As reported in Table 3, between 2005 and 2008 an average of 362,500 corporations could have been included in up to 134,500 corporate groups. Depending on the threshold of common ownership specified, these corporations accounted for an annual average of up to $127 billion in taxable income, and up to $25.5 billion in Part I Tax payable. These corporations further accounted for up to $44 billion in non-capital losses incurred and $107.5 billion in non-capital loss closing balances.

Table 3
Basic Statistics on Corporate Groups
Ownership Threshold Number of Corporate Groups Number of Corporations Taxable Income Part I Tax Payable Non-Capital Losses Incurred Non-Capital Losses Closing Balance
 

  # thousands $ billions
  Average, 2005-2008
> 50% 134.5 362.5 127.0 25.5 44.0 107.5
≥ 75% 120.0 322.0 123.0 24.5 43.0 104.5
≥ 80% 117.5 314.5 122.0 24.5 42.5 103.5
≥ 90% 115.0 306.0 121.0 24.0 42.0 102.5
≥ 95% 113.5 301.0 120.0 24.0 42.0 102.0
= 100% 111.5 294.0 116.5 23.0 41.5 101.0
Note: Part I Tax refers to the tax liability of a corporation as determined under Part I of the Income Tax Act, which is the principal component of a corporation’s federal income tax liability.
Source: Department of Finance

The data in Table 3 show that the majority of corporate groups consisted of wholly-owned group members. Between 2005 and 2008, of the corporate groups that met a common ownership threshold of greater than 50 percent, about 85 percent contained corporations with 100 percent common ownership. In addition, the corporations with 100 percent common ownership accounted for more than 90 percent of taxable income, Part I Tax payable and non-capital losses incurred by corporate groups which met the test for having more than 50 percent common ownership.

The data presented in Table 4 suggest that corporate groups account for a disproportionately large share of Canada’s corporate tax base. While, on average, such corporations accounted for less than 25 percent of all corporate taxpayers between 2005 and 2008, they accounted for up to roughly 65 percent of taxable income and non-capital losses incurred. They further accounted for up to 68 percent of Part I Tax payable, on average, and 62 percent of the annual closing balance of non-capital losses over the same time period.

Table 4
Percentage of the Canadian Tax Base Represented by Corporate Groups
Ownership
Threshold
Number of
Corporations
Taxable
Income
Part I
Tax Payable
Non-Capital
Losses Incurred
Non-Capital Losses
Closing Balance
  Percentage of the total corporate tax base
Average, 2005-2008
> 50% 22% 66% 68% 65% 62%
≥ 75% 20% 64% 66% 63% 60%
≥ 80% 19% 64% 66% 62% 60%
≥ 90% 19% 63% 65% 62% 59%
≥ 95% 19% 63% 64% 61% 59%
= 100% 18% 61% 62% 61% 58%
Source: Department of Finance

Economic activity between 2005 and 2008 was further concentrated within large corporate groups. Approximately 75 percent of corporate groups had only two members. However, these small groups accounted for less than 20 percent of the taxable income, Part I Tax payable, non-capital losses incurred and the closing balance of non-capital losses overall by corporate groups. Conversely, only around 1 percent of corporate groups had ten or more members. These groups accounted for roughly half of taxable income, Part I Tax payable, non-capital losses incurred and the closing balance of non-capital losses overall within corporate groups.

Annex 4: Group Taxation and Loss Utilization in Other Countries 

This annex provides information on the group taxation regimes in certain other countries. The intention is to provide a sense of how other countries have addressed the question of group taxation, as well as of the range of systems in existence. The annex also discusses the question of group taxation at the sub-national level in other countries, and the treatment of loss carry-overs.

Overview of Group Taxation Regimes in Other Countries 

Over two-thirds of OECD countries have some sort of formal group taxation system, the majority of which employ a consolidation system. However, no common approach to consolidation, or group taxation in general, is evident in the OECD. For example, although almost all OECD countries that use a consolidation system make participation voluntary, consolidation systems are fairly evenly divided between requiring all eligible entities to participate in the system once the group elects to use it and allowing the corporate group flexibility in determining which group members will participate. In addition, there are several examples of consolidation systems that require irrevocable elections to consolidate, systems where elections to consolidate remain in force for a limited number of years, and systems that allow annual elections or revocability. All OECD countries with irrevocable consolidation elections require all eligible group members to participate.

Further variability can be observed in the percentage of common ownership required for group members to participate in the system. Over half of OECD countries with formal group taxation systems have ownership thresholds of 90 percent or higher. The remaining countries are split between systems that set a participation threshold at or between 70 percent and 80 percent and those that  set a participation threshold of greater than 50 percent common ownership.

The diversity of group taxation systems in use by other OECD members can be illustrated by looking at the key features of the systems in specific countries:

Australia employs an “absorption” or “asset based” consolidation system, where the individual members of an Australian group lose their identities for tax purposes and a single return is filed for the entire group. A corporate group is generally comprised of a head company and its wholly-owned subsidiaries; special rules allow multiple tier-one corporations if they are owned by a common foreign corporate parent. The election by an Australian corporate group into the system is voluntary, but once the election is made it is irrevocable and it must cover all wholly-owned subsidiaries. The Australian consolidated reporting system came into effect in 2003, replacing various attribute transfer mechanisms. Pre-consolidation losses of a subsidiary are transferred to the parent, but a limit is placed on the amount of such losses that may be used in a given year.

The United States employs a “pooling” approach to consolidated reporting where each member of the corporate group first calculates its own taxable income as if it were filing its own tax return. The consolidated return must then report the sum of income, expenses, and balance sheet items of each member of the corporate group. The initial election to file a consolidated return is voluntary. Once an election is made, it is generally irrevocable and must include all subsidiaries (i.e. an “all-in” rule). A corporate group is comprised of a parent corporation and subsidiaries in which the parent or other subsidiaries own 80 percent of the total voting power and the total value of the group member’s stock. Pre-consolidation losses relating to a particular subsidiary may be offset against the income of the subsidiary only if the group as a whole has taxable income after aggregation of the tax results for the group.

Denmark has a mandatory all-in consolidated reporting regime for domestic companies. A group is comprised of all Danish resident companies and Danish branches of foreign companies that are controlled by a common company, foundation, association, trust or similar entity. If the common parent is not resident in Denmark, there may be multiple tier-one corporations, and an administration company is appointed to act as the top parent for dealings with the tax authorities. In general, the control requirement implies an ownership threshold of 50 percent of voting rights in the subsidiary. Each member of a Danish corporate group must pay its share of the tax burden to the top parent (or administration company) who then pays corporate income tax on the group’s behalf. The top parent is required to compensate for using a member’s losses. The current form of the Danish consolidated reporting system came into effect in 2004, replacing an earlier, voluntary system with a 100 percent threshold of common ownership. Pre-consolidation losses can only be offset against income from the same group member.

The Netherlands employs an “attribution” approach to consolidation, whereby the assets, liabilities and activities of participating subsidiaries are deemed to be those of the parent company for purposes of determining the tax liability, although the subsidiaries retain their separate tax identities. Participation in the system is voluntary for the corporate group. Elections to consolidate are made for at least one fiscal year. The Netherlands’ consolidation system requires a common corporate parent, and the minimum ownership threshold for subsidiaries is 95 percent. Pre-consolidation losses of a subsidiary may only be offset against its contribution to the consolidated profit.

Japan employs a “pooling” approach to consolidation. A corporate group is made up of a Japanese parent corporation and its wholly-owned subsidiaries, employing an “all-in” rule. Pre-consolidation losses of a subsidiary are canceled on entry into the consolidated group.

France offers a “pooling” approach to consolidated reporting for domestic companies called a “tax integration regime”. The tax base is calculated by adding the profits of all members of the group, following adjustments for intra-group transactions. It is more flexible than the U.S. consolidation approach in that elections to participate in the regime are made for renewable five-year periods, and the parent company decides which eligible subsidiaries to include within the group each year. The parent must hold directly or indirectly at least 95 percent of the share capital and voting rights of each subsidiary, and it must be a resident company which is not itself 95 percent or more directly held by another resident company subject to corporate income tax in France. Pre-consolidation losses are offset against the income of the subsidiary before aggregation of the group’s tax results.

Italy has a domestic consolidation system which employs a “pooling” approach. The domestic regime is elective, requires the participation of a controlling company, is based on an ownership threshold of more than 50 percent for participating subsidiaries, and allows the group to choose which domestic entities to include. It requires a minimum three-year commitment. Pre-consolidation losses are offset against the income of the subsidiary before aggregation of the group’s tax results.

The German “Organschaft” is a group taxation system with elements of both a consolidation and an attribute transfer regime. To participate in the German system, a parent corporation and a subsidiary must enter into an agreement with a minimum duration of at least five years. Under the agreement, the subsidiary calculates its own profit or loss for tax purposes, and this profit or loss is transferred to the parent annually, for inclusion in the parent corporation’s tax return. It is voluntary whether to enter into such an agreement, and a separate agreement is needed with each subsidiary. The parent must directly or indirectly own more than 50 percent of the voting rights of the subsidiary. Loss carry-forwards of participating subsidiaries are frozen for the duration of the Organschaft agreement and cannot be applied against the income of the subsidiary or of other participating group members. Loss carry-forwards of the parent originating prior to the Organschaft can generally be netted with the income of the fiscal unity.

An example of a group contribution, or subvention, system is found in Finland. It permits one member of a corporate group to make a deductible payment to another member of the group; the payment is included in the recipient’s taxable income and reduces the recipient’s current-year loss if the recipient is loss-incurring. The amount of the contribution is capped by the profits available for transfer that originate in the member of the group making the payment. Participation is voluntary, and does not require that all group members participate. Membership in the group is determined using a 90 percent ownership threshold, either between the two corporations or with respect to a common direct or indirect corporate parent. The payment made by profitable corporation cannot exceed the profits of that corporation for the year of the transfer (i.e. the payment cannot be used to create a loss). Somewhat similar systems are used in Sweden and Norway.

The United Kingdom offers a loss transfer system known as “group relief” to corporate groups. It allows a group member with taxable operating profits to claim tax relief on the basis of “trading” losses and certain other tax attributes arising in other companies in the group. It is not mandatory to participate in any transfers, which are decided upon annually. To participate, one company must have a minimum 75 percent ownership interest in the other, or both companies must be subsidiaries of a common parent with at least 75 percent ownership interest in each subsidiary. The value of the transfer is limited to the available loss or profit relating to the overlapping portion of the taxation years of the transferor and transferee. Capital gains and losses of different companies within a 75 percent group can generally be offset through a separate system of gain and loss transfer.

Treatment of Sub-National Jurisdictions 

Most other countries either do not have sub-national jurisdictions, or their sub-national jurisdictions do not have the power to levy a corporate income tax. Examples of other countries which do feature types of group taxation at the sub-national level include Germany, Japan, and the United States.

The most relevant example of group taxation at the sub-national level for purposes of this consultation is in the United States. Like Canada, it has a federal structure where both levels of government have significant powers in the area of corporate income tax. Unlike Canada, however, there is much less co-ordination between the two levels of government with respect to the rules for and administration of corporate income taxes.

More than 40 states in the U.S. impose a corporate income or similar business tax. Of these, approximately half have adopted “combined reporting”, a form of mandatory all-in consolidation which affects corporate groups with a member who has appropriate nexus in the state, and allocates the group’s business income to the state based on factors such as payroll in the state, sales in the state, and assets in the state. The other states with a business tax follow separate-entity reporting. There has been a trend in recent years for states to adopt combined reporting, apparently out of concern in these states that separate-entity reporting provides too much leeway for multi-state corporations to shift income to low-tax states, as well as out of the country.

The combined reporting regimes at the state level have been subject to several criticisms, including a lack of harmonization between the states in the definition of the corporate group (and differences between the states’ definitions and the U.S. federal definition), and a lack of harmonization between the states in the factors used to allocate the group’s income to the state.

Loss Carry-Overs 

There are many elements to a country’s corporate income tax system other than its rules for corporate groups that can affect the ability of corporations to use tax losses. An important characteristic in this respect is the extent to which a corporation can carry-over its own losses (Table 5).

Canada generally allows losses to be carried back up to three years; non-capital losses can be carried forward up to 20 years while capital losses can be carried forward indefinitely. Loss carry-backs are particularly valuable to businesses as they provide an immediate benefit, akin to a limited form of refundability. Amongst major economies, only France matches Canada’s three-year carry-back period, while some countries do not permit any carry-back. (Some countries responded to the recent economic slowdown by permitting more generous loss carry-backs on a temporary basis.)  With respect to loss carry-forwards, some countries have shorter time periods or match Canada’s 20-year carry-forward period for non-capital losses; several have indefinite carry-forward periods.

Table 5
Non-Capital Loss Carry-Over Periods in Selected Countries
Country Loss Carry-back Period Loss Carry-forward Period
Australia None Indefinite
Canada 3 years 20 years
Denmark None Indefinite
Finland None 10 years
France 3 years Indefinite
Germany 1 year Indefinite
Italy None 5 years
Japan 1 year 7 years
Netherlands 1 year 9 years
Norway None Indefinite
Sweden None Indefinite
U.K. 1 year Indefinite
U.S. 2 years 20 years
Note: Carry-over periods do not reflect temporary or sector-specific provisions.

1 This paper generally uses the term “provinces” to include the territories.

2 “Explanatory Notes to Legislation Relating to Income Tax”, Minister of Finance, June 1988, p. 466.

3 Most provinces have entered into a corporate tax collection agreement with the federal government under which they use the same tax base as the federal government. Alberta and Quebec have not entered into such an agreement, but there is a high degree of similarity between their tax bases and the tax base in the rest of the country, as well as with respect to the allocation formula.

4 There is a general formula for allocating income among provinces, and also special formulae which apply to corporations operating in particular industries.

5 Currently, many loss utilization transactions are permitted between related corporations. However, the Act requires that for certain loss utilizations the transactions be between corporations that are affiliated.

6 Consideration would also need to be given to the treatment of Canadian corporate groups that are controlled by non-residents.

7 Currently, the Act permits losses and investment tax credits to be carried back up to three years and carried forward up to 20 years.