Monday, August 11, 2008

Interest deductibility rears its ugly head once again

Once you've cut through all the terminology, preserving interest deductibility simply means preserving the ability for corporations to service foreign acquisition debt from their pre-tax cash flows. Something which is taxed at the rate of 31.5%, if it were a publicly traded income trust using its pre-tax cash flow to service its distributions.

That hardly sound like "tax fairness"? Unless you're a clown.

To make things even more egregious, foreign acquisition debt is most likely foreign held, whereas income trusts are predominantly held by taxable Canadian investors. This results in no tax for Canada under the corporate model, and real tax leakage to the extent anyone cares or understands. I know Jack Layton and the NDP certainly don't.

That hardly sounds like "leveling the playing field"? Unless you're a clown.

Not satisfied with this level of flagrant tax inequity, the corporations also want "double dipping" to be preserved. Today’s report (below) recommends they be pacified with such a level of ongoing tax abuse and accounting alchemy. Deducting twice for the same expense. Meanwhile income trusts are tax twice just for the heck of it.

Not satisfied with this level of multiplicative tax inequity, interest on corporate debt paid to foreigners attracts a ZERO withholding tax under the corporate model, whereas income trust distributions attract a 15% withholding tax.

That hardly seems like "Standing Up for Canada'? Unless you're a clown.

The same clown who said a 15% withholding on income trusts was not enough was the same clown who was responsible for reducing it to ZERO on corporate interest payments.

Who might that hypocritical clown be? Hint: He works for Harper and the CCCE, and against the interests of tax paying Canadians. He bears no physical resemblance to the guy pictured above. Just mental.

August 11. 2008

Ottawa under fire to keep interest credit

Eric Beauchesne
Canwest News Service

Monday, August 11, 2008

OTTAWA - Canadian firms trying to grow their businesses internationally would be disadvantaged by the federal government's elimination of interest deductibility on offshore investments, an economic think-tank argues.

Finance Minister Jim Flaherty, under pressure from business groups, has already watered down his 2007 budget measure that would prevent Canadian companies from deducting the interest costs of making foreign investments so that it only applies to investments in which a firm would also be eligible to deduct the interest costs in the host foreign country.

"This is not the time to remove interest deductibility on foreign investments, even if it only applies to 'double-dips,' " the Conference Board of Canada argues in its report, titled Provide Fair Tax Treatment for Canadian International Business.

The report supports the argument of critics of the revised proposal that there is no reason why a deduction should be denied because a deduction is allowed in a foreign country.

"The foreign country deduction has no impact on Canadian tax revenues, and is arguably of benefit . . . since it increases the amount of after-tax income available to be returned to Canada," it said.

Further, the report says that Canada's share of the global foreign-direct investment market is already slipping, adding that the elimination of interest deductibility on such investment would add a new barrier to international business growth and risk placing some Canadian firms at a competitive disadvantage.

"Canadian firms need - at the very least - a level playing field for investment abroad if they are to take full advantage of global value chains and foreign affiliates," said the think-tank's chief economist, Glen Hodgson. "This should be the key guiding principle for all reform of international business taxation."

The report has been submitted to the federal government's Advisory Panel on Canada's System of International Taxation, established last year to review and make recommendations on Canada's system of international business taxation. The panel is expected to issue its report by Dec. 1, 2008.

That Flaherty established the panel and that his department has since also issued a discussion paper on international business taxation are reasons to be "hopeful" that the government will reverse the controversial measure and reintroduce full interest-rate deductibility, Hodgson said in an interview.

While the legislation implementing the revised proposal has been passed, the measure doesn't come into effect until 2012.

"I'm ever hopeful that governments can be convinced to do the right thing by good analysis," said Hodgson, who has worked at both the Finance Department and at Export Development Canada.

In order to compete globally, companies are increasingly looking for the best place to locate specific activities and are also establishing foreign affiliates to sell into global markets, the conference board report said, citing an estimate by the Organization for Economic Co-operation and Development that each dollar of such outward direct investment generates two dollars of additional exports for the originating country.

© Vancouver Sun 2008

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