Contending With Corporate Tax Reform

Abstract

Abstract Canada's oil and gas industry could be adversely affected by corporate tax reform proposals actively being considered by the Department of Finance in Ottawa. When the next set of proposals for tax reform is released later this year as promised by Finance, the industry had better be prepared to take a hard look. Introduction As if the oil and gas industry did not have enough problems to contend with, the sector of corporate tax reform threatens to pose a not inconsequential disruption for oil and gas investors and producers. Two federal budgets ago, in May 1985, Finance Minister Wilson tabled budget papers that were more massive in terms of volume than most federal budgets. Buried in this mass of documentation is a discussion paper entitled "The Corporate Income Tax System — A Direction For Change ", When the discussion paper was tabled over a year ago, reaction from the business sector was almost non-existent. By and large, the paper was regarded as nothing more than one more federal publication of mild academic interest. But, recent events suggest that this discussion paper for corporate tax reform could be the cornerstone for a series of changes to the tax laws which would have more profound and widespread effects for all sectors of the economy than any reform since 1971. No industry in Canada can afford to ignore the movement afoot in Ottawa for corporate tax reform. The May 1985 discussion paper states unequivocally that the present corporate income tax system is in need of re-examination. There is a noticeable sentiment in Ottawa that the current tax system is "distorting of market driven business decisions ", and that a revised system "could lead to a more efficient allocation of resources ". The paper sets out an "illustrative proposal ", which would result in a significant reduction in statutory tax rates for all corporations, coupled with reductions in the most rapid rates of write-off and the elimination of investment tax credits. The paper identifies four fundamental principles for corporate tax reform.Market efficiency — "The corporate tax system should interfere as little as possible with the market signals that form the basis of business decisions. "Certainty — "The corporate tax system should be stable over time, "Simplicity — "The corporate tax system should be as simple and certain in its application as possible. "Stability of tax revenues — "The corporate tax system should provide a predictable and stable revenue base for the federal and provincial governments. " According to the paper, tax reform would not be designed to raise corporate tax revenues — it would be revenue neutral. Present System The paper provides a capsule analysis of the present tax system. In particular, a handful of rules are identified as being in need of further scrutiny, including:the fast rate of write-off for certain classes of capital cost allowance, including oil and gas production and refining machinery and equipment;the 100% write-off of research and development expenditures;