No easy way for corporate groups to share income losses between entities

CALGARY, Jan. 29, 2013 /CNW/ - In a report published today by The School of Public Policy, authors Stephen Richardson and Michael Smart examine a tax issue faced by Canadian corporate groups: the transfer of income losses from one company in the group to another.

The authors indicate that, unlike in other countries, there are no mechanisms in Canada for corporate groups to transfer their losses. These groups may advocate for some form of loss transfer in order to reduce the taxes of profitable units of the group, but for government, this would mean lost revenue.

As Richardson and Smart point out, there is an informal self-help loss trading system in place for corporate groups. However, this is an imperfect system, the authors argue, as not all corporate groups can undertake sophisticated exchanges or the substantial transactions costs associated with them.

As imperfect as the system is currently, shifting to a formal loss transfer system simply isn't advisable in Canada because of the revenue pitfalls, the authors argue. For one, a transfer loss system would cut into overall corporate tax revenues, federally and provincially. Meanwhile, some provinces would be hit harder as companies would receive greater incentive to shift profits out of high tax jurisdictions.

Despite the flaws of the current "self-help" system, the authors argue that it is "providing substantial benefits in terms of overall economic efficiency" and these benefits outweigh the alternative of a formal loss transfer system.

The report can be found at www.policyschool.ucalgary.ca/publications

SOURCE: The School of Public Policy - University of Calgary

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