Tax Loss Utilization and Corporate Groups: A Policy Conundrum

26 Pages Posted: 28 Mar 2013

See all articles by Stephen Richardson

Stephen Richardson

University of Calgary - School of Public Policy

Michael Smart

University of Toronto - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: January 29, 2013

Abstract

There are both theoretical and practical tax policy considerations that favour a broad recognition for the value of corporate income tax losses — including for businesses operated within corporate groups. Ideally, an equitable and economically efficient tax system could obviate the need for loss netting against income by providing for the tax value of losses from business to be refundable by tax authorities in cash to owners. This approach, however, involves many serious difficulties, including revenue cost to governments and potential for abuse by both domestic and foreign businesses. Accordingly, loss refundability tends to be provided for only sparingly, if at all; while many corporate income tax systems — such as in the U.S. the U.K., Japan and many other OECD countries — deal with loss netting within corporate groups through a formal system of tax loss transfer or tax consolidation.

While Canadian policymakers have considered introduction of such a system over a long period of time, they have yet to come up with a satisfactory formal system for Canada. So, corporate groups in Canada have been left to make do with an informal self-help loss trading system that presents a number of problems compared to formal systems.

As a federal country with substantial corporate taxation levied at the provincial level, Canada appears unusually constrained in what it can do to bring greater equity and efficiency to corporate group tax loss utilization. Moreover, the inefficiencies in the current system are small in aggregate terms, and the informal self-help system has a relatively generous threshold for access. Accordingly, while Canada’s current informal self-help corporate group loss system is far from ideal, it appears to remain as a workable approach. Alternatives to the status quo should be considered cautiously, as they have the potential to do more harm than good.

Keywords: corporate, tax, Canada, investments, policy, system, business, law, transfer, income

JEL Classification: H25, K34

Suggested Citation

Richardson, Stephen and Smart, Michael, Tax Loss Utilization and Corporate Groups: A Policy Conundrum (January 29, 2013). SPP Research Paper No. 6-3, Available at SSRN: https://ssrn.com/abstract=2240408

Stephen Richardson (Contact Author)

University of Calgary - School of Public Policy

Calgary, Alberta
Canada

Michael Smart

University of Toronto - Department of Economics ( email )

150 St. George Street
Institute for Policy Analysis
Toronto, Ontario M5S 3G7
Canada
416-978-5119 (Phone)
416-978-6713 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

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