Canadian taxation

It’s not an earth-shattering revelation by any means but add Pierre Bourgeois, Canadian tax e-business leader with PricewaterhouseCoopers LLP (PwC) in Montreal, to a growing list of reputable business leaders, analysts and financial advisors who believe this country’s current taxation policies are out of touch with the new economy.

Bourgeois said the conundrum of how to apply traditional taxation polices to e-business in general is creating confusion.

“Canadian legislation needs to show some guidance,” Bourgeois said. “There is a report due in Ottawa at the federal level next year and their timing is good. Canadian companies are now on the Internet bandwagon and they’re seeking some guidance as well.”

Bourgeois spoke on behalf of PwC during the Current International and Domestic Tax Issues conference in Toronto on Nov. 28. He explained how an e-business interprets the current tax laws can literally make or break a company. He added the prickly tax issue also dramatically impacts how a business conducts its human resources affairs, where it chooses to set up shop, and how it chooses strategic partners. However, Bourgeois’ insights did not come in the form of a bow and a quiver of arrows aimed at Ottawa. On the contrary. He said Ottawa is keeping step with other nations as they study reforms to traditional tax policies affecting e-business.

“Canada is not really any better or any worse than other jurisdictions,” Bourgeois told ComputerWorld Canada. “Whether here or in the U.S., [governments] never considered e-business when they were drafting those laws.

“Look at the U.S. A lot of pure companies take advantage of this situation when they sell to consumers and only charge sales tax to those residents in the states where they have their business offices.”

The problem, Bourgeois said, is Canada’s existing tax laws and treaties don’t specifically address e-commerce development. That leaves current federal legislation open to varied and often contradictory interpretation.

“We’re starting to get some guidance from international bodies and some countries say Web servers don’t create taxable situations. A lot of talk of Internet-commerce is mostly on B2B-related issues depending on what survey you read.”

out of touch

Prof. Vern Krishna, director of the CGA Tax Research Centre at the University of Ottawa, said the federal government must overhaul its current taxation policies and take into account the new economy.

“The entire Canadian tax regime was devised on a bricks-and-mortar economy and does not take into account a digital economy. Thus, it works well for the old economy for which it is designed, but does not work for newer, technologically-driven businesses,” he said. “A substantial revision is necessary.”

Krishna’s research focuses on all aspects of domestic and international tax law, with particular emphasis on e-commerce and tax implications of Internet transactions.

Some tax experts believe the Internet should exist as a tax-free zone, and others see little reason in treating e-businesses differently from brick-and-mortar operations. Krishna falls into the former category, adding Ottawa’s current tax policies pertaining to the Internet are “primitive at worst and sluggish at best.”

According to Bourgeois, at the heart of the matter is taxable presence. This is normally determined by the physical location of a company’s personnel, facilities, intellectual property and corporate residence. Put in an on-line context, borders vanish, thus reducing the need for taxable presence in the traditional sense.

Krishna agreed with Bourgeois on the taxable presence stance.

“Taxable nexus is the key to asserting jurisdiction to tax a person or company,” he said. “In the old economy the governments of Canada and other countries rely on physical presence of a permanent or enduring nature. Physical presence in an electronic economy is really quite meaningless.”

cautious guidelines coming

How do current taxation policies apply to on-line entities such as ING Direct? The Dutch cyber-bank with services in Canada has no physical branches in the traditional sense. All banking transactions are conducted via phone or on-line.

While that translates into higher interest on deposits for their clientele, ING Direct is still subjected to the same taxation polices as other financial institutions in Canada.

Said Bourgeois, “Banking is an interesting point. Companies like [ING Direct] have physical back offices as well. An area like banking has specific rules that would apply to them as well as other institutions.”

Bourgeois added he expected to see cautious guidelines emerge from Ottawa in the near future. He said e-businesses and businesses alike have to tackle the sales tax hurdle – their biggest challenge.

“One big concern (for B2C entities) is the fact that if you remove the costly intermediaries you still have to act as an unpaid tax collector. That’s where there continues to be confusion, the U.S. is still trying to figure that out,” he said.

“[The solution] won’t happen very easily; companies will have to try to minimize those uncertainties.”