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ability to pay; capital export neutrality; capital import neutrality; capital ownership neutrality; credit system; exemption system; foreign business income; foreign portfolio income; territorial principle of taxation; Territorial taxation


This article is based on a submission to the Advisory Panel of Canada's System of International Taxation. It discusses the general approach to tax reform and the specific questions about redesigning the outbound tax system. The main thesis is that the neutrality theories (CIN, CEN and CON) are not particularly determinative or even that useful in thinking about the reform questions in Canada. A principled approach along the lines of fundamental tax principles and tax expenditure analysis should be seriously considered. The ability-to-pay and tax entitlement are fundamental principles underlying the existing outbound tax system. No serious suggestion has been made anywhere that the re-designed system should be fundamentally different. As such, these principles should continue to apply. Situating the exemption system as part of the normative system as opposed to a tax expenditure may redirect the debate to some different questions. This article supports a broader accrual system for foreign portfolio income and a full exemption of dividends received from "foreign affiliates" of Canadian resident corporations.