May 24, 1939

CON
LIB

James Lorimer Ilsley (Minister of National Revenue)

Liberal

Mr. ILSLEY:

The company has expenses of operation totalling $1,000,000. With a gross income of $2,000,000, this would leave a net income of $1,000,000. In the past this company would come to the commissioner of income tax and say, "The $1,000,000 we have in income is non-taxable income and therefore we owe you nothing." This amendment makes that practice impossible. The amendment is based upon the theory that part of the $1,000,000 expense would probably be incurred in earning the non-taxable income as well as the taxable, and therefore there should be an allotment of expenses to the non-taxable and taxable incomes.

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CON
LIB
CON

James Earl Lawson

Conservative (1867-1942)

Mr. LAWSON:

Is the minister to have discretionary power to set the basis, or is it to be as the non-taxable is to the taxable?

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LIB

James Lorimer Ilsley (Minister of National Revenue)

Liberal

Mr. ILSLEY:

It is not ratable. The resolution had it ratable, but I moved to have that struck out. It would not be fair in many cases. This is one of those sections which are most undesirable from my point of view, but I do not know in what other way it can be done. Undoubtedly the principle is right and I think it will have to be left to someone, probably the minister, to allot the expenses between the two kinds of income.

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CON

James Earl Lawson

Conservative (1867-1942)

Mr. LAWSON:

I am not so sure that the principle is right. It may be right in some cases, but I do not think it would be right in others. Let me give an illustration. I know a company which has thirty-seven subsidiaries, every one of which is an operating company, some making money and others losing money. Those that make money pay a tax. The parent company is also a large operating company, doing a larger business than the consolidated business of the thirty-seven subsidiaries. The parent company receives dividends from some of the subsidiaries which have already paid the tax, and this income is non-taxable. In the case of the parent company I admit that an infinitesimal part of some book-keeper's time may be taken up in connection with the dividends from the subsidiary companies, but I venture to suggest that not more than one per cent of the overhead expenses of the parent com-

Income War Tax Act

pany could be referable to the operations of the subsidiaries. Is it worth while bringing this in in connection with such a company? Has the minister in mind certain companies where the overhead expenses of the parent company for the benefit of subsidiary companies is very substantial as compared with the overhead for its own operations?

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LIB

James Lorimer Ilsley (Minister of National Revenue)

Liberal

Mr. ILSLEY:

There are cases. In the case mentioned by my hon. friend, if one per cent was found to be the proportion of the cost of earning and collecting the taxable income, one per cent is all that would be allotted. There would be no injustice. It is essential that these discretionary powers should be given. Hon. members of the house have paid tribute to the commissioner, and I think it is widely conceded that he exercises his powers quite fairly.

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CON

James Earl Lawson

Conservative (1867-1942)

Mr. LAWSON:

We all agree with that.

At one o'clock the committee took recess.

The committee resumed at three o'clock.

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CON

Thomas Langton Church

Conservative (1867-1942)

Mr. CHURCH:

The last three lines of section 8 are:

Where general expenses are incurred to earn both taxable and non-taxable income the minister shall have power to apportion the said expenses.

The point I wish to make is that no minister of the crown should have these powers and prerogatives under a bill such as this, a revenue bill. Parliament is thereby delegating to the minister certain powers under which the regulations he makes will have the force of law. This clause delegating power to the minister is similar to one of the sections which was condemned down at Washington, where after an elaborate senate inquiry it was found that, by such a provision in their bill, many millionaires had escaped income taxation altogether. It is not necessary to give their names, but millionaires and their companies worth hundreds of millions of dollars were able by this route to evade payment of income tax. I make no reflection upon the minister, or upon his able, painstaking and capable deputy, Mr. Elliott. But it seems to me that very few concessions are given to the small man; and in my opinion a national revenue committee of the house should be set up to go into this whole question of national revenue and of the powers of the minister and the delegation to the minister of the right to make rules and regulations along these lines. The committee might inquire into all kinds of sources of additional revenue, irregularities, exemptions, tax evasions, tax dodging, and all that. Further,

there should be incorporated into the statute amendments to make the committee's findings effective. I believe that if a national inquiry were to be held into this question in Canada, as was done at Washington, it would be a national calamity to read about.

No minister of the crown should be given the powers contained in the latter part of this section. I regret that this bill was brought down in the dying days of the session, when there is no time for a proper and adequate discussion of national revenue in all its forms and methods. Revenue and income are the most important things we have, and there should be some more modern way of debating so important a subject than the stereotyped process of bringing in at the end of a long session a bill of many sections along these lines. I repeat that I hope a proper independent inquiry for all Canada will be held to find out who is paying and who is not, and into all methods and practices. I should like to have from the minister some reply to indicate what is being done.

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LIB

James Lorimer Ilsley (Minister of National Revenue)

Liberal

Mr. ILSLEY:

I dealt just before one o'clock with that point of the minister's discretion. I said that I was sorry to see in this bill sections which add to the minister's discretion, but there is no way I can think of by which they can be avoided. When we first drafted this resolution we provided for a ratable, a proportionate, distribution of expenses between non-taxable and taxable income, but on reexamination it was found that that would be unfair, that it was entirely too inflexible. The experience of the department has been that the very persons who complain about the extent of the minister's discretion, when they are confronted by an inflexible rule, hold up their hands in horror and say, "That leads to unfair results; something must be left to discretion, to the judgment of the official,"-the minister, in this case.

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CON

James Earl Lawson

Conservative (1867-1942)

Mr. LAWSON:

In the first place, I want to correct something I said this morning with respect to section 7. I was in error, apparently, in what I had to say with regard to nonresident-owned investment corporations. We had presented to us this morning a bill, nearly every clause of which had not 'been suggested either by the budget speech or by the resolutions in ways and means committee, and several provisions of which amount to straight increases in taxation under the Income War Tax Act; therefore we are trying to struggle through the bill without having had an opportunity to give it previous study.

With respect to section 8, the one specifically before the committee at the moment, I am

Income War Tax Act

soijry that I have to disagree with the hon. member for Broadview and to agree in large measure with the Minister of National Revenue. From my short experience in that office I realize that the Income War Tax Act simply cannot be administered without a wide measure of discretion in respect of many matters. But although I am not objecting in principle t.o the conferring of a discretionary power, the minister cannot in the exercise of that discretion run contrary to some definite principle which may be stated in the act. This brings me to a specific discussion of the section now under consideration.

During the adjournment I had an opportunity to sit down and do a little thinking, and I worked out what I think will be an example of how this will operate. If I am not correct I shall be glad to have the minister correct me.

I am going to take the example of a company which has five subsidiaries. I will call the parent company, company A and the subsidiaries, V, W, X, Y and Z. Each of these subsidiaries is carrying on a similar line of business. Each one annually files a return; and let me assume they have a profit and are paying income tax. What is left of their income after payment of tax goes to the parent company A. Under the present law that income, having been taxed once in the hands of the other company, and being taxed again when it is distributed by the parent company to the shareholders, is exempt from taxation as income in the hands of the parent company. Now, the parent company carries on a business similar to that of the five subsidiaries, and for the purpose of the business of the five subsidiaries it is necessary to have in the head office of the parent company, and associated with it, four officials. The specific duties of these four officials relate in a small measure to the parent company and in a large measure to the five subsidiaries. No deduction is made for their salaries when the income tax return is made by the five subsidiary companies. Let me assume their aggregate salaries amount to $20,000 a year. What result will we get after this legislation is passed?

In the first place let me assume that the income passing from the five subsidiaries to the parent company, and which is non-taxable income in the hands of the parent company, is $100,000. Let me assume that the parent company at the present time from its own operations has an income of $100,000, and that the expense, including the salary of the four officials most of whose time is spent looking after the general affairs of the subsidiaries, is $80,000. At the present time the parent company is paying income tax on a taxable

income of $20,000; the subsidiaries are paying income tax on a taxable income which after payment of the tax is $100,000. How is the minister going to exercise his discretion once this section goes through? It is my submission that he must exercise it in one of two ways. If the minister says, because the gross income of the parent is $100,000 and the net income of the subsidiaries is $100,000, therefore the expenses of the operation of the parent company should be divided fifty per cent to each, the result will be that the parent company will have to pay on a taxable income of $60,000 instead of $20,000.

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LIB

James Lorimer Ilsley (Minister of National Revenue)

Liberal

Mr. ILSLEY:

I cannot follow the arithmetic. That first way is out-or it may be out.

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CON

James Earl Lawson

Conservative (1867-1942)

Mr. LAWSON:

Well, we shall see. Be

careful that I do not confront you with a past decision. Let me assume that the minister takes the only other course which, so far as I can see, is open to him. He says: No, the fair way to exercise this discretion is as follows. Because the aggregate salaries of these four officials is $20,000, and because their time is devoted almost entirely to the subsidiaries, their salaries should be set aside as against the non-taxable income. By reason of that you automatically reduce the expenses of the parent company from $80,000 for the year to $60,000, and thereby you automatically double the taxable income of the parent company, from $20,000 a year to $40,000 a year. Does the minister follow my figures? If I am correct in that, what are you doing in the result?

I admit that there are in this country those who think that double taxation in respect of the same money is justifiable. Personally I do not; I never have, and I have no hesitation in saying so, no matter who likes it or who does not.

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CON
CON

James Earl Lawson

Conservative (1867-1942)

Mr. LAWSON:

I think that the principle of taxing money in the hands of the corporation and then taxing it over again in the hands of the shareholders is wrong. Income should be taxed once, and once only. The resplt of this proposed legislation is that, no matter how fair the minister tries to be, no matter in what way he exercises his discretion, part of that income is taxed three times. True, the third taxation is by the indirect method of taking some of the expenses of the parent company and saying, "This should be set aside against the non-taxable income."

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LIB

Charles Avery Dunning (Minister of Finance and Receiver General)

Liberal

Mr. DUNNING:

They never were expenses of the parent company.

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CON

James Earl Lawson

Conservative (1867-1942)

Mr. LAWSON:

When I took the illustration of five subsidiaries I took a small com-

Income War Tax Act

pany; but the corporation I have in mind has, I venture to suggest, more than fifty subsidiaries. Their principle of operation has always been this. They charge no expenses to the subsidiary-

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LIB
CON

James Earl Lawson

Conservative (1867-1942)

Mr. LAWSON:

Wait a minute. They

cannot, for this reason. To. do that you would have to try to segregate that portion of the time of the four executives of the parent company which is devoted to the interests of the subsidiaries and then charge against the subsidiaries a proportion of their salary and have these men receive their salaries in fifty pieces, fifty cheques, from fifty subsidiaries. The thing is simply not reasonable or feasible, but for the purposes of operation of their subsidiaries it is essential to have these four officials in the head office. No matter how the minister exercises his discretion, if this subsection is passed the net result will be to triple taxation on a part of the earnings of the combined subsidiary and parent companies. I do not care how the discretion is exercised, that will be the result. The parent company has an income of, say, $100,000 from its subsidiaries, which is therefore non-taxable, and the parent company earns from its own operations, in exactly the same business as the subsidiaries, another $100,000 gross income. The parent company's expenses of operations are $80,000 a year, but included in this $80,000 are the salaries of four officials.

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May 24, 1939