April 8, 1941

NAT

Richard Burpee Hanson (Leader of the Official Opposition)

National Government

Hon. R. B. HANSON (Leader of the Opposition):

Hon. gentlemen will remember the discussion that took place yesterday before we went into committee on the special estimate of $35,000,000. I rise now not for the purpose of complaining but to ask that the position be regularized as soon as possible. In the Votes and Proceedings of April 7, referring to the amendment of the hon. member for Haldimand (Mr. Senn) there is the statement:

Thereupon Mr. Senn withdrew his amendment.

The amendment was then withdrawn, and the question being put on the main motion, it was agreed to.

That is not what occurred. I am not going to traverse the whole ground. It was to meet the convenience of the government and especially the Minister of Agriculture (Mr. Gardiner), to get on with his estimate of $35,000,000 for wheat, that we agreed in a way to postpone discussion of the Senn amendment, so called, to the motion to go into supply. But no one, I think, will take it from the discussion that is found in Hansard of yesterday that the Senn amendment was to be dropped and had to be revived. Now I understand the position is, having regard to the record, that the Senn amendment is

gone unless revived, and it cannot be revived according to the rules until the next motion to go into supply-and no one knows when that may be.

I am sure the Prime Minister never intended anything like that. I certainly never did, and I should like to ask that, by unanimous consent, irrespective of the rules, we put the position where we thought it was going to be and that it be done now if it can be done.

Topic:   BUSINESS OF THE HOUSE
Subtopic:   PROCEDURE RESPECTING AMENDMENT OF MR. SENN ON MOTION FOR COMMITTEE OF SUPPLY
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LIB

William Lyon Mackenzie King (Prime Minister; Secretary of State for External Affairs; President of the Privy Council)

Liberal

Right Hon. W. L. MACKENZIE KING (Prime Minister):

If the simplest way to

get the amendment back where it ought to be is to move that the house resolve itself into committee of supply at once, I shall be glad to move accordingly.

Topic:   BUSINESS OF THE HOUSE
Subtopic:   PROCEDURE RESPECTING AMENDMENT OF MR. SENN ON MOTION FOR COMMITTEE OF SUPPLY
Permalink
NAT

Richard Burpee Hanson (Leader of the Official Opposition)

National Government

Mr. HANSON (York-Sunbury):

That

would be all right.

Topic:   BUSINESS OF THE HOUSE
Subtopic:   PROCEDURE RESPECTING AMENDMENT OF MR. SENN ON MOTION FOR COMMITTEE OF SUPPLY
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ROYAL CANADIAN MOUNTED POLICE

ANNOUNCEMENT OF DECISION TO GRANT INCREASES IN PAY AS OF APRIL 1


On the orders of the day:


LIB

Ernest Lapointe (Minister of Justice and Attorney General of Canada)

Liberal

Right Hon. ERNEST LAPOINTE (Minister of Justice):

A few weeks ago, when the

estimates of the Royal Canadian Mounted Police were being discussed, members on all sides of the house strongly urged an increase in pay for members of the force. I have much pleasure in informing the house that the government has now decided to grant an increase in pay for the force from April 1, 1941. In broad outline, the increases are as follows:

Constables and corporals, 50 cents per diem.

Staff sergeants and sergeants, 75 cents per diem.

All officers below the rank of assistant commissioner, approximately $1.25 per diem.

Two junior assistant commissioners will receive an increase of little less than $1 per diem.

All other assistant commissioners and officers above that rank will not benefit by the increases.

The exact details of the increases will be set forth in the order in council, but the general situation is what I have already given. I am sure the house will be pleased.

Topic:   ROYAL CANADIAN MOUNTED POLICE
Subtopic:   ANNOUNCEMENT OF DECISION TO GRANT INCREASES IN PAY AS OF APRIL 1
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THE MEMBER FOR KOOTENAY WEST

RETURN OF MR. ESLING TO THE HOUSE AFTER A PERIOD OF ILLNESS


On the orders of the day:


LIB

William Lyon Mackenzie King (Prime Minister; Secretary of State for External Affairs; President of the Privy Council)

Liberal

Right Hon. W. L. MACKENZIE KING (Prime Minister):

My colleague the Minister of Finance (Mr. Ilsley) has a rather long statement to make, but before he does so I should like to say a word which will be very brief but which I am sure will meet with general approval. When I came into the

Excess Profits Tax

house this afternoon I was greatly pleased, as I am sure every hon. member was, to see the member for Kootenay West (Mr. Esling), who is one of the oldest and best loved members of the house, again in his seat in this chamber. As hon. members are aware, our friend has suffered a rather serious illness. We are delighted to see him back looking hale and hearty, and I can say with all sincerity that we all hope he will so continue for a long time to come.

Topic:   THE MEMBER FOR KOOTENAY WEST
Subtopic:   RETURN OF MR. ESLING TO THE HOUSE AFTER A PERIOD OF ILLNESS
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EXCESS PROFITS TAX

PROPOSED AMENDMENTS WITH RETROACTIVE EFFECT FOR PAST YEAR


On the orders of the day:


LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Hon. J. L. ILSLEY (Minister of Finance):

On Thursday of last week, when I announced that the budget would not be brought down until after the Easter recess, I indicated that before the house rose I would wish to make a statement in regard to certain amendments which we intend to recommend in connection with the excess profits tax.

The proposed amendments I refer to are those which will have retroactive effect for the past year. The reason which leads me to outline them now is to remove uncertainties which would otherwise exist in connection with the returns which will have to be filed and taxes that will have to be paid at the end of this month. Hon. members will, I am sure, appreciate that the present situation justifies this departure from the usual practice of not revealing tax changes in advance of the budget itself.

The house will recall that in the debates on fiscal matters last December, I announced that the government was willing to give careful study to any proposed changes which would tend to remove inequalities or extreme hardships which might arise under the Excess Profits Tax Act as it now stands, although at the same time I emphasized that the main principles of the act would be retained. That announcement has quite naturally given rise to some uncertainty in the business world regarding the permanence of several provisions in the present law. Particularly, in the case of depressed industries, taxpayers are apparently finding it difficult to file their returns for the past year with any assurance that they are complying fully with the legislation as it will be applied.

An announcement at this time will remove these uncertainties and enable taxpayers to proceed with the work of preparing tax statements and filing returns, the great bulk of which are due on April 30. Delay until the budget would merely aggravate the situation and would mean a great deal of unnecessary

work for taxpayers who otherwise might have to revise their returns at a later date. I wish to emphasize that the changes with which we are here concerned are not essentially revenue matters but are rather in the nature of improvements in the structure of the legislation for the purpose of removing inequities and anomalies. They will also greatly simplify and expedite administration. They do not, however, mean that any general relief from the weight of the excess profits tax is being offered. The main principles of the legislation are to be maintained intact, and will continue to operate with their original severity on those who would otherwise make exceptional profits as a result of war-time conditions.

In the budget speech of September, 1939, when I introduced the original excess profits tax legislation I expressed the opinion that it is extremely difficult to frame a law in this field which will achieve its main purpose without causing certain inequalities and hardship in certain cases. Subsequent experience has confirmed this opinion. During the past year much study has been given to the problems involved, and several officials of my department as well as of the Department of National Revenue have devoted a great deal of their time to hearing representations and examining specific cases where the present act would undoubtedly work a real hardship. It has been a relatively easy matter in many cases to work out an answer "on paper" for some of the problems. Such solutions, however, have to be workable from the point of view of administration. To make legislation of this kind work, and work speedily and with certainty, there must inevitably be a certain amount of compromise as between perfect equity on the one hand, and practicability on the other hand. The proposals I now place before the house have been carefully weighed from these two points of view, and I think they will be accepted on all sides as greatly improving the present legislation. In the paragraphs which follow, I will outline the nature of each proposed amendment, then give an explanation of its purpose and how it will work, and finally suggest a tentative form of amendment which would implement the proposal.

With the consent of the house I shall not read the tentative amendments because it would simply slow up what I wish to say, but I will put them on Hansard.

Topic:   EXCESS PROFITS TAX
Subtopic:   PROPOSED AMENDMENTS WITH RETROACTIVE EFFECT FOR PAST YEAR
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NAT

Richard Burpee Hanson (Leader of the Official Opposition)

National Government

Mr. HANSON (York-Sunbury):

Could

there be put on at the same time the present law, for comparison? It would be very convenient.

Excess Profits Tax

Topic:   EXCESS PROFITS TAX
Subtopic:   PROPOSED AMENDMENTS WITH RETROACTIVE EFFECT FOR PAST YEAR
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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

I had not anticipated doing that. The sections are all referred to. It would be difficult, I think, to arrange them in parallel columns.

Topic:   EXCESS PROFITS TAX
Subtopic:   PROPOSED AMENDMENTS WITH RETROACTIVE EFFECT FOR PAST YEAR
Permalink
NAT

Richard Burpee Hanson (Leader of the Official Opposition)

National Government

Mr. HANSON (York-Sunbury):

That may be good enough.

Topic:   EXCESS PROFITS TAX
Subtopic:   PROPOSED AMENDMENTS WITH RETROACTIVE EFFECT FOR PAST YEAR
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LIB

James Lorimer Ilsley (Minister of Finance and Receiver General)

Liberal

Mr. ILSLEY:

I wish to add, however, that these tentative arrangements will be subject to further study before the budget is brought down.

The following proposals for amendments to the act are given in the order in which the respective sections are at present found in the act:

1. Proposal. That the definition of standard period, and also of standard profits, be amended to require the taxpayer to apportion to the four calendar years 1936, 1937, 1938 and 1939 the profits of their corresponding fiscal periods which do not coincide with the calendar year. The apportionment must be on an equal daily basis.

Explanation. Following representations received on the subject of the standard period the government has decided in the interests of the equality of treatment of .taxpayers that the standard period shall in all cases be the profits earned or deemed to have been earned from January 1, 1936, to December 31, 1939, inclusive.

2. Proposal. That the definition of standard period, and also of standard profits, be amended to allow standard profits to be computed from the time of actual commencement of business rather than from the legal date of commencement of business, the date of actual commencement to be determined by the minister in his discretion in the light of the circumstances of the particular taxpayer

Explanation. It was found in some cases that actual business operations did not commence until a considerable time after the incorporation of the company and it seemed reasonable in determining standard profits that the act should not take this into consideration.

3. Proposal. That the definition of standard period be amended to give the taxpayer the choice of his three best years if the profits of his fourth standard year were less than fifty per centum of the average of the profits of the other standard years.

In the case of taxpayers who have been in business only three out of the four standard years and the profits of one of the three years were below fifty per centum of the average of the other two years the proposed amendment will allow them to use the profits of the two best years in computing their standard.

Explanation. It is the experience of the department that a considerable number of taxpayers were claiming relief because one of their four standard years was unusually depressed. The provision of the Canadian act which defines the standard period is more severe than that of the British act because it allows no option. Under our act the relief to a taxpayer in such a case can be obtained only by appealing to the board of referees. It became apparent that a speedier and more satisfactory administration could be achieved by allowing taxpayers to choose their three best years if their fourth year or remaining year was so poor that the profits of that year were less than half of the average of the other three years.

The house will observe that this affords some relief in difficult cases but is not a measure which affords relief to the general run of taxpayers for whom the average of the four years is a reasonable standard.

Tentative Amendment. A rewording of paragraph (h) of subsection 1 of section 2 of the act along the following lines would give effect to the above proposals:

2. 1 (h) "standard period" means the period comprising the calendar years one thousand nine hundred and thirty-six to one thousand nine hundred and thirty-nine, both inclusive, including portions of fiscal periods therein, or such years or fiscal periods or portions thereof since January first, one thousand nine hundred and thirty-six, during which the taxpayer was in business;

Provided that where the profits of a taxpayer in any one calendar year were less than fifty per centum of the average of the profits of the other three or two calendar years as the case may be in the standard period the taxpayer may designate as his standard period the remaining three or two most profitable calendar years during the standard period, and

Provided further that if the date of legal commencement precedes the date of actual commencement of business of any taxpayer the date which the minister in his discretion shall fix as the date of actual commencement of business shall be deemed to be the beginning of the standard period of the said taxpayer.

4. Proposal. That the definition of standard profits be amended by adding thereto a proviso that in no case shall a taxpayer's standard profits be less than five thousand dollars.

Explanation. It has been found that a great many small businesses, particularly unincorporated businesses, are encountering difficulties in computing their capital employed and would experience difficulty in presenting their cases to the board of referees. It is with a view to eliminating the necessity of appearing before the board of referees in such cases and also to provide a fixed standard for cases where the computation of capital is most difficult that the above proposal is made. Such a provision will greatly reduce the applications from this class of taxpayer to the board of referees. The aggregate amount of revenue involved is of minor importance.

Excess Profits Tax

Tentative Amendment. A rewording of paragraph (i) of subsection 1 of section 2 of the act along the following lines would give effect to this proposal as well as complementing the amendments to paragraph (h) required by proposals (1) and (2) above:

2. 1 (i) "standard profits" means the average yearly profits derived by a taxpayer in the standard period, or deemed by the minister to have been derived by the taxpayer in the portions of his fiscal periods that are within the standard period, profits being deemed to accrue on an equal daily basis, in carrying on the same general class of business as the business producing the profits in the year of taxation, or the standard profits as determined in accordance with section 5 of this act:

Provided, however, that losses incurred by the taxpayer during the standard period shall not be deducted from the profits in the standard period but the years when such losses were incurred or deemed to have been incurred shall nevertheless be counted in determining the average yearly profits during the said standard period, and

Provided further that in no case shall a taxpayer's standard profits be deemed to be less than five thousand dollars.

5. Proposal. That the adjustment to standard profits by reference to any increase or decrease in depreciation allowances or other charges as provided by paragraph (d) of subsection 1 of section 4 be repealed.

Explanation. In view of the difficulty which has been encountered in attempting to define the sort of charges in respect of which adjustments in standard profits might properly be allowed it has been decided to repeal this provision entirely. Actually the adjustments possible under the present provisions of the act, if followed to their logical conclusion, would mean a complete equalization of the profits in the taxation period as compared with the standard profits. In the absence of the present provision extraordinary cases of hardship may be relieved by means of an order in council under the Consolidated Revenue and Audit Act.

6. Proposal. That the adjustment to standard profits by reference to increases or decreases in capital be amended to provide for an adjustment at a fixed rate of seven and one-half per centum on the capital change, with the proviso that if new capital to the extent of thirty-three and one-third per centum has been added since the standard period the taxpayer will have the option of being considered a new business.

Explanation. The reason for this changed method of giving credit for new capital, or reducing standard profits in the case of withdrawal of capital, is to simplify the procedure in determining tax liability, both from the point of view of the taxpayers and the government. It has been ascertained that taxpayers

TMr. Ilsley.l

are finding great difficulty in computing their proper tax under the present provision of the act, in cases where there have been material changes in the capital employed. The present method requires the computation of the average capital employed during the standard period in the case of all taxpayers who have made a change in their capital since the standard period. By altering the method of adjustment, delays and uncertainty are eliminated, and the amount of work in determining tax liability is greatly reduced.

A possible hardship is avoided by the proviso that if new capital to the extent of thirty-three and one-third per centum, or more, is added since the standard period the business may apply to the board of referees on the basis of being deemed a new business.

Tentative Amendment. A rewording of paragraph (b) of subsection 1 of section 4, along the following lines, would give effect to these changes:

4. 1 (b) (i) adjust the standard profits, by reference to any increase or decrease in capital contributed or withdrawn since the commencement of the last year or fiscal period of the taxpayer in the standard period, by adding to or deducting from the standard profits an amount equal to seven and one-half per centum of the said change in capital;

Provided that if new capital to the extent of thirty-three and one-third per centum of the capital employed at the commencement of the last year or fiscal period of the taxpayer in the standard period has been so contributed the taxpayer may apply under section five hereof to have his standard profits determined by the board of referees as if he were carrying on a new business. .

(ii) adjust the standard profits by reference to any increase in capital employed during the standard period by adding to the profits of the standard years when such new capital was not employed an amount equal to seven and one-half per centum of the said new capital, and further, adjust the standard profits by reference to any decrease in capital employed during the standard period accompanied by a withdrawal of capital, and in the case of corporations, by a reduction of capital stock, by deducting from the standard years when the withdrawn capital was not present, an amount equal to seven and one-half per centum of the said withdrawn capital.

7. Further Explanation. In addition to the above amendment, the proposal outlined in (6) above would require to be implemented by a rewording of the provision in section 5 of the act whereby new businesses may apply to the board of referees. This rewording, which in the amended statute would be called subsection 2 of section 5 would be on the following lines:

Tentative Amendment.

s. 5, ss (2). If on the application of a taxpayer the minister is satisfied that the business of the taxpayer was not in operation prior to January first, one thousand nine hundred and

Excess Profits Tax

thirty-eight, or that a change in capital to the extent of thirty-three and one-third per centum as provided for in paragraph (b) (i) of subsection 1 of section 4 of the act has occurred he may direct that the standard profits shall be ascertained by the board at such an amount as they think just. The standard profits shall be ascertained by the board in its sole discretion at an amount which represents a rate of return on capital employed by the taxpayer in the taxation year determined by the board in its sole discretion which is equal to the average rate of return during the standard period of taxpayers in similar circumstances engaged in the same or an analogous class of business.

8. Proposal. That the procedure for a depressed business applying to have its standard profits determined by the board of referees on a capital-standard basis be altered so that the taxpayer may file his return and pay his tax on the basis of a standard profits computed by the taxpayer himself, at a percentage on capital which he deems fair and reasonable but being not more than ten per centum on "capital employed," as defined in the act, with the right of the minister to refer any case to the board of referees to have the standard profits finally determined by that body.

Explanation. The reason for this change is that some procedure is necessary to enable taxpayers to make a preliminary computation of their tax and pay on that basis. The onus will be on the department of sending to the board of referees those cases where the taxpayer has estimated his standard profits at too high a figure even though it is within the limit of 10 per cent of capital employed. Thus the depressed taxpayers will no longer wait until their cases have been heard by the board before estimating and paying their tax. The result will be greater certainty among the taxpayers and a much earlier and more orderly receipt of revenue by the government. In addition, instead of every depressed case going to the board of referees it is believed that the department will be in a position to send only typical cases.

Tentative Amendment. A rewording of section 5, repealing the present subsections 1 and 2 and substituting a subsection along the following lines would provide for this change:

5. (1) If the taxpayer is satisfied that his standard profits were so low that it would not be just to ascertain his excess profits with reference thereto, because either the business is of a class which during the standard period was depressed or because the business of the taxpayer was for some reason peculiar to itself abnormally depressed during the standard period when compared with other businesses of the same class, he may compute his standard profits at such greater amount as he thinks just but not exceeding an amount equal to interest at ten per centum per annum on the amount of capital of the taxpayer employed in

the business in the taxation year, computed in accordance with the first schedule to this act. If the minister is not satisfied that the taxpayer was depressed during the standard period, or if he is not satisfied that the standard profits as computed by the taxpayer is a fair and reasonable standard he may direct that the standard shall be ascertained by the board of referees. The board of referees shall thereupon determine the standard profits in its sole discretion at such an amount as they think just being an amount equal to interest of not less than five nor more than ten per centum per annum on the amount of capital of the taxpayer employed during the taxation period as computed by the board in its sole discretion in accordance with the first schedule to this act. The decision of the board shall not be operative until approved by the minister, whereupon the said decision shall be final and conclusive.

9. Proposal. That power be given to the board of referees in the case of both new businesses and depressed businesses to ascertain a fair and reasonable standard profits on some basis other than the capital-standard basis in those cases where the capital employed in the business is so small when compared with the earning power of the business or where other special circumstances of the taxpayer are such that to utilize the capital-standard basis would result in an unjustifiable hardship or would create extreme discrimination or jeopardize the continued existence of the business of the taxpayer.

Explanation. In the case of a depressed business where the taxpayer considers that ten per centum on the capital employed is unfairly and unreasonably low as a standard profit and that he comes within the provisions of this proposal and is entitled to relief thereunder, he may tentatively determine his standard profits at an amount which he considers fair and necessary and file his returns and pay his tax accordingly, but every such taxpayer shall be referred to the board of referees which shall determine whether the taxpayer should be permitted to have his standard profits determined on any base other than that of capital employed and if so what is a fair and reasonable standard profit on such basis as the board thinks just.

The board will depart from the capital-employed basis only if it is satisfied that such basis would result in unjustifiable hardship, extreme discrimination or undue jeopardy to the continued existence of the business of the taxpayer.

Tentative Amendment. An addition to section 5 along the following lines, applicable both to new businesses and to depressed businesses of the above-mentioned type, would give effect to this proposal:

S. 5, ss. (3). If on the application of a taxpayer who either was depressed during the standard period or was not in operation prior to January first, one thousand nine hundred and

Excess Profits Tax

thirty-eight, the minister on the advice of the board of referees is satisfied that because of the nature of the business, or because of other special circumstances, of the taxpayer, a capital standard of earning is an inappropriate standard to be applied to the said taxpayer, and that to apply such a standard would result in an unjustifiable hardship or would create extreme discrimination or jeopardize the continued existence of the business of the taxpayer, by imposing excessive taxation on him under this act, he may direct that the standard profits of such taxpayer shall be determined by the board of referees on such other basis as they think just. The standard profits shall be ascertained by the board of referees in its sole discretion at such an amount as they think just having regard to the standard profits of similar taxpayers engaged in the same or an analogous class of business.

10. Proposal. That the inventory-reserve provisions in the act be amended:

(a) to give the taxpayer the right to provide against a decline in inventory values having regard to a normal quantity of stock in trade as indicated by the quantity on hand during the standard period;

(b) to give the taxpayer the right to provide against a decline in inventory values either to the prices obtaining at the close of his 1939 period or to the prices obtaining during the month of August, 1939; and

(c) to provide that a taxpayer who has any unutilized inventory reserve on hand at the end of the year when this act terminates shall have only the year following the said year of termination in which to utilize such reserve against any possible price decline and must add any unutilized portion of such reserve existing at the beginning of the second year following the said year of termination to the profits assessable to tax in that second year.

Explanation. Proposals (a) and (b) give taxpayers whose fiscal periods happened to end subsequent to the outbreak of war, the right to reserve their prices in respect of quantities indicated in paragraph (a) above down to a figure which is substantially equal to the closing figure of competitors whose fiscal periods closed prior to the outbreak of war.

Proposal (c) notifies taxpayers who have an inventory reserve that the reserve on hand unless utilized because of a price decline before the end of the year following the repeal of this act, must be added to profits for tax purposes in the second year following repeal of this act.

Tentative Amendment. A rewording of paragraph (b) of subsection 1 and also of paragraph (c) of subsection 2 of section 6 of the act along the following lines would implement the above proposals:

S. 6, ss. 1 (b), ss. 2 (c). Such reasonable provision as a reserve against future depreeia-[Mr. Ilsley.l

tion in inventory values as the minister in his discretion may allow having regard to a normal quantity of stock in trade necessary for the business as indicated by the quantity on hand during the standard period of the taxpayer: Provided that no such deduction shall be allowed which provides against a decline in inventory values below the inventory prices of goods on hand either at the end of the fiscal period of the taxpayer ending in 1939 or during the month of August, 1939;

And provided further that any reduction in such reserve shall be added to the profits of the year of reduction for purposes of taxation under this act, and any unutilized portion of such reserve on hand at the end of the year when this act ceases to apply to the taxpayer shall be available to the taxpayer to meet declines in inventory values during the immediately following year and if not exhausted by the end thereof, the unutilized portion on hand shall be added to the taxpayer's profits.

11. Proposal. That the exemption from the provisions of this act given to taxpayers with profits of five thousand dollars or less be amended by a proviso to the effect that in the case of taxpayers with profits above five thousand dollars the tax imposed by the act shall not reduce the profits below five thousand dollars.

Explanation. Under the present wording of section 7 (c) the taxpayer with profits of $5,001 pays an excess profits tax, whereas the taxpayer with $5,000 or less does not pay. The former taxpayer might be required to pay a very heavy tax whereas the latter taxpayer, even though he has increased his profits over the standard by almost as much, is not required to pay any tax. This proposal is designed to remove such discrimination.

Tentative Amendment. This proposal would be effected by adding a proviso along the following lines to paragraph (c) of section 7:

Provided that if the tax exigible under this act shall cause the profits of the taxpayer to be reduced below five thousand dollars in the taxation year, before providing for any payments to proprietors, joint owners, or shareholders, by way of salary, interest or otherwise, then to the extent that it would so reduce the profits below five thousand dollars, such tax shall not be payable.

12. Proposal. That the allowance for excess profits taxes and income taxes paid to Great Britain, other British dominions or dependencies, or to any foreign country allowing reciprocal deduction with respect to Canadian-paid taxes, be enlarged to provide a combined deduction of the British or foreign income and excess profits taxes from the combined liabilities to Canada for income and excess profits taxes.

Explanation. Double taxation must necessarily be alleviated. Reciprocity substantially exists among all countries to-day in allowing the taxes paid in foreign countries as a deduction from the domestic taxes. How-

Excess Profits Tax

ever, now that two taxes in each country are being considered in respect of the same profits wherein in one country the income tax is a deduction in determining the excess profits tax, and that may be vice versa, in the other country, then this lack of parallel treatment produces in reciprocal tax considerations unusual burdens and difficulties.

Hence the necessity of referring to the income and excess profits taxes abroad in a combined sense being a deduction from the Canadian combined liabilities, provided always that substantially like treatment is afforded by foreign countries to those who have profits arising in Canada which are here taxed.

Tentative Amendment. This proposal would be effected by adding a proviso along the following lines to ss. 1 of s. 9:

Provided that the minister may in his discretion allow a .taxpayer to claim as a combined deduction from his combined income tax and excess profits tax liabilities the combined taxes paid to Great Britain or any of its self-governing dominions or dependencies or to any other country between which country and Canada reciprocity exists if the minister is satisfied in the case of such foreign country that a similar deduction of Canadian taxes is allowed against their combined income and excess profits taxes.

And also by inserting the words: "or under this act and the Income War Tax Act combined as provided for in the proviso to subsection 1 hereof" immediately after the words "payable under this act" in subsection

2 of section 9.

13. Proposal. That the definition of capital be amended to require the deduction from the original asset values of the total amount of depreciation which has been taken into account in computing net income or loss for income tax purposes plus any accumulated depreciation reserves as at January, 1917, as recognized by the minister for purposes of the Income War Tax Act.

Explanation. Under the provision in section

3 (c) of the first schedule of the act as it is presently constituted the taxpayer is required to deduct only that depreciation which has been taken as a deduction from profits under the Income War Tax Act. This item in some cases is less than the total accumulated depreciation reflected in the depreciation reserve as computed for income tax purposes. This meant that depreciation reserves were composed of two parts, that part which had been advantageously used in reducing profits in years of profits and that part which was established as a reserve in years of loss.

It is now intended to use the reserve as a whole as a deduction in determining capital thus avoiding, as all accountants will agree, 14873-143

a very substantial technical analysis of many years of accounts to gain the advantage in increased capital which the law held out.

By removing the accounting problems we increase the burden but that burden is offset by alleviation in other directions, such as special reference to the board of referees when there is unduly low capital or negative capital.

Tentative Amendment. To effect this proposal paragraph (b) of section 3 of the first schedule would be repealed and a rewording on the following lines substituted therefor:

(b) a reduction of the total amount of depreciation which has been taken into account in computing net income for income tax purposes in accordance with the Income War Tax Act, plus any accumulated depreciation reserves as at January 1, 1917, as recognized by the minister for purposes of the Income War Tax Act, and the total depletion reserve reflected on the books of the taxpayer.

14. Proposal. That the definition of capital be amended to enable the non-interest-bearing advances from parent to subsidiary corporations, which advances are of a permanent nature and in fact represent invested capital actually employed rather than borrowed capital, to rank as equity capital rather than debts of the subsidiary.

Explanation. The provision in the act which requires that borrowed money be deducted from capital values is considered to work a hardship in cases where the parent has advanced to the subsidiary capital which is called a loan or advance but is equivalent to investment capital in all respects. This amendment gives the board of referees the right to recognize the reality of the situation notwithstanding the name or label attached to the form of investment in the taxpayer company.

Tentative Amendment. This proposal would be effected by adding to paragraph (c) of section 3 of the first schedule a provision along the following lines: and except the amount of indebtedness represented by a non-interest-bearing advance from a parent corporation to a subsidiary corporation which the minister is satisfied is of a permanent nature and is in fact invested capital actually employed in the business.

15. Proposal. That the requirement in the first schedule that dividends paid during the taxation year shall constitute a deduction from the capital employed at the commencement of the period to the extent of one-half the dividends, shall be amended to make it clear that this applies only to cash dividends and not to stock dividends.

Explanation. Since the present provision in the act is designed to reduce the opening capital by a portion of the cash dividends paid out during the year or fiscal period, this

Excess Profits Tax

amendment to exclude from such provision the stock dividends paid during the year is obviously necessary since stock dividends do not represent any payment out of assets from the company.

Tentative Amendment. This proposal would be effected by adding the words, "in cash" to the proviso immediately after the words "dividends paid" in section 4 of the first schedule of the said act.

16. Proposal. That all proposals above mentioned shall apply to the profits of the year 1940 and the profits of fiscal periods and portions thereof ending in 1940 and to the profits of all years and fiscal periods thereafter.

17. Proposal. Every person liable to tax under the Excess Profits Tax Act in respect of the 1940 taxation period shall have until the 30th April, 1941, to estimate and pay their excess profits tax for 1940 without interest. Thereafter interest will be paid as in the Income War Tax Act provided, as if the fiscal period of all such companies had ended on 31st December, 1940.

I am advised by the commissioner of income tax that up to date some 545 standard profits claims have been filed.

These claims were filed for the purpose of having the board of referees determine the standard profits.

Inasmuch as the procedure outlined above by the proposed amendment will require each taxpayer initially to determine his own standard profits, subject to confirmation by the income tax division, those who have filed such claims should now proceed as follows:

First-those companies that have filed their standard profits claim together with their corporate returns-will file a memorandum, in duplicate, with the inspector of income tax for the district in which they filed their returns, setting out their method of calculating and determining their standard profits, and showing the amount of their liability under the tax measure and making payment accordingly on or before April 30, 1941.

Second-those companies that have filed their standard profits claim but have not filed their corporate returns-will now file their returns in accordance with the indications given in this statement, namely by setting out their method of calculating and determining their standard profits, calculating their tax under the act and making payment accordingly,

The proposals which I have just outlined and explained constitute the complete list of proposed amendments to the legislation which will have retroactive application. When the budget is brought down, it will, of course, con-[Mr. Ilsley.J

tain other proposed amendments which will have effect in respect of the profits earned in this and future years. Some of these will be of general application. Others will be designed to reduce special deterrents to expanded production on the part of particular industries. However, as they relate to the future, there is no real reason why I should announce them prior to the budget itself.

The house, I believe, will agree that the amendments with retroactive effect which I have just explained are thoroughly justified and designed to make the act a more equitable and more workable instrument. The overwhelming needs of the present emergency have made drastic taxation inevitable and indispensable, but the government on its part has spared no pains to remove inequalities, anomalies, unjustifiable hardships and other legitimate causes of grievance on the part of Canadian industry. On their part we expect whole-hearted cooperation in the war effort of Canada. Their cooperation has to date been enthusiastic and general. There have, however, been rumours that certain firms have incurred unjustifiable expenditures induced by the knowledge that the government was bearing most of these expenditures because of the 75 per cent rate of taxation applied. To the extent that this practice has prevailed, it is wholly reprehensible.

I have said before and I repeat that any manager, any board of directors which permits higher costs because the government through losses of taxes bears most of them is, in my judgment, guilty of serious misconduct. .

There may be little profit motive for vigilance in economy. But we do not offer the soldier, the sailor, the airman, a profit motive for vigilance at his post, a profit motive to risk his life. Nor should it be necessary to offer it to Canadian business for the prevention of inefficiency or waste.

Existing legislation has been framed with a view to the prevention of unjustifiable expenditures which would not have been made but for the high rate of taxation, an evil which I believe is not widespread, certainly not general. I am confident that the vast majority of Canadian business men have conscientiously discharged their responsibilities in this respect as in others.

Topic:   EXCESS PROFITS TAX
Subtopic:   PROPOSED AMENDMENTS WITH RETROACTIVE EFFECT FOR PAST YEAR
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PRESS REPORT AS TO USE BY PRIVATE COMPANY IN BRITISH COLUMBIA

April 8, 1941