Expenditures of $3,900 million and revenues of $1,672 million will leave an apparent deficit of $2,228 million to be covered by new taxes and borrowing. On the basis of these estimates, we should be paying less than 43 per cent of our expenditures out of revenue. To make a comparison with last year, we can exclude the United Kingdom financing and reach a deficit of $1,228 million as compared with $414 million as estimated for the past fiscal year. Last year, I referred to the financial requirements of 1941-42, which were difficult to define clearly, as "staggering." Confronted now with much larger requirements, set out as the simplest of sums in arithmetic, I must perforce drop all adjectives and try to state, as clearly as one who isn't a prophet may state, what they mean in terms of the future. During the last fiscal year, we appeared to achieve the impossible. Rough estimates indicate that we increased the dollar value of our national output of goods and services by nearly 25 per cent, (bringing the increase during the war to about 80 per cent), but we increased our expenditures on war (including expenditures for United Kingdom purchases) by a greater absolute amount. One might have expected that this would necessitate reduced expenditures for private consumption. On the contrary, estimates indicate that expenditures for private consumption were substantially increased. Our own observation confirms this. The explanation of this seeming paradox is twofold. On the side of goods and services, some of the goods, which were purchased last year, did not come out of our own current output. Apparently, we reduced our inventories somewhat during the fiscal year, and ended the year with lower stocks on hand than we had at the beginning, having used more than we produced in the interval. We did not maintain our capital equipment by expending on repairs and replacements the full depreciation charged as an expense. Shortage of materials, in many cases, made such maintenance impossible. We did not pay for all our imports from the United States out of current production. Decline in our reserves of United States funds and imports of capital provided in the neighbourhood of $200 million of imports paid for out of capital not out of income. On the side of money, not all the funds which the government acquired by taxation and borrowing came out of income, even out of gross income. A substantial amount, in fact, came in this the first year in which really big bond-selling campaigns were carried on, from idle bank balances or directly or indirectly from private bank loans. We obtained from an increase in our treasury bill issues $40 million. As I read the experience of the past fiscal year, we were not able to draw enough goods from sources other than our current output to match the idle balances and bank credit which were drawn into the treasury and paid out again in incomes. Of the $1,673 million which we borrowed from the people of this country, by no means all could have come out of current saving. This, and similar situations in countries with which we trade, together with the insatiable demands of war for goods and services, occasioned the rapid rise of prices last The Budget-Mr. Ilsley

summer, and, but for the prompt action of the government in imposing drastic restrictions on prices and incomes, would have led to a further and disastrous inflation. In the present year, we must and can again increase our total output but by no such amount as was added to it last year. Shortages of materials are daily growing more stringent. Scarcities of power, transport facilities and labour have placed narrow limits on the production of almost everything. The need for war production, and it is only too apparent how urgent that need is this year, will absorb all our capacity to expand output and more. Looking at the problem from the side of goods and services, we shall not be able to obtain substantial imports from the United States without paying for them out of current output, for we expect to meet, or nearly meet, our exchange problem by deliveries of goods under the Hyde Park agreement. We can probably again draw on inventories of civilian goods but by how much I do not know, for information as to inventories is very deficient. Deferred maintenance and replacement must again contribute a substantial sum. Making allowances for these sources outside of current output, the conclusion is inescapable that industry will not be able to supply goods for civilian consumption and private investment on the scale of last year. Looking at money income, the conclusion is the same. Increased government expenditures of the amounts which I have given will, with present rates of taxation, leave in the hands of persons and corporations spendable income far in excess of what can be matched at current prices by goods and services. In our borrowing, it would be dangerous folly to depend on the investment of idle balances. Even if we needed to borrow from the public no more than we borrowed last year, there must be a very substantial increase in current saving. It is a most difficult task to deal with sums of the magnitude involved here. It is an even more difficult and sobering experience to reach decisions affecting such large fractions of the incomes of our people. I have given the most careful and earnest consideration to the problem confronting us, and have inevitably come to the clear decision that my proposals in this budget must include measures to increase our revenues within the fiscal year substantially, at least to the point where our dependence on borrowing will be more nearly within the limits of our current saving; they must provide for increased saving, both corporate and personal; they must include also measures to ensure that the task of contributing to the required increase in current saving is more widely and equitably distributed. These fiscal measures are necessary if we are to follow honestly our declared policy to pay as we go in so far as it is practicable. They are necessary if our war debt is not to create post-war difficulties. It is not the size of the debt that is a matter of chief concern for after all it is an obligation of the people of Canada through their government to the people of Canada. Rather, we are concerned about the distribution of it. It is a matter of the first importance that those who have the right to receive payments on government obligations shall be those who will use the repayments to provide needed improvements in their standard of living, maintain themselves against insecurity, and contribute to the improvement of our productive equipment. These fiscal measures are necessary also to success in our four-front battle against inflation. The price ceiling, control and rationing of supplies, the direction of man-power, and fiscal policy are complementary, not alternative measures. The offensive must be maintained on all four fronts. No one front can be held unless the others are held. The price ceiling, a sound policy which is being administered with great courage and imagination, cannot itself defeat inflation. If I may venture another military metaphor, it can prevent the enemy from winning by infiltration.

From what has been said it is evident that fiscal necessity forces us to look again to the income tax on individuals, or some similar device, for a large amount of additional funds. In devising measures to meet this need I have had to keep in mind three other important considerations-the need for equity, for incentive, and for savings. As regards equity, I am sure we all agree that the income tax on individuals is the fairest method of taxation. By and large, a person's income is the best single measure of his taxable capacity, particularly when we take into account the number of persons dependent on him. It is by no means a perfect measure, however, and as we increase the rates to higher levels we must attempt to take into account other factors affecting ability to pay. Therefore I have several suggestions to put forward in a few minutes, intended to take into account additional special circumstances affecting ability to pay. The problem in regard to incentive is less easy to assess but more fundamental and therefore more difficult to overcome. A pro- The Budget-Mr. Ilsley gressive income tax must of necessity take more out of an additional dollar of earnings than it does out of the average djllar of earnings. Consequently it must bear heavily on additional income earned through extra effort or efficiency. There is a danger that high progressive rates of income tax may interfere with the incentive for harder and better work for efficient production. We can and must rely upon other than economic motives to a large extent these days. Nevertheless we cannot afford to dispense entirely with the incentive of improved earnings as a stimulus in the continual week-in, week-out production work of the nation at a time when production is of vital importance. I have endeavoured therefore, to frame these income tax measures so as to preserve as much as possible of the earnings incentive for the great majority of the working population. The third consideration is the need to ensure that the increase in taxes is reflected in a decrease in expenditures and not in reduced saving. There would be little net gain if the putting into effect of higher income tax rates resulted in a corresponding decline in saving. It is vitally necessary that, while tax revenues increase, the flow of savings into the treasury shall also increase greatly. Equity, incentive, and the encouragement of saving-these are the considerations which I have kept in mind, but fiscal necessity and the rude facts of war press us hard. In order to obtain the increased yield from income tax which is required, I am proposing that we combine the present national defence tax and the graduated income tax into a single assessment to be collected as far as possible by deduction at the source, or, where that is impracticable, by a compulsory instalment plan. This total assessment will consist in part of a flat rate tax on the total income like the present national defence tax. and in part of a steeply graduated tax at substantially higher rates than the present. It will be assessed in respect of incomes of the calendar year 1942, but will be collected and payable over the twelve months from September 1 of this year to August 31 of next year. Returns are to be filed, as at present, on or before March 31. National defence tax already deducted from 1942 incomes will be credited toward the total payable under the new tax; this will afford considerable alleviation of the immediate burden for those in the lower brackets. As at present, single persons with incomes of less than $660 per year and married persons with less than SI,200 a year will be exempt from tax, and the tax will not reduce incomes below these starting points. The flat rate tax corresponding to the present national defence tax, will be at the rate of 7 per cent for married persons, and at the same rate for single persons with incomes not exceeding $1,800; it will be 8 per cent on single persons with incomes exceeding $1,800 but not exceeding $3,000, and 9 per cent on single persons with incomes exceeding $3,000. The allowance of $20 for a child under the national defence tax has been increased to $28 for this flat rate tax-that is, in direct proportion to the increase in the rate. It will be noted that the differentiation between the single and married in the rate of tax comes more gradually and at a higher income than in the present national defence tax; the effect of this on the relative tax payable will be more than counterbalanced in the brackets between $1,200 per year and $3,000 by the changes in the graduated tax and by other means to be noted in a moment. The changes in the graduated tax are more complicated. In place of the present exemptions of $750 for single persons, $1,500 for married persons and $400 for each child, we are shifting over to a single basic exemption of $660-which is also the present starting point for national defence tax-and a flat allowance off the tax for married persons and for children. Married persons will deduct $150 from the graduated tax, and the allowance for children (or other dependents) will be $80 each. These figures were reached by taking the present exemptions of $750 for a wife and $400 for a child and evaluating them in terms of a tax saving at the rate of 20 per cent, which is not the lowest rate of the present graduated tax, but the rate in the second thousand of taxable income. In effect, therefore, we are "freezing" the value of these present exemptions at about the amount they have been worth to a taxpayer having an income of around $2,500 or $3,000. This, I believe to be a better way of increasing the tax on persons with families than reducing the current exemptions, particularly under present circumstances when other changes are being made which will have the effect of widening the difference between the levies on the single, the married, and those with children. The proposed rates of the graduated tax are set forth in detail in the resolution. They are substantially higher than the present rates. The first thousand dollars of net taxable income (i.e., after the exemptions are deducted) is now taxed at the rate of 15 per cent. Under the new schedule the first $500 is to be subject to a rate of 30 per

The Budget-Mr. Ilsley cent, the next $500 to 33 per cent, and the following $1,000 to a rate of 37 per cent- compared with the 20 per cent rate on the second thousand in the present schedule. I shall give a number of examples in a moment to illustrate the effects of these increases. These new rates, together with the changes in exemptions and allowances, will increase very substantially the amounts to be obtained from taxpayers, although they will not impose taxes on any who would not be liable for taxes under present rates and exemptions. For example, these new rates would require from a married man without children and having an income of $3,000 a year a total of $884, in place of the amount of $400 under the present law. While the total yield these rates will produce is still something short of the amounts we should like to obtain and therefore they cannot be considered more than enough from the point of view of our war requirements, they place such a severe burden upon many taxpayers that I believe we must now be prepared to make certain new types of adjustments in order to meet the considerations which I mentioned a few moments ago-considerations of equity, incentive and savings. One type of special provision which I am suggesting, although not the most important, is to permit an exemption from taxable income in respect of unusually large medical or hospital expenses which a taxpayer has had to meet during the year out of the income on which he is being taxed. This will take the form of permitting as a deduction from income, for the purpose of calculating tax, amounts spent by the taxpayer during the tax year on medical, dental, hospital and nursing services to the extent that these exceed 5 per cent of the taxpayer's income. A limit is to be set on the amounts that may be claimed in this way, of $400 for one taxpayer, plus $200 for his wife and $100 for each child, up to a maximum of $1,000. I should point out that while a family of five, for example, is more likely to have a large excess of these expenses in any year than a single person, it is not likely to have five times the amount for it is not to be expected that all five will be subject to serious illness or accident in the same year. I may say by way of explanation of the 5 per cent that studies of family expenditure indicate that the average expenditure on IMr, Ilsley.] medical services, et cetera, are in the neighbourhood of 4 or 5 per cent of income, and we desire only to provide exemption for those who have more than average expenditures of this kind. Those claiming this exemption will be required to submit evidence that these payments have, in fact, been made in respect of services received by the taxpayer or his dependents within a specified period.

The second and most important type of alleviation I wish to recommend in order to render equitable the increased rates which I have outlined involves a substantial innovation in our tax machinery. I am proposing to make a portion of the increased tax refundable within a specified period after the war, with accrued interest at 2 per cent. This portion of the assessment on his income will therefore constitute a form of savings for the taxpayer, rather than simply a tax. This saving will be a part of the taxpayer's wartime earnings, kept for him until after the war, when it can be spent to better advantage. By means of this principle we are able to meet our immediate fiscal needs to a substantial degree without endangering the incentive afforded by the possibility of higher earnings for more and better work. In the case of those with incomes in the lowest brackets subject to tax, the refundable portion will be greater than the increase in the total taken, so that the net tax on these lower paid groups will be somewhat lighter than at present, although they will be required to provide a fair share of the increased total assessment. This refundable portion of the tax we may term a "minimum savings requirement". It will ensure that the taxpayer not only pays his taxes but saves a certain minimum amount, dependent on his income, his tax, and his family responsibilities. In general, it will be collected in the same way and at the same time as the income tax. Allowance is to be made, however, in this refundable portion of the tax for certain types of savings already being made by the taxpayer under contract, which the taxpayer cannot cease making without substantial loss or danger. Payments made by the taxpayer within the tax years as net premiums on life insurance contracts in force to-day, or as principal payments on a mortgage on one residence, or The Budget-Mr. Ilsley as payments into a pension fund, retirement fund or superannuation fund, will be accepted as an alternative to the liability to turn over funds directly to the treasury as part of the minimum savings requirement. These alternative types of savings cannot readily be drawn upon during the war, and of course to the extent they are drawn upon in any year, they cannot be included. The use of funds for these purposes by the taxpayer does not compete with war requirements for goods or services, nor add to the problems of price control and rationing, as does the use of funds for expenditure. By permitting these savings under existing contracts to be counted a part of the minimum savings requirements, we are able to ensure that everyone saves the minimum amount without creating hardship for those who have contracted to save substantial amounts by means of life insurance, mortgage payments or pension funds. Let me emphasize clearly that this minimum of savings to be required of all does not release any of us from the obligation to save as much as is humanly possible in addition to this, and to invest it in war savings certificates or victory loans. We are not substituting compulsory for voluntary savings. On the contrary, we must secure a very large increase in voluntary savings from individuals this year, in addition to the minimum savings now to be required by law. The figures I shall give in a few minutes of the amount we shall have to borrow in addition to the revenue to be obtained from existing and increased taxes will make it quite evident that savings must greatly increase. There is no doubt that Canadians as a whole have the financial means to make such savings. Under the pressure of vast war expenditures their aggregate income is reaching levels which would have seemed impossible a few years ago or even in the palmy days of 1929. Under the measures being proposed we are going as far as we feel we can to ensure a reasonable minimum degree of equity in respect of war saving. But the great majority of Canadians can save more than this basic minimum, and some can save very much more. I have in mind, for instance, family groups whose total income has increased very substantially because of the war. Under a fiscal system which is based on the individual rather than the family as a unit, the full mobilization of possible savings by such groups can only take place on the voluntary principle. / It is therefore clear that the National War Finance Committee, which directs our savings campaigns, has an even bigger and more difficult job to do than it has had in the past. The magnitude and the character of its task is such that the committee does not believe it can succeed unless it becomes to an even greater extent than it is now a people's organization. Success will depend upon the extent to which it can draw upon every group in the community for men and women who will help in planning its activities as well as in carrying them out, and organization is now proceeding with this end in view. The taxes and minimum savings required from persons with various incomes are illustrated in a table which I would like to place on Hansard at this point, with the consent of the house. The table gives the figures for single persons, married persons without children and married persons with two children, for selected incomes from the exemption limits up to high figures. The amount of tax payable at current rates, including national defence tax, is shown for the purpose of comparison: The Budget-Mr. Ilsley

(Amounts shown in even dollars for purposes of illustration) Tax at Proposed Tax at Refundable Portion, or Total, i.e., New Tax plus RefundableAnnual Present Increase Proposed Minimum Portion orIncome Rates in Tax Alone New Rates Savings Require- ment Minimum Savings Require- ment Single Persons, Without Dependents 700 35 -15 20 20 40850 57 1 58 58 1161,000 87 5 92 80 1721,250 162 5 167 100 2671,500 217 30 247 120 3671,750 273 58 331 140 4712,000 340 101 441 160 6012,500 475 151 626 200 8263,000 622 202 824 240 1,0644,000 955 319 1,274 320 1.5945,000 1,332 396 1,728 400 2,1287,500 2,400 570 2,970 600 3.57010.000 3,600 712 4,312 800 5,11220,000 9,105 1,924 11,029 800 11,82930,000 15,082 3,314 18,396 800 19,19650,000 28.392 6,511 34,903 800 35,703100,000 64,347 15,990 80,337 800 81.137500,000 411,720 60,584 472,304 800 473,104 Married Persons, Without Children 1,250 50 -25 25 25 501,300 65 -15 50 50 1001,500 75 34 109 108 2171,750 125 36 161 160 3212,000 175 56 231 200 4312,250 225 91 316 225 5412,500 275 126 401 250 6513,000 400 184 584 300 884,000 675 289 964 400 1,3645,000 1,000 378 1,378 500 1.8787,500 1,965 555 2.520 750 3,27010.000 3,080 682 3.762 1,000 4,76220,000 8,330 1,949 10,279 1,000 11.27930,000 14,085 3,361 17.446 1,000 18,44650.000 26.965 6,588 33,553 1,000 34.553100.000 61,875 16,112 77,987 1,000 78.987500,000 401,120 60,834 461,954 1,000 462,954 fMr, Ilsley.] The Budget-Mr. Ilsley TABLE ILLUSTRATING EFFECT OF PROPOSED INCOME TAX RATES WITH REFUNDABLE FEATURE-Concluded (Amounts shown in even dollars for purposes of illustration) Tax at Present Proposed Increase Tax at Proposed Refundable Portion, or Minimum Total, i.e.. New Tax plus Refundable Portion orIncome Rates in Tax New Rates Savings MinimumAlone Require- ment Savings Require- ment Married Persons, With 2 Children 1 250 22 -6 16 16 32 35 42 491 366 25 -7 18 17 1 400 30 -9 21 21 L500 35 -10 25 24 1 750 48 5 53 52 105 215 325 4352 000 60 47 107 108 2 250 73 90 163 162 2 ,500 115 102 217 218 3 000 215 119 334 334 668 1,148 1.662 3,0544 666 450 218 668 480 5 666 735 327 1.062 600 Y, 500 1,637 517 2.154 900 10 000 2,710 636 3,346 1,200 4,541 11,063 18,23020 000 7,890 1,973 9,863 1,200 30.000 13,621 3,409 17,030 1,200 50 000 26,437 6,700 33,137 1,200 34,337 78,771 462,738loo ooo 61,299 16,272 77,571 1,200 500 000 400,408 61,130 461,538 1,200 - Note.-In calculating the above taxes it has been assumed that all incomes up to $30,000 are entirely earned incomes, and that incomes of more than $30,000 include earned income of that amount and additional investment income to make up the total. Let me give a few examples from the table. A married man without children and with an income of $2,000 a year is liable under the present law for a tax of $175. Under the rates proposed he would be liable for a total amount of $431, of which $231 would be tax and $200 would be his minimum savings requirement to be refunded after the war, with interest. A single man with the same income would be paying $340 under the present rates, and would pay a total of $601 under the new rates, of which $160 would be refundable and $441 would be tax. A single man with an income of $1,000 is at present rates subject to a tax of $87A0, and at the new rates would be subject to a tax of $92-only a slight increase-and as well to a minimum savings requirement of $80. Going up to the middle income brackets, a married man without children, earning $4,000 a year, who is subject to a tax of $675 at present rates, would under the new rates be liable for a tax of $964, and, in addition, for a minimum savings requirement of $400. If he had two dependent children, the tax liability would be only $668, compared with $450 at present, and the refundable portion of the total assessment would be $480, making a total of $1,148. A married man with two children and an income of $1,500 is at present liable for a national defence tax of $35. Under the new plan his tax liability would be reduced to $24.50, and he would have a minium savings requirement of an equal amount. I should point out that in many of these cases at least a portion of the minimum savings requirement will undoubtedly be met by the contractual savings already being made by the taxpayer in the form of life insurance premiums or pension fund deductions from wages or salaries. It will be noted that on the amount of any income in excess of $100,000, the rate of graduated tax is 85 per cent to which, of course, must be added *he flat rate tax of 7 per cent for married persons and 9 per cent for single persons. In addition to this we must The Budget-Mr. Ilsley

add the 4 per cent surtax on investment income, since any income in excess of $100,000 is almost certain to be investment income in this country. Therefore we have an effective top rate of tax of 96 per cent for married persons and 98 per cent for single persons. This leaves what for such persons will amount to only a token residual of 2 per cent or 4 per cent. The effect of these rates will be that while a married person with a $100,000 income, of which $30,000 is earned income, will be left with about $21,000, another having a total income of $500,000 will be left with about $37,000. I have considered the suggestion that a maximum level should be set for net income after tax that we should place a "roof,n so to speak, on what a person may be allowed to retain, whatever his actual income may be. In the United States, where there is an awkward problem arising from the existence of large incomes from tax-exempt securities, there may be some special need for legislation of this character. In this country, however, there would be no substantial amount of revenue to be gained from imposing a 100 per cent top rate rather than the 98 per cent rate I am proposing. There may be some political allurement in the principle of establishing by legislation an absolute limit on personal incomes, instead of adhering to the principles of progressive taxation even though at very high rates. I can only say that there have been too many difficult and far-reaching decisions to be made in framing this budget for me to give any consideration to its political adornment. . 1 would estimate the yield of the present income tax, including national defence tax, for a full year at the present rates on the current level of incomes, at about $410 million. The increase in rates, and changes in exemptions, which are proposed would, I believe, yield an additional $115 million in a full year in the form of tax revenue proper. It would also impose a minimum savings requirement of about $250 million in addition, but we must expect a very substantial portion of this to be met by the alternative contractual forms of saving, leaving possibly $125 million as the yield of refundable taxes. I am not including this refundable tax with the estimates of revenue, however, as it is properly regarded as borrowing rather than revenue.

I mentioned that it was proposed to collect as much as possible of the new tax at the source or by a compulsory instalment pl4n. The instalment plans that have been in effect on a voluntary basis for the last two years have been welcomed by many, but they have been used by only a minority of taxpayers. With the higher rates now being put into effect, including the refundable portion of the tax, it is obvious that the income tax is something for which almost everyone subject to it must budget the year round. From the national point of view, it is necessary that these higher rates should be reflected in reduced spending power as soon as reasonably possible, and regularly thereafter rather than in fits and starts. Consequently it is proposed to commence in September of this year to deduct at the source as much as is practicable of the new income tax rates, including the refundable portion. It will not be administratively possible to deduct 100 per cent of the tax liability as is the case with the national defence tax in some cases, but we shall aim at something like 85 per cent or 90 per cent, leaving only a moderate remainder to be paid when the return is filed. During the first four months the deductions will not be on the full scale that will be in effect from January 1943 to August of that year, but will be at an intermediate level between that and the present national defence tax level, in order to give taxpayers an opportunity to adjust themselves to the change. As I have noted, the national defence tax deducted during the first 8 months of 1942 will be credited against the tax payable on 1942 incomes, and this will be reflected in the scale of the deductions, particularly in the first four months. The actual details of the deduction plans remain to be worked out and are not provided for in the resolution that I am moving. In general, it is expected that employers will be asked to deduct specified amounts from employees of a specified family status within a specified earnings range. Thus, for example, it may be that for married employees without children earning between, say $33 and $36 per week, the employer will be asked to deduct, say, $5.50 a week to be forwarded to the income tax office and to be credited to the employee's tax liability and minimum savings requirements. Tables will have to be prepared showing the amounts to be deducted for various wage and salary ranges for single and married persons and so forth. It is believed that though the amounts to be deducted by employers will be much greater, the work of calculating and recording will not be greatly increased. Deductions will be based upon the income of the pay period against which they are made. It will be necessary for each taxpayer to meet any excess of his tax and savings liability over the amounts The Budget-Mr. Ilsley actually deducted during the twelve months of deductions or to claim a refund in case of over-deductions. It will obviously not be possible to deduct the major part of the tax at the source on all forms of income. It is therefore proposed that those persons having incomes in such forms as are not subject to deduction at the source shall be required to pay their taxes and their minimum savings requirements on a compulsory instalment plan extending over the same period as the deductions from other incomes. For this purpose it will be necessary to provide for only four instalments rather than twelve in order to reduce the administrative work involved in such frequent payments. The collection of most of the income tax at the source, beginning in September, and the compulsory use of the instalment plan of payment for those types of income where the tax is not deducted at the source, would have the effect of increasing the amount of income tax to be received in the current fiscal year, but this effect is offset by the fact that the national defence tax deducted during the first eight months of 1942 will apply toward the payment of the new total tax, and part of the revenue from these national defence tax deductions has already been taken into last year's accounts. As a consequence of the several factors affecting the time of payment, as well as the changes in rates and exemptions, it is estimated that we shall receive from income tax on individuals, including deductions for national defence tax, a total of $435 million in this fiscal year, which amounts to an increase of $45 million over the figure I gave a few minutes ago for the potential yield this year of income tax and national defence tax under the existing law. These figures do not include the portion of the tax which will be refundable; we might expect $140 million of refundable tax or minimum savings requirement during the fiscal year, but a large portion . of this-we may say $70 million-is likely to be accounted for in the alternative forms of contractual saving. There are some minor changes proposed in the personal income tax which I will mention only briefly. I am proposing that the age up to which children may normally be claimed as dependents should be reduced from the twenty-first birthday to the eighteenth birthday except in cases where the child is attending school or college. Under present circumstances all ablebodied persons of eighteen years of age or over should, I believe, be engaged in some useful work or service unless they are completing their education, and consequently children of this age should no longer be presumed to be dependent on their parents. Those dependent by reason of physical or mental infirmity will, of course, continue to be regarded as dependent for the purpose of income tax, irrespective of age. For those at the other end of their working lives I am proposing some alleviation by providing that anyone over the age of 65 years shall not be liable for the minimum savings requirement, if their incomes do not exceed $3,000 per year. Old persons with small incomes cannot reasonably be forced to save a substantial amount for a future which they may not live to enjoy. I would hope, however, that a large proportion of those entitled to this exemption will choose not to avail themselves of it, or to save even more in other forms, so that they may share with their younger compatriots the burdens of these historic years.

In addition to the changes in the rate structure and the other proposals which I have just mentioned there are several other items which are of general interest. I am pleased to announce that I am going to recommend to the house an exemption from all taxes under the Income War Tax Act in respect of war service pensions, regardless of whether they arise out of the past war or the present one. I feel sure that this will meet with a hearty response not only in the house but in the country as a whole.

Legislation will be introduced to prevent tax avoidance in certain directions. For example, it is proposed that- income received from oil or gas wells organized on the so-called royalty basis shall be deemed to be income received by the person or persons actually operating the oil or gas wells on behalf of the royalty holders and taxed at that point. Also, when property is sold on an instalment basis the capital payments shall be deemed to include interest at a reasonable rate in cases where there is no interest provided for or where the interest provided for is unduly low. Our tax on non-residents which now applies to interest, dividends, rents, royalties and cert tain other income will be extended to cover salaries and annuities. This will bring our tax on non-residents more nearly into line with those imposed by other governments on our citizens. At the same time I propose to remove the present limitation on the personal exemption applying to non-residents who but for this limitation would pay tax under our law on the same basis as residents. This provision, which will be on a reciprocal basis, will be

The Budget-Mr. llsley of particular interest to persons who commute across our international border. Several other minor changes in the law will be introduced which I need not mention here but which will appear in the resolutions. Rates of tax in the gift tax schedule will be increased 3 per cent. This concludes the section on proposals relating to personal income taxes. I wish to turn now to some proposals concerning the excess profits tax.

The excess profits tax as it was drafted in the budget of June, 1940, and revised in many details in last year's budget, has been appropriate to the period of expansion during the early years of the war. During this time it has produced substantial revenues for the treasury in a reasonably equitable manner. It has imposed a heavy tax on increases in profits. It has served to keep the over-all increase in profits of all corporations within moderate limits, so that the total of all profits has increased by only a small percentage from year to year despite the very much larger increases in the total of business carried on. At the same time it has permitted rapidly expanding businesses to retain a fraction of their increased profits in order to meet their requirements for additional working capital during this expansion period. The time has now come when we can and should make the excess profits tax more severe The rate of expansion in business will now be much less than it has been heretofore. In the case of many civilian businesses the volume of their production or turn-over is likely to decline rather than expand. Even in the field of war production we are getting close to the levels of full capacity. Consequently, businesses in general no longer need to retain substantial amounts of their current profits for reinvestment in working capital. and can afford to pay a large proportion to the treasury. Secondly, the machinery required to administer the excess profits tax has now been built up and is operating efficiently. We are, therefore, able to undertake changes in the tax which could not be readily undertaken when we did not have the administrative machinery to carry them out effec-, tively. Finally, in the past year we have adopted a much more rigorous general economic policy, involving control over many forms of incomes as well as over production and distribution. This more rigorous economic policy makes appropriate the more rigorous excess profits tax. I have given a good deal of consideration to various alternative means of increasing the excess profits tax. I believe that the increase should affect the tax on excess profits rather than on profits that have not increased substantially over pre-war levels. Already the tax on profits that have not increased is heavy when we bear in mind that those profits when distributed as dividends are snh-ject to all the personal income taxes in addition to the corporation taxes. This involves, in effect, a discrimination against income earned in the form of corporate profits as distinct from other types of income, such as interest. Some discrimination may be justified, but I believe we have already gone far enough in that direction. Consequently, I propose to increase the rate of tax on excess profits but not the flat rate of tax which applies to profits generally. In proposing this increase I think it important that we should not remove entirely the continuing, day to day, incentive for economy and efficiency in production. If that incentive were entirely removed by making the tax such that it would take the whole of any increase in profits, leaving no benefit to the producer, then we would be exposing ourselves to the danger of slackness and carelessness in regard to costs and efficiency. I am not suggesting that Canadian producers, or distributors for that matter, or those engaged in any other type of business would in any way sabotage our national effort at this time, but simply that t}ie complete removal of the standard, by which business men are accustomed to determine whether expenditures are justifiable or not, might make them forget the minor economies and opportunities for increased efficiency which do not appear significant in themselves in relation to the national effort but which in the aggregate have very great importance. We cannot afford now to waste labour, materials or time. We need to preserve efficiency by every reasonable means at our disposal. Secondly, I believe that in making any change we should not deprive businesses of all chance to build up reserves for the post-war period. Some reserves will be needed if business is to press ahead actively after the war with the conversion of its operations from war purposes to peace purposes, to modernize its plant and thereby place itself in the best position to provide employment in the post-war period. Thirdly, we must beware of making too severe an instrument of taxation that can never be perfectly fair and equitable, however much we endeavour to provide for various types of cases and situations. If we had a tax that was extremely severe in its treatment of so-called excess profits, yet something short of perfect in determining standard profits, we The Budget-Mr. Ilsley should be continually tempted to make special allowances of one kind or another to temper its severity in hard cases in an endeavour to be equitable and these would be apt to add up in total to a tax that was far less severe than was intended. On the other hand our need for funds at the present time is very pressing, as I have already emphasized in connection with the personal income taxes. We must obtain every dollar that we can. Moreover, it is desirable at the present time not to permit those who have substantially increased profits to disperse them in higher current dividends since this would be directly contrary to the government's policy of stabilizing incomes. Any increase in profits would better be reserved to enable the business to play an active part in post-war reconstruction. Balancing these various considerations I have decided to propose that the rate of tax on excess profits be raised from 75 per cent to 100 per cent, and, at the same time, that provision be made for refunding after the war 20 per cent of the excess profits taken, over the range where this 100 per cent rate is effective. I am also proposing another more complicated change which is less spectacular but serves to increase the effective rate of tax very substantially on businesses whose profits have increased significantly over pre-war levels. Let me remind the house that under the present act a corporate taxpayer pays an 18 per cent corporation income tax on all of its profits and then under the Excess Profits Tax Act pays either (a) 75 per cent of the excess profits over standard profits after deducting the corporation income tax paid on this excess or (b) 22 per cent of its total profits, whichever is the greater. I am now proposing that under the Excess Profits Tax Act a company shall pay a flat rate of 12 per cent on its total profits in addition to the 18 per cent corporation income tax, and then shall pay as well either 10 per cent of its total profits or 100 per cent of its excess profits after deduction of the corporation income tax and the 12 per cent rate thereon, whichever is the greater. In effect, therefore, I am taking the 22 per cent in the present act and splitting it into 12 per cent to apply to total profits in any event, and 10 per cent to apply as an alternative where that is greater than the amount produced by the rate on excess profits. The effect of this change, which may appear inconsequential at first sight, is to increase substantially the tax liability of all those whose profits have increased by more than one-sixth of their standard profits. The amount to be refunded to those corporations which are subject to the 100 per cent rate on excess profits will be 20 per cent of the amount of profits in excess of the amount at which the 100 per cent tax on the excess after the deduction of corporation income tax and the 12 per cent flat rate equals the 10 per cent tax on the total profit. This rather complicated provision results in the 20 per cent refund applying only where the 100 per cent rate effectively applies on any additional profits. The amount to be refunded will not bear interest but will be returned unconditionally to the taxpayer after the war, provided only that his tax liabilities have been paid. The result of these changes in the rate structure of the excess profits tax will be that no corporation will be permitted to retain more than 70 per cent of its pre-war standard profits, though it will be given the opportunity to earn a post-war credit through economies and efficiencies and increased production that enable it to earn higher profits before tax. This limitation on the amount of profits which may be retained may eventually require some corporations whose profits or dividends have increased substantially in recent years to reduce their current rates of dividends. If certain reductions of dividends should be required by the measure I am proposing I do not believe it will be too much of a burden to place on these corporations or their shareholders at this critical time. The amount of tax which will be refunded will not be lost to the corporation but will enable it to safeguard its post-war position and to make itself ready to take part in the important work of reconstruction. Because these changes impose a 100 per cent rate on many corporations and because in many cases available earnings have already been disposed of, I have decided that it would be impossible to make it retroactive. Consequently, these new rates of excess profits tax will apply as from the 1st of July onwards. In order to ensure that the taxes payable under this act and by corporations under the Income War Tax Act are remitted at as early a date as possible to the treasury it is proposed to require monthly instalment payments on account of the tax liability, including the refundable portion. The payments made before the end of the fiscal period of the business will have to be based upon anticipated earnings or earnings in the preceding period. The result of this change in timing will mean a very substantial increase in the amount of revenues to be obtained from the excess profits tax during the current fiscal year. The Budget-Mr. llsley

Certain other amendments to the Excess Profits Tax Act will be brought in. For example, the tax exemption designed to encourage mineral production which previously was obtained in the Income War Tax Act will be transferred to the Excess Profits Tax Act. The house may recall that the present exemption expires December 31, 1942. It is proposed that a generally similar exemption shall be granted under the Excess Profits Tax Act where the tax relief is greater rather than under the Income War Tax Act. The new exemption will apply to producers of base metals and strategic minerals. This exemption may be regarded as complementary to the measure of assistance being granted under the Income War Tax Act which encourages the search for these minerals. In the interests of achieving greater equity in our taxes on business enterprises which now of necessity are at such very high levels, I propose to allow in future a one-year carry-forward of losses. This will apply in the case of corporations to both income and excess profits tax and in the case of sole proprietorships and partnerships to excess profits tax. The law at present gives complete exemption to small businesses with profits of $5,000 or less. Under a proposed amendment this exemption will be withdrawn in respect of the new 12 per cent flat rate which applies generally to total profits of corporations. Other changes of a technical nature which I need not explain here will be found in the resolutions. I have already given an estimate of $275 million as the yield in this fiscal year of the excess profits tax if there were to be no changes made in it. This revenue would be largely derived from the tax on profits earned in 1941. The introduction of the compulsory instalment plan for the payment of this tax will increase substantially the revenue to be expected from it during this fiscal year from taxes on income earned during 1942. Excluding the effects of the changes in rates, this increase would be about $145 million. The changes in the rates of the excess profits tax which I am proposing would, it is estimated, yield an increase in revenue of about $58 million on the basis of a full year's application with profits at their current levels. Because of the instalment plan, we shall get some of this increase during the current fiscal year, and allowing for the fact that the changes go into effect from July 1, it is estimated that the amount will be about $20 million. In addition to these amounts of actual revenue, the amount we shall receive in the form of refundable tax under the excess profits tax is estimated at about $60 million on the basis of a full year's application with profits at current levels, of which we may anticipate receipts of about $25 million during the current fiscal year. The application of the instalment plan to the corporation income tax will bring about an increase in revenues from that tax during the present fiscal year, even though the rates are not changed at all. It is estimated this will amount to $105 million. In the Succession Duty Act there will be few significant changes. The rate structure will not be altered. As a matter of general interest, however, I may call attention to. the new form of exemption which will allow charitable gifts up to one-half the estate to pass entirely tax free where previously the duty was one-half the ordinary rate. It is also proposed to offer exemption on a reciprocal basis to representatives of foreign governments. Certain other minor changes will be made with a view to clarifying the law and assisting in its administration.