Mr. SENN:

Shortly before the house rose last evening I made an appeal to the minister to increase the percentage of the reduction from income tax on gas wells for exploration and drilling purposfes. The minister was emphatic in his reply, but I found some difficulty in following his arguments and his explanations. He said he was probably stating it in the Greek way, but Greek is a language of which I have no knowledge. He said that because a certain amount was allowed for depletion of gas wells, amounting to some twenty-five per cent of the income, thirty per cent was a sufficient reduction for exploration and drilling purposes. I say definitely to the minister that in the circumstances neither is sufficiently, high. I pointed out to him last night as clearly as I could the importance of the natural gas industry to certain sections of Ontario, particularly the Niagara area, in which I happen to live. The greater proportion of the people in that area depend on coal gas for fuel. Everybody knows that to-day coal is in very short supply, and that it is even more necessary than ever to have sufficient gas produced to allow the people who have already installed gas fixtures to continue to use gas. As I pointed out last night, it is impossible to change over gas equipment to the burning of other kinds of fuel. [DOT]

In the riding which I have the honour to represent, Haldimand, there are some 1,800 gas wells in operation. In the past number of years since the natural gas industry has flourished there, some three or four times that number have gone out of existence; they have been abandoned. Some of them have been dry wells. I venture to say that at least three times as many as are in existence to-day have been abandoned because their usefulness has gone. At the present time drilling is going on in that area, because, as I have already pointed out, it is necessary to keep up the supply. I think I am safe in saying that at least ten per cent of the wells drilled turn out to be dry and of no value whatever. That is a strong argument in support of my request for an increase in the reduction of thirty per cent.

Income War Tax

The amount for exploration and drilling should be increased to at least forty or perhaps fifty per cent.

It is clear that there is no use in a company spending all their profits in the driling of new wells to keep up the supply. After all, the average life of a gas well is not very long. I am on safe grounds, I think, in asking the minister to increase that percentage of reduction.

Later I shall have something to say about the depletion allowance, which is twenty-five per cent, I thinly. I believe that they are entitled to a certain increase in the depletion percentage as well. Mining and oil wells are getting a larger depletion rate than that. However, in the meantime I should like to appeal once more to the minister to enlarge that thirty per cent reduction for exploration and drilling to at least forty per cent, if not fifty per cent.

Mr. ILSLEY:

The point raised last night

was that thirty per cent was given to one class of company, forty per cent to another and twenty-six and two thirds to another. The question asked was. why is the tax credit for natural gas companies only thirty per cent on exploration expenditures, while that for certain oil companies is forty per cent. The hon. member for Haldimand suggested that the tax credit for natural gas companies should be higher. I shall explain how these various tax credits were derived and why they are not the same for all kinds of companies.

I should explain first of all that exploration and drilling expenses are capital expenses laid put on new ventures, and ordinarily are not properly chargeable against profits from existing producing wells. If as a result of exploration expenses new wells are found, the cost of finding them is properly chargeable against the new production. If, however, the exploration and drilling prove unsuccessful, the cost of this unsuccessful capital venture could not in the past be charged against profits from existing producing properties. In war time, in order to encourage the search for much-needed oil, gas and minerals, the government decided to allow these capital costs of exploration as a deduction against profits in computing taxable income. Now, in order to prevent undue benefits being secured by any company which might be in the 100 per cent tax bracket, the write off privilege was given in the form of a tax credit, the tax credit being equal to the tax saving which would be secured by a company taking a write-off under a forty per cent tax rate. Thus the appropriate tax credit in the case of oil companies which paid tax on total earnings and received no' depletion

[Mr. Senn.3

is forty per cent; that is, on every $100 of exploration expenditure charged against taxable income the tax saving or tax reduction is $40. In the case of natural gas companies there is a depletion rate of 25 per cent. Thus only 75 per cent of earnings are subject to tax. A forty per cent-

Mr. SENN:

Is that correct-only twentyfive per cent of the expenses for depletion? Is it not twenty-five per cent for drilling and exploration?

Mr. ILSLEY:

No. What was the question? The statement I am making here is correct; that is. that altogether apart from new ventures the depletion rate allowed is 25 per cent. That is to say, the company pays income tax on only 75 per cent of its earnings.

Mr. SMITH (Calgary West):

That is 25 per cent per year, is it?

Mr. ILSLEY:

Yes. It varies with different kinds of companies, of course; and I will come to that. It is the same for gas companies, 25 per cent.

Mr. SMITH (Calgary West):

That is what you are referring to?

Mr. ILSLEY:

Mr. SENN:

That is just the point I was going to raise, that I believe these producers are more or less in a class by themselves. The need in that locality is very great; the gas produced is used in many homes and in processing in different industries. During the war years the use of gas for processing in various industries increased very greatly, so now the demand for this purpose is cutting to a greater extent than it should into the supply available for domestic heating. I am very much afraid

Income War Tax

that with the shortage of coal and of all kinds of fuel, unless something is done to increase exploration and drilling for gas we in that area are going to find ourselves very short indeed of natural gas for heating our houses. I still think the minister, without doing harm to any other industries, might increase this amount by at least ten. per cent.

Mr. COCKERAM:

I should like to say a few words with respect to the business of prospecting. For a number of years I believe the minister has received deputations and briefs not only from the Ontario prospectors' association but from the Canadian Institute of Mining and Metallurgy, Ontario Mining Association and the mining industry as a whole, with regard to the question of prospecting and the future of mining development in this country. For some time I have felt that the departmental officials have not understood the question of prospecting and its effect on the future prosperity of this country. The history of prospecting started with Sudbury; then to Porcupine, Kirkland Lake and many other centres. To-day prospectors are going farther and farther afield. In the old days prospecting was carried on close to the railroads. To-day prospectors must travel greater distances, with the result that the expense of prospecting is very much greater. Later in this debate I propose, to introduce some statistics bo show how the mining industry, instead of going ahead as we all hoped it would, is being retarded through excessive taxation. I do not think any industry can do more for this Canada in the days to come than the mining industry. It was mining that carried our economy through the depression days of the thirties, and it was that industry which in the early part of this war, when the government was looking for foreign exchange, the minister appealed to produce more gold with which to establish credits to make purchases in the United States, with the result that it was not necessary for Canada to go on a lend-lease basis with the United States at that time.

The minister has been interviewed in the past by many delegations, and I should like to read the paragraph dealing with prospecting from the report of the Ontario royal commission on mining of 1944. In this connection I would suggest to the minister that he might be able to supply members of this house with

copies of this report, as well as with copies of a brief on the taxation of the Canadian mining industry as presented by the Canadian Institute of Mining and Metallurgy, together with copies of any other briefs that have been prepared by the prospectors' association with regard to the whole field of prospecting. This is what the Ontario royal commission had to say in regard* to the decline of prospecting in Canada;

The commissioners are convinced that if mining in Ontario- I

This would apply also to Canada as a whole.

-is to continue on a worthwhile scale prospecting for new mineral resources must be stimulated to a far greater extent than is now possible under existing conditions in respect of tax levies and governmental restrictions.

The following excerpts are taken from *a brief prepared for submission to the dominion Minister of Mines and Resources and the Minister of Finance, by the Canadian Institute of Mining and Metallurgy and made available to this commission. _

"Prospecting for new mineral deposits in Canada has all but ceased and. if the mining industry is to continue on any worthwhile basis, this unfortunate situation must he corrected immediately. Emphasizing the necessity for quick action is the fact that under war-time demands for maximum metal production, coupled with a labour shortage, development work at producing mines has been necessarily and drastically curtailed, and ore reserves are being dissipated at an accelerated pace.

"The incentive for continued prospecting, with its inherent physical and financial risks, lies in the prize which rewards success, i.e., a valuable deposit of mineral. No mineral prospect can justify the risks attendant upon development unless the attainable prize, in the form of commensurate profit, is available to one who succeeds. This prize has been so reduced in value by progressive increases in taxation that it no longer holds sufficient attraction for those who would venture. Private enterprise in the exploration and development of mineral deposits laid the foundations for the production success attained by the Canadian mining industry. The decline in prospecting activity is clearly illustrated in the accompanying briefs.^ "In the province of Ontario, the decline in prospecting activity began in 1929, with the downward trend obscured somewhat during the period 1933-1936 following the increase in the price of gold. In the province of Quebec, experience has been similar. It was plainly evident long before the emergency of the present war."

In that connection I would suggest to the minister that if we are to go ahead and find new mineral deposits in this country, greater consideration than he now .proposes should be given those mining companies who are prepared to expend their money on prospecting and1 development in the Dominion of Canada, I have been in the prospecting business for a great many years and I know that to-day our mineral fields are getting farther apart.

Mr. ILSLEY:

The answer is that they are.

Mr. COCKERAM:

Then why this section?

Mr. ILSLEY:

Mr. COCKERAM:

I cannot see that.

Mr. ILSLEY:

Well, I gave an explanation to the hon. member for Haldimand only a minute ago. There is a depletion rate of thirty-three and one-third per cent. The tax rate is forty per cent. Assuming that they are paying forty per cent-and this is on the assumption that forty per cent is the combined income and corporation tax rate paid by the company-then this resolution, is the equivalent of that for which the hon. member is asking, because forty per cent of sixty-six and two-thirds per cent is twenty-six and two-thirds per cent.

Mr. COCKERAM:

Well then, I congratulate the minister.