Mr. ABBOTT:

The family corporation is no longer of any great practical significance, because the special tax provisions relating to family corporations were repealed some time ago. The personal corporation is a type of corporation defined in the Income War Tax Act. I have not the section here, but broadly speaking it is a company with just a few shareholders which is controlled by an individual or by members of his family, and I think it is 75 per cent or 85 per cent of its revenue must be derived from interest or dividends on securities and the like. The income of the company is taxed in the hands of the shareholder in proportion to the number of shares held. This so-called private company, as used in this section, applies simply to the type of company which was dealt with by the Ives commission in its report, and colloquially it might be described as a company with closely held shares. The requirements in the suggested amendment are that the company should not have more than seventy-five shareholders. That definition is a modification of the provisions of the Companies Act, which states what will constitute a private company for the purposes of the Companies 83166-253J

Act and thereby relieve the company from obligation of filing a prospectus or a statement in a prospectus.

I explained on introducing the resolutions on which these sections are based that in a good many cases, as a result of deaths and distribution among heirs, there are companies which are private companies within the intent of this legislation which have sold more than fifty shares, so we decided to extend it to seventy-five. There is nothing sacramental about the rule of fifty, except it happens to be the number which is set out in the Companies Act. That is a pretty general statement as to what constitutes a private company. There is no special legal significance to the term "private company" except under the Dominion Companies Act and except with respect to this particular legislation.

Mr. JACKMAN:

As far as income tax is

concerned has the family corporation classification any significance now? There are no such family corporations?

Mr. ABBOTT:

That is correct. There are a few companies which may still have some income which was accumulated under the family corporation provision, but I think it has mostly been distributed. The provision with respect to electing to be treated as a family corporation expired in 1942.

Mr. FLEMING:

I should like to ask the minister to give an explanation of this section. It is becoming very confused and involved. It is, without doubt, as difficult to follow as anything I have ever seen for some time. In explaining the effect of the section will the minister have in mind the impression that some of the provisions create, that in fact there will be retroactive taxation here?

Mr. ABBOTT:

I realize these sections are very complicated. I found the greatest difficulty myself in working them out and in understanding them as drafted, although for over twenty years I have had experience in looking into sections of this kind. This particular section, which will be section 97 in the act, is to plug a loophole in the provisions of the act. I issued a press statement back in January pointing out what this loophole was, and stated that I proposed to introduce an amendment at the present session of parliament to plug it. Perhaps it would be as easy as any other way for me to explain it if I were to read into the record the statement I made at that time, and then I can elaborate

Income War Tax Act

on it if my hon. friend wishes. I said I proposed to introduce certain amendments to the Income War Tax Act of a somewhat technical nature affecting private companies. I said that although not many taxpayers would be affected by the amendment, I thought that those who would be concerned should be informed. I now quote from the statement:

The purpose of the amendment is to prevent legal avoidance of tax on distributions of accumulated surpluses of private companies electing to pay tax under part XVIII of the act in cases where persons have purchased their shares from corporate owners since December 31, 1914. Where the shares of the private company are acquired by the individual on or after January 1, 1947, the dividend paid out of accumulated surplus will be taxable in the hands of the individual at the rates that would have been paid by the private company in respect of the surplus represented by the shares in question if the present owner had been the actual owner on December 31, 1944. If the shares were purchased in the calendar years 1945 or 1946 the dividend will be taxable when received by the individual but at a rate of 15 per cent.

The reason for that was this. As my hon. friend will appreciate, dividends from one Canadian corporation to another are exempt from tax. Take a private company which had individual shareholders and corporation shareholders. It could elect and could qualify as a private company under this section. It elects to be taxed on the basis of part XVIII. The tax is calculated at the appropriate rate as income of the company on the proportion of the income of the company or proportion of the surplus of the company attributable to individual shareholders; but since the cor-)orate shareholder would pay no tax on the portion of the income which was going to him, the total tax paid by the private company to which I referred would be less because of having corporate shareholders. Then, step No. 2. If an individual acquired the shares of that corporate shareholder or private company he could get the dividend from the private company tax free. It is to plug that hole that this amendment is introduced.

Mr. FLEMING:

I thank the minister for his statement. The committee appreciates ihat there is a fairness about the proposal, but the feature which troubles me, and which I think has not been fully clarified by the minister is this. Simply because the warning was given in January of this year it is treated as a ground for imposing the tax now. But there may be people who acquired their shares prior to the date of the warning, and acquired them with knowledge, presumably, of the fact that the shares at that time were free of this particular type of tax. The tax is now being extended in 1947 although the individual sought to be taxed now may have purchased

them prior to the date of the warning. No doubt in most cases he purchased them prior to the date of the warning, understanding, and being entitled then to understand, that the shares were free of tax on the proportion of undistributed surplus in the hands of the company. It looks to me like a retroactive tax, which is not a desirable kind of tax.

Mr. ABBOTT:

One answer to my hon. friend is this, and that is why we made the difference between the two rates which were imposed here; the 15 per cent rate, which is the minimum under the schedule in section 92, applies to such cases as took place in 1945 or 1946. In the future the regular rates which are set out in the schedule apply.

Mr. FLEMING:

Would it not be better to make it apply from this point on instead of going back?

Mr. ABBOTT:

No; I really feel that that would be unjustified.

Mr. JACKMAN:

I do not quite understand the minister's reasoning where the tax avoidance is if the corporation gets the distribution from the private company, it being a shareholder. When it receives the income it will go into the earned surplus of the receiving corporation, and then when it is paid out, as it must be some time if anyone is to benefit from it, the shareholders must ultimately pay the tax.

Mr. ABBOTT:

I perhaps was not quite clear in my explanation. What happens is this. The individual buys the shares from corporation No. 2 before the dividend is paid out. That is where I was incomplete in my explanation. An individual buys shares of a private company from this other corporation before the dividend is paid out, and he receives the dividend tax free.

Mr. JACKMAN:

There is nothing new to it in principle except what was said in the budget debate; but as the minister has said, and everyone in Canada believes, the rates of advance on taxation are much too quick, and this schedule is must too fast in its rate of advancement; after SI,500 a man pays an extra 2 per cent, I think it is, upon every $100, so by the time he reaches a taxable income of $2,000 he will be in the 20 per cent bracket. I merely wish to go on record again as saying I think that is too high a rate of

Income War Tax Act

progression if the government wishes to stimulate the best activities and the utmost production in the country.

Mr. ARGUE:

An oil company is allowed to deduct from income the cost of exploration, even it if strikes a dry hole; why is the farmer not allowed to deduct from income the expense of digging, a well, even if he finds no water?

Mr. ABBOTT:

The short answer would be that this is incentive legislation to stimulate in Canada the search for oil, which is a badly needed raw material.

Mr. ARGUE:

So is water.

Mr. ABBOTT:

The hon. member for St. John-Albert raised the question last night that the provisions of this section might be interpreted in a very much broader fashion than I had thought possible, and I said at the time that if he was right the section should be amended or withdrawn. The purpose of the section is to endeavour to provide a flexible workable basis for administering the Income War Tax Act. What we are trying to achieve is an act which will be readily understandable and which will work fairly for all taxpayers. For that purpose it is necessary to give a certain amount of flexibility to the act. We are trying to eliminate the straight ministerial discretion, and in cases where flexibility is necessary we want to incorporate a provision whereby regulations will be adopted by the governor in council, which will of course require approval by the cabinet. The regulations will be published in the Canada Gazette and I hope would be available in brochure form for the use of all taxpayers.

Paragraph (3) (a) provides:

The governor in council may make regulations not inconsistent with this Act.

(a) prescribing the evidence required for any purpose under this Act.

That is pretty broad in its terms. I consulted the law officers of the crown this morning. They do not believe it could be interpreted as widely as my hon. friend suggested last night, but I think we should put the question beyond peradventure and state just what the intention is. As I said last night, this is intended to relate only to the administration of the act as such. The evidence required would be in regard to such matters as establishing charitable donations, dependency, and so forth. Suppose a man claims he has a dependent living in Europe. He should not be held to the strict rule of best evidence, but the department should be able to require that an affidavit be evidence of dependency if accompanied by money order receipts to show that payments were made regularly. That is the sort of thing we had in mind.

Paragraph (3) (b) reads:

(b) requiring any class of persons to make information returns respecting any class of information required in connection _ with the administration or enforcement of this act-

And so forth. I discussed this with the officials of the Department of National Revenue, and they find that in the enforcement of the act they require information from different classes at different times in rather different forms, and it is hard to spell that out in advance in the act. They feel that there should be some flexibility and that regulations should be made, which could be made known to all taxpayers, so that the rules could be varied from time to time. They feel that it is not desirable that we should attempt to spell the whole thing out in the statute. With that in view I think the objections that were taken last night might be met by amending the section in this way:

That clause ten of Bill 269 be amended by deleting the words "for any purpose under this act" where they appear in paragraph (a) thereof and substituting "to establish facts relevant to assessments under this act" and by deleting the words "the administration or enforcement of this act" where they appear in paragraph (b) thereof and substituting the words "assessments under this act."

In other words, prescribe what character of evidence may be accepted by the department, and what type of information may be asked for, relating only to assessments under the act. I suggest to the committee that that is a reasonable provision and that it will make for efficient administration of the act. If it is found that it is abused, and I do not think for one moment that i't will be, the question could be raised in the house and an appropriate amendment insisted upon, but I suggest to the committee that the section as I now propose it and which I will ask one of my colleagues to move in a moment is an appropriate and a workable section.