Mr. Abbott:

Yes, that is right, that sort of case.

On section 12-Defence surtax.

Mr. Abbott:

I am afraid I have to intervene here. This is the section which provides for the surtax on corporations, and the amendment which I shall ask one of my colleagues to move in a moment strikes out the provision under which corporations, if certain conditions were fulfilled, would be given relief from the 20 per cent defence surcharge.

The committee will recall that in my budget speech I expressed concern over the fact that the proposed increase in the corporate tax, when considered in conjunction with provincial corporation taxes, could mean that more than half of a corporation's earnings would be taken away in taxes. At that time I made special reference to the position of certain classes of companies, for example, where there is public control of rates and where the companies ordinarily are able to earn only a modest return on capital. With this group particularly in mind I made provision in the income tax resolution for abatement of the 20 per cent surcharge and I quote from the resolution:

To the extent that it would reduce the corporation's taxable income after payment of ordinary income tax to an amount less than 5 per cent of its capital employed.

Many hon. members who are familiar with the difficult practical problems which arose under our wartime excess profits tax will not, I believe, be surprised to learn of the troubles I have encountered in attempting to work out a definition of "capital employed" for purposes of relief from defence surcharge which, while giving some relief in the directions intended, would not be unsatisfactory

from the point of view of its general application to all companies. For several months I have been exploring the results of several formulae put forward not only by officials of the departments concerned but also by businessmen.

I am now forced to confess that up to this time I have not found a solution sufficiently satisfactory to warrant my recommending it to parliament. I have made an honest try but have not been successful. However, I shall give the problem further consideration and study.

I think I might refer back to my general approach to the budgetary problem when my tax proposals were introduced. At that time after reviewing the current uncertainties in the world situation I said:

In another year's time we should have a clear view of the prospects. I have, therefore, decided not to recommend any major reconstruction of our tax system this year but instead to meet our current requirements by a series of simple but adequate surcharges on several existing taxes and also to widen the coverage of our special excise taxes. I think that over the shorter run this method of defence' surcharges will produce the necessary revenue with the least difficulty and inconvenience. If our optimistic hopes are realized it will be easy to reduce these surcharges or to drop them entirely, but I want to add that if it becomes clear that we are in for the long pull at these high levels of expenditure some major changes in the existing tax structure may have to be devised. My tax proposals, therefore, must be regarded as an interim policy for the period of the current year.

I shall therefore ask one of my colleagues to move:

That subclause (1) of clause 12 be amended by deleting subsections (2) to (5) inclusive of section 37 of The Income Tax Act as set out therein and by substituting the following therefor:

" (2) In this section, 'tax otherwise payable' means the tax otherwise payable before making any deduction under section 38 or any deduction allowed under any other act from the tax imposed by this part."

and that clause 12 be further amended by deleting subclauses (3) and (4) thereof.

Mr. Gardiner:

I move accordingly.

Mr. Adamson:

Then the purport of the new amendment is that the retroactive or safeguarding clause, that the taxation even after the 20 per cent surcharge could not be a sum greater than the capital of the company, has been removed?

Mr. Abbott:

It was found in practice, or perhaps I should say I found it, absolutely impossible at this time to work out a satisfactory definition of "capital employed"- because that was the wording. I tried a definition of "capital employed" as contained in the Excess Profits Tax Act during the war, but I found it did not fill the bill at all. As a matter of fact, as the committee will recall, as I said in my statement there was a difficulty in connection with the definition when

Income Tax Act

the board of referees had to give an attributed capital in a great many cases. I came to the conclusion that this just could not be worked out for this situation.

In the bill it is noted that I left it open to try to work out a definition. I found I simply could not evolve a definition which would be fair to all taxpayers. Therefore I am reluctantly forced to drop what I hoped might be a relieving provision.

Mr. Adamson:

I am glad the minister agrees that this is a retrograde step, particularly in respect of corporations who are now going to face a difficult year because of the uncertainties of materials, supplies and markets. With the 20 per cent surcharge it seems to me we are going to be faced with corporations running into a level of taxation which is very considerably higher than the minister expected.

I wonder whether through their annual statements or from their balance sheets there could not be some empirical formula worked out to see what the "capital employed" is. It does not have to be paid-up capital, capital represented by bonds or preferred stock or common stock. Surely the annual statement of most companies would give information as to the capital actually employed. I would ask the minister to tell us about that. I realize of course that it is a difficult situation.

Mr. Abboli:

I repeat what I said, that I have not been able to evolve a formula, empirical or otherwise, which would be appropriate. A formula which would be appropriate as related to one taxpayer, let us say, would be completely inappropriate for another. I can only assure the house we have looked at the operating results of public utility and other companies and have endeavoured to apply this formula and that formula. All I can say is that for this year I am not prepared to recommend such a measure. Therefore I am forced reluctantly to withdraw the proposal I made. I can only assure the house we will have to look at it again next year.

Mr. Adamson:

Then it simply means that the 20 per cent surcharge is a blanket surcharge on all corporations?

Mr. Abbott:

All corporation profits, in excess of $10,000, will be subject to the 20 per cent surcharge.

Mr. Macdonnell (Greenwood):

It seems to me not only a very disappointing but also a surprising thing, and also a serious thing. After all, we did have a budget, and the public of Canada was advised about it. Now, without warning to anyone, so far as I know,

Income Tax Act

we suddenly find this change. It is a major change and in some cases will be a very serious change, as proposed.

I suggest to the minister that it is not fair to the committee, or to anybody else for that matter, to do this in the present offhand way, without warning. I am going to suggest to the minister that it is not impossible to do these things. I am going to ask him whether he has, in fact, called in the sort of people with whom he often does discuss matters when he is preparing his budget. I am wondering whether this particular matter might not be left for a time, and whether the section might not stand. After all, we will be here for some weeks, and I suggest strongly to the minister that we should not have what can be described only as a major change done in this way, without any notice to us or to the public, and without having further time to consider it or, if necessary, to call in other parties interested in it. I do hope the minister will accept that suggestion.

Mr. Abbott:

I have spent probably more time in the consideration of this section, since the budget was brought down, than any other, because it is an extremely complicated one. I regret that I cannot change the decision I have announced. It was arrived at after most exhaustive consideration by myself, by officials of my department and officials of the Department of National Revenue, after examination of the operating results of a great many companies, and even after obtaining such information as we could as to the probable operating results of companies which we felt were more particularly affected during the coming year.

I can only say that if we sat here for another two months I would not be prepared to proceed with this proposal. I regret it has not been possible to implement it. I said that in my opening statement.

I have to take the primary responsibility for these things. I have recommended this decision to my colleagues. I have made the announcement only after careful consideration, and with considerable reluctance.

Mr. Fleming:

I urge that hon. members should be afforded an opportunity to give to this particular question, on their part, the same degree of careful consideration the minister has given to it, on his part. Before launching into a discussion of the amendment I would ask him if he would be prepared to let it stand. It is now 5.20, and I understand we are to rise, on this bill, at 5.45. It is not probable that we shall finish the discussion on the bill tonight. Therefore we are not asking a great deal when we suggest that this section and the amendment should

stand until the next occasion we have the bill before us, so that we shall have an opportunity fully to consider it.

Mr. Abbott:

I have not the slightest objection to allowing it to stand. But I wish to make it clear that the decision I have arrived at has not been arrived at hastily. That was arrived at in the light of information which I do not believe would be available, for obvious reasons, to most hon. members of the house.

Mr. Maedonnell (Greenwood):

I just wish to make this other point. Does not the minister think it fair that outside parties, the usual outside parties, should have an opportunity to discuss a matter of this kind?

Mr. Abbott:

Whom does my hon. friend mean by "usual"?

Mr. Maedonnell (Greenwood):

If my memory serves me correctly, when the minister was making a major change in the Income Tax Act we were told that it would have to wait a session so that the minister could distribute it to various organizations throughout the country in order to get their views. I am not suggesting that there were any boys in the back room or any sinister communications of any kind. I am suggesting to the minister that in attempting to reach this conclusion he should give an opportunity to those who are competent to discuss these matters to make suggestions. Does not the minister think that that would be fair? This section should not only be allowed to stand, but an opportunity should be given, if it has not been given already, to those parties who are particularly expert in these matters to make submissions to the minister.

Mr. Abbott:

A good many of those who are particularly interested in this question have made representations. I have had numerous conferences with them and it was following those conferences that this decision was arrived at. I have no Objection to allowing the section to stand.

Mr. Fraser:

Can the minister say how much extra revenue he expects to receive?

Mr. Abbott:

That was indicated in my budget speech. I do not remember the exact figure, but it will be quite substantial.

Mr. Adamson:

Can the minister indicate if any 'companies have stated how large a percentage of their capital this surtax would amount to in the coming year?