June 10, 1947 (20th Parliament, 3rd Session)


Douglas Charles Abbott (Minister of Finance and Receiver General)



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.

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