1950-05-18

[Stage Direction]
First report of special committee on the operations of the national research council.- Mr. Mcllraith.


Right Hon. L. S. St. Laurent (Prime Minister):: Mr. Speaker, I beg leave to table copies of two orders in council, dated yesterday, appointing commissions to investigate the nature and extent of the damage resulting from the flooding of the Red river valley and the fires at Rimouski and Cabano.



LOAN OF $745,000,000 ANNOUNCEMENT AS TO OVER-SUBSCRIPTION ON OPENING DAY

Hon. Douglas Abbott (Minister of Finance):: Mr. Speaker, I know the house will be happy to learn of the successful result of our 1950 refunding loan offering. Hon. members will recall that the loan was offered for the purpose of paying off two Government of Canada issues which had been called for payment on June 1 and June 15 respectively, and was for a total amount of $745 million. The loan was offered in two maturities, an eighteen year 2f per cent bond and a four and a half year 2 per cent bond, and I reserved the right to close the books at any time and to determine the amount of bonds to be allotted in each maturity.
The books of the loan were opened at 9 a.m. this morning and were closed at
9.01	a.m. At that time the loan was very heavily over-subscribed, and allotments of both long term and short term bonds have to be substantially less than the subscriptions. The Bank of Canada will be advising primary distributors by overnight telegram tonight as to the portion of their orders which will be filled. As between the long term and short term issues, the loan has been allotted as follows; $350 million in the 2f per cent eighteen year bonds and $395 million in the 2 per cent four and a half year bonds.
This issue represents the largest offering the government has ever made under ordinary peacetime conditions. Its long term portion represents the first offering of ordinary market bonds we have made to the general public since the ninth victory loan bonds were offered in the fall of 1945. Therefore I think we may all take pride in the remarkable success of this loan flotation. The enthusiastic and general response of investors throughout the country provides substantial evidence of prosperous conditions and of confidence in the future of the country. In conclusion I wish to thank the investment dealers and banks whose efforts contributed to the successful placing of the bonds with investors in all parts of the country.



DOMINION ELECTIONS


Hon. F. G. Bradley (Secretary of State):: Mr. Speaker, I should like to lay on the table of the house the report of the chief electoral officer on the twenty-first general election, 1949.



QUESTIONS

[Stage Direction]
(Questions answered orally are indicated by an asterisk).

Mr. Balcer:: What sums were spent by the federal government in 1947, 1948 and 1949, for the erection of a stone or concrete wall on the property of Jean Marie Bureau, in the municipality of Pointe du Lac, county of Trois Rivieres?


Mr. Fournier (Hull):: Fiscal year 1946-47, nil; 1947-48, nil; 1948-49: A 400-foot wall was built at Pointe du Lac to protect the shore from erosion. Part of this wall fronts Mr. Bureau's property. This section is estimated at $3,942.40.


GRAND RIVER, QUE.  PUBLIC WORKS
Mr. Courlemanche:: 1.	Has any work been carried out on the Grand river (Grande riviere), county of Gaspe south, during the summer of 1949?
2.	If so, what was the cost of same?
3.	Who was the foreman, and what daily rate did he receive?

Questions


Mr. Fournier (Hull):: 1.	Yes.
2.	$37,372.31.
3.	(a) Marcel Cauvier; (b) $8 a day.


DOMINION ARSENALS
Mr. Hodgson:: 1.	How many officers, officials or managers are [DOT] there at the dominion arsenal at Lindsay, Ontario?
2.	How many officers, officials or managers are there at the other dominion arsenals in Canada?
3.	What are the names of such persons and their respective positions and salaries?
4.	Are they allowed expenses?


Mr. Mcllrailh:: The terms "dominion
arsenal" and "dominion arsenals" in questions 1 and 2 have been construed to mean the operating divisions of Canadian Arsenals Limited.
1.	Two.
2.	Twelve.
3.	Small arms ammunition division, Quebec city; Brigadier A. Theriault, C.B.E., chief superintendent; Mr. D. Busque, accountant.
Gun ammunition division, Lindsay, Ontario: Lieutenant Colonel E. M. Shields, O.B.E., E.D., manager; Mr. C. W. Walden, accountant.
Small arms division, Long Branch, Ontario: Lieutenant Colonel J. W. Leavens, manager; Mr. T. H. Marshall, accountant.
Gun division, Longueuil, P.Q.: Mr. E. A. Sprenger, manager; Mr. J. C. Mill, accountant.
Filling division, St. Paul l'Ermite, P.Q.: Mr. J. D. Chisholm, manager; Mr. G. R. Jackson.
Explosives division, Valleyfield, P.Q.: Captain T. E. Heron, manager; Mr. P. Reynolds, accountant.
Instrument and radar division, Leaside, Ontario: Mr. A. W. Ballantine, manager; Mr. J. R. Prazak, accountant.
4.	Limited out-of-pocket travelling expenses when on company business.


QUESTION PASSED AS ORDER FOR RETURN
LEGAL SERVICES
Mr. Conacher:: 1.	What amounts of money has Norman L. Mathews received for legal fees from the present government (a) per year; (b) per case?
2.	What was the result of the case of Gordon Davidson, convicted November 3, 1947, appealed in February, 1948, and the decision?
3.	What were the amounts Mr. Mathews received for legal services in this case for each appearance?
!Mr. Courtemanche.]


DOMINION-PROVINCIAL CONFERENCE INQUIRY AS TO PROGRESS OF ARRANGEMENTS   FURTHER CORRESPONDENCE
[Stage Direction]
On the orders of the day:
Mr. Donald M. Fleming (Eglinton):: May I
ask the Prime Minister if he is in a position to make any further report to the house concerning arrangements for the forthcoming dominion-provincial conference; and in particular, would he tell the house whether any date has been set and whether any further correspondence has been exchanged between the governments which might be tabled?


Louis Stephen St-Laurent: No date has yet been set for the conference. Since I tabled the correspondence I believe two further letters have been received; I shall make inquiries and bring down any that have not been tabled. I do not think there is anything I can report as to arrangements. The correspondence has been dealing with suggestions as to the agenda, but nothing has been determined yet in that regard.


DOUKHOBORS
[Stage Direction]
On the orders of the day:
Mr. J. L. Gibson (Comox-Alberni):: In view of the telegrams of protest which have been sent, will the Minister of Justice state whether or not arrangements have been entered into with the Department of National Defence to take over the naval barracks at Comox for the detention of Doukhobor prisoners?


Hon. Stuart S. Garson (Minister of Justice):: The answer to my hon. friend's question is yes. The arrangements are not completed, but they are in course of negotiation and we expect to complete them shortly.


John Lambert Gibson: If I may ask a supplementary question, I take it there is no intention of using the R.C.A.F. station at Comox for this purpose?


Stuart Sinclair Garson: No, sir.


John Lambert Gibson: Has the attorney general of British Columbia been consulted, and has he concurred in this decision?


Stuart Sinclair Garson: We have been in contact with the attorney general of British Columbia with respect to all matters connected with Douk-hobors and their detention, and I think' it might be said that he has at least agreed to accept this as the least undesirable of all alternatives from his standpoint.



FISHERIES


[Stage Direction]
On the orders of the day:
Mr. A. Earl Catherwood (Haldimand):: should like to direct a question to the parliamentary assistant to the Minister of Fisheries. The inspection of whitefish from the great lakes is now on a voluntary basis. Is it the intention of the government to put into effect compulsory inspection regulations covering all whitefish for export?


Mr. J. W. MacNaughi (Parliamentary Assistant to the Minister of Fisheries):: It is
the intention of the Department of Fisheries to have a meeting this fall with representatives of the provincial governments and of the industry, to determine the proper time at which inspection of whitefish will be changed from a voluntary to a compulsory basis.



NORTH ATLANTIC TREATY


[Stage Direction]
On the orders of the day:
Mr. George A. Drew (Leader of the Opposition):: Does the Prime Minister intend to give to the house today any information about the agreement that has been announced at the meeting in London?


Louis Stephen St-Laurent: I am not aware that it has been announced. I am expecting word momentarily as to the hour at which it is to be released. I have the statement here, but I did not feel that I could communicate it to the house until such time as we knew it was being released in London.
(See also page 2621.)



INCOME TAX ACT

Douglas Charles Abbott: the second reading of Bill No. 177, to amend the Income Tax Act.
He said: Mr. Speaker, I have only a word to say in connection with this bill. I regret that it was found necessary to have it run to such length, but there are two or three reasons for that. There are relatively few changes involving important questions of principle, such as the new provisions with respect to surpluses of closely held companies, some provisions respecting charitable corporations, and the like. However, as the house will appreciate, when changes of that kind are introduced it is necessary to make a number of consequential amendments in other sections of the act.
Income Tax Act
As the house will recall, in 1948 we passed a completely new Income Tax Act, and as a result of experience over the last year it has been found desirable to make some changes and improvements in various sections of it. Moreover, because of the virtual elimination of ministerial discretion in the Income Tax Act it has become necessary to spell out in a great deal more detail a number of its provisions. It is for these reasons that the amending act runs to such length.
The house will recall that I introduced it a week or ten days ago, and it has been allowed to stand during that period in order that hon. members might have an opportunity of examining its provisions, and also in order that we might receive criticism and suggestions from those outside the house who may be interested in its provisions. I am glad to say that we have received a number of very helpful and constructive suggestions from the Canadian Tax Foundation, and others; and when we are in committee I shall have some amendments to offer to the sections as they now stand which I think will further improve the act. I hope we may be able to proceed to consideration of the bill in committee at a reasonably early hour.


Mr. J. M. Macdonnell (Greenwood):: Mr. Speaker, I believe one can be thankful for certain forward steps indicated in this bill amending the Income Tax Act. I think there has been a definite attempt to deal with the question of surpluses. I welcome one thing in that connection, that instead of the old-fashioned remedy of pains and penalties, the new clauses turn to the much more helpful area of incentive. In other words, companies are given an incentive to come in and pay the taxes which are indicated. Without labouring the point at the moment I think it is permissible to ask-and it will be asked in committee-why this is limited only to private companies; but on that I shall say no more at the moment.	[DOT]
The other thing one welcomes-and perhaps we on this side may try to arrogate to ourselves a little credit for this-is that the provisions for assisting small companies, which last autumn we felt had been so much tied up by the then legislation, have been relaxed, and I hope in a constructive way.
Having said those things, of course, one must not forget to remind the house that we still have the heavy burden of double taxation. A beginning was made to lighten it; nevertheless it has been lightened very little. One thing of which we shall all be glad is that section 6 disappears-that is, the section
55946-165i

Income Tax Act
which enabled government officials to step in and tell companies what they were to do with their surplus.


Douglas Charles Abbott: Section 9, subsection 6.


James MacKerras Macdonnell: Section 9. The legislation before us encourages one to hope that the time may come when even section 126, I think it is, may be eliminated. Under this section a discretion is still reserved in the department to tell a man he must pay more taxes, even when he has complied with the law in every way and has paid his full taxes. We feel that this is a scandalous provision.
I was glad to hear the minister say that ministerial discretions were being eliminated. We shall all rejoice when that is done. After all, we do exist as a civilization probably mainly because of the rule of law. This section 126 seems to be a contravention of that basic principle in our lives.
I think, Mr. Speaker, the other points I might mention are details which could be dealt with in committee.


Donald Methuen Fleming: There are one or two things I should like to say before the bill goes to the committee. The Minister of Finance (Mr. Abbott) has referred to the fact that there was a complete revision of the act in 1948. The members who were in the house at that time will recall that only two days, or parts of two days, were spent in the banking and commerce committee in a detailed review of that long and important measure. I believe it will be a matter of general regret, Mr. Speaker, that it has been found necessary now to undertake two quite substantial revisions of that important legislation within the last two years. After all, the bill itself was a bill extending to eighty-eight pages. In Bill No. 176, at the second session of this parliament in 1949, we had a measure extending to forty-one pages. In Bill No. 177, now before the house, we have further amendments extending to twenty-nine pages.
While the house will always be glad of an opportunity to remedy weaknesses or injustices in the act, I think this experience does point to the fact that we must take greater care in this house in connection with our taxing legislation. If I may suggest it, when major measures of this kind come before the house, such as the one in 1948, more time should be spent on them in the proper committee.
There is a second regret that I am quite certain will be shared by all members of the house who have made any effort to read and digest the terms of this bill. The regret was expressed last November and December, sir, during the debate on Bill No. 176 of that
CMr. Macdonnell (Greenwood).]
session. It is that our taxing statutes, particularly the Income Tax Act, are constantly becoming couched in more and more abstruse language. If there is one feature of taxing legislation that is more objectionable than another, it is when its provisions defy clear understanding and relatively simple reading. I grant you that if we are to deal with situations in great detail in our taxing acts we are going to have long acts with very detailed provisions, but I submit that we should follow that good axiom that taxing legislation should be written in as clear, simple and understandable terms as possible. Departures from the observance of that axiom ought not to be tolerated by the house if they can possibly be prevented.
Attention was drawn last fall to the very complicated and involved terms of Bill No. 176. I am certain, sir, that those members of the house who have taken the trouble to read the bill before us, and have tried to understand its provisions, will share the regret that it has not been found possible by the draftsmen to couch the terms of the bill in simple, understandable language. It is an extremely abstruse and complicated bill.
In conclusion, sir-because I appreciate there will need to be some time spent in the committee on the detailed clauses of the bill-I mention my disappointment that there are not certain provisions to be found in the bill which some of us had hoped to see in it. In the first place, notwithstanding what the minister had to say on the subject in his budget speech, some of us still hoped that the minister would see fit to introduce some provisions which would dispel the fear that does exist on a substantial scale today that capital gains are in danger of taxation. In his budget speech the minister indicated that he did not think it was possible to go any further in defining income under the act, in order to make it quite clear it is not intended to tax capital gains. The language used in certain recent court decisions, it seems to me, makes it desirable, if not imperative, to clarify the legislation, and a provision of that kind ought to be introduced. I express my regret that such a clarifying provision is not to be found in this bill.
One further matter-and this is not new on my part, because I have raised the point in several previous sessions-I regret that the minister has not seen fit to introduce amendments to section 26 of the act. This section defines the "extraordinary medical expenses" which the taxpayer may deduct to the extent that those expenses exceed four per cent of his income. The minister has not seen fit to propose the elimination of two

obvious anomalies and discriminations. In the first place, while the section permits the inclusion within the definition of "extraordinary medical expenses" of aids to hearing or aids to cripples, no inclusion is offered of aids to sight. I submit, Mr. Speaker, there is no principle which at the one time justifies the inclusion within this definition of aids to hearing or aids to walking, and at the same time excludes aids to seeing. I urge that the expenditure on eyeglasses ought to be included within the definition of extraordinary medical expenses.
The other anomaly that continues to exist, and which this bill makes no effort to remove, has to do with expenditures by taxpayers on drugs. I am sure hon. members are well aware of the fact that the anomaly arises out of the difference in practice in relation to dispensing which is found in urban centres on the one hand, and rural areas on the other. In most cases it is the practice of the physician in the rural areas to dispense his own drugs and medicines. Consequently, the bill which the taxpayer receives from his physician includes the expenditure made on drugs and medicine, and those expenses are allowed by the Department of National Revenue as "extraordinary medical expenses." In the case of the urban dweller, he suffers what I feel is a discrimination. It is not the practice of physicians in urban areas to do their own dispensing. They simply issue a prescription which the patient or taxpayer takes to the dispensing druggist to be filled. The Department of National Revenue rejects expenditures made in that way for medicines and drugs.
Let us acknowledge, Mr. Speaker, that there are some administrative problems to be reckoned with in removing this anomaly and discrimination. I submit that these anomalies and discriminations should have been removed long ago, and I regret that no attempt is made in the present bill to remove them. I urge upon the Minister of Finance once more that between now and the next session of parliament he give further, and this time favourable, consideration to these matters.


[Stage Direction]
Motion agreed to, bill read the second time and the house went into committee thereon, Mr. Dion in the chair.
On section 1-"Death benefit."
James MacKerras Macdonnell: I want to ask a question with regard to clause 1, subsection 1, which adds, in the category of income, death benefit.


Douglas Charles Abbott: These death benefits have been treated as taxable; and as my hon. friend will
Income Tax Act
see, "death benefit" is defined in a later section of the bill. The amendment here is by way of a relieving measure, and in essence it is this- and I am summarizing it shortly: if the death benefit does not exceed three months' salary, then it will not be considered as taxable income. Otherwise, of course, the old rule will apply.


James MacKerras Macdonnell: What does the minister mean by saying "the old rule"?


Douglas Charles Abbott: Under the general rules with respect to income, these so-called death benefits, which were payments made by the employer to the widow or other survivor of the deceased, were income within the definition as contained in the act. This will constitute an exemption. In the section they will be specifically defined as income, and then the exemption will be granted under the other section.


[Stage Direction]
Section agreed to.
On section 2-Stock dividends and stock rights.
James MacKerras Macdonnell: I fully agree with what has been said by the hon. member for Eglinton about the complicated nature of these provisions. As a matter of fact, as somebody pointed out, you almost go at this like a crab, backwards. If you turn to page 22, you really find the operative section. Then if you come back to page 16, you are helped a little on your way, and finally you come back to some of the other operative sections, one of which is subsection 2. I suppose that the order is partly dictated by the order of the sections in the existing act.


Douglas Charles Abbott: It is dictated by that.


James MacKerras Macdonnell: It makes it difficult for one to follow until you get a key to the labyrinth. Would it not be convenient at this point for the minister to give us a statement as to the situation?


Douglas Charles Abbott: Yes.


James MacKerras Macdonnell: And as to
what are the things included and what are the things excluded.


Douglas Charles Abbott: I should be happy to do that. My hon. friend is quite right when he says that the order is dictated by the arrangement of the sections in the act. As he and others who have had legal training will appreciate, it is always more difficult to read an amending bill and explain it unless you have beside it the act which is being amended. In other words, you have to take the section which is being amended, look at the original section, and look at the amendment. Under section 71A we are making provision with respect

Income Tax Act
to what are commonly known as profit sharing plans, and we are in effect here confirming what has been the practice with respect to those plans. Under the so-called profit sharing plans, the employer has been entitled to deduct from his gross income the amount of profits which he contributes to the plan. The employee who is in receipt of a credit for those profits takes his proportion into his own personal income as well as any earnings from the fund. When he receives out at the end his share of the funds accumulated in the plan, then that is free of tax. The committee will appreciate the fact that that is exactly the reverse of the rule in a pension plan, where the pension payments are deductible by the employee and the pension when received out is taxed. These profit sharing plans operate on the exact reverse of the principle which is applied with respect to pensions. Under section 71A we give statutory form to that type of employee savings plan. This subsection 2 is a necessary and consequential amendment to section 6 as a result of section 71 A.


The Chairman:: Shall the clause carry?


James MacKerras Macdonnell: No, Mr. Chairman. I am afraid I have not made myself clear to the minister. Section 2 refers, among other things, to the payment of stock dividends, and so on. '


Douglas Charles Abbott: Oh, I am sorry, I thought we were talking about subsection 2 of section 1.


Joseph-Alfred Dion: Shall clause 2 carry?


Some hon. Members:: Carried.


Joseph-Alfred Dion: Clause 3.


Mr. Fraser:: No. We are on clause 2, Mr. Chairman, because the minister has said that it was the second part of clause 1 that he was talking about. Now we are on clause 2.


Douglas Charles Abbott: I do not know that I can explain the section in much better terms than those that are set out in the explanatory note, which says:
The effect of the amendment is to add the payment of stock dividends and the issuance of stock rights to the exclusions under the section. A new provision governing the taxation of stock dividends is contained in section 73.
My hon. friend and others who have studied the bill will see that we are making a completely new arrangement with respect to these so-called capital distributions. In part that rearrangement is necessary as a result of our new sections authorizing the capitalization of undistributed earnings upon payment of fifteen per cent tax in the case of a private company. Section 9(6), to which my hon. friend has referred, has been eliminated, and

the other provisions of section 9 have been put over into section 73, which contains in one section all the rules with respect to the capitalization of earnings and their distribution. If it would be helpful, we could perhaps consider section 73 at this stage.


James MacKerras Macdonnell: It is whatever the minister wishes.


Douglas Charles Abbott: It is the inevitable inconvenience that results from having to move from one section into another.


Gordon Knapman Fraser: I noticed in the New York
Tribune of yesterday a report that the United States government either have put in or are contemplating putting in a withholding tax on all stock dividends, owing to the fact that they have not been able to collect as we do here in Canada. They have been losing some money. I wondered how much that would affect the convention that you have with the United States on the withholding tax of fifteen per cent on Canadian investors.


Douglas Charles Abbott: My information is that the withholding tax is being considered in the United States, but it relates only to ordinary dividends payable to residents of the United States. It would have no effect on our reciprocal tax agreement.


[Stage Direction]
Section agreed to.
Section 3 agreed to.
On section 4-War savings certificates.
Mr. Adamson:: I should like to say a word on paragraph (j) of subsection 2 of section 4, and I certainly shall have something to say when we get to 73A. It seems to me a simplification of this language might be considered. Paragraph (j) reads:
... an amount received as a result of prospecting that section 73B provides is not to be included.
I suggest to the minister that that seems an extraordinarily complicated way of saying what the intent of 73BC1) is. It is complicated enough as it is.


Douglas Charles Abbott: It is a matter of opinion as to whether the language may or may not be improved. The draftsman put it in this form because section 10, to which this subsection is added, starts off:
There shall not be included in computing the income of a taxpayer for a taxation year-
And then follow paragraphs (a), (b), (c), (d), (e), (f) and so on, which apply to the amount received. There shall not be included the amount received as the result of prospecting that section 73B provides is not to be included. You may say there is a double negative there, but I think the form of the

governing sentence at the beginning of the section makes it necessary to put it in those terms.


[Stage Direction]
Section agreed to.
On section 5-Interest.
Donald Methuen Fleming: Will the minister make a statement clarifying the relationship between this clause and assumed legal obligations? I do not propose to reiterate what I said in the house on the resolution stage on May 4. The matter was discussed at some length and arose out of decisions in the McCool case and the Rhinehorne case with reference to interest on assumed legal obligations.
The budget resolution seemed to indicate quite clearly that it was the intention of the ensuing legislation to place assumed legal obligations on precisely the same footing as those created directly by the taxpayer in the course of earning his income. I am not sure, however, even after carefully reading and rereading section 5, particularly the language of line 33, whether this does in fact include assumed legal obligations. If my understanding of the purpose of the section is correct, that it was intended to eliminate the decisions in the McCool and Rhinehorne cases and to place assumed legal obligations on precisely the same footing as primary obligations on the part of the taxpayer, then it remains a question whether the committee is satisfied that this language does actually carry out that intent. If we are in agreement on the principle, then it becomes a matter of clarifying the terms of the legislation. Personally I do not think it is sufficiently clear.


Douglas Charles Abbott: Of course that is a matter of legal interpretation. As my hon. friend has indicated, and as he is aware, this amendment is intended to cure what seemed to us to be an injustice arising out of the decision in the McCool case, with which my hon. friend is familiar. It was felt that money which was borrowed directly for the purpose of a business, and on which interest being legally payable could be deducted as an expense, was really in no different position from interest on the balance of the price of a property acquired for carrying on the business, or interest on a mortgage existing on a property for the purpose of carrying on a business; and paragraph (c), subparagraph (ii), is intended to cover the case. The Department of Justice have assured me that it accomplishes that purpose. My own personal opinion would be that it does, that the language is sufficient to meet the point which my hon. friend has raised.


Donald Methuen Fleming: It will suffice to answer my fears if the minister will give assurance
Income Tax Act
that the Department of National Revenue, in applying this section, will interpret the expression "legal obligation" as including assumed legal obligations as well as those that are primarily created by the taxpayer himself.


Douglas Charles Abbott: Well, legal obligation refers to a legal obligation to pay interest. My hon. friend appreciates that. If the person who assumes the obligation assumes first an obligation to pay capital, and second an obligation to pay interest on it, I can assure him that the Department of National Revenue will interpret it in the way he suggests.


Mr. Ferrie:: I have one question. Suppose a farmer buys a quarter-section of land which is covered with bush. He goes to work on this quarter-section. He borrows the money to clear off the bush. Can he deduct, for income tax purposes under this amendment, the interest on that borrowed money?


Douglas Charles Abbott: It is an interesting point that my hon. friend has made. As I have said before, I am always reluctant to give a legal opinion as to a specific case, but it seems to me to be the type of case that would qualify. My hon. friend has cited the case of a farmer who makes an investment in his farm and may have to borrow money either to clear it or to buy it. Under these circumstances he is entitled to deduct his expenses. It would seem to me, on the facts that the hon. member for Mackenzie has put, that he would be entitled to deduct the interest on the money he borrowed. I am not charging for that opinion, so do not hold me to it.


Mr. Smith (Calgary West):: Let us take farmers who are clearing land west of the Calgary and Edmonton line in Alberta. In that area we have a lot of good land which is covered with bush. In order to work that farm a man gets the money somehow to clear the bush land so that it may be made productive. By "bush" I do not mean great trees, lumber containing trees, as they have them in British Columbia. At the present time he cannot charge off as an expense in his operation the money he has spent in clearing that land.


Douglas Charles Abbott: That is a capital expense.


Arthur Leroy Smith: That is regarded as a capital expense. I do not think that that is justified either. As a matter of fact, I do not know on what basis it is regarded as an expense, because in a practical way, as the hon. member well knows, there are large portions of the country which will prove productive if cleared. When I speak of bush I mean this scrub stuff that we have all over the place, and which is of no value. It gets

Income Tax Act
in your way; you have to burn it, and possibly that is the only thing you can do with it. I have never understood why that man is not permitted to charge something as an expense in clearing that farm so that it shall be valuable as a productive unit in agriculture. I do know that the present ruling is that he cannot charge one cent of that against his operations. That is something which deserves more consideration at the hands of those in authority. I put it down definitely so that if anybody wants to inquire I am referring at the moment to the district lying west of Cremona in my own constituency. I know that there we have that exact situation. I also know that at no place in the whole of the west, once it is cleared, is there a better place for growing coarse grains than on the very type of land that I am speaking about. I am not joking when I say that I know of lands which are growing a hundred bushels of oats to the acre. Surely it is that kind of production we want, because that happens to be a fairly wet area. I do think some consideration might be given to an alleviation of the situation of the man who has put in all his capital, and who gets no return for a couple of years in any event. Surely that should be considered.


Mr. Wright:: I agree with the minister that in some cases the procedure of investing additional capital in clearing land was abused in the early days. I remember that in 1941 or 1942 it was allowed as a deduction, and there were a number of people in western Canada who, while not farmers, went out and invested a considerable amount of money in clearing lands, and then used it as a deduction.
As a result of that the department changed the regulation to provide that no deduction could be made for the clearing of land. Yet we know that in large areas of the west, including those referred to by the hon. member for Calgary West and the hon. member for Mackenzie, as well as in my own constituency, many young chaps have started out on their own on half-section farms. The money they have to reinvest each year to clear land should be deducted, so far as their income tax is concerned. I suggest some regulation should be made under which the half-section farmer at least will have this deduction. Perhaps it would be necessary to provide that those on larger farms, or those operating larger units, would not be permitted to make the deduction. As a matter of fact the large operator today with equipment of his own is allowed, I believe, $300 worth of clearing-often it is more than that-as a deduction. The small operator has not equipment of his own, but must go out

and hire it. Every cent he pays is from his capital, and he is not allowed a deduction on it.


Douglas Charles Abbott: The question whether money expended for the improvement of land should be a capital item or an operating cost item does not arise under this section. The hon. member for Mackenzie asked whether the interest on money borrowed for purposes of clearing land would be deductible. I said I thought it would be, because it would be a capital expenditure. The farmer would have borrowed it, and, as in respect of any other interest on capital investment, by way of mortgage or anything else, he would be entitled to deduct the interest. But the actual cost of improving the land has always been considered as a capital investment and not as a current operating expense.


Gladstone Mansfield Ferrie: One man has gone so far as to cut down the bush, break up the land and put it into condition so that he could get a crop off it. He did get a good crop, but in getting it he was not able to make a payment on his loan because he had to pay interest to the bank, and then pay income tax. The municipality had to wait another year because he had to pay income tax. In my view that is most unfair, because income tax is bound to be paid in respect of the wheat or grain taken off that land. Therefore why should he not be allowed, as a deduction from income tax, the expense of clearing the land?


Mr. Knowles:: This is the section in the bill which amends that section of the act which has reference to pension plans of one kind or another. Part of the amending section refers to that general question.
A few moments ago the minister made a general statement as to the rule now in effect, namely, that contributions to an approved pension plan are allowed as income tax deductions, but that payments to pensioners out of such plans are taxable.


Douglas Charles Abbott: I do not wish to interrupt the hon. member, but I must point out that the section under consideration has nothing to do with pensions. It is true that it does relate to the general section which states that certain items will be deductible from gross income. But I doubt whether it would be in order to engage in a full-fledged discussion of pension plans under this section. There may be some sections later in the bill under which that could be done. My reference to the matter was simply by way of illustration in contrasting the profit-sharing plan with the pension plan.


Stanley Howard Knowles: I have no intention of discussing pension plans as such, or old age

pensions in general, although I do not blame the minister for thinking that I might have so intended.


Douglas Charles Abbott: I was somewhat apprehensive.


Stanley Howard Knowles: That was not my intention. However, I draw his attention to the fact that section 5 (3), which we are now discussing, does refer to employees' contributions to pension funds.


Douglas Charles Abbott: That is right.


Stanley Howard Knowles: What happens where payments out of a pension fund are being received by persons who, when they made their payments into the fund, were not allowed a deduction for those payments for income tax purposes?


Douglas Charles Abbott: I am informed that payments out in that case are apportioned.


Stanley Howard Knowles: Is it correct to say that by "apportioned" the minister means that the portion contributed prior to a certain date is allowed?


Douglas Charles Abbott: It is tax exempt, yes, so I am informed. I must confess I am not personally familiar with all the - details of the administration of it, but I am told it is apportioned.


Stanley Howard Knowles: It is precisely that kind of case which I feel I must draw to the attention of the minister as a grievance, because it seems to me the act calls for the practice he has just indicated. I believe he is right in that. However, in the case I have in mind it is not being-


Douglas Charles Abbott: If the hon. member would look at section 26, with which we have not yet dealt, he will see that there is a specific provision for that apportionment.


Stanley Howard Knowles: Then I shall wait until we reach that section to discuss this phase of the matter.


Douglas Charles Abbott: The section we are now considering covers the period 1946 or a subsequent taxation year, while section 26, to which I have just referred, covers the period from 1944 to December 31, 1945. Perhaps we could have a full discussion on section 26.


Stanley Howard Knowles: That would meet with my convenience in relation to the discussion of the cases of persons receiving pensions out of a pension fund. However, I wish now to discuss another aspect of the matter, namely that relating to payments into a pension fund, which does come under this section.
The section we are amending states that the portion of trade union dues paid into a pension fund is allowed as an income tax deduction. I am not going to launch into an argument
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about trade union dues generally, because the minister knows my thoughts on that matter. But may I point to certain facts, which I believe I can do most effectively by giving the details of a specific case.
The international typographical union has a pension plan. Under the laws of the union every active member thereof must pay dues that include a portion for pension purposes. Under the terms of this section of the act the income tax authorities have allowed that portion of the dues paid by members of the international typographical union which goes into the pension fund to be deducted for income tax purposes. I can speak from experience. I belong to this union and I get that small deduction at the end of the year.
It so happens that local No. 91, the Toronto local of the international typographical union, which has some 1,400 members in the greater Toronto area, has passed a local law which says that every member of the Toronto local must pay an additional one per cent in addition to the amount levied by head office. The plan has been approved by head office. So far as a member of the Toronto local is concerned, it is just as compulsory that he pay the extra one per cent as it is compulsory upon me as a member of the Winnipeg local to pay the basic pension assessment of two-and one-half per cent.


Mr. Sinclair:: As savings or as pension?


Stanley Howard Knowles: As pension. If I die before I reach pensionable age it is gone. If I reach pensionable age it will come to me, unless I am still a member of this house.


Douglas Charles Abbott: Are there any unemployment benefits attached to the plan?


Stanley Howard Knowles: No. The only other benefit attached to it is a mortuary benefit. If a person dies before he reaches pensionable age there is a mortuary benefit. The point I wish to make is that the extra one per cent I referred to is not voluntary. It is just as compulsory for a member of the Toronto local to pay the extra one per cent as it is for members of other branches of the union to pay the basic amount. Officials of the union have been in touch with the department in Ottawa to try to get them to agree to allow that extra amount. I have seen the correspondence, and I must say that I do not think the point has been recognized by the officials here. There has been some suggestion by officials here that one has to think of these plans in terms of amounts being deducted by the employer and paid into the fund. The act does not say that, and certainly it does not apply in the case of the basic amount we pay into our union pension fund.

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That amount is not deducted by the employer. I pay it to the union and the union pays it into the pension fund. The same thing is done with regard to the extra one per cent at Toronto. In turn if a member of the Toronto union reaches pensionable age he will get an extra $5 a week in addition to the basic pension paid by the union which is now $16 a week. The extra $5 will be taxable income if the recipient is in a high enough bracket, but the one per cent that he is called upon to pay, in the same way that members of the other branches across Canada pay the basic amount, has not yet been allowed as an income tax deduction. It seems to me that the wording of the act is clear. I cannot see that there is any necessity for departmental approval of this; it should be automatic. I hope, despite the fact that the correspondence that has taken place thus far has not produced a favourable result, that such' will now be the case. I am sure the minister will agree with me on that, if I have stated the case correctly, and I am satisfied that I have. I have the correspondence, the laws of the international typographical union and the laws concerning the Toronto local plan before me. If there is any. doubt as to the wording of the act I suggest it should be changed to cover such a case. In the meantime I would be glad to have the minister's comment on it.


Douglas Charles Abbott: I have listened with a great deal of interest to the hon. member. I am not familiar with the particular plan to which he refers. From what he said I understand he has had some discussion about it with the Department of National Revenue. I do not think I can say more now than that I will follow it up myself and see what the situation is. I will ascertain from the Department of National Revenue what their views are and then I will see what mine are.


[Stage Direction]
Section agreed to.
On section 6-Fiscal period for individual member of partnership wound up.
Douglas Charles Abbott: I have an amendment to section 6, subsection 2. Subsection 2 reads:
This section is applicable to the 1950 and subsequent taxation years.
I would ask my colleague, the Minister of National Health and Welfare, to move:
That subclause 2 of clause 6 be amended by substituting 1949 for 1950 in line 35.
As the committee will appreciate, this is a relieving section.


Mr. Martin:: I so move.


[Stage Direction]
Amendment agreed to.
Section as amended agreed to.

On section 7-Lease-option, hire-purchase, etc.
Mr. Fulton:: As I understand it, section 7 has the effect that in these lease-option agreements, or in fact agreements for sale, where the purchase price is to be paid over a period of years by instalments, the amounts of the annual payments will no longer be deductible as rent or an expense but will be included as a part of the purchase price and not deductible from income. I notice that no exception is made in the section, or so far as I can see any discretion given to the taxing authorities, to take account of what is almost a universal feature of such instalment payments, namely, that there is provision for interest on -the unpaid balance of the purchase price. In other words, if you sell under an agreement for sale at $5,000 to be paid at the rate of $1,000 a year, almost invariably there is a provision that interest at the rate of five per cent, let us say, will be payable on the unpaid balance together with the instalments of purchase price. I cannot see that anywhere in the section there is provision for that interest charge to be deducted from income. It is a genuine expense. It is not a part of the purchase price. It is merely interest on the unpaid balance, and I feel provision should be made for its deduction.


Douglas Charles Abbott: Perhaps I might say a word
in explanation of the amendment. Last year section 18, as contained in the act, applied to movable property. The essence of it was that if you agreed to rent machinery or equipment at $5,000 a year, and it was provided that at the end of five years-I am using that figure as an example-if you had paid the rent of $5,000 a year regularly the machinery would belong to you on payment of a further $100, that was looked upon as a capital expenditure. For purposes of depreciation the total rental payments would be aggregated together with the final payment on the option to purchase, and depreciation taken on that figure.
That only extended to movable property. As probably members of the committee are aware, it was found that this type of contract was being extended to real estate. In a good many cases, for instance, an insurance company will take over chain store properties at a figure. They will be leased by the store operator for so much a year, and the contract will provide that at the expiration of a certain period, upon payment of perhaps a fairly nominal sum, the so-called lessee will own the property. If that so-called lease extended over a reasonable period of time there would be no discrimination but if, as is sometimes the case, it was for a very short period, let us say for five years, and the depreciation which could be taken on -that type of property would

normally take twenty-five years to write down, then obviously the effect of such an arrangement would be to enable the so-called lessee to obtain accelerated depreciation at a rate which would not be available to the ordinary owner of a property.
It was felt that should be prevented. Mind you, I think I should say at once these arrangements are not entered into for the purpose of obtaining accelerated depreciation. They are entered into in order to enable the so-called lessee to improve his working capital position and not have too much money tied up in real estate. That is the purpose of the section. The general interest rule of course would apply with respect to moneys borrowed for legitimate purposes in connection with the business. That might cover the point raised by the hon. member for Kamloops.


Edmund Davie Fulton: Take a conditional sale agreement. Would it cover an ordinary conditional sale agreement of movable or immovable property? Would that come under the provisions of this amending section?


Douglas Charles Abbott: I am told that a conditional sale agreement would come under this section, and that the aggregate of the so-called rental and interest would be taken for the purpose of arriving at the capital cost against which depreciation could be taken as an expense.


Edmund Davie Fulton: I can see that, but what about the effect of the amendment?


Douglas Charles Abbott: The only effect of the amendment is to extend the operation of the clause to real property, that is, immovable property. Previously it only related to movables. Now it extends to immovable property, except that used by farmers.


Edmund Davie Fulton: Subsection 2 of the proposed
section 18 provides:
Where a person is deemed under subsection (1) to have acquired property under a contract or arrangement and the contract or arrangement is subsequently rescinded or determined, he shall, for the purpose of section 20, be deemed to have disposed of the property for the price fixed by the contract or arrangement minus the aggregate of all amounts paid by him under the contract or arrangement on account of the rent or other consideration.
From reading the section I take it he would then be penalized by having to pay tax on the amount of the payment already made?


Douglas Charles Abbott: No, I am told that is not the case. He has been taking depreciation on the total sum, and this is to provide for the recapture principle in this type of contract.


Edmund Davie Fulton: It does not have the effect of penalizing him on the payment made, then?
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Douglas Charles Abbott: I am told not. I am told he is deemed to have sold it at the unpaid price, so that would wipe that out.


Edmund Davie Fulton: Then there is one small point further. The next subsection is numbered 2. Should that not be 3? You appear to have two subsections 2.


Douglas Charles Abbott: This is section 18, subsections 1 and 2; then there is subsection 2 of clause 7 of this bill.


Donald Methuen Fleming: In connection with the new section 18 (1), as the minister has pointed out the old section applied only to personal property. Now the scope of the section is enlarged to apply to all property except immovable property used in carrying on the business of farming. Would the minister enlarge upon his answer to the hon. member for Kamloops and indicate why the exception is made in that case? Does it arise out of the difference in the basis of depreciation with respect to farming?


Douglas Charles Abbott: That is right.


Donald Methuen Fleming: Does the minister anticipate any difficulty in the interpretation of the expression "property used in carrying on the business of farming"?


Douglas Charles Abbott: Well, there may be some difficulty in the interpretation, but my hon. friend is right when he says the different treatment here is a result of the exclusion of those engaged in farming from the operation of the diminishing balance principle of depreciation.


[Stage Direction]
Section agreed to.
On section 8-Excess of proceeds over undepreciated capital cost.
Douglas Charles Abbott: I have an amendment to this section, which I will ask my colleague the Minister of Agriculture to move.


Mr. Gardiner:: I move:
That clause 8 be amended by renumbering subclauses (2) and (3) thereof as subclauses (3) and (4) and inserting the following as subclause (2) :
(2) Paragraph (e) of subsection three of the said section twenty is amended by deleting the word "and" at the end of subparagraph (i) thereof, by inserting the word "and" at the end of subparagraph (ii) thereof and by adding the following subparagraph thereto:
"(iii) each amount by which the undepreciated capital cost to the taxpayer of depreciable property of that class as of the end of a previous year was reduced by virtue of subsection (1A)."


Douglas Charles Abbott: This is a point which was overlooked in the new provisions.


Arthur Leroy Smith: I am quite content with it as long as you understand it, because I do not.

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Douglas Charles Abbott: I am giving no explicit assurance as to that.


[Stage Direction]
Amendment agreed to.
Arthur Leroy Smith: I wanted to speak about this broad matter of the change we have made in our depreciation allowance. It will be remembered that when the minister spoke about it a year ago he was not too clear on just how it operated, but he did make the statement that it was a good thing for business. While far from being an expert, I have made some endeavour to understand this; and the opinions I have had from here and there are in pretty general agreement that this is a retrograde step in connection with depreciation. I realize that I should not say a thing like that without having some authority to support me, so I intend to read some short extracts from an article that appears in the February, 1950, issue of The Canadian Chartered Accountant. The heading is, "A long step backward. Diminishing balance depreciation." The writer is Kenneth F. Byrd, B.Sc. in economics, A.C.A., professor of accountancy at McGill university. He is a man who has had to look at these matters in various countries. On page 65 we find that he was born at Durban, South Africa, and his degrees and experience are given. He was dean of the faculty of commerce and administration at Natal university college, and was appointed professor of accountancy at McGill in 1947. He is a member of the Natal society of accountants and of the institute of chartered accountants in England and Wales. In this article this man, who obviously holds a very responsible position, does not pull any punches in what he has to say about what he calls this retrograde step we have taken. The article begins:
For many decades North America has been recognized as the home of the straight-line method of depreciation, and Britain, just as definitely, has been regarded as favouring the reducing instalment or diminishing balance method. Here, as in so many other fields of accounting practice, the division between the two countries has been clearly marked. It does not seem, however, to have been equally clearly noted that, five years ago, Britain came to the conclusion-
I am anxious that the minister should listen to this part.
-that her long clinging to the diminishing balance method was ill-advised and definitely harmful to the interests of good accounting.
He goes on as follows:
The Institute of Chartered Accountants in England and Wales published on January 12, 1945, the ninth of its "Recommendations on Accounting Principles," dealing with the subject of depreciation. The recommendations included the statement that

the straight-line method "is used almost universally in the United States of America and Canada and to a large extent in this country. Though other methods may be appropriate in the case of some classes of assets the balance of informed opinion now favours the straight-line method as being the most suitable for general application." As regards the reducing balance method, "also largely used in this country," it warns that the percentage applied needs to be from two to three times that applied under the straight-line method. This is a fact not generally realized, the consequence being that rates of depreciation fixed on this basis may tend to be inadequate.
Then the author mentions our lapse, as he calls it. He says:
At last, therefore, it might be said that Britain and North America were of the same mind in regard to an important accounting method. Britain had come over to America's point of view. How definitely this was so may be seen in the following extract from a brilliant editorial on the subject, which appeared that time in The Accountant.
I need read only a short part of that editorial.
The outstanding point that will at once catch the attention of every reader is that the time-honoured reducing balance system is now so thoroughly deposed from its former popularity that it is not admitted even to be a second-rate alternative.
The rest of the quotation from The Accountant is interesting, but I go on to-quote the author again:
Scarcely, however, has this happy unanimity become a fact, outstanding among the other accounting principles and practices about which the two countries still disagree, when Canada decides that, for income tax purposes, the diminishing balance method is not such a bad idea after all. Her Minister of Finance, seeking ways of taking into account for income tax calculation the losses through obsolescence-
I do not have to read any further, but I go on to another portion of the article:
If, for income tax purposes, adoption of the diminishing balance method is the only means by which the income tax authorities can be induced to make any allowance for losses due to obsolescence, then, for these purposes only, the old, outdated method must be accepted. But surely this is not necessary. Normal obsolescence can be provided for by allowing a sufficiently generous annual depreciation rate on the straight-line basis, and it should be possible to allow for any abnormal loss at the time the asset is discarded.
The author then shows that South Africa did it by methods of that kind. Then, he comes back to the British experience. I am jumping a good deal of this, Mr. Chairman, but he says this:
Now, why, oh, why does one country not show more awareness of what has been learned by long and bitter experience in another? It is a very clearly established fact that Britain has proved, by decades of use, that the diminishing balance method is wholly unsatisfactory.
Yet, Mr. Chairman, that is the method which we, in the face of the experience in

other countries, are adopting in our country. I should like to read just two short extracts from the last of the article:
The serious thing about the proposed change for Canada is that it is a permanent shift from "straight-line" to "diminishing balance" depreciation.
The author goes on to call it a wolf in sheep's clothing, but I shall not bother about that. He concludes with this sentence:
The immediate danger is that Canada may, in an ill-advised moment, lose the benefits which she has thus far gained from her long adherence to straightline depreciation. Let her give heed to the experience of those who have learned that the "lazy accountant's friend"-
That is the name given to this method.
-that the "lazy accountant's friend" is a wolf in sheep's clothing.
As I indicated at the beginning, I have not sufficient knowledge of this matter to discuss it intelligently, but I have brought as a witness a man who I think is outstanding, and who completely condemns the retrograde step we took last year. I have one other question to ask, and then I am going to sit down. I have not yet heard, it may be through my inattention, any reason why farmers and fishermen should have been granted the option of using the straight-line method or the diminishing balance method. I think it was covered by the Minister of National Revenue the last time the subject was discussed in the house, but speaking from memory, I have not heard why, in this instance, farmers and fishermen should be treated any differently from the man who has a little machine shop in the same town, where the farmer comes to get his work done.
Then I believe the farmer or fisherman had to make his choice within a given time. I suppose that time has now expired or is near expiration. I should like to hear from the minister, first as to what he thinks about this step we have taken, the retrograde step as I call it, or the long step backwards as this author calls it. I should like to hear about that, and then I should like to hear him answer this question. If it was a fair thing for the fishermen and the farmers, why was it not a fair thing to the small businessman?


Douglas Charles Abbott: I read the article by Professor Byrd in the magazine to which my hon. friend referred. He is a professor of accountancy at my own university, and consequently, if for no other reason, a highly competent member of the staff. I am sure it represents his considered and genuine opinion as to the diminishing balance method of depreciation as against the straight-line method, but I am sure that Professor Byrd would be the first to recognize that there
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can be other opinions on this point. We would not assert for a moment that his opinion was necessarily conclusive. I can tell my hon. friend that there are a great many other persons, in whose judgment and technical capacity I have equal confidence, who have expressed exactly the opposite opinion to me. I may say that includes the chartered accountants association. As I say, it is a matter of opinion, and I am not going to attempt to impose my own opinion on the committee. I came to the conclusion that the provision set out last year was the preferable method in Canada, and the house adopted it. It is now law.
As to the reason why farmers and fishermen were exempted from the operation of the new principle, if the hon. member was in the house he will recall that almost all the farmer members rose and said that this was a terrible thing for the farmers; that they did not keep their books in such a way, or most of them did not keep their books in such a way, that they could readily calculate from year to year on this diminishing balance principle. Being a good-natured sort of a fellow, I did not want to impose on them something which seemed to be objectionable, so I excluded them from the operation of the act. I did make a statement at the time that I thought after they had studied it some of them might feel the diminishing balance principle might be advantageous. I just expressed that opinion. This year some of them seem to have changed their mind. Evidently some of them think that I was right because I have had representations since to the effect that they ought to be allowed to use this new method. So again, being good natured and always willing to listen to suggestions of this kind, I have put in a provision for that. The committee will see there is a provision in here which makes it optional. Once having exercised the option, of course you must stay with it. You cannot switch back and forth from one kind of depreciation to the other; but the option is there. Any small farmer who may find it difficult to keep records in such a way that he can operate on this principle, which apparently requires the keeping of slightly more detailed records, can continue on the straight-line basis. That was the reason for making the exception for farmers and fishermen.


Arthur Leroy Smith: May I follow up with some supplementary questions? I want to find out how far the minister will go with me. Do you agree with the professor that it has been in vogue in England for a

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great many years and has now been discarded, and that it is not used in the United States? In fact, Canada is now the only place using it that I know of. Would that be right?


Douglas Charles Abbott: I am told that that is not correct. They may have partially discontinued it in England. I cannot speak for certain as to that. That however does not prove anything.


Arthur Leroy Smith: If the professor says that-this man who guides your children and your children's children in your universities, and having the reputation you gave him -we, would not suspect him of telling us an absolute untruth.


Douglas Charles Abbott: No. But of course he might be mistaken.


Arthur Leroy Smith: The minister says he may toe mistaken. He quotes the accountant in England in the article which he quoted from, where they say identically the same thing that he says. We may be bright enough to rake over some old bones and find some phosphorus or sulphur in them, if we work hard enough. But after all, is it not a fact-whether we are right or wrong; leave that out of the consideration-that we have launched out all by ourselves on something which other -countries have discarded?


Douglas Charles Abbott: That is not correct. Other countries have not discarded it, I am informed.


Arthur Leroy Smith: What other countries have not discarded it? South Africa has, Britain has, -and the United States has. Who are they?


Douglas Charles Abbott: I shall make inquiries and be glad to give my hon. friend a reply at an early date.


Arthur Leroy Smith: I shall be delighted to have it. I am sure the information will do me the world of good. But the thing will go on as it is now.


Edmund Davie Fulton: I am interested in this matter also. One of the strongest arguments, it seems to me, in favour of abandoning this reducing -balance method of depreciation is the extreme complication of it and the unintelligible legislation which it becomes necessary to place on the statute books in order to apply it. I am going to ask the indulgence of the committee to allow me to read paragraph (a) of subsection 1A of this section, so that it will be on Hansard and so that the people in the country will have an opportunity to see if they can understand this or not. It reads as follows:
[Mr. Smith (Calvary West) 1


Douglas Charles Abbott: Had you not better read the whole context? It is very hard to understand anything taken apart from its context, you know.


Edmund Davie Fulton: All right. I will read subsection 1A.


Douglas Charles Abbott: Good.


Edmund Davie Fulton: It reads as follows:
(1A) Where one or more amounts are by subsection (1) required to be included in computing a taxpayer's income for a taxation year in respect of the disposition of depreciable property of a prescribed class and the taxpayer has, during the year but following the dispositions, acquired further depreciable property of that class, notwithstanding subsection (1) and paragraph (e) of subsection (3), the following rules are applicable:
(a) if the aggregate of the amounts that would, according to the terms of subsection (1), be included thereunder in computing his income is equal to or exceeds the amount that would, according to the terms of paragraph (e) of subsection (3), be the undepreciated capital cost to him of depreciable property of that class at the end of the year before any deduction is made under paragraph (a) of subsection (1) of section 11 for that year,
(i)	the amount to be included in computing his income for the year under subsection (1) in respect of dispositions of depreciable property of that class is that aggregate minus the amount that would be that undepreciated capital cost, and
(ii)	the undepreciated capital cost to him of depreciable property of that class at the end of the year is nothing;


An hon. Member:: It does not mean anything.


Edmund Davie Fulton: My hon. friends to the right and left are remarking that it adds up to nothing, as far as their understanding is concerned. There is more, but I shall not read it all. It is all equally incomprehensible.


James Sinclair: Except to clever lawyers.


Edmund Davie Fulton: I would not care to make any distinction as to that. I recall, however, that last year the Minister of Finance, whom we all regard as a clever lawyer, was quite candid in confessing that he was not able to explain it and he would not venture to undertake an explanation.


Douglas Charles Abbott: Oh, no. Wait a minute. I have been waiting for a long time to say something about that one. I never said that I could not explain the section in the act. What I did say was that I was not an accountant and that no one should expect me to explain the technical operation of any method of depreciation; although I think perhaps I could do it if I had to.


Edmund Davie Fulton: I think the minister will agree that he went very far. As I recall it, he said that he felt it was not clear or that he was unable to make it clear-


James Sinclair: To laymen.


Douglas Charles Abbott: Yes, to laymen.


Edmund Davie Fulton: That he was unable to make it plain.


Douglas Charles Abbott: To laymen.


Edmund Davie Fulton: It is not very clear to many people. As I say, I am not going to try to draw any distinction between who may be clever and who may not be. I will leave that to the parliamentary assistant. But there are many accountants throughout the country, as well as lawyers, who have suggested that this is not only a difficult section or provision to interpret but in fact, as the hon. member for Calgary West has pointed out, is a retrograde step.
Referring again to this magazine The Canadian Chartered Accountant, it is true that the minister pointed out that Professor Byrd's opinion expressed in that article in the February issue is his opinion; but in the same issue there is a letter from the committee on accounting and auditing research of the Dominion Association of Chartered Accountants, which does surely refer to the official opinion of the chartered accountants' organization in Canada.


Douglas Charles Abbott: They come to see me. The association send their delegates each year, and I know that my hon. friend will accept my assurance that they not only tell me they have no objection to these measures but they have approved them.


Stanley Howard Knowles: Do they understand them?


Douglas Charles Abbott: I think they understand them very well indeed, if I may say so.


Edmund Davie Fulton: They certainly have objection to the regulations.


Douglas Charles Abbott: They are paid to understand them.


Edmund Davie Fulton: I enjoy these interchanges but perhaps I might be allowed to continue what I have to say. They certainly have objection to the regulations which have so far been worked out or applied in the enforcement of this system, because this is a copy of a letter dated Toronto, February 9, 1950, addressed to the Minister of Finance objecting to certain of the regulations applying this diminishing balance principle. What I want to do particularly is to reinforce what the hon. member for Calgary West has said to the effect that this diminishing balance system of depreciation has been abandoned in the United Kingdom. In that connection I would rely on the authority of an article in an earlier copy of The Canadian Chartered Accountant, the October issue, which the library of the Department of Finance has just been kind enough to lend me.
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James Sinclair: Good.


Edmund Davie Fulton: This is an article by Mr. B. H. Binder, immediate past president of the Institute of Chartered Accountants in England and Wales. At pages 150 and 151 of this magazine Mr. Binder points out that with respect to buildings or structures, with respect to machinery and plant, and with respect to farm buildings, the British government under their latest finance and income tax act have abandoned the diminishing balance principle and have gone on the straight-line depreciation principle.
Here is what it says at page 150 with regard to machinery and plant category:
As regards the annual allowances, rates of wear and tear on a percentage basis have been agreed with the inland revenue in respect of most classes of machinery or plant.
To show the method of computing he says at page 151:
The usual method of computing annual wear and tear is what is termed the reducing balance method. In other words in ascertaining the wear and tear for any year the agreed percentage is calculated on original cost progressively reduced by . each allowance. In some cases, particularly ships and commercial aircraft, the straight-line method is adopted, that is the annual allowance is calculated at a percentage of the original cost. This latter method can now, by arrangement with the inland revenue, in accordance with the terms of the Finance Act 1949, be extended to any machinery or plant, but the percentages are subject to negotiation.
So that in the United Kingdom all machinery and plant can now be placed on the straight-line depreciation basis, although formerly the diminishing balance applied to all that type of equipment. With respect to new farm buildings we find the following: '
Where the owner or tenant of any agricultural or forestry land incurs capital expenditure after the 6th April, 1944, on the construction of farm houses, farm or forestry buildings, cottages, fences or other works for the purposes of husbandry or forestry, an annual allowance is granted at one-tenth of the expenditure, thus writing off the expenditure in ten years.
In other words, straight-line depreciation. Then, as I pointed out in connection with ordinary industrial buildings or structures, the same principle now applies in the United Kingdom. In other words, the diminishing balance principle has been replaced by the straight-line depreciation.


James Sinclair: Has the hon. member studied Mr. Gavsie's article in the same issue?


Edmund Davie Fulton: I have read it.


James Sinclair: That gives the Canadian position pretty clearly.


Edmund Davie Fulton: The Canadian position, I think we agree, is that the diminishing balance system is now applied.

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Donald Methuen Fleming: The government's.


Edmund Davie Fulton: Yes, the government's position, for reasons which are given. Mr. Gavsie, who is an official of the Department of National .Revenue-


Douglas Charles Abbott: A very able official.


Edmund Davie Fulton: If my hon. friends on both sides of the house would permit me they would find that I was prepared to pay him a compliment, but they rush in ahead of me. He is, as I was going to say, an extremely able and competent official. I say that although he is sitting in front of the minister at the present time. But Mr. Gavsie would hardly be expected to give a view different from that view which is being implemented in the legislation brought down by his minister.


Donald Methuen Fleming: He probably wrote the
section.


Edmund Davie Fulton: The only thing we would expect Mr. Gavsie to do would be to explain in precise terms, which he has done, the reasons why they worked out this system and why they are applying it in Canada. As I understand it, that is all he is doing. You would not expect him to do anything else.
The point, Mr. Chairman, is this. The United Kingdom has abandoned this method. Accountants of repute have stated it to be an outmoded method, and it is a retrograde step. The association of chartered accountants of Canada have written to the minister protesting the regulations under which this new method is being applied, and some of the practical applications of this reducing-balance method that need to be modified.
I have an illustration given here, and having dealt with the general situation I should like to ask the minister whether he can explain to me how such an example can fail to result in hardship to the taxpayer. Take the case of a taxpayer who purchases a building for use as a place of business in 1949 for $2,500 and sells it in 1959 for $10,000, which, with the current upward movement of prices of buildings and sites, generally, is not an out of the way proposition. From 1949 to 1959 he will have claimed and been allowed depreciation on a presently unknown rate for ten years-this was written before the regulations were published. The rate is now known -totalling say, $1,500. What is that $1,500, excess depreciation? It is submitted that it is not excess depreciation, but a legitimate charge to profit and loss; but the $7,500 which he sells the building for over and above its original cost is in fact a measure of the increased purchasing power of the taxpayer's original $2,500 and the additional value that he has effected by increasing the location value
IMr. Fulton.]
of the building as a site for that particular type of business. But, Mr. Chairman, under the recovery provisions of this diminishing balances principle the taxpayer will be taxed not only on the recaptured depreciation of $1,500 which has been allowed, but on the capital gain of $7,500.


Douglas Charles Abbott: No.


Edmund Davie Fulton: The minister shakes his head. The shake of his head will not appear on Hansard.


Douglas Charles Abbott: I will answer my hon. friend in a moment. He is completely wrong. The only amount that can be recaptured under the conditions he has given would be the capital cost allowance he has taken of $1,500; and in virtue of the amendment we have to this act that would be spread over five years.


Edmund Davie Fulton: When the minister was questioned on this matter last year, he answered, as I recall, that the capital appreciation would be taxed under this new system.


Douglas Charles Abbott: No, Mr. Chairman. I am positive I never made any such statement. I could not.


Edmund Davie Fulton: Then I take it that the increase of $7,500 over the capital cost will be tax free?


Douglas Charles Abbott: May I answer my hon. friend on that point now? The hypothetical case which he has made is this. A man buys a property for $2,500 at a given time. He sells it x years later for $10,000. In the meantime he has written off as a capital cost $1,500. Now, in fact he has not lost the $1,500; he has got that $1,500 and he has got a capital profit on top; but he will be obliged to bring back into income the $1,500 that he has written off for capital cost, but which in fact he has not lost; and under an amendment which I am introducing to this act he would spread that $1,500 over five years, if he were an individual.


Edmund Davie Fulton: I can see that I was wrong about the $7,500 aspect of it. I can see that clearly now. With regard to the $1,500, is it to be taken that this taxpayer has suffered no possible depreciation?


Douglas Charles Abbott: It has suffered no capital depreciation, because the only justification enabling a taxpayer to take depreciation from current income is on the assumption that in fact the value of his property has gone down; but if on the contrary it has gone up, he is not entitled to depreciation. The building would unquestionably be ten years older, and the bricks may have a slightly more mellow colour, but if he is able to sell it for $10,000 it is quite clear

that he has not taken any capital loss, and the depreciation which a man charges to income for depreciable assets is in fact a capital charge, and it is intended to reimburse him for his capital outlay. If in fact he has not lost any capital then he should not have charged it to income, and that is the basis of the recapture principle.


Edmund Davie Fulton: That seems to me to do what in fact this other article to which reference has been made said the department was doing, namely, setting up an entirely new basis for depreciation, not merely changing the method of calculating depreciation, but changing it from the straight line basis, to a diminishing balance basis, but in fact setting up a totally new concept of depreciation. Is not that so?


Douglas Charles Abbott: Well, I concede to my hon. friend that it is undoubtedly a very complicated subject; but whether it is straight line depreciation, or whether it is on the diminishing balances principle, what you are doing is amortizing the capital cost. That is the fundamental principle of depreciation. The only difference in the act now is a difference in method, and the difference in method is that instead of a straight line method of applying five per cent, ten per cent or fifteen per cent, or whatever it is, over the period of years in which depreciation is exhausted, you start off with the same capital cost. You depreciate at a higher figure in the early years, and then you work down until it arrives, theoretically, at nothing. Of course, if you are on a percentage basis you get down to a fraction of a dollar; but, in effect, it will be nothing.
However, there is no difference in the principle of taking depreciation under either system. It is a process of amortization of a capital expenditure, a recognition of the principle that you should not pay tax on something which is going to disappear. That underlies the whole basis of depreciation.
On the other point I readily recognize that the provisions of this section are extremely complicated and extremely difficult for the average layman to understand, and even for the lawyer to understand. As I said at the outset of my remarks, one reason why they have to be lies in the fact that we have eliminated discretions here. Of course it would be very simple to make a short and easily understood section by saying, "in such amount as the minister may determine,"-and that was the system we used to have.
This amendment is a relieving measure. If you purchase additional assets of the same class you can group them and, instead of having to pay tax on the excess portion of depreciation which, in fact, has not been
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needed, you are getting accelerated depreciation on your new assets. And the second group, group B, covers the case where there has been less.
It is long and complicated but, in defence of the draftsmen, chief of whom was the assistant deputy minister of justice, for whom I have high regard as a draftsman, I do think that it fully and clearly and accurately sets out the contingencies which have to be met. I cannot say anything further about the drafting.
I freely confess I had to study it pretty carefully before I realized how it operated; but I did finally come to the conclusion that it would cover the case to which I have been referring. It is, as I say, a relieving measure which has been requested by outsiders as being an appropriate amendment to make to the act.


Edmund Davie Fulton: What does the minister say in answer to the specific question raised by those who disagree with this method, that it distorts altogether the actual rate of depreciation, making it much too high in the earlier years and too low in the later years?


Douglas Charles Abbott: In my view it comes much closer to the actual facts. Take the case of the ordinary motorcar. Everyone knows that in the initial year the car depreciates more than it does on the straight line basis. It depreciates up to 30 per cent right away. That is why I believe-and I may believe it wrongly-that the diminishing plan principle, where you have a higher percentage in the earlier years, is a fair principle.


Edmund Davie Fulton: The minister has picked out one particular category to illustrate his proposition, and his illustration is not sound. For instance, let us consider industrial plant machinery, where it is generally agreed that new equipment and machinery installed in a plant in fact does not reach maximum output and a level of peak efficiency for perhaps two years after the machinery has been brought into use; whereas, under this reducing plan method the depreciation in the first year is very great, and in the second, third and fourth years it is considerably less. The fact is that the machinery is more valuable to the industry after the second year's operations, when the kinks have been ironed out, and the new product has found its market.
It seems to me that there is a good case, an almost unanswerable case, for those who-say that if you take a straight line method of depreciation it will give you a picture-while not exactly parallel, nevertheless much.

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closer to the actual rate of depreciation or obsolescence of the machine than this new diminishing plan would.


Douglas Charles Abbott: Well, it is a matter of opinion. I have expressed the view that in my opinion, and in the opinion of the government, this is the better and fairer system. There was a good deal of pressure during the war for us to give accelerated depreciation in respect of various businesses. In a sense this is a form of accelerated depreciation, because you get the depreciation more quickly in the earlier years than in the later years.


Edmund Davie Fulton: I will make one final comment. What the minister has said seems to me to prove that here we have a case where a few particular circumstances will be suited by this method, but that it will be unsuitable to the great majority of cases. It is true that under special circumstances it was thought necessary to give accelerated depreciation, but that was a special procedure worked out to fit special cases in wartime. In the same way that accelerated depreciation is not necessary in the normal run of cases I submit that the diminishing balance method is not suitable now. I say this is a wrong principle which will fit only a few special cases, but that the straight-line method is still of much more general application throughout the country.


James MacKerras Macdonnell: Mr. Chairman, I am not going to take the time of the committee to discuss the merits of these two types of depreciation. But I do wish to say a word really by way of repeating what I said last autumn, that we are here in this second session, confronted with regulations, and no one has had1 an opportunity to say a word about them. We get a detail here or there; but it all comes to us as something over and done. We have had it pointed out this afternoon that we are in what seems like an invulnerable position. We are talking about a type of depreciation which has been abandoned in Great Britain.


Douglas Charles Abbott: Only in part. It was only on a certain class of assets.


James MacKerras Macdonnell: I accept the correction. Last autumn I pointed out that we were left in an absurd position, and we were told we had to pass the legislation before the regulations could be made. When I say that I am looking at page 2729 of Hansard for last year.
Here we are again, in another session, and again we have no chance, as a parliament, to consider this matter except in this haphazard fashion. As a matter of fact, it would look

as though the institute of chartered accountants, who are no doubt very worthy people, are making the law, and not parliament. I would be the last one to deny that they have much more technical knowledge about this sort of thing than we have. But I say again that we are here, not as technicians, but as people who are supposed to have common sense. Often it takes the mind of the layman to decide these matters.
That is my complaint. We never have had an opportunity. We may have something to say about it, but we have not yet; and, so far as I can see, we shall have no opportunity now. That is wrong. I think that opportunity should be afforded, and I am voicing my complaint again.


Donald Methuen Fleming: This matter has been discussed fully, and I do not propose to extend the discussion in respect of the two theories, except to make a brief comment on the approach to the question. The minister has referred to representations he received from the Dominion Association of Chartered Accountants, in which he intimated that approval had been given by that association to the diminishing balance method.
I have before me a copy of The Canadian Chartered Accountant for April of this year in which, at page 175 and following, there appears the text of recommendations in relation to the income tax legislation which were submitted to the minister by the taxation section of the Canadian Bar Association,, and the legislative committee of the Dominion Association of Chartered Accountants.
I shall not read at length from these recommendations, except so far as may be necessary to illustrate what seems to be something very important. This relates directly to the last remarks by the hon, member for Greenwood. The subject of a better method of calculating depreciation cannot be dealt with on the basis of legislation alone. The regulations are just as important as the terms of the Income Tax Act itself in debating whether we have now a better or worse method than we had before. In the opening paragraph of this submission those submitting the recommendations draw attention to the fact that while for purposes of taxation the new diminishing balance method appears to have been well designed to provide fair treatment for taxpayers with some exceptions, nevertheless they go on to point out that for accounting purposes this method in comparatively few instances is considered to be appropriate. Then they proceed to say:
... if the introduction of that method for taxation purposes has the effect of causing taxpayers to abandon proven methods of depreciation accounting hitherto adopted consistently for purposes of determining profits for the information of shareholders

and proprietors, then the law and the regulations issued thereunder are objectionable and should be repealed.
Then the submissions which follow attack some of the regulations issued under the section of the act passed last year. It is true there are some sections of the act which are under attack in this submission but it is the regulations that, from the point of view of accounting purposes, are at this point under the attack of these people who have knowledge both of the law and of the best accounting practices. The minister has not made reference in detail to any of the regulations. I shall mention regulation 1100(4), which is under strong attack by the taxation section of the Canadian Bar Association and the legislative committee of the Dominion Association of Chartered Accountants. I shall read one or two observations on page 175. One comment reads:
In operation, subsection 4 will force one group of taxpayers, namely limited companies, to make a choice between either violating sound accounting procedures or depriving themselves of the right to allowances which the regulations are designed to give to them. It is no misstatement of fact to say that only a company that adopts unsound accounting practices will be in a position to take full advantage of the allowances granted under the regulations.
One could read further similar expressions which follow. Again speaking of regulation 1100(4) the submission reads:
For years the accounting profession throughout the world has been striving to develop sound accounting practices which will present business operations in the fairest manner possible. That a tax regulation should be the instrument whereby much of the progress already made in Canada should be nullified is surely contrary to the public interest. Yet, if subsection 4 is to remain in the regulations, such will inevitably be the result.
It is paradoxical that a measure which was supposed to "mean a great improvement over the old system and ... a further step towards greater simplicity in our system of taxing business profits," and which would "likewise be more equitable to the taxpayer and to the treasury" should in fact, because of the inclusion of section 1100(4) produce precisely the opposite results for all incorporated taxpayers.
Then the submission recommends that subsection 4 of regulation 1100 be deleted.
In the second place, in regard to the provision for recapture, section 20, subsection 1, their recommendation is that the section be reworded to relate the calculation of the amount recaptured to the undepreciated capital stock at the end of the year in which disposition takes place.


Douglas Charles Abbott: That is covered by this amendment. My hon. friend will appreciate that that recommendation is dealt with in this amendment.


Donald Methuen Fleming: Then they go on to deal with a number of other regulations. It comes
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down to this, Mr. Chairman, that actually there are very few members of the house who have had the technical experience to arrive on their own account at a final conclusion with respect to the advantages of one method over the other. Nevertheless members of the house are capable of forming opinions, because they are doing so all the time, based upon submissions made to them by those who have had experience and have made a detailed study that will so qualify them. I urge upon the minister that at some stage, and I hope relatively soon, an opportunity be given through the medium of a committee-possibly the banking and commerce committee would be the most appropriate one-to review this question and to receive representations and the assistance of considered views from such well qualified bodies as those whose submissions I have just been reading.


Douglas Charles Abbott: I thank my hon. friend for his comments. The amendment suggested by the accountants and the bar association to section 20 (1) is incorporated in the bill. Discussions with respect to regulation 1100 (4), as indicated by the Minister of National Revenue in a statement in the house on the 28th of March, have been proceeding with the department for some time. I am informed that an amendment to the regulation has been pretty nearly completed, and will probably be announced within the course of the next week or ten days. I merely add that the representations to which my hon. friend has referred have been followed up with the Department of National Revenue, and I think that appropriate amendments to the regulation are now being drafted.


Donald Methuen Fleming: I do not wish to press the minister on the subject of regulations before they have been promulgated. May the committee infer that the amendments intended to be made in regulation 1100 (4) will meet the criticisms contained in this submission?


Douglas Charles Abbott: I would hope so, yes. That is what they are intended to do.
Section as amended agreed to.
Section 9 agreed to.
On section 10-Charitable donations.


Agar Rodney Adamson: I should like to ask the minister a question about Section 10, the charitable donations clause. The explanatory note merely states:
The new paragraph (aa) allows for the deduction of gifts to His Majesty in the right of Canada without limit.
Is that the sole intention of the new section?

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Douglas Charles Abbott: This amendment is intended to tie in with a substantive amendment to the law relating to gifts to charitable organizations and charitable foundations which will be found in section 21 of the bill. I have a proposed amendment to section 21 somewhat enlarging the language thereof which I shall explain when we reach that section. There is a consequential amendment which will be needed to section 10 in order to conform with my proposed amendment to section 21, the main section dealing with the new arrangements concerning charitable organizations. I will ask one of my colleagues to move:
That subclause (1) of clause 10 be amended by inserting immediately before the words "His Majesty" in paragraph (a) of subsection (1) of section 26 of the act the following words: "corporations resident in Canada and exempt from tax under this part by paragraph (eb) of subsection (1) of section 57."


Alphonse Fournier: I so move.


Douglas Charles Abbott: I may say there are two classes of charitable organizations under the section to which I refer, and they come under the headings "(ea)" and "(eb)". I have no doubt they will be known as "ea" charitable organizations and "eb" charitable organizations.


Donald Methuen Fleming: We shall have a full discussion on that?


Douglas Charles Abbott: Yes, I want to go into that quite fully because I think we are proposing some very interesting amendments.


[Stage Direction]
Amendment agreed to.
Section as amended agreed to.
On section 11-Dividends from controlled resident corporation.
James MacKerras Macdonnell: I want to ask the minister what the reasons are for the strict limitation in this section. You will observe that the section applies to cases where control of one company is acquired by another after May 4, and provides in effect that dividends paid by company A are tax free in the hands of company B only to the extent that they are paid out of income earned by company A after the date when control was acquired by company B. I have one or two suggestions to make. Perhaps first of all the minister might explain why there is this apparently strict limitation as to time and also as to company relationship.


Douglas Charles Abbott: I will have an amendment moved making the date May 10 rather than May 4, because May 10 was the date the bill was actually available to hon. members, though it was given formal first reading on May 4. As the committee will appreciate, this is a new section inserted in the act in

order to prevent the transfer of control of one company to another, thereby obtaining the surplus of the first company by a tax-free dividend to the second company and in that way avoiding the tax. As lawyer members of the house may be aware, there are a number of ways to legally avoid the payment of income tax with respect to that accumulated surplus. We are not going to interfere, of course, with any arrangements or contracts that may have been made in the past, but for the future it will not be possible to acquire control of a company which has a large undistributed surplus and then, by various legal means, distribute that surplus to the shareholders of the new company without personal income tax being paid on it.
The corresponding provision, of course, which makes that a fair arrangement is that under the other section we will in future permit the shareholders of a corporation which has a large undistributed surplus, which would be subject to personal income tax if distributed, to capitalize that surplus by paying a flat rate of 15 per cent as indicated in the resolution, and thereafter distribute it without the payment of tax. But this is a blocking provision, to prevent in future the reorganization of companies in such a way that accumulated surpluses of this kind can be obtained free of tax. The amendment to which I referred is as follows:
That subclause (1) of clause 11 be amended by inserting at the end of both subparagraphs (ii) and (hi) of paragraph (b) of subsection (ID) of section 27 of the act the following:
"to the extent that they are not, for the purpose of subsection (1A), deemed to have been paid out of designated surplus."
and that subclause (2) of clause 11 be amended by substituting May 10 for May 4 in line 43.


Alphonse Fournier: I move accordingly.


[Stage Direction]
Amendment agreed to.
James MacKerras Macdonnell: I would refer to the suggestion I made to the minister when we were looking at section 2, and I suggest now that he might deal further with the provisions with regard to the undistributed incomes, dealing with the distinction between the way individuals are treated and the way in which, to some extent at any rate, corporations are treated. I want to come back to the limitations of section 11, but if the minister would care to make a statement covering the difference in treatment as outlined in this section I think it would be helpful.


Donald Methuen Fleming: If the minister is going to accede to the suggestion of my hon. friend may I suggest that it would contribute greatly to the understanding of the committee if the minister would take it in various stages, as it seems to me no one can hope to appreciate

the full implications of section 11 unless at the same time he has regard to those very lengthy new provisions in sections 73, 73A, 73B and 95A, to be found in clauses 25 and 32 of the bill. I think the simpler the approach the better, and perhaps in order to assist the committee the minister would deal with the position created by these amendments first of all-


Douglas Charles Abbott: I wonder if my hon. friend
would permit me to interrupt him. As he was speaking it occurred to me that consideration of this question might be facilitated if we allowed this section to stand until we reach section 73 and possibly section 95A, to which he has referred. If my hon. friend and the committee think that would be helpful I should be glad to follow that course. I think it might be helpful; with this reservation, that we might pass the amendment, and then we can consider the section as amended after we have discussed the other sections mentioned.


The Acting Chairman (Mr. Lesage):: The
amendment has been carried. Shall the section stand as amended?
Section stands.
Section 12 agreed to.
On section 13-Two fiscal periods end in same taxation year.


Douglas Charles Abbott: I have an amendment to this section the purpose of which I might explain before asking one of my colleagues to move it. It adds section 34B following section 34A. As I mentioned in discussing this matter in reply to some questions asked by the hon. member for Kamloops, in the case of the sale of real estate by an individual with the recapture clause coming into operation, it might well prove inequitable if the entire recapture had to be taken into the individual's income tax return in the one year, because of the graduated scale. So I am proposing in section 34B that this amount, whatever it may be, can be spread over a five-year period. It is pointed out to me, of course, that the recapture clause applies only for 1949 and subsequent periods. That is the principle of the new section, and I think the committee will agree that this is a desirable provision to put in the act.


John Lambert Gibson: It does not go backward and forward; just the one way?


Douglas Charles Abbott: 
Alphonse Fournier: I move accordingly.


[Stage Direction]
Amendment agreed to.
Section as amended agreed to.
On section 14-Dividends.
Douglas Charles Abbott: I have a little amendment
here, to add a few words, as follows:
That clause 14 be amended by adding the following words to subparagraph (i) of paragraph (a) of subsection (1) of section 35 of the act:
"to the extent that the dividends so received or so deemed to have been received, as the case may be, were included in computing his income for the year,".


Alphonse Fournier: I move accordingly. Amendment agreed to.
Section as amended agreed to.
Sections 15, 16 and 17 agreed to.
On section 18-Income of resident from a foreign country in blocked currency.


Douglas Charles Abbott: There is a small amendment to this section, as follows:
That clause 18 be amended by inserting after the word "whatsoever" in line 17 but before the comma the following words:
"other than payment of income tax to the government of that other country on income from sources therein."

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Alphonse Fournier: I move accordingly.


Douglas Charles Abbott: That was a point we overlooked.


[Stage Direction]
Amendment agreed to.
James MacKerras Macdonnell: The minister has beaten me to it on that point, but I suggest another point still remains. I think the section is far too harsh or negative in saying that the minister's discretion does not exist if any of the income for the year, from sources in that country, has been transferred to Canada or used by the taxpayer for any purpose whatever. The minister has covered that. But why, if a man has, let us say, an income of $50,000 from Britain and is able to transfer $1,000 or $10,000 to Canada, should this provision then fall to the ground? It is not apparent to me at all.


Douglas Charles Abbott: We have been eliminating the ministerial discretion here, and I am informed that the minister does not want to exercise a discretion as to the portion of the taxpayer's income. If by reason of restrictions in the other country he has to leave it there, or part of it there, then any tax is postponed, and there is no interest penalty. But if he brings in a large part he has to use what he brings back for the payment of tax, pro tanto, and if it is not enough he will have to find the rest elsewhere.


James MacKerras Macdonnell: I am not
satisfied that is the whole answer. I am not advocating a wide open discretion for the minister, but the minister has not always been of such a shrinking nature. He does not need to have this discretion limited to the extent that (a) now limits it. It says that if any income is transferred at all, then the minister's discretion is taken away. Surely that is making it nugatory.


Douglas Charles Abbott: I must say that I do not know that I would agree with my hon. friend there. Conditions in other parts of the world are such that it is difficult, sometimes impossible, to transfer money to Canada. This is a new subsection in the act to provide relief which has never existed before. It seems that this is as far as we can properly go. You cannot split the income up into two or three different sections if he brings some of it in, because his tax liability is determined on his total income, and his rates are determined on that basis. The policy we have followed here is that the income is included for the purpose of arriving at the rates, and the tax liability with respect to the foreign income which cannot be brought into Canada is postponed. There is no interest on it. The taxpayer has a valuable option there, and it seems to me that is fair enough.

It has been pointed out to me that if cases of real hardship arise, they will have to be dealt with as special cases, which can only be done by the use of section 33 of the Consolidated Revenue and Audit Act.


Donald Methuen Fleming: With the objective of the section as stated by the minister, I am sure there should be general agreement. The problem arises, however, with the case stated by the member for Greenwood. My submission to the committee, and to the minister, is that in that case the effect of this section is harsh and restrictive. If the stated objective is sound, and I do not think there can be any question about that, then the detailed requirements that follow at the end of the new subsection 7 are unduly harsh and restrictive. The minister says such a case would be a special case for remission under section 33 of the Consolidated Revenue and Audit Act. The cases that will be remitted under that procedure I am sure will be quite rare; but the cases of the nature stated by the member for Greenwood may be numerous. I would respectfully urge, Mr. Chairman, that the minister retain this section a while longer. Perhaps we could pass over it in the meantime, and come back to it later to give the minister an opportunity of considering the matter. It seems to me there is much merit in the suggestion put forward. We are in agreement upon the objective of the section as stated by the minister, but we do urge that, if the section is passed in its present form, there will arise under it many hard cases that will be denied the remedial intent of the section. I suggest that the minister give the matter consideration.


Douglas Charles Abbott: This is a new section, and we gave it a good deal of consideration. We feel that this is as far as we should go at the start. We will try it this year. We would like to see how it works, and to see some of the cases that would come up under it. If the hardship my hon. friend fears exists, we could amend it next year. If the house had no objection, although to do so is bad in some ways, we might do it retroactively.


James MacKerras Macdonnell: The minister might let us have a crumb from the table. We have not had any concession of any kind so far. He is putting the taxpayer in a difficult position. A man using some of that income, or bringing some of it into Canada, loses this exemption. If the minister had given some other reason, I do not think I should have had the courage to stand up again. The reason was so very much less convincing than it might have been that I am encouraged to ask the minister to reconsider.


Douglas Charles Abbott: I can only assure my hon.
friend that I shall look at the section again next year.

Section as amended agreed to.
On section 19-Evasion of tax.


Mr. Campney:: I should like to suggest to the minister that the word "wilfully" be changed to "fraudulently". As I understand the state of the law, tax evasion is not necessarily illegal. If a man has been able to take advantage of a tax concession granted by law, then it may be an evasion but not an illegal evasion. For instance, if a taxpayer owns a company which does not enjoy the tax concession in respect to its first $10,000 of earnings and sells part of his shareholdings to bring himself within the tax concession, that is legal. I do not see how any tax can be evaded unless it is wilful, in the sense of being intentional. It has to be intentional.	But it is not therefore
necessarily wrong or illegal. I do not think the word wilful is a word that has been clearly determined in law, but I think "fraudulent" has. No one objects to the intent of the clause under consideration, but I think a real intent to evade the tax must be proven, and the wording should so indicate. I would suggest tha-t "fraudulently evaded" is the phrase that should be used. In law "fraudulent" has long had a clear and well known interpretation. In a section of such serious import I question the advisability therefore of using new words which might be interpreted in a way that would not agree with what I believe the minister intends, namely, that the section should deal with fraudulent evasion of tax payments.


Douglas Charles Abbott: I thank my hon. friend for his suggestion. I asked about this myself, and the Department of Justice used this language. They asserted that it should be done because the word "wilful" is the word used in section 120, subsection (3), which reads:
Where a person has been convicted under this section of wilfully, in any manner, evading or attempting to evade, payment of taxes imposed by part I, he is net liable to pay a penalty imposed...
It was felt by the Department of Justice in drafting this bill that the same language should be used in this section as had been used in section 120, subsection (3). It was felt that "wilfully" in this case could be interpreted in no other way than "fraudulently".


Agar Rodney Adamson: I hope the minister will
consult with the Minister of Transport, because I tried to get this word "wilful" inserted into the Aeronautics Act, in connection with a regulation concerning the printing of regulations. The member for Vancouver-Quadra and I had quite a battle in the committee trying to get this word "wilful" inserted in that section. I am afraid we were unsuccessful. Our point was about the same
Income Tax Act
as the one here, that in order to break the law a man must know he is doing it, and he must do it intentionally.


John Lambert Gibson: Is not the governing word actually "evade"?


Douglas Charles Abbott: I would think so, yes.


Agar Rodney Adamson: No.


James MacKerras Macdonnell: That is a dangerous word.


Gladstone Mansfield Ferrie: This word "wilfully" has to be decided by the courts.


Douglas Charles Abbott: Yes, quite. It is a matter for determination by the courts.


[Stage Direction]
Section agreed to.
On section 20-Renumbering.
Douglas Charles Abbott: I have a minor amendment here. This is the section which provides that an appeal may be taken straight to the exchequer court. The reason for that of course is that in important cases the taxpayer may feel that he is going to the exchequer court anyway, no matter what the decision of the income tax appeal board may be, and it is desirable to save time. It was thought that it would be well to give the taxpayers who have now pending before the income tax appeal board appeals which have not been heard a similar privilege. The amendment is to accomplish that purpose, and I would ask my colleague if he would so move.


Alphonse Fournier: That clause 20 be amended by adding thereto the following:
" (2) Where a taxpayer has, before the time this. Act came into force, appealed to the income tax appeal board, if, within 90 days of that time and before that appeal has been heard-,
(a)	he has served on the Minister of National Revenue a notice that he is discontinuing the appeal and has forwarded a copy thereof to the board, and
(b)	he has served upon the minister a notice of appeal to the Exchequer Court of Canada that complies with all requirements of division J of The Income Tax Act,
he shall be deemed to have appealed to the exchequer court under subsection (2) of section 55 of The Income Tax Act as enacted by subsection (1) and shall be deemed not to have appealed to the income tax appeal board."


[Stage Direction]
Amendment agreed to.
Section as amended agreed to.
On section 21-Certain organizations.
Douglas Charles Abbott: This is a section which I am sure will oe of interest to all hon. members. Before we discuss it perhaps I might say just a word about it. There is an amendment to be made, but before I indicate what that amendment is I would point out the-

Income Tax Act
general purpose of the section. The present section in the act which exempts from tax the income of certain charitable organizations -and it is section 57 which exempts from tax various types of organizations-reads as follows:
(e) an organization operated exclusively for charitable purposes or an agricultural organization, a board of trade or a chamber of commerce, no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof.
The committee will appreciate the fact that over the years there have been built up various types of charitable organizations including those known as the so-called charitable foundations-the Massey foundation, the Canadian foundation and so on-where capital gifts are made to the foundation, where sometimes income is paid in and where the moneys appropriated are used for charitable objectives, given to hospitals and the like to be expended. In the past it is questionable whether those organizations have been clearly entitled to the exemption. I am sorry to say that in addition there has been an opportunity for abuse in the case of these charitable foundations; that is to say, moneys could be accumulated in them and not actually paid over to charities. Then the charitable foundation could be wound up and the owners or proprietors get the money back, although in the meantime tax exemption privileges would have been obtained. It was felt both necassary and desirable to plug that loophole. Let me hasten to say that this does not apply by any means to the really bona fide, genuine charitable foundation. Without going into detail, one particular case was drawn to our attention which made me feel that an amendment to the act was called for.


Donald Methuen Fleming: Was that case in the province
of Ontario?


Douglas Charles Abbott: No, it was a case in the province of Quebec, actually; in my own province. The section now provides for dividing these charitable foundations or organizations into two groups. One is:
(ea) a charitable organization, whether or not incorporated, all the resources of which were devoted to charitable activities carried on by the organization itself and no part of the income of which was payable to, or was otherwise available for the personal benefit of, any proprietor, member or shareholder thereof.
Then there is the (eb) section which covers the so-called charitable foundation. On examining the section the committee will notice that there are laid down certain conditions which would permit this type of corporation to qualify as a charitable foundation and to obtain the exemption from income tax which would flow from that quality. As the

sections appear in the bill, there is a clear line of demarcation between the charitable organization which carries on charitable activities itself and the foundation which turns over all its assets or 90 per cent of its receipts to charitable objectives. In the first case under the defining section which we passed earlier, the donor to the organization could claim an exemption within the 5 per cent limit in the case of a corporation and the 10 per cent limit in the case of individuals for gifts made to the charitable organization. But as drafted, the charitable foundation would not qualify such a donor for exemption. It was pointed out to us that there were some cases in which these groups performed both these functions. They not only conducted charitable activities themselves but they also turned over moneys out of their revenues to charitable objectives like hospitals, universities or whatever it may be. We therefore studied whether it would not be possible, while retaining the protective provisions to which I have referred, to give this second class of charitable organization a similar quality which would enable people who made gifts of income to that so-called charitable foundation to deduct this for income tax purposes. The effect of the amendment which I am going to move is this. Perhaps I had better read the amendment. It is as follows:
There shall be included in computing a corporation's income all gifts received by the corporation other than gifts received subject to a trust or direction that the property given, or property substituted therefor, is to be held by the corporation for the purpose of gaining or producing income therefrom.
In other words, the onus will be put upon the donor to say when he gives to the charitable foundation that his gift is a gift of income or of capital; but from the point of view of the tax department, all receipts by the foundation will be considered as income unless the foundation shows that they have been paid over on the advice that they are a gift of capital and that the capital is to be invested and the income only used for charitable purposes. That explanation may not be as clear as it should be, but I have tried to summarize the provisions of the section. I will welcome any discussion by members of the committee.


Donald Methuen Fleming: In the first place, do I understand that this provision applies to charitable foundations in existence at the present time?


Douglas Charles Abbott: From June 1, 1950. The section so provides.


Donald Methuen Fleming: Only those coming into existence on or after June 1, 1950. Is that what the minister means?


Douglas Charles Abbott: No.


Donald Methuen Fleming: I am referring to the date of the creation of the charitable foundation.


Douglas Charles Abbott: The charitable foundation can be created before or after; but the particular requirements with respect to the distribution of 90 per cent of its income and so on apply as and from June 1, 1950.


Donald Methuen Fleming: Quite so.


Douglas Charles Abbott: It would apply to the 1950 taxation year.


Donald Methuen Fleming: I think that is quite clear, but I wanted the minister's confirmation of it. It is quite clear then that this provision may deprive some charitable foundations of an exemption which they hitherto enjoyed.


Douglas Charles Abbott: No. I do not think it is going to deprive them of anything.


Donald Methuen Fleming: I am sorry, but I do not read the amendment in the same way as the minister does.


Joseph-Alfred Dion: Order. Perhaps it would be better to have the amendment read before we debate it.


Alphonse Fournier: That clause 21 be amended by renumbering subclause (3) as subclause (4) and Inserting the following immediately after subclause (2) :
(3) The said section fifty-seven is further amended by adding the following subsection thereto:
"(3) For the purpose of paragraph (eb) of subsection (1)
(a)	a corporation shall be deemed not to have acquired control of another corporation if it has not purchased (or otherwise acquired for a consideration) any of the shares in the capital stock of that corporation, and
(b)	there shall be included in computing a corporation's income all gifts received by the corporation other than gifts received subject to a trust or direction that the property given, or property substituted therefor, is to be held by the corporation for the purpose of gaining or producing income therefrom."


Donald Methuen Fleming: My observations, Mr. Chairman, are not affected particularly by the amendment. I should like some information as to the extent to which section 21 of the bill applies. I think the minister's answer has made it quite clear that this amendment -whatever the effect of it might be-does apply to all so-called charitable foundations in existence. It does not apply only to those that may come into existence after the date of the enactment of this bill.


Douglas Charles Abbott: Quite right.


Donald Methuen Fleming: Therefore if there is anything to be said for or against retroactivity as applied to legislation affecting charitable foundations, then those who object to application of such legislation to charitable foundations in existence had better speak now or forever hereafter hold their peace.
Income Tax Act
The other point on which I should like to have some confirmation from the minister is this. I take it that the underlying purpose of the proposed amendment is to compel charitable foundations, so called, to disburse the income that they receive.


Douglas Charles Abbott: If they want to claim the taxation exemption.


Donald Methuen Fleming: Quite. If they wish to enjoy the benefit of exemption from income tax then they must disburse their income as they go along to the extent of 90 per cent of that income.


Douglas Charles Abbott: That is right.


Donald Methuen Fleming: Back of that must be the view that it is unhealthy to permit charitable foundations to set up businesses and to claim immunity from taxing statutes, and simply to accumulate funds or accumulate control of corporations or businesses. I may say, sir, that with that intent I am in fuil accord, and I hope that this committee of the whole will be in complete accord with it.
I would have been interested to hear from the hon. member for Leeds, had he been in the house, and perhaps any other hon. members who may have spoken against similar Ontario legislation on the hustings in the byelection campaign several months ago in the Ontario constituency of Leeds.


Agar Rodney Adamson: I should like to ask the minister one question on paragraph (eb), subparagraph (i) which reads:
Did not carry on any business.
^ If a charitable organization is established, the creature of a revenue-producing business already in existence, it cannot now carry on any commercial activities. Is that the intent?


Douglas Charles Abbott: No. It is quite possible that some of these charitable foundations which have been created prior to this time may in fact control certain businesses through stock ownership. This does not interfere with that at all. There is no retroactivity effect to this legislation. They may have accumulated their income right up to this time and not paid a bit of it out, but in future in order to continue to qualify they must pay out 90 per cent of their current income. We are not interfering with any practices that may have been followed in the past, but in future they must qualify, and in future it will not be possible for any charitable foundation to acquire control by purchase of shares of a business.


Mr. Coldwell:: Can the minister give us an estimate of the revenue that the government has lost on account of these so-called charitable foundations that have been established in Canada?

Income Tax Act


Douglas Charles Abbott: It is almost impossible to ascertain. I do not want it understood for a moment that I think there has been any widespread abuse of the possibilities which perhaps the charitable foundations would afford in the hands of someone who wanted to use it for that purpose. But the rules which we are setting up here seem to provide a fairly good test for the bona fide charitable institution, which I think is very desirable. I do not want to discourage them for a moment, but I think certain safeguards are needed in order to see that the provisions are not abused. I want to reiterate, that there is no retroactive effect to this whatever.


Major James William Coldwell: The purpose of my question was to find out whether the government has any knowledge as to the extent of loss of revenue to the country, on account of the establishment of charitable foundations. That is something the house should know about, because the more of these we get and the more they multiply the more burden is placed upon the remainder of the taxpayers of the country. That is the point.


Douglas Charles Abbott: The point of course is there is no burden so long as 90 per cent of the revenues of these foundations is paid out for genuinely charitable -purposes. The donations to them can only be made out of income to the extent of the 10 per cent or 5 per cent limits, and gifts of course would be exempt from gift tax; but with these reservations- we have given this a good deal of thought- the protective measures which we are putting in here are adequate; but at the same time I think they are fair.


Agar Rodney Adamson: Then a revenue-producing corporation must disperse 90 per cent of its revenue? Assume it is a profit-producing corporation. I can think of a number; I can think of some of the drug trusts in the United States. In that country some universities have the right to manufacture certain drugs that one of their professors has discovered. I think the university of Wisconsin is one of them. There may be cases like that in Canada where there are revenue-producing corporations. Under this act the corporation to be classed as a charitable organization must distribute 90 per cent of its profits.


Douglas Charles Abbott: Not the way my hon. friend put it. We must be careful not to confuse the situation in the United States with the situation in Canada. In the United States they have a law whereby the taxability of a corporation depends upon the quality of the person who owns it. I am told that Columbia university is operating spaghetti factories, and all kinds of industrial corporations, and

these industrial corporations are exempt from the ordinary corporation taxes because they are owned by Columbia university. I hope that we shall never have that principle in Canada. But let us take the case of -a charitable foundation that owns 5 per cent of the shares of a profitable spaghetti company.


Donald Methuen Fleming: Or a newspaper?


Douglas Charles Abbott: Or a newspaper, or anything else you like. The newspaper is not obliged 'to distribute in dividends any more than the board of directors feels is- proper; but all dividends received by the charitable foundation which owns the shares of the spaghetti factory, or the newspaper or anything else, must be distributed for charitable purposes to the extent of 90 per cent in the year received. It does not affect the commercial company which is operating a profitable business, because under this section a corporation to qualify as a charitable foundation must be one in which no part of the income was payable to or otherwise available for the personal benefit of any proprietor, member or shareholder thereof. I think the section is pretty tight.


Agar Rodney Adamson: The minister brought out the Columbia university. That was the case I was trying to dig out.


Douglas Charles Abbott: That is owing to the difference in the law.


Agar Rodney Adamson: I hope we never get to that stage in Canada. I agree with the minister on that. A corporation may then continue to make a profit so long as it does not pay it over to the charitable foundation?


Douglas Charles Abbott: It is to be hoped the corporation would continue to make profit as long as possible. That is what it is in business for. The dividend policy of the corporation will be determined by its board of directors, but as I say if a profitable corporation is controlled by a charitable foundation the earnings of the corporation as available in dividends to the charitable foundation can now be distributed to a charitable foundation.


James MacKerras Macdonnell: I understand that if a charitable trust is carrying on any business, it would be disqualified under this section; is that correct?


Douglas Charles Abbott: I do not say it would be disqualified under the section. It would be disqualified only if any of the profits of the business it was carrying on inured to the personal benefit of any proprietor, member or shareholder. If it is a charitable foundation it cannot carry on commercial business. It could do it of course through a corporation, if it had the shares of a corporation in a

fashion other than by purchase, or if they had been acquired before the coming into force of this act.
Section stands.
Progress reported.



NORTH ATLANTIC TREATY


Louis Stephen St-Laurent: Mr. Speaker, may I have the consent of the house to revert to motions for the purpose of communicating to the house a statement about which the leader of the opposition inquired when the orders of the day were called earlier this afternoon?
I would like to read to the house the full text of an announcement made in London today, with which our Secretary of State for External Affairs (Mr. Pearson) was associated. The following statement was issued today (Thursday) in London:
During their talks last week, the foreign ministers of France, the United Kingdom and the United States considered how the countries of western Europe and North America might improve their co-operation on economic problems which require adjustments by them in the period immediately ahead. The emphasis in their discussions was on the positive courses of action which need to be taken.
The Secretary of State of the United States emphasized the great value of the existing relationship between the organization for European economic co-operation and the United States and believed that it would be helpful to broaden this relationship to provide for regular discussion and consideration of the problems requiring co-operative action in the coming period. He pointed out that, while the European recovery program terminates in 1952, the interest of the United States in Europe will necessarily continue and that study of the problems is now going forward actively in the United States on the highest governmental level. During conversations this week, the Canadian Secretary of State for External Affairs has indicated a similar interest on the part of his country to participate in the study of these problems. The four ministers believe that this relationship would permit a close co-ordination of the work now going forward in the United States and Canada on these problems with the parallel efforts of the OEEC.
The foreign ministers of France and the United Kingdom, after consultation with the chairman of the OEEC, stated their hope that the OEEC would invite Canada and the United States to establish, on an informal basis, a working relationship with the OEEC whereby the two countries could join with the OEEC in the discussion and consideration of the action to be taken on these problems.
It was agreed that the proposed working relationship between Canada, the United States, and the OEEC would not interfere with the present functions of the OEEC as an organization devoted primarily to European economic problems as provided in the convention for European economic cooperation.
The four ministers were in agreement that the economic and financial problems arising from the
55946-166J
North Atlantic Treaty
defence effort fell primarily within the competence of the North Atlantic treaty organization. They recognized also the concern of the North Atlantic treaty with broader questions of economic relations among the signatory countries and welcomed the decision of the council to have the deputies consider what further action should be taken under article 2 of the treaty.
The four ministers were further agreed that it was their hope, through a new working relationship, to proceed promptly toward finding solutions of the general economic problems which lie immediately ahead along lines which would eliminate conflict in their international economic policie's. They recognize that Canada, the United States and the western European countries have a continuing interest in developing and strengthening economic collaboration between them in order that they can make together their full contribution to the building of a peaceful and prosperous world order. They further recognize that the development and strengthening of the economic ties of this community of nations may in the future require formal organizational expression, but they believe it is unnecessary at this time to attempt to suggest precisely what form of arrangement will prove to be best suited to assist the taking of common action by the community.
The Canadian government welcomes this statement. If the organization for European economic co-operation invites us to establish an informal working relationship with them we shall be glad to accept.
It may be helpful to members of the house if I say a few words about the OEEC. This organization was set up after General Marshall's famous speech of June 5, 1947. In that speech he called on the European countries to draw together. Sixteen countries* including the United Kingdom and Ireland and almost all the continental countries free from Russian domination, responded. As their organization developed, much of its work related to Marshall aid; the members considered together their needs for special * assistance and presented programs and reports to the economic co-operation administration, headed by Mr. Paul Hoffman, in Washington. But the OEEC was never intended merely as a channel to facilitate the provision of Marshall aid. Its purposes were wider and longer than that. It was designed, as its name indicates, to promote co-operation among European countries in all matters of common economic interest and on a permanent basis. It has already reduced many of the trade restrictions between European countries. It has fostered trade by means of currency arrangements designed to make strict bilateral balance and barter unnecessary as between members. In these and other ways it is strengthening Europe economically and therefore politically.
This, then, is the organization with which we may be invited to associate. The European organization might thus be extended to estab-ish an informal relationship with Canada and

North Atlantic Treaty the United States in the discussion and consideration of economic problems of common interest. Thus it may become an organization for North American-Western European cooperation.
I am sure the house will be pleased to know that at the same time as such arrangements for informal economic co-operation in the immediate future are going forward the deputies to the North Atlantic council are to consider further the question of longer-term collaboration under article 2 of the treaty.
In conclusion I should perhaps stress that our new association would be informal. It would involve a recognition that the economic problems faced by OEEC countries, the United States and ourselves are common problems, not isolated individual problems. In the last analysis solutions must depend on action by individual countries, but they should be sought and discussed jointly around a common table.


George Alexander Drew: Mr. Speaker, I wish to associate myself and, in doing so, I am sure all members of the party to which I belong, with the expression of approval of every forward step which will bring together in closer and more effective co-operation the nations of the European community on the Atlantic and in North America. What has been given to us now as the official statement coming from the meeting in London does not report conclusions of such a broad nature as had been suggested in the press. I merely mention that because there was certain speculation earlier about something of a more positive nature. Nevertheless I feel there will be great encouragement in the fact that the . very presentation of this statement indicates that the nations of the Atlantic community are extending their consideration beyond the military aspects of the North Atlantic charter, and are recognizing the necessity of implementing the general provisions of article 2 as complementary to the purposes of article 1.
Undoubtedly economic and military strength go hand in hand. Without economic strength and economic co-operation the military strength upon which our hopes of peace depend could not possibly be maintained as a reality. If through military co-operation based upon economic co-operation the stability and peace which we all desire result, then it will be possible to carry this [DOT] association still further to the fulfilment of the purpose of article 2 and to the strengthening of those very institutions, and the understanding thereof which is in itself an essential part of the whole purpose of the treaty. While the Prime Minister (Mr. St. Laurent) has made it clear that what is contemplated at present

is simply an informal arrangement, nevertheless I hope there will be a sufficient measure of formality and of clarity of defined association to give us hope that the termination of these discussions, with continuing and effective association for military purposes, will be carried into the economic and social sphere as well, that this may in truth be the beginning of a far closer collaboration of the nations of the Atlantic community, and that we may in fact be seeing the beginning of a really workable world association for peace and stability in the years ahead.


Major James William Coldwell: Mr. Speaker, I noted that the leader of the opposition (Mr. Drew) stated that he was speaking for his party as well as for himself. May I say we are pleased to associate ourselves with the remarks he has made. We have always emphasized the importance of article 2 of the Atlantic agreement. I am very glad indeed to learn that the conference has come to some informal arrangement regarding the implementation of that part of the agreement. I believe that economic understanding among the north Atlantic nations is at least as important as military arrangements. If we can bring about reasonable and decent economic conditions among the nations of the world I feel that in time we shall manage, as the leader of the opposition said in his closing remarks, to eliminate the prospect of future war.
At six o'clock the house took recess.


[Stage Direction]
AFTER RECESS

The house resumed at eight o'clock.

[Stage Direction]
The house resumed consideration in committee of Bill No. 177, to amend the Income Tax Act-Mr. Abbott-Mr. Dion in the chair.
On section 21-Certain organizations.
Amendment agreed to.
Section as amended agreed to.
Sections 22 to 27 inclusive agreed to.
On section 28-Application.
Donald Methuen Fleming: Here we come to this group of sections that were referred to earlier, embodying these important new sections 73, 73A, 73B and 95A; and if it meets with the approval of the minister I suggest that these be considered together.


Douglas Charles Abbott: I was just going to make the same suggestion.


Donald Methuen Fleming: Earlier in the day the hon. member for Greenwood had something to say on this in asking for a detailed elucidation of these provisions, and also those in section 11 of this bill, which was allowed to stand for consideration together with this group of related sections. Just before we left that I was outlining to the minister what I hoped might be a helpful breakdown in the approach to this question. If the minister would make that approach as detailed as possible I believe it would be of assistance to hon. members in trying to understand these difficult sections. There are five points on which I am asking the minister for elucidation. First, if he would trace through the position of the individual shareholder in corporations of the kind dealt with in these sections.	.


Douglas Charles Abbott: You are referring to section 73?


Donald Methuen Fleming: Yes, the group we are taking together; 73, 73A, 73B, 95A and section 11 of the bill.


Douglas Charles Abbott: Is my hon. friend suggesting that for the sake of convenience we might consider together section 73, section 95A, and the section that was allowed to stand a short time ago, all of which relate to the same subject matter? It seems to me that might be very useful.


Donald Methuen Fleming: That is what I was suggesting.


Douglas Charles Abbott: Then could we carry on with the other sections, until we reach 95A?


Agar Rodney Adamson: Had we finished section 21?


Douglas Charles Abbott: Yes. I am in the hands of the committee, but I would be quite prepared to have section 73 stand until we get to 95A, and then deal with these together. Section 95A is in effect the substantive section.


Donald Methuen Fleming: Then does the minister propose that section 28 should stand?


Douglas Charles Abbott: Yes.
Section stands.
On section 29-Hearing and determination by any number.


Donald Methuen Fleming: Apparently it is intended by this section that one member of the income tax appeal board may hear appeals. I should like to know if it is intended that the legislation should go that far. It is one thing for a board of three to have a panel of two, but it is another thing for the board to break itself up into panels of one. That seems to be the effect of the section.


Douglas Charles Abbott: Here is the position. It was felt that a good many of these appeals could
Income Tax Act
be heard by one member of the board. There is, of course, an appeal to the exchequer court; but apart from that the member appointed to hear an appeal may at any stage of the appeal refer it to the whole board. After some experience in the administration of the appeal board, the chairman of that board and the officers of the Department of National Revenue felt that the hearing of what I might describe as rather minor appeals could be readily undertaken by one member. It is always open to the single member hearing the appeal, under the amendment as proposed, to refer it to the whole board. It is to be assumed that he would do so at the request of the appellant, let us say; and in any case there is the protection of an appeal from the board to the exchequer court. That was the thinking behind the proposed amendment.


Donald Methuen Fleming: What will be the practice followed by the board in the assignment of this work? Is it the intention of the board to make a practice of having appeals heard by only one member, or of sorting out the appeals and assigning some to a panel of two or three members and some to a panel of only one?


Douglas Charles Abbott: I am told that is the practice that will be tried out; that the appeals will be sorted, and what appear to be the simpler ones dealt with by one member, and others dealt with by two or more members of the board. It is believed that this will quite appreciably speed up the work of the board.


Donald Methuen Fleming: Can the minister tell the committee how the board stands now in relation to its backlog of work?


Douglas Charles Abbott: I would not want to be too definite about this, because we have not checked recently, but I am told they are about two months behind now, having regard to the fact that the procedure of assessment has been speeded up greatly in the Department of National Revenue.


[Stage Direction]
Section agreed to.
Sections 30 and 31 agreed to.
On section 32-Private company election.
Donald Methuen Fleming: Here we are back on this group of sections again. I think this is the third time I have started to offer a suggestion to the minister in the hope of simplifying and clarifying these very difficult sections. I am suggesting that the minister take this in five stages. The first would be to trace through this new legislation the position of the individual shareholder, that is, the non-corporate shareholder; second, the position of the corporate minority shareholder under these

Income Tax Act
sections and in relation to section 27 of the act; third, the position of the corporate controlling shareholder before May 10; fourth, the position of the corporate controlling shareholder after May 10; fifth, the position of the corporate controlling shareholder in reference to subsidiaries of subsidiaries.
Mr. Chairman, those are suggestions to the minister. I think if the minister can clarify the position, or the effect of those amendments at those five stages, he will have helped the committee to understand these provisions.


Douglas Charles Abbott: My hon. friend appreciates that these sections apply only to private companies as defined in the terms of the section, and that was the principle that was applied to similar measures following the recommendation of the Ives commission. Take the case which he puts up first, of the individual shareholder of a private corporation which has accumulated a surplus.


Agar Rodney Adamson: This is a corporation with less than seventy-five shareholders?


Douglas Charles Abbott: According to the definition of the act, that is right. A corporation may elect to pay fifteen per cent tax on that accumulated surplus, which thereupon becomes capitalized and then becomes a tax-paid surplus. It may not pay on any part of it; it must pay a tax on the whole thing, so far as the arrears are concerned. Now, when that has been done, it becomes a tax-paid capital surplus. The corporation may capitalize it, and it then becomes a capital surplus which can be distributed in accordance with the law governing corporations in so far as the distribution of capital is concerned. It could take the form of a stock dividend; it could take the form of a distribution for the reduction of capital. My hon. friend is a lawyer, and he will appreciate that when one is effecting a distribution of capital under the company law relating to the particular company, whatever the requirements of the particular company law for the reduction of capital are must be observed; that is the case of an individual shareholder.
In the case of a corporate minority shareholder, he would be in exactly the same position as an individual shareholder. The corporation would have capitalized this undistributed surplus, and it could then be capitalized and distributed to corporate minority shareholders and would not be taxable in the hands of that shareholder.


Donald Methuen Fleming: Will that be so after we have adopted section 11 of the bill which amends section 27 of the act?


Douglas Charles Abbott: Yes; section 11 will not interfere with that situation. Section 11 only

applies to the future acquisition of control, so the ordinary rules apply, and the dividends from corporation to corporation are free as between one Canadian taxpayer and another where control was previously acquired.
I think I have answered the third question as a result of my hon. friend's interjection.
I think I have answered both three and four. I have dealt with both prior to, and subsequent to, May 10. The fifth question concerns the position of the corporate controlling shareholder of a subsidiary of a subsidiary. I must confess that I get a little lost there. I think the same rules apply though, no matter how far you carry it through. What is referred to in the section as a designated surplus, that is the surplus any particular company has which exists on May 10, can be dealt with in the way I have indicated; that is, it could be capitalized upon the payment of the fifteen per cent tax, and the earnings subsequent to May 10 will follow the ordinary rule and can be paid to another company tax free as between those companies, if the other company is a Canadian tax paying company; or the matching principle can be applied on future dividends when earned, and an individual corporation may capitalize, upon payment of the fifteen per cent tax, an amount equivalent to the part which it pays out in cash dividends.


Donald Methuen Fleming: And that can be carried right through, one degree after another, from subsidiary to subsidiary?


Douglas Charles Abbott: I think I am right on that. I confess I have not given any thought to that particular condition. I see no reason why it should not be so.


James MacKerras Macdonnell: Did the minister say that the privilege of paying the fifteen per cent had to be exercised in respect of the whole amount?


Douglas Charles Abbott: That is right, all the existing surplus up to the end of 1949.


James MacKerras Macdonnell: Where does the minister find that in the legislation?


Douglas Charles Abbott: It is in section 95A (1) which reads as follows:
A private company may elect, in prescribed manner and in prescribed form, to be assessed and to pay a tax of fifteen per cent on an amount equal to its undistributed income on hand at the end of the 1949 taxation year minus its tax paid undistributed income as of that time.
Then subsection (2) covers the accumulation of earnings for the future, or what I refer to as the matching principle.


Agar Rodney Adamson: Has not the minister amended that?


James MacKerras Macdonnell: I want to go back to the provisions of section 11 of the bill, to be sure I understand that the provisions of subsection 1 are applicable where the receiving corporation acquired control of the payer corporation after May 4, which is now May 10.
I am not clear on how far that limitation goes. It seems to me that is going to cut out two classes of cases, and the reason for cutting them out I do not see. One is when a company acquiring the shares already controls, through ownership of shares, another company, the company whose shares are transferred; second, a case where a company acquired shares, and the company whose shares are acquired is controlled directly or indirectly by the same company. The narrow wording that is used in section 11 seems to exclude that and yet I cannot see why, in principle, those cases should be excluded.


Douglas Charles Abbott: I am not quite clear that I see what my hon. friend's difficulty is. The purpose of section 11 is to put a cut-off date with respect to the acquisition of control and provide that those surpluses can only be disposed of by capitalizing them under the provisions of section 95A so far as arrears are concerned. So far as the future is concerned, in disposing of their earnings, they may accumulate to the extent that they distribute in cash; and that applies whether it is a company which is now controlling a company which has a large accumulated surplus, or which acquires control in the future. My remarks relate entirely to private companies. The committee will appreciate that we are not talking about public companies at all.


James MacKerras Macdonnell: I am coming to that.


Douglas Charles Abbott: When we say "private companies", those are the relatively closely held companies.


James MacKerras Macdonnell: I still come back to the wording of subsection 2 of section 11, which seems to say that the provisions of subsection 1 are applicable where the receiving corporation acquired control of the payer corporation after May 10. That is really what is meant, that it only becomes effective where that receiver corporation acquired control of a payer corporation after May 10?


Douglas Charles Abbott: Yes; we are not interfering with arrangements that have been made prior to May 10.


Mr. Hatfield:: Why does it only apply to private companies?


Douglas Charles Abbott: The answer to that is this. This method of providing a means whereby accumulated surpluses of closely held companies
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could be distributed without too great penalty arose following the investigations made by the Ives commission. Part XVIII of the old act provided that surpluses of private companies could be capitalized and distributed upon payment of a tax which was something of the order of 20 per cent. We decided to extend that provision to companies which had accumulated surpluses beyond that time. It is a new move. One might say that in logic there is no reason why it should not be applied to public companies; but the Ives commission report did not recommend that it should be. We thought that for the time being we would proceed fairly slowly here and make it apply to the same class of companies that were dealt with under part XVIII of the old act. After we have seen how this works for a year, it may be possible to extend it to public companies. But this sort of legislation could have quite significant effects on the market quotations of publicly held companies, and I really did not feel that I wanted to go that far in this initial step. I am proceeding a bit cautiously here. Frankly, that is the reason why we have restricted it to the same class of company to which the old part XVIII applied.


Agar Rodney Adamson: There is a question I should like to raise, and I should like to get clarification-although I think I know what the answer is-for the sake of the record. Under this bill there is no intention to deal in any way with a public company which has shares listed on the stock exchange and which may have a large surplus. There is no intention under this act to force that surplus into dividends or distribution or to force a public company to distribute its surplus. I ask that question, although I think I know the answer, in order to get the situation adequately cleared up.


Douglas Charles Abbott: No. Neither is there the intention of doing so nor does the proposed legislation do so. It does not affect public companies. It relates only to private companies as defined.


Donald Methuen Fleming: I wish to say that I think the use of the term "private company" is unfortunate. If the legislation had retained the expression used by the minister in his budget speech, namely, "closely held corporation," I think it would be much better. When we came to the budget resolution we found this expression "private company" instead of the earlier and better expression "closely held corporation".


Douglas Charles Abbott: I am sorry, but I was consulting my officials and did not catch that.


Donald Methuen Fleming: I just said that I regretted that when the budget resolution was introduced it used the expression "private company" rather than the clearer expression "closely

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held corporation" which the minister used in his budget speech. The expression "private company", of course, under the Companies Act has a definite statutory significance. In this bill this expression "private company" has no relation whatsoever to "private company" as that expression is used in the Companies Act. In other words, the kind of company that is contemplated here may be either a private or a non-private company, provided it has not more than 75 shareholders on its share record. In order to avoid confusion on the part of people reading this legislation hereafter, will the minister not consider dropping this expression "private company"? I am sure many people who will read this legislation are going to treat it as the equivalent of the expression "private company" as used in the Companies Act, and that will be misleading. Will the minister not give consideration to using that earlier expression "closely 'held corporation"?


Douglas Charles Abbott: I shall be glad to give consideration to it. But may I say that the reason we used it was that in part XVIII, which has been in the law for some time, the phrase "private company" was used, and we have been using it here again. I think in the trade it has come to be fairly well known among lawyers and accountants who are advising with respect to these things. I think it is fairly clearly known what it was, and that is why I retained it. The phrase "closely held corporation" is an excellent colloquial expression, but I do not know that it is much more accurate than "private company". I realize my hon. friend's point that "private company" under the Companies Act has a certain specific meaning with certain conditions attached to it; the number of shareholders is somewhat smaller than is provided under this section.


Donald Methuen Fleming: It has a statutory meaning.


Douglas Charles Abbott: I shall be glad to give consideration to the matter; but I think perhaps we had better let it stand for the moment. I would not want to make that decision this evening.


Donald Methuen Fleming: There is another point I should like to raise. On page 23-and it might be simpler to refer to the page and line number rather than the clause because of the fact that we are dealing with a group of them together-line 3 in subclause 4, we have a definition of "shareholder" for the purpose of these so-called private companies; and he is defined as "a person who is recorded on the books of the corporation as a shareholder". Has the minister given consideration to the position of the holders of bearer share warrants? It is obvious at once, of course, that

if you are going to include holders of bearer share warrants you would have to have some provision for the proof of the fact that the number of holders of bearer share warrants and registered shareholders combined does not exceed 75. But under this clause the minister reserves the right to make regulations and to set up the kind of proof that is required in determining the number of shareholders, and it does not seem to me to present too great a problem to define methods of proof in the case of holders of bearer share warrants.
Lest some hon. members be concerned about what might appear to be opening the door a little bit wider here, and lest they also be concerned perhaps as to the position of holders of bearer share warrants, for instance, under the succession duty act I should like to point out that there is no danger whatever in that respect. So far as this act is concerned, as I say, I think it should not be difficult to prove to the satisfaction of the department the number of holders of bearer share warrants. The number of shares is determined on the books of the company. The only point left to be determined would be the number of the holders. As long as proof is adduced to establish that the number of holders of bearer share warrants plus the number of registered shareholders does not exceed 75 in all, then it seems to me we should not be enacting legislation which is so restrictive in its terms as to exclude the holders of bearer share warrants.
On the succession duty angle may I point out that there is no possibility whatever of difficulty arising here. The shares of companies organized under the laws of this parliament or of any of the provinces have a situs or location in Canada for duty purposes, under section 6 (2) of the succession duty act. That section applies where the deceased died on or after January 1, 1948. Then under paragraph 2 of article III of the tax convention existing between Canada and the United States, for the avoidance of double taxation, we have a provision that the shares of Canadian companies shall be deemed to have situs in Canada; and it has been laid down that the fact that the shares are represented by bearer share warrants does not affect the position in the least. Under the succession duty act they are still deemed to have situs in Canada. Under the practice that exists, as I understand it, where the holder of bearer share warrants in a Canadian company dies in the United States, it is the practice of the United States government to report that fact to the Canadian government, and succession duty is levied in Canada

in that case. A similar practice prevails in the converse case where the holder in Canada of bearer shares in a United States corporation dies here. I ask the minister's consideration of that point because bearer share warrants are a useful means of evidencing ownership of the shares of a corporation. I submit that this provision is unduly restrictive in its present form; that it could be widened without risk.


Douglas Charles Abbott: I will give some consideration to that. As my hon. friend knows, the use of bearer share warrants is extremely rare, certainly in the case of private companies. I had a reasonably extensive practice in matters of this kind and I can think of only three or four companies that use them. The Canadian Pacific issue share warrants, the Imperial Oil and the International Petroleum used to; but they are very rare in the case of private companies. I knew of no case of less than seventy-five; but if there is any hardship I shall certainly look into it. We are going to proceed a little cautiously with this section. It is not a section of general application to companies which are widely held, but I shall take note of my hon. friend's suggestion, and perhaps if we are reviewing the section next year, to extend it to give it somewhat wider scope, we will bring in the question of share warrants.


Donald Methuen Fleming: Do I take it that in the
regulations that the minister proposes to lay down under this section determining the terms of proof it is proposed to include the holders of bearer share warrants?


Douglas Charles Abbott: If we can do it legally it
could be considered. It would seem to me that perhaps it would be the sort of thing one should spell out in the act. I will think it over.


James MacKerras Macdonnell: I want to go back to section 11, because I still want to persuade the minister that the point I am raising there is a point that, purely by reason of wording, a narrow construction may be given which quite possibly is never intended.
I	want to go back and repeat what I said before. At the present time, under section
II	it applies only to the simple case apparently of where one company is acquired by another. It would operate unfairly, I suggest, in the case of a company having several subsidiaries or even sub-subsidiaries. I want to suggest to the minister again that it would be entirely in accordance with the spirit of this legislation if a broader interpretation were given. I am suggesting that the section be amended to provide that it is not to apply (1) to the case where the company acquiring the shares already controls through
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the ownership of shares of another company the company whose shares are transferred. The minister will appreciate that that is a method of acquiring control, not in the simple way indicated in the section but in a more complicated way, but nevertheless the relationship is the same, I submit; (2) to a case where the company acquiring the shares and the company whose shares are acquired are controlled directly or indirectly by the same company. I suggest to the minister these two cases are entirely within the four corners of the section but owing to the naryow wording of the section they might be shut out. The section says simply and exclusively that it applies to cases where control of one company first of all is acquired -that is not the wording of the section- where one company is acquired by another. That is the effect of it. Will the minister not give consideration to that right now and say whether what I am suggesting is reasonable?


Douglas Charles Abbott: I do not know whether I have been able to think through exactly what my hon. friend is suggesting. He appreciates that this section does not apply to any acquisition of control, by subsidiary or further subsidiary or anything else, entered into prior to the 10th of May, 1950. It is only for the future. Offhand I must say that the evil that we are attempting to correct here could be achieved by going through two or three transfers just as readily as it could by making one.


James MacKerras Macdonnell: I am suggesting that this is substantially the same as what the minister has in mind. Will the minister let this section stand until he has time to consider it? Surely that is a reasonable request?


Douglas Charles Abbott: I am told that the case to which my hon. friend is referring has been considered, and we felt that the evil which we are trying to prevent could be avoided in that way; that one company which controls another and which has a surplus could sell these shares to another subsidiary at the book value, and in that way get the surplus out tax free without paying the tax which we think should be imposed.


Donald Methuen Fleming: Mr. Chairman, the expression "resident" and the expression "non-resident" as applied to corporations and as used here in various places are not defined. There is no definition to determine residence in the section. What basis does the department propose to follow to determine residence in the case of a corporation? Are they going by head office?


Douglas Charles Abbott: I understand that the rule which is followed is laid down in the British

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Columbia Electric case. Stated rather briefly, where the seat of management and control of the corporation rests constitutes the residence for the purposes of the act.


Donald Methuen Fleming: In the administration of the act will a corporation be treated as having only one residence? After all, there are many cases where a corporation may have its head office, its management offices, in one country and still be carrying on very substantial operations in the other country. There are a good many of these cases on either side of the international boundary.


Douglas Charles Abbott: My hon. friend will recognize that they can have only one residence for purposes of our tax. There are a good many Canadian companies that do business in the United States, and a good many United States companies that do business here through either branches or subsidiaries. If they do business through branches then the reciprocal arrangements both of the tax treaty and the act apply, and there are appropriate provisions for credits of taxes paid in the other country. I do not think any difficulty has arisen in practice under the act so far as I am aware.
Mr. Chairman, I have a technical amendment to section 28 which I am told is merely to correct a drafting error. Perhaps my colleague the Minister of Agriculture would move it.


James Garfield Gardiner: I move:
That clause 28 be amended by substituting the word Part for the word "Act" in subparagraph (ii) of paragraph (a) of section 73A of the Act, by substituting "1949" for "1950" in subparagraph (iv) of the same paragraph; by substituting the words "reduced previous to the specified year" for the words "previously reduced" in subparagraph (v) of the same paragraph, and by substituting the words "subsection (4) of section 73" for the words "section 73" in subparagraph (i) of paragraph (b) of subsection (1) of section 73A.


[Stage Direction]
Amendment agreed to.
Douglas Charles Abbott: I have a second amendment to the section which includes section 73B, relating to mining, which I would ask my colleague to move.


James Garfield Gardiner: I move:
That clause 28 be amended by substituting the following subsection for subsection (4) of section 73B:
" (4) Paragraph (b) of subsection (2) and paragraph (b) of subsection (3) do not apply:
(a)	in the case of a person who disposes of the shares after carrying on a campaign to sell shares of the corporation to the public, or
(b)	to shares acquired by the exercise of an option to purchase shares received as consideration for property described in paragraph (a) of subsection (2) or paragraph (a) of subsection (3)."


Agar Rodney Adamson: I do not know whether the minister wants to make a statement.


Douglas Charles Abbott: Perhaps I should make a brief statement. I assumed that some hon. members would wish to discuss this section. The amendment which is proposed here is to give statutory recognition to a practice which has prevailed since 1941 in the income tax administration with respect to persons who invest or put moneys into the location and development of mining properties. I am informed that in 1941 a directive was issued by 'the then deputy minister of income tax in which he provided, in substance, what is set out in this section, namely, that if I alone or in conjunction with others put $10,000 or $15,000 into locating a mining claim, and had done a certain amount of preliminary work in proving up the property, locating it and so on, and then sell that claim for a substantial profit, either in cash or in shares, that profit will not be taxable-even though I may make a business of doing that, day after day, month after month, or year after year.
It was felt it was desirable to give statutory recognition to an administrative practice which, frankly, I thought the terms of the law scarcely justified. In this section, as it originally appeared in the bill, we had provided that a person would not be eligible for that special consideration if he were engaged in carrying on a business of dealing with the public in shares and securities. On reconsideration it did not seem fair to me that because a man was a stock broker or a bond dealer, or even if he was a mining stock broker, he should be precluded from making this type of investment, or doing this type of promotional work, just because of the fact that he might make his livelihood out of underwriting shares and selling them.
That is the purpose of the amendment which has just been read and, briefly, the purpose of the section. There is rjo change whatever in the law as it has been administered since 1941. However, the section I am proposing gives statutory recognition to this special extent in favour of those people who back the promotion of development by the location and the development of mining properties.


Agar Rodney Adamson: I am glad to have the minister's statement in this matter because, as he knows, there has been some considerable worry about this section. As the minister knows, the financing, discovery and development of a mine is an extremely hazardous and speculative business. Unless every encouragement is given both to individuals and to companies engaged in this extremely hazardous and speculative business we will not find that this type of capital,

this speculative capital, so essential for the development of mines, will continue but that it will tend to dry up.
The minister would be infernally lucky if he were on the ground floor in respect of even one producing mine. If he took a number of speculative chances he would find that the number of times he does win or that he does get in on the ground floor would be extremely rare. Over the past quarter century I believe the chances are less than one per cent.
I mention this merely to show how necessary it is to encourage risk capital in the development of mines. I understand the reason for this amendment. In many ways I have some sympathy for the purpose indicated by the minister. But there is grave danger in any attempt to restrict individuals who, to put it colloquially, make a practice of taking bets in the development of mines.
Some of us do it, to our sorrow, in an amateurish sort of way. But the net result is frequently, and more or less generally, unsuccessful. Some of us who perhaps have more time and more knowledge consider that it is part of a necessary development of the Canadian economy. Even so, despite the knowledge we have, and the trouble and exploration involved, we also find that the secrets of nature are very, very elusive. Even though a mine or an ore body is discovered-and this is not a common thing- and reasonably delimited by diamond drilling, trenching or shaft sinking, then we have the great difficulty of raising capital to develop what is considered, from engineering judgment, to be a worth-while ore body.
There is no easier way to kill the mining industry than to restrict speculation. By its very nature mining is an extremely speculative business. Even though you have what you consider to be a rich ore body, as indicated by surface drilling, until that rich ore body is developed, cross-cuts put through it, stopes developed, and shafts and mills erected, you have not got a mine; and all the work, all the effort and all the capital put into this may go for naught.
May I emphasize to the minister that to restrict in any way the flow of speculative capital into mining in its early stages is going to do the greatest disservice to the development of this country that could be done by anyone. Mining is entirely different from ordinary business. In ordinary business procedure, particularly manufacturing, a prospectus is issued, on which there is a reasonable estimate as to the probable profit that can be made. In mining no such thing occurs. All one can do is to say, "We have such-and-such a property; the geology is such-and-such;
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we have diamond-drilled it and found that we have such-and-such an intersection carrying such-and-such a value." On that bet, and only on that bet, does the initial speculator put money into the property.
That is an extremely hazardous and extremely speculative bet. But that is where mines are made. It is that type of speculation, that type of gambling, if we wish so to describe it colloquially, that gives the prospector and the initial developer and the man who puts up the money for the diamond drilling and the man who puts up the money for the initial trenching or the geophysical work or for the initial shaft-sinking, the money to go ahead with the development of the mine. As I have said, the betting against such capital is about a hundred to one but it is still a hundred to one. If by any regulation you make the one per cent who are a success subject to taxation for income purposes you are going to kill the goose that laid the golden egg more surely than by anything else that could be done to destroy the development of our country. I hope what the minister has said is correct, and that the section in fact does what he has said it does, namely, encourages the investment of capital in the mining business.
There are two or three cases which I think should be brought to the attention of the committee. In mining there are groups of prospectors who form themselves into syndicates. Then there are companies whose principal business is concerned with the prospecting and developing of mining properties. The act merely deals with prospectors as individuals. As a matter of fact most prospecting is done by syndicates at the present time. The old-fashioned individual prospector is very nearly a thing of the past. A great deal of prospecting is done by companies making a specialty of such work. I should like a statement from the minister to the effect that the capital gains, which may occasionally accrue to syndicates and prospecting companies that are fortunate enough to discover a property and develop it to the stage where its stock can be sold publicly, will not be taxed. I should like an assurance that the profit of the original prospector, whether it be an individual, syndicate or company, will be considered as a capital gain and not taxable even though the prospecting syndicate is principally engaged in the business of prospecting and carrying on the early development of mining properties.	*


Mr. Dumas:: Will the minister give the committee the assurance that the intent and meaning of subsection 3 of section 73B is the same as that in the departmental ruling of 1941?

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Douglas Charles Abbott: I am told the departmental ruling of 1941 took the form of a directive from the then deputy minister of taxation. I am also told that the section as drafted sets out exactly the practice that the department has been following since that time. I cannot make that statement from my own personal knowledge because I do not administer that department. As I said at the outset, there is no intention in this section to change in any way the practice which has prevailed since 1941.
The hon. member for York West raised the question as to what the position would be with respect to a syndicate. If the syndicate is unincorporated it obviously comes straight within the specific language of the section. If the development work was done by means of the purchase of shares in what was loosely referred to as a syndicate, then the ordinary rules with respect to the purchase of shares would apply, and the question whether or not there would be tax liability would depend on the quality of the investor.


Agar Rodney Adamson: That is just the question. Frequently a syndicate or individual will invest money in a prospect by taking down shares either in a syndicate or in an incorporated company. Many companies today have been incorporated and then several other development companies have purchased stock in the incorporated company-I am thinking of one particularly-in order to advance development. Let us take a mine which is one of the most active presently in the Canadian economy, and which may develop into a major copper producer. I will not mention its name but many members probably know it. It requires several million dollars to bring it into production. Several companies have invested large sums of money in this one company by the purchase of treasury stock. That money went immediately, without any deduction, into the development of the property which as yet is unproven.
It will take probably a year or so and possibly three or four million dollars more to decide definitely whether it is a major commercial operation. At the present time several prospecting companies whose business it is to develop mines have purchased stock in company X, shall we say, in order to put money in the treasury to enable company X to be developed. There is a strong possibility that a mine will be developed on the property. If that happens it may be that the individual companies which have invested money to bring company X into production will wish to sell a part or all of their equity in the producing mine a year or two years from now. I want to ask the minister

whether the money so received is going to be considered as income of these companies or as capital gain.


Douglas Charles Abbott: As my hon. friend has put it, I would say it would not be subject to tax. If one or two companies then proceeded to make a market for the stock, underwrite the stock and increase the capital of the company after it had been proven there was a producing mine, then of course they would be engaged in another operation. On the facts as set out, however, if two or three of them invested in a prospect, brought it to the point where it got to be a real mine and then sold their stock to somebody else, they would come within the operation of this section and in my opinion would not be subject to tax.


Arthur Leroy Smith: It is a fine distinction.


Douglas Charles Abbott: There are fine distinctions in all these cases; it cannot be helped. There are always cases in which it is very hard to tell whether a man is making an ordinary investment or speculation, or whether he is engaging in a regular course of dealing which constitutes a business.


Arthur Leroy Smith: The size of the chancellor's boot, as you and I used to say.


Douglas Charles Abbott: That is about it.


Mr. Simmons:: If this section is not clarified to the satisfaction of those interested in mining development, I am afraid it will seriously affect the development of new properties.


Douglas Charles Abbott: I would hope that the explanation I have given this evening would go a long way toward reassuring those people, and toward clearing up what I think has been some misunderstanding of the real situation. I repeat, there is no change whatever in the existing law. Rather there is a change in the existing law, because I think a practice has been prevailing since 1945 which was not justified by law, and we are now making legal what I think was of questionable validity under the ruling to which I have referred.


James Aubrey Simmons: That is the ruling of 1941?


Douglas Charles Abbott: Yes.


Agar Rodney Adamson: I realize what the minister is trying to do in this section, and I appreciate his intentions; but there has been a very considerable amount of worry in the legitimate mining business over this section, and I know the minister has received representations from people who are interested in prospecting and developing. That is why I

want it abundantly clear that there is no intention to tax as income any profit made from the development by a mining company or a mining syndicate of a worth-while prospect which is subsequently sold to the public and becomes a public company. That is so?


Douglas Charles Abbott: I am afraid I did not follow my hon. friend very closely, but I answered him previously. On the facts he set up before, if an individual, a corporation or anybody else backs a new development, brings it to the mining stage and sells it, the profit on that transaction, even if he makes a habit of doing that sort of thing, is not taxable.


Agar Rodney Adamson: Even if it was an incorporated company before he did it?


Douglas Charles Abbott: That is right.


Agar Rodney Adamson: Many companies are up against it for capital today-


Douglas Charles Abbott: In the case of shares it would have to qualify as a speculation or investment, not as a marketing operation. But there would not be any objection to a mining company buying shares in an incorporated prospect, thereby providing the prospect with the cash to go ahead and do the development. Then if the prospect turned out to be a mine it could sell the shares and take that profit. That would be a capital profit. Of course, in the case I have cited, if they engaged in a marketing operation, took up options on additional stock and made a market for it, then what I have said would have no application.


Agar Rodney Adamson: Thank you very much; I think that is clear.


Donald Methuen Fleming: There is another place where an amendment will be required. That is at the top of page 23, in the third line. Will not "May 4" need to be changed to "May 10"?


Douglas Charles Abbott: That is correct, and I thank my hon. friend for calling it to my attention. I thought we had provided an amendment in each case where May 4 appeared and made it May 10, but I am afraid we have overlooked this one. I shall ask one of my colleagues to move that section 32, subsection 1, be amended by striking out the words May 4, 1950, in subsection 3 of section 95A and replacing them by the words May 10, 1950.


Alphonse Fournier: I move accordingly.


[Stage Direction]
Amendment agreed to.
Stanley Howard Knowles: Now that the minister has taken us back to some of these earlier sections I wqpder if he would be willing to spend a moment or two on section 26.
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Douglas Charles Abbott: I am quite ready to do that.
I told my hon. friend this afternoon that we would go back to section 26 to take up a point with which he wanted to deal. However, I have two minor amendments to sections 22 and 24, so perhaps we could proceed with the rest of these sections and then go back to section 26 and move the two amendments to which I have referred. I do not think there is anything very controversial in the remainder of the bill.
The Aciing Chairman (Mr. Lesage): Shall section 11 as amended, section 28 as amended, and section 32 as amended carry?
Sections 11, 28 and 32 as amended agreed to.
Sections 33 to 36 inclusive agreed to.
On section 37-Interest.


Donald Methuen Fleming: I should like to mention a matter in connection with the imposition of interest. This is not by way of quarrelling with this section, because I am sure it will commend itself to the house since it involves a reduction in the rate of interest in this particular case from 7 per cent to 6 per cent. However, this gives me an opportunity to say that I think the Department of National Revenue is going unwarrantably far in imposing interest in the case of taxpayers who pay their current income tax on a quarterly basis, which means they estimate their income. I have seen one or two cases lately in which it seems to me the department has taken an attitude that is simply indefensible in insisting on charging interest on the balance required to be paid by a taxpayer who has made an estimate and who, after making his four quarterly payments, finds that his estimate was too low and so has a substantial payment to make on April 30 following. It seems to me that in the case of persons coming within that classification, people who make an estimate of their income and their tax and on that estimate make-quarterly payments on their tax, the department has no business to expect them to do-almost superhuman things in refining the estimate of their income. There are many people in that category who by March 31 cannot even come close to estimating their income for the year, and I submit as strongly as I can that in cases of that kind the department has no business at all imposing interest charges.


Douglas Charles Abbott: My hon. friend will appreciate that this only applies to 1948 and previous years. The law in that respect has now been changed, but that was the law that applied in those years. The obligation was upon the taxpayer to estimate, and if he underestimated the interest penalty ensued.

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Donald Methuen Fleming: Quite so, but I am taking advantage of this opportunity to complain about the way that provision is being administered at the present time. While I appreciate that it is the Department of National Revenue and not that of finance, I do register a very strong protest against what I consider to be harsh administration.


[Stage Direction]
Section agreed to.
Sections 38 to 43 inclusive agreed to.
On section 44-Application.
Douglas Charles Abbott: I have a minor amendment
here, Mr. Chairman, that provides for the insertion of section 115A. It is one of the new sections enacted by this bill.


Alphonse Fournier: [DOT]
That clause 44 be amended by substituting the words "sections 115 and 115A" for the words "section 115" in lines 39 and 40.


[Stage Direction]
Amendment agreed to.
Section as amended agreed to.
Section 45 agreed to.
On section 46-Deductions from income of corporation in petroleum or natural gas business.
Mr. Harkness:: I have a few remarks I
should like to make on this section, and a few questions I should like to ask. I am glad to see there has been a remarkable increase in interest in, and knowledge of, oil and gas development, particularly by people in eastern Canada, during the last two or three years. I have noticed it particularly, because in travelling across the country, when I tell people I come from Alberta they immediately start talking about the oil business; that was not the case a few short years ago. I think by now we all recognize the advantages to Canada of extensive oil and gas exploration and drilling programs. During the past two or three years we have had fairly extensive programs of that kind.
I should like to make the point that the taxation structure should be such as to encourage oil and gas men to further extend that program. I do not think there is any need to go into the advantages of that. If Canada becomes self sufficient in oil it means that the tremendous saving of United States dollars would go a long way towards fighting our generally adverse balance of trade with that nation. There are a number of misconceptions which are common about the oil and gas business. A large number of people have the idea that all you have to do in Alberta is dig a hole any place, and you immediately get a gusher and are wealthy for the rest of your life. When some of the people I meet find I

am from Alberta they say, "Do you own an oil well?" I have to admit with sorrow that I do not own an oil well. They seem to be surprised that anyone who comes from Alberta does not own one. The general idea seems to be that everyone in Alberta is wealthy and owns an oil or gas well, and there is no trouble about getting one. That is so far from the truth, it should not be necessary to say much about it, but I should like to put on the record a few figures to show what an extremely hazardous industry the oil industry is, and covering the profits which have accrued to people in that industry.
I have a compilation of the expenditures of twelve of the largest oil companies now operating in Alberta, and who have been operating there for a year or more. This shows what their returns have been up to date. These twelve companies have expended in exploration work, acquiring acreage for drilling and general operating costs-this excludes completely all costs of refining and relates to the expenditures incurred in the search for oil- $287,912,000. During that same period their gross return, which they received for the oil, amounted to $156,188,000, after they had subtracted from that the payment of royalties. In other words, they have spent the sum of $130 million more in the search for oil than they received for the oil which they found. I believe that is a good indication of the fact that this oil business has not been all gravy. It is not the easiest thing in the world to get
oil.	On the contrary, it is a very difficult thing. In the United States the general average of productive wells drilled is about one in five. There are four dry holes to one well which produces. Up to date in Canada it has been closer to twenty-three or twenty-four dry holes to one producing well.
A lot of people answer this by saying that a number of these companies have only been operating in the exploration and drilling business in Canada for a comparatively short time, and therefore you cannot take figures such as I have been giving as being indicative of the profit. I should like, therefore, to separate from the figures I have given the figures for the two companies which have been in operation there for the longest period of time, Imperial Oil Limited and its former subsidiary, Royalite Oil Company. During their entire period of operation these two companies, which were formerly one, have expended nearly $160 million, and they have received in return for that just over $111 million. These two companies, which have been in business the longest and have had producing wells for a long time in the Turner valley, have spent up to date roughly $48 million more than they received. Now, that gives an indication of the risky nature of

this business, and the fact that large sums have to be expended on exploration work before any returns are secured.
In view of that fact, I should like to make the point that during what is really the exploration period, so far as the development of the oil fields in Canada is concerned, and that is the period in which we are now, that exploration work should be burdened as little as possible by taxation costs which hamper operations. These costs prevent the companies from drilling as many wells as they might drill otherwise.
Coming to specific points in connection with this particular section, I should like the minister to clarify these bonus payments and other acquisition costs. In a brief submitted to the minister on February 21, 1950, the western Canada petroleum association asked that those bonus payments, and other acquisition costs in connection with securing leases, be allowed as expenses when the property had to be abandoned as unproductive. These expenses did not result in anything of capital value accruing to the company. As such they should be included as exploration expenses, the same as the costs of the geophysical survey. In so far as I can interpret this amendment, there is nothing in it to take care of costs of this kind. What is the situation in connection with these costs? Are they going to be allowed under these amendments?


Douglas Charles Abbott: The answer to that is that this amendment excludes those costs. They cannot be amortized, but the depletion is permitted against it. My hon. friend is referring to the bonus payments, those payments that you bid for?


Douglas Scott Harkness: Yes. I should like to suggest to the minister that costs of that kind, where no producing well has been brought in and where they do not represent any gain to the company whatever, should be allowed as an exploration cost or development cost, the same as other costs are.
My next question is this. In the explanatory note I see the following:
Subclause (1). The new subsection (1) corrects a technical error in the existing subsection.
What is the technical error that is corrected?


Douglas Charles Abbott: The words "the lesser of" were inadvertently omitted in the section as it now appears.


Douglas Scott Harkness: Can the minister tell us what difference that makes? In other words, what is the effect of this change going to be?
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Douglas Charles Abbott: The amendment is to section 53 (1), and that section as it now stands reads as follows:
A corporation whose principal business is production, refining or marketing of petroleum, petroleum products or natural gas or exploring or drilling for petroleum or natural gas may deduct in computing its income, for the purposes of The Income Tax Act, the lesser of.
Those words "the lesser of" were left out by accidental means; it was perhaps not quite a typographical error but about as close to that as possible. And then it goes on:
(a) the aggregate of the drilling and exploration costs . . .
And so on. On reading the section it becomes quite clear that you need such words as "the lesser of" in order to make it comprehensible.


Douglas Scott Harkness: Do I take it that the putting in of those words is going to make things less favourable for the oil companies?


Douglas Charles Abbott: Oh, no. It is just to give the section meaning, which it did not have before.


Douglas Scott Harkness: The explanatory note also states:
Subclause (2). The new subsection (2A) provides a deduction for so-called "lease rentals" up to $1 per acre for 1949 and later years.


Douglas Charles Abbott: It is the clause that excludes the bonus payments that my hon. friend was referring to.


Douglas Scott Harkness: Yes. As I understand it the lease rentals expenditure, as it is called, of $1 an acre is allowed as an income tax deduction.


Douglas Charles Abbott: It would not be without this section, but it is with this section.


Douglas Scott Harkness: No, but with this section it will allow it. If the lease rental is $5 an acre, as I understand it, $1 of this would be allowed as a deductible expense but the other $4 per acre would not be allowed as a deductible expense. Is that correct? I understand that it does not matter really what the amount of that lease rental is per acre, that allowance will be made only up to $1. It might be $10 per acre.


Douglas Charles Abbott: If it were an annual rental and exceeded $1 per year, only $1 would be allowed.


Douglas Scott Harkness: Yes. It does not matter whether it is $5, $6 or what it is; the $1 is still allowed. That is the point I was getting at.
Next I should like to ask what the situation is in a case in which prepayment of this lease rental has taken place. For example, there are many individual freehold owners

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of mineral rights, and they will give a rental only for a period of years, say for ten years or something of that kind. If, for example, the rental was only $1 a year, they would give a lease rental on a basis of a 10-year lease, at $1 a year; but they would give it only if they were paid the entire amount when the lease was entered into. In other words, they would have to get the $10 per acre at the start.
The reason for that is quite simple. There are many people who go into the oil business, and they would enter into contracts of this kind. They might have bad luck and put down a number of dry holes. The result is that the company would go broke. Then the man who had given this 10-year lease would of course have no means of collecting the money. In order therefore to ensure that he does collect the money, in many cases-and I think in the majority of cases-he wants to get the money when the lease is entered into. When that situation exists, when there is a prepayment of this lease rental will the deduction be allowed at the rate of $1 for say the ten years in this case that we instanced that the lease lasts?


Douglas Charles Abbott: 1 would hesitate to answer that question on a hypothetical basis. I think you would have to look at the agreement. Under certain conditions, if it were a genuine prepayment and so on, it could perhaps be allowed or spread over the period. But I would have to see the agreement before I would feel free to give a definite answer.


Douglas Scott Harkness: By that does the minister mean that what you might call discretion will have to be exercised in each individual case?


Douglas Charles Abbott: No. It would depend on the facts. There is the law. The law says:
(2A) In computing a deduction under subsection (1) or (2) no amount shall be included in respect of a payment for or in respect of a right, licence or privilege to explore for, drill for or take petroleum or natural gas other than an annual payment not exceeding $1 per acre.
That is clear enough. There is nothing obscure about that language. That would have to be applied to the particular contract which was entered into.


Arthur Leroy Smith: I think it is very obscure. Suppose it is a 10-year job and they paid for that all at once. Why do you not say they are allowed to deduct that?


Douglas Scott Harkness: I think that the case I gave was quite clear. If prepayment had been made for ten years, shall the $1 an acre which had been paid all at once to cover the 10-year period be deducted year by year at the rate of $1 per acre?


Douglas Charles Abbott: I would have to look at it when the circumstances came up.


Douglas Scott Harkness: I do not know, but it would seem to me that as this will actually operate in practice, the interpretation which is going to be placed upon it is perhaps the most important thing. I should think that the minister could make that a little bit clearer for the benefit of the oil people involved.


Douglas Charles Abbott: As I have had to say in this chamber before, Mr. Chairman, I used to charge for opinions of that kind, but I cannot do so now. I will therefore leave it to my other colleagues at the bar who earn their living in that way.


Douglas Scott Harkness: I should like to ask the minister this question. Is a payment such as that in the hands of the recipient, say the farmer who gets it, considered as income in his hands, or is it not?


Douglas Charles Abbott: That would depend on the circumstances of the case. I would think if it is an annual payment of so much an acre, it would be income. That is only a personal opinion, offhand; and free.


Douglas Scott Harkness: It is considered as income. I would make the proposition that it should certainly be allowed on the $1 an acre basis over the ten years or fifteen years or whatever period the lease might last for.
I should like to go on to another point now, and that is the question of reservation and extension fees for these reservations. In the province of Alberta when an oil company applies to the Alberta government it secures what is known as an oil reservation which gives them the right to prospect for oil or to survey it and explore for oil on it. The normal payment for that I think is $250. That covers the reservation for the first year. Then the second year the company holds this reservation they get an extension as it is called; and the second year they pay 30 cents an acre for the right to explore on that land. If they wish to continue to explore on it a third year, they pay 70 cents an acre during the third year. I should like to ask if payments of that kind are included under this subsection 2A. In other words, are these reservation fees and extension fees allowable as part of the $1 per acre which is provided for in this amendment?


Douglas Charles Abbott: I am informed that if they are annual payments, they would come under this section. I cannot speak from personal knowledge.


Douglas Scott Harkness: I think these reservation and extension fees, as I have indicated, are annual payments. I think that your adviser, Dr. Eaton, could advise you in connection

with that. I think he knows much more about that than anybody else here. He knows much more about this than anybody else.
I would take it then that companies of that kind are included. Can the minister say definitely whether they are included or not?


Douglas Charles Abbott: I am basing my statement on information which I have received from officials that if they are on annual payment they would come under the section which we are discussing.


Douglas Scott Harkness: Then there are certain other fees.


Arthur Leroy Smith: The minister is not charging for that opinion.


Douglas Charles Abbott: No; these are all free opinions.


Douglas Scott Harkness: I must say that in some of these opinions the minister is not committing himself very firmly.


Douglas Charles Abbott: I do not want to infringe the prerogatives of the legal profession.


Douglas Scott Harkness: I do not like to see so many loopholes left or opened up. The next question I should like to ask is in connection with lease agents' fees and legal expenses. When an oil company starts looking for leases it very frequently gets them from a lease agent whose business it is to pick up leases and to handle them as an agent might handle real estate or anything else. The ordinary fee paid to a lease agent runs anywhere from 10 cents an acre to a dollar an acre. And of course there are certain legal expenses in connection with securing leases. Unfortunately these legal expenses always seem to creep up, and in some instances they come to a considerable amount. Are these lease agents' fees and legal expenses incurred in connection with securing a lease applicable to this dollar an acre business?


Douglas Charles Abbott: I am not familiar with that business, Mr. Chairman, but they sound like capital expenditures to me.


Arthur Leroy Smith: Lawyers' fees?


Douglas Charles Abbott: Yes.


Arthur Leroy Smith: When did you
find that out?


Douglas Scott Harkness: I should like to point out that lease agents' fees or legal fees are as much of an expense to the company which is in the oil exploring and drilling business as any other sort of expense; and if they cannot be applied under this dollar an acre clause, then I would contend that they should be applicable under section 4, I think it is, which provides for exploration and other expenses being deducted. Will the minister
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tell me whether any of these things are deductible under what you might call general exploration expenses?


Douglas Charles Abbott: I am afraid I cannot give any general opinion, but legal fees are a capital expense. If they are legal fees, for instance, incurred in acquiring a piece of immovable property, or if you hire a lawyer to examine title to a factory that you wish to purchase, it is a part of the capital cost of the factory.
I suppose if you incurred some legal fees for the purpose of getting a lease it may be part of your leasing cost. I am speaking with a great deal of diffidence here because I know nothing about the way in which the oil business is conducted or how the lawyers who advise the oil companies or the lessees charge.
I know that I am in the presence of experts here in that line, so I am speaking with a great deal of caution.


Douglas Scott Harkness: Section 4 provides that all expenses incurred directly or indirectly in searching for minerals in Canada are deductible. My contention is that this type of expense is one which is not indirectly, it is really directly, incurred in order to be able to search for oil, and to take part in the search for oil, and as such it should be deductible. Under the regulations I think it comes down to departmental rulings. If the present departmental ruling does not include expenses of this sort I would urge upon the minister that it be changed so that they are included either in subsection 2A or subsection 4. It does not matter under which section it is put except that I think it would be better under section 4.
The next matter that I should like to deal with is surface rental costs. I do not see anything in either of these sections covering surface rental expenses. I understand in the past it has been ruled by the department that these surface rental expenses are not deductible as operating expenses. Why that should be I quite fail to understand. The situation is this, Mr. Chairman. In Alberta when an oil company goes on a man's land, what is known as an arbitration board sits on the case and determines what compensation that man, the owner of the surface rights, shall be paid for the inconvenience caused him by the oil drilling company going on his land and taking some of it out of production and, I suppose, for the right of entry and things along that line.
In Alberta the ordinary amount which has been awarded by the arbitration board has been between $1,200 and $1,500 per well site. In other words every time a company drills a well it has to pay the surface owner $1,200 to $1,500 for the right to drill. It has nothing

Income Tax Act
to do with the minerals underneath. In addition to that the arbitration board fixes the rental a year for the area around the well. The area taken is usually four acres, and for that four acres the usual arbitration award has run from $65 to $100 an acre. In other words, up to $400 a year is paid as surface rental for the four acres that surround the well site. This of course could not possibly apply under the dollar an acre business because the cost per acre is so much greater that it would have no effect, really.
Has consideration been given to looking at these expenses as normal exploration or drilling expenses? It is certainly an ordinary drilling expense, in my opinion. The minister said a while ago that anything that went on from year to year could be included in the dollar an acre provision, and so forth. This is a thing that goes on from year to year as long as the well is producing, and it seems to me it should be included as a legitimate expense for the production of oil. Can the minister make a statement on that?


Douglas Charles Abbott: That particular point about rental for surface rights has not been brought to my attention so far as I am aware. I have listened to my hon. friend's remarks, and I shall ask the Department of National Revenue to see how they are dealing with it. I presume it must have been brought to their attention, but it was not included in the brief that the western petroleum-


Douglas Scott Harkness: Yes, it was included in their brief-in fact I am quite sure it was.


Douglas Charles Abbott: Not in the brief submitted to me. However, I will look into the question.


Douglas Scott Harkness: The minister has mentioned the brief which was submitted by the western Canada petroleum association. In the past he has given favourable consideration to many of the recommendations which have been made by that association, which takes in all of the oil men engaged in exploring and drilling for oil in western Canada. What reception was given to or what decision was made on the recommendations that they submitted to him this year? We have already dealt with some of them, but in addition to that there is their recommendation that depletion be calculated on the basis of the income from each individual well or property instead of against all the wells of the company, after charging against such well or property only the cost directly attributed to it. What was done in connection with that, if anything?


Douglas Charles Abbott: I had a very pleasant interview with representatives of the association. Careful consideration was given to their representations, and such of those representations as it was possible to implement will be found in the sections of the bill. It was not found possible to accept their request that depletion be calculated on individual well basis.


Douglas Scott Harkness: Another matter which I
have brought up here year after year, and which is contained as the third recommendation of this association, is that the deduction of drilling and exploration costs be put on a permanent basis. It was put on a three-year basis, and it has been extended for another year; or is it proposed to extend it by this act? I asked the parliamentary assistant about this when we were dealing with the resolution, and he said he understood considerable attention had been given to it but it had not been decided to make a change this year. I wonder if the minister can add anything to that?


Douglas Charles Abbott: What the parliamentary assistant said is correct. We did not feel that we could yet put this very special provision on a permanent basis, but we have now put it on a three-year basis. They know three years ahead what the provision will be. At a later date it may be possible to carry out that recommendation which has been made, but I do not feel we can do it this year.


Douglas Scott Harkness: I was glad when it was put on the three-year basis last year, and I am glad to find that that has been extended another year. I would hope further consideration would be given to it before the next budget is brought down, so that these various special deductions for oil and gas drilling companies might be put on a permanent basis, so that they would know where they stand and so that as a result of that provision they could lay out a ten-year program, or whatever it seemed wisest to do, always knowing their exact position.


Douglas Charles Abbott: Further consideration will be given before the next budget.


Douglas Scott Harkness: I can assure the minister that every oilman in Alberta is quite sure that this would assist them in raising capital and in extending their drilling program, which certainly would redound to the general benefit of the country as a whole.
There was a recommendation with respect to the right to deduct drilling and exploration costs, and such right being extended to any taxpayer. Under the act as it is at the present time these special drilling and exploration costs deductions are applicable

only to companies the main business of which is that of drilling for oil. It is considered out in that country that there are probably quite a number of mining companies with money available to them who, if these special deductions were extended to them, would go into the drilling business.
A request was made that the special gas and oil provisions be extended to any taxpayer so far as his operations in drilling for gas and oil are concerned. I wonder if the minister would make a statement on that question?


Douglas Charles Abbott: I am sorry, but I did not catch the hon. member's question


Douglas Scott Harkness: I do not wish to repeat all I have said.


Douglas Charles Abbott: I heard the first part of it.


Douglas Scott Harkness: My question is this: What consideration has been given to placing all taxpayers who drill for gas and oil, even though that is not their main business, on the same basis as oil companies, so far as gas and oil operations are concerned?


Douglas Charles Abbott: My recollection is that we began giving consideration to that back in 1943 or 1944, when I was parliamentary assistant to the then minister of finance, and we decided we should not do it. Our mind has not changed since then.


Douglas Scott Harkness: Then, section 73 of the Income Tax Act-


Douglas Charles Abbott: It has been repealed. We agreed to that recommendation. That is out.


Douglas Scott Harkness: It has been repealed?


Douglas Charles Abbott: Yes.


Douglas Scott Harkness: I am glad that is so. I believe that will assist in the exploration program by making it possible to finance a considerable number of wells by means of royalty trusts, which otherwise could not have been financed. It is decidedly a step in the right direction, if that has been repealed. May I thank the minister for taking that action.


Joseph-Alfred Dion: Shall the section carry?


Arthur Leroy Smith: No. I shall keep the committee for less than five minutes. But in dealing with all these sections and subsections I believe it is apparent that the government has lost the idea in connection with the general policy with respect to the development of oil in the country from which I come. What it should be-and the minister may tell me that this is the policy-is that, first, the government should not be inclined to collect
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income tax, except from those people who have earned an income. That is a very gentle statement of the situation; but I think perhaps it is a proper basis upon which to consider the matter.
I agree with the details mentioned by the hon. member for Calgary East-and do not regard that lightly, because we have talked the matter over in our room. Here is what, it seems to me, should have been done: the history of the industry indicates, and it is admitted by all of us, that the development of oil in Canada is a very important development indeed. I must assume that any government in Canada will do all it can to assist in that development, having in mind the benefit which will be derived by the whole of the country.
One need mention only the dollar situation to realize the significance of this. I am sure the minister will appreciate what I have in mind. My objection to what is being done is that the government has lost sight of the general benefits the country should have from this industry, and it is stumbling over little bits of things which, in terms of revenue to the country, mean very little. Yet, to the individual or company confronted with these things, they constitute stumbling blocks greater in extent than might have been envisaged by those who prepared them.
Let us refer to one point mentioned by the hon. member for Calgary East-and perhaps to only one. We approach the man who owns his own oil rights, having secured those rights back in the nineties. He is in the position of being on a wildcat acreage, in possession of a half-section. He says to the leasehound- those are the fellows who are always wanting to be regarded as exceptions, but you do not worry much about them-"a dollar an acre?- yes. You will not be here for some years, will you?" They say No. I am being very practical about this, because there are not nearly enough drilling outfits in the world to permit those companies operating under permit to conform with the conditions set out by the Alberta government. That is the reason we hear about farm-outs. Imperial Oil will see this company and that company on a split basis of return-farm-outs-in order to carry out the program.
This man says, "I am not going to give you a lease on my property for ten years at one dollar an acre, payable year by year,"-which in wildcat country is probably the going rate. He says, "If you will give me ten times $320, then I will talk to you. I will give it to you on the dollar-a-year basis, but I want cash in my little hot hand right now."

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Under the present legislation the company, which pays him not $320, but ten times that, may on that basis deduct only one dollar an acre, or $320. At the same time the Department of National Revenue takes from the man who gave the company the lease, with prepayment over a ten-year period, income tax in that one year for all the money he got. Let us have a little bit of consistency about this matter. It is income in the hands of the recipient, and what is the situation with respeot to the man who pays it? I go a step further. I am merely making suggestions, and I am not being tough about the matter. If we were back on the question of depreciation I could be very tough. I notice that the minister and the man who invented this cock-eyed depreciation are having a little chat at the moment.
What I say is that we should promote the purpose which the government has, which it must have, and for which I honour them. They are seeking the development of oil, and we all want that to take place. It seems to me that when it comes down to a question of charging an expense to make that development the department might even adopt an attitude of generosity. You should talk to Dr. Hume about it. It involves so much and so many things. An attitude of generosity would not hurt at all the development which is going on out there. With great respect, may I say that is not your attitude. Your position is that you have allowed implements such as drilling equipment to enter Canada from the United States duty free. You thought you had given somebody a great Christmas present. All you did was to give Canada a chance to develop. In dollars you have got it back a thousandfold. I am sick and tired of being told that last year you gave so much and this year you will give a little more. Why not make one bite of the cherry and simply say that expenses incurred in exploration will be allowed, particularly if they result in dry wells or non-productive areas. Let us quit quibbling about the matter and put an end to it by adopting that view. [DOT] I know that in several other departments of federal and provincial governments such as workmen's compensation and unemployment insurance instructions have gone out that if a question of doubt arises it should be resolved in favour of the individual.
That is not the position with respect to the oil business. The oil business is not begging. These people, if their ideas of development are correct, will come out all right at the end of the road. When they do they will not mind the government imposing income tax to whatever extent the government thinks reasonable, but they do object to taxes being imposed on them now. With the greatest respect in the world to Dr. Eaton,
[Mr. Smith (Calgary West).!
they are being imposed on companies searching for oil even when the results of their searches are fruitless. Let us take one of the instances referred to by the hon. member for Calgary East. In the great generosity of your big hearts you have allowed $1 an acre. Suppose you cannot get the land for $1 an acre. Suppose it costs you $10 an acre. You drill the land and you lose your money. You have paid $10 an acre, and it is not much satisfaction to know that you are allowed $1.
In saying that I come back to the point that your purpose must be to encourage the finding and development of oil in Canada. I have enunciated your broad policy for you perhaps too generously but it is what you are.doing in these small picayune ways. It is the pinpricks. You are using $1 an acre against $2 an acre and all that sort of nonsense. When a man pays $10 for a ten-year period $1 an acre will be his but the $9 is not. That sort of thing will not develop the oil business in Canada. I am not going to use harsh language. Oil development is taking place in spite of restrictions. I want to thank Dr. Eaton and the other persons with whom the oil people have had to deal for fair treatment within the knowledge which Dr. Eaton had supported by the knowledge given to him by those persons who call on him. Let us stop worrying in this House of Commons about $2 here and there. By proper encouragement and not picking on these people we will get $2,000 for every dollar we have been bothering about.
Therefore, Mr. Chairman, it is an attitude that I am talking about. I am not dealing with any of the details which have been touched upon. I wish Dr. Eaton would come to Alberta and I would drive him around to some of these places. There is oil in Alberta and in neighbouring provinces because it is not going to be confined to Alberta. Let us remember that within the past week the government sold two quarter-sections, only 160 acres each, for $3,188,000 by way of bonus allowance.


Mr. Low:: Just the oil rights.


Arthur Leroy Smith: Only the rights and that by way of a bonus. They still have their $1 an acre, and perhaps it has put that figure into the minds of some people here. They still have 12J per cent of the gross. That means that for every barrel of oil that comes out of the ground they will receive one-eighth. Let us get that idea into our minds. We are not dealing with little piddling things. I speak from a dominion standpoint. The minister is happy. He thought that some of the radio broadcasts he made straightened out the dollar situation.

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With great respect, Alberta did more to straighten out the dollar situation than all the radio talks the minister ever made.


Douglas Charles Abbott: A few other things helped besides Alberta.


Arthur Leroy Smith: Pardon?


Douglas Charles Abbott: Alberta was very helpful but there were other things that helped besides, apart from the radio talks.


Arthur Leroy Smith: Rich Albertans stopped travelling. I think that was one of the things that happened, and those who were not rich never travelled anyway. Let us get down to cases and not talk a lot of nonsense about people going to Florida. Let us all grasp this vision. For all the dollars you are going to get by the few things mentioned by the hon. member for Calgary East, it will cost you more to collect them than you will have at the end of the year.
Let us think of this. We all agree on the development of industry within our country. We all say production is the only thing that can carry us, that production is the only thing that can carry a $2,400 million budget. I hope I am right in that figure. It not only staggered me; it staggered my imagination when I heard the minister mention it, but my memory was not staggered, so I think I am right in that. That budget can be carried and fulfilled if we are but generous to people who are doing big things, instead of inflicting little pinpricks in their sides or their backs or their bellies. That is all these refusals amount to with respect to these little things. But one of these little things to a man engaged on the job may become a big thing by the time he reaches the end of his road. The income you are saving by this-what is a nice word?


Douglas Charles Abbott: Assistance to the oil industry.


Arthur Leroy Smith: Nonsense. I was going to use the word "puerile", but I thought that would be unkind; but what you are doing by this nonsense amounts to nothing in the economy of this country. When a man gets an oil well and an income, go after him; but for the love of all that is reasonable help him get that oil well producing. Do not hinder him, as you are doing by these refusals here, there, and elsewhere.


[Stage Direction]
Section agreed to.
Section 47 agreed to.
On section 48

Gift to His Majesty by wife or other dependent.
Donald Methuen Fleming: It is to be observed that provision is made here only in the case of a gift to His Majesty in right of Canada. The
reasons for this amendment I think are quite obvious, and I have no doubt we will all support the amendment, but I am questioning why we should stop at gifts to His Majesty in the right of Canada. If we refer back to section 36 of the bill we see that in the case of the gift tax provision is made for exempting gifts to His Majesty in the right of Canada, or in the right of a province, or gifts to a municipality. I do not know if there are any gifts to His Majesty in the right of a province or gifts to a municipality in issue here, but I oannot quite follow the logic of limiting the provisions of section 48 to gifts to His Majesty in right of Canada and stopping there, when in section 36 we make provision for gifts to His Majesty in right of Canada, gifts in right of a province and gifts to municipalities.


Douglas Charles Abbott: If my hon. friend will think
back he will remember that this section and the corresponding section in the old act provide for special gifts to His Majesty in the right of Canada relating to income tax alone, in order to avoid a very heavy penalty or very heavy additional tax in the case, let us say, of a married man whose wife had a certain amount of separate income which would run him into a higher bracket. I am told this is simply to carry forward and take care of some special transition provision in connection with that tax. It does not relate to gifts in the ordinary sense at all. It is simply a special enabling provision which was in the old act and has been carried forward in this act, permitting taxpayers, by making a gift to His Majesty within a certain period of time, thereby to save themselves or their consorts a very substantial amount of income tax.


Donald Methuen Fleming: I quite agree with the purpose of the section.


Douglas Charles Abbott: There could be no purpose in making the gift to anybody else for that purpose. It is simply the gift of an amount to reduce the income below a certain taxable level.


Donald Methuen Fleming: I expect that all hon. members are familiar with the way that type of gift has operated, because there have been many cases of that kind. But if we recognize in principle a broader kind of gift in the other section I am just wondering why this provision could not be broadened to include gifts to provinces or municipalities.


Douglas Charles Abbott: The gift here is to be applied on account of the tax liability, for the reasons I have mentioned.


[Stage Direction]
Section agreed to.
[Stage Direction]
Income Tax Act
On section 22-Income of beneficiary.
Douglas Charles Abbott: I am going to have to revert to this section in order to move a minor amendment. I have also a minor amendment to section 24. Then I assured the hon. member for Winnipeg North Centre that there would be an opportunity to discuss section 26, on which he has some points he wishes to raise. The amendment to this section reads:
That subclause (2) of clause 22 be amended by adding to subsection (6A) of section 58 the following words:
"but shall, for the purpose of section 20, be deemed to have been allowed to the trust or estate under those regulations in computing its income for the year."


Alphonse Fournier: I move accordingly.


Douglas Charles Abbott: This is a purely technical amendment.


[Stage Direction]
Amendment agreed to.
Section as amended agreed to.
On section 24-Non-application of paragraph (a), ss. (2), sec. 73.
Douglas Charles Abbott: The first amendment reads:
That subclause (2) of clause 24 be amended by substituting "1949" for "1950" therein.


Alphonse Fournier: I move accordingly.


[Stage Direction]
Amendment agreed to.
Douglas Charles Abbott: The second amendment adds a new clause, exempting for the purposes of income tax payments or grants made by provincial governments to those producer cooperatives organized under provincial legislation. The amendment reads:
That subclause (1) of clause 24 be amended1 by substituting the word "subsections" for the word "subsection" in line 24 and adding the following within the quotation marks:
"(3) Where a corporation that was incorporated under provincial legislation respecting the establishment of co-operative corporations for the purpose of marketing (including processing incident to or connected therewith) natural products belonging to or acquired from its members or customers, of purchasing supplies, equipment or household necessaries for or to be sold to its members or customers or of performing services for its members or customers has received a grant from the government of a province that was not fixed by reference to natural products marketed, supplies, equipment or household necessaries purchased or sold or services performed by it,
(a)	no amount shall be included in respect of the grant in computing the corporation's income for any year, and
(b)	paragraph (h) of subsection (4) of section 20 is not applicable in respect of any property in respect of or for the acquisition of which it was received."


Alphonse Fournier: I move accordingly.
Amendment agreed- to.
Section as amended agreed to.
[Mr. Abbott.)
On section 26-Certain payments from pension funds.


Stanley Howard Knowles: This afternoon I discussed with the minister a particular problem relating to the deductibility of payments into pension funds. As I understand the general rule now in force, it is that payments into approved pension or superannuation funds are deductible for income tax purposes, with the consequence that when a pensioner receives payment under a pension plan those payments are taxable. What is the situation with respect to persons receiving pension payments from a fund into which they made their contributions at a time when those contributions were not allowed as a deduction for income tax purposes?


Douglas Charles Abbott: All the payments were made before the period when they became deductible?


Stanley Howard Knowles: As a matter of fact I have in mind two kinds of cases, but I was trying to simplify it by taking first the case in which all the payments were made before those payments were allowed as a deduction.


Douglas Charles Abbott: In that case it would be all exempt when it came out.


Stanley Howard Knowles: What was the year when the change was made? Was it 1944?


Douglas Charles Abbott: It was following the report of the Ives commission. I would be inclined to think it was 1945, but I would have to check on that.


Stanley Howard Knowles: What about the case of a person who paid into a fund prior to 1944 or 1945 when no deductibility was allowed, but who continued to pay in for a year or two after that before going on pension? I am told that there are cases of persons who, because they continued to pay for a couple of years after the time when those payments in were allowed as deductions, they are not now permitted to receive their payments free of tax.


Douglas Charles Abbott: I am told that if the payments in straddled the date oh which the change was made, which would appear to be the case just outlined by my friend, there is an apportionment of the pension coming out as between the taxable portion and the nontaxable portion. If the payments had been made in for two years which were deductible for income tax purposes, under the new ruling then the appropriate part of that pension represented by those two payments would be taxable and the remainder would be exempt.


Mr, Knowles:: I think I am prepared to let it go at that, for that seems the way it ought to be. It does not jibe with the statements made in a letter to me by the Acting Minister of National Revenue with respect to a particular case. I shall send the national revenue people a copy of today's Hansard, for the minister's statement will back up our case.


[Stage Direction]
Section agreed to.
Title agreed to.
Bill reported.
Mr. Speaker:: When shall this bill be read the third time?


Stanley Howard Knowles: Next sitting of the house.



WAR VETERANS ALLOWANCE ACT


[Stage Direction]
The house resumed from Tuesday, May 16, consideration of the motion of Mr. Gregg for the second reading of Bill No. 180, to amend the War Veterans Allowance Act, 1946.
Percy Ellis Wright: This is one of those bills, Mr. Speaker, where one criticizes the government for their sins of omission rather than their sins of commission. The act does certain things which everyone in the house agrees with, but it fails to go far enough. It fails to take care of some inconsistencies and some needs which exist today. For instance the amount payable today under the War Veterans Allowance Act is just $40.41 per month. I do not think anyone will nrgue that is sufficient to meet the needs of an aged veteran. When this bill was passed in the first place, it was passed for the purpose of taking care of the prematurely aged war veterans who had served in the first war. The payments under it today certainly are not enough to do that. As a matter of fact, the government admitted that last year, by passing a special appropriation of $500,000, which was made available to take care of needy cases under this act. This year the minister has in the estimates an amount of $750,000 to take care of special cases of need.
It seems to me it would be far better if we were to increase the payments under the act rather than put on another means test, as we do under these special payments, and have the investigation which goes with it. If this bill had gone to a veterans affairs committee, it could have been discussed and we could have heard the submissions of the various veterans organizations in Canada with respect to this matter. There is another aspect of which we have not heard in connection with this matter. There is a lack
War Veterans Allowance Act of markets in Canada for certain products. As a matter of fact, there are two ministers of our government overseas today trying to find a market for surplus products which we have. I have no objection to seeking markets abroad providing we cannot find a market at home for those products. I think we are neglecting the market at home. If we provided an additional $10 per month to the prematurely aged veteran, I am sure that money would be spent in Canada to purchase many of the goods which are in surplus supply in this country today.
Instead of creating purchasing power at home, what are we doing? We are making loans or gifts to governments overseas so that they can purchase these products. It seems to me we would be much farther ahead if we first supplied these things to our own people. I am sure this is one way we could do it. There are many anomalies under the act. I know in my own constituency there are people who immigrated to this country from enemy countries after the first war, who are today receiving old age pensions. In the province of Saskatchewan they are getting more security under that old age pension than we are giving to our prematurely aged veterans of the first war under this act. It seems to me to be reasonable that the Department of Veterans Affairs should at least make the payments under the War Veterans Allowance Act equal to the best old age pension of any province in Canada; that is the least the government should do.
Then there is the matter of the widows of veterans who will be included under this amendment to the act. These will be the widows of veterans of the various wars which have been fought in the past. If the veteran lived in Canada for twenty years, his widow will be entitled to receive the war veterans allowance. If however the veteran died before completing his twenty years' residence in Canada, his widow will not receive the war veterans allowance. I feel sure there should be an amendment to the act to take care of these cases. There is also the matter of service in England to consider. For a number of years every veterans organization in Canada has been asking that service in England be considered for the purposes of the War Veterans Allowance Act, that is service in England during the first war. As time goes on, we are going to find that the veterans of the second world war will be entitled to the war veterans allowance for service in England, while the older veterans will not be entitled to it. As a matter of fact, we have cases today of men who served in both the first and the
2642	HOUSE OF
War Veterans Allowance Act second war, and who went to England. They are now entitled to the war veterans allowance. Their comrades who did not have the opportunity of serving in the second war are not entitled to that allowance. I feel that England should be declared a theatre of war for world war I. This would remove the anomaly under the act, and would place all veterans in the same position. These are just two or three things which I believe should be discussed further. That is one of the reasons why we in this group have insisted that we should have a permanent veterans affairs committee of the house before which we could take these different acts which have to do with veterans affairs, have them discussed, hear evidence from the various veterans organizations in the country, and come to some unanimous agreement as to the best treatment that we can give our veterans.


Mr. Victor Quelch (Acadia):: There are just a few comments, Mr. Speaker, that I wish to make at this time. There is no doubt that the veterans organizations across Canada will be glad that at last we have granted entitlement to the war veterans allowance to former members of His Majesty's forces who fought prior to 1921 and who have been resident in Canada for twenty years or more. The act, however, goes beyond that and also includes former members of foreign powers who fought with us in the wars before 1921, but against us in the last war.
I am not opposing the proposal to make the war veterans allowance available to men of foreign powers, even though they may have fought against us in the last war. I feel, however, that before we bring in that group of men we should make more adequate provision for our own men who are receiving the war veterans allowance; and by that I mean that we should increase the amount of the war veterans allowance from $40 a month to $50 a month in order to put it on a level with what is paid under the Old Age Pensions Act in Alberta and British Columbia. But more especially I feel that the time has come when Britain should be declared a theatre of war in world war I.
We have made England a theatre of war in world war II, and I think the time has now come when England should be recognized as a theatre of war in the first war. After all, it is merely an arbitrary decision on the part of the government to declare that it was not a theatre of war. As a result of this amendment, it seems to me that we are going to have some undesirable situations in many communities. There will be veterans of Canada's armed forces who volunteered for overseas service in world war I, who may have


actually served three or four years overseas and who today may be 100 per cent incapacitated but yet are refused any benefits from the Department of Veterans Affairs on the ground that their service did not extend beyond England. Yet at the same time, as a result of this amendment, there will be veterans of foreign powers who fought with us in world war I but whose country fought against us in world war II, who have resided in this country for twenty years, and will now be eligible for the war veterans allowance; and they may be men whose physical condition may be far better than that of our own Canadians who are refused any help at all. That situation of course can only be taken care of by declaring England a theatre of war in world war I.
I think many people in districts throughout Canada are going to be somewhat disturbed when they see veterans of foreign powers that fought against us in the last war receiving the war veterans allowance when our own men are refused it. Mind you, I am not saying that these men fought against us in the last war but the country of which they are nationals fought against us. I realize that the act states that if these men fought with us in the first war and then fought against us in the second war, they will not get the benefits. But if their country fought against us in the second war they are apparently eligible. For instance, Italians who fought with us in the first war and yet whose country fought against us in the last war, I take it will be eligible for the benefits of this act even though they were interned during the last war. I take it that under this act. Japanese who fought with us in the first war and yet whose country fought against us in the second war will now be eligible for the benefits of the War Veterans Allowance Act. I think it will be a rather disturbing picture to many communities when they see our own men who volunteered for overseas service, who went overseas for three or four years, refused a pension merely because England was not declared a theatre of war. As I say,
I am not opposing the idea of the bonus of the war veterans allowance being paid to these men but I think that before that is paid we should more adequately take care of our own veterans.
I now wish to say just a few words with regard to the widows of veterans of His Majesty's forces who died before completing twenty years' residence in this country and who are thereby declared ineligible for the benefits of the act. I find it extremely hard to see any sense or reason for that ruling. So long as a veteran came to this country over twenty years ago and did not leave the

country, it seems to me that his death should not affect the granting of a pension to his widow, provided she has continued to live in this country since his death. Those are matters that I think should be given further consideration. I hope the minister can find it possible to refer this measure to a committee in order that these matters may be discussed, especially the matter to which I have referred with regard to nationals of foreign powers who fought with us in the first war and yet fought against us in the last war.


Mr. Howard C. Green (Vancouver-Quadra):: This whole question, Mr. Speaker, was dealt with at some length when the resolution preceding the bill was under consideration. I therefore have comparatively little further ground to cover tonight. At the outset I should like to support the suggestion made by the hon. member for Acadia (Mr. Quelch), that this bill be sent to a committee. Throughout the session I have regretted that a special committee was not set up to deal with the problems of the veterans. But at the very least this bill should be sent to a committee, and I think such committee should be made up of veterans who are members of the house, just as has been the case in other sessions when we have had a special committee.
The bill is divided into two parts. One deals with the benefits which are now to be given to those imperials who settled in Canada up to the year 1930 and to other groups who served in other allied forces during the first war. Personally, I am greatly pleased that the imperials are at last to be made eligible for the war veterans allowance; but I urge upon the minister once more that a wider provision be made for the widows of these men. As he knows, we pointed out to him during the earlier discussions that it was unfair that all the widows should not be covered. Now we find, from the way in which the legislation reads, that the widow will not qualify unless her husband had been alive in Canada for twenty years. The test should be just the other way around. In other words, if he came here twenty years ago the widow should be eligible. Many of the widows came from the old country. In addition I imagine there would be quite a few who were native-born Canadians and who married imperial veterans. Neither group will be eligible unless the husband was actually alive for twenty years in Canada. I hope it is not yet too late to amend the legislation to cover both of these groups.
The second part of the bill deals with administration, in that for the first time it
War Veterans Allowance Act provides that committees shall be set up in the districts called district authorities. These district authorities are to exercise practically all of the powers that from 1930 to the present time have been exercised by the war veterans allowance board. I think that is a wise move, but it is a very drastic change in the handling of the war veterans allowances. That fact alone would justify the setting up of a committee, because there are many points which arise by virtue of the fact we are now to have these district authorities.
I hope that they will have power to review any case which has been dealt with in the past by the war veterans allowance board. Suppose a person has applied for war veterans allowance and has had his application rejected; I hope that it will now be possible for that veteran to apply to the district authority. The minister did not make that clear when he spoke on the earlier occasions. I would ask him to let us know whether the intention is that any veteran who has been turned down will now be able to apply to his district authority.
It also seems to me that the time has come to write into the War Veterans Allowance Act a benefit of the doubt section. There is such a section in the Pension Act numbered 63, which reads in this way:
Notwithstanding anything in this act, on any application for pension the applicant shall be entitled to the benefit of the doubt, which shall mean that it shall not be necessary for him to adduce conclusive proof of his right to the pension applied for, but the body adjudicating on the claim shall draw from all the circumstances of the case, the evidence adduced, and medical opinions, all reasonable inferences and presumptions in favour of the applicant.
I suppose we have taken it for granted that the benefit of the doubt is being applied in the case of an application for war veterans allowance just as in the case of an application for pension. But it is not the law. Under the War Veterans Allowance Act there is no such benefit of the doubt clause. I have reached the conclusion personally that these ageing veterans will not get the kind of treatment to which the public believes they are entitled unless there is a benefit of the doubt clause written into the act.
When I spoke earlier I mentioned several types of cases, in which I thought there had been unfair decisions, and cases of that type would be covered if there were a benefit of the doubt clause. For example, the one that worries me the most is this question of the veteran who is under 60 years of age, or the widow who is under 55 years of age. In the War Veterans Allowance Act we find two provisions to cover them. In the first place

War Veterans Allowance Act if they are permanently unemployable because of physical or mental disability they can qualify, although they have not reached the age of 60 in the case of the veteran or 55 in the case of the widow. But then there is also this other provision: is incapable and unlikely to become capable of maintaining himself or herself because of economic handicaps combined with mental or physical disability or insufficiency.
I have always been of the opinion that that would cover practically every other case where the veteran was unable to earn his living; but within the last few months I have had two such cases brought to my attention which were decided against the applicant; one the case of a woman who qualified herself as a veteran, and the other the case of a widow both of whom I believe are unable to earn a living and are about 50 years of age. They cannot get work, and I do not consider that they are physically fit to work even if they could find a job, and yet it has been decided by the board that they do not come under either of those clauses. It may be that the board is correct in the strict interpretation of the act, but I know that was not the intention of members of parliament who served on the various veterans affairs committees. I believe these cases would be covered if there were a benefit of the doubt clause written into the act.
Other cases have to do with casual earnings. We thought that we had that casual earning provision broadened out to such an extent that anybody who had earnings which the ordinary person would consider were just odd amounts would not have those amounts counted against him in his application for an allowance. I doubt whether the board has been interpreting the provision in just such a wide way.
Then there are other instances. Perhaps you might call them borderline cases. But I do suggest that these borderline cases should get the benefit of the doubt. I would ask the minister to give consideration to putting in a benefit of the doubt clause which would make it clear beyond any question that parliament intended that borderline cases would be covered.
This change in the administration of the act also brings up another question, and it is this. A year ago an assistance fund was set up. The minister will correct me if I am wrong. I believe it is called the assistance-*


Mr. Gregg:: The war veterans allowance assistance fund.


Howard Charles Green: -the war veterans allowance assistance fund, which, in effect, merely provided relief for war veterans allowance recipients who were drawing the full amount of allowance. It is of no use to a veteran

who is not drawing the full allowance. For example, I believe if he gets a pension of 25 per cent he cannot then get the full war veterans allowance and therefore would be ineligible for help under this fund, although actually he would not be getting any more than $40.41 if a single man; but because of the fact that he does not get it all in the form of war veterans allowance he does not qualify for help under the assistance fund. Furthermore it is only a vote; there is no legislation behind it; it depends on a vote being brought in each year, and that of course is a very uncertain and unstable way to provide for this help. There should be a statute providing for that assistance so that the rights of the veterans will be very clearly defined and that the help will not be subject merely to a parliamentary vote being brought in each year.
This assistance fund at the present time, although called a war veterans allowance assistance fund, is not being administered by the war veterans allowance board. It is administered by the welfare branch of the Department of Veterans Affairs. I would suggest that when these amendments become law, and we have the district authorities set up, such authorities should be given power to administer the assistance fund. That would seem to be more reasonable than having one group dealing with war veterans allowances and another group dealing with the assistance fund.
But the very fact that it has been necessary to set up an assistance fund and, in this year's vote, to increase it from $500,000 to $750,000, proves beyond the shadow of a doubt that the war veterans allowance itself is not ample, and that there should be an increase in the amount of war veterans allowance. If that were done, once the veteran had established a right to the war veterans allowance he or she would get an adequate amount; whereas at the present time the veteran gets only the old figure, and then has to go through a second means test every year in order to get help from this assistance fund- and he cannot get very much, at that. It is limited in the case of a single man to $10 a month and in the case of a married veteran to $15 a month, and as I have pointed out, unless he is getting full war veterans allowance, he cannot get any help at all under the assistance fund. You see, the cost of living is higher than it has ever been. The old age pensioners are getting more, in at least two of the provinces they are getting $10 a month more than the veteran can get; in fact, it means a good deal more than that in the case of the married

veteran. The single veteran in British Columbia gets $40 a month-to be exact it is $40.41-and the single old age pensioner gets $50.


Milton Fowler Gregg: Not all your old age pensioners get that.


Howard Charles Green: The veteran without any other means gets $40.41, while the old age pensioner without any other means gets $50.


Milton Fowler Gregg: Not all of them.


Howard Charles Green: In British Columbia.


Milton Fowler Gregg: Not all your old age pensioners in British Columbia get $50.


Howard Charles Green: I think the minister is wrong; I believe they all do.


Milton Fowler Gregg: No.


Howard Charles Green: If they are entitled to the dominion-provincial old age pension of $40, then the province adds $10 more. In fact, the province adds $10 even though they are not entitled to the full $40 under the dominion-provincial legislation. The province adds a bonus of $10, so that they are getting up to $50 a month. The veteran is properly a charge of the dominion government, just as the province has some responsibility in respect of the old age pensioner, and adds on $10 a month. It is an impossible situation when the veteran gets less than the old age pensioner in the province. I do suggest the time has long since passed when the war veterans allowance recipient should get the same amount as the old age pensioner.
I think the only way in which we will get this legislation made right is by referring it to a committee, allowing veterans organizations to make representations and giving the opportunity to members of the committee to question officers from the Department of Veterans Affairs and to go into this whole matter. If we do not do that it is very unlikely that there will be any legislation brought in at the next session in connection with the War Veterans Allowance Act. In fact, it might be quite impossible to get any further amendment to the act during the whole life of the present parliament. If we are to follow the course which has been followed by parliaments in Canada ever since the first war in dealing with veterans legislation as important as the bill before the house tonight, then we certainly should have a parliamentary committee. I hope the minister will agree to having such a committee set up, and to having this bill referred to that committee for study.


Mr. Speaker:: Is it the pleasure of the house to adopt the motion?


Howard Charles Green: Could we have an answer from the minister?
War Veterans Allowance Act


Milton Fowler Gregg: I would prefer if the house would agree to my dealing with the points pertaining to the bill when we get into committee.
Motion agreed to and bill read the second time.


Mr. Speaker:: Mr. Gregg moves that I do now leave the chair for the house to resolve itself into committee on the bill.


Percy Ellis Wright: At this point, Mr. Speaker, I should like to move that-


Mr. Speaker:: Order; this motion is not debatable.


Percy Ellis Wright: I am moving an amendment to the motion.


Mr. Speaker:: The motion itself not being debatable, it is not amendable.


Percy Ellis Wright: I would refer Your Honour to Beauchesne, citations 699 and 406, where Your Honour will find that authority is given to move that a bill be referred to a select committee on the motion that Mr. Speaker leave the chair for the house to go into committee of the whole.
I therefore move-


Mr. Speaker:: As I have mentioned previously, this motion is not debatable, and not being debatable, it is not amendable. The hon. member for Melfort has referred to Beauchesne, third edition, as his authority to move that a bill be referred to a select committee on the motion that Mr. Speaker leave the chair for the house to go into committee of the whole. May I point out that citation 699 in Beauchesne's third edition is taken from Bourinot at page 519 where it is stated:
Any bill may be referred to a select committee in amendment to the motion for the house to go into committee of the whole, or on the reading of the order for committee.
That is taken from the debates of the House of Commons of Canada in connection with the marine electric telegraph bills, referred to in Canadian Commons Hansard for 1879.
I might point out to the hon. member that in 1879 a motion for Mr. Speaker to leave the chair for the house to go into committee of the whole was debatable. Since that time, however, the rules have been changed so that the motion is not debatable.
Is it the pleasure of the house to adopt the
motion?
Motion agreed to and the house went into committee, Mr. Lesage in the chair.
2646	HOUSE OF
War Veterans Allowance Act
On section 1-Newfoundland veterans.


Milton Fowler Gregg: Mr. Chairman, I should like to touch briefly upon points made in earlier discussion both on the resolution and on the bill, but particularly those things affecting the bill itself. First may I refer to the observations of the hon. member for Kamloops as they are reported at page 1749 of Hansard, where he said:
I have had cases where ... it has .... taken months, in fact nearly a year, to complete a case ... to the final disposition.
It seems to me that no administration should take from six to nine months . . .
It may be that in cases requiring special investigation an inordinate length of time has been consumed but I am sure that hon. members know of their own personal knowledge that those are unusual cases. I will be the first to admit that in many cases it has taken too long to adjudge applications, and it is our sincere hope that the plan suggested here will help to shorten the time required.
At page 1752 of Hansard I think the hon. member for Winnipeg North Centre shows a misapprehension about the payment of allowances when recipients of war veterans allowance are taken to hospital. He stated:
... I think it is a reasonable request that the wife of a veteran . . . who has to go to hospital, should get not less than she will get if she becomes a widow.
She does not get less under any circumstances. If a veteran is receiving $70 p.er month for himself and his wife, and he is admitted to hospital, usually about $15 is suspended leaving her with $55 which is more than she would receive if she were a widow.
The hon. member fbr Kings referred to a veteran who applied for war veterans allowance and was told that the expiry date for receiving such applications was in the year 1936. Of course that is untrue. There is no expiry date so far as war veterans allowance is concerned at the present time.
The hon. member for Calgary East referred to the supplementary allowances, and I should like to quote his exact words as recorded at page 1754 of Hansard. He said:
So far as I know, no one in that part of the country from which I come has received the benefit of that $10; no matter how desperate his circumstances may have been, he just did not get it.
In the Calgary district from which my friend comes supplementary allowance has been granted to 341 recipients out of 443 applicants. In short, more than 25 per cent of all those who receive war veterans allowance in the district have been receiving benefits from the assistance fund. I think those are the main points raised on the resolution and the bill. As to the point made by my hon. friend a few minutes ago about those


who will become eligible if the bill is put into effect, I am free to confess to the committee, Mr. Chairman, that after all the discussions of this matter going back for ten, twelve or fifteen years it was not until recently that anybody, even the veterans organizations themselves, got down to cases and said to themselves, "Where are we going to draw the line?" My hon. friend and I, among others, applauded loudly when my colleague, the Secretary of State for External Affairs, and others talked about the peace of the world and better understanding between nations, about those who have come to Canada from other countries, have lived here for many years, and have taken part in the development of the country, and how we should begin to forget what their background was, what country they came from, their race or their creed. We have all thumped our desks and rightly so.
I am not going to go into detail on this question except to say that I would feel most unwilling to stand in the house and defend any other course than is reflected in the bill. In the case of those from across the Pacific who served with us in the first war, have been twenty years in Canada, and have taken part in the life of Canada, even with all the bitterness of feeling that has existed in the last ten years, I think we would be breaking down something if we did not treat them here in the same way as those who have come from the United Kingdom. I am the first to admit that I saw the difficulties referred to by my hon. friend. I suppose those things do occur in the administration of any such legislation. After all, we can only go step by step in these matters, keeping in step, if you like, with nineteen other departments of government. I am quite certain in the knowledge that progress is being made in the protection against hardship of those ageing veterans who have fought in battle, and that our people will understand if anomalies turn up here and there.
The hon. member for Vancouver-Quadra referred to the benefit of the doubt. Frankly I had never thought of that in relation to the War Veterans Allowance Act. I think he will admit the Pension Act is a little different. Under that legislation doctors and lawyers have a go at it and there are certain very fine decisions to be made based upon opinions that are professional in nature. The factors surrounding the ageing veteran are not quite so professional. They are more rules of thumb. They are facts as to the living conditions under which the veteran is found, of trying to find out .these factors without being too much of a policeman in doing so, of trying to size them up and add them together and see whether or not they come within the spirit of the act.

I hope the cases he referred to can be reviewed again, but by and large I feel safe in saying that the benefit of the doubt has been put into practice in dealing with applications in the past.


Howard Charles Green: Then there would be no objection to putting it into the law.


Milton Fowler Gregg: Frankly I do not see any object in doing so. A question was asked whether a veteran who was in receipt of war veterans allowance in the past under the former method of administration will be able to have his case reviewed, or whether he can apply again if he was turned down in the past. Under the new plan the answer to that is yes. As my hon. friend knows, under war veterans allowance the man may apply as many times as he thinks he has a case.
The administration of the assistance fund has just passed through its first experimental year. So far as investigations are concerned they were conducted by those who had training in welfare work. They were not always employees of the Department of Veterans Affairs. Some of the investigations were conducted by trained social service workers within the community at the request of the department. It was done with the purpose of overcoming the charge that there is sometimes a second means test on top of a first. From my observation, in the main I think it has worked quite well.
As to referring the bill to a committee, in principle I can assure you at once that I
War Veterans Allowance Act have no objection. In practice, however, I cannot see the object. The points that have been made with respect to an increase in the basic rate at this time have been dealt with by myself this session, and I must repeat that I am not in a position to recommend an increase in the basic rate at this time. Consequently I can see no object in bringing that matter before a committee. I believe the points incorporated in this bill can be dealt with adequately in committee of the whole, which will give the board and those charged with the administration of the act an opportunity to put it into effect at the earliest possible moment.
Section stands.
Progress reported.



BUSINESS OF THE HOUSE

Alphonse Fournier: Tomorrow we will take up second reading of Bill No. 209, to amend the Prairie Farm Assistance Act, 1939. Then we will take up the estimates of the Department of Agriculture. If we are fortunate enough to complete those we will take the estimates of veterans affairs.


Donald Methuen Fleming: What about third reading of the Income Tax Act?


Douglas Charles Abbott: We do not have to announce it; it is at the head of the order paper anyway.


[Stage Direction]
It being five minutes after eleven o'clock the house adjourned, without question put, pursuant to standing order.
[Stage Direction]
Friday, May 19, 1950