It began by a spread of 2J per cent between the tax on non-residents and the tax on non-resident companies. The spread is now increased to 7\ per cent, and the total tax involved is 22i per cent.
I have this further to say, that a good deal of the assets of these non-resident companies consist of United Kingdom securities. Therefore the companies in Canada, by reason of the exchange control restrictions there, cannot get from England the revenue from their British securities; and yet they are taxed in Canada in respect of that revenue.
I believe so. Then these companies have very considerable holdings of United States securities, and there they would be subject to the 16i per cent, too. These companies will not have the advantage of non-residents of exemption from the holding tax in respect of dominion government bonds. Putting all these things together cumulatively, we get a result which the traffic
will not bear; in the long run we shall lose this business, and I do not think it will come back. .
I puzzled over this resolution, and I regret to say that I had not received any illumination on it until I heard the hon. gentleman. What he has stated is extremely disquieting to me. This is going to drive capital out of this country to a degree.
On nonresidents, all right, but if what the hon. member for St. Lawrence-St. George has said to-night is correct, I would ask the minister to consider the matter again because I believe it will be a black-eye to foreign capital coming to invest in our securities.
I wish my hon. friend would let me put my side of the matter before him before he passes judgment. I have the greatest respect-it is mutual, my hon. friend says -for the hon. member for St. Lawrence-St. George, but let me tell this story. I cannot go into details because they are extremely complicated, but the Income War Tax Act was amended in 1936 to permit a new species of corporate creature to have existence in this country. They were called non-resident owned investment corporations.
Not at all. These investors were most anxious to come here and incorporate, largely in Charlottetown, to some extent in Montreal and perhaps in some other places in Canada. We provided that they should be taxed at 7i per cent, which was half our corporate rate at the time, but certain deductions were permitted from their income which made the effective rate on these companies five per cent, not 7jt per cent. I said to the hon. member for St. Lawrence-St. George that I would correct his statement. I should properly have said that I would complete his statement. His statement was perfectly correct, technically, but it was never intended to tax these companies 2i per cent more than non-residents. It was intended to
Income War Tax Act
tax them at the non-resident rate which was five per cent, and this was a way of doing it. The rate in the statute is 7i per cent, but the effective rate on their income was five per cent.
The reason why we are raising this rate, multiplying that original 7J per cent by three, is that we have multiplied the non-resident rate by three. It was five per cent and has now become fifteen per cent, and the effective rate on these companies now is not 22i per cent but, by reason of deductions and adjustments which I cannot describe because they are so complicated but anyone acquainted with them will know what they are, the effective rate is fifteen per cent.
It may be that we shall lose revenue rather than gain revenue by this. I do not know. The resolution is being passed more as a matter of principle than anything else. There was never any undertaking, express or implied, with these corporations that we would not move the rate up if we moved our nonresident rate up. If our non-resident rate goes to fifteen per cent, it is only fair that this rate should also go to fifteen per cent. I do not know whether they will discontinue their corporate existence, but they will in effect be paying only fifteen per cent on the dividends of their shares when they go abroad. Is that not correct?
That applies only to the revenue which was received from dividends of Canadian incorporated companies. On the interest from Canadian bonds the tax will be 22| per cent. I am sure I am correct in that. As a matter of fact, these companies will not benefit from the exemption of section 9 B(2). If they hold the bonds of the Dominion of Canada they will pay 22^ per cent. I know one or two companies which have substantial holdings of Dominion of Canada bonds. They now pay a nine per cent tax on these bonds. Under the proposed amendment they will pay 22i per cent.
statements of my hon. friend, but when I was Acting Minister of Finance-I could not get the details of all the various enactments and references from one section to another in my head solidly enough to remember them for more than a day at a time- I remember distinctly that the intention was to give these corporate companies the five per cent rate, and it was considered that by giving them a rate in the act fifty per cent higher, that is the effective rate they would get. It was based upon that, and the theory of this resolution, whether there is some error in detail or not, is that we are giving them the fifteen per cent rate now.