July 30, 1946

CCF

Eric Bowness McKay

Co-operative Commonwealth Federation (C.C.F.)

Mr. McKAY:

It is my conviction that resolution 12 will still have very serious-consequences to cooperative enterprises as it now stands. It seems to me that cooperative-enterprise is so far-reaching in its effect upon the economic life of the Canadian people that anything that is done to limit cooperative activity is most undesirable and will because of its ramifications affect the lives of thousands of people. In the past, cooperatives have received reasonably good treatment at the hands of government. As a matter of fact most provinces have encouraged cooperative enterprise, and that of course is in keeping with the recommendation of the united nations conference on food and agriculture which in 1943 made certain recommendations which appear in the "Canada Year Book". While in convention in the United States, the conference recommended that all countries study the possibilities of further establishing producer and consumer cooperative societies in order to provide necessary production, marketing, purchasing, finance and other services.

Over the years cooperative development has been on a vast scale in this country. According to the "Canada Year Book" in 1942 member-

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ship in the organizations from coast to coast was in the neighbourhood of 561,000 persons, and besides this there were over 600,000 patrons. In that year cooperative associations conducted business on a large scale, totalling in all over a quarter of a billion dollars. These associations embraced consumer cooperatives for the sale of petroleum, food and clothing in some 1,722 different organizations.

In the case of fruit cooperatives, largely located at the Pacific coast, stores were operated which provided fertilizer, barrels, boxes and spray materials for the growers, while on the western plains cooperatives handled fuel for tractors, feed and household needs.

In Saskatchewan a great producer cooperative operates for the marketing of grain, namely, the Saskatchewan wheat pool, which has a membership exceeding 125,000 persons. Other producer cooperatives include poultry, live stock and dairy products marketing. Indeed, cooperatives of this type are found in almost every province of Canada. To meet the needs of farmers for low-cost fuel, a [DOT]cooperative oil refinery operates in the city of Regina and its record to date has been most [DOT]encouraging.

On the coasts of Canada, both west and east, 'fishermen have banded together in some 67 associations. I believe that figure is up considerably now, because my figures are taken from the Canada Year Book for 1942. In these 67 associations there were some 5,000 members banded together for the purpose of processing and marketing their fish.

In the province of Quebec cooperative enterprise takes on a somewhat different form. There the credit unions have been most enterprising and on the whole most successful. Loans have been provided by these unions at interest rates considerably lower than those provided by the small loan companies, and profits are distributed to members in the form of patronage dividends.

Throughout Canada, in 1942, 1137,000,000 in loans was provided by these cooperatives to the people, who in many cases would not have been able to obtain these loans elsewhere. That is the point which I wish to make most emphatically.

In order to provide fire insurance to farmers at low cost, some 150 farmers' mutual fire cooperatives are now functioning. In 1942 these organizations had risks valued at more than a billion dollars.

Finally I should like to refer to cooperative enterprise in the province of Nova Scotia. The hon. member for Cape Breton South is occupied this morning in the industrial relations committee and is unable to participate in

[Mr. McKay.1

this discussion. In Nova Scotia the British Canadian Cooperative Society of Sydney Mines was born because of the great need of the folk of that area during the depression years. It has been an outstanding success. The people have remained loyal to the principles of cooperation. Several stores now handle groceries, dry goods, meats, and men's wear, things the people who work with their *hands must have. The society operates a bakery, a dairy and a tailoring department. Legislation which interferes with such development strikes deep into the lives of these [DOT]people. There are many other hundreds of cooperatives, including group life insurance, which were born during the depression when thousands of people had to relinquish high-priced line company insurance policies. Cooperatives dealing with hospitalization operate in most of our larger cities. Rural people have set up cooperative telephone systems in places where private enterprise failed to provide them with that much needed communication service.

The scope of cooperative enterprise is vast. People in low income brackets were not only forced to group themselves together to sell their products most advantageously, but also to enable them to purchase consumer goods to the very best advantage. And now this resolution is presented to the house. In spite of what the minister says, cooperatives are of the opinion that the adoption of this proposal will restrict their activities and the general effect may well damage the whole cooperative movement.

There is a fundamental difference between a cooperative and a non-cooperative enterprise. Obviously the government does not recognize this difference in the resolution now before this committee. Differences were recognized in section 4p of the Income War Tax Act, and unless they are recognized now it will have a serious effect upon the cooperative development generally. Section 4p has been repealed, and so far as I can determine there is nothing specific to replace it. I am pleased to note, however, that the government is prepared to accept the representations which have been made by cooperatives and members of the house that there should be some differential between the treatment of members and non-members. The extension of the time for the payment of patronage dividends from six to twelve months is also an alteration in the resolution which commends itself to all cooperatives. However, I believe a longer period than twelve months will be much more acceptable. It has been suggested to me that twenty-four months would meet with the approval of all cooperatives.

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If I understand the minister correctly, the revolving fund will be permitted to revolve even though set up subsequent to 1941. But the legislation before us will make it almost impossible for cooperatives to outlive a depression of any length of time. The cooperatives should have power to limit the amount paid out to ten per cent of the total in any one year, and in times of crisis to be able to suspend payments of patronage dividends entirely. If this resolution is adopted, members of cooperatives will not be permitted to use their own money in operating the business unless interest of at least three per cent is paid on the capital, or an alternative tax is paid on an equivalent amount. This, in effect, forces the cooperative into the position of a profit enterprise, and is contrary to the non-profit principle set up by the Rochdale pioneers. If individuals wish to place their money in the cooperative, interest free, they should have that privilege. Interest free loans were not uncommon during the war when the government was in grave need of money. After all it is the people's money, and this restriction on their use of it in cooperative enterprise without expecting interest should be removed.

I wish to place on the record a letter and two telegrams protesting against this proposed legislation. These telegrams and letters were received from cooperatives. One comes from the Saskatchewan Credit Society Limited of Regina. I shall read the resolution which was passed on July 26:

That this board urge most strongly that parliament adopt the recommendations of the royal commission on cooperatives with respect to' the taxation of credit unions, including federations of credit unions whose membership may comprise other credit unions, cooperative associations, parishes, school districts and other similar bodies.

The first telegram comes from the Cooperative Union of Saskatchewan, and reads as follows:

Cooperative Union of Saskatchewan strongly urges first cooperatives be exempt three years from commencement of operations. Hardship to many new cooperatives if three year tax exemption confined to those organized after 1946. Second, exemption of retained patronage dividends if withdrawals subject to discretion of directors to protect cooperative; third, exemption of medical housing rural telephone electricity cooperative desired.

The second telegram comes from the cooperative association of Riceton, Saskatchewan, and reads as follows:

Our cooperative association and credit union urge that all new cooperatives be allowed three year tax exemption; that allocated dividends be exempt if stated reasonable term

for payment announced; that federations of credit unions be included in same category as unions; that hospital, housing and electricity cooperatives be included.

In conclusion may I draw the attention of the committee to resolution 17 on eodpera-tive movements which was passed by the united nations conference on food and agriculture, held in the United States in 1943, and attended by forty-five different nations. Section 3 of resolution 17 reads as follows:

The democratic control and educational programmes, which are features of the cooperative movement, can play a vital part in the training of good democratic citizens, and assist in inducing a sound conception of economic matters.

It is my hope, and I am sure it is the hope of every cooperative, that nothing will be done by this parliament to destroy the movement which plays such an important part in developing sound democratic citizenship, and which has done so much to create a better understanding of the economic life of our nation.

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CCF

Robert Ross (Roy) Knight

Co-operative Commonwealth Federation (C.C.F.)

Mr. KNIGHT:

There are two things which I like particularly about cooperation. The first is that it teaches men to help themselves, and the second is that it gives them an interest and a stimulus in helping each other. I am pleased to note that the government is showing a greater disposition to be fair to the cooperative organizations throughout the country. With its finger on the public pulse- and no one will deny it has that-it has sensed a growing resistance throughout this country toward legislation which would be unfair to such institutions. So I believe the minister is to give consideration to our representations, with a view to reviewing the whole situation before .presenting the bill. True, the three per cent provision in respect of capital remains, but such excellent expositions were given on this subject by my colleagues from Dauphin and Cariboo that I shall be content to leave the record as it is.

Perhaps I should apologize for the observation I intend to make to-day, because of the simplicity of the matter which has oome to my mind as a result of the question asked by the hon. member for Calgary West. At page 3960 of Hansard the hon. member said that the minister would first have to define a cooperative, and that then he would have to tell what profits are, and also what patronage dividends are. The committee may be disappointed in what I have to say, because I believe every hon. member could answer those questions, and none more ably than the hon. member for Calgary West. However

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the issue has become so much confused, and the propaganda of the enemies of cooperatives so widespread, that I believe it would be wise to answer the hon. member's questions.

He has said that when he drives along the road in his automobile he comes to two little stores. He sees a sign in the window of one store and another in the window of the other. He goes into the store the sign of which he likes best, and there makes his purchase. He says there seems to be no difference in the operation of the two stores, and I take it he assumes there should be no difference in the treatment they receive at the hands of the taxing powers of the country, fn what I shall say I shall ignore the large cooperatives, including the wheat pools, and shall confine my remarks to the small stores on the corners, as described by the hon. member.

First of all, the little store with the cooperative sign in the window meant nothing to the hon. member. He saw only a sign. Although it meant nothing to him, to me it means years of organization in that district. It means a protest against conditions as they were, and an attempt on the part of the people to do something about it. To me it means people gathering in meetings and, perhaps after repeated failures, electing a board of directors to look after their interests, and appointing a manager to run their store.

One would say that the stores are identical in appearance and in operation. They sell at the same prices. But here is one point I would call to the attention of the committee: The retail store has nothing to fear from the cooperative, as I know it. The enemy of the retail store is the same enemy as confronts the cooperative. Cooperatives have never cut prices. They have sold at the regular rates charged by retail merchants. They get their cut-back in patronage dividends. They do not interfere with the retail merchant in any way; nor will they, unless by unjust taxation they are compelled to cut their prices to a point where they will have practically no patronage dividends. It will be a sad day for the retail merchants of Canada when that takes place. If those merchants were wise they would not fall for the submissions of such organizations as the Income Tax Payers' Association.

To come back to the two stores: I am not a business man, but I would ask the committee to take note of the selling prices of the cooperative store which, for purposes of clarity,

[DOT] we shall call store A. The selling prices of that store are made up of three factors, the first of which is the original cost of the goods,

(Mr. Knight.]

the second the expenses in connection with the operation of the store, and the third the overcharge.

For the moment we shall leave store A and turn to store B, which is not a cooperative but which operates in exactly the same way. Its selling prices consist of the original cost of the goods, the cost of operating the store, and the overcharge.

One will ask what the difference is. In reply one could say that a cooperative institution is an organization in which one finds a number of people who want to buy a certain article for a dollar. They find that by banding themselves together they can make the purchase for ninety cents. Would any sane man say they should be taxed upon the ten cents they do not pay for the article which they have been able to buy for ninety cents through the process of joining together? One would say that that is self-apparent, that it is oversimplification. I admit it is simple, but the actual process is just as simple as the description I have given.

What is the difference between the two stores, or the two processes of merchandising, which I have described? The whole difference lies in what is done with the overcharge. And by making an explanation of that I hope to answer the question of the hon. member for Calgary West when he inquired as to the meaning of profit and of patronage dividends.

Let us return for the moment to a consideration of store A, with its cost, expenses and overcharge factors. The overcharge of store A is paid back into the pockets of Smith, Jones and Thompson, who bought the goods and paid for them on the understanding that they were charging themselves a little too much with a view to holding something in reserve and taking care of the expenses in the operation of the store. So that overcharge returns to the pockets of those individuals who in the first instance paid money for the goods. This much is clear.

On the business done in store B all the overcharge paid by Jones, Smith and Thompson goes into the pocket of Brown, the owner of the store. In the first instance I believe one is using a misnomer when he refers to patronage dividends paid back to the people who originally made the purchases. In other words that money disappears; it goes out of the picture; it is no longer there as an overcharge. It is that part which was paid in excess when the purchaser bought his goods from store A, and has been returned to such purchaser. On the other hand in the purchases from store B the overcharge goes from the pockets of all the purchasers I have named

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to the pocket of one man. This in simple language is I believe the definition of profit.

The minister will say that he is not going to tax such organizations, and of that I am glad. But I believe it is time someone, for the benefit of those who may be confused, should lay down facts as simple as those I have set forth.

The hon. member for Calgary West asked for the definition of a cooperative. In that connection I would bring to the attention of the committee a matter which I have already discussed with the minister's department and to which I received an answer. It has to do with a medical aid society which operates a branch in my city. I should like to have it defined as a cooperative which would escape taxation. This society has a large membership in the three prairie provinces, and is made up of employees of the Canadian National Railways. Its purpose is similar to that of other medical societies, namely that of providing surgical and medical care, in this instance, for the railway workers and their dependents. Why should there be any doubt about this organization being tax free? When the society was organized there was no suitable legislation then in force in Saskatchewan under which it would come and they had to organize under the insurance act. It is a nonprofit organization, and we feel that it should be free of income tax levy. What would be the status to-day of such an association? The royal commission on taxation of cooperatives paid some attention to these non-profit making organizations. The recommendation No. 9 of the commission report reads:

That associations incorporated or registered under provincial cooperative legislation, or incorporated as a cooperative under dominion authority, for the purpose of providing telephone services, distribution of electric power, or medical and hospital services, be exempt from income and excess profits taxes.

It will be noted that the legislation must be cooperative. At the time of the inauguration of this Canadian National employees association, although it is mutual and cooperative in nature, they were unable to register under a cooperative act. Although it has been overlooked, we are satisfied it was the intention of the commission to recommend that all such societies or institutions should be tax exempt. Can the minister tell us what would be the status of an institution of this kind?

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LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

Offhand I would think that an organization of that kind would probably not have income within the meaning of the act and consequently would not be subject to tax. The question is a technical one, and

I should like to take time to look into it. Perhaps I can give my hon. friend a more definite answer when we are on the bill.

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PC

Grote Stirling

Progressive Conservative

Mr. STIRLING:

I have had great difficulty in finding out just how this legislation will apply to the various cooperatives in the riding I represent, of which I suppose there are thirty or forty. Some are consumer cooperatives, there are producers' cooperatives, there is an egg producers' cooperative, a seed growers' cooperative, but the great majority are fruit and vegetable shipping houses. They receive produce from the farmer and they estimate that it will cost a certain number of cents per package to grade, pack and prepare for shipment. If it is found at the end of the season that they have deducted more than enough for that purpose they rebate to the producer so many cents per package. I think that could be described as being the simplest form of cooperative. Of course there is no profit.

This organization, in order to assist its members, may set up a store which sells feed, seed, tools, groceries and all sorts of things. Here again it endeavours to buy as economically as it can and sell as economically as it qan, and at the end of the season it may be in position to make rebates, or possibly they would be termed patronage dividends to members and non-members alike.

From what the minister said in amendment two or three days ago I understand that the rebates or patronage dividehds paid to members will be allowed as a deduction, but a deduction from what? This organization is occupied principally in handling and packing the farmers' produce, and' it is only as a convenience for its members that it sets up the store. It surely cannot be conceived that the target amount of three per cent on capital can apply in this case, where but a small portion of the capital of the cooperative is tied up in the store which it runs.

I find it hard to ascertain what the three per cent really means. Am I right in assuming it is the amount which shall be considered to be taxable if the cooperative makes a profit and if, after deducting the patronage dividends paid to its members, it has left a comparatively small sum of money which is profit? We agree that a cooperative which makes a profit is taxable under this legislation, but is it to pay a tax up to three per cent of its capital when only a small part of that capital is used' for the business which produces a small profit?

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LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

I will see if I can explain it. The assumption is that the cooperative which my hon. friend has described, which

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might be both a consumer cooperative and a producer cooperative, has certain employed capital, that is, it has certain capital tied up in buildings, machinery, equipment and perhaps as working capital of some sort. This being a small cooperative it may have from $10,000 to $15,000 tied up in that type of asset. The legislation proceeds on the assumption that capital as such earns a return qua capital. If I have $15,000 and I put it into victory bonds, I get three per cent. If I have S15.000 and I put it into real estate, I get the rental. If I am a business man and I invest $15,000 in plant and equipment, I get a return on that capital as distinct from the return I get from my business acumen and other aspects of my trading venture. If a cooperative employs $15,000 of capital-I am using that as an example-and has that much income, it is considered as earning three per cent on that $15,000. That three per cent of $15,000 will be considered as taxable income and subject to tax. The whole kernel of this three per cent proposal about which there has been so much discussion is that capital is considered as producing a reasonable return, whether it is in a cooperative, in a grocery store, in a factory, or anything else; and it is suggested here that three per cent on that capital is a reasonable return. I do not know whether I,have made myself clear, but I have tried.

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PC

Grote Stirling

Progressive Conservative

Mr. STIRLING:

I gave an illustration of of what I conceived to be a true cooperative, that is, a business which receives the farmers' produce, grades it, packs it, prepares it for shipment, and sells it. There is no profit, because any excess over and above the cost of that work is returned at the end of the year. I understand from the minister that three per cent of its capital would be subject to tax.

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LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

Not if it operated on the basis my hon. friend suggests and returned everything at the end of the year. A cooperative of that type would have no profit out of which it could pay interest on capital. A great many cooperatives will not have earned three per cent on their capital; if their operations are conducted in such a way that they do not have a taxable income, then the three per cent rule just would not apply. My hon. friend has cited what to me appears to be a combination cooperative, a consumer cooperative and a producer cooperative. It is perfectly true that for the producer cooperative the result may be no taxable income on that end of its operations, whereas on the consumer cooperative end there may be a profit. If you combine the two, some of the

so-called profits on the consumer end of the operations may be income available for this three per cent return on invested capital.

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PC

Grote Stirling

Progressive Conservative

Mr. STIRLING:

In this instance we agree that the purely shipping house is a true cooperative and that there is no profit.

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LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

I did not use the term " purely shipping house." It may so conduct its operations that it will not have a profit.

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PC

Grote Stirling

Progressive Conservative

Mr. STIRLING:

Now I will cite the case of such a cooperative, and we will say that eighty per cent of its business is in handling the produce of the farmer, but it wishes for the benefit of these farmers to set up this store. It employs but a fraction of the capital of the association, and surely it cannot be right to set up that as a figure on which taxation can be levied, three per cent of the total capital. Can it not be three per cent of that portion of the capital used for the purpose of setting up the store?

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LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

I think my hon. friend is right, but I must reiterate that if the cooperative, for its own convenience or for reasons of its own, combines its producer and consumer functions, and if it has what is taxable income within the meaning of the act, then to the extent that it has capital invested in its general enterprise, three per cent on that capital must be considered as the return which the cooperative organization has earned on invested capital. There has been a lot of talk that it should be perfectly free to members of cooperatives to lend money to a cooperative without interest. That is quite true. They are free to do it. That is their privilege. But the organization as such must be deemed to have earned a return on that investment, and that applies to any organization that has invested capital. I know it is a little confusing.

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PC

Grote Stirling

Progressive Conservative

Mr. STIRLING:

Take as an illustration this association whose primary business is the handling of the produce of fruit or vegetable growers. Such associations have their annual meeting in the winter, and the directors of the association put it to their members that they deduct from any moneys coming to the growers in the coming year the sum of money required as working capital, a levy, if you will, in the form of so many cents a package or so many cents a box. In that way it sets up what practically amounts to what is called here a revolving fund, although that is not the term we use in the Okanagan valley. I take it that that sum certainly is^ looked upon as the growers' own money and is in no sense a profit and therefore is not subject to tax.

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LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

That is correct. I gave that answer to the hon. member for Fraser Valley the other night. If there is an agreement that so much per box or per barrel or per quart of milk shall be deducted for that purpose, my hon. friend is correct. But that cannot be determined solely by a resolution of the directors of the cooperative. The member himself must agree that there shall be so much deducted per box of apples or whatever it may be.

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PC
LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

Sign a contract, or send a letter to the association, the other contracting party.

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PC
LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

Yes, and the other contracting party is the cooperative association.

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CCF

Thomas John Bentley

Co-operative Commonwealth Federation (C.C.F.)

Mr. BENTLEY:

The minister has left me a little bit confused. He was not consistent in his statement. He said in reply to the hon. member for Yale that if the organization pays out all its surplus in the way of dividends it has no income and is not taxable.

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LIB

Douglas Charles Abbott (Minister of National Defence; Minister of National Defence for Naval Services)

Liberal

Mr. ABBOTT:

I did not say that. My hon. friend was citing a type of cooperative which operates in British Columbia, where the growers enter into a contract with the cooperative whereby they get an initial advance and authorize the cooperative to hold back so much per box of apples or per quart of milk, which they get back at the end of the season if the money is not needed.

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CCF

Thomas John Bentley

Co-operative Commonwealth Federation (C.C.F.)

Mr. BENTLEY:

Even in that case you are going to insist on applying this clause, "except that portion of such payments as would if deducted leave the taxpayer with an income less than an amount determined by deducting from three per cent of the capital employed in the business." That is to apply to the capital equipment.

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July 30, 1946