May 30, 1947

EEVISED EDITI0X


Income War Tax Act



passed and two-thirds was yet to come. Was that taken into consideration, and what difference there would have been in revenues if the Canadian people had been given that-added incentive of two months' advantage as compared to the present arrangement whereby the rates do not become applicable until July 1?


LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. ABBOTT:

The principal reason for not making it effective immediately was that under our pay as you go tax system, deduction tables must be placed in the hands of thousands of employers, and it was not possible to prepare and have those tables available and in the hands of the various employers in time. Secondly, it would have meant a large number of tax refunds because the deductions have been going on since the beginning of the year at the existing rates. There would have been a loss of revenue of between $30,000,000 and $40,000,000.

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CCF

Robert Ross (Roy) Knight

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

Mr. KNIGHT:

I should like the minister to revert to the matter I brought up a moment ago. I wanted to find out for my own information what is the basic principle of deductions in regard to these pensions. Is it the fact that the payment is compulsory, or is consideration given to the element that it must be a plan recognized by the province, the employer and the employee?

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. ABBOTT:

It is not a matter for the province; the pension plan must be approved by the Minister of National Revenue. The underlying principle is that the pensioner is entitled to deduct from his current income for taxation purposes the contributions which he makes to the pension fund, and then the pension which he receives at the end is taxable.

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CCF

Robert Ross (Roy) Knight

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

Mr. KNIGHT:

If the four per cent

deducted at the source is exempt and if an additional two per cent or four per cent is paid in on a voluntary basis as a main part of the pension plan and as a contribution to the annuity which this fund will buy when the man becomes pensionable, then this extra or voluntary amount should also be deductible.

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. ABBOTT:

I really must ask my hon. friend to go to the administrative officials to get a legal interpretation. The statute provides that an amount not exceeding $900 may be actually retained by the employer from the remuneration of the taxpayer for the employee's superannuation or pension fund or plan. On the facts that my hon. friend has given, my personal opinion would be that they are probably included, but I suggest that he go to the deputy minister or the official in the department who is specially charged with administering the provisions of the act, put thp specific facts before him and get a

tMr. Case.] , ]

specific ruling. Then if he feels there is an injustice, the thing to do would be to come back and suggest that the act be amended.

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CCF

William Irvine

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

Mr. IRVINE:

I dislike to ask the minister a question in respect to income tax in so far as it affects farmers, but he promised a moment ago to give some information before the bill is passed.

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. ABBOTT:

I was going to answer

some specific questions that were asked by the hon. member for Red Deer.

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CCF

William Irvine

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

Mr. IRVINE:

The first specific question

that I should like to ask is in regard to basic herds. I am sure the minister will know whether provision should be made in this bill for any alterations that might be needed in the present practice, or whether it is only an administrative matter. Second, I should like to ask whether there is to be any alteration in the present regulation which provides that a farmer who is selling out after long years of farming is taxed on the entire proceeds of the sale of his capital stock.

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. ABBOTT:

In answer to the first

question, my understanding is that it requires no amendment to the act. It is simply a matter of accounting practice and administrative decision by the Department of National Revenue. As to what the actual practice is at the moment I am not in a position to say. I think the whole question is being discussed at some length by deputy ministers and others. Perhaps my colleague, the Minister of National Revenue, can elaborate on it, but I doubt it, because I myself have never been able to. I do not know whether he knows more about basic herds than I do; I do not believe he does. I do not know what the present day practice is, but it would be an administrative matter.

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SC

Victor Quelch

Social Credit

Mr. QUELCH:

I should like to say a

few words on this matter. There has been a great deal of dissatisfaction regarding the way the matter has been dealt with. For instance, the recommendation of the federation of agriculture of last year reads:

That breeding herds be recognized as a capital asset, and that a basic herd plan be adopted to distinguish between capital and income in live stock dispersal sales.

And then the brief of the Alberta farmers' union, which was referred to by the hon. member for Battle River, had this to say:

That in case of dispersal sales of live stock, an equivalent number of animals to those owned on January 1, 1941, be considered a capital asset and not subject to income tax.

If the government do not like that proposal they should at least bring in one that does

Income War Tax Act

recognize the principle involved. For instance, let us say a farmer sold a piece of land and invested the capital in live stock back in 1939. From then on he would have paid income tax on any offspring he may have sold. It may be today that he desires to sell out. He should be entitled to recover the full thousand dollars for the sale of the live stock. Apparently that is not what happens. He is taxed on a set proportion of the amount. Then again he is not allowed to charge any depreciation against that stock, and in the meantime a certain number of the live stock may have died. Therefore when he sells out he should be allowed to include some of the offspring as part of the capital in order to recover the total amount of capital invested. That is not allowed today. That is why the Alberta farmers' union suggests a method by which a fair deal may be given to farmers.

We recognize that it is not an easy question to deal with. Again I should like to suggest to the minister that the proposal put forward by the Alberta farmers' union could very well be taken into consideration. May I read it again:

That in case of dispersal sales of live stock, an equivalent number of animals to those owned on January 1, 1941, be considered a capital asset and not subject to income tax.

If the minister is not prepared to deal with the question now probably he will deal with it when the bill is before the house. The question was raised time and again in the house by the late member for Portage la Prairie, Mr. Leader, who urged the government to take some action in this regard.

One or two other proposals were put forward by the federation of agriculture which I should like to deal with at this time. The recommendations of the Alberta farmers' union and the federation of agriculture are similar. The federation of agriculture, along with the other faim organizations, asked that the exemption for single persons be raised to SI,000 and for married persons to $2,000. All people, especially farmers, were disappointed when the minister announced that he was not prepared to take any action in that regard. First of all apparently he took the stand that already we had exempted over fifty per cent of the people who earned incomes, and second, he said that if we were to raise the exemptions to S1.000 for single persons and $2,000 for married persons we would be reducing the taxes of those people in the high income brackets. Of course it would be a very simple matter to make sure that the people in the higher income brackets would not get any benefit from the raising of the exemption. It 83166-2314

would merely mean an adjustment in the tax schedule. I was wondering just what the cost of such a proposal would be. I do not think that the answer which the minister gave on page 3560 of Hansard is quite correct. This question was asked the minister:

Can the Minister of Finance tell us what difference it w'ould make to our revenues in Canada if all single persons receiving less than $1,000 and all married persons receiving less than $2,000 were exempt from paying income tax? Has the minister the information available?

The minister replied:

I am told that it would make a difference of roughly $200 million.

Surely that $200 million must represent the loss of revenue not merely from those who would be exempt from paying taxes but also from those who have incomes above the $1,000 and the $2,000 respectively. What I should like to know is, what would be the loss of revenue from these two groups alone? -as the tax schedule could be adjusted so that those above these amounts are not affected. I would say that the figure would be considerably below $200 million. As a matter of fact I would say it would be less than half the $200 million. I hold in my hand the taxation statistics of April, 1946. Pages 117, 118 and 119 give an estimate of the individual income tax payments. From that I tried to work out what the actual loss w-ould be. I quite realize that there may be a mistake in my figures but I think they are substantially correct. From these statistics we find that the number of income taxpayers in the single brackets with incomes below $1,000 would be 593,100, with a total income of $533,172,000. They paid a total tax of $37,730,000. Married income taxpayers with incomes below $2,000 number 799,300, with a total income of $1,271,100,000. They pay a tax of $60,430,000. If all married persons with incomes of less than $2,000 and single persons with incomes of less than $1,200 were relieved of taxes, the government would lose $98,160,000 out of a total of $671,596,000. This class of income taxpayers represents 54 per cent of all income taxpayers. Therefore by relieving from taxes 54 per cent of the taxpayers in the lower income brackets the government would suffer a loss of revenue from income tax of 14 per cent. Of course that does not take into consideration the loss of revenue from people in the higher income brackets above $1,000, which greatly reduces the loss of revenue that the government w'ould suffer from those who would no longer be paying income tax. and those are the people with whom we are chiefly concerned.

Income War Tax Act

I should like the minister to answer this question-whether or not the $200 million referred to the people who would no longer pay income tax, or whether it was taking into consideration the total above the $2,000 or below?

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. ABBOTT:

The total amount of the revenue, of course.. In increasing the exemption I think that $8 out of $10 would go to those in the upper brackets. The effect would be that they would benefit by raising the exemptions. I suppose that approximately $50 or $60 million in tax would be lost by increasing the exemptions for single persons to $1,000 and married persons to $2,000. If one took into account only the loss of revenue from people in these brackets, what would be the result? You would give no reduction to the man who earns $2,001 or $2,500. You would have to start increasing the tax. In other words you have to increase the rates of tax on everybody above $2,000 to the extent of say $50 million; and the practice in other countries where income tax has been highly developed, including Great Britain which is under a socialist government today, and Australia which is under a socialist government, and New Zealand which is under a socialist government, shows that the exemptions are lower than they are in Canada. I feel strongly that the income tax level is fair, eminently fair, just as fair as if not fairer than the level in other advanced countries. I say that to increase the exemptions will create more unfairness rather than less. To use a slang phrase, I am convinced that this plea for increasing income tax exemptions is a phony in so far as it will benefit the vast majority of the people of the country who have to pay taxes. I do not suggest that the hon. gentlemen who put it forward believe that for one moment. I do not impute motives. I know they genuinely believe that it is in the interest of the lower income levels. But my contention is that it is not. I think there is a point beyond which you hurt them rather than help them, because of the fact I mentioned in the budget speech that, rightly or wrongly, or any way you put it, half the people who earn income are below the existing level. There is no use. fooling ourselves. This tax revenue has to be got somewhere, and it cannot all be got from people of any figure you like, $5,000 a year and up, if you like, because there are simply not enough of them in the country to do it. If therefore we do not have a well worked out, well adjusted income tax schedule, we shall have to get the revenue some other

way, and that means indirect taxes, which work much more injustice on the low income groups than on the high.

That is my view and I hold it strongly. I am a strong believer in a well thought out, graduated, progressive income tax scheme, and that is what I believe we have in this country today. I believe that in fairness income tax relief should be graduated in all groups in the community, naturally less for those with high incomes. But the method suggested of raising the exemptions would not in my judgment accomplish the purpose intended.

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SC

Victor Quelch

Social Credit

Mr. QUELCH:

I do not see how the minister can argue that by raising the exemptions you do not benefit the majority, because the figures I have show that if you increase the exemptions for married people to $2,000 and single people to $1,200 you relieve 54 per cent of the taxpayers. In other words, the majority would benefit, and not the minority, by such action.

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. ABBOTT:

The majority would benefit by unduly penalizing the minority. That is the fact. No man can convince me that the man with $2,500 or $3,000 or $3,500 is not entitled to just as much consideration, on a logical and reasonable basis, in the matter of tax treatment under the income tax act, or under any other act, as the man earning $1,500 or $1,800. It is true that taxes should be imposed in proportion to ability to pay, but you do not do that by an arbitrary exemption. I repeat what I said before. If the argument from analogy is of value, we are not doing too badly when our exemption levels are higher than those in any other country.

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SC
LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. ABBOTT:

We have taken the lead in many things, and we have done so in this instance.

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SC

Victor Quelch

Social Credit

Mr. QUELCH:

There is no reason why we should not continue. If you raised the exemptions to $1,200 for single and $2,000 for married persons, from the figures I have obtained, on the basis of 1945, it would cost the government a loss of revenue of $98 million, not taking into consideration the amount lost in respect of people above the proposed exemptions. But in view of the fact that we are bringing about a reduction of revenue greater than $98 million, we could increase the exemptions and at the same time allow for a reduction in revenue from people in the lower income brackets above S2.000 and $1,200.

There are one or two other points that I should like to consider in regard to the brief submitted by the federation of agriculture and

Income War Tax Act

the Alberta farmer? union. I refer to No. 7 on the list, which asks that payment of arrears of interest and principal on farm loans due in 1940 be allowed as deductions for income tax purposes. That is from the farmers union, which is almost identical with the one from the federation of agriculture, which asks that payment of arrears of interest and principal on farms due for 1940 be allowed as deductions for income tax purposes. I feel there is every justification for that demand. It is true that last year we introduced legislation to make it possible for the farmer to average his income over a period of three years. The majority of farmer members last year took the stand that the period should be increased to five, but there was a compromise on three years. That, however, was not made retroactive and therefore we find today that many farmers are having to pay tax on debts that were incurred in the past, and therefore the federation of agriculture and the farmers union ask that where payments are made on certain debts incurred in the past, no income tax be charged thereon. There is every justification for that position, for this reason. In the thirties the farmers, through no fault of their own, were forced into debt owing to the fact that they were having to produce at considerably below the cost of production. That was due to the policy of the government of the day.

At that time the farmers were told that they would have to accept world market prices, and that situation continued until 1942, and the farmers kept going into debt. Then in 1942 prices of agricultural products were increased, but at the same time the income tax was greatly increased. Moreover, it might have been possible for the farmers to get higher prices, but the government placed a ceiling on agricultural prices. The result was that we found ourselves faced with this situation. In peace time when prices were low the farmers were told they would have to accept world prices, and when the war came and prices went up they were not allowed to get the advantage of world prices but were told that they would have to take less. Nevertheless they were faced with the problem of having to meet debts that had been incurred in the period of low prices, and those debts unquestionably represent to a large extent unpaid expenditures.

Expenditures incurred in production should be allowed as cost and therefore deductible from taxation. But today, when the farmer tries to meet obligations incurred in the thirties, he finds that those obligations are increased to from 30 to 40 per cent as a result of having to pay income tax. I think the suggestion of the federation of agriculture is reasonable, that repayment of interest and capital on mortgages incurred prior to 1940 should be exempt from taxation.

There is nothing new in this principle. We have adopted it in regard to certain other corporations in the country, and if we can adopt it so far as those corporations are concerned, I cannot see why the principle cannot be followed in agriculture. Agriculture is probably one of the most risky occupations in the country. We have to realize, therefore, that although it is doing fairly well today it may run up against very great difficulties in the future-not as serious, we hope, as in the thirties; nevertheless we may run into a situation where it may be impossible for the farmer to recover cost of production in the prices he receives, and hence he will run into debt once more.

I suggest it would be a good thing if we were to allow the farmers to establish a reserve fund to offset future losses. We must help them not only to get out of debt but to establish such a reserve to take care of future losses. We do that in connection with the chartered banks. We allow them to set aside a certain amount as reserve; the public are not allowed to know what that inner reserve is, and the banks pay no income tax on the amount they put in that reserve. When they suffer losses they can draw money from such reserves to meet' those losses, and the excuse given is that these losses are unpaid expenditures and therefore should not be taxed.

I contend that exactly the same principle should be applied to farmers. They should be allowed to meet losses which represent expenditures without having to pay income tax on them. The chartered banks have always argued that inner reserves are merely for the purpose of meeting losses, and they emphasize the fact that during the thirties they suffered heavy losses and had to use up a large percentage of those reserves. But I think it is more true to say that the inner reserves are not merely for the purpose of meeting possible losses but for the purpose of guaranteeing profits, because during the thirties the chartered banks averaged dividends of around nine or ten per cent on paid-up capital. I do not see therefore how you can Say that they were having heavy losses when they were able to pay around nine or ten per cent dividends. The fact that they could pay such dividends proves that they were using inner reserves to guarantee profits; and yet they were not charged income tax on the reserves because it is claimed that those reserves were for the purpose of meeting losses. Apparently we are still continuing that policy. In 1943,

Income War Tax Act

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PC

May 30, 1947