June 5, 1951

LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. Abbott:

I will consider very carefully the facts which my hon. friend has presented. I did not want to interrupt him, but this

Income Tax Act

question of exemptions for other than specified dependents in the act is a very broad one. I do not think it is strictly relevant to discuss it under this section. As I pointed out, it was arranged that we were going to discuss the subject of depreciation. However, I will consider the facts that he has put forward, and perhaps at an appropriate time before we finish consideration of the bill I will try to give him a considered answer on it.

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PC

James MacKerras Macdonnell

Progressive Conservative

Mr. Macdonnell (Greenwood):

I should like to make a few brief observations on the question of depreciation which I think has an importance very great and perhaps different from what some of us thought at the time that it was originally brought forward by the minister. I will read briefly from what the minister said in his budget speech at page 1808 of Hansard. After speaking about the tremendous investment program facing us in the year ahead the minister said:

What we need is a stiff financial deterrent that will affect particularly the businessman who is considering the kind of investment which is attractive, not because of its long-term soundness, but because it can be written off out of the expected high profits of the next few years at a time when he expects the rate of corporate income tax to be abnormally high.

Then the minister refers in a general way to the nature of the deterrent, and I want to read something that he said later because I think it is very important to have in mind that this is the type of thing the minister was picturing to us. I want to suggest that what this provision may do is to have results that are far enough off from the minister's intention unless it is very broadly interpreted, and indeed I think unless some changes are made in the regulations. The minister went on to say:

The deterrent will particularly affect the businessman whose decision to make a capital expenditure is strongly influenced by the expectation that he can write off a large fraction of his cost ... In other words it will compel the businessman to give primary attention to the long-term prospects of proposed capital expenditures and if outside financial participation is required lenders will also take this view.

What I want to draw attention to at the outset is that the whole tenor of this is that it is to affect big business, people who are wanting to go into business in a big way-

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. Abbott:

My hon. friend is wrong about that. It is to affect everyone, big and small.

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PC

James MacKerras Macdonnell

Progressive Conservative

Mr. Macdonnell (Greenwood):

I say the

atmosphere that the minister created is rather of the big man. It is because it does affect the big man-

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. Abbott:

That was completely unintentional, if that is the case.

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PC

James MacKerras Macdonnell

Progressive Conservative

Mr. Macdonnell (Greenwood):

At any rate I am coming to the other aspect of it because what I want to ask him to consider particularly is that it affects the small as well as the big. It is that point I wish to emphasize particularly. I do not agree by any means with all that the hon. member for Kootenay West (Mr. Herridge) said a little while ago, but I agree very heartily with the fear he expressed that in the circumstances in which we find ourselves at the moment, and with the development of the defence economy, we may find it harder and harder for small men to originate small businesses or, as he put it, we may find more and more wealth passing into fewer and fewer hands. That is something that should not be disregarded.

I want to refer in passing to the regulations which will come up again. I point out also in passing that the purpose is really twofold. First of all it is to act as a bit of a damper on expansion, and second I presume it is to conserve necessary defence materials. That may be ancillary, but I think it is not irrelevant. I want to point out next that there is the greatest danger as the matter stands that it will be almost impossible for new businesses to start up, and I even suggest to the minister that it should be considered whether there may not be an exemption of businesses of a certain size. I am not prepared to dogmatize as to the amount, but I suggest very earnestly that we should try not to allow this to create a situation which will make it difficult, if not impossible, for new businesses to arise, because we are not considering something which is going to last for a month or a year. As now contemplated it will last for four years, and if we create a situation for four years which is going to make it, as I say, difficult if not impossible for small businesses to arise, or at any rate make it very much harder for them, I think that is a very serious thing and should be so considered.

I next want to bring to the attention of the minister certain specific types of cases which it seems to me will arise, and the problems of which I hope can be most seriously considered. I am not overlooking the fact that there is a wide range of exceptions, and that beyond the exception there is a discretion. I am not overlooking that at all, but having said that I wish to bring certain cases to attention which I think are pertinent, and in some cases urgent. I hope they will be considered on their merits, and that we may have an answer with regard to each of them.

First of all I wish to go back and read one operative clause from what the minister said in his budget speech. At page 1808 of Hansard he said:

To provide this deterrent it is proposed to defer for a period of four years the right to charge depreciation on all capital assets acquired after April 10, 1951, excepting certain classes of assets defined in the regulations and certain additional kinds of assets when certified as eligible by the Minister of Trade and Commerce.

The types of cases I wish to bring up are these. The first is where a business was committed, at the time the order became effective, to capital expenditure. In other words, it was not a case of making a decision after the minister's speech, after the coming into effect. There was a capital investment commitment made before that. Second, there is the case of businesses which merely change the form of ownership after the order becomes effective. For example you have a single business which is turned into a corporation, or a partnership turned into a limited liability company, or the case of a man dying, leaving his business to his son and creating a situation where the business has to be sold. If the right to depreciation is gone in such a case we shall have a serious lessening of the value of the property. Finally I want to reiterate again what I said, that I hope special consideration will be given to the position of those wishing to start up small businesses, and on these points I should like to hear the minister's comments.

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. Abboti:

On the points that have been raised by my hon. friend, first I should say that the regulations are being reviewed at the moment. I understand that the Minister of National Revenue, with the concurrence of myself and the Minister of Trade and Commerce, very shortly will be recommending certain amendments to these regulations in the light of the experience we have had in the three or four weeks since the original regulations were put in, in the light of applications which have been made, and so on. Among other things I might say that provision will be made under which the names of those given certificates of eligibility, together with the reasons for which they were given, will be published, probably in the official gazette. In any case that will be provided in the regulations.

Consideration is being given to the problem raised by my hon. friend of a change in the form of ownership, and I think probably the Minister of Trade and Commerce, the Minister of National Revenue and myself will be making some announcement about

that before very long. On the question of small businesses, it is pretty hard to say what a small business is. As my hon. friend knows, the rate of corporation income tax on the smaller businesses is very much lower than on the large businesses. It was 10 per cent; it is now 15 per cent. I do not think any serious hardship would be suffered by these smaller businesses if depreciation were postponed on the assets they may acquire.

I want to make it clear that this measure is not aimed at large businesses as such or at small businesses as such, but at all businesses. The main purpose of the proposal is to cause businessmen to defer less essential expenditures, and to be perfectly satisfied that the asset they are acquiring is one they are willing to keep for a number of years and which will be profitable for a number of years, so that on the expiration of the period during which depreciation is deferred they will still be in a position to make profits against which the capital cost allowances can be taken.

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PC

James MacKerras Macdonnell

Progressive Conservative

Mr. Macdonnell (Greenwood):

I appreciate what the minister has said, but I would like to ask one or two things. The minister has indicated that changes are in contemplation. May I take it that when these changes are made an opportunity will be provided in the near future to discuss the matter again in the house?

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. Abbott:

I cannot give any positive

assurance as to that in the light of the probable sessional program. My hon. friend appreciates that these regulations are made under section 11 of the Income Tax Act, which provides for capital cost allowances. The granting of capital cost allowances is made by regulation, on the recommendation of the Minister of National Revenue. In strict theory he does not have to do so; but of course, as I explained, this is a matter for determination by regulation. Under the old act it was purely a matter of ministerial discretion; under the new act it is provided by regulation. I should hope that the regulations would be completed and perhaps tabled before the estimates of the Department of National Revenue are finished. Unquestionably at that time there would be an opportunity to question the minister about them, though I think perhaps a more satisfactory course would be to have that discussion when the estimates of the Minister of Trade and Commerce were under consideration, because it is by his department that the certificates of eligibility are being issued. The Department of National Revenue will have the responsibility of determining questions of fact such as when particular assets were acquired, and so on. I cannot

Income Tax Act

give a positive assurance that the amendments, which I hope will be available within a few days, will be discussed, but I should think there would be that opportunity and certainly I would do what I could to provide a suitable time at which that discussion could take place.

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PC

James MacKerras Macdonnell

Progressive Conservative

Mr. Macdonnell (Greenwood):

Purely as

a matter of what seems a convenient practice, with these changes likely to be available in a few days, I take it that submissions could be made to the proper authority continuing this discussion, in the hope that some of the things we bring up now may be felt worthy of consideration. These regulations are not like the laws of the Medes and Persians.

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LIB
PC

James MacKerras Macdonnell

Progressive Conservative

Mr. Macdonnell (Greenwood):

I take it

they are flexible; that is the reason they are left in regulation form, is it not?

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. Abbott:

That is it exactly. This is a new move. The government wants to make the regulations as reasonable as possible, to cause as little dislocation as possible and yet achieve the objective in view. The department is always ready to listen, and in fact welcomes representations from businessmen and others who may be affected, in order to ensure that the regulations are drawn as well as possible.

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PC

James MacKerras Macdonnell

Progressive Conservative

Mr. Macdonnell (Greenwood):

That seems a very sensible way to deal with the situation. While I am on my feet I might as well mention one or two other points so they will be on record and those who are considering the regulations will have them before them. Another question that arises is the depreciation of used equipment and buildings which pass into the hands of new owners. Obviously there is a situation there. Then there is the question of the depreciation where the capital asset acquired has been used by a former owner, though some kind of safeguard would be necessary so it would be clear that the transaction was genuine. Probably it should be in the hands of the former owner for a period of twelve months, say. Finally there is the case where you have a business property on which the purchaser had an option to purchase dated prior to April 10. I am not going to delay the committee by dwelling further on these points. I am glad to know the regulations are flexible, and that these matters can be brought up and discussed further from time to time.

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. Abbott:

As my hon. friend has indicated, this question involves a number of very complex problems. Those he has raised are being considered. It may be possible to do something about some of them;

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in others it may not. We are proceeding in this, as in all other things, by a process of trial and error, by elimination, and by seeing what can and cannot be done.

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PC

Frank Thomas Stanfield

Progressive Conservative

Mr. Stanfield:

I would like the minister to explain this deferred depreciation a little more clearly, because I have heard two or three versions. I imagine the correct one is that if you buy a new piece of machinery you lose four years' depreciation. Some people seem to think that when 1956 comes around they will get the four years' depreciation all at once, but I do not think that is right. Would the minister explain it?

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. Abbott:

To put it shortly, this is pushing the whole period forward. Suppose an article was acquired in June of 1951. If this rule were not in force depreciation would commence in 1951. Instead of that the right to take depreciation or capital cost allowance is deferred for four years. After that four-year period the owner can take the depreciation he could have taken in 1951. In 1955, let us say, he can take the depreciation he could have taken now, in 1956 the depreciation he could have taken in 1952, and so oh until the asset is fully depreciated. I want to emphasize that the right to depreciation is simply postponed; it is not taken away. So long as earnings are available after the expiration of the period, then the depreciation can be taken.

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PC

Frank Thomas Stanfield

Progressive Conservative

Mr. Stanfield:

As I said during the budget debate, I think this is a very foolish change for the minister to make. I have a very high regard for him, but I believe he has made a mistake in this case. For many years the depreciation rate was 10 per cent, and everyone knew exactly what to expect and just what to do. Even in times of great crisis, even when our profits' tax had to go to seventy-five per cent, or say it did, as long as you had a steady rate of depreciation and knew what you were doing, business could keep on going along on a sound basis. But now, when you get fooling around with depreciation, and fooling around with everything, you get to a point where nobody knows what he is doing. I believe the minister was ill advised to change these rates of depreciation. He should have left it the way it was.

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LIB

Douglas Charles Abbott (Minister of Finance and Receiver General)

Liberal

Mr. Abbott:

I suppose we have been discussing depreciation, Mr. Chairman, but the clause itself does not relate to that.

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PC

Donald Methuen Fleming

Progressive Conservative

Mr. Fleming:

Mr. Chairman, the minister has given some indication to the house that the present order in council, which I believe is P.C. 1778 dated April 10, is now under review, and that certain amendments may be made to that order. I believe that that fact probably makes it all the more desirable,

since the minister has not indicated the nature of the probable amendment-perhaps he is not in a position to do so-that any views hon. members may have concerning this measure should be put forward at this point, in the hope that they may receive consideration when the amendments to the order in council are being determined.

There are one or two aspects of the view put forward by the minister in regard to this whole subject that I believe deserve comment. The minister has stated that one of the objectives of the proposals to defer depreciation is to encourage business enterprises, where possible, to defer physical expansion of their plant and equipment. Now, I suppose every one of us will say that, so far as that will make a contribution towards conserving essential defence materials that may be in short supply, the purpose is worthy of support. Again, to the extent to which this measure may be intended to reduce postpone-able expenditures, and to increase savings, about which we were speaking earlier in the evening, I think the house would wish to approach the proposals favourably. On the other hand, Mr. Chairman, we have to assess the professed purpose that the minister has assigned in relation to the facts as we see them developing since April 10.

I am glad the minister has spoken as he has tonight in clarifying the issue, because unquestionably the words he used on pages 1808 and 1809 of Hansard of April 10, have carried the impression abroad that his policy was directed against new and smaller businesses. The minister tonight has sought to correct that impression, and to stress that it is of general application. Nevertheless, Mr. Chairman, the fact of the matter is that the weight of this new policy is going to be felt particularly by newer businesses, younger businesses and businesses which are in the course of expansion. They are going to be now compelled either to arrest their expansion or forgo what is a very important element in their financial plans, namely, depreciation. So we may say that a young or growing industry is the one that will feel the effects of this new policy most severely at the present time.

To that extent, any measure of this kind is necessarily discriminatory. This is not going to hurt any business that had the good fortune to carry out any needed expansion of physical facilities or physical plant prior to April 10. It is a matter of luck that some industries acquired their physical plant or assets prior to April 10, and will be permitted to depreciate them in the ordinary way, while other businesses, in the midst of expansion and the

growing pains of a young business, but which did not acquire the physical plant prior to April 10, are now going to feel the full weight of this new policy. This is a regrettable form of discrimination. It may be inevitable in measures of this kind.

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June 5, 1951