July 26, 1955 (22nd Parliament, 2nd Session)


James Joseph McCann (Minister of National Revenue)


Mr. McCann:

Mr. Chairman, perhaps I can anticipate the question which the hon. member for Dauphin wants to bring up. When he spoke on this matter I promised that I would make a statement, and I think perhaps it would facilitate matters if I made it before he asks any questions.
I undertook on April 20 to reply to a question raised by the hon. member for Dauphin regarding certain remissions of income tax granted by orders in council to the Aluminum Company of Canada Limited, the Bell Telephone Company of Canada, the Saguenay Power Company Limited and the Gatineau Power Company. As I have previously advised, the Income War Tax Act and the Income Tax Act contained provisions which prohibited a taxpayer from deducting, as an expense of doing business when computing his income, any corporation tax as defined by regulation.
"Corporation tax" was defined at considerable length in three orders in council; P.C. 332,

dated January 30, 1948, P.C. 953, dated March 6, 1948, and P.C. 5948, dated December 23, 1948. The tax imposed by the province of Quebec, commonly referred to as the "Quebec education tax" was deemed by the officials of my department to fall within the definition contained in the above-mentioned orders in council, and accordingly the amount of such tax was disallowed as a deduction when computing the income of the four companies in question. That is the first point to note. The result was that appeals were taken by these companies, in which appeals they disputed the disallowance of this tax.
These appeals were first argued before the income tax appeal board by Saguenay Power Company Limited and Gatineau Power Company. By agreement the hearing of the appeals of the Bell Telephone Company of Canada and Aluminum Company of Canada Limited was held in abeyance to await the outcome of the Saguenay Power Company Limited and Gatineau Power Company appeals.
There were two issues before the income tax appeal board. First, were the orders in council defining "corporation tax" within the authority of the governor in council and therefore valid? Second, if this question was answered in the affirmative, did the Quebec education tax fall within the terms of the orders in council? The income tax appeal board with all members present, and after hearing argument which lasted five days, had no hesitation in unanimously allowing the taxpayers' appeals and in holding that the governor in council had, in passing the orders in council defining corporation tax, exceeded its power and that accordingly such orders in council were ultra vires.
After giving the matter due consideration it was decided that it was advisable to have the decision of the income tax appeal board reviewed by a higher court, and accordingly an appeal was taken to the exchequer court, where the decision of the board was reversed in a judgment handed down by Mr. Justice Cameron on January 24, 1953. Very shortly after the decision of the exchequer court had been issued, parliament repealed the section of the Income Tax Act about which the controversy had arisen. The repeal was to take effect for the 1953 and subsequent taxation years.
Under ordinary circumstances, all school taxes imposed on property used in a business are treated as a proper deduction when determining the profits of that business, and in view of the fact that the Quebec education tax was imposed for the purpose of improving the financial position of the schools in the province of Quebec, it was felt that there was an element of discrimination in disallowing this particular tax imposed by one province,
Supply-National Revenue due to the fact that it was deemed to fall within the meaning of "corporation tax" as defined by order in council.
Immediately prior to the repeal of the controversial section of the Income Tax Act, the Gatineau Power Company and Saguenay Power Company Limited served upon the department a notice to the effect that it was their intention to appeal the decision of the exchequer court to the Supreme Court of Canada. The matter in issue in the appeals, being solely that of the interpretation of this particular section in the statute, and that section having been repealed, the outcome of the litigation before the Supreme Court of Canada would have no effect in the assessment of taxes for subsequent years.
Accordingly when the companies submitted an offer that a settlement be made of the matters in question on the basis that in computing income for the years under appeal, 1946 to 1952 inclusive, one-half of the amounts of the Quebec education tax be allowed as a deduction, it was thought to be a matter which should be given very serious consideration.
Consultations took place between the Department of Finance, the Department of Justice and my department with the following factors in particular being considered. First: the uncertainty regarding the outcome of the further litigation in view of the fact that the income tax appeal board and the exchequer court had expressed diametrically opposite views on the matters in issue. Second: income taxes in the total amount of $3,989,456.22 were involved in the dispute between the Department of National Revenue and the four companies referred to by the member for Dauphin.
It was appreciated that there was a chance that a decision unfavourable to the department might be given by the Supreme Court of Canada which would result in the loss to the revenue of the total amount of the tax involved. Accordingly when an offer of a compromise settlement was made by the taxpayers, the government considered it advisable to ensure the collection of $1,994,728.11 in taxes, being 50 per cent of the total, rather than risk the loss of the total amount.
That is the reasoning on which it was based. It appeared to the government at the time it agreed to a settlement that it was quite justified in doing so, and we have had no reason subsequently to change that opinion, in view of the uncertainty of the outcome of the litigation, the nature of the school tax involved, the repeal by this house of the statutory provision concerning which the controversy had arisen, and the large amount of tax which might have been lost to the revenue.

Supply-National Revenue
Once the decision had been made to settle on this basis with the two companies who had appealed to the Supreme Court of Canada, the same basis of settlement on this item of expense was made available to all other taxpayers with respect to assessments then under appeal or which were open to the appeal procedure.
I think that clearly outlines the whole situation, and I should be very glad to listen to the comments of the hon. member for Dauphin or to any questions he may have. I hope his understanding of the matter is clearer now than it was when he brought up the question in the house.

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