Tax Reform

Within the next year a reformed taxation system should be in operation. Because the basic framework will serve us for many years, the Government not only wants a fair system, but one that Canadian taxpayers think of as fair. Public debate, consultations with interested groups and organizations and with the provinces are essential to achieving a reasonable concensus. The debate has been underway for the best part of this decade, and in the next few months will increase in tempo.

In April, 1967, my predecessor proposed a five-stage programme to tax reform. First, oral and written consultation with the taxpayers and governments. Second, publication of a white paper incorporating the Government's decisions about the income tax. The paper would contain some important details to make clear how the proposals would work. Third, consideration by a Parliamentary committee which could listen to taxpayers and the provincial governments. Fourth, publication of a draft bill which might incorporate changes resulting from the views received in the Parliamentary committee. Fifth, further public hearings on the draft bill before a Government bill was prepared for presentation to Parliament.

When I moved to this portfolio last Spring I decided against publishing a white paper and to make some other changes in the process of consultation to take account of this. There were several reasons for the change. The original target of putting tax reform on the law books in 1968 was obviously missed. Elimination of a second round of public hearings might recoup some of the lost time by avoiding a duplication of the debate. There also seemed a great advantage in producing a draft bill at the outset to provide lawyers, accountants, businessmen and taxpayers with more precise information about how the system might work.

The factors have prompted me now to adopt another course, which will involve publication of a white paper but avoid two hearings before a Government bill is placed before Parliament.

We plan to publish the white paper in June. Hearings before a Parliamentary committee will listen to representations from interested persons and organizations after everyone has an opportunity to study the proposals. Some of the legal work will be referred to the committee to demonstrate some of the proposals in greater detail. These might contain changes based on the Government's reaction to the debate which has taken place up to then. Then the testimony at the committee hearing will all be considered seriously by the Government before a tax bill is presented to Parliament.

I said there were two reasons which led me to adopt this revised programme for consultation and legislative action. We are doubtful that a draft bill can be written by early Summer without delaying the drafting into law of other priority proposals. The second reason is psychological and of great importance. It was becoming clear that many persons and groups viewed a white paper as evidence of the Government's intention to consult and discuss the subject fully before legislating. Comprehensive consultations were always a part of the Government's plans whether there was a white paper or not. But perhaps a white paper will help to achieve what I talked about earlier: a concensus that the new system is thought of as fair as well as being fair.

Consultation which satisfies everyone is probably impossible to achieve. Those opposed to a certain course of action probably consider consultation inadequate unless a government acquiesces to their view. We have been told recently that we failed to consult with the provinces before proceeding with the reform of the estate tax. In fact there was consultation for almost two years. It started following the publication of the Carter Royal Commission Report on Taxation. In April, 1967, Mr. Sharp specifically asked for comment and submissions on the question of inheritance taxes. Few of the organizations and governments which made submissions and talked to the Federal Government during 1967 recommended abolition of the estate tax. There was a general consensus it was a fair part of the total tax system. The estate tax is also a direct tax which bears no relation to the income tax. And, as I said at the time, this change was overdue whether there was any general tax reform or not. The budget was followed by a Federal-Provincial conference at which I indicated interested provinces would have every opportunity to raise the subject.

Our reasons for bringing in proposals affecting the chartered banks and insurance companies now rather than later were twofold: there was a reasonable concensus for action of this kind in the submissions made to the Government during the previous year and one half; there was also the certainty of immediate revenues to help the Federal Government achieve a budget of relative balance in 1969-70.

Consultations are fruitless unless followed by action either for or against a proposal. When action is decided upon our first responsibility is to Parliament. Therefore proposals of this kind must be announced there before the provinces or anyone else are informed. The Federal Members of Parliament should be informed of Government decisions as soon as the Provincial governments. They would have a duty to complain if they were told any later than the provinces what the Government was planning to ask Parliament to do.

I have been speaking of our approach to reform and development in one area of public policy which will certainly engage the serious attention of all Canadian taxpayers in the months ahead. May I turn now to a second issue of perhaps even greater long-run significance for the future of our country. I refer, of course, to constitutional reform and particularly to the consensus which has now been reached to undertake a major review of one of the most complex parts of this work--the distribution of powers and responsibilities between the federal and provincial governments.

Needless to say, there are few aspects of the constitution which are more complex and difficult, or of greater significance to the long-run economic growth and prosperity of Canada. It takes on added meaning and importance as the total role of government in our economy seems to expand under almost irresistible pressure. When the Fathers of Confederation met to assign powers to legislate, to regulate, to spend money, and to raise revenues, they were concerned with only a small portion of the total output of the economy passing through government channels at all levels. Today, however, the three levels of government absorb and spend about one-third of the gross national product.

Consequently, it is more necessary than ever to make sure that governments at all levels are applying this large share of our total resources to the most urgent and important needs. And they must make use of them in the most productive and efficient manner. It is here that the distribution of powers among governments in a federal system is of such critical importance. We need an allocation of responsibilities which will make for functional efficiency in terms of modern society, an allocation which respects the social, economic and cultural diversity of the country, and an allocation which will help at the same time to strengthen the bonds of national unity and our national identity. To achieve these ends we need a distribution of tax and fiscal powers which will permit all levels of government to carry out, and be accountable for, their assigned responsibilities.

This is the challenge which the constitutional conference has now taken up. I shall not, of course, try in any way to anticipate what might finally emerge from the months of hard work and sharp clash of opinion which seems to lie ahead. I can, however, draw to your attention the broad view set out one year ago in published form by the federal government in its approach to this issue.

Perhaps it is a bit surprising after 100 years to find that our present view on the distribution of powers is remarkably close in spirit to that which seems to have guided the Fathers of Confederation in delineating the areas of federal and provincial jurisdiction, set out mainly in sections 91 and 92 of the British North America Act. They clearly subscribed to a conception of Canada as a unified market economy, in which citizens, goods and services, and capital should all be enabled to move freely across all internal boundaries. Although the modern notions of full employment, economic stabilization and growth, and viable international balance had not been elaborated, they were all inherent in the vision of a free, independent and developing national economy, occupying the northern half of this continent.

It is this broad conception, and its more detailed economic goals, which require that the Parliament of Canada must have responsibility and control of the major, interrelated levers of economic policy. These include monetary and credit policy, adequate powers of taxation and spending for fiscal stabilization, foreign trade, tariffs and international exchange.

There is not, I think, any really serious dispute on these traditional matters, although the case is increasingly made for close attention to the regional effects of national policies in these fields. But the Fathers of Confederation could not have been expected to foresee clearly the dimensions and requirements of two other major objectives. One of these concerns the newer concept of the role of government in actively promoting the process of economic growth both nationally and regionally. This need and responsibility today accentuates the importance of so-called "supply-oriented policies." These have to do with the productive capacity and efficiency of the economy, and embrace policies and programmes for investment in human and natural resources, in transportation and communication, in science and technology, and in regulating trade and commerce. I am not suggesting any exclusive power for the national government in these latter areas, but modern economic analysis points clearly to the fact that powers to act and to spend in all of them are essential elements in the promotion of economic growth.

The other broad field which has come strongly to the fore in more recent decades flows out of the relatively successful development of our economy and our substantially increased per capita income. We are, today, a relatively affluent society. Because of this we can pay serious attention to problems of distribution and redistribution. Here as well, in a manner not even dreamed of in 1867, the federal government believes there is a national responsibility to redistribute income, between persons and between provinces, in order to equalize opportunity among all Canadians. This, as we have pointed out, involves both the power to tax and the power to spend.

Finally there continues to be an important, if less easily defined role for the federal government in strengthening the bonds of nationhood and our sense of identity. Much of this appears in the realm of culture, communication and technological development. We reach out for this instinctively, if perhaps somewhat haltingly. The CBC, Expo '67, the Canada Council, a national hockey team--and the earnest and serious attention now being given to the bilingual and bicultural nature of our country. "Cultural and technological developments across the country," we have said, "are as essential to nationhood today as tariffs and railways were one hundred years ago."

As for a broad view of the vital and integral role of the provinces--and of the powers which they must have to discharge that role--we have suggested the guiding principle that "most services involving the most immediate contact between the citizen and the government, and those which contribute most directly to the traditions and heritages which are uniquely provincial, should generally be provided by . . . provincial governments."

Again this is a widely-held view, which has come down to us in our present constitution. It implies strong provincial governments, with responsibility for education, and their own power to support cultural and technological development. It embraces the power to provide for the intimate personal services of health and welfare at the community level. It includes the major supervision of municipal services and institutions, including the huge metropolitan centres which inevitably attain a particular national stature.

We have said, further, that the provinces should continue to have the constitutional powers required to enable them to promote the development of their own economies. Our economic system itself, by its very nature, calls for decentralized decision-making and it is appropriate that growth and development should proceed as far as possible along decentralized lines. In this area, however, because of our essentially unified market economy, provincial policies will affect and be affected by national policies, and the problems of interaction come rapidly to the fore.

These problems are even more prominent, however, in defining the distribution of tax and fiscal powers appropriate to the broad division of responsibilities I have outlined. I need not remind you of the very lively debates on fiscal matters which have been going on for many years between the provincial and federal governments. But our concern has been to keep the problem in an appropriate constitutional context. It is, as I have said, an obverse side to the allocation of spending responsibilities. Enduring solutions to both questions are bound up together. However, we have pointed out that while the present constitution restricts the provinces to direct taxation, in fact the development and use of sales taxes by the provinces and their use of the income tax fields has enabled them, together with their municipalities, to raise almost one-half of all tax revenues in the country. In the search for constitutional solutions, therefore, we have suggested that an exact division of tax fields is not likely to be relevant in a rapidly changing society, and that it is probably most useful to think in terms of the principle of access to tax powers and tax fields in a reformed constitution.

Finally may I say a word about the process of interaction between federal and provincial governments. Such interaction is increasingly pervasive and is probably unavoidable under a federal system in a country and society such as ours. Certainly in responding to a variety of emerging needs across the country over the past two decades, the federal government has felt impelled to use its constitutional power to spend its money in areas of provincial jurisdiction in many diverse ways. But our present constitution gives no recognition to the problems which have arisen, and it was in this context that the Prime Minister spoke of the need for ground rules which would assist in defining the appropriate response of the federal government under any accepted division of powers. This is another, and far-reaching aspect of constitutional reform to be given searching study as we explore further all the ramifications of the vast, and complex challenge of constitutional reform upon which we are now clearly embarked.

Although they attract less attention than the issues I have discussed so far, there are two other subjects I wish to discuss briefly.

In Parliament within the next few months, besides seeking approval for the remainder of our October budget proposals, we are putting forward a package of legislation dealing with financial institutions. The first, which was introduced in the Senate, is the Investment Companies Act which is designed to regulate and supervise certain types of federally incorporated financial institutions such as finance and acceptance-type companies, which at present are not subject to regulation in the way that banks, federal insurance companies, federal trust companies and federal mortgage loan companies are.

Because the bill is now in the Upper House I will confine my remarks to explaining the bill's objectives. Its need became apparent following the collapse of several companies of this type. Many investors suffered heavy losses, and on occasion, confidence in the stability of our financial institutions was shaken. Some of the financial institutions themselves have taken steps to improve the safety of investments by the public. Some provincial governments have tightened laws governing provincially incorporated companies of this sort. The Federal Government decided a federal law governing federally incorporated companies was also required.

It may not be generally recognized that certain of the financial companies whose collapse caused such concern were not engaged solely or even substantially in the business of making consumer-type loans. They were to a large extent using funds borrowed from the public to invest in other companies, some of them owned by the same group of shareholders who controlled the company borrowing the funds from the public. The true nature of the business of these companies was not always known by the investing public.

Accordingly the bill before Parliament does not confine its coverage to finance companies proper, but includes companies which borrow funds from the public and invest a substantial part of those funds in financial assets, including loans to other companies,

One of the problems that has plagued investors, the investment companies themselves and governments trying to protect the interests of investors is that very little is known about the patterns of investment of many of these companies. As Mr. Rasminsky pointed out the other day in a speech in Montreal our financial institutions are going through a period of rapid evolution. I share his general approval of this process of change. I believe that Canada will be better served as our financial institutions adapt themselves to new ways of channelling savings into productive investment. But the public can only invest their savings wisely if they know what they are doing. And governments can only protect the investing public sensibly if they know more about the nature of these new financial institutions. In some cases neither the investing public nor the governments concerned are sure whether a company is really a financial institution or whether it is essentially a segment of an integrated manufacturing or commercial operation.

The first objective of the bill is therefore to establish a system of regular reporting for companies which fall within a rather broad definition of investment companies. The reports required in the legislation will flow into the Department of Insurance, where they will be studied carefully. After the government feels that they have become familiar with the operations of these companies they would be in a position to make sensible regulations for the protection of the public. There would probably need to be different sets of regulations for different classes of companies.

The bill provides that the only rules which would be imposed immediately on the activities of these companies would limit their ability to invest funds in other companies in which their major shareholders, directors or officers had a substantial interest or to lend to their own major share-holders, directors or officers. These rules would be designed to ensure that the persons managing companies to which the public is entrusting their saving will be completely objective in deciding how these savings are to be invested.

As I have said, the bill dealing with this matter is before Parliament. It is currently being studied by a Senate Committee. That Committee is examining witnesses and receiving briefs. It will then decide whether to recommend modifications in the bill. I am sure the bill is capable of improvement. But I am equally sure that the basic objectives of the bill are sound and that its passage will provide better protection for the investing public and thereby greater public confidence in our financial institutions.

In the area of commercial policy, I expect that we shall be quite extensively involved in trying to maintain the momentum of progress towards further liberalization of international trade. The successful outcome of the Kennedy Round discussions represented a major step forward towards this goal which, for many years has been a prime objective of Canadian trade policy. We are determined to do all we can to ensure that there is no falling back from these achievements, and that the further expansion of world, and Canadian, trade is not jeopardized by restrictive action of any kind. Pressures for that type of action are evident in some quarters and we shall have to be constantly on guard against them as well as alert to all possibilities for further progress in this direction.

I expect we shall also be busy in the months ahead in trying to work out a solution to the very grave problem of the economic disparities between the developing and developed countries of the world. Last year we saw at least one major step in this direction when unanimous agreement was reached by all U.N. member countries that a non-reciprocal generalized scheme of tariff preferences should be established to provide developing countries with better access for their goods to the markets of the developed countries. We, along with other developed countries, are now engaged in working out a scheme of this kind for discussion with the developing countries later this year. We are still hoping that it will be possible to implement an arrangement of this kind in 1970, whatever the form it eventually takes. Like most tariff matters, this is a highly intricate exercise that requires a lot of careful thought and consideration in order to ensure that the scheme provides maximum benefits to developing countries without causing undue damage to Canadian firms and workers.

Thanks of the meeting were expressed by Mr. R. Bredin Stapells, Q.C.