Tax! Tax! Tax!—The Canadian Tax Scene

MR. GORE:

The five per cent surcharge on income tax announced last week by Finance Minister Mitchell Sharp may not be calculated to win many friends, but its influence on most Canadians is undeniable. Palatable or not, income tax is a fact of life in our society. Yet, although we are familiar with its effects and apparatus, and may even have resigned ourselves to its necessity, how many of us completely understand its origination or its legal framework?

One man who has made not only a point, but a profession, of endeavouring to know all there is to know about income tax is our speaker today, Francis Eugene La Brie, an eminent barrister and solicitor in the City of Toronto, a member of the Alberta Bar and the Ontario Bar, and internationally known tax consultant.

Mr. La Brie is the author of such books as The Meaning of Income in the Law of Income Tax and Introduction to Income Tax Law, Canada. He has also been associated with numerous legal publications including The Canada Income Tax Guide. Apropos of my opening remarks, I quote the following lines from the publisher's description of Mr. La Brie's book The Principles of Canadian Income Taxation, published in 1965:

"As the title of this book implies it is a discussion of the principles, both legal and non-legal, that underlie and pervade the vastly expanding topic of Canadian income taxation and of the variety of problems that inevitably arise out of any attempt to impose a high level of tax on incomes."

Our speaker was born in 1920 at Roselea, Alberta, where he spent his earlier years on his father's farm. He graduated in arts from the University of Alberta, then enrolled in the university's law course where he won graduate fellowships that enabled him to take further degrees in law at the University of Toronto.

Mr. La Brie was a member of the Canadian Tax Foundation from its inception and has served on Foundation study groups. He has also been associated with the Canadian Institute of International Affairs and the Canadian Institute on Public Affairs.

From 1945 to 1963, he was a member of the Faculty of Law at the University of Toronto. As editor of that university's Law Journal, he once wrote an article on the subject of "Tax Avoidance and Evasion". . . . In case that last statement stimulates any misconceptions, I hasten to add that the article was a very formal and legal dissertation on the subject.

Our speaker is married and has five children. He maintains an office suite in the Sun Life Building, Toronto, but resides in Pickering Township where he also engages in farming- a not-surprising activity when we remember his farming years as a youth in Alberta.

From all this, it is obvious that in the person of F. Eugene La Brie, we have with us an outstanding legal mind, author, and specialist in the field of taxation. It is my pleasure to present him at this time. Mr. La Brie.

MR. LA BRIE:

My topic, the present Canadian taxation scene, is one of my own choosing and, as you will readily recognize, its a topic of the utmost breadth, leav ing me with liberty to range over a very wide area of present government and public administration in Canada. In the time at my disposal, I should like to place before you my own point of view on matters of taxation in Canada together with my reasons for adoption of that point of view. I realize that I must be efficient with words if I aim to succeed in communicating with you and in not wasting your time here; and in furtherance of that end, I have done what I rarely do. I have reduced my remarks to the form of written presentation. I do not like reading written oral presentations. The written word and the spoken word are distinct forms of presentation. As a former teacher, I fully realize that the spoken word can be much more effective. In order to teach, you must catch the mind off guard. The devices are many, including humour, mental embarrassment and other techniques of suggestion. Today, I shall make no attempt at any of these things. I shall put my own views clearly before you. Again, this is a departure from my former practice as a teacher, mainly because I did not consider my views relevant to the function that I was then performing. The function of a teacher is not to indoctrinate but to encourage thought. This is a fundamental that few teachers realize; and that is the tragedy of modern education in Canada. Accordingly, if there are any of my former students in this audience, I beg of you not to be shocked or disillusioned by what I am about to say to you today.

I have spent no large money on extensive research into the facts and details of taxation. Neither have I submitted taxation to investigation aided by modern technology and automated analysis. Moreover, no new laws have been enacted to await my legal analysis. Yet I feel at home at this task. I view law much more broadly and place much less restriction on the legal range of enquiry than is commonly accepted by lawyers. To me, there is but one social science and that is law. At an earlier day, when the educated man took all learning as his province, the law comprised all of what today is generally classified as the arts and social sciences. I regret that lawyers ever permitted legal training to be concerned with anything less than that. Our social sciences of today are undisciplined, are vague and meaningless in their content, so that any wisdom they have evolved is little used. The study of law deals with real existing situations and calls for decisionmaking, either in the form of general edict or specific direction, and it is only in this context that knowledge becomes meaningful and challenging. We speak of this ability to meet specific situations as being realistic, as being practical, or as being non-academic, or down to earth. By whatever name we describe it, the problem is the same-that of translating thought, reflection and factual knowledge into action, the problem of passing judgment. Today modern education has provided us with information, analysis, theory and logic. But we are lacking in judgment. And, in brief, my message to you today on the approach to present tax reform in Canada, is that it is lacking in judgment.

The main item of interest on the current tax scene is the report of the Carter Royal Commission on Taxation. These commissioners were asked to inquire into and report upon the incidence and effect of taxation imposed by Parliament and to make recommendations for improvements in the tax laws and their administration that may be consistent with the maintenance of a sufficient flow of revenue. The commission was well financed and powerfully staffed and finally reported in a six-volume, 2600page report after 41/2 years of work, aided by a staff of 150 lawyers, accountants and economists at a cost of 31/2 million dollars. From the very first announcement of the report, it became obvious that the commissioners paid little attention to the limitations in the terms of their reference. The commissioners were drawn by theoretical considerations (not, I am sure, by the briefs and hearings) to the point of recommending not only improvement, but practical abandonment of the present system of federal direct taxation. In their enquiry, they were led to consideration, not only of dominion taxes, but of provincial taxes, and to making recommendations as to taxes that should be imposed by the provinces and the balance that should exist between federal and provincial taxation. Finally, in their ardour for reform, they were moved to comment upon the need for enquiry into the area of government expenditure, particularly in the area of social services. Indeed, at the recent Canadian Tax Foundation Conference in Montreal, Mr. Harvey Perry, one of the commissioners, is reported as saying: "One of the recommendations the Carter Commission nearly made, but didn't, is that one of the very earliest exercises in reviewing programmes should be in the area of social welfare. I believe that, in one of our drafts, we had included such a recommendation and later we decided it was none of our business. However, if any part of our present government financial structure comes even close to competing with the tax system for being unplanned, ramshackle and jerry built, it is social welfare. Welfare is a No. 1 subject, following taxation, requiring an immediate and complete overhaul".

I am not concerned with the fact that terms of reference may or may not have been exceeded. Some of the world's greatest achievements have been carried out in defiance of orders. What more concerns me is that in my opinion, the breadth of the commssioners' actual investigation was still insufficient to justify the recommendations that they made. If we accept the major premises, i.e. the first few pages of the report, the conclusions and the reasoning in support are satisfactory reading. The report is essentially a lengthy study on the subject of tax equity. The conclusions of the commissioners on the questions of incidence and economic effect that they investigated may be wholly sound. I have no reason for doubting most of them. But as it stands, the commissioners' report is in the nature of an intensive study more becoming a university research centre, tax institute or tax foundation than a royal commission of enquiry charged with the responsibility of making recommendations for the passage of law. The conclusions may be sound, yet the recommendations are bad. Despite the finality of the commissioners' recommendations, I am inclined to the view that what now is necessary is a further enquiry into the question of what should be done with present tax laws.

Turning now to the commissioners' proposals, we find basically the recommendation of a complete transformation of the Canadian tax system, designed mainly to achieve "equity", by which the commissioners meant taxation according to the ability to pay. The underlying principle is "from each according to his ability to pay". The main proposal in support of the ability to pay principle is that of adoption of a comprehensive tax base. To me, it is inconceivable that the adoption of a comprehensive tax base founded on the principle of ability to pay can be recommended as a basis for raising government revenue without a complete enquiry into the purpose for which the revenue is being raised, that is to say, into the question of government expenditure. We might even there find a similar principle of equity as emerging. The commissioners appear to take for granted that taxation may be justifiably imposed in order to effect a redistribution of wealth. It might very well be that this redistribution should be governed by the principle of "to each according to his need". The principles of "from each according to his ability and to each according to his need" may be sound principles in themselves and completely above attack. They may even represent the Christian ethic. Yet we are dealing here with private conscience and it is well known that this type of ethic is far from receiving universal acceptance and is even further from being the prime motivating factor in human conduct. Accordingly, to the legislator who sits in parliament, this form of recommendation is of no value, except insofar as it may cause him to reflect on whether his own life is being run on proper lines.

Beginning from the concept of equity, the report of the royal commission proceeds to construct an entire system of Canadian direct taxation. Ability, it is reasoned, means financial ability of every nature, and the persons whose ability is to be measured mean only real, live persons who, in the final analysis, are the taxpayers who pay tax. We believe, say the commissioners, that equity is achieved when individuals and families with the same gains in discretionary economic power pay the same amount of tax. By economic power they mean the power to command goods and services for personal use. By discretionary economic power, they mean the residual power to command goods and services for personal use after providing the necessities of life and after meeting family obligations and responsibilities.

In constructing a tax system from these principles, the commissioners found themselves at various stages in the situation of having to depart from them. The commissioners' report has even been criticized by some observers as being inconsistent by reason of these departures.

One of the principle departures is the commissioners' advocacy of progressive tax rates. Having proceeded to construct an equitable tax base in terms of discretionary economic power, the commissioners proceed to tax it at progressive rates. Obviously the equity here applied is no longer the tax base, or amount of wealth gained. Rather, it is the amount of discretionary economic power that remains after tax. The fact that these progressive rates are recommended to apply equally to all taxpayers does not deny that this feature of their proposals is developed from a different hypothesis and theory of equity. Moreover, this hypothesis was apparently adopted without investigation. Progressive tax rating must surely proceed from the assumption that the distribution of wealth effected by the present economic laws is not equitable. The higher a man's annual gain in wealth, the greater the degree of unfairness in the mode of its acquisition, requiring adjustment. Is this true? If A gains more than B, is the difference necessarily inequitable? Perhaps, on analysis, the difference will actually be found to be insufficient. If the present system of distribution may err in one direction it may equally err in the other. Judged from the standpoint of A's and B's skill, ability, contribution to society at large, the difference may be too small, in which event progressive tax rates agLravate an already inequitable situation.

The family is recognized by the commissioners as a tax unit, a departure from the concept of a living taxpayer, which idea precluded recognition of other companies, such as business partnerships, co-operatives, trusts, corporations, and so on. Obviously, the commissioners show preference here. This choice is understandable. Togetherness is part of modern folklore. It may actually promote a slogan -"the family that pays together stays together".

Similarly, we find concessions in the area of liberal education allowances by way of reduction of tax base, education being an unexceptionable and unchallengeable ideal of modern times. The same may be said of the concessions to savings plans.

Some of the commissioners' departures are strikingly amusing, for instance the total inclusion of gambling gains and exclusion of gambling losses only in reduction of gambling gains. The practicality of the commissioners is unmistakable at times, for example in omitting to suggest a $25.00 per day limitation on the deductible living costs of members of parliament.

Other recommendations are as decidedly unrealistic and narrow of outlook, for example the imposition of the burden of an accrual accounting on small businesses, particularly on the farming community. Why cannot gain be measured by any standard, so long as it does not escape measurement? Another foolish exception from the comprehensive tax base denies taxpayers a deduction of business losses after the business has incurred a loss for more than three years. Most of the small businesses in Canada, whose capital is owned by the operator and whose labour is the labour of the operator, clearly do not qualify as profitable businesses. They contribute no income tax on the annual value of their investments and the annual value of the labour applied to them. Yet under the present proposal, entry into these businesses is penalized except where they are privately owned and operated.

The commissioners' conception of economic power as meaning the power to command goods and services for personal use is carried logically at times to the point of absurdity. Consider for example the question o€ giving, by which the amount given is not deductible from the tax base of the donor, because it supposedly represents a form of consumption by that donor or personal use by him of his funds. But even if we are persuaded to accept that proposition, we are now confronted with a proposition that when giving upon death, where there is no choice except as to the identity of the donee, there is no reduction in the tax base of the decedent in the year of his death, he being treated as having consumed it upon his expiry. Moreover his unrealized property gains are swept into his tax base at that moment.

But these and other exceptions, such as they are and remain, do not question the idealism that underlies the general report. They simply illustrate that the commissioners themselves are capable of abandoning consistency where expediency dictates. In truth, they did very well in demonstrating the inadequacy of a logical approach to taxation, bearing in mind that they do not have to stand for re-election every four years.

But more fundamentally, I should like to take exception to the concept of equity expanded by the commissioners as the basis for their proposed structure. The idea of a comprehensive tax basis is not new. It has been expanded by a number of German writers on the subject of income and in the United States was put forth by Henry Simons, an economics professor at the University of Chicago, in his book called Taxable Income which appeared before the last war. The concept of a comprehensive tax base on all forms of gain may very well represent a fair situation where the tax rate is small as it was before the last war. But when you enter an area of taxation rising to 50 per cent, in which a major part of the government programme of expenditures is free redistribution, the commissioners' concept of equity breaks down, simply because the effects on motivation, both on the taxpayer and the recipient under redistribution are too significant to be ignored. A sounder guideline would be taxation consistent with the principle of providing the widest opportunity for advancement in the fullest exploitation of each citizen's own ability. Such an enquiry, as I have already indicated, would require examination of the entire area of government.

Another related defect of equitable taxation, as meaning contribution according to discretionary power to command goods and services for personal use, is that it dis regards the human and resource expenditure side of the income account. Surely, there is no comparison between $20,000 received by way of interest on wealth that has been inherited and $20,000 received for long hours spent in the expenditure of physical and mental effort in the performance of an assigned task or, by way of even further contrast, for the loss of a leg in a motor vehicle accident. Again, where rates of tax are nominal, these differences can be ignored. Where tax rates rise progressively and rapidly, too much emphasis is automatically shifted to the manner of seeking gain. This is a serious fault of the present system of income taxation despite amendments to compensate. The commission, in eliminating those differences of income treatment that have been deliberately introduced in our present system, arising out of considerations of social desirability, economic need, personal circumstance, etc., simply serves to give that fault emphasis.

Surely, in examining equal income situations from the standpoint of equity, we are entitled to ask (a) How hard did each man work? (b) What is the duration of each man's pace? (c) What risk, personal or financial, does each assume? (d) What contribution does each make? (e) To what extent has the gain of any man been adjusted to the impact of the tax, i.e. has the tax been passed on?

By way of further criticism of the comprehensive tax base, I submit to you that equation of the situation of wealth exchanged with wealth produced is unacceptable. This equation arises from the definition of the tax base as meaning the power to command goods and services for personal use. There is something naive about this approach to the concept of income. Beyond the equivalent of $25,000 a year, this definition is meaningless. Annual wealth beyond this amount has no practical relation to the power to consume, but is more likely to relate to the desire and the power to produce and to the control of that production. Proponents of the Carter Commission definition would likely agree with this observation, but would point out that this form of exercise of power is in reality a form of consumption. But if the exercise of power is to be regarded as a form of consumption, then it is proper to observe that the Carter definition of income ignores the exercise of power in any form other than the control of wealth. Consider for a moment the power exercisable by a trade union leader, by a cabinet minister, by a prominent clergyman, by a professor in a university, by a senior civil servant. It is readily recognizable that wealth is but one form of power and a great deal could be said for discriminating in favour of this form of power and not against it. I would suggest to you that no form of power in present day society is under more open competition than monetary power. There are two generations, it is said, between shirtsleeves and shirtsleeves, and while we all know that this principle does not hold universally true, the fact does remain that no medium of exercise of power is more closely contested. It may therefore be queried whether the ownership of money in greater quantity than the annual ability to consume should be subjected to the degree of progressive control proposed by the Carter Commission. Private accumulated wealth has been known to be eliminated in a number of present day societies, and, indeed, not without justification. But no one would suggest for a moment that the power that was exercisable by money has there disappeared. It has simply been replaced by control in some other form. The accumulated wealth in private control is simply one of the forms of power that is built into the balance of our present system.

Similar innocence is evident in the arguments of the Royal Commission that corporate and individual tax integration should be acceptable and welcome to Canadians because it reduces the over-all tax from what it would be now. The present corporate taxpayer is not concerned with the tax over-all. Again, wealth means the control of wealth. Money borrowed is as valuable as money owned. At present, small incorporated businesses can obtain the control of money on the payment of slightly over 20 per cent tax. Under the proposed system the rate is 50 per cent, subject, of course, to adjustment where income is distributed or allocated, the adjustment being made with the shareholder and not with the corporation, the corporation being out of control.

The income adjustment account proposal is equally unrealistic. Gains of large size, it is proposed, may be free of tax if paid to the government, to be held without inter est and in completely unassignable form, to be taxed in the year of withdrawal at the taxpayer's will. Why not tax at 100 per cent, on condition that the full tax may be borrowed from the government by the taxpayer on terms of interest and repayment, the amount repaid to be included in income in the year of repayment, tax then recalculated, and the amount remaining after tax returned to the taxpayer? The proposal, as it stands, encourages taxpayers to go on a capital annuity--a result not to be encouraged in my opinion.

In brief, I submit to you that the Carter logic is carried too far and that the definition of the tax base is patently naive. I would suggest to you that taxation beyond

the level of ability to consume simply deals with a transfer of productive control from private hands to state hands, and it cannot be made to appear as anything else. Further, in the interest of applying a broad wisdom to the problems of this nation, emphasis today is truly needed on regulating and guaranteeing the conditions surrounding private acquisition in Canada and not on its progressive elimination.

Another well-known consequence of the application of the Carter Commission conception of equity has been the inclusion in the tax base of capital gains and losses. I object to this inclusion of capital gains and capital losses in the tax base along with income for the very practical reason that it creates an unstable tax base, and one that is completely unworkable and, even if implemented, would not long survive. Even the slightest recession, such as we have often experienced in the past few years, can eliminate billions of dollars from the value of securities listed on even the Toronto Stock Exchange and can cause an immediate decline in the value of other forms of capital whose values are not so prominently listed. At the cost of mere brokerage fees, a selling and a buying, this entire loss can be shifted to the tax base, thereby eliminating by offset billions of dollars of earned income. This even occurs at the time when the tax base is most needed, particularly if income tax is a useful method of fiscal control of the economy. (However, I do not believe that income tax is normally of any value for that purpose). Aside from this question, however, the main defects of the system can be eliminated by taxing capital gains separately, and this, I venture to predict, is the situation that will prevail if capital gains taxation is introduced.

I should like to go on record as stating that I am opposed to the taxation of capital gains in any form as being totally unacceptable in this country at this time in terms of the general welfare and interest. In fact, I will go further and suggest to you that serious reconsideration should be given to the practice of taxing transfers in capital, with or without gains, at the present time, by way of succession duties and gift tax. As you are well aware, the government of my native province of Alberta is striving toward their total elimination. My own inclination would be to eliminate capital taxes on outright transfers, except in regard to transfers made on death, and transfers made in contemplation of death, my reasoning being that so long as wealth is being shifted from outright control of the older generation to outright control of the younger generation, there is no need for intervention. The notion that a dollar is a dollar is a false one and is universally rejected in private life. The expenditure of money from current earnings and the expenditure of money from accumulated savings is universally recognized as different. Nations are but individuals at large. Essentially, Canada is a primary producing nation, living on the wealth of substantial natural resources. This wealth is distributed directly and indirectly within a population that is relatively small. Since the war, we have made progressive income taxation a permanent feature of this distribution. With the passing of federal war-time expenditure, we have witnessed a gradual intrusion by the federal legislation and administration into the area of social services that had been regarded as the function of the local community. This expansion of federal responsibility has been carried out under two banners, one of them the regional redistribution of wealth between regions of unequal opportunity in Canada, and the other the establishment and maintenance of a Canadian national identity. Under the Carter proposals, produced and unconsumed wealth is to be subject to a continuing lien, calling for payment in the event of its transfer and realized growth. In this way, the rate of tax on the low- and middle-income classes can be reduced, it is proposed, giving them a higher level of expenditures. In brief, even accumulated wealth is now to be applied to consumption. A nation that chooses to live from its capital resources, like an individual in like circumstances, finds itself in a very vulnerable position. New nations and new continents are today being opened up to resource development. Capital knows no loyalty, no citizenship, no patriotism. It is extremely unlikely that any nation that deals so unimaginatively with its natural endowment will ever succeed in preserving that endowment and, indeed, there is some sound moral basis for urging that such individual or nation, as the case might be, should not so succeed.

Yet there is considerable likelihood that capital gains taxation will be introduced in Canada. To begin with, the general public in Canada look favourably on the redis tribution of wealth and show considerable hostility toward accumulated wealth. We are concerned with the idle rich, regardless of evidence as to whether the rich are idle, and we distrust the use made of private money without regard to evidence that private money is truly in this day being misused and misapplied. Also, many wealthy taxpayers are today discouraged at having to pay the present high progressive rates of income tax on capital gains. The Carter Commission proponents have made great use of this phenomenon in defending their proposal. This defect could, however, be eliminated by simply legislating to exclude capital gains from taxation and to provide expressly that capital shall have the same meaning in this context as in the context of excluding capital losses from deduction. Present injustices arise from the fact that the courts have different meanings for capital, and in particular have a different meaning for capital gain and capital loss. Moreover, if these two meanings were equated the present administrative enthusiasm for expanding the meaning of income to include certain capital gains would rapidly diminish. Some support for capital gain taxation is generated by the fact that the United States taxes capital gains and so, for the past few years, does Great Britain. The differences in the economic scene prevailing in either of those countries is so obvious as hardly to require elaboration. Yet the idea does persist that Canadians must follow where foreign wisdom has dictated. Not the least of the forces at work in support of capital gain taxation is the prelevant idea that change is a good thing in itself. Very often there is no due consideration of the direction that such change might take, or of the consequences that are likely to follow.

Finally, there runs through the report of the Royal Commission on taxation an element of absurdity that cannot escape attention. I should mention a few examples. For one example, it has been said that because the tax base has a logical structure, it reduces the number of construction difficulties requiring high-priced legal and accounting talent. Another, it is said in defence of the report's proposals that the taxation of transfers in wealth and gains in wealth is offset by tax concessions and reduced taxation on the taxpayer during the process of accumulation (integration, reduced rates, etc.). What, it may be asked, is the compensation for the taxpayer whose wealth has been accumulated under the older rules and who now finds his accumulation taxed by the new rules?

Again, far-reaching proposals were recommended for sweeping all gains from natural resources, including presently discovered resources, into the tax base. Much of the proposed reduction in rates depended on this feature and, hence, the proposal that the report must be implemented as a package deal. Clearly, we are here in the area of negotiated tax. My own concern is not with the owners of natural resources. The struggle lies between two strong forces, each capable of affecting and influencing the other. I do have some concern for the impact of the commission's proposals on the distribution of natural-resources wealth between the provincial and federal governments. Here I refer to the fact that an increase of federal taxes must certainly reduce royalties and sales where provincial property is put on an auction basis for distribution. I am also concerned with the commissioners' observation that some natural resources have been explored and discovered to the commissioners' point of satisfaction. They show no great concern for imposing new rules to the taxation of resources that have been discovered through expenditure laid out in reliance upon the old rules. Most assuredly, everyone must be prepared for the interventions of government to effect change in the laws, but changes of this nature can be damaging beyond the extent of the benefit that may seem to flow from this logical extension of a principle of equity.

The greatest absurdity in the entire recommendation of the Royal Commission lies in the suggestion that adoption of a broad tax base will result in reduced taxes at the lower level. This may be described as the political content of the report; and it is of great importance if there is to be any hope of its introduction. Last Thursday night, the Minister of Finance stated, in presenting his budget: "In the first place, it must be recognized that our tax reform programme must be undertaken under circumstances quite different to those contemplated in the terms of reference of the Royal Commission and its work. The commission was designing a system to raise yearly revenue comparable to that of 1964. Clearly, we will need a tax system in 1969 and subsequently, which will produce more revenue than that of 1964 -even after allowing for the growth of our economy since then and a consequent increase in prices and incomes within our federal revenues." In brief, the Royal Commission's major promise is already exploded. The government has reneged.

A feature of the Carter commission report that I regard as ill-advised for reasons not even mentioned in the report is the overwhelming requirement for tax reporting. If the recommendations were ever implemented, every feature of the economic life of every indvidual and organized group of individuals in Canada would be fully reported, fully recorded and fully data-processed in Ottawa. That includes all exchanges of wealth and exchanges of benefits both in monetary and non-monetary forms. I should like you and the Royal Commission on taxation to bear in mind that in this country there are no constitutional guarantees for infringement on human liberty. In recent years, I have seen enough of the uses that can be made of government information to turn my mind against the vesting of a complete inventory of everyone's activity in a central government charged with ultimate power and ultimate force.

An interesting feature of the report is the finding that the present tax structure is inequitable and that the present burden falls on the lower-income and lower middle-income groups and not on the higher-income taxpayers as one might expect. Within a year after the appointment of the Royal Commission, the Parliament of Canada moved to correct abuses in the present system by the introduction of section 138A and, by the use of ministerial discretion, to cure income splitting through non-associated co-operations as well as avoidance of the shareholder tax on corporate accumulated earnings. I repeat that this was done by use of discretionary power and would further point out that the Minister of National Revenue was at about that time made Chairman of the Treasury Board, that is to say, head of the board that sits to determine the question of when thoroughly legal tax avoidance is improper and how it should be defeated, pursuant to section 138 of the Income Tax Act. United States tax experts have long and repeatedly pointed out that the United States capital gains tax has been so used as to place less tax on the wealthy than is actually endured by the less wealthy--a result totally opposed to what was intended by the introduction of that tax. The reality may be that, in our free economy, the distribution of wealth is established by certain forces--of collective bargaining, of monopoly and semi-monopoly, of shortage, of surplus, of world markets, of advertising and goodwill, of uniqueness of service and speciality of skill. It is my suggestion to you, for your earnest consideration, that the imposition of progressive income tax to achieve equity, as envisaged and defined by the Carter Royal Commission, cannot be achieved in a free capitalist society that recognizes private ownership. It may even be that the illogical departures, unjustified concessions and other items condemned by the Carter Royal Commission actually represent those features of the present high and progressive tax system that have enabled it to survive. Income tax may be largely built into our present price structure.

The truth, ladies and gentlemen, is that equity does not have to do with the raising of revenue, and I am disappointed that the Royal Commission held such a magni fied view of the importance of the topic with which they were dealing. It is symbolic perhaps of the society in which we live and the emphasis that it places upon material wealth. I would submit to you that equity is a product of civilization. The forces of equity are the forces of human sympathy and understanding. Insofar as equity is reflected in government, it must arise out of the feeling of community among those governed and between them and the governing body. If equity is lacking in the Canadian tax structure, it is lacking because of the absence of that community of interest, of value and of judgment; and any attempt to achieve equity by radical changes in taxation is a treating of the symptoms of maladjustment and not the causes. I further submit for your consideration that, in relation to these direct taxes which are so difficult to administer, questions of fairness must relate to the community governed, whose acceptance of what is fair may very well differ from that of another community. Moreover, as I have already mentioned, fairness and equity are concepts that relate only to the entire area of government, not merely to the revenue side. Whether the tax is fairly imposed to raise revenue depends upon the choice of where the revenue is to go, of whether it is intended to provide universal health care, or to generate improved housing, or to provide capital services to new industry. These are judgments for the community at large.

In brief, equity in taxation becomes a matter of property and civil rights and generally of a local or private nature. The British North America Act, 1867, clearly intended that these direct taxes, these personal taxes, should be imposed at a local level, and indeed, they did originate there and for all practical purposes continued there until the Second World War. I should like to see them restored and the question of equity resolved at the local level. I say of Canada's enquiry into equity by a Royal Commission on taxation that the enquiry has started at the wrong end. Enquiry should first of all relate to the question of what is to be expected of government. When that is resolved, the question of how the money can be raised can be examined against a definite and conclusive background. But the enquiry into the role of government will depend, in turn, on a division of responsibility between local government and central government and there, in my submission, is where a solution to our present problems has to start.

I now submit the following definite proposals in this regard, all of which should originate by Dominion-Provincial agreement toward a constitutional convention:

1. Federal income taxes and death taxes should be levied at a flat rate of tax and the entire proceeds from these taxes, less the cost of administration, should be distributed among the provinces by way of unconditional grant.
2. The imposition of further income taxes, death duties and any other direct taxes should be confined to the provincial legislatures.
3. The spending power, both of the provinces and of the government of Canada, should be restricted to those areas over which they entertain legislative powers and jurisdiction for direct control.
4. Provincial legislatures should impose no indirect taxes or sales taxes in any form.
5. During times of national emergency, all restrictions on dominion taxing powers should be suspended.
6. There should be created a dominion-provincial legislative council, made up of eleven men appointed by the governor-in-council of each of the ten provinces and the dominion. They should meet at least annually and whenever summoned by three members, decisions to be made by majority vote.

The jurisdiction of this council should extend as follows:

(a) to establishing of the annual, flat, federal rate of income and death taxes;
(b) to determine annually the allocation of net federal income and death tax revenue among the provinces;
(c) to declaring the beginning and end of periods of national emergency;
(d) to appointing justices to the Supreme Court of Canada.

To my mind, the most encouraging development on the Canadian scene of public affairs in many years has been the Quebec separatist movement. We have in this movement a most seriously sustained challenge to complete federal domination of this country. For a time it was my fear that the restless attitude of Quebec province would be interpreted by the rest of Canada as being one of concern over language, religion and culture. Certainly such is not the case. The true separatist is quite prepared to abandon the migrant French Canadian to absortion in the American culture that surrounds him. The true concern of Quebec province is with matters that should concern all provinces. Ontario's Premier Robarts, it seems to me, has done much to bring about recognition of this state of affairs; and for this service great credit is due to him.

One thing further. Do not be led into the belief that centralization of government power in Canada is a condition precedent to a strong nation and a healthy national ism. On the contrary, national survival in our present circumstances is dependent on a strong local sentiment. There is no Canadian national community nor is there prospect of any. And when Canadians have been led to the point of abandoning local pride and loyalty for the reason that more money is obtainable federally, they will then have reached the point of recognizing that still more money is to be had in Washington.

Thanks of the meeting were expressed R. Bredin Stapells, Q.c.