UBC Theses and Dissertations

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UBC Theses and Dissertations

Assessment and collection of corporate income tax in Quebec, Ontario and Alberta : the problems of an… Young, Claire F. L. 1982

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ASSESSMENT AND COLLECTION OF CORPORATE INCOME TAX I N QUEBEC, ONTARIO AND A L B E R T A ' - THE PROBLEMS OF AN INDEPENDENT APPROACH I N A FEDERAL J U R I S D I C T I O N b y CLAIRE F . L . YOUNG L L . B ( H O N S . ) , U N I V E R S I T Y OF LONDON A THESIS SUBMITTED I N P A R T I A L FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF LAWS i n THE FACULTY OF GRADUATE STUDIES i n t h e F a c u l t y o f Law We a c c e p t t h i s t h e s i s a s c o n f o r m i n g t o t h e r e q u i r e d s t a n d a r d THE U N I V E R S I T Y OF B R I T I S H COLUMBIA S e p t e m b e r , 1982 (cT) C l a i r e F . L . Y o u n g , 1 9 8 2 In p r e s e n t i n g t h i s t h e s i s i n p a r t i a l f u l f i l m e n t o f the requirements f o r an advanced degree a t the U n i v e r s i t y o f B r i t i s h Columbia, I agree t h a t the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and study. I f u r t h e r agree t h a t p e r m i s s i o n f o r e x t e n s i v e copying of t h i s t h e s i s f o r s c h o l a r l y purposes may be granted by the head o f my department or by h i s o r her r e p r e s e n t a t i v e s . I t i s understood t h a t c o p y i n g o r p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be allowed without my w r i t t e n p e r m i s s i o n . Department of Law  The U n i v e r s i t y o f B r i t i s h Columbia 2075 Wesbrook P l a c e Vancouver, Canada V6T 1W5 D a t e August 30, 1982 ( i i ) A B S T R A C T Seven provinces i n Canada have entered tax c o l l e c t i o n agreements with the federal government whereby that government c o l l e c t s corporate income tax on t h e i r behalf. Quebec, Ontario and Alberta have not entered such agreements and levy and c o l l e c t corporate income tax pursuant to t h e i r own l e g i s l a t i o n and within t h e i r own administrative systems. This thesis w i l l examine the problems r e s u l t i n g from the independent approaches taken by Quebec, Ontario and Alberta, as they a f f e c t the corporate taxpayer. The problems f a l l into three categories. F i r s t , p r o v i n c i a l adoption of the Income Tax Act (Canada), while assuring some s i m i l a r i t y between the federal and p r o v i n c i a l systems, can have adverse consequences for the corporate taxpayer. Secondly, differences between the l e g i s l a t i o n of Canada, Quebec, Ontario and Alberta creat inconsistencies that present d i f f i c u l t i e s for the corporate taxpayer. T h i r d l y , differences in the administrative systems of the three provinces and the federal government increase the cost to the corporate taxpayer and create compliance problems for i t . The thesis concludes that the future of the Canadian corporate income tax system w i l l involve even more p r o v i n c i a l independence and, therefore, measures to a l l e v i a t e some of the problems are discussed. These include a new approach to co-operative federalism, an examination of the e f f i c a c y of e ( i i i ) more p r o v i n c i a l autonomy and tax harmonization. This analysis shows that the corporate taxpayer would benefit from more co-operation between .the federal and p r o v i n c i a l governments together with a degree of harmonization of the tax bases. (iv) T A B L E OF CONTENTS : Page CHAPTER I OVERVIEW OF CORPORATE INCOME TAX IN CANADA 1 A. Introduction 1 B. H i s t o r i c a l Background 4 C. Constitutional framework 11 D. P r o v i n c i a l corporate income tax 14 (i ) Ontario and Alberta 15 ( i i ) Quebec 18 ( i i i ) The seven other provinces 21 CHAPTER II PROBLEMS PRESENTED BY PROVINCIAL ADOPTION OF THE INCOME TAX ACT 31 (CANADA) A. Referential L e g i s l a t i o n 31 B. Application rules - the p r i c e to be paid for s i m p l i c i t y 35 C. Amendment of the federal Income Tax Act, i t s e f f e c t on p r o v i n c i a l l e g i s l a t i o n 43 CHAPTER III PROBLEMS PRESENTED BY DIFFERENCES BETWEEN FEDERAL AND PROVINCIAL LEGISLATION 53 A. Introduction 53 B. L i a b i l i t y for Income Tax 54 C. Computation of Income 61 D. Computation of Taxable Income 67 E. Computation of Income Tax Payable 72 (i ) Investment incentives 75 ( i i ) Other incentives 81 F. A l l o c a t i o n Rules 85 CHAPTER IV ADMINISTRATIVE PROBLEMS 100 A. Introduction 100 B. Assessment and Reassessment 101 C. Payment of tax 102 D. Appeal procedure ....105 E. C o l l e c t i o n of taxes 106 F. Elections 110 G. Tax avoidance and tax evasion 116 H. Deemed association of corporations 120 CHAPTER V THE FUTURE 128 A. Introduction 128 B. Co-operative federalism 129 C. P r o v i n c i a l autonomy 137 D. Tax harmonization 141 E. Conclusion 144 (V) A C K N O W L E D G E M E N T The idea for t h i s thesis came from discussions with my fellow workers i n the L e g i s l a t i v e Counsel O f f i c e , Department of the Attorney General, Government of Alberta. The thesis i t s e l f could not have been written without the encouragement and expert guidance of Professor M. J. O'Keefe. To them I express my gratitude. 1 CHAPTER I : OVERVIEW OF C ORPORATE INCOME T A X IN C A NADA A. Introduction Two indisputable facts emerge when the system of levying and c o l l e c t i n g corporate income tax in Canada i s examined. F i r s t , corporate income tax i s an indispensable form of revenue for a l l governments. It i s the second largest source of tax revenue for the federal government and the fourth largest for the provinces."'" Secondly, over 75 per cent of corporate taxable income earned i n Canada i s earned in the three provinces that do not subscribe to a common system of corporate income taxationr The question i s what e f f e c t do these facts have on a corporate taxpayer i n a federal j u r i s d i c t i o n that includes eight other participants? F i s c a l federalism in Canada has become a popular t o p i c for comment by both economists and p o l i t i c a l s c i e n t i s t s . Its popularity i s evidenced by the appointment i n 1981 of a Parliamentary Task Force to report on Federal-Provincial F i s c a l Relations i n Canada.^ That Task Force was charged with examining: [T] he programs authorized by the Federal-P r o v i n c i a l F i s c a l Arrangements and Established Programs Financing Act, 1977, focusing, i n p a r t i c u l a r , on f i s c a l equalization, the tax c o l l e c t i o n agreements, the Canada Assistance Plan, and Established Programs Financing. 5 2 While the Task Force rather daringly likened i t s report to that of the Royal Commission on Dominion-Provincial Relations (the Rowell-Slrois Commission),^ there i s no doubt that i t was not so extensive i n i t s examination of nor so novel i n i t s solution to the problems. Nevertheless i t s . recommendations were timely, i f somewhat predictable. In the income tax area, i t recommended a continuation of the present d i s t r i b u t i o n of taxing powers and a continuation of the tax c o l l e c t i o n agreements with emphasis on f i s c a l harmonization achieved through consultation with a l l governments. Inevitably, any report that examines the tax c o l l e c t i o n agreements also examines the arrangements of those j u r i s d i c t i o n s that have not entered the f e d e r a l - p r o v i n c i a l tax c o l l e c t i o n agreements. In t h i s regard, the Task Force i s of the opinion that there has been, of l a t e , a movement towards more p r o v i n c i a l autonomy i n the corporate income tax f i e l d . The tax c o l l e c t i o n agreements are viewed by the provinces as a f e t t e r on t h i s p r o v i n c i a l autonomy. The Task Force stated: Increasingly, however, provinces view the r e s t r i c t i o n s a r i s i n g out of these arrangements as constraints on t h e i r a b i l i t y to implement s o c i a l or economic p o l i c i e s through s e l e c t i v e tax measures. ^ The report, however, i s a p o l i t i c a l document tabled i n the House of Commons and as such takes a p o l i t i c a l approach to the problems. The purpose of t h i s thesis i s to examine one component of f i s c a l federalism, namely the corporate income tax system. That examination w i l l 3 be made from a leg a l perspective rather than an economic or p o l i t i c a l one. It w i l l concentrate on the problems faced by the corporate taxpayer ;and w i l l be r e s t r i c t e d to the problems presented by the l e g i s l a t i o n of the three provinces which do not permit Ottawa to administer t h e i r corporate income tax systems. The d i f f e r e n t tax bases and tax systems w i l l be analysed. S p e c i f i c a l l y , t h i s analysis w i l l focus on three main issues. F i r s t , a look w i l l be taken at the problems a r i s i n g from the p r o v i n c i a l adoption by Ontario and Alberta, and to a lesser extent by Quebec, of the Income Tax Act (Canada). Secondly, the problems r e s u l t i n g from differences between those three provinces' l e g i s l a t i o n and the federal l e g i s l a t i o n w i l l be analysed. T h i r d l y , administrative d i f f i c u l t i e s that occur when a corporate taxpayer has to comply with the administrative requirements of more than one system w i l l be highlighted. F i n a l l y , three p o t e n t i a l courses open to the federal and p r o v i n c i a l governments to improve the system and thereby the lot of the corporate taxpayer w i l l be examined. As mentioned, the approach w i l l be one of analysis of the l e g i s l a t i o n and legal d i f f i c u l t i e s posed by that l e g i s l a t i o n . Despite t h i s , i t must not be forgotten that there are many other factors that affect the d i r e c t i o n and content of Canada's corporate income tax system. They are, most notably, factors of a p o l i t i c a l , economic and s o c i a l nature that are not easy to grasp l e t alone change with a view to o v e r a l l improvement of the system. This thesis w i l l ignore v i r t u a l l y a l l those other factors and r e s t r i c t i t s e l f to a leg a l i n t e r p r e t a t i o n of the problems and solutions. B. Historical background It i s somewhat f i t t i n g that Quebec was the f i r s t province a f t e r Confederation and enactment of the B r i t i s h North America Act? 1867, to levy a tax on corporations. As w i l l be seen Quebec has, with the exception of a short period in the early 1940sj consistently pursued i t s own independent course i n the taxation of the corporation. The passage, i n 1875, of An Act to compel Assurers to take out a L i c e n c e ^ i n v o l v e d a novel form of taxation. Despite i t s name, that Act imposed a tax based on corporate income. An assurer was bound to purchase a licence to s e l l assurance and the p r i c e of that licence was a percentage of the premiums received by the corporation from sales of assurance p o l i c i e s . The l i f e of that Act was, however, short. It was held u l t r a v i r e s the province of Quebec by the Privy Council in Attorney-General for Quebec v. Queen  Insurance Company the basis that i t was a Stamp Act because the fee was paid by f i x i n g postage stamps to the p o l i c i e s i n the required amounts. As such i t was an i n d i r e c t tax and thus not within p r o v i n c i a l powers under subsection 92(2) of the B.N.A. Act, 1867. Undeterred by t h i s decision Quebec, in 1882, enacted An Act to impose 12 ce r t a i n d i r e c t taxes on c e r t a i n commercial corporations. That l e g i s l a t i o n imposed a tax on the income of banks and insurance companies carrying on business i n Quebec and was held v a l i d by the Privy Council i n Bank of 1 "3 Toronto v. Lambe. The d i s t i n c t i o n of imposing the f i r s t v a l i d tax on corporations belongs to r i t i s h Columbia. In 1876 the province enacted The Assessment Act 1 4 w h i c h B imposed a tax of "one-half of one per cent on the income of every person of $1,500 and over"."*"^ Today in Canada every province imposes a corporate income tax and f i v e provinces impose a tax on corporation c a p i t a l . ^ It i s important to be aware of the progression over the years towards this state of a f f a i r s because those events help to explain the disparate approaches taken to corporate taxation today by the federal government and the provinces, e s p e c i a l l y Quebec, Ontario and Alberta. 17 By the early 1900s three provinces were levying corporate income tax They were soon followed i n 1916 by the federal government which imposed, 18 e f f e c t i v e January 1, 1915, a business p r o f i t s war tax. The tax was a 25 per cent tax on the p r o f i t s of incorporated businesses to the extent that those p r o f i t s exceed 7 per cent of the c a p i t a l of the business. It marked a departure from custom for the federal government for u n t i l t h i s Act was passed, the Canadian war e f f o r t had been supported by revenues raised from 19 bonds and taxes on consumer items. This tax lasted u n t i l 1920 but i t was not the only tax that was the product of World War I. In 1917 the federal parliament passed the Income War Tax A c t , 2 0 the forerunner to today's federal Income Tax Act and the foundation on which income tax law i n Canada has been b u i l t and expanded upon over the years. The Act s p e c i f i c a l l y included corporations and a 4 per cent tax was levie d on corporate p r o f i t s . At the time of introduction of t h i s Act the Minister of Finance said: I may say that the adoption of such a measure i s a d i s t i n c t innovation i n federal f i s c a l l e g i s l a t i o n . Hitherto we have r e l i e d upon duties of custom and of excise, postal rates and other miscellaneous sources of revenue. 6 An innovation i t was, but one that despite i t s temporary sounding t i t l e been around ever since. 2 3 B y 1939 a l l nine provinces were levying taxes on corporate p r o f i t s i n amounts ranging from 1 per cent on the f i r s t $1,000 i n B r i t i s h Columbia 2 4to a top rate of 10 per cent i n Manitoba. 2 ^ x n e federal government levied a 15 per cent tax on corporate p r o f i t s . The res u l t was chaos. In 1937 the federal government had attempted to a l l e v i a t e t h i s choas when i t appointed the Royal Commission on Dominion P r o v i n c i a l Relations (the Rowell-Sirois Commission) to determine, among other matters, "whether taxation as at present allocated and imposed i s as equitable and as e f f i c i e n t as can be devised". 2 6 That Commission i l l u s t r a t e d the problems that the e x i s t i n g federal and p r o v i n c i a l corporate tax regimes presented when i t said i n i t s report issued i n 1941: There are, i n addition, taxes levied by one or more governments, on various bases such as c a p i t a l stock, number of business places, gross revenue, physical volume of output, period of operation, mileage of track or wire, mileage operated, note c i r c u l a t i o n , insurance premiums, investments, volume of deposits. These taxes apply on d i f f e r e n t terms to banks, chain stores, e l e c t r i c power companies, f i r e insurance companies, accident and guarantee companies, and 'miscellaneous' companies. They have grown up i n a completely unplanned and unco-ordinated way, and v i o l a t e every canon of sound taxation. 2 7 The Commission's recommendation was that the provinces should only tax a corporation i n respect of i t s business i n the same way that an ind i v i d u a l was taxed, that i s taxation based on income. The federal government should increase i t s taxation of corporations to compensate for the ov e r a l l loss of' 7 revenue incurred as a r e s u l t of withdrawal of the provinces from the other forms of corporate taxation. It i s i n t e r e s t i n g to note that despite : the unhappy fate of these recommendations at the time they were made, today's Canadian corporate tax system i s not d i s s i m i l a r i n structure to t h i s recommendation. 2® However, i n 1941 Canada required immediate revenues to finance i t s war e f f o r t and thus the Minister of Finance did not wait for p r o v i n c i a l agreement on the recommendations. The government went one step further than the Commission had suggested and persuaded a l l nine provinces to enter Wartime Tax Agreements whereby the provinces vacated the f i e l d of personal and corporate income tax and other corporate taxes in return for payments from the federal government.29 Thus from September 1, 1941 to August 31, 1947 Canada had, for the f i r s t and l a s t time in i t s h i s t o r y , a uniform corporate tax on income and excess p r o f i t s payable to only one government. Unfortunately for Canadian corporations once the wartime tax agreements expired things were never t h i s simple again. On the expiry of the agreements both Quebec and Ontario chose to go t h e i r own ways in the taxation of the corporation. While a l l other provinces, including Newfoundland i n 1949, entered tax agreements with the federal government whereby the federal government c o l l e c t e d a 5 per cent tax on corporate incomes for those provinces, Ontario and Quebec imposed t h e i r own corporate income tax."^ Both taxed corporate income at 7.5 per cent and imposed miscellaneous taxes of 1.5 per cent. The pattern for the future was established and continued with minor variations u n t i l January 1, 1981 when Alberta began to administer i t s own 32 corporate tax system. During the intervening years Ontario had b r i e f l y 8 re-entered the federal f o l d when i t permitted the federal government to c o l l e c t a l l income taxes on i t s behalf from 1952 to 1956. When new tax agreements were entered into between the federal government and a l l provinces except Quebec i n 1957, Ontario returned to i t s own system of corporate taxation. The variations that have occurred over the years mainly centre on the federal government's system of abatement of a percentage of federal tax i n l i e u of p r o v i n c i a l tax payable. That system was introduced i n 1957° and applied to tax paid by corporations to both agreeing and non-agreeing provinces. At that time the federal abatement was 9 per cent and Quebec corporate taxpayers were paying tax at the rate of 11 per cent. New f e d e r a l - p r o v i n c i a l taxation agreements were entered into i n 1961,^ 35 36 37 1967, 1972 and 1977 and today Ottawa c o l l e c t s corporate income taxes for 7 provinces while Quebec , Ontario and Alberta levy and c o l l e c t t h e i r own corporate income tax.38 Those seven provinces a l l have the same tax base but t h e i r rates vary. Why did Quebec, Ontario and Alberta opt out, at d i f f e r e n t times, from a corporate income tax system administered by the federal government? As w i l l be seen, each province gave d i f f e r e n t reasons for i t s decision. Both Quebec and Ontario refused to enter the tax agreements of 1945 that were negotiated at the Federal-Provincial Conference on Reconstruction. Quebec went to that conference armed with a document e n t i t l e d a Memorandum Submitted to the Dominion-Provincial Conference. That document made i t clear that Quebec objected strenuously to the federal proposals. Duplessis, Prime Minister of Quebec, said: In i t M. The F i n a n c i a l proposals of the Dominion Government tend to replace the system of f i s c a l autonomy of the Provinces, i n the f i e l d of taxation, by a system of grants that would allow the Dominion Government to exercise over them a f i n a n c i a l tutelage control. Such a system i s incompatible with t h e i r sovereignity. Moreover, these proposals exclude the Provinces from the most important f i e l d of d i r e c t taxation and to that extent deprive them of the exercise of the powers assigned to them by the constitution.40 Yet, encroachment on the f i s c a l autonomy of Quebec was not that province's only concern. In subsequent statements made i n the Quebec Legislature, the Treasurer indicated that, Quebec f e l t that the proposed tax rental system struck at the heart of Confederation by favouring certain provinces over others. He added that Quebec, under the federal proposal, would receive less money per person from the federal government than any other province.^ This was probably the key issue. Quebec f e l t that f i n a n c i a l l y i t could do better on i t s own and thus went i t s own way in both the corporate and personal income tax f i e l d s . Ontario expressed i t s d i s s a t i s f a c t i o n with the proposed f i s c a l arrangements at the 1945 meeting by countering with i t s own set of proposals. In the corporate tax f i e l d Ontario agreed that the federal government should be the c o l l e c t i o n agent for the provinces. The difference of opinion with the federal government arose over the a l l o c a t i o n formula. Premier Drew of Ontario requested an a l l o c a t i o n formula based on sales alone and not on gross incomes together with s a l a r i e s and wages.^2 Ontario's alternative 10 proposals were rejected by both the federal government and several of the provinces who no doubt f e l t that an a l l o c a t i o n formula based on sales alone would favour the well populated provinces at the expense of the less populated provinces. However, the main cause of concern to Ontario seems to have been the b e l i e f that the amounts to be paid by the federal government to rent the p r o v i n c i a l income tax f i e l d s were not s u f f i c i e n t nor c e r t a i n enough. Premier Drew said: I can only say that the r i g i d p o s i t i o n of the Dominion government, the fact that i t says, 'Here i s what you are going to get although we may possibly make cer t a i n adjustments within that amount', makes agreement impossible. From the very f i r s t time we came here I have said that an agreement i s absolutely e s s e n t i a l . There w i l l be only one reason why t h i s conference breaks down and we do not get an agreement, namely, that r i g i d i t y which says, 'Here i s the t o t a l amount: you s i t around the table and divide i t up'. 4 3 In l i g h t of t h i s r h e t o r i c i t i s l i t t l e wonder that no agreement was reached and i n 1947 Ontario enacted i t s own Corporations Tax Act. Alberta's progression towards independent control of i t s corporate tax system was very d i f f e r e n t from the events i n Ontario and Quebec. Alberta entered a l l the f e d e r a l - p r o v i n c i a l tax c o l l e c t i o n agreements up u n t i l 1981. E f f e c t i v e January 1, 1981 the tax c o l l e c t i o n agreement between Alberta and the federal government was amended to exclude corporate income tax and Alberta enacted the Alberta Corporate Income Tax Act. There had been no obvious public disagreement at f e d e r a l - p r o v i n c i a l f i s c a l conferences between Alberta and the federal government although Alberta had expressed i t s concern over the federal government's White Paper on tax reform issued i n 1970. On A p r i l 2, 1974 Premier Lougheed announced i n the Alberta Legislature that Alberta was giving notice to the federal government of- i t s withdrawal from the tax c o l l e c t i o n agreement i n respect of corporate income t a x . 4 4 He continued that Alberta would pursue i t s own course i n that f i e l d . B a s i c a l l y , Premier Lougheed argued that the national corporate tax structure was not s e n s i t i v e to the needs or objectives of Alberta. He summed up Alberta's view of the current arrangements t h i s way: There i s i n s u f f i c i e n t scope for a p r o v i n c i a l government to develop a d i f f e r e n t d e f i n i t i o n of the tax base i n order to meet p a r t i c u l a r and unique circumstances. There i s no scope to redefine income, provide incentives or to levy d i f f e r e n t i a l rates of p r o v i n c i a l t a x a t i o n . 4 5 After t h i s announcement i n 1974 there were meetings between representatives of the Alberta and federal governments to ascertain whether Alberta's move could be headed o f f . Despite some federal concessions, including permitting p r o v i n c i a l rebates and cre d i t s where t h e i r c a l c u l a t i o n followed the federal determination of taxable income, the la s t straw seems to have been the federal government's r e f u s a l to administer the Alberta rental investment c r e d i t . 4 ^ Thus, i n 1981 Alberta began levying and c o l l e c t i n g p r o v i n c i a l corporate income tax. C. Constitutional framework No h i s t o r i c a l view of corporate income taxation would be complete without a b r i e f examination of the c o n s t i t u t i o n a l framework within which federal and p r o v i n c i a l taxation powers are exercised. The federal government's taxing 12 power i s exercised pursuant to subsection 91(3) of the Constitution Act, 1867. 4 7 That subsection grants the federal parliament powers with respect to "the r a i s i n g of Money by any Mode or System of Taxation". The p r o v i n c i a l Legislatures derive t h e i r taxing powers from subsection 92(2) of the Constitution Act, 1867 which allows them to make laws i n r e l a t i o n to "Direct Taxation within the Province in-order to the r a i s i n g of a Revenue for P r o v i n c i a l Purposes". I t i s clear that the levying of corporate income tax comes within the scope of both these powers.48 With respect to the p r o v i n c i a l powers i n t h i s area, i t should be noted that the tax has to be d i r e c t . There i s no question about the directness of income tax. It f i t s squarely within the d e f i n i t i v e d e s c r i p t i o n of a d i r e c t tax given by J. S. M i l l . He said: Taxes are either d i r e c t or i n d i r e c t . A d i r e c t tax i s one which i s demanded from the very person who i t is intended or desired should pay i t . Indirect taxes are those which are demanded from one person i n the expectation and intention that he s h a l l indemnify himself at the expense of another; such are excise and customs. 4 g This d e s c r i p t i o n has formed the cornerstone on which a l l j u d i c i a l d e l i b e r a t i o n on the directness or indirectness of a p r o v i n c i a l tax has been founded. 50 was f i r s t r aised i n Attorney-General of Quebec v. Reed^and, although not an i n t e g r a l part of that decision, i t was adopted i n Bank of  Toronto v. Lambe ^ 2 a n d applied to hold "an act to impose certain d i r e c t taxes on c e r t a i n commercial corporations" v a l i d . Since that decision p r o v i n c i a l corporate income tax has been recognized as a v a l i d p r o v i n c i a l tax provided that i t meets the other requirements of subsection 92(2). Taxation within the province has been held to include d i r e c t taxation of property, transactions or benefits acquired even though the taxpayer ; may reside outside the province. This p r i n c i p l e was upheld i n Alworth v. 54 Minister of Finance where a logging tax imposed by B r i t i s h Columbia was held not to be r e s t r i c t e d to persons r e s i d i n g i n the province but to be payable in respect of income derived from logging a c t i v i t y i n the province. Therefore p r o v i n c i a l corporate income tax l e g i s l a t i o n that taxes on the basis of permanent establishment i s v a l i d . Any c o n s t i t u t i o n a l examination of taxation powers i n Canada i s i n e v i t a b l y coloured by the operation of the taxation agreements. These agreements place taxation i n a unique position since they contemplate a d i v i s i o n of the f i s c a l powers that i s independent of the written constitution. They are not entered into pursuant to any s p e c i f i c power in the Constitution Act, 1867 and have been said to be no more than a "gentleman's agreement". 5 5 The fact that these agreements are not enforceable pursuant to any p r i n c i p l e s of c o n s t i t u t i o n a l law i s evidenced by the resolution of a dispute that arose i n 1944 between the federal government and the government of Saskatchewan over a seed grain debt. The federal government refused to pay to the province money promised under the Wartime Tax Agreement Act because a debt owing by Saskatchewan in respect of seed grain had not been paid. The A r b i t r a t i o n Board appointed to hear the dispute held by a majority that there was nothing i l l e g a l i n the federal government's a c t i o n . 5 ^ They held that the federal government could set o f f the seed grain debt owing against the payments due and, inter a l i a , that the agreement was not l e g a l l y enforceable against the federal government in 14 respect of this issue. Even though the decision turned on the plea of s e t o f f , i t does i l l u s t r a t e the tenuous nature of taxation agreements. Their enforcement i s dependent on the rules of contract law and not on any inherent c o n s t i t u t i o n a l r i g h t . Yet despite t h e i r lack of any c o n s t i t u t i o n a l basis, taxation agreements are an i n t e g r a l part of the taxation system i n Canada. Their negotiation and operation has dominated Canadian taxation since the 1940s and they play a major r o l e i n the taxation of corporations. F i n a l l y , because the taxation powers of the provinces and parliament under the Constitution Act, 1867 are interdependent of each other there i s no c o n s t i t u t i o n a l objection to double taxation. Thus a corporation may be required to pay tax to both the federal and p r o v i n c i a l governments. In Forbes v. Attorney-General of Manitoba Lord MacMillan, when considering federal and p r o v i n c i a l income tax l e g i s l a t i o n , put i t t h i s way: Both income taxes may co-exist and be enforced without clashing. The Dominion reaps part of the f i e l d of the Manitoba c i t i z e n ' s income. The Province reaps another part of i t . 5 8 D. Prov i n c i a l corporate income tax Examination of p r o v i n c i a l corporate income tax l e g i s l a t i o n in Canada reveals that three d i f f e r e n t approaches to the levying and c o l l e c t i o n of corporate income tax have been taken by the provinces. One approach i s that taken by Ontario and Alberta. These provinces incorporate sections of the 15 Income Tax Act (Canada) i n t h e i r p r o v i n c i a l corporate income tax l e g i s l a t i o n . Quebec, on the other hand, takes a d i f f e r e n t approach. I t has enacted a corporate income tax statute that makes no reference at a l l to the federal l e g i s l a t i o n . The f i n a l approach i s that taken by the other seven provinces. They levy a corporate income tax based on taxable income as calculated under the Income Tax Act (Canada). A b r i e f look at the form and content of the p r o v i n c i a l l e g i s l a t i o n used in these disparate approaches i s necessary before taking a c r i t i c a l look at the ramifications of and problems presented by Quebec, Ontario and Alberta's corporate income tax l e g i s l a t i o n . ( i ) Ontario and Alberta Both Ontario and Alberta have enacted l e g i s l a t i o n that i s based on the Income Tax Act (Canada) . 5 9The framework of the corporate income tax system in both those j u r i s d i c t i o n s i s provided by the Income Tax Act (Canada). That framework i s then supplemented and t a i l o r e d to meet s p e c i f i c p r o v i n c i a l needs by the p r o v i n c i a l l e g i s l a t i o n . Thus, the p r o v i n c i a l l e g i s l a t i o n i s read i n concert with the federal l e g i s l a t i o n . The reasons for taking t h i s approach and the problems associated with i t w i l l be discussed l a t e r . At t h i s stage, however, an analysis of the technique used by Ontario and Alberta to adopt the Income Tax Act (Canada) and combine i t with t h e i r own l e g i s l a t i o n i s useful. Both Ontario and Alberta open t h e i r corporate income tax l e g i s l a t i o n with a series of a p p l i c a t i o n rules designed to ensure incorporation of the federal 16 provisions with no r e s u l t i n g ambiguity or uncertainty. Thus, most of the interpretations contained i n Part XVII of the Income Tax Act (Canada)' are adopted without change and made applicable for the purposes of the 60 p r o v i n c i a l l e g i s l a t i o n . The most c r i t i c a l rules are those that deal with the a p p l i c a b i l i t y of sections of the Income Tax Act (Canada) that are not s p e c i f i c a l l y incorporated i n the p r o v i n c i a l l e g i s l a t i o n but that are referred to in provisions of the federal l e g i s l a t i o n that are incorporated. These ground rules are c r u c i a l to the successful operation of a statute that r e l i e s on another statute for the majority of i t s substantive provisions. B a s i c a l l y , both Ontario and Alberta provide that where a reference i s made i n an adopted section of the Income Tax Act (Canada) to an unadopted section of that Act, then unless there i s a p r o v i n c i a l provision equivalent to or enacted i n l i e u of the unadopted section the adopted federal section i s to be read as though the reference to the unadopted section were deleted. Some of the other basic i n t e r p r e t i v e rules deem acts done pursuant to the federal l e g i s l a t i o n to also be acts done for the purposes of the p r o v i n c i a l l e g i s l a t i o n . For example, references i n the Income Tax Act (Canada) to returns or assessments required or made under that Act are deemed to be references to returns or assessments under the p r o v i n c i a l legislation.62 Ontario and Alberta d i f f e r i n t h e i r treatment of regulations made under the Income Tax Act (Canada). Alberta makes a l l regulations made pursuant to the Income Tax Act (Canada) applicable for p r o v i n c i a l purposes 6 3 Therefore as soon as a regulation i s enacted and published i n the Canada Gazette i t automatically applies to Alberta's corporate income tax system. There are 17 two exceptions to t h i s rule. Adoption i s automatic unless Alberta provides by i t s own regulation that, i t i s not applicable or unless the federal regulation i s inconsistent with an e x i s t i n g regulation made under The Alberta Corporate Income Tax Act. Ontario takes the opposite approach i n that rather than automatically adopting a l l federal regulations, i t provides a mechanism to adopt only those federal regulations that the province requires.^ 4 The technique i s d i f f e r e n t but the result i s the same. Both j u r i s d i c t i o n s use federal regulations made under the Income Tax Act (Canada) i n the administration of t h e i r corporate income tax systems. Both Ontario and Alberta base the computation of income for the purposes of ca l c u l a t i n g corporate income tax payable on the federal Act. Ontario makes sections 3 and 4 of the Income Tax Act (Canada) applicable to i t s Act*' 5 Therefore i t adopts, with only minor e d i t o r i a l changes, the federal rules respecting c a l c u l a t i o n of income and income or loss from a source. Alberta also uses the federal rules although i t does not adopt the federal sections but rather r e i t e r a t e s them i n the text of i t s legisation.66 Both provinces then proceed to make D i v i s i o n B of Part I of the Income Tax Act (Canada) applicable to t h e i r own l e g i s l a t i o n and thus incorporate many of the other federal rules respecting computation of income. They also, i n d i f f e r e n t ways, make D i v i s i o n C of Part I of the Income Tax Act (Canada) respecting cn computation of taxable income applicable to t h e i r l e g i s l a t i o n . It i s when income tax payable i s computed that both Ontario and Alberta depart from the federal l e g i s l a t i o n . Both provinces impose a corporate income tax on a percentage of the "amount taxable" i n the province.^® In Ontario that i s taxable income earned i n Ontario less the deduction i n 18 respect of e l e c t i o n c o n t r i b u t i o n s 6 9 In Alberta amount taxable i s taxable income earned i n Alberta less the royalty tax deduction. 7^ The income' tax payable i s then reduced by a series of deductions offered by each province. This i s where both systems acquire t h e i r uniquely p r o v i n c i a l c h a r a c t e r i s t i c s . The incentives to business are provided by these sections and the desire to provide these incentives i s one of the reasons often given by the two provinces for the decision to administer t h e i r own 71 corporate income tax systems. F i n a l l y , both provinces set up t h e i r own administrative schemes for the c o l l e c t i o n of corporate income t a x . 7 2 While these systems are s i m i l a r to each other and to the federal administration they are administered by the respective provinces and therefore are not dependent on the federal administation or l e g i s l a t i o n for t h e i r operation. It i s worth noting that despite the independent administrative systems some fe d e r a l - p r o v i n c i a l and i n t e r p r o v i n c i a l co-operation i s anticipated. Both Ontario and Alberta's l e g i s l a t i o n permits communication between the province and the federal government or the government of another province i n respect of information 73 obtained under the respective p r o v i n c i a l Acts, ( i i ) Quebec 1972 was an h i s t o r i c year i n the hi s t o r y of Canadian taxation. That was the year that a new income tax system was implemented. It must not be forgotten that 1972 was also an h i s t o r i c year in the history of Quebec 74 taxation. That year saw the enactment of The Taxation Act, a statute that 19 embodied a new income tax system for Quebec. Certainly, i t was no coincidence that the Quebec tax reform took place at the same time as' the federal tax reform. In fact the Quebec Minister of Finance, Raymond Garneau, announced i n late 1971 i n the National Assembly that one of the objectives of the Quebec tax reform was to bring Quebec tax law more into 75 l i n e with the federal system. Thus, The Taxation Act, while not r e f e r r i n g 7 d i r e c t l y to the federal l e g i s l a t i o n as i t s predecessor l e g i s l a t i o n had, 77 p a r a l l e l e d the federal l e g i s l a t i o n i n many ways. The s i m i l a r i t i e s between the two statutes and lack of d i r e c t reference to the Income Tax Act (Canada) was explained t h i s way by Andre Gauvin, Deputy Minister i n the Quebec Department of Revenue: You may wonder why Quebec wanted to have a separate Act, as complete as the federal Act. Would i t not have been enough that Quebec, l i k e the other provinces, pass a law which reproduced only the points on which i t wanted to be d i f f e r e n t from the federal? Could i t not have adopted the federal provisions either by r e f e r r i n g to them mutatis mutandis or by reproducing t e x t u a l l y i n i t s own Act the provisions of the federal Act? We have asked ourselves these questions too. To begin with, several objectives had to be reconciled, some immediate and some long-term. Among immediate objectives, we wanted a statute which came as close as possible to the federal law, i n order to meet the requirements and p r i o r i t i e s of the government of our province. We also wanted a statute that would be as autonomous as possible, thus avoiding references to the federal Act. The law had to be drafted and structured so as to conform with the whole 7ft p r o v i n c i a l l e g i s l a t i o n . Those two objectives could have proved rather d i f f i c u l t to achieve together since they tend to be i n c o n f l i c t with each other. Nevertheless, i f one 20 accepts p r o v i n c i a l autonomy i n the f i e l d as merely meaning the omission of references to the federal Act, then autonomy was achieved. The references to the federal Act appear in the regulations made under The Taxation Act and not i n the body of the Act i t s e l f - a rather subtle d i s t i n c t i o n . This procedure enables Quebec to change the law based on the federal Act without resorting to l e g i s l a t i v e approval. An Order i n Council signed by the Quebec Prime Minister and Lieutenant Governor i s s u f f i c i e n t . If one associates a greater degree of independence with p r o v i n c i a l autonomy then the 1972 l e g i s l a t i o n would not meet that requirement. The wording may 7 9 have been d i f f e r e n t , the structure of the Act was d i f f e r e n t but the basic elements of the system were the same. The system i n 1972 p a r a l l e l e d that of the federal government. Evidence of t h i s was that at the time of enactment of the Quebec l e g i s l a t i o n 842 of the 922 provisions i n The Taxation Act were to be found i n one form or another i n the Income Tax Act 80 (Canada). The d e f i n i t i o n of income in the Quebec l e g i s l a t i o n was the same as that contained i n the federal Act and the inclusions, exclusions and deductions with respect to computation of income and taxable income were very s i m i l a r to the federal ones. Nevertheless, events since 1972 have resulted i n the Quebec corporate income tax system becoming more p r o v i n c i a l i n nature. The 1977 Quebec Budget proposed changes to the system that prompted one commentator to note that " i t i s obvious from the l a s t budget and the ' m i n i s t e r i a l declaration that Quebec intends to reaffirm i t s autonomous r i g h t i n d i r e c t taxation and intends to be less influenced by federal policies"?''" The changes proposed i n 1977 included a r e d e f i n i t i o n of "taxable Quebec property" and changes in the c a l c u l a t i o n of Canadian exploration and development expenses by the resource industry. Since that time there have been other changes that confirm the trend towards a more independent approach by Quebec towards corporate income taxation. In 1979 the meaning of "establishment", the basis on which corporate income tax i s levied, was extended.®-^ The 1981 Budget brought changes to the rules respecting non c a p i t a l losses that put these rules at variance with the federal rules. A tax c r e d i t i n l i e u of the use of the losses i s now available to corporations for the year i n which the losses were incurred.® 4 Therefore Quebec appears to be slowly edging away from i t s past attachment to federal corporate income tax po l i c y . . The new approach seems to be less harmonization with the federal system and a more uniquely Quebec system. As we s h a l l see, the further Quebec diverges from the federal system, the more problems that a r i s e for the corporate taxpayer. ( i i i ) The seven other provinces The t h i r d approach to corporate income taxation i s that taken by B r i t i s h Columbia, Saskatchewan, Manitoba, Prince Edward Island, New Brunswick, Nova Scotia and Newfoundland. These seven "agreeing" provinces have entered tax c o l l e c t i o n agreements with the federal government and t h e i r corporate income tax i s c o l l e c t e d under those agreements by the federal government. 8 5 The tax c o l l e c t i o n agreements are entered into pursuant to the Federal-Provincial F i s c a l Arrangements and Established Programs Financing 86 Act, 1977 and the Income Tax Acts of the respective provinces. The agreements, due to expire in 1982, provide that the corporate income tax 22 levied by the provinces s h a l l be "expressed as a percentage of the taxable income of a corporation earned i n the Province i n the y e a r " . 8 7 Thus, a l l 88 seven provinces have the same tax base although the rates vary. The system appears to be a harmonious and uniform one. Yet appearances can be deceptive. While a l l seven provinces do express the tax payable by a corporation as a percentage of the taxable income, the federal government has been persuaded to administer various tax cre d i t s on behalf of some of the provinces. J In 1974 the federal Finance Minister acknowledged t h i s movement by the agreeing provinces away from a uniform corporate income tax system. John Turner said: I have come to the conclusion that where i t i s possible to permit p r o v i n c i a l income tax systems to depart from s t r i c t conformity with the c r i t e r i a we have previously i n s i s t e d upon without d i s t o r t i n g and damaging the o v e r - a l l national system. I would be prepared to do so. This does not mean that I no longer consider the esse n t i a l harmony of the federal and p r o v i n c i a l tax systems as necessary. I c e r t a i n l y do. It simply means that we can now begin to consider relaxing the e a r l i e r conditions we i n s i s t e d on i n the tax c o l l e c t i o n agreement provided, i n doing so, we do not jeopardize the main features of our tax system or overstrain the tolerance of taxpayers or the capacity of the tax c o l l e c t i n g apparatus. 9 0 An i l l u s t r a t i o n of the lack of harmony between an agreeing province and the federal government i n the corporate income tax area can be found i n an examination of corporate income tax in B r i t i s h Columbia. Section 5(3) and (4) of The Income Tax Act 9"4>rovides for a foreign tax cre d i t i n respect of foreign investment income. Section 7 provides for a small business tax 23 rate of 8%. There i s nothing too unusual about these two items as every other agreeing province grants a foreign tax credit and a l l agreeing provinces, except Prince Edward Island, provide a lower rate of tax for small businesses. However, B r i t i s h Columbia then goes on to provide three other " p r o v i n c i a l " deductions. They are a deduction from tax payable i n respect of logging taxes payable or paid, a deduction i n respect of p o l i t i c a l c o n t r i b u t i o n s 9 3 and royalty rebates for gas producers, o i l producers and mining c o r p o r a t i o n s ? 4 Not s u r p r i s i n g l y , these types of p r o v i n c i a l i n i t i a t i v e s i n an area administered for them by the federal government have led to some adverse comments by federal representatives. The Minister of Finance, A l l a n MacEachen c r i t i c i z e d the provinces for t h e i r i n i t i a t i v e s when he said: [T] he p r o l i f e r a t i o n of sp e c i a l p r o v i n c i a l income tax c r e d i t s and other measures has complicated calc u l a t i o n s for taxpayers and tax administration for Revenue Canada, thereby eroding the s i m p l i c i t y of the system.95 He concludes that s p e c i a l p r o v i n c i a l incentive measures i n the corporate income tax system lead d i r e c t l y to i n t e r - p r o v i n c i a l tax competition. This, i n his opinion, i s an extremely undersirable state of a f f a i r s . Therefore a l l indications are that the federal government w i l l not be so •  w i l l i n g i n the future to allow those provinces with which i t has entered tax c o l l e c t i o n agreements to diverge from a c e r t a i n degree of uniformity i n the tax base. However the federal government has to measure i t s moves very c a r e f u l l y i n t h i s area. If i t r e s t r i c t s the power of the provinces to 24 i n d i v i d u a l i z e t h e i r own corporate income tax systems by the use of regional incentives, then the r e s u l t may well be withdrawal from the tax c o l l e c t i o n agreements by the provinces. C e r t a i n l y Alberta's recent withdrawal from the agreement i n the corporate income tax area appears to be d i r e c t l y a t t r i b u t a b l e to federal r e s t r i c t i o n s W e are also seeing indications that the federal government w i l l have to deal with a s i m i l a r s i t u a t i o n i n B r i t i s h Columbia. In 1980 the B r i t i s h Columbia government asked the federal government to administer a dividend tax credit for B r i t i s h Columbia residents investing i n B r i t i s h Columbia based corporations. The federal government refused to administer such a program. This led the B r i t i s h Columbia Minister of Finance to comment that B r i t i s h Columbia would " i f 9 7 absolutely necessary" c o l l e c t i t s own personal and corporate income taxes. Thus there are three d i f f e r e n t approaches in Canada to the levying and c o l l e c t i o n of corporate income tax. This thesis i s concerned mainly with the two d i f f e r e n t approaches taken by Quebec and both Ontario and Alberta. As a point of i n t e r e s t , these three provinces together account for over 75% of corporate taxable income earned i n Canada.^® Yet they are the three provinces that do not p a r t i c i p a t e i n the tax c o l l e c t i o n agreement system in respect of corporate income tax. This would suggest that any b e l i e f that the federal government may have that the Canadian corporate income tax system i s well-coordinated and i n harmony p r o v i n c i a l l y i s an i l l u s i o n . The desire that " f i s c a l arrangements should seek to provide machinery for harmonizing the p o l i c i e s and p r i o r i t i e s of the federal and p r o v i n c i a l governments i s commendable but, as w i l l be seen, c l e a r l y not a fact of l i f e i n the present Canadian corporate tax system. 25 C H A P T E R I - F O O T N O T E S 1 R . W . Boadway and H. M. Kitchen, Canadian Tax Policy, Canadian Tax  Paper No. 63, Canadian Tax Foundation (1980) at 98. 2 These provinces are Quebec, Ontario and Alberta. See Federal-Provincial F i s c a l Arrangements i n the E i g h t i e s , A Submission to the Parliamentary Task Force on the Federal-Provincial F i s c a l Arrangements (1981) at 55-56. 3 Numerous a r t i c l e s have been written discussing f i s c a l federalism i n Canada i n the 1970s. For an economic view see, for example, Boadway and Kitchen, supra, note 1; R . M. Bird, F i s c a l Dimensions of Canadian  Federalism, Canadian Tax Foundation (1980). For a p o l i t i c a l s c i e n t i s t ' s point of view see Canadian Federalism: Myth or Re a l i t y (2nd ed.) ed. J. P. Meekison and Canadian Federalism: Myth or Re a l i t y (3rd ed.) ed. J. P. Meekison. 4 The Task Force was established on February 5, 1981 and submitted i t s report i n August, 1981. 5 F i s c a l Federalism i n Canada, Report of the Parliamentary Task Force on Federal-Provincial F i s c a l Relations (1981) at 1. 6 Ibid, 3. 7 Ibid, 41-42. 8 Ibid, 177. 9 30 & 31 V i c t . , c. 3 (Imp.). 10 S.Q. 1875, c. 7 (39 V i c t . ) . 11 (1877-78) A.C. 1090. 12 S.Q. 1882, c. 22 (45 V i c t . ) . 13 (1887) 12 A.C. 575. 14 S.B.C. 1876, c. 8 (38 V i c t . ) . 15 Section 9(3) of The Assessment Act. It should be noted that "person" included a body corporate by v i r t u e of section 8(13) of The Interpretation Act. 16 These provinces are Quebec, Ontario, Manitoba, Saskatchewan and B r i t i s h Columbia. 26 17 These were Quebec, B r i t i s h Columbia and Prince Edward Island. Prince Edward Island introduced i t s corporate income tax i n 1894. 18 The Business P r o f i t s War Tax Act, 6-7 Geo. V, c. 11. 19 It was repealed e f f e c t i v e December 31, 1920 by S.C. 1924, c. 10. 20 7-8 Geo. V, c. 28. 21 Section 4 of the Income War Tax Act. 22 S i r Thomas White, Canadian House of Commons Debates, July 25, 1917, 3760. 23 Newfoundland did not enter Confederation u n t i l 1949. 24 Section 21 of The Income Tax Act R.S.B.C. 1936, c. 280, as amended by S.B.C. 1938, c. 57. 25 The Corporations Taxation Act, R.S.M. 1924, c. 191, as amended by S.M. 1932, c. 49. 26 Royal Commission on Dominion-Provincial Relations Report (Rowell-Sirois Commission) Book I, 13. 27 Royal Commission on Dominion-Provincial Relations Report (Rowell-Sirois Commission) Book I I , 113. 28 The obvious exception i s the levying of a corporation's c a p i t a l tax by f i v e provinces. 29 For an i n depth analysis of the tax ren t a l agreements, see also R. M. Burns, The Acceptable Mean; The Tax Rental Agreements, 1941-1962, Financing Canadian Federation 3, (Canadian Tax Foundation, 1980). 30 These agreements were entered into under the authority of the Dominion-Provincial Tax Rental Agreement Act, S.C. 1947, c. 58. 31 An Act to amend The Corporations Tax Act, 1939 S.O. 1947, c. 19; The Corporation Tax Act, S.Q. 1947, c. 38. 32 The Alberta Corporate Income Tax Act R.S.A. 1980, c. A-17. 33 The Federal-Provincial Tax Sharing Agreements Act, S.C. 1956, c. 29. 34 The Federal-Provincial F i s c a l Arrangements Act, 1961, S.C. 1960-1961, c. 58. 35 The Federal-Provincial Arrangements Act, 1967, S.C. 1966-1967, c. 89. 36 The Federal-Provincial F i s c a l Arrangements Act, 1972, S.C. 1972, c. 8. 27 37 The Federal-Provincial F i s c a l Arrangements and Established Programs Financing Act, 1977, S.C. 1976-1977, c. 10. 38 The federal government c o l l e c t s corporate income tax on behalf of Newfoundland, New Brunswick, Nova Scotia, Prince Edward Island, Manitoba, Saskatchewan and B r i t i s h Columbia. 39 The rates vary from a low of 10 per cent (excluding the small business deduction) in Prince Edward Island to a high of 16 per cent i n B r i t i s h Columbia. 40 Dominion and P r o v i n c i a l Submissions and Plenary Conference Discussions, Dominion-Provincial Conference (1945) 353 at 362. 41 Hon. Onesime Gagnon, Treasurer of Quebec, Budget Speech, March 25, 1947. 42 Supra, note 40, at 242. 43 Supra, note 40, at 599. 44 Alberta Hansard, A p r i l 2, 1974, 888. 45 Alberta Hansard, A p r i l 2, 1974, 889. 46 Hon L. Hyndman, P r o v i n c i a l Treasurer, advised the Alberta Legislature that the federal government has refused to administer the Alberta MURB program and that t h i s was a reason for withdrawing from the federal system, Alberta Hansard, May 13, 1980, 943. 47 This was formerly subsection 91(3) of the B r i t i s h North America Act, 1867, 30 & 31 V i c t . , c. 3 (Imp.). 48 See generally, G. V. LaForest, The A l l o c a t i o n of Taxing Powers under the Canadian Constitution, Canadian Tax Paper No. 65 (2nd ed. 1981). 49 J. S. M i l l , P r i n c i p l e s of P o l i t i c a l Economy, Book V, (1848), at 418. 50 M i l l s ' d e f i n i t i o n has appeared with u n f a i l i n g r e g u l a r i t y i n a l l decisions of the Privy Council and the Supreme Court of Canada on the issue of d i r e c t and i n d i r e c t taxation. See, for example, Attorney-General of Quebec v. Reed (1884) 10 A.C. 141; A t l a n t i c Smoke  Shops v. Conlon [1943] A.C. 550; Simpson-Sears Ltd. v. P r o v i n c i a l  Secretary of New Brunswick 20 N.B.R. (2d.) 478 and Canadian Industrial  Gas and O i l Ltd. v. Government of Saskatchewan fl977] 6 W.W.R. 607. 51 (1884) 10 A.C. 141. 52 (1887) 12 A.C. 575. 53 R v. L o v i t t [l912j A.C. 212; Alleyn v. Barthe [1922] 1 A.C. 215; International Harvester Co. v. P r o v i n c i a l Tax Commission [1949] A.C. 36. 28 5 4 [ l 9 7 8 J 1 S.C.R. 4 4 7 . 55 F. R. Scott, The Constitutional, Background of Taxation Agreements ( 1 9 5 5 ) 2 McGill L.J. 1. 5 6 In re Taxation Agreement between Government of Saskatchewan and  Government of Canada 1 9 4 6 1 W.W.R. 2 5 7 . 57 [1937J A.C. 2 6 0 . 5 8 Ibid, 2 7 4 . 59 The Corporations Tax Act, R.S.O. 1 9 8 0 , c. 9 7 ; The Alberta Corporate Income Tax Act, R.S.A. 1 9 8 0 , c. A - 1 7 . 6 0 The Corporations Tax Act, R.S.O. 1 9 8 0 , c. 97 s. 1 ( 1 ) ; The Albert Corporate Income Tax Act, R.S.A. 1 9 8 0 , c. A - 1 7 , s. 1 ( 1 ) . 6 1 The Corporations Tax Act, R.S.O. 1 9 8 0 , c. 9 7 , s. l ( 2 ) ( d ) ; The Albert Corporate Income Tax Act, R.S.A. 1 9 8 0 , c. A -17 s. 2 ( 1 ) , ( 2 ) and ( 3 ) . 6 2 The Corporations Tax Act, R.S.O. 1 9 8 0 , c. 9 7 , s. l ( 2 ) ( c ) ; The Albert Corporate Income Tax Act; R.S.A. 1 9 8 0 , c. A - 1 7 , s. 2 ( 5 ) . 6 3 The Alberta Corporate Income Tax Act, R.S.A. 1 9 8 0 , c. A - 1 7 , s. 5 6 ( 2 ) . 64 The Corporations Tax Act, R.S.O. 1 9 8 0 , c. 9 7 , s. 1 ( 3 ) . 65 The Corporations Tax Act, R.S.O. 1 9 8 0 , c. 9 7 , ss. 9 and 1 0 . 66 The Alberta Corporate Income Tax Act, R.S.A. 1 9 8 0 , c. A - 1 7 , ss. 6 and 7 . a a a 67 The difference i s that Ontario adopts D i v i s i o n C of Part I of the Income Tax Act (Canada) with only minor changes and then expands i t s operation by adding i t s own provisions dealing with the d e d u c t i b i l i t y of e l e c t i o n contributions. Alberta does not adopt D i v i s i o n C of Part I i n whole but does make sections 110, 111, 112 and 113 applicable and expands t h e i r operation with the inclu s i o n of the royalty tax deduction as a factor i n determining the amount taxable i n Alberta. 68 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 30; The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 21. 69 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 30. 70 The Alberta Corporate Income Tax Act, R.S.A. 1980 c. A-17, s. 20(2). 71 See, Premier Lougheed of Alberta, M i n i s t e r i a l Statement to the Alberta Legislature, A p r i l 2, 1974 reported i n Alberta Hansard, A p r i l 2 1974, 888 when he outlined the s p e c i a l needs of Alberta corporations for t h e i r own incentives i n tax l e g i s l a t i o n . 29 72 The Corporations Tax Act, R.S.O. 1980, c. 97, Part V; The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, Part 8. 73 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 91(3); The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 77(4). 74 S.Q. 1972, c. 23. 75 See, Guy Dube, A New Phase i n Quebec: Tax Evolution (1978) 26 Can. Tax 123. 76 The Corporation Tax Act, R.S.Q. 1964, c. 67; The Logging Tax Act, R.S.Q. 1964, c. 68; The P r o v i n c i a l Income Tax Act, R.S.Q. 1964, c. 69. 77 See also, for an analysis of the s i m i l a r i t i e s and differences between the two statutes i n 1972, Jacques Raymond, Quebec Tax Developments, Report of Proceedings of the Twenty-Fifth Tax Conference (1973), Canadian Tax Foundation, 528. 78 Ibid at 539-540. 79 Supra, note 77. 80 Robert. Bertrand, Understanding Quebec Tax Laws, 1973 Meredith Mem.  Lect., 8. 81 Supra, note 75, at 131. 82 An Act to amend the Taxation Act, S.Q. 197 7, c. 26. 83 An Act to amend the Taxation Act, S.Q. 1979, c. 18. 84 Tax Highlights of the 1981 Budget, Quebec Tax Reporter, Vol. 2, 11641. 85 The two t e r r i t o r i e s have also entered tax c o l l e c t i o n agreements with the federal government. The Northwest T e r r i t o r i e s entered an agreement i n 1978 and the Yukon T e r r i t o r y entered an agreement in 1980. 86 S.C. 1976-77, c. 10, s. 7. 87 This phrase i s contained i n a l l the tax c o l l e c t i o n agreements entered i n t o between the federal government and the provinces. 88 The corporate income tax rates, as of June 1982, are as follows: Corporate rate Small Business rate Newfoundland 15% 12% Prince Edward Island 10% Nova Scotia 13% 10% New Brunswick 14% 9% 30 Manitoba Saskatchewan B r i t i s h Columbia 15% 14% 16% 11% 10% 8% 89 See, F i s c a l Federalism in Canada, Report of the Parliamentary Task Force on Federal-Provincial F i s c a l Arrangements, August 1981, at 41. 90 Hon. John Turner, Minister of Finance, Federal-Provincial Meeting of Ministers of Finance and P r o v i n c i a l Treasurers, January 1974, quoted in Federal-Provincial F i s c a l Arrangements in the E i g h t i e s , A Submission to the Parliamentary Task Force on the Federal-Provincial F i s c a l Arrangements, (1981) at 53. 91 R.S.B.C. 1979, c. 10. 92 Ibid, s. 6. 93 Ibid, s. 8.1. 94 Ibid, s. 8. 95 Supra, note 2, at 53. 96 Supra, note 71. 97 Hon. Hugh M. C u r t i s , B r i t i s h Columbia Budget, March 1981, at 31. 98 Supra, note 2, at 55-56. 99 Hon. M i t c h e l l Sharp, Minister of Finance, Federal-Provincial Tax Structure Committee (Ottawa: Queen's P r i n t e r , 1966). 31 CHAPTER II PROBLEMS PRESENTED BY PROVINCIAL ADOPTION OF THE INCOME T A X A C T (CANADA) Both Ontario and Alberta d i r e c t l y incorporate c e r t a i n provisions of the Income Tax Act (Canada) into t h e i r corporate income tax statutes. Quebec incorporates c e r t a i n provisions of the federal Act into i t s regulations made under the Taxation Act."*" It has long been acknowledged that r e f e r e n t i a l l e g i s l a t i o n , that i s l e g i s l a t i o n that adopts and, in some instances, adapts statutory provisions of another j u r i s d i c t i o n , i s v a l i d l e g i s l a t i o n . In f a c t , the technique of adopting l e g i s l a t i v e provisions by reference has been traced back to the thir t e e n t h century when the Statute of Westminster, 1285 adopted terms from the Statute of Malborough, 1267." A . Referent ia l Legis lat ion Concern over r e f e r e n t i a l l e g i s l a t i o n i s not based on the legal v a l i d i t y of such l e g i s l a t i o n . Rather, the concern arises over more prosaic matters. A statute that adopts provisions of another statute i s meaningless when read on i t s own unless the reader i s f a m i l i a r with the text of the adopted statute. Conversely, without r e f e r e n t i a l l e g i s l a t i o n our statute books would be considerably thicker than they are at present. The draftsman's argument i n favour of r e f e r e n t i a l l e g i s l a t i o n is that the text of an adopted provision may have an established meaning that i s automatically extended to the adopting l e g i s l a t i o n when the provision i s referred to. The tax p r a c t i t i o n e r could well argue i n reply that r e p e t i t i o n of the words 32 of the provision would not af f e c t the established meaning and would c e r t a i n l y make the statute easier to read. , Obviously, the f i n a l decision as to whether or not r e f e r e n t i a l l e g i s l a t i o n w i l l be enacted i s made by the p o l i t i c i a n s . In the corporate income tax f i e l d both Ontario and Alberta chose to enact r e f e r e n t i a l l e g i s l a t i o n while Quebec d e l i b e r a t e l y chose to r e s t r i c t the use of references to federal 4 l e g i s l a t i o n to i t s regulations. One reason the p o l i t i c i a n would favourably consider r e f e r e n t i a l l e g i s l a t i o n would be to r e s t r i c t the time spent debating and enacting l e g i s l a t i o n that had already been debated and enacted, a l b e i t i n another forum or another context. There i s no doubt that l e g i s l a t i o n by reference i s a p a r t i c u l a r l y expedient method of enacting tax l e g i s l a t i o n . In an area that i s so technical and exacting resort to references to existing p r i n c i p l e s and concepts tends to be welcomed by both the draftsmen and the p o l i t i c i a n s . A more cyni c a l view of r e f e r e n t i a l l e g i s l a t i o n would be that the true ramifications of such l e g i s l a t i o n are well hidden when other l e g i s l a t i v e provisions are incorporated but not repeated word for word. There tends to be no debate of, nor p u b l i c i t y attached to, provisions of another j u r i s d i c t i o n ' s l e g i s l a t i o n adopted by reference. Certainly t h i s i s a v a l i d complaint i n respect of l e g i s l a t i o n of a controversial nature. Whether tax l e g i s l a t i o n i s controversial or just merely unpopular i s a matter of opinion. The one leg a l issue that does arise when considering r e f e r e n t i a l l e g i s l a t i o n i s a question that touches on the area of delegation. I f the 33 adopting l e g i s l a t i o n refers to other l e g i s l a t i o n as i t reads at the time of adoption and as i t may read i n the future then i s that a delegation of authority by one j u r i s d i c t i o n to another and u l t r a v i r e s the j u r i s d i c t i o n that incorporates the l e g i s l a t i o n ? Before pursuing t h i s issue, the difference between r e f e r e n t i a l l e g i s l a t i o n and delegatory l e g i s l a t i o n should be examined. It has been described t h i s way: In the case of r e f e r e n t i a l l e g i s l a t i o n each l e g i s l a t u r e acts independently in the exercise of i t s own l e g i s l a t i v e authority; in the case of delegation, the authority to enact the l e g i s l a t i o n to be incorporated i s derived from the ^other l e g i s l a t u r e and cannot stand on i t s own feet. The argument can be made that by adopting l e g i s l a t i o n that i s subject to change in the future by another l e g i s l a t i v e body the adopting j u r i s d i c t i o n has granted the power to amend i t s l e g i s l a t i o n to that other l e g i s l a t i v e body. The authority to enact l e g i s l a t i o n that w i l l be incorporated no longer l i e s with the adopting j u r i s d i c t i o n because the amendments of the other j u r i s d i c t i o n w i l l automatically apply to the l e g i s l a t i o n of the adopting j u r i s d i c t i o n . The adopting j u r i s d i c t i o n does not have the power to amend the l e g i s l a t i o n referred to and therefore an i n v a l i d delegation of power has occurred. This view of anticipatory adoption of l e g i s l a t i o n has been approved by several writers i n the past. The issue of whether or not anticipatory adoption of l e g i s l a t i o n i s v a l i d arises when considering the corporate income tax l e g i s l a t i o n of Ontario and Alberta. Both provinces provide i n t h e i r corporate income tax l e g i s l a t i o n that a l l references to the Income Tax Act (Canada) are references to that 34 7 Act as amended from time to time. Does th i s represent a delegation of power to the federal parliament? The answer appears to be no. Certainly, i n the past, there was considerable doubt about the v a l i d i t y of such l e g i s l a t i o n R v. F i a l k a the Ontario Court of Appeal held that l e g i s l a t i o n that adopted other statutory provisions "as amended or re-enacted from time to time" i n t r a v i r es the province but only i n respect of amendments p r i o r to enactment of the adopting statute. The court reserved judgment on the v a l i d i t y of adoption of subsequent amendments. The issue was dealt with squarely in R v. Glibbery where the Ontario Court of Appeal held that federal regulations that incorporated by reference p r o v i n c i a l law respecting highways included any future amendments to those laws even though the regulations d i d not s p e c i f i c a l l y so provide. M c G i l l i v r a y J.A. said: Parliament could v a l i d l y have spelled out in i t s own regulations the equivalent of relevant sections of the Highway T r a f f i c Act as they existed from time to time but i t was more convenient to include them, as has been done, by reference to contemporary l e g i s l a t i o n in the Province. There should be no objection to delegation of this type made for a v a l i d Federal purpose to save r e p e t i t i o n i n i t s own regulations of v a l i d P r o v i n c i a l l e g i s l a t i o n . The issue appears to have been well s e t t l e d There i s no question that adoption of sections of the Income Tax Act (Canada) by reference i s legitimate. On the other hand i t i s clear that a delegation by the province of i t s taxing powers to the federal government 12 would be u l t r a v i r e s the province. Therefore care must be taken to ensure 35 that the adopting l e g i s l a t i o n i s worded i n such a way that i t i s c l e a r l y incorporation by reference and not a delegation. This point arose i n E v. Zaslavsky* -^ when the Saskatchewan Court of Appeal held a purported adoption by reference of the federal Livestock and Livestock Products Act by the Saskatchewan Livestock and Livestock Products Act was i n fact not an adoption by reference but was a delegation by Saskatchewan to the federal government of a power that the federal Parliament would not otherwise have had. It has been suggested that the reason for the decision was that "the apparently intended r e f e r e n t i a l section was so clumsily written that the majority could not construe i t as being other than an attempt at delegation and struck i t down."^4 The same cannot be said of Ontario and Alberta's adoption of the federal sections. It i s cl e a r , d i r e c t and e x p l i c i t i n i t s intent i o n and purpose. B. Application rules - the price to be paid for simplicity? To say that one i s in favour of tax s i m p l i f i c a t i o n i s tantamount to s t a t i n g that one i s i n favour of good as opposed to e v i l or to st a t i n g that one favours equity and n e u t r a l i t y i n a tax statute. Everyone favours s i m p l i c i t y and c l a r i t y , but the question which must be faced up to i s the cost and p o s s i b i l i t y of obtaining simplicity.15 One can c e r t a i n l y make a case for the proposition that adopting l e g i s l a t i o n by reference contributes to tax s i m p l i f i c a t i o n . Adopted sections usually come with given and well-understood meanings. This, i n the area of tax law, provides c e r t a i n t y for the p r a c t i t i o n e r and to a certain extent eliminates the complexity normally associated with income tax l e g i s l a t i o n . Most users of p r o v i n c i a l tax l e g i s l a t i o n are f a m i l i a r with the adopted 36 provisions of the Income Tax Act (Canada) and therefore do not have to interpret these provisions from scratch. A reference to section 87 o f ; the federal Act immediately conjures up v i s i o n s of the myriad of rules respecting amalgamation of corporations. E x i s t i n g knowledge can be used, thus s i m p l i f y i n g the i n t e r p r e t i v e and a p p l i c a t i o n processes. A j u r i s d i c t i o n that wishes to adopt the laws of another j u r i s d i c t i o n has three options. It can incorporate those laws r e f e r e n t i a l l y , reproduce them word for word or rewrite those laws i n a new manner. Quebec chose to rewrite the federal corporate income tax laws in a new manner and, in the opinion of some, that decision has resulted in a clearer set of rules. ^ Yet, while the law i s c l e a r and may be simpler, the c e r t a i n t y of i n t e r p r e t a t i o n i s l o s t . A rewritten provision does not carry the guarantee that i t w i l l be interpreted in the same manner as the o r i g i n a l section. Word for word reproduction of provisions presents i t s own problems. Alberta has taken t h i s approach i n i t s adoption of the computation of income rules found i n sections 3 and 4 of the Income Tax Act (Canada). Sections 6 and 7 of The Alberta Corporate Income Tax Act reproduce the federal rules. However, the problem arises when the sections reproduced are not reproduced exactly word for word. Alberta, in i t s reproduction of the federal sections has omitted references to income from o f f i c e or employment because Alberta's l e g i s l a t i o n i s r e s t r i c t e d to corporate income tax. This leaves room for the argument to be made that Alberta's section i s not to be interpreted in the same manner as the federal section because i t i s d i f f e r e n t . In addition, because Alberta adopts so many other sections of the federal Act, some with change, an argument can be made that i n t h i s 37 instance i t d i d not adopt sections 3 and 4 of the Income Tax Act (Canada) because i t wished to express something d i f f e r e n t . The s i m p l i c i t y of: the l e g i s l a t i o n i s not enhanced by t h i s kind of uncertainty. Therefore, adoption by reference has become an acceptable technique. Yet, there i s a pri c e to be paid for t h i s approach. What at f i r s t glance may appear to r e s u l t i n a straightforward, simple expression of the law can turn into a complicated and somewhat incoherent l e g i s l a t i v e document. The reason - those rules of application without which a l l adopted provisions would be meaningless. Both Ontario and Alberta use two d i f f e r e n t kinds of ap p l i c a t i o n rules. Each province opens t h e i r corporate income tax l e g i s l a t i o n with general rules that determine how the adopted federal provisions are to be applied. Then, scattered throughout both provinces' Acts are s p e c i f i c rules of appli c a t i o n that deal only with i n d i v i d u a l sections of the federal Act. Although Ontario and Alberta's general application rules are not word for word i d e n t i c a l , t h e i r import i s the same. In order to examine the d i f f i c u l t i e s presented by the operation of these rules a close look at t h e i r wording should be taken. Alberta's rules, as contained i n section 2 of The Alberta Corporate Income Tax Act read as follows: 2(1) Where a section of the federal Act or a regulation made under the federal Act has, by t h i s Act been made applicable for the purposes of t h i s Act and reference i s made i n that section to another provision of the federal Act and that other provision has been made inapplicable for the purposes of th i s Act, then that section s h a l l be read as i f the reference to the other provision had been struck out. 38 (2) Where a section of the federal Act or a regulation made under the federal Act has, by t h i s Act, been made applicable f o r the purposes of t h i s ; Act and reference i s made i n that section to another provision of the federal Act and that other provision does not apply for the purposes of th i s Act because a provision of this Act applies i n l i e u of i t , then the reference to the other provision s h a l l be deemed to be a reference to the provision of t h i s Act that applies i n l i e u of i t . (3) Where a section of the federal Act or a regulation made under the federal Act has, by t h i s Act been made applicable for the purposes of t h i s Act and reference i s made in that section to another provision of the federal Act and that other provision applies i n a d i f f e r e n t manner f or the purposes of the federal Act then i t does for the purposes of t h i s Act, then the reference s h a l l be deemed to be a reference to the other provision as i t applies for the purposes of th i s Act. Interpreting these rules before one even attempts to apply them can be a l i t t l e complex. Presumably t h e i r object i s to cover every s i t u a t i o n where an adopted provision of the Income Tax Act (Canada) has a reference to another provision of the Income Tax Act (Canada) and that other provision has not been adopted or applies i n a d i f f e r e n t manner for the purposes of the p r o v i n c i a l Act. Yet when s p e c i f i c situations are examined problems a r i s e i n the i n t e r p r e t a t i o n of the rules. For example, Ontario and 17 Alberta's rules d i f f e r in one important respect. Ontario's rules operate when a reference i s made to a provision of the federal Act that "does not apply" for the purposes of the p r o v i n c i a l Act. Alberta's l e g i s l a t i o n also operates i n that p a r t i c u l a r case, except for the s i t u a t i o n described i n section 2(1). In that instance a reference to a provision of the federal Act that "has been made ina p p l i c a b l e " for the purposes of the p r o v i n c i a l Act i s to be read as though the reference was struck out. The difference between the two approaches i s a subtle one. Ontario's wording would appear 39 to encompass the wider instance of general non-application of a section for any reason. Alberta's l e g i s l a t i o n would appear to be more r e s t r i c t i v e i n operation, only applying where there i s a p o s i t i v e statement i n the 18 l e g i s l a t i o n that a section of the federal Act does not apply. It should be easier for the reader to determine whether or not Alberta's rule applies because a l l he needs i s a statement i n the l e g i s l a t i o n that a provision does not apply. The reader of Ontario's l e g i s l a t i o n has to make a judgment c a l l i n respect of whether or not a federal section applies i f the Ontario Act i s s i l e n t on the issue. A minor difference i n the wording of the two provinces, but one that can res u l t i n major differences i n the int e r p r e t a t i o n to be given to the same federal provision. Both Ontario and Alberta's application rules apply when a section of the federal Act "has been made applicable" for the purposes of the p r o v i n c i a l Act. The question then becomes, when has a section been made applicable for the purposes of the p r o v i n c i a l Act? The general wording used by both j u r i s d i c t i o n s i s to state that a section of the federal Act applies or i s applicable. It i s clear that t h i s wording would bring the rules of appli c a t i o n into play. However, there are variations on th i s theme and they present problems. Section 22 of The Alberta Corporate Income Tax Act provides for the small business deduction for Alberta corporate taxpayers carrying on an active business. Section 22(1)(h) provides that "income of the corporation for the year from an active business has the meaning assigned to i t by paragraph 125(6)(e) of the federal Act." Has paragraph 125(6)(e) of the Income Tax Act (Canada) been made applicable for the purposes of the 40 p r o v i n c i a l Act? Certainly, paragraph 125(6)(e) i s being referred to in the p r o v i n c i a l Act, thus eliminating the need to repeat the wording of' the paragraph. Any jurisprudence attached to the meaning of the phrase "income of the corporation for the year from an active business" i s being brought into the p r o v i n c i a l Act. Yet, i f paragraph 125(6)(e) has been made applicable for p r o v i n c i a l purposes there i s a problem when the appl i c a t i o n r u l e i n section 2(1) i s applied. Paragraph 125(6)(e) of the Income Tax Act (Canada) excludes from the d e f i n i t i o n "income from a source i n Canada that i s a property (within the meaning assigned by subsection 129(4.1))". Thus income from a s p e c i f i e d investment business i s excluded from the d e f i n i t i o n of income of the corporation for the year from an active business. A problem arises because subsection 129(4.1) i s not adopted p r o v i n c i a l l y and therefore section 2(1) of The Alberta Corporate Income Tax Act operates to eliminate the reference. This e f f e c t i v e l y results i n s p e c i f i e d investment business income being included i n the d e f i n i t i o n of income from an active business because the s p e c i f i c exclusion i n the federal Act i s struck out by the p r o v i n c i a l a p p l i c a t i o n rules. It seems u n l i k e l y that t h i s would be an intended r e s u l t because there are more d i r e c t methods of achieving that r e s u l t , i f desired. An i n d i c a t i o n that perhaps paragraph 125(6)(e) has not been made applicable for the purposes of the p r o v i n c i a l l e g i s l a t i o n can be found i n section 22(1)(c) of The Alberta Corporate Income Tax Act. That section provides that '"business l i m i t ' has the meaning assigned to be by subsection 125(2) of the federal Act, as modified by subsections 125(3) and (4) of that Act 41 and as adopted by t h i s Act". Normally the rule of application i n section 2(3) would apply to ensure that any changes made to subsections 125(3) and (4) by the p r o v i n c i a l Act would apply i f the d e f i n i t i o n of "business l i m i t 1 had been adopted. The r u l e respecting the ap p l i c a t i o n of a federal section that refers to a section that does not apply because a p r o v i n c i a l section applies i n l i e u also presents problems. How does the reader know whether or not a p r o v i n c i a l section applies i n l i e u of a federal section? Ontario enacts th i s r u l e i n section 1(2)(d) of The Corporations Tax Act. Yet, none of the sections of that statute expressly provide that they are in l i e u of a federal section. The reader i s l e f t to determine that issue unaided. For example, i t i s clear that the foreign tax deduction provided by section 32 i s i n l i e u of the federal foreign tax deduction provided i n section 126 of the Income Tax Act (Canada). Therefore the reference to section 126 of the federal Act in subsection 138(8) of the federal Act, a section adopted by Ontario, should read as a reference to the p r o v i n c i a l foreign tax deduction. Other examples are not so obvious. Section 125 of the Income Tax Act (Canada) provides for the federal small business deduction. That section i s not adopted by Ontario's corporate income tax l e g i s l a t i o n . Therefore any reference to i t in another federal provision that i s adopted by Ontario should read as a reference to an Ontario section i n l i e u of section 125. Section 15.1 of the federal Act i s 1 9 adopted by Ontario. That section refers i n paragraph (2)(c) to subsection 125(1). Therefore, any p r o v i n c i a l p r o v i s i o n that applies i n l i e u of subsection 125(1) should be substituted. The question i s which section 42 applies i n lieu? Ontario does not provide for a small business deduction that i s i d e n t i c a l to the federal one. Instead, there are three separate deductions. Section 33 provides for a deduction from tax otherwise payable of an amount calculated with reference to section 125 under the heading "small business incentives". Section 34 provides a deduction from tax otherwise payable of an amount calculated with reference to section 125 .under the heading of "tax credit for e l i g i b l e p r o f i t s " . Section 35 provides a deduction from tax otherwise payable by a corporation e n t i t l e d to a deduction under section 125 in respect of the cost of depreciable property. To further complicate matters sections 33, 34 and 35 of The Corporations Tax Act r e f e r to subsection 125(1) of the federal Act, although they do not adopt i t . Another type of a p p l i c a t i o n rule that has become a standard feature of income tax l e g i s l a t i o n i s the t r a n s i t i o n a l section. This section provides the rules that are to apply during the change from one set of rules to another. Because taxation years do not take heed of l e g i s l a t i v e change and do not end and r e s t a r t on enactment of new l e g i s l a t i o n there is a need for a mechanism to ensure continuity. The t r a n s i t i o n a l rule i s that mechanism and i s e s p e c i a l l y important i n l e g i s l a t i o n that i s based on an e x i s t i n g system and that purports to incorporate part, but not a l l , of that e x i s t i n g system into a new system. Perusal of both Ontario and Alberta's corporate income tax l e g i s l a t i o n indicates that two kinds of t r a n s i t i o n a l rule are used. The f i r s t includes 20 rules of a general nature that apply to the whole p r o v i n c i a l Act. The 21 second kind of t r a n s i t i o n a l rule i s that r e s t r i c t e d to s p e c i f i c s i t u a t i o n s . 43 The only s i g n i f i c a n t issue that arises i n respect of the t r a n s i t i o n a l section i s whether or not the general type of section i s s u f f i c i e n t l y broad enough to encompass a l l possible events. Alberta soon discovered a f t e r enactment of i t s corporate income tax l e g i s l a t i o n that i t had not foreseen a l l possible events. That province enacted a new subsection to provide that amounts calculated, deducted or deductible under the federal Act for previous taxation years are to be deemed to have been calculated, deducted 22 or deductible under the new l e g i s l a t i o n for that previous taxation year. This would presumably encompass losses calculated under the federal Act that are to carry forward and be deductible under Alberta's l e g i s l a t i o n . As can be seen, the app l i c a t i o n rules, with perhaps the exception of those of a t r a n s i t i o n a l nature, leave many unanswered questions. They are a required t o o l of i n t e r p r e t a t i o n of adopted sections but a t o o l that sometimes seems to r a i s e as many problems as i t solves. They should be a simple rule of construction but i n v a r i a b l y result i n a l l manner of complexities when put to use. C. Amendment of the Federal Income Tax A c t - its effect on pr o v i n c i a l  corporate income tax legislation. One of the ironies i n the approach taken to corporate income taxation by Quebec, Ontario and Alberta i s that while those provinces profess t h e i r autonomy i n the area an amendment by the federal government to the Income Tax Act (Canada) often amends the p r o v i n c i a l corporate income tax l e g i s l a t i o n . This i s e s p e c i a l l y true i n Ontario and Alberta where so much of the federal Act i s incorporated into the p r o v i n c i a l tax statutes. It i s 44 also true, though to a lesser extent i n Quebec where some provisions of the Income Tax Act (Canada) are made applicable for the purposes of : the 23 Taxation Act by a Regulation Respecting the Taxation Act. The r e s u l t i s that any i l l u s i o n s of independence from the federal system must be tempered by the r e a l i t y of the consequences of adoption of l e g i s l a t i o n by reference. Quebec In 1972 Quebec rewrote i t s Taxation Act and eliminated a l l references to the Income Tax Act (Canada) from i t s Act. Nevertheless, the d e f i n i t i o n of tax base and computation of taxable income are s i m i l a r to those of the federal government. Therefore any change to the federal l e g i s l a t i o n has an e f f e c t on Quebec's corporate income tax structure. This effect occurs i n one of two ways. If a section of the federal Act i s made applicable by Quebec's Regulation Respecting the Taxation Act and that section i s amended, obviously that amendment w i l l automatically apply in Quebec by v i r t u e of the adoption of the o r i g i n a l section. What is more i n t e r e s t i n g i s the other e f f e c t of federal amendments on the Taxation Act. If a federal section i s not adopted but rather i s rewritten in the Quebec Act without any reference to i t s o r i g i n s , then any federal amendment w i l l not a l t e r the federal provision. However, i f Quebec wishes to keep in harmony with the federal system i t must make a corresponding amendment to i t s l e g i s l a t i o n . Thus, a conscious decision must be made on whether or not to follow the federal government's p o l i c y changes. 45 This presents an i n t e r e s t i n g s i t u a t i o n . On the one hand we have the p o l i t i c a l r h e t o r i c that espouses autonomy and independence for the Quebec corporate income tax system. On the other hand we have the convenience and expediency of following i n the federal government's footsteps and thereby preserving some elements of harmony between the two systems. Perhaps t h i s dilemma was best expressed i n 1965 i n the Quebec Report of the Royal Commission on Taxation. That Commission recommended that "unless there are sp e c i a l reasons, Quebec and federal l e g i s l a t i o n governing taxes shared „ 24 j o i n t l y by both sectors of government should be in agreement . The Report then continued by q u a l i f y i n g the recommendation in t h i s way: This recommendation should not be interpreted to mean that the Quebec Government must s l a v i s h l y and b l i n d l y follow federal l e g i s l a t i o n . On the contrary, Quebec should even break new ground i f need be and have i t s viewpoint admitted by the other governments as i t has done i n other f i e l d s . In addition, i t should not hesitate to l e g i s l a t e d i f f e r e n t l y from other governments i f required to do so by economic or s o c i a l circumstances.25 2 6 As has been indicated e a r l i e r , Quebec has l e g i s l a t e d some uniquely Quebec touches in the corporate income tax f i e l d . Yet, generally i t can be said Quebec has amended i t s l e g i s l a t i o n to conform with the federal amendments. In fa c t since 1977 the Minister of Revenue for Quebec has each year made a " m i n i s t e r i a l declaration" to the Quebec National Assembly o u t l i n i n g the amendments to be made to the Taxation Act as a re s u l t of federal amendments to the Income Tax Act (Canada). These declarations have been made i n respect of amendments "to harmonize the taxation systems of Ottawa and Quebec." 2 7 That language must surely be of comfort to corporate taxpayers and federal o f f i c i a l s a l i k e . 46 Thus Quebec has maintained some degree of harmony between i t s Taxation Act and the Income Tax Act (Canada) by amending i t s Act to incorporate changes made to the federal Act. Nevertheless, because such incorporation i s not automatic i t would be very easy for Quebec to diverge from federal p o l i c i e s . A l l that would be required would be no action on the part of Quebec after the f e d e r a l law i s changed. The s i t u a t i o n i s a tenuous one to say the least. Ontario and A l b e r t a Both Ontario and Alberta incorporate a l l future federal amendments to the 28 Income Tax Act (Canada) automatically. Certainly the j u s t i f i c a t i o n s for t h i s approach are many and varied. Because t h e i r systems are so close to the federal one i t seems reasonable and expedient that any change to the federal system become a change to the p r o v i n c i a l one. The corporate taxpayer i s only faced with digesting one set of changes to the law. The work of the respective p r o v i n c i a l o f f i c i a l s i s lessened since they do not have to plan and propose the amendments. Any double taxation that might ari s e i f the amendments were not incorporated does not a r i s e . But, for every advantage there i s a disadvantage. From a p r o v i n c i a l point of view, the most obvious disadvantage i s t h e i r non-participation i n the p o l i c y discussions and decisions that lead up to the changes. Proposed changes to the Income Tax Act (Canada) are t r a d i t i o n a l l y announced in the federal Budget and p r o v i n c i a l p a r t i c i p a t i o n 47 in the processes leading up to the Budget i s limited. The rationale was explained t h i s way in respect of the period between 1972 and 1976: ; F i r s t , the concept of Budget secrecy demanded that there be no consultation with respect to most issues. Second, even i f consultation could take place, i t would have been impossible to obtain a consensus on a l l changes. 2 9 Nothing appears to have changed since that date. Federal-provincial co-operation has been limited to rather strained formal discussions at the p o l i t i c a l l e v e l . What i s r e a l l y needed i s more co-operation at a less exalted l e v e l . Federal and p r o v i n c i a l o f f i c i a l s should be in a p o s i t i o n to discuss and plan together changes that a f f e c t both j u r i s d i c t i o n s and are of mutual concern. The Tax L e g i s l a t i v e Process Committee of the Canadian Tax Foundation has recommended more f e d e r a l - p r o v i n c i a l communication i n t h i s area. In i t s report submitted to the federal Minister of Finance i n 1977 i t stated that " i n the f e d e r a l - p r o v i n c i a l context, the present procedures i n h i b i t co-ordination of the taxing p o l i c i e s . of the respective .. . n30 authorities . Therefore, i n pr a c t i c e , the federal government d i r e c t l y affects Ontario and Alberta's corporate income tax p o l i c y and l e g i s l a t i o n . It i s not merely influence but takes the more substantive form of amendment to the p r o v i n c i a l l e g i s l a t i o n . If Ontario or Alberta do not wish to follow the federal i n i t i a t i v e s they have to amend t h e i r l e g i s l a t i o n . That i n i t s e l f i s a time-consuming, c o s t l y exercise that also involves p o l i t i c a l and public debate. Therefore, both provinces have tended to accept the federal 48 amendments. Any changes they have made to t h e i r l e g i s l a t i o n have been i n the form of the addition of new p r o v i n c i a l incentives and programs. • Automatic adoption of federal amendments to the Income Tax Act (Canada) also presents problems for the corporate taxpayer. Obviously, when consulting the p r o v i n c i a l l e g i s l a t i o n the taxpayer must be aware of any recent changes to the federal l e g i s l a t i o n that has been adopted p r o v i n c i a l l y . However, of more serious concern to the taxpayer i s the retrospective nature of the federal amendments. Two issues a r i s e here. F i r s t , because there i s u s u a l l y a lengthy gap in time between announcement in the federal Budget of the proposed changes and enactment of those changes, the taxpayer i s l e f t i n an uncertain p o s i t i o n as to the status of the changes. Then when and i f they are enacted i t i s done r e t r o a c t i v e l y to the date of t h e i r announcement. Second, the retroactive nature of the federal amendments i s adopted p r o v i n c i a l l y . There i s no le g a l b a r r i e r to retroactive l e g i s l a t i o n . " ^ The objections to such l e g i s l a t i o n are based on a d i s t a s t e for the imposition on a taxpayer of legal requirements or consequences for a period of time when the taxpayer was not aware of those requirements or consequences. Automatic adoption of amendments to the Income Tax Act (Canada) means automatic adoption of the retrospective 32 aspects of that l e g i s l a t i o n . Automatic adoption of federal amendments to the Income Tax Act (Canada) raises an issue that s t r i k e s at the foundation of Quebec, Ontario and Alberta's corporate income tax systems. A l l three provinces claim control over t h e i r own systems. When Alberta's new corporate tax l e g i s l a t i o n 49 received second reading in the Alberta Legislature on May 13, 1980, the P r o v i n c i a l Treasurer asserted that Alberta : £w| ould in e f f e c t acquire control over our own p r o v i n c i a l corporate destiny. We would be able to have as one of the basic levers for economic d i v e r s i f i c a t i o n t h i s very c r u c i a l tool of control 33 over our own corporate tax act. Quebec and Ontario have both expressed similar sentiments about t h e i r corporate income tax systems. The question is does enactment of l e g i s l a t i o n that i s either altered d i r e c t l y or, in the case of Quebec i n d i r e c t l y , by the federal government r e a l l y give the three provinces the control over t h e i r systems that they so vociferously claim they want? The answer has to be no. The appearance of independence i s there but the mechanics of i t are not. What i s there are a l l the problems associated with l e g i s l a t i o n based on one system and t a i l o r e d to f i t another without breaking a l l t i e s with the o r i g i n a l system. The only consolation for the corporate taxpayer i s that t h i s i s more to his advantage than a t o t a l departure from the federal system. 50 C H A P T E R I I - F O O T N O T E S 1 Regulation respecting the Taxtion Act, O.C. 1981-80, Quebec Gazette. 2 See generally, E.A. Driedger, The Composition of L e g i s l a t i o n (1976) at 124-126; G.V. LaForest, Delegation of L e g i s l a t i v e Power i n Canada (1975) 21 McGill L.J. 131, at 138; E.A. Driedger, The Interaction of Federal and P r o v i n c i a l Laws (1976) 54 Can. B. Rev. 695, at 708. 3 Horace Read, Is Referential L e g i s l a t i o n Worth While? (1940) 18 Can. B. Rev. 413, at 416. . 4 See, Jacques Raymond, Quebec Tax Developments. Report of the  Proceedings of the Twenty-fifth Tax Conference (1973), Canadian Tax Foundation, 539-540. 5 E.A. Driedger, The Composition of L e g i s l a t i o n (1976) at 126. 6 K. Lysyk, Consti t u t i o n a l Law - The Inter-Delegation Doctrine: A Constitutional Paper Tiger (1969) 47 Can. B. Rev. 271 at 175; see LaForest, supra, note 2, at 138; see Read, supra, note 3, at 444. 7 The Corporations Tax Act, R.S.O. 1980, c.97, s. 1(6); The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17 s. l ( l ) ( e ) . 8 (1953) 4 D.L.R. 440. 9 (1963) 1 O.R. 232. 10 Ibid at 236. 11 R v. Glibbery was approved by the Supreme Court of Canada in Attorney-General for Ontario v. Scott (1956) 1 D.L.R. (2d) 433 and Cough1in v. Ontario Highway Transport Board et a l (1968) S.C.R. 569. 12 See Attorney-General for Nova Scotia v. Attorney-General for Canada (1951) S.C.R. 31 where a scheme of inter-delegation between the federal government and the government of Nova Scotia was held i n v a l i d . 13 (1935) 2 W.W.R. 34. 14 E.A. Driedger, the Interaction of Federal and P r o v i n c i a l Laws (1976) 54 Can. B. Rev. 695, at 713. 15 M.A. Cohen, Tax S i m p l i f i c a t i o n - A Government Perspective, Report of  Proceedings of the Twenty-Seventh Tax Conference, (1975), Canadian Tax Foundation, 7. 51 16 Heward Stikeman, Tax S i m p l i f i c a t i o n , Report of Proceedings of the  Twenty-Seventh Tax Conference,(1975), Canadian Tax Foundation, 26-28. 17 For Ontario's rules of appli c a t i o n , see The Corporations Tax Act R.S.O. 1980, c.97, s . l ( 2 ) ( d ) . 18 See, for example, The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s 13(2). 19 The Corporations Tax Act, R.S.O. 1980, c.97, s.12. 20 See, for example, The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 85(1), (2), (3), (4) and (4.1). Ontario does not contain any general t r a n s i t i o n a l provisions because i t has been i n force so long and they have been removed on successive revisions of the Ontario statutes. 21 See, for example, The Corporations Tax Act, R.S.O. 1980, c.97, ss. 33(4) and 35(5) for s p e c i f i c t r a n s i t i o n a l provisions respecting small businesses. 22 An Act to amend The Alberta Corporate Income Tax Act, S.A. 1981, c.34. 23 Supra, note 1. 24 Report of the Royal Commission on Taxation, (Government of Quebec, 1965) at 85. 25 Ibid 26 See, pages 20-21. 27 J. Parizeau, M i n i s t e r i a l Declaration concerning the concordance of Federal and P r o v i n c i a l Taxation Systems and the adoption of certain  f i s c a l measures, December 21, 1978. 28 The Corporations Tax Act, R.S.O. 1980, c.97, s. 1(6); The Alberta Corporate Income Tax Act, R.S.A. 1981, c. A-17 s . l ( l ) ( e ) . 29 A. Drache, Introduction to Income Tax Pol i c y Formulation: Canada 1973-76 (1978) 16 Osgoode H a l l L.J. 1, at 7. 30 The Tax L e g i s l a t i v e Process (1978) 26 Can. Tax J.157 at 162. It would appear that nothing has changed since that report was issued i n 1977. The Committee on the Budget Process, Canadian Tax Foundation, commented that "since the submission of the Committee's report (in 1977), l i t t l e has been done to cure the d e f i c i e n c i e s outlined." See, On Opening Up the Budget Process: A Report to the Hon. Al l e n J. MacEachen, Minister of Finance (1982) 30 Can. Tax J. 161. 31 E.A. Driedger, Retroactive, retrospective r e f l e c t i o n s (1978) 56 Can. B. Rev.264. 52 32 See, for examples of s p e c i f i c items affected adversely by the r e t r o a c t i v i t y of federal l e g i s l a t i o n , D.R. Huggett, The Budget Process and Income Tax Changes, Report of the Proceedings of the Twenty-Ninth  Tax Conference, (1977), Canadian Tax Foundation, 3?.-33. 33 Hon. L. Hyndman, P r o v i n c i a l Treasurer.Alberta Hansard,May 13, 1980, at 942. 53 CHAPTER III PROBLEMS PRESbNTED BY DIFFERENCES BETWEEN FEDERAL AND PROVINCIAL LEGISLATION A. Introduction The problems presented by p r o v i n c i a l adoption of the provisions of the Income Tax Act (Canada) have been examined. This chapter looks at the other side of the coin. It analyses the issues and problems that a r i s e from the decision of Quebec, Ontario and Alberta to diverage from the federal p o l i c i e s and l e g i s l a t i o n i n the levying and c o l l e c t i o n of corporate income tax. The problems are more obvious than those associated with the adoption of federal l e g i s l a t i o n . Double taxation of the corporation i s a legal r e a l i t y i n Canada. The taxing province may also suffer because of the difference between i t s l e g i s l a t i o n and that of other provinces and the federal government. The corporate taxpayer may be able to use thes differences to i t s advantage r e s u l t i n g i n tax avoidance and less revenue for the province. The problem has been described as one of "multiple taxation, excessive taxation and undertaxation. It can be said that a c r i t i c of both p r o v i n c i a l adoption of the federal income tax l e g i s l a t i o n and p r o v i n c i a l divergence from the federal l e g i s l a t i o n w i l l never be s a t i s f i e d with any p r o v i n c i a l corporate income tax system because these two approaches are the only ones open to the provinces. This i s not so. There i s a t h i r d a l t e r n a t i v e open to the provinces and that i s a combination of the two approaches. Unfortunately, the combination enacted by the non-agreeing provinces encompasses the worst and not the best of each approach. e 54 P r o v i n c i a l adherence to a system that i s either t o t a l l y based on the federal l e g i s l a t i o n or t o t a l l y p r o v i n c i a l i n character would, obviously, be a more consistent approach. The agreeing provinces have taken the former p o s i t i o n levying corporate income tax as a percentage of taxable income under the federal Act. The non-agreeing provinces have not taken the l a t t e r p o s i t i o n . Instead, they have f a l l e n somewhere between two stools and have made no more than a rather feeble attempt to e s t a b l i s h t h e i r own corporate income tax systems. The r e s u l t i s that a l l the disadvantages of an independent course are there and yet, in r e a l i t y , independence from the federal system has not been achieved. This chapter w i l l examine the results of p r o v i n c i a l divergence from the Income Tax Act (Canada) under four headings. They are based on Divisions a to e of Part 1 of the Income Tax Act (Canada) and are l i a b i l i t y for income tax, computation of income, computation of taxable income and computation of tax payable. B. L i a b i l i t y f or Income Tax The Income Tax Act (Canada) imposes corporate income tax on the taxable 2 income of every corporation resident in Canada. Ontario and Alberta levy 3 corporate income tax on the basis of permanent establishment and Quebec 4 levies i t on the basis of establishment. These basic charging sections are supplemented by provisions dealing with non-resident corporations. There i s no doubt that i t i s i n the area of taxation of non-resident corporations that the l e g i s l a t i o n of the agreeing provinces d i f f e r s most 55 s u b s t a n t i a l l y from that of the federal government. In addition, each of the agreeing provinces treats non-resident corporations i n a d i f f e r e n t manner from the other agreeing provinces. Before examining the d i f f e r e n t d e f i n i t i o n s of permanent establishment and establishment, a description of the statutory provisions respecting non-resident corporations i s i n order. Alberta has not changed the scope of i t s l i a b i l i t y for income tax provisions since i t s days as an agreeing province. Therefore, i t s t i l l does not tax non-resident corporations unless they have a permanent establishment i n Alberta. The seven agreeing provinces also do not tax non-resident corporations unless they have a permanent establishment. The Income Tax Act (Canada) imposes an income tax on non-resident corporations which carry on business i n Canada or which dispose of taxable Canadian property."' This imposition i s , however, d i r e c t l y affected by the tax t r e a t i e s that Canada enters with other j u r i s i d i c t i o n s and therefore not a l l non-resident corporations are taxed i n Canada. Quebec levies corporate income tax on non-resident corporations that have an establishment i n Quebec and on those non-resident corporations that do 7 not have an establishment but that do dispose of taxable Quebec property. An example of the former would be a corporation deemed under section 3 of The Taxation Act to have an establishment in Quebec because i t carries on business through an employee or agent. The corporation could be a non-resident and s t i l l caught by the extended establishment rules. As with taxation by the federal government, treaty provisions provide an exception to these rules. Quebec does not tax a non-resident corporation that i s exempt from tax pursuant to a treaty entered into with the federal 56 government. The problems that the corporate taxpayer incurs i n Quebec revolve around Quebec's extended d e f i n i t i o n of establishment. Lf a non-resident corporation has a permanent establishment i n an agreeing province and i s also caught by Quebec's extended d e f i n i t i o n then the federal government may well not grant that corporation the federal abatement i n respect of the tax paid to Quebec on the basis that i t does not recognise the extended d e f i n i t i o n of establishment. This issue w i l l be examined i n more d e t a i l when a close look i s taken at the p r o v i n c i a l d e f i n i t i o n s of permanent establishment and establishment. Ontario takes the broadest approach p r o v i n c i a l l y to taxation of non-resident corporations. It taxes corporations incorporated i n a j u r i s i d i c t i o n outside Canada with which Canada does not have a tax treaty i f the corporation has a permanent establishment i n Ontario, received income from the sale or renta l of r e a l property, timber resource property Q or a timber l i m i t i n Ontario or disposed of taxable Canadian property. Much more i n t e r e s t i n g , however, i s the treatment afforded non-resident 9 corporations from a j u r i s d i c t i o n with which Canada does not have a treaty. They receive rather harsh treatment from Ontario. U n t i l recent amendments a non-resident corporation from a treaty j u r i s d i c t i o n that disposed of taxable Canadian property was l i a b l e for Ontario tax. That provision was repealed as part of Ontario's 1981 b u d g e t N e v e r t h e l e s s , two types of non-resident but treaty j u r i s i d i c t i o n corporations are s t i l l taxed by Ontario. They are the corporation with a permanent establishment i n Ontario and the corporation that receives income from the rental of r e a l property, timber resource property or timber l i m i t or from a royalty or timber royalty on that property and that has elected to f i l e an income tax return with the federal government. The tax on these corporations i s levied i n accordance with the rules provided by section 115 of the Income Tax Act (Canada) respecting a non-resident taxable income in Canada. Non-resident corporations with a permanent establishment i n Ontario or receiving rent or r o y a l t i e s may well have an argument that they are being treated rather shabbily by Ontario because, pursuant to the tax t r e a t i e s , they are not taxable i n any other province or by the federal government. Because a l l three non-agreeing provinces base t h e i r taxation of corporations on permanent establishment or establishment, i t would be useful for the corporate taxpayer i f the terms had the same meaning in each j u r i s i d i c t i o n . Unfortunately, t h i s i s not so. There are three d i f f e r e n t versions of permanent establishment or establishment. Alberta and the agreeing provinces have adopted the federal d e f i n i t i o n of permanent establishment. In Alberta's case the d e f i n i t i o n i s repeated i n the Alberta 12 l e g i s l a t i o n . Quebec and Ontario have both followed a d i f f e r e n t path and each j u r i s d i c t i o n has expanded the d e f i n i t i o n so that i t i s s i g n i f i c a n t l y 13 d i f f e r e n t from the federal d e f i n i t i o n . The expanded d e f i n i t i o n s increase the tax burden for both non-resident and resident corporations by bringing them into the net of Ontario and Quebec taxation. As far as non-resident corporation i s concerned, section 5(8) of Ontario's l e g i s l a t i o n catches non-resident corporations that roduced, grew, mined, created, manufactured, fabricated, improved, packed, preserved or constructed i n whole or in part anything i n Canada, whether or not the corporation exported 58 that thing without s e l l i n g i t p r i o r to exportation. Quebec's l e g i s l a t i o n provides a v a r i a t i o n on t h i s theme as i t encompasses non-resident corporations that operate a mine, produce, process, preserve, pack or b u i l d goods or products i n whole or i n 14 part, or produce or pres.ent a publ i c a t i o n . These provisions can have an adverse e f f e c t on the corporate taxpayer. Take the example of a non-resident corporation that packs goods i n Ontario for sale elsewhere and that i s a resident of a non-treaty j u r i s d i c t i o n . That corporation w i l l be denied the federal abatement in respect of p r o v i n c i a l tax paid and therefore be subject to double taxation. It works t h i s way. The corporation w i l l pay tax f e d e r a l l y as a non-resident corporation from a non-treaty j u r i s d i c t i o n but Ontario w i l l also levy corporate income tax on the basis of i t s expanded d e f i n i t i o n of permanent establishment. Meanwhile, the federal government w i l l not recognise the expanded d e f i n i t i o n and therefore w i l l not grant the abatement i n respect of p r o v i n c i a l tax paid. If the corporation packed i t s goods i n any province other than Ontario or Quebec i t would not pay a p r o v i n c i a l corporate income tax and the problem would not a r i s e . The corporation that i s caught by the expanded d e f i n i t i o n and subject to double taxation has one option, other than re l o c a t i n g to another province, l e f t open to i t . It can apply to the federal government for a remission order i n respect of the denied federal abatement. Those orders issued by the Governor i n Council, on the recommendation of the Treasury Board, under the Fi n a n c i a l Administration Act have, i n the past, returned taxes paid to individuals subject to double Whether or not such an order corporation i s another questio Canada. 59 taxation i n th i s kind of si t u a t i o n , would be issued i n respect of a' L that can only be answered by Revenue The Canadian resident corporation also faces d i f f i c u l t i e s because of discrepancies i n the p r o v i n c i a l a l l o c a t i o n r u l e s . Ontario i s the only province that extends i t s d e f i n i t i o n of permanent establishment to include the province i n which the head o f f i c e , as designated i n the corporation's charter or by-laws i s situated.^" 6 U n t i l a recent amendment, t h i s provision presented problems i n the al l o c a t i o n of taxable income.^ A corporation that had a head o f f i c e i n Ontario by vi r t u e of section 5(11) and yet ca r r i e d on a l l i t s day to day operations i n another province would be taxable i n both Ontario and the other province. Yet, once again the federal government presumably would not grant an abatement i n respect of the Ontario tax paid and the other province would expect a l l the taxable income of the corporation to be allocated to i t . In 1981 Ontario made a major change to section 5(11) when i t r e s t r i c t e d i t s . operation to the instance where the corporation does not have any other permanent 18 establishment i n Canada. This severely l i m i t s the operation of the subsection since one would not expect to fi n d many corporations without a permanent establishment i n Canada under the federal rules but with a head o f f i c e i n Ontario. Perhaps t h i s move by Ontario i s an ind i c a t i o n of changing times and attitudes towards i n t e r - p r o v i n c i a l and f e d e r a l - p r o v i n c i a l co-operation i n the d i f f i c u l t area of what should constitute a permanent establishment. 60 There has been another recent s i g n i f i c a n t event that may well have heralded improved i n t e r - p r o v i n c i a l relations i n the administration of, . but not the content of, p r o v i n c i a l corporate income tax l e g i s l a t i o n . On June 18, 1979 Quebec and Ontario entered several agreements respecting exchanges of information i n the tax area between the two 19 provinces. These agreements refer d i r e c t l y to issues raised by the d e f i n i t i o n s of permanent establishment and establishment. While they do not dwell on the differences i n the d e f i n i t i o n s they do c l a r i f y how c e r t a i n parts of the d e f i n i t i o n s should be interpreted. For example, Ontario and Quebec had encountered d i f f i c u l t y i n agreeing on what was an " o f f i c e " for the purposes of the d e f i n i t i o n . The agreement resolves t h i s issue by s t a t i n g that the two provinces w i l l adopt the federal interpretation contained i n Interpretation B u l l e t i n IT-177R. As far as the corporate taxpayer i s concerned, t h i s kind of i n t e r - p r o v i n c i a l co-operation i n the administration of corporate income tax l e g i s l a t i o n i s welcome. Nevertheless, i t does not go far enough. As can be seen from the problems with the d e f i n i t i o n s of permanent establishment, a l l the co-operation i n the world on administrative matters does not help i f the content of the l e g i s l a t i o n varies from province to province. U n t i l there i s more uniformity in the l e g i s l a t i o n and e s p e c i a l l y the c a l c u l a t i o n of taxable income, double taxation and the n o n - a v a i l a b i l i t y of the federal abatement w i l l continue to be a hardship endured by the corporate taxpayer. 61 C. Computation of Income The f i r s t factor in the c a l c u l a t i o n of tax payable, both f e d e r a l l y and p r o v i n c i a l l y , i s the computation of income of a corporation. Alberta's computation of income provisions p a r a l l e l those of the Income Tax Act (Canada). The only difference of any note i s the adaptation of subsections 87(2) and 88(1) of the Income Tax Act (Canada) respecting amalgamation and winding up of a corporation to 20 the c a l c u l a t i o n of the Alberta royalty tax deduction account. It i s when examining Quebec and e s p e c i a l l y Ontario's method of computing income that a d i s t i n c t departure from the federal l e g i s l a t i o n i s v i s i b l e . Quebec's l e g i s l a t i o n d i f f e r s from the Income Tax Act (Canada) i n only two respects i n t h i s area. They involve the c a l c u l a t i o n of a business investment loss on the sale of shares of a c o n t r o l l e d corporation and c e r t a i n deductions for the resource 21 industry. On the other hand, Ontario has- enacted major changes i n the computation of income and i t s l e g i s l a t i o n operates i n a rather d i f f e r e n t manner from that of the federal government and the seven agreeing provinces and Alberta. 22 Ontario adopts by reference subdivisions a and b of D i v i s i o n B of Part 1 of the Income Tax Act (Canada). It i s i n t e r e s t i n g to note that neither Alberta nor Quebec adopt by reference or otherwise subdivision a of D i v i s i o n B of Part 1 i n respect of corporations. Subdivision a deals with income or loss from an o f f i c e or employment. Alberta does not adopt the subdivision at a l l and Quebec rewrites i t to refer to income or loss to an i n d i v i d u a l . The question becomes, can a 62 corporation have an income or loss from an o f f i c e or employment? Presumably, Ontario would answer that question p o s i t i v e l y while Quebec' and Alberta would answer i n the negative. Subdivision a i t s e l f appears to contemplate a p o s i t i v e answer since i t refers to income or 23 loss of a "taxpayer" and corporations. It may be that Ontario takes the view that a corporation can be an employee and i s attempting to bring into the ambit of i t s l e g i s l a t i o n those personal service corporations that receive some of the benefits outlined i n section 6 of the Income Tax Act (Canada) i n t h e i r capacity as employees. While th i s issue would only affect a small number of one man corporations i t could r e s u l t i n a s i g n i f i c a n t p r o v i n c i a l tax burden to those corporations that operate in Ontario. It c e r t a i n l y i s a major difference in treatment of those corporations from that afforded by a l l other provinces. Ontario also includes in income several items that are not included in income f e d e r a l l y or by any other province. These include l o c a l items such as payments received under the Ontario Beef Calf S t a b i l i z a t i o n 24 Program. A minor v a r i a t i o n of the federal provisions require a corporation to include i n income imputed interest on loans made by i t to non-residents, whether or not tax has been paid under Part XIII of 25 the Income Tax Act (Canada). An i n c l u s i o n in income of a more important nature i s to be found i n section 12(6) of The Corporations Tax Act. That subsection requires that five-fourteenths of certain payments made to non-residents with whom the payer i s not dealing at arms length be included in the income of the payer corporation. These payments include: 63 (a) a management or administration fee or charge; (b) a rent, royalty or a s i m i l a r payment; use of motion picture for use i n connection been or are to be The i n c l u s i o n i n income i s only to be made i f federal withholding tax i s 27 exi g i b l e under section 212 of the Income Tax Act (Canada). Once again, Ontario i s l e g i s l a t i n g i n an area previously the sole domain of the federal government, that is taxation a f f e c t i n g non-resident corporations. On the deduction side of computation of income, Ontario again d i f f e r s from the federal law in several respects. Slight changes are made to the rules 28 pertaining to 'deductions i n respect of c a p i t a l cost of property and i n the resource area. Mining corporations are i n e l i g i b l e for a resource 29 allowance deduction based on resource p r o f i t s . A benefit to the corporate taxpayer i s to be found i n section 12(7)(c) which expands a federal deduction to permit a corporation to deduct property taxes and int e r e s t expenses i n respect of land held i n inventory for resale and 30 development. In an age of high in t e r e s t rates, such a deduction i s of considerable value to a corporation. However, Ontario's l e g i s l a t i o n also denies the corporate taxpayer a p r o v i n c i a l deduction i n respect of cer.tain items deductible f e d e r a l l y and i n the agreeing provinces. Section 12(8) operates to proh i b i t a corporation from deducting a reserve under paragraph 20(1)(n) of the Income Tax Act (Canada) for p r o v i n c i a l purposes i f the corporation has "sold, pledged, assigned or in any way disposed of any (c) a right i n or to the f i l m or films or video tapes with t e l e v i s i o n that have reproduced i n Canada. 64 ,,31 s e c u r i t y received by i t as payment for the property sold and for which a reserve was previously claimed. , The purpose of l i s t i n g these differences between the federal computation of income rules and those of Ontario i s to show that while the differences may not appear i n d i v i d u a l l y to be of any great import, taken as a whole they do present the corporate taxpayer with problems. They represent a marked departure from the f a m i l i a r federal provisions applied to p r o v i n c i a l tax i n a l l other provinces. In addition, while the number of corporations affected by the differences may not be many, once the differences do apply to a corporation t h e i r e f f e c t can make a considerable difference i n the amount of income attributable to that corporation for a taxation year. There i s one item in the computation of income that i s treated i n d i f f e r i n g ways by Canada, Ontario and Quebec. That item i s the c a l c u l a t i o n of c a p i t a l cost allowances. Alberta, by virtue of adopting a l l the regulations made under the Income Tax Act (Canada) incorporates Part XI of the federal regulations. That Part provides the method of c a l c u l a t i n g the c a p i t a l cost allowance i n respect of the d i f f e r e n t classes of property for the purposes of a deduction under paragraph 20(l)(a) of the Income Tax Act (Canada). Quebec and Ontario have taken a d i f f e r e n t approach. While both provinces have enacted l e g i s l a t i o n that follows the general p r i n c i p l e s of the federal l e g i s l a t i o n , the d e t a i l s are d i f f e r e n t . Ontario acknowledges those differences i n Information B u l l e t i n No. 10-78R which says: 65 Both Ontario and the federal authorities use the same classes of assets and c a p i t a l cost allowance rates, except for Ontario grain storage : f a c i l i t i e s . The amount of C C A . deducted i n 32 Ontario may d i f f e r from that at the federal l e v e l . That difference was f i r s t permitted by Ontario Regulation 504/77, f i l e d on July 14, 1977. That regulation allowed corporations to claim a d i f f e r e n t amount or d i f f e r e n t proportion of c a p i t a l cost allowance for Ontario purposes than for federal purposes. The corporations to benefit from t h i s are those that do not wish to claim the f u l l allowance at the federal l e v e l for a taxation year because i t i s not to t h e i r advantage to do so but that do wish to claim the f u l l amount at the Ontario l e v e l . Meanwhile i n Quebec, corporate taxpayers have never been required to claim the same 33 amount of c a p i t a l cost allowance in Quebec that they claim f e d e r a l l y . There i s no doubt that a corporation can use the differences i n the federal rules and those of Ontario and Quebec to i t s advantage. The claimable amount can be larger i n Ontario and Quebec and t h i s i n i t s e l f may persuade c e r t a i n corporations to relocate to one of the non-agreeing provinces. Those provinces can use the c a p i t a l cost allowance rules to encourage ce r t a i n types of corporations to move to the province. Because the technical rules are l e g i s l a t e d by regulations and not statute they can be changed quickly and with no p o l i t i c a l debate. Yet the substantive differences between the federal rules and those of Ontario and Quebec presented both those provinces with a problem. While immigrating corporations from the agreeing provinces were carrying over the undepreciated c a p i t a l cost of t h e i r c a p i t a l property, as calculated for federal purposes, into Ontario and Quebec corporations that moved between 6 6 Ontario and Quebec were not. They were claiming the f u l l h i s t o r i c a l cost of t h e i r depreciable property rather than the undepreciated c a p i t a l cost. The state of a f f a i r s led to both Ontario and Quebec enacting l e g i s l a t i o n to stop corporations moving between the two provinces from claiming the f u l l 34 h i s t o r i c a l value of t h e i r assets for c a p i t a l cost allowance purposes. The l e g i s l a t i o n deemed the immigrating corporation to have claimed for p r o v i n c i a l purposes the c a p i t a l cost allowance i t claimed under the Income Tax Act (Canada) p r i o r to i t s immigration into the province. Yet, t h i s did not solve a l l the problems associated with a corporation moving from Ontario to Quebec or vice-versa and the c a l c u l a t i o n of i t s c a p i t a l cost allowance. An excellent example of the problems incurred in such a 35 s i t u a t i o n i s given by Richardson i n his a r t i c l e . He i l l u s t r a t e s how the corporation could lose p o t e n t i a l l y claimable c a p i t a l cost that would, but for the move, have been used to reduce income i n the o r i g i n a l province of residence. In addition there can be recapture problems for the corporation that s e l l s the depreciable property before taking any further c a p i t a l cost allowance i n the new province. As Richardson comments, such results can be extremely c o s t l y to corporations and careful planning must be done before such a move i s executed.^ Therefore, in conclusion, three points should be made. F i r s t , corporations in Quebec and Ontario have a d i s t i n c t advantage over t h e i r counterparts in the agreeing provinces because they can claim a d i f f e r e n t amount of c a p i t a l cost allowance p r o v i n c i a l l y than f e d e r a l l y . Secondly, those corporations are not encouraged to leave Ontario or Quebec because on departure t h e i r base for claiming c a p i t a l cost allowance i n t h e i r new province of residence reverts to the federal base. T h i r d l y , there may well be a tax disadvantage to a corporation that moves i t s permanent establishment from Ontario to Quebec or vice versa. D. Computation of Taxable Income Computation of taxable income i s a c a l c u l a t i o n that i s made i n a d i f f e r e n t manner in each of the three non-agreeing provinces. Alberta adopts section 110 to 113 of the Income Tax Act (Canada) unchanged and thereby incorporates the deductions provided by section 110 and those respecting losses and dividends i n sections 111 to 113. Ontario and Quebec have used the federal provisions as a framework for computation of taxable income but have reworked the d e t a i l s to provide deductions and rules that are peculiar to those provinces. An example of Ontario and Quebec's reworking of the federal rules can be seen i n the computation of taxable income of the non-resident corporation. Quebec taxes a non-resident corporation that does not have an establishment 37 i n Quebec on the d i s p o s i t i o n of taxable Quebec property. Therefore, i t does not include i n taxable income a l l the items l i s t e d i n section 115 of the Income Tax Act (Canada) although the d e f i n i t i o n of "taxable Quebec property" i s very s i m i l a r to the d e f i n i t i o n of "taxable Canadian property". Ontario meanwhile takes a substantively d i f f e r e n t approach. That province adopts section 115 of the Income Tax Act (Canada) but expands i t s 39 operation to include events not brought within the federal Act. Once 68 again Ontario i s much more aggressive i n i t s taxation of the non-resident corporation than any other province. : Ontario includes i n taxable income earned by a non-resident any income from the sale or rental of re a l property i n Canada. Ontario also, e f f e c t i v e 1981 and future tax years, w i l l not tax c a p i t a l gains r e a l i z e d on the di s p o s i t i o n of taxable Canadian property i n Ontario i f the proceeds were not taxed, because of a tax treaty, by the federal government. Nevertheless, i f a non-resident corporation from a j u r i s d i c t i o n with which Canada does not have a tax treaty owns r e a l property i n Canada and rents that property out, tax w i l l be e l i g i b l e i n Ontario. Again, on sale of that property, any c a p i t a l gain w i l l be taxable. Another area where Ontario has diverged from the federal law i s i n the deduction from taxable income of e l e c t i o n contributions to Ontario p o l i t i c a l parties and candidates. Section 28(1) of The Corporations Tax Act permits t h i s deduction to be made by a corporation and t h i s i s in marked contrast to both the federal and Alberta l e g i s l a t i o n that gives a tax c r e d i t , that i s a deduction from tax payable, for p o l i t i c a l 4 contributions to the respective federal and Alberta parties and candidates. Quebec does not grant either a c r e d i t or deduction i n respect of p o l i t i c a l contributions made by a corporation, r e s t r i c t i n g the deduction 41 from tax payable to in d i v i d u a l s . A recent i n d i c a t i o n of p r o v i n c i a l d i s s a t i s f a c t i o n with the federal method of computing taxable income i s to be found i n Quebec's new rules respecting non-capital losses. It was announced i n the Quebec Budget speech on March 69 10, 1981, that a corporation would receive an option with respect to the tax treatment of non-capital losses. It could, for tax years a f t e r March 10, 1981, continue to have i t s losses treated i n the normal way as far as the carry forward of the loss i s concerned or i t could choose to claim a tax c r e d i t for the loss. The e x i s t i n g Quebec rules are s i m i l a r to those found i n section 111 of the Income Tax Act (Canada) and provide for a carry 42 forward of non-capital losses for f i v e years and a carry back for one year. The proposed tax c r e d i t i f claimed i n the year i n which the loss i s incurred w i l l be the lesser of (a) 3% of the loss net of carry backs for the previous year (which represents the r a t i o between business c a r r i e d on in Quebec during the taxation year in which the losses were incurred and businesses c a r r i e d on in Quebec and elsewhere i n the same year), and (b) a corporation's paid-up c a p i t a l tax for that 4 ~i year. If the c r e d i t i s claimed i n the f i v e year period immediately preceding the year the losses were incurred, the c r e d i t i s calculated according to the formula stated above but may not.exceed the corporation's t o t a l income tax and c a p i t a l tax payable for that year. This treatment of non-capital losses i s unique in p r o v i n c i a l taxation. Losses are normally deductible from a corporation's taxable income and not the subject of a refundable tax c r e d i t . Yet, i n Quebec, i f a corporation so elects i t may receive the tax c r e d i t . 4 4 Furthermore, Quebec now links the tax treatment of non-capital losses to the amount of paid-up c a p i t a l tax paid by the corporation i n a year. If the corporations paid-up c a p i t a l 70 tax i s less than 3 per cent of i t s non-capital losses then the corporation w i l l only receive a refund of the lesser amount of paid-up c a p i t a l 'tax. Therefore the corporation that has a higher paid-up c a p i t a l and thus pays more c a p i t a l tax w i l l receive the greater economic benefit from the tax c r e d i t . The existence of t h i s tax c r e d i t may well influence those corporations that have a high paid-up c a p i t a l but that anticipate losses to set up an establishment in Quebec so that at least part of those losses are allocable to Quebec f o r the purposes of obtaining the tax c r e d i t . Whether or not a corporation chooses to claim the tax c r e d i t or deduction treatment w i l l depend on the amount of i t s losses i n r e l a t i o n to the paid-up c a p i t a l tax paid by i t . Quebec and Ontario's treatment of non-capital losses d i f f e r s from the federal treatment i n one other important respect. Paragraph 186(1)(c) of the Income Tax Act (Canada) permits a corporation to deduct i t s non-capital losses from income used to determine Part IV tax payable. While the o f f s e t t i n g of losses against t h i s income i s an unusual practice because the rate of tax i s less than that payable under Part I, nevertheless losses can be and are u t i l i z e d i n t h i s manner. The provinces do not levy Part IV tax. Therefore both Quebec and Ontario omit from t h e i r l e g i s l a t i o n any reference to the use of losses i n t h i s manner. Thus, i t would appear that a corporation that uses up i t s non-capital losses against income on which Part IV tax i s payable may s t i l l carry forward these losses and use them as a deduction from income p r o v i n c i a l l y or, i n Quebec, to obtain a tax c r e d i t . 71 This i s an i n t e r e s t i n g anomaly allowing non-capital losses to be used i n a d i f f e r e n t manner against d i f f e r e n t kinds of income. : F i n a l l y , because the income of a corporation i s calculated i n a d i f f e r e n t way by two of the three non-agreeing provinces, the amount of income calculated for p r o v i n c i a l purposes can be d i f f e r e n t from that calculated for federal purposes. Therefore the amount of non-capital losses that a corporation w i l l wish to use against that income w i l l also vary for federal and p r o v i n c i a l purposes. The issue has been put t h i s way: ' This could have serious reprecussions i f such losses, otherwise available, expire without being f u l l y u t i l i z e d . Corporations should, however, by planning t h e i r other deductions (and adjusting c a p i t a l cost allowance claims) be able to avoid such r e s u l t s . The differences i n computation of taxable income outlined i n t h i s chapter are yet another example of the lack of harmony between federal and p r o v i n c i a l income tax treatment of corporations. The reason that they can be considered more c r u c i a l than those differences at the computation of income l e v e l i s that they are that b i t closer to tax payable. The amount of tax payable i s the bottom l i n e for every corporation. A reduction or increase i n taxable income due to d i s p a r i t i e s i n federal and p r o v i n c i a l l e g i s l a t i o n r e f l e c t s i t s e l f more d i r e c t l y i n the tax payable than a reduction or increase i n income. 72 E. Computation of Income Tax Payable It i s when income tax payable i s calculated that governments are able to o f f e r tax programs of the most stimulating economic nature. Any diminution of tax payable i s an obvious and e a s i l y c alculable reduction for the corporate taxpayer. Therefore i t i s at th i s stage that j u r i s d i c t i o n s introduce the various incentives to industry that are of such value to the corporate taxpayer. These incentives can take the form of tax rebates, tax 46 c r e d i t s , tax reductions or even d i f f e r e n t tax rates. "incentive" i s a term used in i t s broadest sense since the measures contemplated by i t range from a tax c r e d i t i n Alberta to builders of certain multiple unit r e s i d e n t i a l buildings to a s p e c i a l tax rate for small businesses granted by the federal government and a l l provinces except Prince Edward Island. P r o v i n c i a l tax incentives c l e a r l y contribute to j u r i s d i c t i o n shopping by corporations. This fact was acknowledged by the Parliamentary Task Force on Federal-Provincial F i s c a l Arrangements when, in i t s discussion of the value of incentives, i t sai d : No corporation w i l l long remain i n a j u r i s d i c t i o n in which the costs i n terms of taxation outweigh the benefits received i n the form of public goods and services 4 7 These incentives also add an element of tax competition to i n t e r - p r o v i n c i a l r e l a t i o n s h i p s . Whether t h i s competition i s benefical or detrimental to the corporate income tax system depends on whether you view the effect of the incentives as a corporate taxpayer or not. 73 To the corporate taxpayer the profusion of s p e c i a l incentives offered through a tax system can only be b e n e f i c i a l . In contrast to the problems a corporation encounters with d i f f e r e n t rules respecting computation of income and taxable income that can r e s u l t in double or excessive taxation, the incentives offered can only work to lower the tax burden of a corporation. The corporation can organise i t s a f f a i r s i n such a manner that i t makes the best use of the p a r t i c u l a r tax advantages offered by the incentive schemes of the p a r t i c u l a r j u r i s i d i c t i o n s . The c r i t i c s of t h i s 4 system, however, attack these incentives on the basis of t h e i r regionalism. They argue that such an approach does nothing to harmonize the Canadian tax system and adversely affects f e d e r a l - p r o v i n c i a l and i n t e r - p r o v i n c i a l 4 9 r e l a t i o n s . Perhaps the most r e a l i s t i c view of the issue i s that expressed by the Minister of Finance who said: prjhe introduction of special measures has altered the p r o g r e s s i v i t y of the combined federal and p r o v i n c i a l i n d i v i d u a l income tax system. It must therefore be assumed that the equity objective which was to be achieved by requiring uniform p r o g r e s s i v i t y now has a lower p r i o r i t y . 5 0 While t h i s comment was made i n the context of i n d i v i d u a l income tax, i t i s equally pertinent when considering corporate income tax. Certainly, j u s t i f i c a t i o n of the p r o l i f e r a t i o n of p r o v i n c i a l incentives as a result of a change in p r i o r i t i e s i s an easy way to avoid a d i r e c t confrontation with the provinces. An examination of the application of federal and p r o v i n c i a l incentives to the corporate taxpayer in the c a l c u l a t i o n of income tax payable should begin with Alberta. That province determines tax payable in a d i f f e r e n t 74 manner from Ontario, Quebec and the federal government. Alberta i s the only province to calculate amount taxable i n the province by making a 51 deduction from taxable income. It then levies a tax of 11 per cent of the amount taxable i n Alberta and provides for p r o v i n c i a l deductions from 5 2 that figure. The deduction at the computation of amount taxable stage i s in respect of any royalty tax paid by a corporation to the Crown. The royalty tax deduction results i n a corporation's amount taxable i n Alberta being i n i t i a l l y computed with reference to the corporation's t o t a l Canadian taxable income for the year and not j u s t the part that i s allocated to Alberta. The royalty tax deduction was o r i g i n a l l y introduced i n 1974 and was intended to o f f s e t the disallowance by the federal government of the 53 deduction of royalty payments to the Crown from taxable income. The deduction i s the amount of a corporation's a t t r i b u t e d Canadian royalty income for the year and that income is calculated with reference to r o y a l t i e s paid to the Crown and i n respect of which there i s no deduction under the Income Tax Act (Canada) or that are included i n income under that Act. The importance of the royalty tax deduction i s d i r e c t l y related to Alberta's contention that i t i s the undisputed owner of at least 85 per 54 cent of a l l petroleum and natural gas resources i n the province. The province enters leases with the producer corporations and c o l l e c t s r o y a l t i e s pursuant to those leases. Those corporations with a permanent establishment i n Alberta then receive a tax deduction i n respect of the r o y a l t i e s paid. Alberta's royalty tax deduction i s a clear example of a province granting tax r e l i e f to corporations to f i l l the vacuum l e f t by the federal reluctance to provide such r e l i e f . It i s also an example of a 75 p r o v i n c i a l deduction unique to one province. No other province has the petroleum and natural gas reserves that Alberta has. Therefore no other province needs to consider the s p e c i a l interests of the producers of those resources. Deductions from tax otherwise payable i n the form of tax credits are popular with corporate - taxpayers because they involve an immediate reduction i n the amount of tax payable rather than merely a reduction in the amount of one of the components used to calculate tax payable. The Income Tax Act (Canada) provides two d i f f e r e n t kinds of incentives by way of tax credits to corporations. These are incentives intended to encourage investment i n Canadian corporations and incentives of a more general nature that a s s i s t the d i f f e r e n t types of corporations. The former incentives 55 would include the investment tax c r e d i t and accelerated c a p i t a l cost allowances"^ while the l a t t e r group includes items such as the employment 57 58 tax c r e d i t , manufacturing and processing deduction, small business d e d u c t i o n , f o r e i g n tax d e d u c t i o n ^ and logging tax d e d u c t i o n ^ ( i ) Investment incentives A comparison of the federal incentive schemes with those of the provinces indicates that the provinces have used tax credits as an incentive to corporations in areas either l e f t untouched by the federal government or areas that the provinces consider not adequately dealt with by the federal government. This has led to obvious differences in the incentives offered by the agreeing provinces and non-agreeing provinces. The agreeing provinces have tended to leave the creation of incentives through taxation to the federal government but Alberta and e s p e c i a l l y Quebec and Ontario have used the f l e x i b i l i t y offered by t h e i r own l e g i s l a t i o n co o f f e r new and varied incentives to corporations. The federal investment tax c r e d i t permits a corporation to reduce i t s tax payable by an amount ranging from 5 per cent to 50 per cent of the c a p i t a l cost of c e r t a i n q u a l i f i e d or c e r t i f i e d property. This then reduces the c a p i t a l cost of property for the purpose of claiming the c a p i t a l cost allowance. Therefore the c r e d i t must be viewed i n conjunction with the accelerated write off for depreciable property provided by federal regulations 1100 and 1104. If the investment tax c r e d i t i s taken then the accelerated write o f f of the c a p i t a l cost of the property i s only available i n respect of that portion of the cost of the property not the subject of the tax c r e d i t . If the accelerated c a p i t a l cost depreciation i s taken, then the property may have been written o f f to such an extent that no investment tax c r e d i t i s available. As far as the effectiveness of these federal incentives i s concerned, i t has been said that "Canadian investment incentive p o l i c i e s have had an impact on the lev e l of investment expenditures, but the revenue losses associated with the p o l i c i e s casts a 62 cloud over t h e i r e f f i c a c y " . This view appears to be shared by the provinces who, as we s h a l l see, have adopted c e r t a i n parts of the federal investment incentive schemes, rejected others and formulated some new ones. The federal incentives offered to s p e c i f i c kinds of corporations are well known. There i s a deduction from tax payable for small business i n respect of income from an active business or non-qualifying business. The manufacturing and processing deduction offers a c r e d i t to those corporations engaged i n that business. When combined with the small business deduction, the tax saving can be substantial. The employment" tax cr e d i t i s a uniquely federal item offered to both corporations and individuals a l i k e . The foreign tax deduction and logging tax deduction are self-explanatory. As with the federal deductions from tax payable, the credits granted by Quebec, Ontario and Alberta can be divided into two groups. F i r s t there are those offered as investment incentives and secondly those designed for p a r t i c u l a r kinds of corporations. None of the three non-agreeing provinces have adopted the federal investment tax cr e d i t . They have chosen instead to provide tax r e l i e f to encourage investment by providing for a return of c a p i t a l invested i n fixed assets through the accelerated c a p i t a l cost allowance. In Quebec, T i t l e VI of The Taxation Act Regulations provides for accelerated write-off i n a manner very s i m i l a r to that found i n the Income Tax Act (Canada). Ontario and Alberta both incorporate the federal 63 provisions into t h e i r l e g i s l a t i o n . The result of t h i s i s that the option to take the investment tax c r e d i t and thereby less accelerated c a p i t a l cost depreciation of assets i s not available i n respect of p r o v i n c i a l tax payable. The major advantage to a corporation of the investment tax cre d i t as opposed to accelerated w r i t e - o f f i s that the tax c r e d i t w i l l continue for a longer period of time than the write-off. Accelerated depreciation, as i t s name implies, i s a method to claim a tax deduction i n a faster way than usual. It ends once the asset has been f u l l y depreciated. The immediate boost to a corporation's cash flow r e s u l t i n g from the accelerated pace of the deduction i s sh o r t l i v e d . Therefore the investment incentive offered p r o v i n c i a l l y i s t a i l o r e d for the corporation that wants a quick 78 return on i t s investment i n the form of lower taxes. It does not encourage a slower or more controlled return on investment. An i n c i d e n t a l r e s u l t of the n o n - a v a i l a b i l i t y of the investment tax credit p r o v i n c i a l l y i s that a corporation may acquire a d i f f e r e n t undepreciated c a p i t a l cost i n respect of depreciable property for federal purposes than for p r o v i n c i a l purposes. The reason i s that i f a corporation chooses to claim the investment tax cre d i t f e d e r a l l y , i t probably has assets e l i g i b l e for the c a p i t a l cost allowance i f i t chooses to claim i t s f u l l c a p i t a l cost allowance p r o v i n c i a l l y then i t s undepreciated c a p i t a l cost w i l l be less for p r o v i n c i a l purposes then federal purposes. Some of the problems presented 64 by d i f f e r e n t undepreciated c a p i t a l costs have been examined e a r l i e r . Quebec, Ontario and Alberta have each provided new and d i f f e r e n t incentives to investment. A b r i e f look at one such incentive from each j u r i s d i c t i o n i s warranted. As w i l l be seen the three incentives examined represent an expansion and continuation of an old federal incentive and two examples of new p r o v i n c i a l incentives. Alberta has taken a discontinued federal program and redesigned i t for use in Alberta. That program was an incentive to encourge investment i n multiple unit r e s i d e n t i a l buildings.^^ It has resurfaced i n Alberta as the 66 Alberta Rental Investment Tax Credit and the Extended Alberta Rental 67 Investment Tax Credit. There i s , however, one s i g n i f i c a n t difference between the old federal program and that offered i n Alberta. The federal MURB program provided for a c a p i t a l cost allowance claim i n respect of q u a l i f y i n g MURBs. Alberta's program goes one step further and grants a non-refundable tax c r e d i t , generally f i v e per cent of the amount invested i n the MURB. Certainly, the MURB program i n Alberta i s of considerable value to the corporate investor. It has been said that "investors who are able to q u a l i f y probably r e a l i z e the best return on investment of any MURB 68 investors to date". The success of the program i s indicated by a recent amendment to The Alberta Corporate Income Tax Act to provide for a new 69 extended MURB program u n t i l the end of 1984. I t i s somewhat i r o n i c that i t was the federal government's refusal to administer Alberta's o r i g i n a l MURB program that was given as one of the reasons Alberta chose to administer i t s own corporate income tax system. ^ Another form of investment incentive i s to be found i n the venture c a p i t a l f i e l d . S i g n i f i c a n t l y , t h i s i s an area that the federal government has 71 chosen not to take any action i n . It has been l e f t to others to promote investment in t h i s f i e l d and both Ontario and Quebec have been quick to step i n where some have been rather hesitant. As long ago as 1975 the Alberta Legislature was presented with a p o s i t i o n paper recommending the establishment of Alberta Investment Incentive Corporations and special 72 manufacturing and processing incentives for new corporations. As yet, none of these recommendations have become the subject of l e g i s l a t i o n , 73 although there are indications that t h i s may occur soon. Meanwhile Ontario and Quebec have vigourously encouraged investment i n the venture c a p i t a l area. In Ontario there i s a tax c r e d i t i n respect of investment i n a small business development corporation (SBDC) and in Quebec the credit i s for investment i n a Societe de developpement de l'enterprise Quebecoise (SODEQ). 80 Ontario s Small Business Development Corporations Act grants a deduction from tax payable to a corporate investor equal to t h i r t y per cent of money paid for equity shares of a SBDC established under that Act. In addition 7 5 the SBDC i s not l i a b l e for c a p i t a l tax. The Act also provides for a recapture of the tax c r e d i t granted i f the SBDC i s wound-up, dissolved or 7 6 buys back i t s own shares. The recapture i s imposed on the SBDC i t s e l f and not on the investor and takes the form of a tax imposed under The 7 7 Corporations Tax Act. Investors in a Quebec SODEQ receive a tax c r e d i t equal to twenty-five per cent of t h e i r investment and, as in Ontario, the SODEQ i t s e l f becomes l i a b l e to repay the amount of the tax c r e d i t on 7 8 revocation of i t s r e g i s t r a t i o n or cancellation of the shares. The SODEQ may then invest i n small or medium sized firms in Quebec. As noted, these incentives are not provided by the federal government and are only available i n Quebec and Ontario. The advantages of p r o v i n c i a l rather than federal tax credits i n t h i s area has been put this way: Where the provinces control the venture c a p i t a l corporation, they control the areas of stimulus and also provide the required p o l i c i n g over the input of funds to the venture c a p i t a l corporation and t h e i r d i s t r i b u t i o n . The p r o v i n c i a l government, presumably being closer to the economic pulse of the province, can move more quickly to a l t e r the d i r e c t i o n and quantum of stimulus than the federal government? 9 One could add to t h i s statement the further point that federal incentives of t h i s nature tend to be so a l l encompassing and general that they cannot and do not aid s p e c i f i c corporations i n s p e c i f i c regions. 81 On the other hand a purely p r o v i n c i a l approach to investment i n the venture c a p i t a l f i e l d encourages regionalism and i n t e r - p r o v i n c i a l tax competition. This s i t u a t i o n i s exacerbated by the perennial problem of the less a f f l u e n t provinces. In order to set up a tax c r e d i t scheme to encourage investment, revenues are needed to finance the tax credits and those revenues are recouped i n the form of income taxes and other economic benefits to the province from the now presumably successful corporations. Provinces such as Quebec and Ontario with t h e i r larger budgets are able to carry the burden over the intervening period of time. The less affluent provinces are not able to do so and are l e f t i n a precarious position. They need the investment most but are least able to afford to grant the tax r e l i e f that produces such investment. There i s also a question, of course, as to whether or not the federal government would administer a tax c r e d i t to encourage investment for an agreeing province. The answer i s probably no i n l i g h t of the federal government's more recent tough l i n e on „ . . . . , 80 administering p r o v i n c i a l programs. ( i i ) Other incentives Quebec, Ontario and Alberta a l s o , o f f e r special deductions from tax payable that are designed to a s s i s t p a r t i c u l a r types of corporations. In Alberta, not s u r p r i s i n g l y , the emphasis i s on the o i l and gas industry. The royalty tax deduction has already been discussed. In addition to that deduction, Alberta also grants a royalty tax c r e d i t to corporations with a permanent establishment i n that province. This tax c r e d i t was available to corporations before Alberta chose to administer i t s own corporate income tax system but recent amendments have increased the value of the c r e d i t 82 ,82 81 considerably. This c r e d i t has been c a l l e d the "small explorer's c r e d i t and that d e s c r i p t i o n i s most apt. The deduction from tax payable i s ; for 83 corporations that have an Alberta crown royalty. Those corporations receive a refundable tax c r e d i t of 75 per cent of the royalty for tax years from August 31, 1981 to January 1, 1984 and 50 per cent for tax years 84 commencing after December 31, 1983. There i s a maximum allowable c r e d i t of $4 m i l l i o n for the former period and $2 m i l l i o n for the l a t t e r period. In addition, the royalty tax c r e d i t sections also provide for deemed association of corporations by the P r o v i n c i a l Treasurer and sharing of the 85 maximum allowable l i m i t s among associated corporations. What i s e s p e c i a l l y i n t e r e s t i n g about the Alberta royalty tax c r e d i t i s that the amount of i t has been increased so s i g n i f i c a n t l y . P r i o r to the recent amendments the percentage of royalty available to corporations was 25 per 86 cent with a maximum allowable c r e d i t of $1 m i l l i o n . In addition, i t i s a refundable tax c r e d i t payable on an instalment basis and therefore a corporation w i l l receive a refund i f the royalty tax c r e d i t due to i t exceeds the corporation's Alberta taxable income. It i s c e r t a i n l y an inducement to resource corporations to explore and recover resources i n Alberta. It i s not offered by the federal government. As mentioned e a r l i e r , the federal government does not even o f f e r a deduction for r o y a l t i e s and t h i s point i s highlighted by Alberta when i t defines an Alberta crown royalty as being the aggregate of r o y a l t i e s included i n income under paragraph 12(1)(o) of the Income Tax Act (Canada) and "any amount i n respect of which no deduction i s allowed in computing the corporation's income for the year by v i r t u r e of paragraph 18(1)(m) of the federal Act".^ 7 83 It should also be noted that corporations that are exempt from tax pursuant to section 35(1) of the Alberta Corporate Income Tax Act w i l l be able to claim the royalty tax c r e d i t . The reason i s that the exemption i s from tax payable on taxable income and i s not an exemption granted d i r e c t l y to the corporation. Therefore a c a l c u l a t i o n of taxable income can be made and the refundable royalty tax cr e d i t granted on the basis of th i s c a l c u l a t i o n to a 88 corporation that would otherwise be exempt from tax. This could involve quite a loss of revenue for Alberta since not only w i l l the province receive no taxes from the exempt corporation, i t w i l l have to make a "refund" to i t i n respect of r o y a l t i e s paid. Ontario and Quebec emphasize the small business i n t h e i r tax credit system. 89 Ontario grants a small business tax c r e d i t for 4 per cent, a special tax 90 c r e d i t of 1 per cent for manufacturing and processing income and a depreciable property c r e d i t of 20 per cent of the cost of depreciable 91 property used i n Ontario to earn income from a business. Quebec grants a deduction for small businesses by v i r t u e of providing that tax payable on corporate income i s equal to the difference between 13 percent of taxable yearly income and 5 per cent of the annual federal tax deduction allowed 92 for small businesses. The 1981 Quebec Budget proposed to extend this small business deduction to an e f f e c t i v e amount of 10 per cent for July 1, c 1981 to December 31, 1981, 5 per cent for 1982 and 2 per cent thereafter." The 1981 Budget also provided that " e l i g i b l e business" became e l i g i b l e for a 5 per cent tax c r e d i t , e f f e c t i v e January 1, 1982 and a 7.5 per cent c r e d i t e f f e c t i v e January 1, 1983. An e l i g i b l e business includes, among other a c t i v i t i e s , manufacturing and processing corporations, f i s h i n g , 84 farming, mining, professional practices, service businesses, management and professional services and investment a c t i v i t i e s deriving income :from property. These incentives of both an investment and non-investment nature are the one item that cause most of the bad f e e l i n g between the agreeing and non-agreeing provinces. Quebec, Ontario and Alberta, by v i r t u r e of administering t h e i r own corporate income tax systems, are in a po s i t i o n to of f e r whatever tax incentives they f e e l are economically viable. The agreeing provinces, bound by the terms of t h e i r agreements with the federal 94 government, cannot do t h i s . Therefore i n the competition to at t r a c t investment and c e r t a i n types of corporations to the province the non-agreeing provinces s t a r t from a much superior position than that enjoyed by the agreeing provinces. In fact, the major concern of the non-agreeing provinces is just to make sure that they s t r i k e the correct balance between a t t r a c t i n g investment and corporations to the province and losing tax dol l a r s to over generous incentive schemes. It i s l i t t l e wonder that the agreeing provinces f e e l at a d i s t i n c t disadvantage. They face a dilemma. I f they wish to continue to enjoy the benefits of Ottawa administering t h e i r corporate income tax programs then certain s a c r i f i c e s have to be made. There i s evidence that the agreeing provinces see th i s dilemma. They have taken the view that s a c r i f i c i n g tax room to the federal government i n return for the administration of the system puts the onus on the federal government to ensure that neither the province nor i t s c i t i z e n s 9 5 suffer because of a lack of revenue. 85 F. Allocation rules Without doubt, one of the major headaches for the corporate taxpayer i s the operation of the a l l o c a t i o n rules. These rules, based on gross income together with wages and s a l a r i e s , a l l o c a t e a corporation's taxable income among the provinces. The operation of the federal rules contained i n Regulations 400 to 413 made under the Income Tax Act (Canada) has been described as follows: The f i r s t step i s to ca l c u l a t e t o t a l s a l a r i e s and wages and then determine the portion of s a l a r i e s and wages paid to employees at permanent establishments i n each province. Gross revenue must then be determined i n t o t a l and for each province with a permanent establishment. The percentages attributable to each province with a permanent establishment are applied to taxable . 9 6 income. Because the a l l o c a t i o n rules determine the percentage of a corporation's taxable income that w i l l be allocated to and thus subject to tax in each province, a degree of uniformity i n the tax l e g i s l a t i o n i s necessary to achieve a f a i r r e s u l t for the corporate taxpayer. Differences i n the tax rate, c a l c u l a t i o n of taxable income and the credits and rebates offered p r o v i n c i a l l y a l l confuse the procedure. As we s h a l l see, uniformity i n the a l l o c a t i o n rules themselves has been sadly lacking over the years and there are no indications that any improvement i s in sight for the corporate taxpayer. In fa c t , as long ago as 1912, one writer said: Each province should tax corporations on the gross income earned within i t s j u r i s d i c t i o n . The proportion of the t o t a l gross earnings of a corporation taxable by each authority can be 86 ascertained according to some index, such as mileage i n the case of railways, or by co-operation on the part of the several i j u r i s d i c t i o n s under which the company operates. Such co-operation w i l l make possible, not only the proper d i v i s i o n of earnings, but also the devising of methods of ascertaining the t o t a l amount of 97 earnings. 3' That co-operation s t i l l does not exist today. In order to view the e f f e c t of the a l l o c a t i o n rules on the corporate taxpayer i n t h e i r true context, a b r i e f h i s t o r i c a l review of t h e i r 98 enactment and operation i s of assistance. In 1946, the federal government proposed a reduction of federal corporate income tax by 10 per cent together with a 5 per cent income tax to be le v i e d by the provinces. This necessitated rules to al l o c a t e income to the provinces for the purposes of the new p r o v i n c i a l tax. Rules were proposed and after much fe d e r a l - p r o v i n c i a l debate were drafted. At that time i t was said that they 99 would reduce, i f not eliminate, double taxation. As we s h a l l see th i s was not to be. Those rules were agreed to by a l l provinces except Quebec and Ontario. Quebec and Ontario drafted t h e i r own sets of rules and these c o n f l i c t e d dramatically with the federal r u l e s . Not only did both these provinces levy tax at a 7 per cent rate, rather than 5 per cent, they also based the a l l o c a t i o n of income on the location of the head o f f i c e of a corporation. For example, even i f a corporation's income was earned outside Ontario, that income was allo c a b l e to Ontario i f i t s head o f f i c e was located i n the p r o v i n c e T h e problems presented by th i s were somewhat a l l e v i a t e d during the period from 1952 to 1957 when Ontario b r i e f l y re-entered the federal f o l d and signed a tax renta l agreement with 87 the federal government. It therefore abided by the federal a l l o c a t i o n rules during t h i s period. ; However, r e l i e f for the corporate taxpayer was only temporary. In 1957 Ontario again went i t s own way i n the levying and c o l l e c t i o n of corporate income tax and introduced a l l o c a t i o n rules that d i f f e r e d substantively from those i t had been applying with the federal government for the past f i v e years. These new rules included a rule that d i r e c t l y c o n f l i c t e d with both the federal and Quebec rules respecting a t t r i b u t i o n of revenue to the place of shipment of goods to a customer rather than the place of residence of the customer^"'" Over the next ten years, however, Ontario and Quebec slowly began to change t h e i r a l l o c a t i o n rules to bring them more i n l i n e with those of the federal government and that were used by the seven agreeing provinces. In 1961 Quebec adopted the sales and wages formula contained in the federal government's rules and by 1972 and the new Canadian tax system a c e r t a i n degree of s i m i l a r i t y began to appear i n the a l l o c a t i o n rules of Quebec, Ontario and the federal government. The serious differences of the past no longer existed, but nevertheless there were and are today enough subtle differences to present some rather d i f f i c u l t situations for the corporate taxpayer. As far as the use to which the a l l o c a t i o n rules are put, the most obvious one i s to apportion the taxable income of a corporation to the various j u r i s d i c t i o n s . Yet the rules play an extremely important r o l e in another area. The amount of taxable income allocated to a province i s a key factor in determining the amount of federal equalization payments made to that province. It works l i k e t h i s . The amount allocated to a province i s given 88 a weighting of about 50 per cent and as such i s a part of the c a l c u l a t i o n of simulated t o t a l income of a province. The simulated t o t a l income i s used to calculate about 15 per cent of the revenues of a province. Therefore while the corporate taxpayer may complain that the a l l o c a t i o n rules operate i n a harsh and sometimes i l l o g i c a l manner, i t must be remembered that t h i s may in part be attributable to the fact that they are used by a province i n the continuing war over equalization payments. As mentioned, the federal a l l o c a t i o n rules are to be found in Regulations 400 to 413 made under the Income Tax Act (Canada). Alberta adopts the federal a l l o c a t i o n formula by vi r t u e of section 19(2) of The Alberta Corporate Income Tax Act which provides that "taxable income earned i n Alberta" i s to be calculated with reference to the federal regulations made under the Income Tax Act (Canada). How long Alberta w i l l continue to operate under the federal rules i s another matter. Spokesmen for the province have expressed d i s s a t i s f a c t i o n with the federal rules on the basis that they do not include a c a p i t a l factor and therefore create an a l l o c a t i o n bias against the c a p i t a l intensive corporations that exist i n 102 Alberta. Quebec's a l l o c a t i o n rules are contained i n regulations made pursuant to section 771(2) of The Taxation A c t O n t a r i o ' s rules are to 104 be found i n regulations made under section 31 of The Corporations Tax Act. The federal rules apply where a corporation has a permanent establishment in more than one province and all o c a t e taxable income accordingly. It i s at t h i s stage and before one gets into an analysis of the operation of the technical rules that the f i r s t problems i n the application of the federal rules and those of Quebec and Ontario a r i s e . Regardless of how similar the 89 rules of these three j u r i s d i c t i o n s appear to be, because they are predicated on the notion of permanent establishment they can and do operate to produce double taxation. The problem i s the expanded meaning given to permanent establishment and establishment by Ontario and Quebec. As already i l l u s t r a t e d ^ ! corporation may have i t s income allocated to more than one j u r i s d i c t i o n by the operation of p r o v i n c i a l a l l o c a t i o n rules and only receive the federal abatement i n respect of one such a l l o c a t i o n because of the non-recognition by the federal government of the expanded d e f i n i t i o n of permanent establishment. About a l l a corporation can do in this instance i s to plead i t s case with the respective governments and hope for a sympathetic hearing. Yet there are also l e g i s l a t i v e differences between the detailed rules that determine the two major components of the rules gross revenue and s a l a r i e s and wages. In Ontario, for example, there are special a l l o c a t i o n rules to allocate taxable income earned in Canada by non-residents. These are necessitated by Ontario's taxation of non-resident corporations. Ontario also excludes the proceeds of the d i s p o s i t i o n of c a p i t a l property 106 from gross revenue and excludes investment income from gross revenue i f 107 the corporation has business income in the taxation year. One of the more s i g n i f i c a n t differences between the federal a l l o c a t i o n rules and those of Ontario from the viewpoint of the corporate taxpayer i s to be found in section 402(4)(j) of the Ontario regulations. That section provides that gross revenue derived from the sale of land that i s non-capital property and constitutes a permanent establishment in the province, i s allocated to 90 the province. Therefore'if a corporation s e l l s a head o f f i c e and land i t stands on, or other land that comprises a permanent establishment', the proceeds of sale w i l l be allocated to Ontario. This a f f e c t s the corporation that moves i t s operation out of Ontario. It could f i n d i t s e l f being .required to a l l o c a t e the proceeds of d i s p o s i t i o n from the sale of the land to Ontario and to another province i n which i t also had a permanent establishment at the time of the sale. Under the federal rules the f u l l amount of the sale would be allocated to the other province. Therefore a corporation f i n d i n g i t s e l f in such a s i t u a t i o n would do well to make sure that i t only has one permanent establishment at the time of the sale. Quebec's l e g i s l a t i o n d i f f e r s from that of both the federal government and 108 Ontario. Perhaps the most obvious difference is that Quebec bases i t s rules on the carrying on of business i n a province rather than on taxable income. This results i n a d i f f e r e n t a p p l i c a t i o n of the a l l o c a t i o n rules that otherwise bear a great deal of resemblance to those contained in the regulations under the Income Tax Act (Canada). Such an application can r e s u l t in the a l l o c a t i o n of a greater percentage of a corporation's taxable income to Quebec. Taxable income i s a narrower s t a r t i n g point than carrying on business. Taxable income, as indicated e a r l i e r , is an amount determined af t e r a pplication of credits and deductions to income. Carrying on business, on the other hand, i s a more f l e x i b l e and vague concept that i s determined without reference to credits and deductions that would reduce the amount of income derived from i t . The r e s u l t i s that the operation of Quebec's a l l o c a t i o n rules i s more dependent on p r o v i n c i a l administration 91 than those of any other j u r i s d i c t i o n . Quebec has given i t s e l f much more di s c r e t i o n i n the application of i t s a l l o c a t i o n rules. ; The treatment of investment income under the federal and p r o v i n c i a l a l l o c a t i o n rules also presents d i f f i c u l t i e s for the corporate taxpayer. An investment corporation with a permanent establishment i n more than one j u r i s d i c t i o n may well be of the view that there i s no need to allocate i t s income for income tax purposes. This i s because the federal a l l o c a t i o n rules exclude from gross revenue income derived from i n t e r e s t and dividends 109 and rentals and r o y a l t i e s from property. Yet Ontario includes i n i t s determination of gross revenue investment income i f that i s the only income of the corporation.''""''0 Therefore the corporation may well have d i f f i c u l t i e s deciding how i t should pay tax p r o v i n c i a l l y . Ontario's rules w i l l a l l o c a t e a portion of i t s income to Ontario while the rules of the other province i n which i t has a permanent establishment w i l l not operate to make an a l l o c a t i o n . From an administrative standpoint, i t has been said that both Ontario and Quebec have been more aggressive i n reviewing the corporate taxpayer's a l l o c a t i o n of income than the other provinces This aggressiveness has ine v i t a b l y resulted i n clashes between the two provinces over the application of the rules. In fact these disputes have arisen over a sale occurs what should be included i n gross revenue what should be included i n s a l a r i e s and wages what c r i t e r i a should be established to determine the permanent establishment to which an employee should be attached and when management fees should be included i n s a l a r i e s and wages. 1 1 2 hat constitutes a sale and what a service when Faced with a continuing b a t t l e over these issues, Ontario and Quebec f i n a l l y reached agreement i n June, 1979 to adopt a uniform basis' for deciding these questions. This agreement must be seen by the corporate taxpayer as an encouraging sign. While the agreement i s r e s t r i c t e d to administration of the rules rather than t h e i r content and therefore not a t o t a l solution to the problem, i t i s a d e f i n i t e improvement. Unfortunately there i s one dark cloud on the horizon. That i s the d i s t i n c t p o s s i b i l i t y that Alberta w i l l draft i t s own rules based on a d i f f e r e n t formula. If Alberta follows up on t h i s threat, the corporate taxpayer w i l l once again be faced with double taxation because of a p r o v i n c i a l i n a b i l i t y to agree on the format of these basic rules. 93 CHAPTER III - FOOTNOTES 1 E.H. Smith, A l l o c a t i n g to Provinces the Taxable Income of Corporations: how the Federal P r o v i n c i a l A l l o c a t i o n Rules Evolved (1976) 24 Can. Tax J. 545 at 568. 2 The Income Tax Act, R.S.C. 1952, c. 148, s. 2(1). 3 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 2(1); The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 5(1). 4 The Taxation Act, R.S.Q. 1977, c. 1-3, s.22. 5 The Income Tax Act, R.S.C. 1952, c. 148, s. 2(3). 6 See, for example, Canada - U.S. Tax Convention, A r t i c l e s I, II and VIII; Canada - United Kingdom Income Tax Convention, A r t i c l e s 7 and 13. 7 The Taxation Act, R.S.Q. 1977, ss. 22 and 27. 8 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 2(2). 9 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 2(3). 10 Section 29(2) of the Corporations Tax Act removes the d i s p o s i t i o n of taxable Canadian property from the ambit of section 2(3)(b). 11 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 29(1). 12 The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. l ( l ) ( g ) 13 The Taxation Act, R.S.Q. 1977, c. 1-3, ss. 12, 13, 14, 15, 16 and 16.1: The Corporations Tax Act, R.S.O. 1980, c. 97, s. 5. 14 The Taxation Act, R.S.Q. 1977, c. 1-3, s. 16.1. 15 See, E. Richardson, Tax Planning for Corporations i n Light of Differences i n Federal and P r o v i n c i a l Income Tax Le g i s l a t i o n , Report of  the Proceedings of the T h i r t y - f i r s t Tax Conference (1979), Canadian Tax Foundation, 766 at 7 75. Mr. Richardson points out i n a footnote that r e l i e f of t h i s nature had not been granted to a corporation at the time his a r t i c l e was written. 16 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 5(11). 17 An Act to amend The Corporations Tax Act, S.O. 1981, s. 2. 18 Ibid. 94 19 Richardson, supra, note 15, at 773-774. Mr. Richardson describes the meetings leading up to these agreements and reports that the agreements were described by the Ontario Minister of Revenue as "providing a framework for a province to advise the other of proposed tax assessments which af f e c t the other's revenue or income a l l o c a t i o n , to avoid double taxation". 20 The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s.14(3.1) and (3.2). 21 The Taxation Act, R.S.Q. 1977, c. 1-3, ss. 236.2 and 236.3. 22 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 12(1). 23 The Income Tax Act, R.S.C. 1952, c. 148, s. 248(1). This section defines "taxpayer" to include a person and under the Interpretation Act, R.S.C. 1970, c. 1-23, person includes both individuals and corporations. 24 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 12(3). 25 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 12(5). 26 The Corporations Tax Act, R.S.O. 1980, c. 98, s. 12(6). 27 Interpretation B u l l e t i n No. L-6, Ontario August 14, 1978, gives a detail e d d e s c r i p t i o n of the operation of section 12(6). 28 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 12(7)(a). 29 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 12(7)(b). 30 Interpretation B u l l e t i n No. L-5 Ontario, August 14, 1978 gives a det a i l e d d e s c r i p t i o n of the operation of section 12(7) (c). 31 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 12(8)(b). 32 Information B u l l e t i n No. 10-78R, September 14, 1981. 33 One reason for t h i s i s that i n Quebec c e r t a i n p r o v i n c i a l deductions and grants do not reduce the c a p i t a l cost of property for Quebec tax purposes. See, sections 130 and 130.1 of The Taxation Act and regulation 130 R 56 to 133.2 R 1 of the Regulations respecting the Taxation Act. 34 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 9(3): The Taxation Act, R.S.Q. 1977, c. 1-3, s. 31. 35 Supra, note 15, at 793. 36 Supra, note 15, at 794. 37 The Taxation Act, R.S.Q. 1977, c. 1-3, s. 27. 95 38 For the d e f i n i t i o n of "taxable Canadian property", see, the Income Tax Act, R.S.C. 1952, c. 148, s. 115(l)(b). 39 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 29. 40 The federal tax c r e d i t i s provided by section 127(3) of the Income Tax Act (Canada) and Alberta's tax c r e d i t i s found i n section 24 of The Alberta Corporate Income Tax Act. 41 The Taxation Act, R.S.Q. 1977, c. 1-3, s. 776. 42 The Taxation Act, R.S.Q. 1977, c. 1-3, s. 727. 43 Tax Memo No. 65, 1981 Tax Developments (Canadian Tax Foundation, 1981) at 101. 44 The ele c t i o n procedure i s to be found i n the addition of section 1029.1 to The Taxation Act by an Act to amend cer t a i n l e g i s l a t i o n to give e f f e c t to government budget p o l i c y for the f i s c a l period 1981-82, assented to on June 18, 1981, s. 12(1). 45 Supra, note 15, at 788. 46 It has Been calculated that in 1975 tax incentives for investment in Canada cost an estimated $4 b i l l i o n , an amount equal to 52% of the t o t a l corporate taxes levied i n that year. R.M. Bird, Tax Incentives for Investment: The State of the Art. Canadian Tax Paper No. 64, at 1. 47 F i s c a l Federalism i n Canada, Report of the Parliamentary Task Force on Federal-Provincial F i s c a l Arrangements, August 1981 at 178. 48 See, for example, Wayne Thirsk, Tax Harmonization and i t s Importance i n  the Canadian Federation, contained in F i s c a l Dimensions of Canadian Federalism, ed. Richard M. Bird, Canadian Tax Foundation, 118 at 132. 49 See, D. V. Smiley, Canada i n Question: Federalism in the Seventies (2nd ed.) 142. 50 Hon. A l l a n J. MacEachen, Federal-Provincial F i s c a l Arrangements in the  Ei g h t i e s , A Submission to the Parliamentary Task Force on the Federal-Provincial F i s c a l Arrangements, (1981) at 53. 51 Section 20(2) of The Alberta Corporate Income Tax Act reads as follows: (2) Subject to subsection (3), "amount taxable i n Alberta" means the product obtained when taxable income less the royalty tax deduction i s m u l t i p l i e d by the Alberta a l l o c a t i o n factor. 52 The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, Part 5. 53 L. Landry, Address to the I n s t i t u t e of Chartered Accountants of Alberta, Edmonton, June 12, 1981. 96 54 See, Hon. M. Leitch, The Constitutional Position of Natural Resources, contained i n Canadian Federalism: Myth or Rea l i t y (3d. ed.) ed. J. P. Meekison, 170 at 173. The figure of 85% ownership was given by the Minister of Mines and Minerals for Alberta i n a speech to the Canadian Council of Resource and Environment Ministers i n V i c t o r i a on November 21st, 1974. Considering the source of the figure i t may be a l i t t l e o p t i m i s t i c . Nevertheless, i t gives a good i n d i c a t i o n of Alberta's view of the s i t u a t i o n . 55 The Income Tax Act, R.S.C. 1952, c. 148, s. 125(5). 56 While not a deduction from tax payable, the accelerated c a p i t a l cost allowance goes hand in hand with the investment tax credit to provide a double b a r r e l l e d incentive to investment i n Canadian corporations. For an informative analysis of the h i s t o r y of the two incentives, see F. J. Harman and J. A. Johnson, An Examination of Government Tax Incentives for Business Investment in Canada (1978) 26 Can. Tax J. 691. 57 The Income Tax Act, R.S.C. 1952, s. 148, s. 127(13). 58 The Income Tax Act, R.S.C. 1952, c. 148, s. 125.1. 59 The Income Tax Act, R.S.C. 1952, c. 148. s. 125. 60 The Income Tax Act, R.S.C. 1952, c. 148, s. 126. 61 The Income Tax Act, R.S.C. 1952, c. 148, s. 127. 62 Supra, note 56, at 704. For an economic assessment of the value of investment incentives see Robin W. Boadway and Harry M. Kitchen, Canadian Tax Po l i c y , Canadian Tax Paper No. 63, (1980) at 134-136 and Richard M. Bird, Tax Incentives for Investment: The State of the Art, Canadian Tax Paper No. 64. (1980) at 32-45. 63 This i s done i n Alberta by the general adoption of a l l federal regulations by section 56(2) of the Alberta Corporate Income Tax Act. In Ontario section 301(1) of the regulations made under The Corporations Tax Act adopts the federal regulations. 64 See page 65. 65 The federal MURB program expired on December 31, 1979. 66 The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 25. 67 The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 26.5. 68 Ross D. Freeman, The Alberta MURB (1981) 30 Can. Tax J. 163 at 170. 69 The Alberta Corporate Income Tax Amendment Act, 1982, S.A. 1982, c. 1. 70 Hon. L. Hyndman, P r o v i n c i a l Treasurer, Alberta Hansard, May 13, 1980, 943. 97 71 For discussion of the lack of federal action i n th i s area, see also, J. Michael Lavery, A Review of Developments i n the Venture Capital F i e l d , Report of the Proceedings of the T h i r t y - F i r s t Tax Conference (1979), Canadian Tax Foundation, 508 at 511-514. 72 Basic Objectives and Terms of Reference for Alberta Business Taxation  and Incentives, A Position Paper of the Government of Alberta, January 29, 1975, presented to the Alberta Legislature by the Hon. Gordon Miniely, P r o v i n c i a l Treasurer. 73 Alberta News Release, Hon. L. Hyndman, P r o v i n c i a l Treasurer, March 7, 1980. 74 R.S.O. 1980, c. 475. 75 Ibid, s. 19. 76 Ibid, s. 24. 77 Ibid; s. 25. 78 An Act respecting Corporations for the development of Quebec Business Firms, R.S.Q. 1977, c. S-28; The Taxation Act, R.S.Q. 1977, c. 1-3, s. 1163. 79 Supra, note 71, at 521. 80 See, supra note 50, at 54. 81 Supra, note 69, s. 12. 82 Donald H. Watkins, Current Developments i n Petroleum Income Taxation (1981) 19 A l t a . L. Rev. 62 at 78. 83 The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 26.1. 84 The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 26.1(9) and (10). 85 The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 26.1(7). 86 See, section 26 of The Alberta Corporate Income Tax Act, as repealed by section 12 of The Alberta Corporate Income Tax Amendment Act, 1982, S.A. 1982, c. 1. 87 The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 26(l)( b ) . 88 This i n t e r p r e t a t i o n has been confirmed by o f f i c i a l s with the Alberta Department of the Pro v i n c i a l Treasurer. 89 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 33. 98 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 34. The Corporations Tax Act, R.S.O. 1980, c. 97 s. 36. The Taxation Act, R.S.Q. 1977, c. 1-3, s. 771. Supra, note 43, at 100. See page 24 for a description of the federal government's refusal to administer a B r i t i s h Columbia dividend tax cre d i t scheme. See, Attitudes Towards F i n a n c i a l Relations, Nova Scotia's view, contained i n Canadian Federalism: Myth or Reality (2nd ed.) ed. J. Peter Meekison, 304-308. 96 Supra, note 15, at 776. 97 S. Vineberg, P r o v i n c i a l and Local Taxes i n Canada, (Toronto: Longman Green) 134-135. 98 See, for a f u l l h i s t o r i c a l review of the evolution of the a l l o c a t i o n rules, Smith, supra, note 1. 99 Letter from Dr. W. C. Clark, Deputy Minister of Finance to Department of National Revenue, 1947, quoted i n Smith, supra, note 1 at 553. 100 See, J. H. Perry, Taxation in Canada, (1st ed.) (Toronto: University of Toronto Press, 1951) 176-177 for a f u l l d escription of the differences between the federal a l l o c a t i o n rules and those of Ontario and Quebec. This description i s p a r t i c u l a r l y informative, probably because Mr. Perry was involved i n the d r a f t i n g of the 1946 a l l o c a t i o n rules i n his capacity as an o f f i c i a l with the Department of Finance. 101 This rule was rescinded i n December 1957 and replaced with a rule a t t r i b u t i n g revenue to the place of destination of goods. 102 As early as 1975 d i s s a t i s f a c t i o n was expressed by the P r o v i n c i a l Treasurer i n Basic Objectives and Terms of Reference for Alberta  Business Taxation and Incentives, June 29, 1975. Since that report a Caucus Committee on Business Tax and Tax Incentives has been established and i t i s understood that once i t makes i t s f i n a l report changes w i l l be made to the a l l o c a t i o n formula i n Alberta, Press Release, Hon. L. Hyndman, March 7, 1980. 103 Regulation respecting The Taxation Act, O.C. 1981-80, Quebec Gazette, ss. 771R1 to 771R38. 104 Regulation made under The Corporations Tax Act, 1972, 0. Reg. 350/73, Ontario Gazette, ss.401 to 419. 90 91 92 93 94 95 105 See, page 58. 99 106 Regulation made under The Corporations Tax Act, 1972, 0. Reg. 350/73, Ontario Gazette, s. 402(8)(c)(iv). 107 Regulation made under The Corporations Tax Act, 1972, 0. Reg. 350/73, Ontario Gazette, s. 4 0 2 ( 8 ) ( c ) ( i i i ) . 108 See, Richardson, supra, note 15, for a detailed description of four major differences between the a l l o c a t i o n rules of Quebec and the federal government. 109 Income Tax Regulations, s. 402(5). 110 Regulation made under The Corporations Tax Act, 1972, 0. Reg. 35.0/73, s. 402(8). 111 Richardson, supra, note 15 at 779. 112 Ibid. 100 CHAPTER IV A D M I N I S T R A T I V E PROBLEMS A . I n t roduc t i on A corporation that has a permanent establishment i n Ontario, Quebec and Alberta i s faced with the prospect of dealing with four d i f f e r e n t administrative bodies when i t comes to payment of i t s corporate income tax. They are the Ontario Ministry of Revenue, Corporations Tax D i v i s i o n , the Quebec Department of Revenue, Operations Branch, The Alberta Treasury Department, Corporate Income Tax and, of course, the federal Department of National Revenue. Each administration issues i t s own forms, interpretation b u l l e t i n s and information c i r c u l a r s . Furthermore, each province requires a separate p r o v i n c i a l return to be f i l e d i n respect of income earned in the province and each follows i t s own procedures when i t comes to assessing tax, handling appeals and generally enforcing the respective p r o v i n c i a l n • 'i • 1 corporate income tax l e g i s l a t i o n . The inconvenience or even hardship encountered by corporations dealing with four d i f f e r e n t administrative bodies i s hard to evaluate. This hardship takes two forms. F i r s t there i s the expense and inconvenience in dealing with two or more d i f f e r e n t administrations. Secondly, there is the substantive problem of double taxation. Literature on the levying and c o l l e c t i o n of corporate income tax focuses almost exclusively on the federal system and the problems corporations encounter with that administration. There has been no comprehensive analysis of the operation of the p r o v i n c i a l administrations and t h e i r r e l a tionship to that of the 101 federal government. Perhaps one reason for t h i s i s that u n t i l recently there had been no new developments i n the area. Only Ontario and Quebec administered t h e i r own systems. Now that Alberta has joined them and broken t i e s with the federal government on t h i s issue, the time i s ripe to take a look at the administrative side of corporate income tax c o l l e c t i o n in Canada. This chapter w i l l examine the p r o v i n c i a l administrative provisions and attempt to pinpoint areas of pot e n t i a l d i f f i c u l t y for corporations. It w i l l also h i g h l i g h t those areas where i n t e r - p r o v i n c i a l or fe d e r a l - p r o v i n c i a l f r i c t i o n could a r i s e because of d i f f e r e n t administrative rules. There i s no question that Quebec, Ontario and Alberta consider the administration of t h e i r own corporate income tax systems to be a purely p r o v i n c i a l matter and therefore one that should have no d i r e c t federal input. This is evidenced by the fact that while t h e i r corporate income tax l e g i s l a t i o n adopts by reference, i n many instances, the federal rules respecting the steps leading up to c a l c u l a t i o n of tax payable, none of the 2 provinces do t h i s when i t comes to the administrative provisions. The administrative provisions are uniquely p r o v i n c i a l i n nature and each of the three provinces has l e g i s l a t e d i t s own d i s t i n c t i v e set of rules without d i r e c t incorporation of the federal rules. Certainly they are sim i l a r to the federal rules and each other but there are enough substantive differences to allow the provinces to f e e l that they can c a l l the system t h e i r own. 102 B. Assessment and reassessment One of the f i r s t procedures that divergence between federal and p r o v i n c i a l practice can be found i n i s the assessment and reassessment of tax payable. Section 152 of the Income Tax Act (Canada) provides that the Minister of National Revenue s h a l l assess the tax owing for a year together with int e r e s t and penalties. That section also provides that such an assessment can be made at any time but that a reassessment may only be made within 3 four years of the date of the o r i g i n a l assessment. There i s an exception to the four year rule and that i s where the taxpayer has made a misrepresentation a t t r i b u t a b l e to neglect, carelessness or w i l f u l default 4 or has committed fraud or has f i l e d a waiver with the Minister. The expiry of the four year period for reassessment i s of great importance to a corporation since i t can aff e c t i t s future tax planning. Quebec and Alberta's provisions are the same as those found i n the Income Tax Act (Canada). Ontario, however, does not follow the federal format for reassessment i n i t s entirety. That province diverges i n two s i g n i f i c a n t respects. F i r s t , the time period for reassessment i n Ontario i s s i x years. Secondly, Ontario permits reassessment at any time i f f i n a n c i a l statements have not been f i l e d with the return as required by section 67 of The 5 Corporations Tax Act. The pote n t i a l problem for both a corporation and the federal government involves the s i x year reassessment time period. Obviously as far as the corporation i s concerned i t would rather not s t i l l be subject to reassessment i n one province once the time l i m i t for reassessment has expired both f e d e r a l l y and i n the other provinces. The problem for the federal government i s of a more p r a c t i c a l nature. If Ontario should reassess af t e r the four year period has expired f e d e r a l l y 103 but before the s i x year period has expired p r o v i n c i a l l y then the federal government's hands are t i e d . They cannot reassess and, assuming that the p r o v i n c i a l reassessment produced more tax payable, w i l l be unable to c o l l e c t any revenue that may be owing federally. Ontario's a b i l i t y to reassess at any time i f the required f i n a n c i a l statements have not been f i l e d also gives that province an opportunity to reassess once the statutory time l i m i t has expired. The Income Tax Act (Canada) does not have an equivalent to section 67(2) of The Corporations Tax Act requiring the f i l i n g of f i n a n c i a l statements with the return and therefore a corporation cannot be reassessed f e d e r a l l y for f a i l u r e to comply with t h i s requirement. It should be noted, however, that the federal return must contain the "prescribed information" required by the Minister of National Revenue and presumably t h i s could include f i n a n c i a l statements and in that case f a i l u r e to comply would open the door to reassessment f e d e r a l l y . As mentioned, the federal authorities can reassess at any time i f the corporation has f i l e d a waiver of the four year time l i m i t . Ontario also provides for reassessment i f a federal waiver has been f i l e d under subsection 152(4) of the Income Tax Act (Canada) and i n addition authorizes i t s own p r o v i n c i a l waiver which permits reassessment after the s i x year period.^ What i s i n t e r e s t i n g i s that neither Quebec nor Alberta permit reassessment at any time af t e r f i l i n g of a federal waiver. Those two provinces each provide for t h e i r own p r o v i n c i a l waivers but do not accept a federal waiver for p r o v i n c i a l purposes. The result i s that these provinces re l y heavily on administrative cooperation with the federal government. If the provinces are not advised by the federal o f f i c i a l s that a waiver has been f i l e d f e d e r a l l y and that a reassessment is i n progress then they can 104 fi n d themselves unable to reassess at the expiry of the four year time period. Alberta has t r i e d to a l l e v i a t e t h i s problem by a recent amendment that permits p r o v i n c i a l reassessment within s i x months of a federal reassessment. Yet t h i s i s not a t o t a l solution since Alberta's hands are t i e d u n t i l the federal reassessment i s made. Meanwhile Quebec's hands are t i e d completely on federal reassessment unless they have exacted a p r o v i n c i a l waiver from the corporation. C. Payment of tax B a s i c a l l y , the rules respecting payment of corporate income tax and inte r e s t thereon are the same in the three non-agreeing provinces as they are f e d e r a l l y . Tax i s paid on an instalment basis at the end of each month of the taxation year. The remaining tax due i s then payable at the end of 7 the second month following the end of the f i s c a l year. Quebec has a minor v a r i a t i o n on the federal rules i n that i t does not di s t i n g u i s h between a corporation claiming the small business abatement and one that does not claim the deduction when determining when the remaining tax s h a l l be paid. The federal government, Ontario and Alberta a l l give a corporation that claims the small business abatement an extra months grace with respect to 8 payment of the remaining tax. The only p r o v i n c i a l differences of any note i n t h i s area concern corporations exempted from making instalment payments. The federal government, Quebec and Alberta exempt corporations holding forth the prospect of paying patronage dividends or cr e d i t unions that have 9 a taxable income of no more than $10,000 for the year. Ontario, however, has a s l i g h t l y d i f f e r e n t r u l e . It exempts any corporation that has tax 105 payable of less than $2,000 for the taxation year from payment by instalment?"^ Alberta grants a further exemption to a corporation ;that claims the small business abatement and that estimates i t s taxable income to be less than $500,000'!'"'" Therefore the s i t u a t i o n could arise where a corporation with a permanent establishment i n both Alberta and Quebec, for example, would be required to pay tax by instalments i n Quebec but not required to do so i n Alberta. D. Appeal procedure Once an assessment has been made a corporation that disagrees with the assessment may, within ninety days, f i l e a notice of objection to the assessment. This procedure i s the same f e d e r a l l y and p r o v i n c i a l l y although of course a separate notice of objection must be f i l e d i n each j u r i s d i c t i o n . The powers of the respective Ministers of Revenue on receipt of a notice of objection are s i m i l a r i n a l l j u r i s d i c t i o n s . Once the notice of objection has been f i l e d each j u r i s d i c t i o n provides for an appeal procedure. It i s worth noting that while the appeal procedures are s i m i l a r one further step i s provided f e d e r a l l y . That i s an appeal to the Tax Review Board p r i o r to an appeal to the Federal Court and from there to the Federal . Court of Appeal. None of the three provinces have established a 12 Tax Review Board and the appeals are, i n Ontario to the Supreme Court, in 13 Alberta to the Court of Queens Bench and i n Quebec to the P r o v i n c i a l 14 Court. Presumably the volume of appeals at the p r o v i n c i a l l e v e l is not s u f f i c i e n t l y onerous to warrant an intermediate appeal l e v e l . 106 E. Collection of taxes When i t comes to the c o l l e c t i o n of taxes owing, the provinces, p a r t i c u l a r l y Alberta and Ontario, have chosen to give themselves rather extended powers. For example, in Ontario the province can r e g i s t e r any taxes, i n t e r e s t , penalties or other costs owing under The Corporations Tax Act in the land r e g i s t r y o f f i c e and thereby impose a l i e n on r e a l property owned by the 15 corporation. That l i e n receives p r i o r i t y over any subsequent encumbrances on the property and can even be attached to land leased by a corporation and i n respect of which the corporation i s not the registered owner. The l i e n extends not only to taxes, i n t e r e s t , penalties and other costs owing at the time of r e g i s t r a t i o n but also to taxes, i n t e r e s t , penalties and 16 other costs that may become due. Ontario has t r i e d to create a statutory l i e n that i s to take p r i o r i t y over a l l subsequent l i e n s , including presumably those registered on behalf of the federal government and other p r o v i n c i a l governments. This provision highlights a problem that i s becoming increasingly important for the federal and p r o v i n c i a l governments. What i s the p r i o r i t y among governments when i t comes to the c o l l e c t i o n of taxes? Ontario's l e g i s l a t i o n i s r e s t r i c t e d to the context of a l i e n on land but i t begs the broader question of who gets the f i r s t chance to c o l l e c t owed taxes from an insolvent corporation. The problem i n sorting out the respective government's claims has been put th i s way: Courts elsewhere and before t h i s have bemoaned the results thrust upon them by the in t e r a c t i o n of federal and p r o v i n c i a l laws with reference to 107 debtor-creditor p r i o r i t i e s . The resolution of anomalies i n t h i s complex f i e l d i s a l e g i s l a t i v e process. The duty of the Court i s to interpret • the l e g i s l a t i o n as i t finds i t . The r e s u l t must follow, and i f i t i s a r e s u l t with which the community interests do not coincide, i t i s a matter for the L e g i s l a t u r e ^ ' Unfortunately the l e g i s l a t i o n with respect to debtor-creditor relationships in the income tax area i s remarkably s i l e n t on the issue of p r i o r i t y of claims. At present, with the exception of Ontario in a limited way, no j u r i s d i c t i o n has purported to give i t s e l f statutory p r i o r i t y over other j u r i s d i c t i o n s with respect to the c o l l e c t i o n of income tax owing. The federal government and Alberta have both included i n t h e i r l e g i s l a t i o n sections that provide that any taxes, i n t e r e s t , p e n a l i t i e s and other amounts payable under t h e i r 18 l e g i s l a t i o n are debts due to the Crown and recoverable as such. Quebec and Ontario have not enacted t h i s provision. Yet, such a section does 19 nothing to e s t a b l i s h p r i o r i t y . The Income Tax Act (Canada) also provides that taxes withheld in accordance with that Act are held i n t r u s t for the 20 Crown. Again, no p r i o r i t y i s established. Interestingly enough, the Income Tax Act (Canada) once contained a section that did give the Crown 21 p r i o r i t y with respect to withheld taxes. It read as follows: 123(6) Every person who deducts or withholds an amount under t h i s Act i s l i a b l e to pay to Her Majesty on the day fixed by or pursuant to t h i s Act an amount equal to the amount so deducted or withheld and, except i n the case of bankruptcy, t h i s l i a b i l i t y constitutes a f i r s t charge on his property and, notwithstanding the Bank Act or any other statute or law or other than the Bankruptcy Act, ranks for payment i n p r i o r i t y to a l l other claims, including claims of Her Majesty i n right 108 of a province or i n any other r i g h t , of whatsoever kind a r i s i n g before or a f t e r the commencement of t h i s Act, except only the j u d i c i a l costs, fees and lawful expenses of an assignee or other public o f f i c e r charged with the administration or d i s t r i b u t i o n of his property. This section was repealed in 1956 and has never been replaced. There has never been an equivalent, section i n respect of non-withheld taxes. Therefore only Ontario purports to e s t a b l i s h any kind of p r i o r i t y and that is l imited to a l i e n on land. Therefore the solution to the issue of p r i o r i t y must be determined by the common law and the case law. At common law debts due to the Crown and t h e i r c o l l e c t i o n are a matter of crown prerogative. It has also been established that the Crown's right to 22 recover a debt owing to i t supercedes any right a c i t i z e n may have. However, where the federal Crown and p r o v i n c i a l Crown both have a right to recover a debt, the s i t u a t i o n i s d i f f e r e n t . Their rights rank i n p a r i 23 passu in the absence of any statutory enactment to the contrary. It should be noted that such a statutory enactment cannot be a p r o v i n c i a l enactment that purports to abrogate the federal Crown prerogative. In those instances where a province has attempted to assert i t s p r i o r i t y at the expense of the equal p r i o r i t y of the federal Crown, the l e g i s l a t i o n has 24 been struck down as u l t a v ires the province. Following t h i s reasoning, i t could well be that should Ontario attempt to claim p r i o r i t y of l i e n over any l i e n subsequently imposed by the federal government, i t runs the r i s k of having section 92 of The Corporations Tax Act struck down as an abrogation of the federal prerogative to c o l l e c t debts owing. 109 On the other hand, there i s no legal b a r r i e r to the federal government establishing i t s p r i o r i t y over a p r o v i n c i a l j u r i s d i c t i o n . ; In Attorney-General of Canada v. Workmen's Compensation Board for the Province 25 of B r i t i s h Columbia the Supreme Court of B r i t i s h Columbia confirmed the doctrine that debts owing to the Crown i n right of Canada and the Crown i n righ t of a province rank i n p a r i passu. The court then held that the claim of the federal Crown took p r i o r i t y over that of the p r o v i n c i a l Crown as represented by the Workmen's Compensation Board of B r i t i s h Columbia. Munroe J. reasoned that because the federal l e g i s l a t i o n permitted garnishment proceedings to be c a r r i e d out while the p r o v i n c i a l l e g i s l a t i o n merely made the p r o v i n c i a l Crown a judgment debtor, the federal Crown had taken l e g i s l a t i v e steps to e s t a b l i s h t h e i r p r i o r i t y . Once the federal Crown chose to exercise i t s statutory rights then the p r o v i n c i a l Crown no longer ranked in p a r i passu. The federal government was not so successful in i t s pursuit of income tax owing as a debt in a more recent decision. Dauphin Plains Credit Union 2 6 Limited v. Xyloid Industries Ltd. and the Queen involved the resolution of a claim by the federal government for income tax n o t i o n a l l y withheld from employees' wages before a receiver was appointed to manage the a f f a i r s of the employer. The federal representatives argued that there was a "deemed t r u s t " provision in the Income Tax Act (Canada) that would require an employer to hold income tax withheld from an employee's wages in trust for the federal Crown. The Supreme Court of Canada rejected t h i s argument and held that since the repeal of subsection 123(6) of the Income Tax Act (Canada) there had been no provision in the Act that would deem such a t r u s t . This decision confirms the view that i f the federal government 110 wishes to give i t s e l f p r i o r i t y with respect to income tax owing over i t s p r o v i n c i a l counterparts i t must do so i n l e g i s l a t i o n . However, that a b i l i t y to acquire p r i o r i t y through l e g i s l a t i o n does not extend to the provinces at the expense of the federal government. F. Elections One administrative area of concern for corporations involves the various elections that may be made or that are required to be made under the Income Tax Act (Canada), the Income Tax Application Rules and the Regulations made pursuant to the Income Tax Act (Canada). There are eighty-seven elections contemplated by the federal l e g i s l a t i o n and sixty-nine of these are 27 applicable to corporations. A corporation's concern arises over the eff e c t of an e l e c t i o n made for federal purposes on the computation of pr o v i n c i a l tax payable. There i s no problem with respect to c a l c u l a t i o n of pr o v i n c i a l tax in the agreeing provinces because an el e c t i o n made for federal purposes automatically applies p r o v i n c i a l l y . In Quebec a separate e l e c t i o n i s required by The Taxation Act for a l l p r o v i n c i a l purposes and the procedures involved are to be found i n that Act. The s i t u a t i o n i s di f f e r e n t i n Ontario and Alberta. Ontario provides that an elect i o n made by a corporation under the Income Tax Act (Canada) w i l l apply i n Ontario i f the federal section under which the e l e c t i o n i s made has been made 28 applicable for Ontario purposes. The foregoing i s subject to two conditions. F i r s t , i f a d i f f e r e n t amount would be determined under the pr o v i n c i a l l e g i s l a t i o n then that d i f f e r e n t amount w i l l apply. Secondly, the federal p e n a l i t i e s for late f i l i n g of elections do not apply I l l p r o v i n c i a l l y . Therefore i t i s not the amount elected for federal purposes that i s adopted but rather the e l e c t i o n i t s e l f . As w i l l be seen, t h i s i s important when considering the e l e c t i o n of d i f f e r e n t amounts for federal and p r o v i n c i a l purposes. Alberta's l e g i s l a t i o n goes one step further than Ontario's. It provides that an el e c t i o n made under the federal Act may be f i l e d for p r o v i n c i a l purposes by a corporation and i f that i s done the rules i n the Income Tax 29 Act (Canada) apply. It then goes on to provide that i f the federal e l e c t i o n i s not f i l e d p r o v i n c i a l l y , the P r o v i n c i a l Treasurer s h a l l accept 30 an e l e c t i o n made in accordance with the rules i n the federal Act. Once again, i t i s not the amount elected that i s adopted for p r o v i n c i a l purposes, only the el e c t i o n i t s e l f . Thus Alberta's l e g i s l a t i o n covers a s i t u a t i o n not contemplated by the Ontario l e g i s l a t i o n . Alberta anticipates a separate p r o v i n c i a l e l e c t i o n made in accordance with a federal section that governs a federal e l e c t i o n . Ontario corporations are r e s t r i c t e d to an el e c t i o n made f e d e r a l l y under the federal rules as made applicable i n Ontario and accepted for p r o v i n c i a l purposes or p r o v i n c i a l l y i n accordance with The Corporations Tax Act. Alberta corporations, meanwhile, have the opportunity to elect d i f f e r e n t amounts for federal and p r o v i n c i a l purposes provided that those amounts are permissable within the operation of the federal rules. Ontario corporations can only elect a d i f f e r e n t amount for p r o v i n c i a l purposes i f a d i f f e r e n t amount i s permitted by the Ontario l e g i s l a t i o n . The next question i s in what circumstances can a corporation elect a d i f f e r e n t amount for p r o v i n c i a l purposes than the amount i t has elected 112 federally? A n c i l l a r y to t h i s i s the issue of what ef f e c t can a d i f f e r e n t elected amount have on the c a l c u l a t i o n of a corporation's tax payable, and when would i t be b e n e f i c i a l for a corporation to ele c t a d i f f e r e n t amount? Perhaps the best way to answer these questions i s to take a look at two d i f f e r e n t types of elections that may be made under the Income Tax Act (Canada) and t h e i r a p p l i c a t i o n p r o v i n c i a l l y . One of the more straightforward elections i s to be found i n subsection 83(2) of the Income Tax Act (Canada). A private corporation may elect to pay a c a p i t a l dividend out of the corporation's c a p i t a l dividend account and i f i t does so that dividend i s not included i n the income of i t s rec i p i e n t . Section 2101 of the Regulations made under the Income Tax Act (Canada) prescribes the procedure to be followed when making t h i s e l e c t i o n . Both Ontario and Alberta make subsection 83(2) applicable without change 31 for the purposes of t h e i r l e g i s l a t i o n . Therefore an el e c t i o n made under that section w i l l have e f f e c t i n the respective provinces. As mentioned, Ontario would not i n these circumstances accept an el e c t i o n for p r o v i n c i a l purposes that d i f f e r e d i n amount from that made fe d e r a l l y . Alberta, on the other hand, could accept an el e c t i o n i n a d i f f e r e n t amount. However the nature of the c a p i t a l dividend e l e c t i o n i t s e l f would pro h i b i t an el e c t i o n i n a d i f f e r e n t amount for p r o v i n c i a l purposes. The e l e c t i o n of a c a p i t a l dividend i s the el e c t i o n of an amount that is paid d i r e c t l y to shareholders of the taxpayer corporation. Because the figure i s a re a l one and not merely a notional one, i n practice i t must be the same for federal and pr o v i n c i a l purposes. 113 Nevertheless there i s a series of events that, should i t occur, could produce a v a l i d e l e c t i o n of d i f f e r e n t amounts for federal and p r o v i n c i a l purposes. This scenario revolves around the non-application for p r o v i n c i a l purposes of Part III of the Income Tax Act (Canada). That Part provides for a tax on an excessive e l e c t i o n from the c a p i t a l dividend account of three-quarters of the excess. It also provides that a corporation may, instead of paying the excessive e l e c t i o n tax, el e c t to have the excess 32 treated as an ordinary taxable dividend. Assume that a corporation elects under subsection 83(2) to pay a dividend from the c a p i t a l dividend account of $150,000. That amount i s then excluded from the recipient's income for federal purposes and for Ontario and Alberta purposes. Further assume that the e l e c t i o n , on review by the federal a u t h o r i t i e s , i s considered to be an excessive one and that i n fact the amount available for d i s t r i b u t i o n as a c a p i t a l dividend i s only $100,000. For federal purposes the corporation can either pay an excessive e l e c t i o n tax of $37,500 or i t can elect under subsection 184(3) to treat the excess $50,000 as an ordinary taxable dividend i n which case the amount of the c a p i t a l dividend i s reduced to $100,000. Yet, neither of these alternatives i s available to the corporation i n respect of Ontario or Alberta calculations and consequently the question i s w i l l there be a corresponding reduction i n the amount of the c a p i t a l dividend i n Ontario and Alberta? I f the answer i s no, then we have a c a p i t a l dividend of $100,000 f e d e r a l l y and a c a p i t a l dividend of $150,000 i n Ontario and Alberta. There i s no i n d i c a t i o n i n either Ontario's or Alberta's l e g i s l a t i o n of the treatment that t h i s excess would receive. One would assume that the amount of the c a p i t a l dividend could be reduced for p r o v i n c i a l purposes i f only to 114 re t a i n p a r i t y between the amount remaining i n the c a p i t a l dividend account for federal and p r o v i n c i a l purposes. Yet, the l e g i s l a t i o n i s not clear on t h i s and the argument could be made by a corporation that, i n the absence of any statutory provision to the contrary, i t can claim the higher amount p r o v i n c i a l l y . It i s of in t e r e s t that Quebec's l e g i s l a t i o n provides that the amount of the c a p i t a l dividend account i s the same for Quebec and 33 federal purposes. Neither Ontario nor Alberta impose such a requirement and the inference can be drawn from t h i s that d i f f e r e n t amounts are permissable. One of the most important elections made by a corporation pursuant to the Income Tax Act (Canada) i s the elect i o n of an agreed amount for the purposes of a property transfer to a corporation. A look at a hypothetical example of a section 85 r o l l o v e r indicates the problems encountered by a province that permits e l e c t i o n of a d i f f e r e n t agreed amount for p r o v i n c i a l purposes. It also i l l u s t r a t e s the benefits that can accrue to a corporation that takes advantage of the s i t u a t i o n . As discussed e a r l i e r , Ontario only permits the e l e c t i o n of a d i f f e r e n t amount where i t is expressly provided for i n The Corporations Tax Act. In the case of a section 85 r o l l o v e r no such provision exists so the federal election applies. This i s not the s i t u a t i o n i n Quebec and Alberta. Quebec provides i t s own r o l l o v e r e l e c t i o n rules and procedures i n sections 518 to 528 of The Taxation Act, the Quebec equivalent of section 85 of the Income Tax Act 34 (Canada). Alberta makes section 85 applicable i n Alberta and, as discussed e a r l i e r , permits the el e c t i o n of a d i f f e r e n t amount p r o v i n c i a l l y i f the corporation does not f i l e i t s federal e l e c t i o n i n Alberta. 115 Therefore the s i t u a t i o n can ari s e where corporations i n Quebec and Alberta that r o l l over property into other corporations resident i n those provinces can elect a greater agreed amount for p r o v i n c i a l purposes than they do for federal purposes. Two advantages are immediately apparent. If the corporation r o l l i n g the property over has less taxable income f e d e r a l l y than p r o v i n c i a l l y , then i t i s advantageous to i t to include any gain i n i t s income. Meanwhile the corporation into which the property i s r o l l e d has acquired a higher adjusted cost base i n respect of the property transferred to i t and on d i s p o s i t i o n of the property i t w i l l be better protected from any gain i t may incur. The province, on the other hand, w i l l lose revenue amounting to the tax not coll e c t e d on the gain and not c o l l e c t a b l e in the future on d i s p o s i t i o n of the property because the amount w i l l be part of the r e c i p i e n t corporation's adjusted cost base. The following example i l l u s t r a t e s the problem: SECTION 85 ROLLOVER BETWEEN TOO ALBERTA CORPORATIONS A Co c a p i t a l property shares and cash B Co Cost of property to A Co. $ 70,000 F a i r market value of property on r o l l o v e r $200,000 Consideration recieved from B Co. $200,000 ($70,000 cash, $130,000 shares) Elected agreed amount for federal purposes $ 70,000 Elected agreed amount for p r o v i n c i a l purposes $100,000 116 Tax Consequences Federal P r o v i n c i a l C a p i t a l gain to A Co. Adjusted cost base to B Co. NIL $70,000 $ 30,000 $100,000 G. Tax avoidance and tax evasion As far as a corporation i s concerned some of the most c r i t i c a l sections of the Income Tax Act (Canada) are those that deal with tax avoidance and tax evasion. In order to organize i t s a f f a i r s a corporation needs a clear understanding of the rules of the game and therefore c l a r i t y i n both the federal and p r o v i n c i a l l e g i s l a t i o n i s v i t a l . If the l e g i s l a t i o n d i f f e r s from j u r i s d i c t i o n to j u r i s d i c t i o n , then a corporation faces the dilemma of t r y i n g to r a t i o n a l i z e the two approaches and come up with a course of action that offends neither j u r i s d i c t i o n . In respect of tax avoidance by Canadian residents, the relevant sections of the federal Act include sections 55 and 84.1. Both these sections have 3 5 been adopted without change by Ontario and Alberta. Quebec, however, while r e i t t e r a t i n g subsection 55(1) i n section 308 of The Taxation Act, has chosen to omit subsection 55(2). The p r a c t i c a l result of th i s ommission for a corporate taxpayer i n Quebec i s not as b e n e f i c i a l as i t might, at f i r s t glance, appear to be. Subsection 55(2) of the Income Tax Act (Canada) e f f e c t i v e l y stops a corporation from turning what would normally be a c a p i t a l gain into a tax free dividend. Therefore i t would appear that tax planning that would be caught by subsection 55(2) for federal purposes would be v a l i d i n Quebec and not offend the Quebec l e g i s l a t i o n . That i s of 117 l i t t l e comfort to corporations since a federal p r o h i b i t i o n i s s u f f i c i e n t to stop such schemes. The only corporation that could possibly benefit"from Quebec's ommission would be a corporation that, despite having a tax free dividend converted to a gain pursuant to subsection 55(2), had no taxable income f e d e r a l l y but did have taxable income in Quebec. That taxable income would now presumably be reduced by the corporation being able to receive a dividend rather than a gain. One wonders why Quebec chose to omit t h i s subsection and yet include the more general subsection 55(1) of the federal Act. Perhaps they were of the opinion that subsection 55(1) was s u f f i c i e n t to p r o h i b i t the transactions contemplated by subsection 55(2), although in l i g h t of the federal experience with the ineffectiveness of subsection 55(1) t h i s seems u n l i k e l y . Perhaps i t was a deliberate decision to permit a corporation to organize i t s a f f a i r s i n a way that i s prohibited f e d e r a l l y . Perhaps they preferred to l e t the federal government administer the subsection rather than set up the machinery to do so themselves. Whatever t h e i r reason the fact remains that Quebec i s the one j u r i s d i c t i o n i n Canada where a corporation i s not r e s t r i c t e d by t h i s controversial subsection. Quebec has, however, enacted a set of rules equivalent to those found in 3 6 section 84.1 of the Income Tax Act (Canada). Ontario and Alberta have 37 also adopted section 84.1 without change. Therefore the anti-dividend s t r i p p i n g rules that prevent the premature extraction of a pre 1972 c a p i t a l gain tax free are applicable i n respect of both federal and p r o v i n c i a l corporate income tax. 118 It i s in the area of tax evasion that the differences between the federal and p r o v i n c i a l rules become more obvious. Part XVI of the Income Tax : Act (Canada) contains three sections that deal with s p e c i f i c methods of evading tax. Section 245 prohibits an a r t i f i c i a l reduction i n income by use of deductions or i n d i r e c t payments or transfers. Section 246 allows the Treasury Board to counteract tax avoidance or reduction of tax payable by a r t i f i c i a l means. Subsection 247(1) ensures that dividends are not stripped out of corporations under the guise of c a p i t a l gains. Subsection 247(2) allows the Minister of National Revenue to deem corporations to be associated with each other in c e r t a i n circumstances. Ontario has adopted section 245' without change i n section 21(1) of The Corporations Tax Act and Quebec has restated i t i n section 1080 of The Taxation Act. Alberta has not adopted or re-enacted the rule in section 245. Therefore, presumably, Alberta i s r e s t r i c t e d i n i t s power to determine what i s an a r t i f i c i a l transaction to the extent that i t must r e l y on the federal government to make such a determination. In addition, Alberta does not adopt or re-enact section 246 of the Income Tax Act (Canada). P r a c t i c a l l y , however, neither omission i s a s i g n i f i c a n t problem for the province unless the corporate taxpayer has no taxable income fe d e r a l l y without the use of the a r t i f i c i a l transaction or avoidance scheme and i s using the transaction or scheme for the purposes only of avoiding p r o v i n c i a l tax. If t h i s i s the case Alberta w i l l have to attempt to persuade the federal authorities to make such a determination even though the corporation's actions do not impinge on the federal tax payable. As far as tax avoidance goes, Ontario i s i n a s i m i l a r p o s i t i o n to Alberta 119 because i t does not adopt section 246. Quebec does restate section 246 for 3 8 p r o v i n c i a l purposes. : When i t comes to the anti-dividend s t r i p p i n g provisions i n the federal and p r o v i n c i a l l e g i s l a t i o n , one see a d i f f e r e n t approach taken by each of the three non-agreeing provinces. Admittedly the importance of subsection 247(1) of the federal Act has diminished over the years but i t i s s t i l l relevant. Alberta does not adopt subsection 247(1) nor does i t enact i t s own anti-dividend s t r i p p i n g section. I t , therefore, r e l i e s on the federal a p p l i c a t i o n of the section. However, without enactment of an equivalent section or adoption of the federal subsection no amount determined under subsection 247(1) and directed to be included i n income calculated f e d e r a l l y can be so included for Alberta purposes. This could be a major omission from income. Ontario does not t e c h n i c a l l y adopt subsection 247(1) but i t does go one step further than Alberta because i t provides that: 21(2) In computing the income of a corporation for a taxation year there s h a l l be included an amount that i s included i n computing the income of the corporation under Part XVI of the Income Tax 3 9 Act (Canada) pursuant to section 247 of that Act. 3 Thus, the amount determined f e d e r a l l y i s applied i n Ontario to the corporations income but the Ontario Minister of Revenue does not have the power to decide whether or not there has been avoidance of tax. 40 Quebec takes the opposite approach. It not only gives the Quebec Minister of Revenue the same powers as those exercised by the federal Minister of National Revenue but. those powers are apparently not subject to review by 120 41 the courts, except i n exceptional circumstances. In Quebec, when the Minister of Revenue i s of the opinion that the object of a transaction i s to decrease the assets of a corporation or cause these assets to disappear in such a manner that tax that would otherwise be payable has been or i s avoided, he may determine the amount of that tax that must be included i n income. One immediate difference between t h i s provision and subsection 247(1) i s that i n Quebec the Minister i s r e s t r i c t e d to transactions where the object, not one of the p r i n c i p a l objects as 247(1) permits, i s to avoid tax. However, t h i s r e s t r i c t i o n i s compensated for by the fact that unlike the federal Minister's decision, the decision of the Quebec Minister of Revenue i s not subject to j u d i c i a l review unless i t can be shown by the 42 taxpayer that the m i n i s t e r i a l d i s c r e t i o n was exercised i n bad f a i t h . H. Deemed association of corporations The power to deem of corporations to be associated has been treated d i f f e r e n t l y by the federal government and the three non-agreeing provinces. This causes confusion for corporate taxpayers over whether or not they are considered to be associated for p r o v i n c i a l purposes. The statutory d e f i n i t i o n of associated corporations i s found in subsection 256(1) of the Income Tax Act (Canada) and t h i s subsection has been adopted by both 43 Ontario and Alberta. Quebec does not enact a statutory d e f i n i t i o n of association. The problems r e a l l y surface i n the application of subsection 247(2). That federal subsection gives the Minister of National Revenue the power to deem corporations to be associated. Alberta accepts a federal deeming of association and provides that i f corporations are associated 121 f e d e r a l l y under subsection 247(2) then they are to be considered associated 44 for the purposes of The Alberta Corporate Income Tax Act. The only p r o v i n c i a l power to deem corporations to be associated i s granted to the P r o v i n c i a l Treasurer in respect of c a l c u l a t i o n of entitlement to the 45 royalty tax c r e d i t . These Alberta provisions leave a corporation i n no doubt as to whether or not i t i s associated with one or more corporations i n Alberta. The s i t u a t i o n i s not so straightforward i n Quebec and Ontario. It would appear that two questions a r i s e when considering the p r o v i n c i a l problems presented by the issue of deemed association. F i r s t , does a province consider corporations that are associated for the purposes of the federal l e g i s l a t i o n to be associated for the purposes of the p r o v i n c i a l l e g i s l a t i o n ? Secondly, does the province have i t s own power to deem corporations to be associated for the purposes of c a l c u l a t i n g p r o v i n c i a l tax payable? The answer i s a q u a l i f i e d no.to both questions i n Ontario and Quebec. Quebec does not give the Minister of Revenue the power to deem corporations to be associated. It also does not d i r e c t l y adopt a federal deemed association. Section 771 of The Taxation Act i n d i r e c t l y incorporates a limited concept of associated corporations by reference to subsection 125(1) of the Income Tax Act (Canada). Section 771 provides that the tax payable by a corporation i s an amount that i s calculated by reference to the amount a Canadian controlled private corporation may deduct pursuant to subsection 125(1). Therefore the subsection 125(1) c a l c u l a t i o n i s brought into the c a l c u l a t i o n of Quebec tax payable. The operation of subsection 125(1) i s dependent on the concept of associated corporations because the deduction made under subsection 125(1) i s based on a corporation's business l i m i t and t o t a l business l i m i t . Those expressions 122 are defined i n subsection 125(2) and associated corporations have li m i t s of n i l . This rather convoluted set of statutory references results i n Quebec only using the federal concept of associated corporations for a s p e c i f i c l i m i t e d purpose. Federally associated corporations w i l l be associated for the purpose of reducing p r o v i n c i a l tax payable by a percentage of the federal small business deduction. The deeming of association i s limited to that set of circumstances and does not extend to Quebec's own incentives for " e l i g i b l e business". Ontario's Minister of Revenue does not have the power to deem corporations to be associated and a federal deeming of association under subsection 46 247(2) i s not made applicable generally for Ontario purposes. It does come into play i n the c a l c u l a t i o n of Ontario's small business incentives through a reference i n sections 33, 34 and 35 of The Corporations Tax Act to subsection 125(1) of the federal Act. Therefore corporations can be deemed to be associated with each other for federal purposes but not p r o v i n c i a l purposes in Ontario and Quebec. The converse i s true i n Alberta and the seven agreeing provinces. These corporations deemed to be associated by the Minister of National Revenue w i l l be associated for a l l p r o v i n c i a l purposes. Corporations would do well to act with these facts i n mind. In conclusion, differences i n the administrative provisions of the Income Tax Act (Canada) and the l e g i s l a t i o n of Quebec, Ontario and Alberta can adversely affect corporations with a permanent establishment i n these j u r i s d i c t i o n s . Those adverse e f f e c t s arise e s p e c i a l l y i n the areas of 123 assessment and reassessment and the powers to deem corporations to be associated. Both those areas are f u l l of uncertainties that, as discussed, put the corporate taxpayer in an invidious p o s i t i o n when i t comes to planning i t s a f f a i r s and the tax consequences of those a f f a i r s . The p o s s i b i l i t y of reassessment in Ontario after the federal time l i m i t for reassessment has expired, the lack of administrative co-operation generally between the non-agreeing provinces and the federal government and the question of whether or not corporations are associated both f e d e r a l l y and p r o v i n c i a l l y a l l contribute to t h i s uncertainty. Several problems are also presented by the d i f f e r e n t approaches to tax evasion. F i r s t , what i s legitimate within the scope of both the federal and p r o v i n c i a l l e g i s l a t i o n must be determined by each corporation. Then, i f the conclusion i s reached that a transaction or scheme i s permitted by one j u r i s d i c t i o n but prohibited by another, a decision must be made on the ramifications of that for the corporation. F i n a l l y i f an advance r u l i n g i s sought and the proposed transaction or scheme receives a favourable reception i n one j u r i s d i c t i o n but unfavourable i n another, the only course open to the corporation i s to hope that negotiations with both j u r i s d i c t i o n s w i l l produce an acceptable r e s u l t . Once again the corporate taxpayer has to r e l y on inter-governmental co-operation and goodwill, both very unpredictable and uncertain concepts. Inter-governmental co-operation appears to be the key to improvement in the administrative treatment of the corporate taxpayer. Yet, there i s one drawback to more co-operation. As seen, there are a few advantages for the taxpayer to be found as a r e s u l t of the uncertain state of a f f a i r s . These 124 advantages are primarily i n the area of elections and r e s u l t from the e l e c t i o n of d i f f e r e n t amounts for federal and p r o v i n c i a l purposes. Nevertheless i t would seem that i n t h i s case the disadvantages are more numerous than the advantages. Yet change i s u n l i k e l y unless more pressure i s put on the federal and p r o v i n c i a l governments by those corporations that can show the d i f f i c u l t i e s and hardships they have encountered. 125 CHAPTER IV - FOOTNOTES 1 It should be noted that at present Alberta accepts the federal return for p r o v i n c i a l purposes although Alberta o f f i c i a l s have indicated that they are currently drawing up t h e i r own return to replace the federal one for p r o v i n c i a l purposes. 2 The administrative provisions referred to i n t h i s chapter are contained i n The Taxation Act, R.S.Q. 1977, c. 1-3, ss. 1000 to 1086; The Corporations Tax Act, R.S.O. 1980, c. 97, ss. 67 to 100; The •Alberta Corporate Income Tax Act, R.S.A. 1980 c. A-17, ss. 36 to 84 and the Income Tax Act, R.S.C. 1952, c. 148, ss. 150 to 180 and ss. 220 to 247. 3 The Income Tax Act, R.S.C. 1952, c. 148, s. 152(4). 4 Ibid. 5 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 73(7)(a)(iv). 6 The Alberta Corporate Income Tax Amendment Act, S.A. 1982, c. 1, s. 20(1) amends section 4 3 ( l ) ( b ) ( i i ) of The Alberta Income Tax Act. 7 The Income Tax Act, R.S.C. 1952, c. 148, s . 157. 8 The Income Tax Act, R.S.C. 1952, c. Corporations Tax Act R.S.O. 1980, c. 97, s Corporate Income Tax Act, R.S.A. 1980, c. 148, s. 1 5 7 ( l ) ( b ) ( i ) ; The . 70(2)(b)(i); The Alberta A-17, s. 3 8 ( l ) ( b ) ( i ) . 9 The R.S. R.S. Income Tax Act R.S.C. 1952, c. 148, Q. 1977, c. 1-3, s. 1028; The Alberta A. 1980, c. A-17, s. 38(3). s. 157(2); The Taxation Act, Corporate Income Tax Act. 10 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 70(3). 11 The Alberta Corporate Income Tax Act, R.S. A. 1980, c. A-17, s. 38(1.1). 12 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 78. 13 The Alberta Corporate Income Tax Act, R.S. A. 1980, c. A-17, s. 50. 14 The Taxation Act, R.S.Q. 1977, c. 1-3, s. 1066. 15 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 92. 16 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 94(l ) ( b ) . 17 Dauphin Plains Credit Union Limited v. Xyloid Industries Ltd. and the Queen (1980) C.T.C. 247 at 265, per Estey J. (dissenting). 126 18 The Income Tax Act, R.S.C. 1952, c. 148, s. 222; The Alberta Corporate Income Tax Act R.S.A. 1980, c. A-17, s. 57. 19 I t should be noted that because the federal government c o l l e c t corporate income taxes on behalf of the agreeing provinces, no problems of p r i o r i t y a r i s e . 20 The Income Tax Act, R.S.C. 1952, c. 148, s. 227(4). 21 The Income Tax Act, R.S.C. 1952, c. 148, s. 227(6), repealed by S.C. 1956, c. 39, s. 27. 22 This proposition i s well established. In R_^  v. Wells 16 East 278 at 282, Macdonald, C.B. said " i take i t to be an incontrovertible rule of law that where the King's and the subject's t i t l e concur the King's s h a l l be preferred". 23 See, In re S i l v e r Bros. Limited (1932) A.C. 514; In re Walter's  Trucking Service Ltd. (1965) 50 D.L.R. (2d) 711. 24 See, for example, Gauthier v. The King (1918) 56 S.C.R. 176; Crowther v. Attorney-General of Canada (1959) 17 D.L.R. (2d) 437; Re Sternschein, Sternschein v. The Queen (1965) 50 D.L.R. (2d) 262. 25 (1968) C.T.C. 111. 26 Supra, note 17. 27 For a f u l l l i s t of a l l the elections available under the Income Tax Act (Canada), the regulations made under that Act and the Income Tax Application Rules, see, Recommendations on the Income Tax Act 1980/81 by the Joint Committee on Taxation of the Canadian Bar Association and the Canadian I n s t i t u t e of Chartered Accountants, Appendix I. 28 The Corporations Tax Act, R.S.O. c. 97, s. 1(4). 29 The Alberta Corporate Income Tax Act, R.S.A. 1980 c. A-17, s. 2(6). 30 Ibid 31 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 23(1); The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 14(1). 32 The Income Tax Act, R.S.C. 1952, c. 148, s. 184(2) and (3). 33 Regulation respecting The Taxation Act, O.C. 1981-80, Quebec Gazette, s. 590R2. 34 The Alberta Income Tax Act, R.S.A. 1980, c. A-17, s. 14(1). 35 The Corporations Tax Act, R.S.O. 1980, c. 97, s l 3 ( l ) ; The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 9. 127 36 The Taxation Act, R.S.Q. 1977, c. 1-3, ss. 517.1 to 517.6 37 The Corporations Tax Act, R.S.O. 1980, c. 97, s. 23(1); The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 14(1). 38 The Taxation Act, R.S.Q. 1977, c. 1-3, s. 1082. 39 The Corporations Tax Act. R.S.O. 1980, c. 97, s. 21(2). 40 The Taxation Act, R.S.Q. 1977, c. 1-3, ss. 1083 to 1085. 41 See, Roncarelli v. Duplessis (1959) S.C.R. 121 and E.J. Richardson, Tax Planning for Corporations i n Light of Differences i n Federal and Pro v i n c i a l Income Tax Le g i s l a t i o n , Report of Proceedings of the  T h i r t y - F i r s t Tax Conference, (1979), 766 at 801. 42 Ibid. 43 The Corporations Tax Act, R.S.O. 1980, c. 97, s. l ( l ) ( a ) ; The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 1(1). 44 The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 2(9). 45 The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 26.1(9), (10). 46 The Corporations Tax Act, R.S.O. 1980, c. 97, s. l ( l ) ( a ) ; The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 1(1). 128 CHAPTER V THE FUTURE A. I ntroduction It i s very easy to c r i t i c i s e an e x i s t i n g state of a f f a i r s and the levying and c o l l e c t i o n of corporate income tax in Canada c e r t a i n l y lends i t s e l f to a l l kinds of c r i t i c i s m . What i s not so easy i s to suggest viable improvements to the system. This i s even more d i f f i c u l t i n a federal country where the v i a b i l i t y of any recommendations for change i s dependant upon acceptance by not only the federal government but by the ten p r o v i n c i a l governments as well. One would suspect that, i n retrospect, the Carter Commission would agree that unanimous acceptance i s d i f f i c u l t to achieve. That Commission c i t e d one of the main goals of Canada to which the tax system should contribute was "to maintain and strengthen the Canadian federation". In fact, the lack of harmony on tax issues could be said to have seriously weakened Canadian federation. The Prime Minister obviously took t h i s view when he said: What i s required i s a new orientation to inter-governmental co-operation a clearer d e f i n i t i o n of the roles of the two orders of government may well help to achieve t h i s a new orientation which would focus the attention of governments on the whole complex issue of public services and on the whole of Canada's tax system, as they a f f e c t the c i t i z e n . This new orientation, t h i s focus, i s what f e d e r a l - p r o v i n c i a l relations must come to mean to the c i t i z e n , instead of the unhappy disputes which have persisted during the post war period as to the share of ^  c e r t a i n taxes which each government ought to get. 129 W i l l there be a new orientation to inter-governmental co-operation in the corporate income tax f i e l d ? If there i s , w i l l i t be a solution to: the problems already discussed? This chapter w i l l examine three potential courses open i n the corporate tax f i e l d to the federal and p r o v i n c i a l governments. One i s the inter-governmental co-operation espoused by the Prime Minister. Another i s the antithesis of t h i s , that i s more p r o v i n c i a l autonomy and independence in the f i e l d . The t h i r d i s tax harmonization, a popular concept in theory but as yet untried i n p r a c t i c e in the corporate tax area in Canada. B. Co-operative federalism It has been said that Canadian inter-governmental f i s c a l relations "are as unharminous and unconstructive as at any time in the history of Confederation and even the term 'co-operative federalism' has been dropped from our vocabulary". These are strong words but, when applied to corporate income tax, true. Co-operative federalism represents f e d e r a l - p r o v i n c i a l coordination through consultation i n the administration 4 of matters that are shared by both levels of government. Co-operative federalism has, over the l a s t few years, become somewhat unfashionable. In the corporate tax area the coordination of co-operative federalism i s p r a c t i c a l l y non-existent as far as the federal government, Quebec, Ontario and Alberta are concerned. It does exist between the federal government and the agreeing provinces but the damage i s done by the three provinces that chose to opt out. The essence of co-operative federalism is t o t a l co-operation and thus i t cannot exist without the p a r t i c i p a t i o n of a l l j u r i s d i c t i o n s . 130 Yet, co-operative federalism has been suggested as the panacea to cure a l l the problems with the Canadian corporate income tax system. In order to determine whether i t i s f e a s i b l e to expect such a r e s u l t , the e f f e c t of a new s p i r i t of co-operation on some of the areas of the system c r i t i c i s e d e a r l i e r w i l l be examined. The most obvious area for more communication and co-ordination between a l l the provinces and the federal government i s the administration of the system. It i s curious that while Quebec, Ontario and Alberta value the independence of t h e i r administrations so highly, this i s the area where one senses that neither the provinces nor the federal government would be averse to more co-operation. At the present time, for example, the federal government, Ontario and Alberta a l l include a provision i n t h e i r corporate income tax l e g i s l a t i o n permitting the respective p r o v i n c i a l o f f i c i a l s to communicate and exchange information 6 with each other. That in i t s e l f goes a long way to a s s i s t i n g the provinces i n t h e i r pursuit of the revenue due to them as taxes from corporations. In addition there have been i s o l a t e d incidents of committees being set up for p a r t i c u l a r purposes in the quest to solve 7 i n t e r - p r o v i n c i a l and f e d e r a l - p r o v i n c i a l problems. Yet, this i s not enough. There i s no formal l i n e of communication at the administrative l e v e l between the federal government and the non-agreeing provinces and between the non-agreeing provinces themselves. As we have seen, instances a r i s e where the taxpayer i s adversely affected by an i n t e r - j u r i s d i c t i o n a l discrepancy and i s unable to do more than hope that one of the j u r i s d i c t i o n s involved w i l l recognise the d i f f i c u l t y and g a l l e v i a t e the problem. A formal l i n e of communication between the j u r i s d i c t i o n s would at least give the taxpayer a body to which the 131 complaint could be directed. As far as the j u r i s d i c t i o n s are concerned, any disadvantage involved i n a s a c r i f i c e of independence should be outweighed by the advantage of knowledge acquired that would otherwise be unknown. The aim of c o l l e c t i n g a l l taxes due i s shared by both the federal government and provinces a l i k e . The easiest means to achieve that aim surely involves more co-operation. Perhaps a lesson can be learned from the operation of a f e d e r a l - p r o v i n c i a l body that has had some success in the tax p o l i c y area. That body i s the Federal-Provincial Continuing Committee on F i s c a l and Economic Matters set up i n 1955. Its terms of reference are discussion and exchange of information on f i s c a l and economic matters, and to examine questions that may be referred to i t by the f e d e r a l - p r o v i n c i a l Premiers Conference"?"^ It i s the most v i s i b l e sign that f e d e r a l - p r o v i n c i a l communication about tax p o l i c y s t i l l e x i s t s . It includes representatives from both the agreeing and non-agreeing provinces, an important factor since t h i s i s the one opportunity for the federal government and agreeing provinces to learn about any proposed changes to the l e g i s l a t i o n of the non-agreeing provinces. Nevertheless, there i s s t i l l room for improvement i n the operation of t h i s committee. According to one senior Department of Finance o f f i c i a l , p o l i c y discussions on proposed taxation p o l i c y often take place af t e r the federal government has made a decision to implement a p a r t i c u l a r policy.^"^ This tends to detract from the value cf any decisions made by the Committee. Perhaps the best that can be said i s that at least there i s a forum for discussion of the p o l i c y issues. Discussion after the fact i s better than no discussion at a l l . 132 An i n t e r e s t i n g recommendation that would be of considerable assistance to the corporate taxpayer caught i n the middle of an i n t e r - j u r i s d i c t i o n a l dispute or by an anomaly i n the l e g i s l a t i o n i s that a code of tax conduct be established and adhered to by a l l governments. When the Parliamentary Task Force on Federal-Provincial Arrangements made t h i s recommendation they commented that: [s] uch a code of tax conduct would not preclude the use of p r o v i n c i a l government expenditure p o l i c y or regulatory devices to achieve p a r t i c u l a r economic or s o c i a l objectives, but i t might at least help to maintain reasonable administrative and compliance costs. These comments are es p e c i a l l y apt when considering the application of a code of tax conduct to corporate income tax. Whether this recommendation w i l l be implemented or not probably depends on how much of a benefit the non-agreeing provinces can foresee i n the form of increased revenues through better administrative and c o l l e c t i o n procedures. The benefit to the corporate taxpayer would be an in c i d e n t a l r e s u l t of such action. A new approach to corporate income tax administration based on co-operative federalism, whether i n the form of the establishment of a committee or introduction of a code of conduct, would d i r e c t l y a f f e c t the federal budget process. As discussed, p r o v i n c i a l p a r t i c i p a t i o n i n the discussions leading 13 up to the introduction of the federal budget i s extremely limited. There i s no formal communication between the Minister of Finance and his p r o v i n c i a l counterparts about proposed tax changes to be contained i n the Budget. The rationale for t h i s i s that f a m i l i a r excuse, budget secrecy. Yet, there i s a glimmer of l i g h t on the horizon. The Green Paper on Budget 133 Secrecy and Proposals for Broader Consultation introduced i n the House of Commons in A p r i l , 1982 by the Minister of Finance acknowledges that budget secrecy i s somewhat of an over-rated reason for non-communication of budget i 14 information p r i o r to the budget s introduction. This theme i s picked up by the Committee on the Budget Process of the Canadian Tax Foundation which emphatically c a l l s for more communication between federal o f f i c i a l s and those of the provinces before the Budget decisions are f i n a l i z e d "without .,15 the spectre of budget secrecy unduly i n h i b i t i n g t h e i r discussion . A new approach to communication of information to the p r o v i n c i a l governments about the federal Budget i s well overdue. If the federal government should agree to be more forthcoming with t h i s information, then there i s a good chance that as a 'quid pro quo' the provinces w i l l agree to divulge more information about t h e i r future tax p o l i c i e s to the federal government and other p r o v i n c i a l governments p r i o r to introduction in the p r o v i n c i a l Budget .^ "^  That would be a true example of co-operative federalism. A fundamental question that arises when considering the e f f e c t of co-operative federalism on the corporate income tax system i s : are co-operative federalism and regionalism compatible? Does the existence of one preclude the existence of the other? Regionalism and i t s effects seem to have become the l a t e s t preoccupation of p o l i t i c a l s c i e n t i s t s and others 17 who write about Canadian federalism. The consensus seems to be that regionalism i s an i n t e g r a l part of a f e d e r a l i s t country and therefore i s 18 compatible with co-operative federalism. It has been put t h i s way: Federalism presumes the existence of both nationalism and regionalism. It i s the coexistence of c e n t r i p e t a l and c e n t r i f u g a l forces, 134 of pressures for . c e n t r a l i z a t i o n and decentralization, of desires for unity and d i v e r s i t y , of attachments to the nation and the : region which are the very foundations of federalism as a p r i n c i p l e of p o l i t i c a l organisation .x-' If regionalism i s a part of co-operative federalism the next question i s , in the context of the corporate income tax system, how far must the pendulum swing away from nationalism towards regionalism before that co-operative federalism no longer exists? It can be argued that the pendulum has already swung too far. Three out of ten provinces do not p a r t i c i p a t e i n the national system. That i n i t s e l f i s enough to suggest that an excess of regionalism has o b l i t e r a t e d co-operative federalism. More evidence of a r e g i o n a l i s t i c approach i s found when a close look i s taken at the tax incentives offered by the three non-agreeing provinces. The Alberta royalty tax credit i s a c l a s s i c example of a province o f f e r i n g an incentive to the type of corporation that i t i s in the p r o v i n c i a l government's int e r e s t to a s s i s t . The Alberta economy depends to a large extent on the fate of the o i l and gas industry. In Quebec and Ontario i t is the small business and e s p e c i a l l y the manufacturing corporations that are assisted through tax incentive schemes. Again, regionalism i s prevelant because these corporations form the backbone of the Quebec and 20 Ontario economy. Even some of the non-agreeing provinces have come up with t h e i r own tax incentives for corporations. B r i t i s h Columbia, for 21 example, provides for a logging tax reduction while Saskatchewan grants a 22 royalty tax rebate. Given, therefore, that the corporate income tax system in Canada has become one that leans more towards a regional approach than a national approach, ' 135 what ef f e c t would more attention to co-operative federalism have on the regional incentive schemes? Presumably i n order to recapture the s p i r i t of co-operative federalism the emphasis would have to be put more on a n a t i o n a l i s t i c approach and that r e s u l t s i n less regionalism. Less regionalism means fewer p r o v i n c i a l tax incentive schemes designed to a s s i s t l o c a l corporations. The vacuum l e f t by such a change in emphasis would have to be f i l l e d by the federal government which in turn would provide the 23 tax incentives of a regional nature. Therefore co-operative federalism, while not precluding regional tax incentive schemes, would require that they be provided by the federal authorities and not the p r o v i n c i a l a u t h o r i t i e s . The f i n a l item to be examined when considering the a p p l i c a t i o n of more co-operative federalism to the corporate income tax system i s the operation of the a l l o c a t i o n rules. This is perhaps the most obvious area where a l i t t l e co-operative federalism would a s s i s t the corporate taxpayer by eliminating the p o s s i b i l i t y of double taxation. The problems presented by the d i f f e r e n t rules and the differences i n application have been examined. Tax commentators have come up with some int e r e s t i n g methods of solving these problems. One commentator has suggested ridding the rules of the 24 sales factor and instead basing them on p r o f i t s . F i r s t he assumes that a corporation's a c t i v i t i e s are a l l equally p r o f i t a b l e . He then postulates that i s a determination i s made i n respect of a permanent establishment of the annual p a y r o l l of that a c t i v i t y and the value of company property i n the province then p r o f i t s earned i n any province w i l l be an amount that bears the same r e l a t i o n to t o t a l p r o f i t s of the company as p a y r o l l and property i n the province bears to the t o t a l p a y r o l l and property of the 136 corporation. One drawback to t h i s analysis i s that i t assumes that p r o f i t s are earned wherever business a c t i v i t y i s c a r r i e d on, and t h i s i s not necessarily so. Nevertheless, the a t t r a c t i o n of t h i s suggestion i s that i t may well appeal to provinces such as Alberta that view the present rules as orientated too extensively towards the manufacturing corporation. Elimination of the sales factor could make the rules more acceptable generally. On the other hand, there are those who f e e l that the rules s t i l l have merit. It has been said that: The e x i s t i n g rules, with a l l t h e i r f a u l t s , have the v i r t u e of being s u f f i c i e n t l y simple, as well as being s u f f i c i e n t l y f a m i l i a r , to be understood by taxpayers and to be capable of being readily administered by tax c o l l e c t o r s . ^ C e r t a i n l y t h i s comment i s v a l i d i n respect of the federal rules but one wonders whether the corporate taxpayer views the rules in Quebec and Ontario and e s p e c i a l l y t h e i r application as " s u f f i c i e n t l y simple". The solution to the taxpayer's problems with the a l l o c a t i o n rules must be based on co-operation between the federal government and the provinces. That co-operation should take two forms. F i r s t , the a l l o c a t i o n rules should be the same in a l l j u r i s d i c t i o n s . Secondly, the rules should be applied i n an atmosphere of compromise and common sense, thereby eliminating the present anomalies that occur i n t h e i r a p p l i c a t i o n . Yet, even this would not be enough. The rules may be uniform and thereby equitable but t h e i r a p p l i c a t i o n w i l l s t i l l r e sult i n i n e q u i t i e s . The reason i s that the rules are based on the d e f i n i t i o n of permanent establishment and that term has a 137 d i f f e r e n t meaning for federal purposes and i n Quebec, Ontario and Alberta. Those differences in i n t e r p r e t a t i o n are fundamental to the corporate income tax systems of the three non-agreeing provinces and no amount of co-operative federalism w i l l be able to overcome that b a r r i e r . Therefore a new s p i r i t of co-operative federalism applied to the Canadian corporate income tax system can obviously only improve the system and thereby the l o t of the corporate taxpayer. However, i t i s c e r t a i n l y not a solution to a l l the problems. The concept i s extremely laudable i n theory but in pr a c t i c e almost impossible to implement. Therefore the best that can be hoped for i s a l i t t l e more co-operation at the administrative l e v e l where s a c r i f i c e s of p o l i t i c a l p r i n c i p l e or, even worse, tax revenues are not involved. That would be a good beginning. C. Prov i n c i a l autonomy The evolution of the Canadian tax system has been described by one commentator as "the piecemeal d i s i n t e g r a t i o n of the national tax system". If t h i s i s so, then perhaps events have reached the stage where a t r u l y "national" corporate income tax system i s impossible to achieve. The Canadian corporate income tax system could consist of two d i s t i n c t components. The federal government could, on i t s own behalf, levy and c o l l e c t corporate income taxes as i t now does but each province would have i t s own corporate income tax rules and administration. This exercise i n p r o v i n c i a l autonomy may not, in l i g h t of recent events, be as far fetched as i t would have seemed to be ten years ago. Alberta has recently decided 27 to pursue i t s own course and B r i t i s h Columbia i s threatening to do so. 138 Perhaps the best solution i s to l e t t h i s happen and encourage a l l provinces to i n i t i a t e t h e i r own systems. There are advantages i n t h i s for both the federal government, the corporate taxpayer and the provinces. The advantage to the federal government i s , of course, that i t w i l l no longer have to administer the corporate income tax systems of seven provinces. The saving in do l l a r s would be considerable. As far as the corporate taxpayer i s concerned i t could be said that i t would be no worse off than i t i s at present. The ideal s i t u a t i o n is t o t a l conformity in the corporate income tax systems of the federal government and the provinces but i f that does not e x i s t the degree of non-conformity i f i r r e l e v a n t . Any non-conformity at a l l presents problems for the corporate taxpayer. Another more p o s i t i v e advantage to the corporate taxpayer would be the opportunity to j u r i s d i c t i o n shop. If the provinces are given a free hand to develop t h e i r own tax systems, they w i l l be able to o f f e r incentives to those types of corporations that they wish to encourage. A new corporation would be well advised to pick i t s permanent establishment with t h i s i n mind and look for the province o f f e r i n g the most advantageous tax incentives. The advantages to the provinces are obvious. Each province w i l l be able to design i t s own corporate income tax system to meet i t s own requirements. The only r e s t r i c t i o n s on the design w i l l be those of a c o n s t i t u t i o n a l nature and the economic v i a b i l i t y of the system. From a c o n s t i t u t i o n a l viewpoint, the tax must be d i r e c t . On the economic side, the tax must not be so onerous that i t drives corporations out of the province thereby diminishing tax revenues. Yet, the opportunity i s there to increase revenues from corporate income taxes provided that the correct balance is 139 struck between the tax burden imposed on corporations and t h e i r a b i l i t y to pay i t . There w i l l be much more room for a province to fine tune- i t s system. I r o n i c a l l y enough, another advantage of p r o v i n c i a l independence i n th i s f i e l d might well be the promotion of more collaboration on tax p o l i c y by the provinces. It may be that such collaboration proves necessary i n order to administer systems that p a r a l l e l each other. Unfortunately, for every advantage there i s a disadvantage. For the federal government t h i s means a loss of control over the p r o v i n c i a l systems. For the corporate taxpayer the problems are more serious. A corporation paying tax i n more than one province w i l l be faced with the added expense of f i l i n g more than one return and generally complying with the l e g i s l a t i o n of more than one j u r i s d i c t i o n . We have seen how complicated l i f e can be for a corporation that has to abide by the d i f f e r i n g l e g i s l a t i o n of Quebec, Ontario and Alberta. The s i t u a t i o n would be exacerbated by the addition of seven more non-agreeing provinces. For the provinces one of the more mundane disadvantages is the expense of set t i n g up and administering t h e i r own corporate income tax systems. Perhaps, however, the r e a l hardship would b e f a l l those provinces that, because of regional d i s p a r i t y , are unable to compete on equal terms with the more affl u e n t provinces. This regional d i s p a r i t y i s in evidence when a look i s taken at the f i s c a l capacity of each province. That f i s c a l capacity varies dramatically. For example, the t o t a l revenues, including federal transfer payments, of Alberta are more than double those of Prince 2 8 Edward Island. It is these stark r e a l i t i e s that s t r i k e fear into the heart of p r o v i n c i a l p o l i t i c i a n s from the less affluent provinces when the 140 t a l k i s of more p r o v i n c i a l autonomy in the tax f i e l d . This can be seen i n a statement made i n 1963 by the Premier of Nova Scotia. He said: , fl] n the l i g h t of the d i s p a r i t y i n natural resources and economic development i n the various provinces, the federal government must reta i n a s u f f i c i e n t portion of the tax f i e l d s i n Canada to enable i t to discharge i t s d i r e c t c o n s t i t u t i o n a l r e s p o n s i b i l i t i e s and to a s s i s t provinces with low tax p o t e n t i a l so as to enable them to furnish a national standard of services of ( s i c ) the Canadian c i t i z e n s r e s i d i n g within t h e i r O Q boundaries. ax o The less a f f l u e n t provinces cannot afford the i n t e r - p r o v i n c i a l t competition that more p r o v i n c i a l autonomy would bring. They do not have the resources to be able to design a corporate income tax system that would bring them s u f f i c i e n t revenues. When the f i s c a l capacity of the provinces is examined i t i s easy to see why Quebec, Ontario and Alberta are able t run t h e i r own corporate income tax systems. They can afford i t . Other provinces cannot. The prospect of the Canadian corporate income tax system becoming one where every province fends for i t s e l f by levying and c o l l e c t i n g i t s own corporate income tax i s slim. As seen, the economic problems are many. Yet, even more fundamental problems can be found when the p o l i t i c a l r e a l i t i e s of the s i t u a t i o n are considered. No federal government would want to be the one to r e l i n q u i s h federal power i n t h i s area. No federal.government would want to incur the wrath of the corporate taxpayers who could face increased costs i n order to comply with the l e g i s l a t i o n of ten provinces. No federal government would want to endure the outcry that would ensue from those provinces that cannot afford to administer t h e i r own systems. 141 P o l i t i c a l autonomy as a solution to the problems with the Canadian corporate income tax system i s a form of o v e r k i l l . D. Tax harmonization One issue that has never received much debate i n Canada i s "tax harmonization". This economic term has been s u c c i n c t l y described as "the removal of tax rate d i f f e r e n t i a l s among f i s c a l j u r i s d i c t i o n s which are clos e l y linked by commodity trade and sometimes factor exchange „30 relationships . When applied to Canadian corporate income tax i t assumes a broader meaning to encompass both tax bases and tax rates. The Carter Commission was of the opinion that "even greater uniformity of tax bases than now prevails among governments would be highly desirable, as would n 31 uniformity of rates". Yet the Commission took a r e a l i s t i c approach to this kind of harmonization when i t indicated that i t would not be easy to 32 achieve. This conclusion has proved to be accurate i n l i g h t of the f i f t e e n years that have elapsed since i t was reached. Those f i f t e e n years have seen no move at a l l towards harmonization of the tax base or tax rates. An example that Canada can look to on the e f f i c a c y of tax harmonization i s the European Economic Community. The Neumark Committee was set up by the E. E.C. to examine harmonizing taxation and that Committee recommended a 33 single tax rate on a l l production by E.E.C. countries. That recommendation i s presently i n the process of being implemented. At f i r s t glance i t would appear that i f the independent sovereign states that comprise the E.E.C. can get together and implement tax harmonization, then 142 surely the members of a one country federation should be able to do i t . Two points should be made here. F i r s t , the E.E.C.'s harmonization p o l i c y only affects commodity transactions, not corporate income taxes. Secondly, each of the countries p a r t i c i p a t i n g i n the E.E.C. starts o f f on an equal footing with the others. In Canada the d i v i s i o n of l e g i s l a t i v e power puts the federal and p r o v i n c i a l governments i n d i f f e r e n t positions and harmonization of the tax bases involves both these governments. At t h i s stage, a d i s t i n c t i o n must be made between v e r t i c a l tax coordination, that i s harmonization of tax bases between the federal and p r o v i n c i a l governments, and horizontal tax coordination which i s harmonization of tax rates among the provinces. Total harmonization i n Canada would involve both these types of coordination. The advantages are obvious. The cost of c o l l e c t i n g taxes drops considerably since one central body i s responsible for tax c o l l e c t i o n . I n ter-provincial tax competition no longer exi s t s . The cost to the corporate taxpayer drops as only one return i s required. The system i s uniform, simple to administer and simple to comply with. Double taxation i s eliminated and there i s no requirement for an a l l o c a t i o n formula. The disadvantages of t o t a l harmonization revolve around the inevitable s a c r i f i c i n g of p r o v i n c i a l autonomy that such a system requires. The provinces, while receiving revenues to spend, would have no d i r e c t authority to es t a b l i s h the amount of those revenues. The present freedoms they have to determine t h e i r own economic and f i s c a l p o l i c i e s would disappear. Total harmonization would make the provinces t o t a l l y dependent 143 on the federal government for a major source of revenue. This, no doubt, would be viewed by them as a most regressive step. There i s , however, an a l t e r n a t i v e to t o t a l harmonization. Harmonization of the tax base alone as between the federal and p r o v i n c i a l governments, that i s v e r t i c a l tax coordination, would go a long way to solving many of the problems with the present Canadian corporate income tax system. It should be much more acceptable to the provinces than t o t a l harmonization because i t w i l l allow them to set t h e i r own tax rates. The corporate taxpayer w i l l benefit because, as with t o t a l harmonization, there w i l l be no difference in the computation of taxable income between the j u r i s d i c t i o n s . A l l the anomalies already discussed that are a r e s u l t of p r o v i n c i a l tinkering with the tax base would disappear. In fact, t h i s form of harmonization could be considered to be merely an extension of the present system. It would not change the fundamental character of the Canadian corporate income tax system. Instead i t would r e s t r i c t the power of the provinces with respect to the tax base but at the same time give them a free hand with respect to tax rates. The rules would be the same across Canada, the rates would not. This solution has been suggesed i n the wider context of harmonization of both individual and 34 corporate income tax. The theory i s that the corporate income tax system lends i t s e l f more to such harmonization because of the i n t e r - p r o v i n c i a l nature of corporations and t h e i r a f f a i r s . Because the system should be a t t r a c t i v e to corporate taxpayers, i t would be i n t e r e s t i n g to see what e f f e c t a concerted e f f o r t on t h e i r part to lobby for i t s implementation would have. 144 E. Conclusion "The World of Dominion-Provincial finance has, indeed, an a i r of grotesque u n r e a l i t y , untrammeled by l o g i c and the ordinary r e s t r i c t i o n s and meanings n 3 5 of words. So said one p o l i t i c a l s c i e n t i s t more than t h i r t y years ago. L i t t l e has changed since that time. That "grotesque u n r e a l i t y " i s evident i n Canada's corporate income tax system. What may on the surface appear to be compatible and s i m i l a r tax systems turn out, on closer examination to be nothing of the kind. The corporate taxpayer with a permanent establishment in Quebec, Ontario or Alberta has two major problems. F i r s t , i t must deal with at least two d i f f e r e n t administrations. Secondly, i t must in the organisation of i t s a f f a i r s pay close attention to those subtle differences between the federal l e g i s l a t i o n and that of the three provinces. Those differences may appear to be subtle but t h e i r e f f e c t i s far from subtle. Inattention to them can have serious adverse consequences for the corporation. As to whether or not a federal country should have a corporate tax system of t h i s nature, that is another question. The Carter Commission was of the opinion that the federal government and the provinces should maintain a common corporate tax base. It further recommended that the system be administered by one government, namely the federal 36 government. This has not happened and i n l i g h t of present f e d e r a l - p r o v i n c i a l r e l a t i o n s i s not l i k e l y to happen. Nevertheless, a l l governments must reconsider these proposals, or at least a v a r i a t i o n of them, based on more co-operation and harmonization. If the opportunity to do t h i s i s not taken now i t w i l l probably never be taken. One more province choosing to administer i t s own corporate income tax system w i l l be the f i n a l blow that extinguishes any remaining vestiges of 145 fe d e r a l - p r o v i n c i a l and i n t e r - p r o v i n c i a l co-operation and harmony in the Canadian corporate income tax system. It w i l l also be a c l a s s i c example of federalism that operates to fracture a system rather than to consolidate and improve i t . That for the corporate taxpayer, and indeed Canada, would be an unnecessary tragedy. 146 CHAPTER V - FOOTNOTES 1 Report of the Royal Commission on Taxation, Vol. 2, (Carter. Commission) (1966), at 7. 2 Right Honourable Pierre Trudeau, The Constitution and -the People of  Canada, (Queen's Printer, Ottawa), (1969), at 12. 3 Donald V. Smiley, Federal-Provincial F i s c a l Relations Some Current Issues, Report of the Proceedings of the Twenty-Sixth Tax Conference (1974), Canadian Tax Foundation, 20 at 23. 4 Co-operative federalism has been the subject of numerous a r t i c l e s i n recent years. See generally, D. V. Smiley, Co-operative Federalism:  An Evaluation, Volume 4, Documents of the Royal Commission on Bilingualism and Biculturalism (Ottawa, Queen's Print e r , 1970) pp. 111-128; J.R. Mallory, The Five Faces of Federalism, contained i n Canadian Federalism: Myth or Reality (3rd ed.) ed. J. P. Meekison 19; A. R. Kear, Co-operative Federalism: A Study of the Federal-Provincial Continuing Committee on F i s c a l and Economic Matters, Canadian Public  Administration, Vol. VI, No. 1 March 1963, 43-56. 6 The Income Tax Act, R.S.C. 1952, c. 148, s. 240(4); The Corporations Tax Act, R.S.O. 1980 c. 97, s. 91(3); The Alberta Corporate Income Tax Act, R.S.A. 1980, c. A-17, s. 77(4). 7 For example, the Quebec-Ontario agreement on certain aspects of the a l l o c a t i o n r u l e s , at 92. 8 See generally the discussion of the a l l o c a t i o n rules at 85-92. 9 For a f u l l d escription of the hist o r y of the Federal-Provincial Continuing Committee on F i s c a l and Economic Matters, see Kear, supra, note 4, at 305. 10 K. W. Taylor, Co-ordination i n Administration, Proceedings, The  In s t i t u t e of Public Administration of Canada, Toronto, (1957) at 261. 11 See, Douglas G. Hartle, The Revenue Budget Process of the Government of Canada: Description, Appraisal and, Proposals, (1982) Canadian Tax  Paper No. 67, Canadian Tax Foundation, at 11. 12 F i s c a l Federalism in Canada, Report of the Parliamentary Task Force on Federal-Provincial F i s c a l Arrangements, August 1981 at 185. 13 See pages 46-47. 14 Green Paper -- The Budget Process -- A paper on Budget Secrecy and Proposals for Broader Consultation, reproduced in (1982) 30 Can. Tax J. 170-178. 147 15 Committee on the Budget Process, On Opening Up the Budget Process: A Report to the Hon. A l l a n J. MacEachen, Minister of Finance (1982) 30  Can. Tax J. 161 at 166. 16 It should be noted that p r o v i n c i a l o f f i c i a l s apparently f e e l that they are much more w i l l i n g to divulge t h i s information at the present time than the federal government and resent the federal government not reciprocating i n kind. See Hartle, supra, note 12, at 40. 17 This current interest i n regionalism i s demonstrated by the i n c l u s i o n by J. Peter Meekison i n the t h i r d e d i t i o n of his book Canadian  Federalism: Myth or R e a l i t y of an entire section comprising s i x a r t i c l e s about regionalism. The previous two editions of the book did not contain t h i s section. 18 See, Canadian Federalism: Myth or Reality (3rd. Ed.), ed. J. Peter Meekison, 280-363. 19 David M. Cameron, Whither Canadian Federalism? The Challenge of Regional D i v e r s i t y and Maturity, contained in Canadian Federalism: Myth  or Reality (3rd ed.) ed. J. Peter Meekison, 304 at 309. 20 For a f u l l d e scription of these incentives, see Chapter I I I . 21 The Income Tax Act, R.S.B.C. 1979, c. 10, s. 6. 22 The Income Tax Act, R.S.S. 1978, c. 1-2, s. 8. 23 For a discussion of the kinds of tax incentives of a regional nature that the federal government could o f f e r see generally R. M. Bird, Tax Incentives for Regional Development, Report of the Proceedings of the  Twenty-First Tax Conference, (1968) Canadian Tax Foundation, 192; Charles E. McLure, Tax Incentives for Regional Development: A C r i t i c a l Comment, (1970) 18 Can. Tax J. 545; R. M. Bird, Further Thoughts on Regional Tax Incentives (1970) 18 Can. Tax J. 549. 24 A. Kenneth Eaton, Essays i n Taxation, Canadian Tax Paper No. 44, (1966), Canadian Tax Foundation, 100-102. 25 Ernest H. Smith, A l l o c a t i n g to Provinces the Taxable Income of Corporations: How the Federal-Provincial A l l o c a t i o n Rules Evolved, (1976) 24 Can. Tax J. 545 at 569. 26 D. V. Smiley, Federal-Provincial F i s c a l Relations, Some current Issues, Report of the Proceedings of the Twenty-Sixth Conference (1974) Canadian Tax Foundation, 20 at 21. 27 Federal-Provincial F i s c a l Arrangements in the E i g h t i e s , A Submission to the parliamentary Task Force on the Federal-Provincial Arrangements, (1981) at 55. B r i t i s h Columbia has served notice of i t s intention to withdraw from the tax c o l l e c t i o n agreement unless the federal government agrees to administer proposed dividend and venture c a p i t a l tax c r e d i t s . 148 28 Ibid, 43. 29 Robert S t a n f i e l d , Attitudes Towards F i n a n c i a l Relations, Nova Scotia's view, contained i n Canadian Federalism: Myth or Reality (2nd ed.) ed. J. Peter Meekison, 304 at 308. 30 Wayne R. Thirsk, Tax Harmonization and Its Importance i n the Canadian Federation, contained i n F i s c a l Dimensions of Canadian Federalism, ed. Richard M. Bird, Canadian Tax Foundation (1980) at 118-119. 31 Report of the Royal Commission on Taxation, Vol. 6 (Carter Commission), (1966), at 188. 32 Ibid. 33 For a f u l l analysis of the Neumark Committee's report, see C. S. Shoup, F i s c a l Harmonization i n Common Markets (1967) (New York: Columbia University Press). 34 Donald R. Huggett, Tax Base Harmonization, (1977) Intergovernmental  Relations, Ontario Economic Council, 55 at 62. 35 Robert MacGregor Dawson, The Government of Canada (University of Toronto Press, 1947) at 120. 36 Report of the Royal Commission on Taxation, Vol. 6 (Carter Commission) (1966), 193-194. 149 SELECTED BIBLIOGRAPHY Books 1976) Meekison, J. P., Canadian Federalism: Myth, or Re a l i t y (1st ed. ) (Toronto Methuen, 1968) Meekison, J. P. , Canadian Federalism: Myth or Reality (2nd ed. ) (Toronto Methuen, 1971) Meekison, J, . P., Canadian Federalism: Myth or Reality (3rd ed. •) (Toronto Methuen, 197 7) M i l l , J. S., Pr i n c i p l e s of P o l i t i c a l Economy, Book V, (1848) Perry, J . H., Taxation i n Canada (1st ed.) (Toronto: University of Toronto Press, 1951) Smiley, D. V., Canada i n Question: Federalism i n the Seventies (2nd ed.) (Toronto: McGraw-Hill Ryerson, 1976) Reports Alberta Hansard, A p r i l 2, 1974 Alberta Hansard, May 13, 1980 Basic Objectives and Terms of Reference for Alberta Business Taxation and  Incentives, A Pos i t i o n Paper of the Government of Alberta (Provincial Treasurer, 1975) Dominion and P r o v i n c i a l Submissions and Planning Conference Discussions, Dominion-Provincial Conference (Ottawa: King's P r i n t e r , 1945) 150 Federal-Provincial F i s c a l Arrangements i n the E i g h t i e s , A Submission to the Parliamentary Task Force on the Federal-Provincial F i s c a l Arrangements (Department of Finance, 1981) : F i s c a l Federalism in Canada, Report of the Parliamentary Task Force on Federal-Provincial F i s c a l Arrangements (Ottawa: Queen's Pr i n t e r , 1981) Report of the Federal-Provincial Tax Structure Committee (Ottawa: Queen's Pr i n t e r , 1966) Report of the Royal Commission on Taxation Vols. 1, 2 and 6 (Carter Commission) (Ottawa: Queen's Print e r , 1966) Report of the Royal Commission on Taxation, (Government of Quebec, 1965) Royal Commission on Dominion - P r o v i n c i a l Relations Report (Rowell-Sirois Commission) (Ottawa: King's Prin t e r , 1940) Books I and II. A r t i c l e s and Monographs Bertrand, R., Understanding Quebec Tax Laws (1973) Meredith Men. Lect. Bird, R. M., F i s c a l Dimensions of Canadian Federalism (Canadian Tax  Foundation, 1980) Bird, R. M., Further Thoughts on Regional Tax Incentives (1970) 18 Can- Tax J. 549 Bird, R. M., Tax Incentives for Investment: The State of the Art, Canadian  Tax Paper No. 64 (Canadian Tax Foundation, 1980) Bird, R. M., Tax Incentives for Regional Development, Report of the  Proceedings of the Twenty-First Tax Conference (Canadian Tax Foundation, 1968) 192 Boadway, R. W. and Kitchen, H. M., Canadian Tax Policy, Canadian Tax Paper  No. 63 (Canadian Tax Foundation, 1980) 151 Burns, R. M., The Acceptable Mean; The Tax Rental Agreements, 1941-1962 (Canadian Tax Foundation, 1980) Cohen, M. A., Tax S i m p l i f i c a t i o n - A Government Perspective, Report of  Proceedings of the Twenty-Seventh Tax Conference (Canadian Tax Foundation, 1975) 7 Committee on the Budget Process, Canadian Tax Foundation, On Opening Up the Budget Process: A Report to the Hon. A l l a n J. MacEachen, Minister of Finance (1982), 30 Can. Tax J. 161 Drache, A., Introduction to Income Tax Po l i c y Formulation: Canada 1972-76 (1978), 16 Osgoode H a l l L. J. 1 Driedger, E. A., The Interaction of Federal and P r o v i n c i a l Laws (1976), 54 Can. B. Rev. 695 Driedger, E. A., Retroactive, retrospective r e f l e c t i o n s (1978), 56 Can. B. Rev. 264 Dube, A New Phase i n Quebec: Tax Evolution (1978), 26 Can. Tax J. 123 Eaton, A. K., Essays in Taxation, Canadian Tax Paper No. 44 (Canadian Tax Foundation, 1966) Freeman, R. D., The Alberta MURB (1981), 30 Can. Tax J. 163 Harman, F. J. and Johnson, J. A., An Examination of Government Tax Incentives for Business Investment i n Canada, (1978) 26 Can. Tax J. 691 Hartle, D. G., The Revenue Budget Process of the Government of Canada: Description, Appraisal, and proposal, Canadian Tax Paper No. 67 (Canadian Tax Foundation, 1982) 11 Huggett, D. R., The Budget Process and Income Tax Changes Report of the  proceedings of the Twenty-Nineth Tax Conference (Canadian Tax Foundation, 1977) 20 Huggett, D. R., Tax Base Harmonization, Intergovernmental Relations, (Ontario Economic Council, 1977) 55 152 Kear, A. R., Co-operative Federalism: A Study of the Federal P r o v i n c i a l Continuing Committee on F i s c a l and Economic Matters, (1963) Can. Pub.  Administration, Vol. VI., 43 : LaForest, G. V., The A l l o c a t i o n of Taxing Power under the Canadian Constitution, Canadian Tax Paper No. 65 (Canadian Tax Foundation, 1981) LaForest, G. V., Delegation of L e g i s l a t i v e Power i n Canada (1975), 21 McGill L.J. 131 Lavery, J. M., A Review of Developments i n the Venture Capital F i e l d , Report of the Proceedings of the T h i r t y - f i r s t Tax Conference (Canadian Tax Foundation 1979) 508 Lysyk, K., Constitu t i o n a l Law - The Inter-Delegation Doctrine: A Constitutional Paper Tiger (1969), 47 Can. B. Rev. 271 McLure, C. E., Tax Incentives for Regional Development: A C r i t i c a l Comment (1970) 18 Can. Tax J. 545 Raymond, J., Quebec Tax Developments, Report of Proceedings of the  Twenty-Fifth Tax Conference (Canadian Tax Foundation, 1973) 528 Read, H., Is Referential L e g i s l a t i o n Worth While? (1940), 18 Can. B. Rev. 413 Richardson, E., Tax Planning for Corporations in Light of Differences i n Federal and P r o v i n c i a l Income Tax L e g i s l a t i o n , Report of the Proceedings of the T h i r t y - F i r s t Tax Conference (Canadian Tax Foundation, 1979) 766 Scott, F. R., The Constitutional Background of Taxation Agreements (1955), 2 McGill L. J. 1 Smiley, D. V., Co-operative Federalism: An Evaluation, contained i n Documents of the Royal Commission on Bilingualism and Biculturalism Vol. 4 (Ottawa: Queen's Printer) 111 Smiley, D. V., Federal-Provincial F i s c a l Relations - Some Current Issues, Report of the Proceedings of the Twenty-Sixth Tax Conference (Canadian Tax Foundation, 1974) 20 153 Smith, E. H., A l l o c a t i n g to Provinces the Taxable Income of Corporations: How the Federal P r o v i n c i a l A l l o c a t i o n Rules Evolved (1976), 24 Can. Tax J. 545 : Stikeman, H. H., Tax S i m p l i f i c a t i o n , Report of Proceedings of the  Twenty-Seventh Tax Conference (Canadian Tax Foundation, 1975) 21 Tax L e g i s l a t i v e Process Committee, Canadian Tax Foundation, The Tax L e g i s l a t i v e Process (1978), 26 Can. Tax J. 157 Tax Memo No. 65, 1981 Tax Developments (Canadian Tax Foundation, 1981) Taylor, K. W., Co-ordination i n Administration, Proceedings, The In s t i t u t e  of Public Administration of Canada (Toronto, 1963) Trudeau, P. E., The Constitution and the People of Canada (Ottawa: Queen's  Pr i n t e r , 1969) Watkins, D. W., Current Developments i n Petroleum Income Taxation (1981), 19 A l t a . L. R^  62 Cases Alleyn v. Barthe [l922j 1 A.C. 215 Alworth v. Minister of Finance [1978] 1 S.C.R. 447 A t l a n t i c Smoke Shops v. Conlon [l943J A.C. 550 Attorney-General of Canada v. Workmen's Compensation Board for the province  of B r i t i s h Columbia /l968j C.T.C. I l l Attorney-General for Nova Scotia v. Attorney-General for Canada jl95lj S.C.R. 31 Attorney-General for Ontario v. Scott (1956) 1 D.L.R. (2d) 433 Attorney-General for Quebec v. Queen Insurance Company (1877-78) 3 A.C. 1090 Attorney-General of Quebec v. Reed (1884) 10 A.C. 141 Bank of Toronto v. Lambe (1887) 12 A.C. 575 154 Canadian Industrial Gas and O i l Ltd. v. Government of Saskatchewan [l977j 6 W.W.R. 607 Cough1in v. Ontario Highway Transport Board et a l |l968] S.C.R. 569 Crowther v. Attorney-General of Canada (1959) 17 D.L.R. (2d) 437 Dauphin Plains Credit Union Limited v. Xyloid Industries Ltd. and the Queen D.980] C.T.C. 247 R v. F i a l k a [1953] 4 D.L.R. 440 Forbes v. Attorney-General of Manitoba [1937] A.C. 260 Gauthier v. The King (1918) 56 S.C.R. 176 R v. Glibbery [l963] 1 O.R. 232 International Harvester Co. v. Pr o v i n c i a l Tax Commission [1949) A.C. 365 R v. Lo v i t t [l912]A.C. 212 Roncar e l l i v. Duplessis (1959) S.C.R. 121 In re S i l v e r Bros Limited [j.932] A.C. 514 Simpson-Sears Ltd. v. P r o v i n c i a l Secretary of New Brunswick 20 N.B.R. (2d) 478 Re Sternschein, Sternschein v. The Queen (1965) 50 D.L.R. (2d) 262 In re Taxation Agreement between Government of Saskatchewan and Government  of Canada J1946] 1 W.W.R. 257 In re Walter's Trucking Service Ltd. (1965) 50 D.L.R. (2d) 711 R v. Wells 16 East 278 R v. Zaslavsky [l935] 2 W.W.R. 34 155 Statutes and Regulat ions The Alberta Corporate Income Tax Act R.S.A. 1980 c. A-17 The Alberta Corporate Income Tax Amendment Act, 1981, S.A. 1981 c. 34 The Alberta Corporate Income Tax Amendment Act, 1982, S.A. 1982 c. 1 The Assessment Act S.B.C. 1876 c. 8 (38 V i c t . ) An Act to compel Assurers to take out a License S.Q. 1875 c. 7 (39 V i c t . ) The B r i t i s h North America Act, 1867, 30 & 31 V i c t . c. 3 (Imp.) The Business P r o f i t s War Tax Act 6-7 Geo. V c. 11 An Act to impose Certain Direct Taxes on Certain Commercial Corporations S.Q. 1882 c. 22 (45 V i c t . ) The Constitution Acts, 1867 to 1981 An Act respecting Corporations for the development of Quebec Business Firms R.S.Q. 1977 c. 5 - 28 The Corporation Tax Act S.Q. 1947 c. 38 The Corporation Tax Act R.S.Q. 1964 c. 67 The Corporations Tax Act R.S.O. 1980 c. 97 The Corporations Taxation Act R.S.M. 1924 c. 191 The Dominion-Provincial Tax Rental Agreement Act S.C. 1947 c. 58 The Federal-Provincial Arrangements Act, 1967 S.C. 1966-67 c. 89 The Federal-Provincial F i s c a l Arrangements Act, 1961 S.C. 1960-61 c. 58 The Federal-Provincial F i s c a l Arrangements Act, 1972 S.C. 1972 c. 8 The Federal-Provincial F i s c a l Arrangements and Established Programs Financing Act, 1977 S.C. 1976-77 c. 10 The Federal-Provincial Tax Sharing Agreements Act S.C. 1956 c. 29 The Income Tax Act R.S.B.C. 1936 c. 280 The Income Tax Act R.S.C. 1952 c. 148 The Income Tax Act R.S.B.C. 1979 c. 10 The Income War Tax Act 7-8 Geo. V c. 28 156 The Logging Tax Act R.S.Q. 1964 c. 68 The P r o v i n c i a l Income Tax Act R.S.Q. 1964 c. 69 Regulation respecting the Taxation Act, Quebec O.C. 1981-80 The Small Business Development Corporations Act R.S.O. 1980 c. 475 The Taxation Act S.Q. 1972 c. 23 

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