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Should the earnings of co-operative associations be made subject to the federal income tax? Chambers, Edward James Stewart 1947

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L£3 I tHf ftZ SHOULD THE EARNINGS OF CO-OPERATIVE  ASSOCIATIONS BE MADE SUBJECT TO THE  FEDERAL INCOME TAX? by Edward James Stewart Chambers A Thesis submitted in partial fulfillment of the requirements for the Degree of MASTER OF ARTS in the DEPARTMENT OF ECONOMICS, POLITICAL SCIENCE AND SOCIOLOGY -at the University of British Columbia August, 19^7 PREFACE I should like to express my grateful acknowledge-ments to Mr. Arthur Wirick of the Co-operative Union of Br i t i s h Columbia for his kind assistance in the interpretation of the present income tax lav; as applied to co-operatives; to Mr. George Dolsen of the British Columbia Co-operative wholesale Society for his permitting me to use the f i l e s of the Society; to the many who answered my letters of enquiry and 1 supplied me with Information; to Dr. R. M. Clark under whom this thesis was written and who provided much helpful advice and criticism; and to Mrs. H. Foster who typed this thesis. ( i i ) SHOULD THE EARNINGS OF CO-OPERATIVE  ASSOCIATIONS BE MADE SUBJECT TO THE  FEDERAL INCOME TAX? Introduction. The Essentials of a Co-operative. Co-operative Development in Canada. The Business Methods of Co-operatives and the Relation of Tax Discrimination to Co-operative Plant Values. The Canadian History of the Taxation of Co-operatives and the Growth of the Controversy Over the Application of the Income War Tax Act to Co-operative Associations. The Pg.rticulp.r Application of the Canadian Income Var Tax Act to Co-operative Associations before the 19^6 Amendments. The Report of the 1919 British Royal Commission on Income Tax, and the Report of the 1932 British Parliamentary Committee Inquiring into the Position of Co-operative Societies in Relation to the Income Tax. The Report of the Canadian Royal Commission of Co-operatives, The Present Tax Status of Co-operatives in Canada as Compared with their Position in Great Britain and Foreign Countries. An Analysis of the Arguments put Forward by Co-operatives and Their Competitors Regarding the Subjection of the Earnings of Co-operative Organizations to Income Tax* Conclusions. ( i i i ) This thesis attempts to give an equitable and just answer to the problem of subjecting the earnings of co-operative associations to the federal income tax. The f i r s t three chapters discuss the nature of a co-operative per se, the development of the co-operative movement in Canada, the financial and business methods of Canadian co-operatives and the effect which the accumulation of tax-free reserves had had upon co-operative plant values. Chapters IV and V trace the Canadian history of the , controversy over co-operative income taxation, and explain the particular application of the Income War Tax Act to co-operative associations before the 19^6 amendments. The next two chapters examine the recommendations of three government bodies - two in Great Britain and one in Canada - which have wrestled with the question of subject-ing co-operative earnings to income taxation. Chapter VIII explains the present Canadian tax ISM as i t applies to co-operatives and compares i t to the laws found in Great . Britain and certain foreign countries. Chapter IX consists of an examination of the chief arguments advanced by both the advocates of co-operative income taxation and the defenders of co-operatives from such taxation. It w i l l be noted that the problem is dealt with s t a t i s t i c a l l y , historically and theoretically. Such a three sided attack is necessary i f just conclusions are to be set forth. INTRODUCTION During the War an intensive controversy arose in Canada over the status of co-operative organizations in regard to the Federal War Income Tax Act. While this controversy has been of recent origin in our country, i t has been a moot question for many years in other lands. It is l i k e l y that the dispute came to a head in Canada because of the heavy wartime taxes levied on private business, and because of ambiguities in Section Mp) of the Income War Tax Act. Any individual or group of individuals, who were f e l t by other individuals or groups, to be unfairly exempt from income tax naturally were the recipients of severe criticism from those in the country suffering the most from taxation. Co-operatives found themselves in the position of being con- . sldered unfairly exempt from income taxation. In the following pages an attempt l s made to give a comprehensive picture of the various aspects of the Canadian co-operative movement having a bearing on the question of the subjection of the earnings of co-operative organizations to federal income tax. In order to do this an effort has been made at the start to indicate the essential nature of a co-operative, and to show the various ways in which i t differs from a Joint stock company. Once this has been done, i t is necessary that a picture be presented of the over-all co-operative development in Canada. No sensible approach to the problem can be taken unless the peculiar sectional development of the Canadian movement is fully-understood. The f r u i t associations of British Columbia, the Prairie Wheat Pools and the purchasing associations of Nova Scotia a l l form a part of a regional scheme. It i s also Important that co-operative development be examined relative to the development of other forms of business organization. Too many people have noted only the absolute increase in the volume of co-operative trade. They either have not taken the trouble, or have not wished'to take the trouble to compare increases in co-operative trade with increases In the national income, and with increases in the trade of other private business .organizations. Chapter III is devoted to an examination of the business methods of various co-operative organizations, both of the marketing and of the purchasing type. An examination is made of the effect of tax discrimination upon the growth of co-operative plant values. This concerns i t s e l f principally with the increase in plant values during the War as compared with prewar growth figures. In this way some indication is gained of the effect of tax free reserves upon capital expansion. To understand the co-operative tax problem It is necess-ary to know something of the history of the Canadian contro-versy. Chapter IV, ss well as presenting the controversy in (v) in chronological form, attempts to show how and why i t arose.' Unfortunately i t is extremely d i f f i c u l t to obtain reliable in-formation on this aspect of the work. The particular applic-ation of the Income War Tax Act to Canadian co-operatives shows amezing vacillation and may probably be attributed tn large measure to the ambiguity inherent in that part of the Act applicable to co-operative societies. The foregoing enables, a reasonably complete picture of the co-operative movement in Canada, and of its relation to the income tax. Once this has been concluded i t i s possible to turn to various studies made by impartial groups appointed by governments. These groups have concerned themselves with an investigation of the tax status of co-operatives. The findings of a British Royal Commission and of a British Parliamentary Committee are presented. A notable feature of their respective reports is the disagreement observed in the f i r s t as compared with the unanimity found in the second. The British situation i s of interest because at the time of the appointment of the Commission in 1919, English co-operatives were experiencing somewhat the same growth as may be. noted ln the Canadian movement at the present time. However, in examining the Br i t i s h solution to the problem, two or three things should be kept in mind. The movement in the United Kingdom has been primarily a consumers' movement, and as such (vl) i t s members have not suffered the extreme price fluctuations of the primary producers who comprise the bulk of the member-ship in Canadian societies. • Secondly, i t must be remembered that the financial methods of British associations differ considerably from the Canadian. The former finance mainly by the sale of additional shares, and through loans and deposits from members; the latter have come more and more to finance through the retention of patronage dividends as in the case of consumers' associations, and the withholding of part of the gross proceeds from the sale of a member's product as in the case of marketing associations. No better source for information on the Canadian co-operative movement can be found than the Report of the Royal 1 Commission on Co-operatives. A Canadian Royal Commission was appointed in 19"^ to look into the whole question of the exemption of co-operative organizations from federal income tax under Section M p ) of the Income War Tax Act. The five man Commission held hearings from Vancouver to Halifax, and later visited the United Kingdom and the United States. This body presented i t s report in 19^5 and the conclusions of this, study are outlined and commented upon. The Canadian Government incorporated many of the recommen-dations found in the Report of the Royal Commission on Co- operatives. As a result, old Section M p ) of the Act was 1. Ottawa, King's Printer, 19^5. (vii) repealed, and a new Section M p ) substituted. The great surprise of this new legislation was the provision for a tax on 3 per cent of the capital employed. This special tax was levied inspite of the fact that the Commission unanimously rejected consideration of a special tax as beina outside the 1 scope of the body's inquiry. An attempt is made to analyze the reasons for this special tax on co-operatives, and to discover i t s application under varying circumstances. In order to find out i f any relatively uniform pattern exists in co-operative taxation, a study has been included of the tax laws in various' European countries and in the United States with reference to their particular application to co-operatives. Finally, i t is essential that an analysis be made of the arguments advanced by both the spokesmen of co-operatives and of their competitors with regard to the taxation of co-operatives. This centers around the theoretical Justifica-tion for the exemption of co-operatives from income tax on the one hand, and for the subjection of co-operatives to income tax on the other. This is important in helping us to reach f a i r and equitable basis on which co-operatives may be made subject to income tax. 1. R. C. 0. . p. 38 ( v l i i ) CHAPTER I THE ESSENTIALS OF A CO-OPERATIVE CHAPTER I THE ESSENTIALS OF A CO-OPERATIVE In order to examine the v a l i d i t y of the exemption of co-operative o r g a n i z a t i o n s from the corporate income tax, i t i s f i r s t necessary that the e s s e n t i a l f e a t u r e s of the co-opera-t i v e form of o r g a n i z a t i o n be made c l e a r . This chapter alms to set out those features i n order that a c l e a r d i s t i n c t i o n be drawn between a bona f i d e co-operative o r g a n i z a t i o n and a j o i n t stock company. As Ivan V.Emelianoff 1s Economic Theory of Co-operation p o i n t s out, to do t h i s the nature of co-operatives must be s a t i s f a c t o r i l y explained i n the l i g h t of a l l the forms which 1 they have taken throughout the world. In order to meet t h i s demand, a b a s i s other than the widely p u b l i c i z e d "Rochdale P r i n c i p l e s " must be found. While g e n e r a l l y accepted i n England and on t h i s Continent, the "Rochdale P r i n c i p l e s " are not e s s e n t i a l to the co-ope'rative form of o r g a n i z a t i o n . In the Economic Theory of Co-operation Mr. Emelianoff appears to have s a t i s f a c t o r i l y explained the nature of co-operation. In r e a l i t y , he p o i n t s out a co-operative a s s o c i -a t i o n Is an aggregate of economic u n i t s , e i t h e r of the pro-1. Washington, D.C., Edwards Bros.,. 19^-2. \ - 2 -ducing or of the consuming type. Only farmers, fishermen, householders and the l i k e - u n i t s which perform an economic f u n c t i o n i n t h e i r own r i g h t - can he members of a co-operative. The membership of any co-operative a s s o c i a t i o n i s d e f i n i t e l y l i m i t e d to the number of p o s s i b l e buyers or s e l l e r s i n the f i e l d where the a s s o c i a t i o n i s operating. On the other hand, a j o i n t stock company i s a f u s i o n of economic f r a c t i o n s . The e n t r e p r e n e u r i a l r i s k s are borne by a body of shareholders, and i n d i v i d u a l shareholders may simply be regarded as f r a c -t i o n s of the e n t r e p r e n e u r i a l whole. A co-operative i s termed an aggregate because the members of the a s s o c i a t i o n r e t a i n t h e i r i n d i v i d u a l i d e n t i t y . Shares i n a co-operative are i d e n t i f i e d w i t h i n d i v i d u a l s . Shareholders must be admitted to membership, and t r a n s f e r s of shares must be approved by the a s s o c i a t i o n . E s s e n t i a l l y , a co-operative o r g a n i z a t i o n i s an agency through which a group of economic u n i t s co-ordinate c e r t a i n of t h e i r economic a c t i v i t i e s . A J o i n t stock company l s termed a f u s i o n of economic f r a c t i o n s because i t s stockholders are not n e c e s s a r i l y economic u n i t s i n t h e i r own r i g h t . For example, a shareholder i n an e l e v a t o r l i n e organ-i z e d as a j o i n t stock company, does not have to be a wheat farmer. On the other hand, shareholders i n a wheat pool must be wheat farmers. The medium through which i n d i v i d u a l share-holders of a J o i n t stock company f i n d expression i s the general meeting of the company. Their opinion i s expressed by v o t i n g . They vote i n p r o p o r t i o n to the number of shares which each owns. Shareholding i n a j o i n t stock company i s not under s u p e r v i s i o n e i t h e r by the company, or the d i r e c t o r y which means that shares are e a s i l y t r a n s f e r a b l e and may be h e l d by anyone. Every f r a c t i o n f u n c t i o n s as the whole and so i s s t r i c t l y subordinated to the whole. E s s e n t i a l l y , a j o i n t stock company i s an o r g a n i z a t i o n i n which an i n d i v i d u a l i n v e s t s h i s money i n order to o b t a i n a p r o f i t . PROPORTIONALITY The f i n a n c i a l operations p e c u l i a r to a co-operative are based upon the i n d i v i d u a l i t y of the members. The maintenance of i n d i v i d u a l i d e n t i t y i s achieved by means of the p r i n c i p l e of p r o p o r t i o n a l i t y . Where p o s s i b l e , members finance co-operative a s s o c i a t i o n s i n p r o p o r t i o n to the volume of business which each expects to do through the a s s o c i a t i o n . I f a member of a consumers co-operative buys through the a s s o c i a t i o n one per cent of the goods handled by the a s s o c i a t i o n , i t i s commonly con-s i d e r e d i n co-operative c i r c l e s that he should have been required, to c o n t r i b u t e one per cent of the c a p i t a l r e q u i r e d by the co-operative. However, i n c e r t a i n circumstances, i t may be impossible to a n t i c i p a t e the amount of business which each member may do. In such cases I n d i v i d u a l i t y i s main-t a i n e d by a p r o v i s i o n f o r the payment of a dividend on c a p i t a l stock. In Canada, the maximum f o r such a payment v a r i e s be-tween f i v e and eight per cent. Where a member has advanced l e s s c a p i t a l to the a s s o c i a t i o n than i s warranted by the volume of h i s t r a n s a c t i o n s , he i s a c t u a l l y u s i n g a part of • the s e r v i c e s provided by the advances c o n t r i b u t e d by other members. Where a member has advanced more than i s warranted by the volume of h i s t r a n s a c t i o n s , then other members are making use of h i s c o n t r i b u t i o n s i n order to carry on t h e i r t r a n s a c t i o n s . A div i d e n d on stock a c t u a l l y represents some co n s i d e r a t i o n p a i d by those members who underestimated t h e i r volume of t r a n s a c t i o n s , and ther e f o r e t h e i r advances, to members who overestimated t h e i r volume of t r a n s a c t i o n s and there f o r e t h e i r advances. The members of the a s s o c i a t i o n who c o r r e c t l y a n t i c i p a t e d t h e i r volume of t r a n s a c t i o n s , and the r e f o r e c o n t r i b u t e d a proper p r o p o r t i o n of the c a p i t a l , are n e i t h e r the payees nor the r e c i p i e n t s of such a co n s i d e r a t i o n . Dividends on stock e l i m i n a t e any maladjustments among the members of the a s s o c i a t i o n which might have a r i s e n because of l a c k of p r o p o r t i o n a l i t y between money advanced and volume of 1 t r a n s a c t i o n s c a r r i e d on through the a s s o c i a t i o n . 1. This i s true e i t h e r i f the members d i d the same volume of sales each year, or, i f i n d i v i d u a l c a p i t a l c o n t r i b u t i o n s changed each year i n the same r a t i o as t r a n s a c t i o n s . - 5 -Any surplus which might e x i s t i s d i s t r i b u t e d as a patron-age d i v i d e n d , or c r e d i t e d as a l l o c a t e d reserves, to each mem-ber i n p r o p o r t i o n to the volume of business done by him through the a s s o c i a t i o n , i n s t e a d of i n pr o p o r t i o n to the amount of c a p i t a l subscribed by each member as i s true i n a j o i n t stock company. With regard to member business, a larg e part of the surplus of an a s s o c i a t i o n a r i s e s on account of t h i s member business through underpayments, as i n the ca6e of marketing a s s o c i a t i o n s , or overcharges, as i n the case of a purchasing a s s o c i a t i o n . Once declared, a patronage di v i d e n d could be l i k e n e d to an "account r e c e i v a b l e " on the books of the member and an "account payable" on the books of the a s s o c i a t i o n . THE ROCHDALE PRINCIPLES In s p i t e of the f a c t that a co-operative i s an aggregate of economic u n i t s and the one v i t a l p r i n c i p l e of i t s opera.-t i o n s i s p r o p o r t i o n a l i t y , the "Rochdale P r i n c i p l e s " are often accepted as the c r i t e r i a of a true co-operative o r g a n i z a t i o n . These p r i n c i p l e s are: 1. G-ood.s to be so l d at market p r i c e s , 2. Cash t r a n s a c t i o n s only, 3. - The number of shares owned by any one person i s l i m i t e d , h. Dividends on stock may not exceed the p r e v a i l i n g ra.te of i n t e r e s t , 5. D i s t r i b u t i o n of patronage dividends i n p r o p o r t i o n to the volume of business done by each member through the a s s o c i a t i o n , 6. P r o v i s i o n f o r democratic c o n t r o l — one member, one vote. - 6 -Only the p r o v i s i o n f o r democratic c o n t r o l r e q u i r e s comment. There i s u s u a l l y homogeneity of membership i n co-operative o r g a n i z a t i o n s —- i n f a c t , laws governing the organ-i z a t i o n of c r e d i t unions demand homogeneity of membership. P r o v i n c i a l laws applying to c r e d i t unions r e q u i r e that mem-bers have a common occupational bond or that they r e s i d e i n the same general d i s t r i c t or neighborhood. However, where co-operatives have a heterogeneous membership, i t would seem to be more i n accord w i t h our governing p r i n c i p l e ' o f propor-t i o n a l i t y i f v o t i n g were i n accord w i t h the volume of business t r a n s a c t e d through the a s s o c i a t i o n . This would be e s p e c i a l l y a p p l i c a b l e where there were wide d e v i a t i o n s between members i n the use which they made of the a s s o c i a t i o n . A l l p r o v i n c i a l l e g i s l a t i o n i n Canada though, a s s e r t s that a necessary pre-r e q u i s i t e of a co-operative a s s o c i a t i o n i s that each member of t h a t a s s o c i a t i o n s h a l l have only one vote. -o-o-o-c-CHAPTER II CO-OPERATIVE DEVELOPMENT'IN CANADA CHAPTER I I 1 CO-OPERATIVE DEVELOPMENT IN CANADA With the exception of the farmers' wheat pools and the A n t i g o n i s h movement, Canadian co-operatives have apparently seldom been considered an important p a r t of Canadian economic l i f e . On the whole the growth of the co-operative movement i n Canada has been slow, but a more r a p i d growth has been d i s c e r n i b l e d u r i n g the past few years. Those who turned f i r s t to co-opera.tion were the ones who were hardest h i t by p r i c e f l u c t u a t i o n s — the primary producers. Farmers found they had to buy t h e i r farm and household s u p p l i e s at p r i c e s that were hig h r e l a t i v e to those r e c e i v e d f o r t h e i r produce. In an e f f o r t to overcome t h i s disadvantage many turned to co-operative marketing of t h e i r farm products. This placed the emphasis of co-operative development upon producer r a t h e r than consumer co-operatives. The f i r s t consumer co-operatives i n Canada were organiz-ed d u r i n g the l a t t e r part of the nineteenth century but none 2 was s u c c e s s f u l . The only exception was the British-Cana.dian Co-operative S o c i e t y Limited,of Sidney Mines, Nova S c o t i a . 1. This chapter aims only at g i v i n g a sketchy p i c t u r e of co-operative development i n various f i e l d s i n Canada. A comprehensive p i c t u r e has not been attempted. 2. Stewart, Rosemary G-. , THE PLACE OF THE CO-OPERATIVE MOVE-MENT IN THE CANADIAN ECONOMY, B.A. Thesis, U n i v e r s i t y of. B r i t i s h Columbia. - 9 -This a s s o c i a t i o n followed Rochdale p r i n c i p l e s to the l e t t e r 1 and i n 19^3 had a volume of s a l e s amounting to $1,500,000.-A g r i c u l t u r a l co-operation had i t s beginnings i n the pioneer settlements. However, the commercial a g r i c u l t u r e of recent years changed the form of group a c t i v i t y although the co-operative p r i n c i p l e s remained. In such a commercial a g r i c u l t u r a l economy the disadvantages of the unorganized farmer gave emphasis to the development of producers' co-operation. Table I i n d i c a t e s how,marketing co-operatives have continued to dominate the Canadian co-operative scene. TABLE I - MARKETING OF PRODUCE AND PURCHASES OF SUPPLIES  AND MERCHANDISE AS PERCENTAGES OF THE BUSINESS~~OF  CANADIAN CO_OPERATIVES, Years ending; J u l y 3 1 s t l Year Marketing of Produce Purchases of Supplies 1932- 33 93 7 1933- 3^  95 5 1934- 35 94 6 1935- 36 92 8 1936- 37 91 9 1937- 38 87 13 1938- 39 90 10 1939- ^0 91 9 1940- 4l 89 11 1941- 42 85 15 1942- 43 86 14 1943- 44 89 11 2. This percentage includes f i g u r e s f o r consumers 1 co-oper a t i v e s . Source: Report of the Royal Commission on Co-operatives, W 5 , P . 7 9 . 1. Stewart, Rosemary G., I b i d p.2?. - 10 -CONSUMER CO-OPERATION E a r l y attempts at consumers' co-operation appear to have f a i l e d due to the i n a b i l i t y of both members and management to understand the p r i n c i p l e s of co-operation and to develop co-operative f e d e r a t i o n s w i t h the economies of bulk purchases. When members f e l t they were not r e c e i v i n g the economies that they thought they should, many were disappointed and d i s l o y a l to the a s s o c i a t i o n . In a d d i t i o n , the i n a b i l i t y to o b t a i n sound, e f f i c i e n t management had a depressing e f f e c t on growth. Unsound f i n a n c i a l s t r u c t u r e was also a major f a c t o r i n many f a i l u r e s . A great many a s s o c i a t i o n s l a c k e d s u f f i c i e n t work-in g c a p i t a l to carry on the day to day operations of the business. According to a pamphlet e n t i t l e d "Co-operative  Purchasing A s s o c i a t i o n s i n the Province of Saskatchewan, 191^-1938" ^ 1091 co-o-nerative purchasing a s s o c i a t i o n s x^ere incorporated i n Saskatchex^an d u r i n g that period. By December 31st, 193^, 531 of these a s s o c i a t i o n s had d i s s o l v e d . 23 per cent of these d i s s o l u t i o n s represented a s s o c i a t i o n s which had never been commercially a c t i v e . Of the a c t u a l f a i l u r e s , 21.5 per cent were caused by mismanagement a r i s i n g from over-extended c r e d i t , poor accounting and i n s u f f i c i e n t l y q u a l i f i e d o f f i c i a l s . Lack of i n t e r e s t accounted f o r 17.1 per cent of 1 the d i s s o l u t i o n s . 1. Regina: Department of A g r i c u l t u r e , 19*4-1. - 11 -In large centres and i n more t h i c k l y populated areas, the competition of the chain store proved to be too much for the younger and f i n a n c i a l l y weaker co-operatives. Thus, consumer co-operatives have grown most rapidly i n the r u r a l areas where chain stores have not penetrated and where a more or less homogeneous population has provided a l o y a l membership. Table II indicates t h i s r u r a l predominance. TABLE II - CO-OPERATIVE RETAIL STORES IN CANADA.•1941. Number Sales Amount Per Cent • of Total General Merchandise Stores 27 % 3,195,300 16.1 Country General Stores 248 8,823,200 44.5 Grocery Stores (without 69 1,840,600 9.3 fresh meat) Combination Stores . 53 3,370,600 17.0 Restaurants c -J 130,200 - 0.6 F i l l i n g Stations 5 145,800 0.7 Farmers' Supply Stores 17 1,048,200 2-3 Other R e t a i l Stores 21 1,284,600 6.5 Total 445 $19,839,000 100.0 Source: Eighth Census of Canada, 1941, Vol. X, p.26. Since 1926 and more especially since the depression and during the war years there has been an increase i n consumer r e t a i l d i s t r i b u t i o n . The turnover has been in such consumer goods as groceries and dry goods, while i n the West farm supplies provide a large proportion of the stock. A general idea of the increase which has taken place over the period from 1930 to 1941 and of the position which co-operatives occupy i n r e l a t i o n to the total r e t a i l trade i s given i n Table III (next page). TABLE I I I - A COMPARISON OF THE NUMBER AND SALES OF CO-OPERATIVE RETAIL STORES J IN CANADA f o r the Years 1930 and 19"ffiT No. of Stores 1930 Amount of Sales 1930 (000) Per Cent of T o t a l R e t a i l Trade 1930 No. of Stores 19^ 1 Amount of Sales 19^ 1 (000) Per Cent of T o t a l R e t a i l Trade 19^ 1 Canad.a 282 15,647.9 0.6 445 P r i n c e Edward I s . 0 0 0 5 Nova S c o t i a 17 2,103.7 2.1 72 New Brunswick 15 890.7 1.0 18 Quebec 13 1,303-5 0.2 78 Ontario 71 4,809.1 0.4 81 Manitoba 28 689.3 0.4 35 Saskatchewan 61 • 2,991.8 1.6 70 A l b e r t a 31 1,288.9 0.7 53 B r i t i s h Columbia 46 2,301.4 0.9 33 19,839.0 59.0 3,434.9 665.7 3,248.7 4,478.9 936.4 2,97^.^ 2,169.9 1,881.1 0.6 0.4 2.1 0.7 0.4 0.3 0.4 1.6 1.0 0.6 Source: Report of the Royal Commission on Co-operatives, 19^5, p.107. - 12 -- 13 -CREDIT UNIONS The c r e d i t union movement developed i n the province of Quebec and the f i r s t c r e d i t union was organized there i n 1900. The movement made l i t t l e progress outside of the province u n t i l the depressed conditions encountered i n the t h i r t i e s , and the b e l i e f that c r e d i t unions provided a u s e f u l method of encouraging people i n low income groups to b u i l d up savings and provide themselves w i t h a source of c r e d i t at low I n t e r e s t r a t e s , tended to spread the movement throughout Canada'. Table IV gives some ide a of the r a p i d r a t e of growth experienced i n the l a s t few years; Table V shows that the r a t i o f o r 1943 of r u r a l to urban c r e d i t unions v a r i e s g r e a t l y between the provinces; Table VI gives the p o s i t i o n of the cre-d i t union movement i n Canada i n 1945. TABLE IV - STATISTICAL SUMMARY OF THE DEVELOPMENT OF CREDIT UNIONS IN CANADA from 1900 to 1945 Year Cred i t Unions Members Assets NO. NO. 1900 1 . 26. 1915 91 23,614 2,027,728 1920 113 31,752 6,306,965 1925 122 33,279 8,261,515 1930 194 45,767 11,178,810 1935 277 52,045 10,173,997 1936 331 62,068 11,115,800 1937 441 77,177 13,769 ,468 1938 645 111,012 16,835,672 1939 844 151,55^ 20,680,594 1940 1,167 201,137 25,069,685 1941 1 ,31^ 238,46? 31,230,813 1942 1,486* 295,984 43 ,971,925 1943 1,780 374,069 69,219,654 1944 2,051 478,841 92,574 ,440 1945 2,219 590,794 145 .890,889 Source: Report of the Royal Commission on Co-operatives,1945, p.241. Saskatchewan Dept. of Co-operation and Co-operative Development, Annual Report, 1946, p.87. - 14 -TABLE V - THE NUMBER OF CREDIT UNIONS IN THE DIFFERENT PROVINCES TOGETHER WITH AN ESTIMATE OF THE NUMBER SERVING RURAL AS COMPARED WITH URBAN RESIDENTS. 194?  PROVINCE T o t a l No. Urban No. R u r a l No. Pr i n c e Edward I s l a n d ^7 5 42 Nova S c o t i a 204 80 124 New Brunswick 145 48 97 Quebec 775 131 644 Ontario 163 141 22 Manitoba 80 ' 20 60 Saskatchewan 128 35 93 A l b e r t a 129 59 70 B r i t i s h Columbia 109 67 42 Canada , 1,780 586 1,19^ Source: Report of the Royal Commission on Co-operatives, 19^5, p.241. / - 15 -TABLE VI STATISTICAL SUMMARY OF CREDIT UNIONS IN CANADA 1Q45 Province. C r e d i t C r e d i t Loans T o t a l Loans Unions Unions Members Assets Shares Deposits to sin c e Chartered Report- Members I n c e p t i o n ' i n g 1945  Wo~, NoT NoT |" | I I P r i n c e Ed.Is. ^ 2 52 8,239 457,202 323,187 111,958 250,218 1,081,715 Nova S c o t i a 2 i 8 218 33,645 2,567,055 2,.315,909 70,250 1,723,097 9,764,292 New Brunswick ^ 5 1^ 8 32,168 2,6l4,56l 2,340,024 126,929 1,345,698 6,074,410 Quebec: Desjardins 9 0 8 908 371,211 119,089,459' 7,367,379 107,213,042 25,000,000*209,735,698s Que.League ^ 9 2,624 .552,822 114,330 186,414 173,999= • 781,782 Montreal Fed. 9 9 n^-86 5,362,558 467,32.4 4,648,976 1,116,797 1,116,797 Ontario 266 248' 53,728 6,893,683 2,894,638 3,324,558 4,658,071 24,644,455 Manitoba . 100 97 16,616 1,419,972 563,740 721,784 1,303,575 3,331,833 Saskatchewan 172 172 25,563 3,715,813 2,012,441 1,303,599 2,488,964 6,060,609 A l b e r t a .179 169 18,128 1,512,583 1,271,912 280,137 1,549,792 4,109,037 Br.Columbia 145 145 17,386 1,705,181 1,433,914 147,646 1,595,426 3,667,006 Canada,1945 2.219 2,175 590.794 145.890.889 20,960,798 118,135.293 4l,205.637^270.36?,628  Canada.1944 2,0 51 1.993 478,841 92,574,440 13.011.976 75.694,723 53.008,826^228,922,559 1. Assets shares and deposi t s of "Caisses r e g i o n a l e s " not included. 2. Estimated loans to members only not i n c l u d i n g investment loans. 3. Includes approximately $52,250,000 investment loans since 1926. 4. Does not Include investment loans. 5« Includes $20,006,340 investment loans by Quebec Desjardins i n 1944.  Source: Saskatchewan, Department of Co-operation and Co-operative Development, Annual Report, 1946, p.87. - 16 -AGRICULTURAL CO-OPERATION Canadian co-operatives have always had more to do w i t h the s a l e of farm produce than w i t h the purchase or s a l e of any other type of commodity. In the West, co-operation s t a r t e d with'the o r g a n i z a t i o n of the Grain Growers Grain Company in "1906. Since that time the amount of a g r i c u l t u r a l co-operation has s t e a d i l y grown u n t i l between 1933 a n < i 1 9 ^ the d o l l a r value of products marketed through co-operative channels f l u c t u a t e d between 19*5 Ver cent and 27.9 per cent of the t o t a l cash income from the sale of farm products. This i s i n d i c a t e d i n Table V I I . Table V I I I i n d i c a t e s the lar g e percentage which g r a i n and seed makes up of the t o t a l value of commodities marketed through co-operative a s s o c i a -t i o n s . TABLE V I I - DOLLAR VALUE OF CO-OPERATIVE MARKETING AS A PERCENTAGE OF CASH INCOME FROM THE SALE OF FARM PRODUCTS FOR ALL CANADA . A l l Products Year A l l Products Less Grain and Seed 1933 193# 26.9 1 3 0 26.6 9.8 1935 23.0 • 11.7 1936 25.0 .. 11.3 193? 24.3 10.7 1938 20.2 11.1 1939 25.0 13.4 1940 27.9 1 4 . 6 19^1 23.5 12.2 19^2 19.5 13.8 1943 21.0 15.1 1944 26.2 16.2 Source: Report Royal Commission on Co-operatives, 19^5,P«99 - 17 -TABLE VIII - GRAIN AND SEED AS A PERCENTAGE OF TOTAL PRODUCE MARKETINGS OF CANADIAN COOPERATIVES, 1933-1944 Year Percentage 1933 69.0 193^ 73-5 1935 66.4 1936 67.4 1937 69.6 1938 ' 60.1 1939 61.5 19^0 66.3 1941 63.7 1942 4 0 . 6 19^3 ^5 .5 1 9 ^ 57.6 Source: Report Royal Commission on Co-operatives, 1945,p.86. Table IX shows the value of products marketed through co-operatives by provinces. The table reveals.the large percentage of the t o t a l carried on i n the P r a i r i e Provinces. This may be attributed to the major po s i t i o n occupied by grain and seed with regard to the whole. Table X shows the value of commodities marketed by co-operative associations i n Canada by commodities. With the exception of grain, seed and fur there has been a steady growth i n co-operative marketing a c t i v i t i e s for the other products. This increase has been notable i n every province. Of the commodities Indicated, wool is handled on a national basis through the Canadian Co-operative Wool Growers Limited. Other commodities' are handled either p r o v i n c i a l l y or regionally. TABLE IX - VALUE OP PRODUCE MARKETED BY CO-OPERATIVE ORGANIZATIONS IN CANADA, 1933 - 1944, By Provinces  " (Thousands of D o l l a r s ) Crop Year Ending In Canada Maritimes Quebec Ontario Manitoba Saskatche\vran B r i t i s h A l b e r t a Columbia 1933 1 9 3 ^ 1 9 3 5 1 9 3 6 1937 1 9 3 8 1 9 3 9 1 9 4 0 1 9 4 1 1 9 4 2 1 9 4 3 1944 1 0 6 , 8 0 4 1 2 8 , 9 0 9 1 1 7 , 7 8 4 1 4 4 , 9 6 3 1 5 7 , 0 3 1 1 3 4 , 4 9 2 1 8 0 , 7 4 7 2 1 4 , 2 9 3 2 1 5 , 0 3 0 2 1 4 , 7 6 3 2 9 5 , 4 9 9 4 5 9 , 5 3 7 2 , 7 ' 2',7l 2 , 6 7 3 3 , 5 8 0 3 ^ 4 7 2 4 , 0 8 5 4 , 9 7 2 4,340 4 , 0 8 2 6 , 1 1 2 8 , 1 8 9 1 0 , 0 3 8 6 , 0 6 6 61175 8 , 2 1 1 1 1 , 8 8 3 9 , 5 0 2 l l , l 6 0 1 0 , 5 6 1 1 3 , 8 8 5 1 8 , 5 2 9 2 7 , 9 4 9 2 7 , 9 4 9 3 2 , 9 6 8 9 , 1 9 0 9 , 2 0 6 1 1,446 1 2 , 9 2 2 14,646 16,655 33,014 3 2 , 5 1 3 2 8 , 7 2 6 4 4 , 2 8 4 4 6 , 0 4 7 5 1 , 3 6 4 6 , 7 3 1 8 , 9 0 2 8,402 7 , 7 0 1 11,172 1 9 , 1 3 1 15,793 16,175 2 0 , 2 2 6 26,811 3 2 , 0 7 5 61.014 3 2 , 8 9 0 5 0 , 6 7 7 4 5 , 9 8 2 4 9 , 6 6 0 6 1 , 5 7 1 2 1 , 1 0 7 4 8 , 4 0 8 79,024 7 0 , 2 1 6 4 4 , 6 1 1 8 6 , 0 8 2 1 5 9 , 4 4 4 2 5 , 2 2 9 2 7 , 3 9 5 . 2 0 , 7 3 0 3 2 , 3 0 5 2 6 , 7 6 3 3 3 , 2 9 3 3 6 , 0 3 9 3 4 , 5 3 7 3 7 , 5 1 4 3 2 , 9 9 9 4 5 , 9 4 4 7 8 , 4 8 9 6 , 1 7 3 6 , 9 3 9 7 , 2 5 3 8 , 1 4 5 7 , 8 8 7 8 , 0 6 3 8 , 3 8 3 8 , 6 4 9 8 , 1 2 3 1 2 , 9 6 0 1 6 , 9 2 5 1 9 , 5 4 6 Source: Report Royal Commission on Co-operatives, 1 9 4 5 , p . l l 4 . - 19 -TABLE X - VALUE OF COMMODITIES MARKETED BY CO-OPERATIVE ORGANIZATIONS IN CANADA BY COMMODITIES For Yeage 1933-19^4  " • (Thousands of D o l l a r s ) Year T o t a l Dairy F r u i t G r a i n Produce Products and & (2) (1) Veget- Seed ables (2) (2) L i v e s t o c k (1) P o u l t r y (1) Honey (2) Maple Sugar (1) Tobacco (1) Wool (1) Fur (2) 1933 193^ 1935 1936 1937 1938 1939 19^0 1941 19^2 1943 19^4 106,804 128,909 117,784 144,963 157,031 134,492 180,7^7 214,293 215,030 214,763 295,^99 ^59,357 12,372 L4,277 18,474 16,329 19,004 19,^12 18,580 23,637 38,650 ^3,607 52 ,664 6,002 67783 7,264 8,603 8,193 8,278 9,125 10,135 9,355 15,^32 19,505 21,093 73,771 94,796 81,284 97,693 109,355 80,889 111,117 141,981 137,116 87,014 134,240 264,201 10,066 17,565 18,777 15,371 18,913 16,169 18,775 25,383 40,419 62,840 82,230 1,809 2,409 2,458 3,283 3,146 ^,297 3,130 4,493 7,192 10,924 15,315 367 238 59^ 211 272 203 245 571 287 293 453 456 668 685 502 839 710 1,138 727 1,138 530 972 647 263 6,858 9,202 7,693 15,^52 17,171 17,758 10,113 19,937 18,957 18,081 7^7 758 879 649 615 844 1,1?3 1,367 1,989 1,79^ 1,454 1,823 1,639 1,654 678 528 705 761 1,025 Source: Report of Royal Commission on Co-operatives, 1945, p.115 (1) Calendar year. (2) Crop year. - 20 -Table XI shows the extent and v a r i e t y of co-operation In Canada. TABLE XI - PRODUCTS MARKETED," MERCHANDISE AND SUPPLIES HANDLED BY CO-OPERATIVE BUSINESS ORGANIZATIONS IN CANADA, . Crop Year Ended J u l y 31.1944  A s s o c i a t i o n s No. Value of Sales Marketing: Dairy Products F r u i t s & Vegetables Grain and Seed L i v e Stock Eggs & P o u l t r y Honey Maple Products Tobacco Wool Fur Lumber and wood Miscellaneous T o t a l , Marketing Merchandising: Food Products C l o t h i n g and home f u r n i s h i n g s Petroleum products and auto a c c e s s o r i e s Feed, f e r t i l i z e r or-spray m a t e r i a l Machinery and equipment Coal, wood., build-ing m a t e r i a l Miscellaneous T o t a l , Merche.nd.ising Grand T o t a l 5 -^5 162 96 250 201 5 2 7 10 3 11 21 949 331 213 561 803 3^7 446 676 1.271 .,792 52 ,664 ,433 21,092,565 264,200,667 82,492,637 15,315,^37 647,368 972,050 18,080,820 1,79^,000 1,025,40.2 15^,935 ^59,798,798 14 ,822,120 2,478,991 11,256,372 25,^72,160 811,760 4,312,091 6,355,277 65.508.771 525,307,569 Source: Marketing Service, Economics D i v i s i o n , Department of A g r i c u l t u r e , "Co-operation i n Canada" 1944, p.6. - 21 -FISHERMEN1S CO-OPERATIVES This type of co-operative i s of f a i r l y recent o r i g i n . The f i r s t was e s t a b l i s h e d i n 1924 on the A t l a n t i c Coast at . 1 T i g i n i s h , P r i n c e Edward I s l a n d . Their development has been more r a p i d and more advanced on the Eastern coast than i n B r i t i s h Columbia. Fishermen's co-operatives are engaged i n other a c t i v i t i e s besides the marketing and processing of f i s h . On both coasts the fishermen pool t h e i r purchases of f i s h i n g gear and nets through t h e i r marketing a s s o c i a t i o n s . Many groups operate co-operative stores which supply the members w i t h household n e c e s s i t i e s . By 1942 there was a t o t a l of 6? a s s o c i a t i o n s w i t h a membership of 4,826 doing an annual volume of sales amounting 2 to $2,628,380. In 1943-44 a s u b s t a n t i a l increase was shown i n membership and s a l e s , there being 68 a s s o c i a t i o n s w i t h an estimated membership of 7,193 doing an annual volume of 3 business of $5,055,109. 1. Co-operation i n Canada,IQ42. P«6 2. Loc c i t . 3. Co-operation i n Canada, 1944, p.3 - 22 -MUTUAL AND CO-OPERATIVE INSURANCE Mutual and co-operative insurance has been used by 1 farmers f o r 75 years to p r o t e c t t h e i r property against f i r e . Table X I I shows that there are roughly 400 such companies i n Canada. These companies are of s p e c i a l importance i n Ontario and Quebec. In farmers' mutuals, a premium note i s given by the insured. He may be r e q u i r e d to pay a d e f i n i t e p o r t i o n of t h i s i n cash i n advance, or he may be assessed from time to time to provid.e cash against l o s s e s and management expenses. Other mutual f i r e insurance groups also s p e c i a l i z i n g to a considerable extent i n farm r i s k s have a l a r g e membership i n contrast w i t h l o c a l farm mutuals. These include "cash mutuals which commenced operations on the premium note b a s i s , but are now operating on a cash premium b a s i s as w e l l . Mutuals o p e r a t i n g on both the cash premium and premium note plan are of s p e c i a l importance i n Ontario and Western Canada, i n s u r i n g a l a r g e number of farmers. Table X I I a l s o r e v e a l s the 19^3 f i g u r e s f o r mutual insurance i n Canada. While Quebec has had. by f a r the l a r g e s t number of companies, Ontario has the l a r g e s t volume of business. 1. Department of A g r i c u l t u r e , Economics D i v i s i o n , Marketing S e r v i c e , "Co-operation i n Canad.a, 19^2 TABLE X I I Province - 23 -- FARMERS' MUTUAL FIRE INSURANCE COMPANIES IN CANADA 194? Unassessed Companies Premium No. Note Residue Net T o t a l Net Amount Admitted L i a b i l i t i e s Insurance Assets at Risk Net Losses P a i d 19^ 3 P r i n c e Edward I. Nova Scotia. New Brunswick Quebec: ..: County-M u n i c i p a l i t y P a r i s h Ontario Saskatchewan B r i t i s h Columbia Dominion T o t a l 1 5 5 9 77 234 67, 4o 6 64,114 107,320 1,533,1 -^2 195,133 ^67,577 56,696 7l ,6l l 108,361 3,158 110,033 30,33*+ 28,358 11,221 3 11,221 6,082,093 337,508 42,160 15,535,561 6,650,3^3 1-295, .160 172,080 997,^24 364;877. 21,402 ,113,7*4-9 ,*+71.938 14,672,600 20,797,^ 35 6,126,962 24,661,585 26,251,457 130,596,709 636,545,069 33,379,752 6.315.281 17,990 2.4,037 9,181 45,616 30,089 200,119 972,770 35,^ 20 1,840,500 5,572,559 2,479,137 454,716,271 1,204.262 25,^ 68,559 14,529,150 4^385,840 1,35^,063,121 2,544,933 1 m Includes unassessed premium note r e s i d u e . 2! Includes one company which does business i n four Western Provinces. Source: Department of A g r i c u l t u r e , Economics D i v i s i o n , Marketing S e r v i c e , "Co-operation i n Canada, 19*4-4" p .9 . - 2k -TOTAL CO-OPERATIVE BUSINESS AND MEMBERSHIP As was po i n t e d out before, co-opera.tives have developed at a steady and r a p i d pace since the f i r s t years of the depression. Table X I I I i n d i c a t e s the expansion i n numbers, members and volume of business from 1932 through 19^5• With the exception of 19^3 there has been no move toward the amalgamation of e x i s t i n g s o c i e t i e s . This i s i n d i c a t i v e of the preponderantly r u r a l nature of the Canadian co-operative movement. The Table shows a s i g n i f i c a n t increase i n the number of shareholders and i n the business per member. Some of the increase i n volume of business may be a t t r i b u t e d to a. higher p r i c e l e v e l but much can al s o be a t t r i b u t e d to the Increasing s e r v i c e s and. wider range of goods made a v a i l a b l e by consumers' and farmers' supply co-operatives. We should a l s o r e a l i z e that the n a t i o n a l inoroaoo has v i r t u a l l y t r i p l e d over the pe r i o d . I n c r e a s i n g co-operative education has a l s o been a c o n t r i b u t i n g fa.ctor. I t i s apparent that both co-operative s a l e s of farm pro-ducts and co-operative purchase of s u p p l i e s have g r e a t l y increased. However, by f a r the greater r e l a t i v e i n c rease i s i n the l a t t e r . Of i n t e r e s t i s the f a c t that a very h i g h ^percentage of the patrons a.re a l s o members of co-operatives. - 25 -TABLE X I I I - SUMMARY OF ANNUAL STATEMENTS OF NUMBERS MEMBERSHIP AND BUSINESS OF OF CO-OPERATIVE BUSINESS ORGANIZATIONS IN CANADA, 1932 to 194$ ' ' Year A s s o c i a t i o n s No. Places of Share-Business h o l d e r s No. or Members No. Patrons No. Sales of Supplies T o t a l Business I n c l u d i n g other Revenue 1 9 ? 2 1933 193^ 1935 1936 1937 1938 1939 19*40 19*4-1 19*42 19*43 19*44 19*45 795 >86 690 697 781 1,024 1,217 1,332 1,151 1,395 1,722 1,650 1,792 1,82*4-3,501 3,057 3,223 3,301 3,186 3,987 4,125 3,791 3,657 4,005 *4,291 4,4o6 *4-,53*+ 379,687 3*42,369 3*4 -5 ,024 341,020 366,885 396,918 435,529 445,7*42 450,453 451,685 561,314 585,826 690,967 739,604 417,000 376,000 379,7^0 378,730 406,321 451,231 *462,937 486,589 462,296 507,223 620,03*4-608,680 719,080 10,665 8,779 7,389 7,991 12,788 16,363 20,091 20,400 21,129 25,895 42,327 55,689 65,508 81-, 360 ,503 ,115 ,034 ,755 ,192 ,966 ,893 ,008 ,822 ,374 ,447 ,141 ,771 ,855 l*+5,303,95*4-115,849,89*4-136,411,483 126,064,891 158 ,165,565 .173,927,117 155,080,435 201,659,984 236,322,466 242 ,158,305 257,090,427 352,785,598 527,855,5*+0 585,650,066 Source: Department of A g r i c u l t u r e , Economic D i v i s i o n , Marketing S e r v i c e , '"Co-operation In Canada. 19*4-4"^  p . 4 . Department of Co-operation and Co-operative Developments, Annual Report,1946. p. 84. - 26 -Table XIV shows the f i n a n c i a l c o n d i t i o n of the movement In Canada from 1932 to 19*4-4. For purposes of comparison the excess of assets over general l i a b i l i t i e s has been taken. A n o t i c e a b l e decrease i n members' equity i s shown whi l e there has been a s i x - f o l d , increase i n genera.1 l i a b i l i t i e s over the p e r i o d , which may i n l a r g e measure be expla.ined by the i n c r e a s -i n g l y popular method of f i n a n c i n g through loan c a p i t a l advanced by the members. A comparison of the value of the reserves and surplus r e v e a l s a decrease from $97.00 per member i n 193 2 to $82.00 per member i n 1944. This drop i s p a r t i a l l y the r e s u l t of the l a r g e number of new a s s o c i a t i o n s which have been i n -corporated. Their surplus and reserve accounts would, i n most cases'be q u i t e small or even n e g l i g i b l e . PROVINCIAL PATTERN There remains the problem of showing the p o s i t i o n of co-operative a s s o c i a t i o n s by provinces This i s done i n Tables XV and XVI, which r e v e a l the d i f f e r e n c e i n co-operative growth i n each province. I f a. comparison were made of the v a r i e d types of co-operatives, the s e c t i o n a l development would be s t i l l more apparent. The d i f f e r e n c e s i n r a t e s of development of the various types has n a t u r a l l y been accentuated by the f a c t that there i s no Dominion co-operative l e g i s l a t i o n , each province having i t s own. TABLE XIV - SUMMARY OF THE ANNUAL BALANCE SHEETS AND FINANCIAL CONDITION OF COOPERATIVE BUSINESS ORGANIZATIONS IN CANADA, 1932 to 1944 ; , Year T o t a l Assets Value of P l a n t General L i a b i l i t i e s Paid-up Share C a p i t a l Reserves and Surplus Working C a p i t a l Net Worth i n Per Cent of To t a l Assets 1 9 3 2 7 0 , 2 2 6,288 1 9 3 3 9 0 , 0 0 3 , 2 6 1 1 9 3 4 1 0 4 , 3 5 0 , 7 0 2 1 9 3 5 1 0 5 , 1 8 3 , 5 6 5 1 9 3 6 8 5 , 7 5 1 , 9 0 1 1 9 3 7 8 7 , 9 3 8 , 4 5 3 1 9 3 8 8 3,140 , 6 9 7 1 9 3 9 8 6,240 , 7 8 3 1 9 4 0 1 0 2 , 6 8 5 , 1 0 9 19*4-1 1 4 5 , 6 5 8 , 9 0 4 19*42 128,004,893 1 9 4 3 1 8 6 , 6 3 4 , 8 3 9 1 9 4 4 2 0 3 , 0 4 7 , 9 1 1 24-5,607,366 42,520,970. 40,432,859 38,850,488 35,289,468 36,338,952 36,569,984 37,751,641 38,265,055 38,567,084 37,597,916 36i866;86l 40,664,827 2 2 , 0 7 2 , 3 3 1 *+-3,005,593 5 6 , 0 4 6,004 5 5 , 3 0 6 , 6 7 1 3 4 , 6 6 5 , 2 1 0 3 6 , 6 8 5 , 6 2 5 3 3 , 4 2 3 , 6 0 7 3 2 , 9 7 3 , 3 2 1 48,424 ,694 92,222,9*4 -7 6 9 , 9 6 4 , 8 2 2 1 2 4 , 2 6 4 , 0 8 5 1 3 0 , 5 5 6 , 3 7 3 8 , 5 7 0,488 8,224 , 0 1 6 8 , 7 2 2 , 4 5 1 8,933,*425 8 , 9 5*4 , 1 3 5 9 , 2 6 5 , 7 * + 7 9 , 2 6 5 , 3 9 1 9 , 6 8 5 , 5 3 7 1 0 , 1 5 5 , 2 2 1 1 0 , 5 0 3 , 0 7 7 1 2 , 2 2 0,249 1 3 , 0 9 1 , 9 * + 8 1 5 , 6 0 8 , 1 5 0 3 7 , 8 0 5 , 1 3 7 3 8 , 7 7 3 , 6 5 2 3 9 , 5 9 0 , 0 5 0 40,9*+3,*+69 4 2 , 1 3 2 , 5 5 6 4 1 , 9 8 7 , 0 8 1 4 0 , 4 5 1 , 6 9 9 *43 , 5 8 l , 9 2 5 44,105,19*4-42 ,932,880 4 5 , 8 1 9 , 8 2 2 4 9 , 2 7 8 , 8 0 6 5 6 , 8 8 3 , 3 8 8 2,546 , 6 9 1 4 , 4 7 6 , 6 9 8 7,871 , 8 3 9 1 1 , 0 2 6 , 4 0 6 1 5 , 7 9 7 , 2 2 3 1*4 , 9 1 3 , 8 7 6 . 1 3,147 , 1 0 6 1 5 , 5 1 5 , 8 2 1 1 5 , 9 9 5 , 3 6 0 1 4 , 8 6 8 , 8 7 3 2 0,442 , 1 5 5 2 5 , 5 0 3 , 8 9 3 3 1 , 8 2 6 , 7 1 1 6 6 . 0 5 2 . 2 46 . 3 47.4 5 . 9 . 6 5 8 . 3 5 9 . 8 6 1 . 8 5 2 . 8 3 6 . 7 *+5.3 33-*+ 3 5 . 7 1m Working c a p i t a l , as used i n t h i s Table, i s the excess of assets l e s s value of plan t over general l i a b i l i t i e s . Source: Department of A g r i c u l t u r e , Economics D i v i s i o n , Marketing S e r v i c e , "Co-operation In Canada, 19*4-4", p.5 . - 2 8 - , . TABLE XV - GO-OPERATIVE BUSINESS ORGANIZATIONS BY PROVINCES, Crop Year Ended J u l y 31,19*4-5 Province A s s o c i a t i o n s Shareholders or Members Sales of Products No. Pri n c e Edward I. 2 5 Nova S c o t i a 8 3 New Brunswick 41 Quebec 5 8 9 Ontario 2 5 6 Manitoba 95: Saskatchewan 4 9 o A l b e r t a 1*4-6 B r i t i s h Columbia 8 7 I n t e r - P r o v i n c i a l 6 No. 1 2 , 3 2 7 16,2*4-2 8 , 0 * 4 3 6 1 , 7 1 3 5 7 , 7 1 5 116,0*4-3 237,8*4-2 1 * 4 9 , 1 9 6 2 8 , 6 7 5 5 2 , 0 0 8 3 , * 4 - 3 7 , 5 3 0 5 , 0 9 * + , 0 6 3 3 , 5 6 5 , 4 7 * 4 -4 2 , 0 3 4 , 8 2 7 6 4 , 9 2 9 , 6 2 2 4 2 , 1 8 0 , 0 9 9 1 7 4,346 , 8 8 8 9 1 , 0 6 7,024 2 8 , 5 7 3 , 5 1 9 4 5 , 2 5 2 , 5 8 1 Sales of Merchandise T o t a l Business .Including other Income 7 2 5 , 4 4 3 6 , 4 0 7 , 6 1 0 2 , 7 8 0,242 2 0 , 7 3 7 , 7 1 * 4 1 3,464 , 1 3 1 5 , 5 8 6 , 1 8 6 1 6 , 4 4 9 , 7 8 5 7 , 7 6 4 / 5 7 5 5 , 7 8 8 , 2 6 9 2 , 1 5 6 , 9 0 0 4 , 2 2 1 , 8 6 0 1 1 , 5 7 7 , 7 1 0 6 , 5 0 7 , 7 9 0 6 2 , 2 7 5 , 2 6 9 7 7 , 5 0 7 , 7 0 7 4 7 , 9 2 7 , 9 * 4 2 1 9 1 , 1 6 4 , 3 9 5 . 9 9 , 0 8 0 , 3 7 0 3 5 , 6 2 6 , 0 5 3 4 7 , 4 2 6 , 8 5 1 T o t a l 1,824 7 3 9 , 6 0 4 5 0 0,481 , 6 2 7 8 1 , 3 6 0 , 8 5 5 . 5 8 5 , 6 5 0 , 0 6 6 Source: Saskatchewan: Department of Co-operation and Co-operative Development, Annual Report, 1 9 4 6 , p.84. - 29 -TABLE XVI - FINANCIAL STRUCTURE OF CO-OPERATIVE BUSINESS ORGANIZATIONS BY PROVINCES Crop Year Ended J u l y 31. 1944. Province T o t a l Assets Value of Plan t General L i a b i l i t i e s Paid-up Share C a p i t a l Reserve and Surplus Prince Edward I . Nova S c o t i a New Brunswick Quebec Ontario Manitoba Saskatchewan A l b e r t a B r i t i s h Columbia I n t e r - P r o v i n c i a l T o t a l 337,612 91,003 2,688,757 1,039,034 871,693 303,354 16,392,729 7,896,714 7,996 ,148 3,118,001 12 ,647,242 2,665,086 92 ,193 ,558 12,492 ,140 31 ,649 ,554 4,715,170 10 ,742 ,867 2,661,987 27,527,751 5,692,338 156,667 1,002,656 443,856 6,991,640 3,359,-374 8,419,453 . 61,223,062 21,356,887'. 6 ,341,847 21,260,931 52,170 918,816 181,456 3,091,311 1 ,646 ,885 539,789. 2,703,818 750,962 2 ,464 ,837 3,258 ;,106 128,775 767,285 ' 246,381 6,309,778 2,989,889 3,688 ,000 28,266,678 9,541,705 1,936 ,183 3,008,714 203,047,911 40,664 ,827 130,556,373 15,608,150 '56,883,388 Source: Department of A g r i c u l t u r e , Economics D i v i s i o n , Marketing S e r v i c e , "Co-operation i n Canada. 1944" p.8. - 30 -RELATIVE G-ROWTH In order not to create a misleading impression about the growth of co-operatives i n Canada during the past two decades, and e s p e c i a l l y s i n c e the war, i t i s necessary to examine co-op e r a t i v e growth i n r e l a t i o n to the growth of other forms of business e n t e r p r i s e . An attempt has been made to give a p i c t u r e of the development of co-pperatIves i n the absolute sense. However, r e l a t i v e growth i s even more important and t h i s has been recognized i n the "Report of the Royal Gommis-1 s l o n on Co-operatives" U n f o r t u n a t e l y , comparable data f o r non-co-operative agencies i s not a v a i l a b l e . With r e g a r d to marketing co-operatives, the Commission has used as a b a s i s of comparison, cash Income from the s a l e of farm products. This i s sound because farm cash income f i g u r e s c l o s e l y approx-imate the value of a l l marketings, co-operative and non-co-operative, done at the same s e l l i n g l e v e l as co-operative marketing. ALL FARM PRODUCE Table XVII compares i n d i c e s of d o l l a r turnover of co-operative marketing agencies w i t h i n d i c e s of cash Income from the s a l e of farm produce. The years from 1935 to 1939 i n -c l u s i v e are used as the base p e r i o d i n order that undue weight 1. Ottawa: King's P r i n t e r , 192+5. - 31 -be not given to any extreme year. The Table would seem to i n d i c a t e that despite great absolute growth, co-operative marketing was a c t u a l l y performing a smaller p r o p o r t i o n of t o t a l marketings than i t xvas i n the l a t e 19301 s. TABLE XVII - INDICES OF DOLLAR VOLUME OF PRODUCE MARKETED BY COOPERATIVES COMPARED WITH INDICES OF CASH INCOME FROM SALE OF FARM PRODUCE FOR ALL CANADA (1935-1939 - 100) Year Produce Marketed Cash Income 1933 72.6 63.5 1934 87.6 77.7 1935 • . 80.1 ' 81.9 1936 98.6 92.6 1937 106.8 103.4 1938 .91.4 - ' 106.4 1939 122.9 115.7 19^0 145,7 122.7 1941 146.2 146 .4 19^2 145.6 176.3 1943 200.4 224 .6 1944 311.4 280.5 Source: Report of Royal Commission on Co-operatives, 1945, p . 8 3 . Table X V I I I shows the average annual percentage r a t e s of growth of co-operative marketing and of cash Income from the s a l e of farm products. The i n d i c a t i o n i s that the r a t e of growth i s l e s s f o r co-operative marketing than f o r cash Income, but i n Tables XVII and XVIII the co-operative market-i n g f i g u r e i s h e a v i l y weighted by g r a i n and seed-^figures. - 32 -Marketing co-operatives have apparently more than h e l d t h e i r own i n Quebec, Ontario and Manitoba, w h i l e cash income has grown at a f a s t e r pace i n Saskatchewan, A l b e r t a and B r i t i s h Columbia. In the Maritimes both have grown at • the same r a t e . One cannot help n o t i n g the d e f i n i t e s e c t i o n a l d i f f e r e n c e s . TABLE XVI I I - AVERAGE ANNUAL RATES OF GROWTH OF CO-OPERATIVE FARM PRODUCE MARKETINGS AND OF-CASH INCOME FROM THE SALE OF FARM PRODUCE BY REGIONS Province or Region Produce Marketed Cash Income Canada 9.3 11 .5 Maritimes 10 .3 10.5 Quebec 16.2 14 .6 Ontario 16.9 10 .9 Manitoba ' 16.3 13.5 Saskatc.hexvan 11.8 A l b e r t a 5.6 9.3 B r i t i s h Columbia 7.6 • • 10.0 Source: Report of the Royal Commission on Co-operatives, 1945, p.86. GRAIN AND SEED The data i n the Royal Commission Report i s r a t h e r ambig-uous. The d o l l a r value of co-operative g r a i n and seed market-ing as a percentage of cash Income from'grain and seed market-in g has shown a decrease d u r i n g the years 1940 to 1944. From 1935 "to 1939 the co-operative share averaged about 52 per cent, wh i l e from 1940 to 1944 i t d e c l i n e d to an average of 48 per - 33 -cent.- D i f f e r e n c e s may i n part be ex p l a i n e d by d i f f e r e n c e s i n . han d l i n g charges made by the pools and the p r i v a t e e l e v a t o r companies, f o r the pools c l a i m they a n t i c i p a t e the p r i v a t e companies In any p r i c e cuts made. However, hand l i n g charges are g e n e r a l l y the same, and on the whole the c o n c l u s i o n of the Royal Commission may be accepted, that co-operatives ' ha n d l i n g g r a i n and seed have n e i t h e r increased nor decreased 1 t h e i r share of the g r a i n h a n d l i n g business. Manitoba, Quebec and B r i t i s h Columbia, however, do show a d e f i n i t e i ncrease i n the p r o p o r t i o n of g r a i n and seed marketed; through co-operative channels. The l a t t e r has shown a p a r t i c u l a r i n c rease d u r i n g the war years. Ontario, l i k e the P r a i r i e Provinces, shows n e i t h e r an increase nor a decrease. ALL FARM PRODUCE EXCLUDING- GRAIN AND SEED A r e l a t i v e l y steady upward trend i s evident i n co-2 o p e r a t i v e marketing since 1935' I n that year the co-ope r a t i v e share was 11.7 per cent and i n 1944 i t had r i s e n to l 6 . 2 per cent. No unusual increase appears d u r i n g the war years. 1. R.C.C., p. 95-2. .R.C.C., p.99-- 34 -DAIRY PRODUCTS The p r o p o r t i o n of co-operative marketing has shown a decided increase during the war. The 1935 to 1939 average was 11.5 P e r cent, while the 1940 to 1943 average was 15.4 1 per cent. This increa.se Is apparent i n every province or r e g i o n , except B r i t i s h Columbia, where the increase has been much l e s s s u b s t a n t i a l , and the Maritimes where there has been a continuance of a steady growth beginning In the depression. FRUITS, VEGETABLES AND POTATOES 2 No increase of the co-operative p r o p o r t i o n i s i n d i c a t e d . The 1935 to 1939 average was 19.3 per cent and the 1940 to 1944 average was 20.6 per cent. In Quebec and B r i t i s h Columbia the co-operative p r o p o r t i o n has remained about the same. Ontario shows a co-operative increase between 1936 a.nd 1939 w i t h a s l i g h t d.ecrea.se from the 1939 f i g u r e during the Xfar years. A war-time increase i s apparent i n the Maritimes. LIVESTOCK The co-operative p r o p o r t i o n increased from a 1935 to 1939 average of 9.8 per cent to a 1940 to 1943 average of 1 4 . 5 per 3 cent. A s u b s t a n t i a l war-time increase occurred i n Saskatcha-wan, Manitoba, A l b e r t a and B r i t i s h Columbia. The p r o p o r t i o n 1. R.C.C., p.102. 2. R.C.C., p.103. 3.R.C.C., p.104. - 35 -remained r e l a t i v e l y constant in Ontario and Quebec, and f e l l i n "fre Maritimes. POULTRY AND EGGS The figures show a co-operative increase from a 1935 "to 1939 average of 7 . 2 per cent to a 19*+0 to 19*+3 average of 1 10 . 7 per cent. -A d e f i n i t e war-time increase i s evident i n B r i t i s h Columbia, while figures for the other provinces are rather inconclusive. CO-OPERATIVE PURCHASING In Canada, co-operative purchasing i s r e l a t i v e l y unimport-ant. The Royal Commission has presented l i t t l e date on i t s growth. Table III has shown that i n both 1930 and 1941 co-operative r e t a i l stores accounted for only .06 per cent of t o t a l Canadian r e t a i l trade. Table XVIV compares co-operative purchasing with general * r e t a i l tre.de and with country general store sales. A rapid war-time growth i n co-operative purchasing i s indicated. However, some reservations should be kept i n mind. The 1941 census showed that less that 50 per cent of co-operative purchasing was done through consumers' co-operarive r e t a i l 2 stores. . In r u r a l areas, moreover, a large proportion of 1. R.C.C., p.97,104. 2. R.C.C., p.108. of co-operative merchandising i s wholesale rather than r e t a i l . Further, the past co-operative purchasing growth may partly be explained by increases in.sales of feeds and f e r t i l i z e r s 2 during the war. The l a t t e r make up a large proportion of the co-operative purchasing business. With these considera-tions i n mind, the Table indicates that the increase i n co-operative purchasing i s not a war-time development, but something which, has been taking place at a steady rate since 1933-TABLE XVIV- INDICES OF CO-OPERATIVE PURCHASING- AND OF RETAIL TRADE AND COUNTRY GENERAL STORE SALES: CANADA. (1935-39 - 100)  Year Co-operative Country General R e t a i l Purchasing Stores Trade 1933 40.3 73.^ 1934 44.0 — , 82.1 1935 70.4 — 87.I 1936 90.1 C— 94.7 1937 110.7 105.4 107.2 1938 112.4 IO3.2' 104.5 1939 116.4 100.7 106.6 19^0 142.6 •106.7 121.2 19^1 204.1 116.2 141.4 1942 265.7 132.9 149.3 1943 -317.9 148.0 154.3 Source: Report of the Royal Commission on Co-operatives, 1945,pp.l08,109. The Royal Commission Report contains figures for the Province of Saskatchewan, which during the war years d i d the largest co-operative purchasing business i n the Dominion. 1. R.C.C., p.108. 2. Ibid pp.110-111. - 37 -The m a t e r i a l shows that t h i s has not been an increase a t t r i b u t -able to war-time c o n d i t i o n s , but ra t h e r that such a development had been t a k i n g place throughout the depression. War-time expansion would i n l a r g e measure appear to be a c o n t i n u a t i o n of t h i s growth. CHAPTER I I I THE BUSINESS METHODS OF CO-OPERATIVES AND THE RELATION OF TAX DISCRIMINATION ON CO OPERATIVE PLANT VALUES CHAPTER I I I THE BUSINESS METHODS OF CO-OPERATIVES  AND THE RELATION OF TAX DISCRIMINATION ON  COOPERATIVE PLANT VALUES The problem of d i s c u s s i n g the business methods of co-operatives i s complicated by the f a c t that there Is no s p e c i a l Dominion l e g i s l a t i o n a f f e c t i n g the co-operative movement. Although, there i s no s p e c i f i c enabling l e g i s l a t i o n , Part I or Part I I of the Companies Act i s a v a i l a b l e . However, t h i s i s an u n s a t i s f a c t o r y v e h i c l e f o r co-operative i n c o r p o r a t i o n , since no reference to the co-operative form of o r g a n i z a t i o n i s contained t h e r e i n . Every province has l e g i s l a t i o n d e a l i n g w i t h co-operative a s s o c i a t i o n s but i n c e r t a i n cases great v a r i a t i o n s e x i s t . Laws enabling the formation of co-operative c r e d i t a s s o c i a t i o n s are found i n every province; laws governing a g r i c u l t u r a l co-operative a s s o c i a t i o n s are evident i n 8.11 provinces; laws p r o v i d i n g f o r co-operative s o c i e t i e s f o r the production and d i s t r i b u t i o n of commodities are found i n every province except Ontario and. New Brunswick. The three uniform features of the l e g i s l a t i o n a p p l y i n g to co-operative business o r g a n i z a t i o n s appear to be: (a) the p r o v i s i o n s that each member s h a l l have one vote rega r d l e s s of the number of shares that he may own, - 4o -(b) the p r o v i s i o n s that surplus l e s s reserves s h a l l be d i s t r i b u t e d among the members i n p r o p o r t i o n to patronage, (c) the f a c t that a co-operative a s s o c i a t i o n i s h e l d to be a body corporate. Since co-operative a s s o c i a t i o n s are regarded as body corporates, they possess the same advantages and face most of the same problems as any J o i n t stock company or p u b l i c l y owned business. Any co-operative has the problems of i n i t i a l f i n - • ancing, of f i n d i n g working c a p i t a l to c a r r y on day to day oper-a t i o n s , of p r o v i d i n g f o r reserves, of d i s t r i b u t i n g s u r p l u s , and of p r o v i d i n g f o r c a p i t a l investment out of earnings. MARKETING- CO-OPERATIVES The best source of m a t e r i a l on the business methods and f i n a n c i a l operations of marketing co-operatives i n Canada, i s the Canadian Royal Commission Report. The Commission obtained evidence from co-operative a s s o c i a t i o n s engaged i n the g r a i n trad.e, i n the d a i r y Industry, l i v e s t o c k marketing, i n process-i n g and handling f r u i t s and. vegetables, and. from the Canadian Co-operative Wool Growers, L i m i t e d . One cannot help but note the v a r i e t y i n methods and operations. Some marketing co-operatives handle the products of t h e i r members on consignment, others purchase the products o u t r i g h t . Generally, co-operative a s s o c i a t i o n s h a n d l i n g g r a i n and seed . - 41 -make an outright purchase, of a member's product. The Alberta, Saskatchewan and Manitoba Pools finance t h e i r operations by i n t e r n a l methods out of current operations. The Saskat-chewan and Alberta Pools deduct 2P' per bushel f o r an elevator reserve, and 1 per cent of gross sales f o r a commercial 1 reserve. Table XIX shows the sources of c a p i t a l funds for the Saskatchewan Pool and i t s s u b s i d i a r i e s , and i s in d i c a t i v e of in t e r n a l financing. In Manitoba, l o c a l associations con-s t i t u t e the membership of the Manitoba Pool. Locals have a separate corporate existence, and operate on a contract basis •2 . with the Pool. Financial d i f f i c u l t i e s ' have forced the Manitoba*Pool to make somewhat di f f e r e n t f i n a n c i a l arrangements. There, up to 50 per cent of the net surplus of each l o c a l has to be placed i n a special reserve to repay chartered bank loans guaranteed by the Government, and up to 25 per cent i n 3 a working c a p i t a l reserve. In Alberta and'Saskatchewan, c e r t i f i c a t e s representing the members' equity i n commercial and elevator reserves have been issued. Interest ha,s been paid on these c e r t i f i c a t e s when f i n a n c i a l conditions per-mitted. Both Pools use a form of revolving fund. Part of the patronage rebate i s withheld, and. used to buy up the commercial and elevator reserve c e r t i f i c a t e s of those who are no longer active i n the association. By this means active 1. R.C. C,pp.. 142,145. 2. .Ibid, p. 146. 3. Ibid, p..148. - 42 -TABLE XIX - SASKATCHEWAN CO-OPERATIVE PRODUCERS LIMITED, MODERN PRESS LIMITED, SASKATCHEWAN CO-OPERATIVE LIVESTOCK PRODUCERS LIMITED, SASKATCHEWAN POOL ELEVATORS LIMITED AND SASKATCHEWAN POOL TERMINALS LIMITED: SOURCE OF CAPITAL FUNDS As At J u l y 31. 1946  Source of C a p i t a l Funds C a p i t a l Commercial E l e v a t o r Reserve Deductions L i v e s t o c k Pool Equity Account. Old Membership (Table Continued Below) Stock S u b s c r i p t i o n s Deductions from Pool Payments Retained from Operations Province of Saskatchewan Loan T o t a l C a p i t a l Receipts TABLE CONTINUED: Stock S u b s c r i p t i o n s • Deductions from Pool Payments Retained from Operations Province of Saskatchewan Loan 129,412 6,567,351 12,188,060 184,843 129,412 6,567,851 12,188,060 184,843 Excess Charges Deferred Reserve Undivided Refund Seasons Loans Accounts Surplus 43-4;44-5;45-6 Outstand'g 4,710,179 1 ,230,093 8,484,758 4,733,979 T o t a l 129,412 18,755,911 14 ,609,872 4 ,733,979 T o t a l C a p i t a l Receipts 4,710,179 1,230,093 8,484 758 . „ 4 > ? 33,979 38,229,174 Source: basicatcnewan Uo-ope'rative Producers L t d . , Annual Report, 194b, p.52. • - 4 3 -membership i s maintained, and reserve c e r t i f i c a t e s are held roughly i n accord w i t h patronage. In r e a l i t y , c e r t i f i c a t e s are not redeemed, but merely p e r p e t u a l l y t r a n s f e r r e d i n the d i r e c t i o n of more a c t i v e members. A l l three Pools have paid patronage dividends i n cash to the members when f i n a n c i a l c o n d i t i o n s have permitted. The United Grain Growers, L i m i t e d , have financed by both d i r e c t and i n t e r n a l means. U n t i l r e c e n t l y , e l e v a t o r f a c i l i t i e s were acquired through the r e t e n t i o n of surplus 2 earnings.- However, from 1925 to 1929, d i v i d e n d c e r t i f i c a t e s on a patronage b a s i s were i s s u e d and l a t e r redeemed. Since 1940-1941, the Company has s o l d p r e f e r r e d shares w i t h a par value of $20.00, p r o v i d i n g f o r a 5 per cent dividend. These shares are s o l d to the general p u b l i c and c l a s s i f i e d as Class "A" P r e f e r r e d . Class "B" shares are the v o t i n g shares w i t h a par value of. $5.00 and s a l e of these i s l i m i t e d to farmers and l e s s e e s or owners of land. These shares c a r r y 3 the r i g h t to p a r t i c i p a t e i n patronage dividends. The vast m a j o r i t y of d a i r y co-operatives purchase the producers' product o u t r i g h t . In evidence before the Commiss-i o n , only one co-operative claimed to handle i t s members 4 products on consignment. Operations have been f i n a n c e d by both i n t e r n a l and d i r e c t means, although the former g r e a t l y predominates. C e r t a i n co-operatives w i t h h o l d some of the 1. R.C.C.,p.l43 and 146. 2. I b i d , p . l 4 l . 3. I b i d , p . l 4 l 4. I b i d , p.157. 1 - 44 -surplus f o r use as working c a p i t a l . Others finance by means of a " r e v o l v i n g door fund". Under a f i v e year " r e v o l v i n g door p l a n " , f o r example, surplus w i t h h e l d to the c r e d i t of a member i n the year 1937 would be repayable to that member i n 1942, surplus w i t h h e l d i n 1938 would be repayable i n 1943 and so on. Here there i s a commitment on the part of the a s s o c i a t i o n to repay the funds of which they have made use. These a s s o c i a -t i o n s have also used r e t a i n e d surplus to finance p l a n t expan-si o n . Other co-operative d a i r y a s s o c i a t i o n s have s o l d addi-t i o n a l bonds, shares, or p r e f e r r e d stock i n order to buy up 1 p l a n t s or to b u i l d new ones. I t must be kept i n mind that s e v e r a l d a i r y co-operatives have r e c e i v e d government a s s i s t -ance i n the form of guarantees. Such a s s i s t a n c e has enabled expansion of pla n t f a c i l i t i e s . This a s s i s t a n c e was p a r t i c u - ' l a r l y i n evidence dur i n g the 1930's i n A l b e r t a . L i v e s t o c k marketing co-operatives a l s o show v a r i a t i o n i n method of operation. There i s g e n e r a l l y a marketing contract between the a s s o c i a t i o n and the member. In A l b e r t a , shippers 2 are members of l o c a l a s s o c i a t i o n s . The l i q u i d i t y of the l o c a l a s s o c i a t i o n i s insured e i t h e r by the deduction of a la r g e handling charge, or by the use of reserves set aside out of proceeds. The shipper r e c e i v e s an i n i t i a l p r i c e and a p r o - r a t a payment i f any surplus a r i s e s . The l o c a l s are 1. R.C.C.,pp.149-158. 2. I b i d , pp.159-160. 3. I b i d , pp l 6 0 - l 6 l . - i*5 -a f f i l i a t e d i n a c e n t r a l s e l l i n g o r g a n i z a t i o n . The c e n t r a l o r g a n i z a t i o n r e t u r n s the proceeds to the members a f t e r deduct-i n g operating costs and $1.00 per car f o r a commercial reserve. The fund procured from membership fees and from reserve deductions i s on a three year r e v o l v i n g ba.sis. Fund.s f o r an educational reserve and an operating reserve are a l s o deducted. Member a s s o c i a t i o n s r e c e i v e equity c e r t i f i c a t e s showing t h e i r . p a r t i c i p a t i o n i n these reserves. In Saskatchewan and Manitoba, 1 shippers are members of province wide o r g a n i z a t i o n s . The Saskatchewan body i s a s u b s i d i a r y of the Saskatchewan Co-operative Producers. In n e i t h e r province i s marketing contract i n exist e n c e . When surplus i s d i s t r i b u t e d it'must be on a patronage b a s i s . The Manitoba-and Saskatchewan or g a n i z a t i o n s are members of a central, s e l l i n g agency — Canadian L i v e s t o c k Co-operative (Western). L o c a l co-operatives or i n d i v i d u a l s may consign l i v e s t o c k to the body as s e l l i n g agent. A f t e r c e r t a i n handling deductions, there i s an i n i t i a l r e t u r n d i r e c t to the producer. Surplus i s returned on a pro r a t a b a s i s to the member co-operatives, 90 per cent, being i n 2 cash and 10 per cent on an eleven year " r e v o l v i n g fund b a s i s " . In the Maritimes, Maritime Co-operative Services i s a 3 f e d e r a t i o n of 100 l o c a l a s s o c i a t i o n s w i t h 10,000 members. There i s a contract r e q u i r i n g that a member confine h i s market-in g and purchasing ( i f p o s s i b l e ) to the l o c a l concerned. Each 1. R.C.C. p p . l 6 0 - l 6 l . 2 . I b i d , p . l 6 l . 3. I b i d , p . l 6 2 . l o c a l must h o l d at l e a s t one of the 4,000 shares of c a p i t a l stock. Shares have a par value of $25.00. I n t e r e s t not exceeding 6 per cent i s p a i d on shares. Since 1944 the c a p i t a l s t r u c t u r e plan has provided f o r the s e t t i n g aside of 5 per cent of the surplus each year as an u n a l l o c a t e d reserve u n t i l i t reaches 20 per cent of the p a i d up c a p i t a l ; the p r o v i s i o n f o r other reserves deemed necessary by the shareholders; p r o v i s i o n f o r the payment of the remainder of surplus to 1 1 shareholders only. The P r i n c e Edward I s l a n d Marketing Board i s a f e d e r a t i o n 2 of l o c a l s h ipping a s s o c i a t i o n s . Each member i s bound by a contract to consign h i s l i v e s t o c k through the l o c a l a s s o c i a -t i o n . There i s a per cent commission on a l l l i v e s t o c k shipped, a charge of $1.00 per shipment to cover t r a n s p o r t a t i o n c o s t s , and ij- per cent of surplus i s set aside as a condemnation 3 fund. The Board estimates p r i c e s w i t h great care and very l i t t l e surplus i s l e f t over. As-a r e s u l t no patronage 4 d i v i d e n d payment i s made. I t should be pointed out t h a t i n Prince Edward I s l a n d and the Maritimes, i t appears that government grants have provided both an i n i t i a l source of funds and working c a p i t a l . 1. R.C.C. p .163. 2. I b i d , p.164. 3. I b i d , p . l64 4. .Ibid, p . l64 . - kr -The co-operative marketing of f r u i t s and vegetables i s a.large p r o p o r t i o n of t o t a l marketings "in B r i t i s h Columbia. The A s s o c i a t e d Growers i n the Okanagan V a l l e y have a three party marketing agreement between the grower, the l o c a l a,nd 1 • the c e n t r a l s a l e s agency. The c e n t r a l sales agency handles members' produce on consignment. There i s a commercial reserve set up through the deduction of 1 per cent from the gross s e l l i n g p r i c e a l l o c a t e d to the l o c a l s . Returns are 4 pooled, and a l l l o c a l s r e c e i v e the same amount per box f o r a s i m i l a r product. Excess handling charges, i f any, are rebated on a p r o - r a t a b a s i s through the l o c a l s . However, a small 2 surplus account i s h e l d back. L o c a l associations' are financed mainly by deductions f o r which growers r e c e i v e shares. These revolve on a three to f i v e year b a s i s . In l o c a l s work-ing c a p i t a l i s obtained through a per box deduction f o r which redeemable stock c e r t i f i c a t e s may or may not be issu e d . Excess handling and packing charges are rebated on a pro-rata, b a s i s . The P a c i f i c Co-opera.tive Union, not a f f i l i a t e d w i t h the Associated Growers, revalves i t s $10.00 shares every f i v e years. Shippers 1 products are handled on consignment and a contract i s i n f o r c e . Returns from l i k e grades of product are pooled and rebated on a pro-rata, b a s i s . 1. R.C.C. p . l68 . 2. I b i d , p . l 69 3. I b i d , p.170 4. I b i d , p.170 - 48 - . In Ontario, fr u i t and vegetable marketing schemes have been tried on a regional basis as well as through the United 1 Farmers Co-operative. Of the regional associations mentioned, variations in operating methods are apparent. One is a buying and selling agency for four local associations who sign a 2 * contract. There is a membership fee', and annually not more than 20 per cent of the surplus can be put into a reserve 3 A fund. Another association is divided into sales units. One per cent of gross sales may be set aside out of surplus. annually as a reserve fund for that year. The remainder may be distributed on a pro-rata patronage basis. Operating costs are covered by a deduction from each sales unit not to exceed per cent of the sales units total gross sales. Each unit deducts a brokerage fee of £ cent per pound. A third association ha.s non-revolving share capital. Memhers sign a marketing contract. Dividends are paid on a pro-rata basis and in cash, and the remainder of the surplus is placed in a four or five yes.r revolving fund. A fourth association has interest bearing shares with a par value of $100.00. Under an agreement, members leave surpluses with the associa-tion to provide increased storage capacity. These Ontario examples are indicative of the tremendous variation found in the business methods and financial operations of marketing associations. 1. R.C.C., p.171. 2. Ibid, p.171. 3. Ibid, p.171. 4. Ibid, p.171. 5 .Ibid, p.171. 6. Ibid, p.171. _ 49 -In Nova S c o t i a , the United F r u i t Company i s the c e n t r a l 1 s e l l i n g agency f o r the l o c a l s . Operating expenses are met by deductions of s e v e r a l cents a b a r r e l . C a p i t a l c o n s i s t s of $100.00 shares w i t h i n t e r e s t dependent upon c o n d i t i o n s . Advances are made to growers through the season, and the company must pay back a l l s u r p l u s . The company owns pro-ce s s i n g p l a n t s , and r e c e n t l y members have permitted the company to r e t a i n $50,000. f o r a c o l d storage p l a n t . A s s i s t -ance f o r warehouses has been re c e i v e d by l o c a l s from the Nova S c o t i a Government Mortgage Company. "The d i v i d e n d p a i d i s only a rough approximation to payment on a patronage 2 b a s i s " . Co-operative wool marketing i s carried, on by the Canadian Co-operative Wool Growers, L i m i t e d , which i s incorporated f e d e r a l l y . Marketing i s c a r r i e d on e i t h e r through a small number of l o c a l a s s o c i a t i o n s or by some 12,000 i n d i v i d u a l farmers. L o c a l a s s o c i a t i o n s are incorporated p r o v i n c i a l l y , and meet expenses by a per pound levy on wool, and by earn-ings d e r i v e d from the sale of s u p p l i e s i n areas not served by other a s s o c i a t i o n s . There i s no contract membership i n the c e n t r a l body. The c a p i t a l of the c e n t r a l a s s o c i a t i o n c o n s i s t s of $10.00 shares. L o c a l a s s o c i a t i o n s may purchase 1. R.C.C., p.172, 2. I b i d , p.173, 3» I b i d , p.177-- 50 -an unlimited number, but individual members are limited, to f i f t y shares each. In practice the shares return a 4 to 6 per cent dividend, although the limit is 8 per cent. During the clipping season, the association borrows $500,000 from 1 the banks. Two-thirds of the estimated wool price is advanced to growers or associations at marketing time. After 80 per cent of the c l i p has been marketed a final payment is made. Any surplus after reserves ha.ve been deducted is rebated on a pound.age basis at the end of the year. The following reserves have been set up: (1) A contingency reserve which is the property of the association, but which the by-laws provide shall be distributed on a pro-rata basis to current year shippers upon dissolution of the association. (2) A general reserve which is the property of the members, distributed upon dissolution to current year's shippers on a pro-rata basis. (-3) A groxvers reserve tfhich is essentially a revolving fund used by the association as working capital. ' The co-operative shows no desire to make a member's equity in the association proportional to the volume of prod.uce which he markets through the association. PURCHASING- CO-OPERATIVES . . The Royal Commission Report has detailed information on co-operative purchasing only for the province of Saskatchewan. This information is valuable because in 1944 Saskatchewan 1. R.C.C. p.177. 2. R. C.Cp.178. - 51 -purchasing and consumers' co-operatives enjoyed the l a r g e s t volume of t o t a l s a l e s of any province. In 1929 many of the co-operative purchasing a s s o c i a t i o n s i n the Province federated to form the Saskatchewan Co-operative 1 Wholesale Society Limited. The Wholesale Society was to supply i t s members w i t h both farm s u p p l i e s and consumers' goods. In 1935 a consumers' co-operative r e f i n e r y was organized i n Regina by many of the co-operative o i l purchasing a s s o c i a t i o n s throughout the Province. 1944 saw t h i s f l a t t e r e.~ body amalgamate .with-.the Co-operative Wholesale Society , c ; s under the name of Saskatchewan Federated Co-operatives,Limited. The Federated Co-operatives finance p r i n c i p a l l y by means of the " r e v o l v i n g door fund". The b a s i s of s u b s c r i b i n g f o r c a p i t a l stock i n l o c a l 2 a s s o c i a t i o n s v a r i e s w i t h the by-laws of those a s s o c i a t i o n s . In the great m a j o r i t y of cases an i n i t i a l payment may be made, towards owning stock when t a k i n g out membership i n the a s s o c i a -t i o n . The balance i s paid up mainly through the a p p l i c a t i o n of patronage dividends. A l a r g e number of l o c a l a s s o c i a t i o n s hs.ve p r o v i s i o n f o r " r e v o l v i n g door funds" which have become popular, since t h e i r advantages have been i l l u s t r a t e d by the s u c c e s s f u l operation of the Consumers Co-operative R e f i n e r i e s . Other l o c a l a s s o c i a t i o n s o b t a i n c a p i t a l by loans from members •and by d e f e r r i n g payment of patronage dividends. 1. R.C.C. p. 181. 2. I b i d , p.181. - 52 -Table XX shows .the f i n a n c i a l r e s u l t s of a l l co-operative a s s o c i a t i o n s engaged i n a r e t a i l business i n Saskatchewan durin g the years 1935-36 to 1945r-46. The increase i n both numbers of a s s o c i a t i o n s and members i s evident. Members' equity has increased 6000 per cent since 1935-36, and over 550 per cent s i n c e 1939-40. Equity per member has d e c l i n e d from $83 i n 1935-36 to $56 i n 1945 -46. Volume of s a l e s i n c r e a s e d from $3,000,000 i n 1935-36 to $18,500,000 In 1 1945_46. Table XXI shows the f i n a n c i a l r e s u l t s of co-operative w h o l e s a l i n g and manufacturing o r g a n i z a t i o n s i n Saskatchewan. The Table i s h e a v i l y weighted by f i g u r e s f o r the Saskatchewan Federated Co-operatives. While t o t a l business has g r e a t l y increased, i t should be remembered that v i r t u a l l y 100 per cent of the products s o l d by the Saskatchewan Federated Co-operatives are s o l d e i t h e r to member a s s o c i a t i o n s or to other u n a f f i l i a t e d l o c a l co-operative a s s o c i a t i o n s . Sales of the Federated Co-operatives are d u p l i c a t e d i n Table XX. However, l o c a l s o c i e t i e s are buying an i n c r e a s i n g l y l a r g e percentage of t h e i r goods from the Federated Co-operatives, L i m i t e d . 1. Table XX. - 53 -TABLE XX - FINANCIAL RESULTS OF ALL CO-OPERATIVE ASSOCIATIONS ENGAGED IN A RETAIL BUSINESS  Year No. No. Sales T o t a l L i a b i l i t i e s L i a b . Paid Net Members' Report'g Membrs. Assets to P u b l i c to Members Up Reserves Eq u i t y C a p i t a l 1935-6 194 12,690 $3,000,000 f l ,341,704 $288,695 $ — — $ T11 $ 193,334 1938- 9 306 23,182 3,937,209 1,564,717 403,152 ~ - 624,571 536,994 1,161,565 1939- 40 327 28,590 4,681,510 1,888,397 642,054 — .632,208 614,135 1,246,343 1940- 1 453 42,535 7,068,226 2,582,910 777,547 — 863,252 942,111 1,805,363 1941- 2 483 50,881 8,576,518 3,215,392 726,626 — 917,605 1,571,161 2,488,766 1942- 3 489 57,948 11,225,288 3,775,739 724,923 — 954,902 2,095,914 3,050,816 1943- 4 486 66,340 13,078,226 4,491,150 903,'9,6l — 971,849 2,615,340 3,587,189 1944- 5 483 76,714 16,549,383 5,593,834 1,420,936 — , 0,981,512 3,191,386 4,172,898 1945- 6 519^ 121,545^ 18,588,4l l 7,854,112">> 1,020,765^ 3,125,937 ;654,840 ( / ) 2 ,052,570^6,833,347 1. 1945-46 f i g u r e s Include l6 co-operative implement a s s o c i a t i o n s w i t h t o t a l assets amounting to | 4 8 l ,06l and 28,239 members. 3. This 1945-46 f i g u r e i n c l u d e s a l l o c a t e d d e f e r r e d patronage dividend of $1,975,451 shown i n previous years as reserves (4) and loans from members of 1,150,486 shown i n previous years as l i a b i l i t y to the public/2<J. S o u r c e : Royal Commission Report on Co-operatives, p . l87 - l88 and Saskatchewan: Department of Co-operation and Co-operative Development, Annual Report, 1945-46. - 54 -TABLE XXI - FINANCIAL RESULTS OF CO-OPERATIVE WHOLESALING AND MANUFACTURING- ORGANIZATIONS No. Places Member L l a b l l - L i a b i l i t i e s Year Report- of Assoc- Fixed Total i t i e s to ing Bus. iatlons Assets Assets to Memhers Public  ^^ ^^ ^ 42 ^ Q E ^ ^ ^ f f i ^ <J£ HP SP HP HP 539 165,870 528,633 225,164 5,413 780 295,825 949,155 456,519 5^ ,616 623 723,292 1,428,602 640,346 120,095 626 825,565 1,988,920 878,172 224,215 664 856,333 2,456,324 973,038 349,276 696 , 835,827 3,018,610 1,239,438 624,625 46l 1 777,089 3,218,015 1,613,848 604,372 499 1,203,889 3,939,675 2,291,438 1,369,374 1938-59 2 2 1939-40 2 4 1940-41 2 4 1941-42 2 4 1942-4? 2 4 1943-44 2 4 1944-45 1 5 1945-46 1 7 1. Decrease in membership due to amalgamation of two co-operative federations. 2. Business for 7 months period only. Source: Saskatchewan: Department of Co-operation and Co-operative De\elopment, Annual Report, 1945-46. - 54 A -Commodities Total Paid-up Members Sold or Other Business Capital Reserves Equity Marketed Income 156,800 141,256 303,469 1,664,473 14,859 1,679,332 242,565 195,^55 492,636 2,508,592 13,643 2,522,235 367,862 300,299 788,256 3,857,635 30,420 3,888,055 512,122 374,411 1,110,748 4,814,243 36,529 4,850,772 633,838 500,172 1,483,286 6,104,564 51,3^ 8 6,155,912 669,925 484,622 1,779,172 7,076,952 2 54,759 7,131,711 437,871 561,924 1,604,167 6,838,629 26,018 6,864,647 53,536 225,327 1,648,237 7,141,551 15^,53^ 7,296,085 The Royal Commission Report also has selected 40 purchasing associations in the Province for separate analysis. Table XXII is very significant. It shows the total earnings avail-able for allocation and the large percentage of the total earnings which has been retained by the associations. Of these earnings which have been retained, in the four year period 1936 to 1939, 74 per cent remained unallocated, In the 1940 to 1943 period 69 per cent remained unallocated, and throughout the entire eight year period 70 per cent remained unallocated. Thus, these forty associations did not repay to their members 70 per cent of the operating earnings which they retained over the eight year period 1935 to 1943. However, since we do not know the method of selecting these forty purcbslng associations, and since they are a l l in the one Province of Saskatchewan, i t Is necessary to be cautious in drawing conclusions from the Table. PLANT VALUES Unfortunately ho figures are available for the plant values of those Joint stock companies in direct competition with co-operatives. The only available basis for comparing companies and co-operatives is to compare their working capital. The net increase in co-operative working capital was 14,500,000 from 1935 to 1939-and |10,000,000 from 1939 1. R.C.C. p.182. - 56 -TABLE XXII - A STATEMENT SUMMARIZING CHANGES IN MEMBERS' EQUITY IN THE FORTY SELECTED PURCHASING ASSOCIATIONS IN SASKATCHEWAN During the Eight Fiscal Years, 1936'to 19*4-3  Four Years Four Years Eight Years 1936 - 1939 19*40 - 1943 1936 - 19*4-3 i 1 IP Sales 5,521,192 9,863,372 15,38*4,56*+ Less Cost of Sales & Operating Expenses 5,328,539 9.3*44.973 1*4.673.612 Operating Earn'gs 192,653 518,399 710,952 Add Other Income 141.762 262.758 404.620 Earnings Available for Allocation 334,415 781,157 1,115,572 Deduct Earnings Allocated to 203,335 467,463 670,798 Patrons Earnings Unallocated 131.080 313.694 444.774 Allocated Earnings as above 203,335 467,463 670,798 Deduct Patronage Dividends paid and interest paid on Capital (less Increase in paid-up capital) 156.117 326.760 482.877 Allocated Earnings Retained ,47.218 140.703 187.921 Total Earnings Retained (Allocated & unallocated) representing increased equity: 178.298 454.397 632.695 Source: Report of Royal Commission on Co-operatives,p.190 - 57 -l to 1943. For corporations, the net increase was 141,000,000 from 1935 to 1939, and f144,000,000 from 1939 to 1943. These figures seem to show that corporatiohs have accumulated larger reserves during the war than co-operatives. However, we must remember that these figures include corporations engaged in war work. There were allowed to set aside generous untaxed depreciation reserves which are Included in these working capital figures. If we had statistics for the companies competing with co-operatives, our results would probably be quite different. Presumably corporations engaged in normal peacetime occupations were not allowed to set aside such large depreciation allowances. The principal competitive advantage arising from tax exemption received by co-operatives would appear to be the use of tax free reserves in order to buy up competitors or to build additional plant and equipment. The Royal Oommisslon Report mentions two cases of ex-pansion by purchase. Retention of surplus has played an im-portant part in purchases in 1944 by the Northern Alberta Dairy Pool of a creamery at Bonnyville, and eighteen drivers and creameries formerly owned by Burns and Company. In B.C., the Fraser Valley Milk Producers Association purchased the remaining half of the associated dairies' stock that i t did not already own. As for purchasing associations, 59 1. Canada,Department of Trade and Commerce,Dominion Bureau 2 3 of Statistics Printer, p.52 3. R.C.C., p.155 s - 5 8 -r e t a i l stores ln the province of Saskatchewan were converted 1 from private to co-opers-tlve ownership. Of interest *rould be figures of the Increases in the number of co-operatives and in co-operative plant values. These would be particularly valuable i f total plant value figures were broken down into plant value figures for the various products marketed through co-operative channels. This break-down is available up to 1941, but unfortunately after that, the figures for plant values of Canadian market-ing co-operatives are not segregated from the plant values of a l l business co-operatives. Table XXIII shows the plant values of Canadian co-operatives by provinces. The figures from 19413 on include a l l Canadian business co-operatives but Quebec figures do not include stat i s t i c s for urban co-operative r e t a i l stores for 1942. Table XXIV presents plant value figures for the years 1935 to 19^1 for marketing co-operatives ln various fi e l d s . Table XXV indicates the increase in co-operative associations engaged in marketing various products. Un-fortunately these figures are not available on a provincial basis. 1. R.C.C. p . l l l . - 59 -TABLE XXIII PLANT VALUE OF CANADIAN CO-OPERATIVES FROM 1935 to 1944 ' (Thousands of Dollars) Year Inter Prov_ i n c i a l Mari-times Quebec % Ontario Sask-at che-Manitoba wan British Columbia Alberta Total 1935 1Q36 1937 1938 1939 1940 1941 1942 1943 1944 6,868 6.181 6* 262 6,626 6,320 6,224 6; 688 5,837 6,002 5,692 788 804 768 821 83O 801 804 1,170 1,552 1,434 1,779 2,085 2,203 3,05f 2,386 3,224 3,790 4,424 4,606 7,897 1,394 1,252 1,298 1,370 1,598 1,470 1,446 2,245 2,357 3,118 2,268 1,964 2,282 2,483 2,903 3,046 ,142 ;806 2,757 2,655 17,333 15,533 16,097 16J167 15,379 14,920 13,787 13,032 12,492 7,129 6,043 6,017 5,725 6,298 5,941 5,325 4,943 4,715 1,290 1,427 1,473 1,308 1,824 1,836 2,002 2,021 2,66l 38,850 35,289 3§,339 36,570 37,786 38,265 38,567 37,598 37,273 40,665 1, Does not Include statistics for urban co-operative r e t a i l stores. Source: Canada Year Books 1937 - 1946. - 6o -TABLE XXIV - PLANT VALUE OF CANADIAN MARKETING- CO-OPERATIVES 1935 to 1941 (Thousands of Dollars) Fruits and Grain and Poultry Year Dairying Vegetables Seed Livestock and eggs 19?5 2,070 1,755 32,3^3 616 94 1936 2,184 1,711 28,412 328 96 1937 2,308 1,808 29,007 5§0 115 1938 2,397 l,86l 29,474 563 HO 1939 2,674 2,329 29,608 538 120 1940 3,164 2,627 29,007 521 148 1941 3,601 2,472 28,748 370 136 Source: Canada Year Books 1937-1942. - 6 l -TABLE XXV NUMBER OF MARKETING- ASSOCIATIONS ENGAGED IN MARKETING VARIOUS PRODUCTS FROM TQ?5 to 1944  Year ' Dairying Fruits and Grain and Poultry ' Vegatables Seed Livestock and Eggs 19?5 115 104 30 53 24 1936 136 107 30 59 31 1937 1^ 6 98 . 35 115 57 1938 166 94 36 177 61 1939 197 100 32 180 87 1940 279 113 32 92 66 1941 386 117 47 53 79 1942 443 193 11^ 321 199 1943 446 161 105 225 194 1944 545 162 96 250 201 Source: Canada Year Books 1937-1946 - 62 -. What must be sought from these tables l s a relationship between plant values and the co-operative growth Indicated in the previous chapter. Table XXIII has limited value. In spite of the fact that the greatest relative co-operative 1 gains were scored in Manitoba during the war, the Table shows that plant values actually declined there. This may be a t t r i -buted to the high percentage of total Manitoba co-operative business that is in grain and seed. Elevators are a high percentage of total plant value and changes in plant values of other Manitoba co-operatives would be hidden in total plant figures for the Province. Purchasing is a large per-2 centage of total co-operative business in the Marltimes, and st a t i s t i c s for the region would therefore be: largely un-reliable i f applied to marketing associations alone. The importance of grain and seed in Saskatchewan and Alberta prevents the Table from being much use in those Provinces. However, for Quebec, Ontario and British Columbia the figures could be significant. Clear marketing co-operative gains were scored in Ontario and Quebec, while Br i t i s h Columbia co-operatives held their own. Meantime from the outbreak of the War to 1944 plant values trebled in Quebec, doubled in Ontario, and rose by over 60 per cent in British Columbia. Quebec showed gains in the co-operative marketing of poultry and eggs, 1. R.C.C., p . 8 5 2. Ibid, p.79 - 63 -livestock, grain and seeds and dairy products; Ontario showed gains In dairy products, fru i t s and vegetables, and poultry and eggs; British Columbia showed an increase in poultry and eggs, livestock, grain and seeds, fruits and vegetables and dairy products. In 1940 the ratio of plant value to total sales of dairy products was $1 to $7.60; for fruits and vegetables i t was |1 to |4; for grain and seeds i t was $1 to |5; for livestock i t was $1 to #50; for poultry and eggs i t 1 was $1 to $30. Grain and seed, fruits and vegetables and dairy products a l l require a heavy fixed Investment. Taking a l l this into consideration we may infer that the relative wartime growth of co-operatives in British Columbia, Quebec and Ontario may have arisen partly from the use of tax free surpluses to buy or construct capital equipment. Plant figures arranged according to produce are inter-esting. Regarding poultry and livestock, the figures show a slow irregular increase ln the case of poultry, and a decline ln the case of livestock. On the other hand, co-operative marketings in both made great gains during the war relative 2 to the competitors of co-operatives. In 1941 co-operative livestock marketings were 229*6 per cent of the 1935-1939 average; cash income from the sale of livestock was only 193*^ per cent of the 1935-1939 average. 194l figures for 1. Table XXIII and Royal Commission Report, p.115 2. R.C.C., pp 9$ and 97. o - 64 -poultry were 220.4 per cent of the 1935-1939 average, while cash income averaged 149.3 per cent for the same five year period. Further, as the war continued, marketings through co-operative channels of poultry and livestock rapidly in-creased, and so did the number of co-operative associations in those field s . Absence of plant Increases In the early war years and increases in the number of associations later in the war, force us to the conclusion that use of tax-free reserves to extend plant and equipment had l i t t l e or nothing to do with the relative growth during the war of poultry and livestock co-operatives. Of the other figures, the dairying is the most inter-esting. The plant value figures for 194l show a $930,000 increase over 1939 figures. On the other hand 1939 figures 1 show an increase of only $365,000 over 1937. In 1941 co-operative dairy marketings were 210.5 per cent of the 1935-1939 average, while cash income from the sale of dairy pro-ducts was only 149.3 per cent of the 1935-39 average. As. pointed out previously, the ratio of fixed assets to sales Is quite high in dairying. These facts would appear to indicate the use of tax free reserves to extend plant and equipment. However, consideration must also be given to 1. Table XXI - 65 -the rapid numerical increase in associations from 1939 to 1944. The importance of this numerical increase is largely-n u l l i f i e d by the fact that the structural organization of many dairy co-operatives is such that many local associations 1 are members of some centralized organization. For example, dairy or creamery purchases by a central organization may result in the Incorporation of local associations. Our con-clusion with regard to reserves of dairying co-operatives, though somewhat modified, would s t i l l appear to apply. The figures show no significant relative increase or decrease in the plant values of fru i t and vegetables or gre.ln end seed co-operatives during the war years. - 0 - 0 - 0 - 0 -CHAPTER IV THE HISTORY OF THE TAXATION OF CO_OPERATIVES AND  THE GROWTH OF THE CONTROVERSY OVER THE APPLICATION OF THE INCOME WAR TAX ACT TO COOPERATIVE ASSOCIATIONS CHAPTER IV THE HISTORY OF THE TAXATION OF COOPERATIVES AND THE GROWTH OF THE CONTROVERSY OVER THE APPLICATION OF THE INCOME WAR TAX ACT TO CO.OPERATIVE ASSOCIATIONS The Income War Tax Act was f i r s t passed in 191?. There was no direct reference to co-operative associations in the Act, but i t did contain the following exempting clause: "The incomes of mutual corporations not having a capital represented by shares, no part of the income of which Inures to the profit of any mem-ber thereof." 1 In reply to a question in the House from Sir Herbert Ames, Sir Thomas White, then Minister of Finance, indicated that 2 the paragraph was intended to exempt co-operatives. However, the phrasing of this paragraph was extremely vague, and In 1919 a dispute arose over the exemption of co-operatives. In The Budget, (the organ of the Alberta Wheat Pool), of September 6, 1941, George Keen, who was at the time Secretary of the Co-operative Union of Canada, declared: "In 1919 I had a voluminous discussion in writing with Mr. Law, the then Solicitor of the Income Tax Division at Ottawa, on the question of the l i a b i l i t y of co-operatives for Income taxation. Eventually he accepted my argument that the above mentioned savings could not legally be taxable as Income or profit. The Commissioner of Income Tax at the time, a layman, however, overruled his la.wyer on a legal question, and declared that the net surplus, after deducting patronage dividends as , discounts, was taxable." 1. Statutes of Canada, 1917, 2. Canada, Parliament, House of Commons, O f f i c i a l Report of Debates, Aug. 2, 1917,p.4101. (Hereinafter referred to as Hansard). - 68 -Inspite of this decision made ln 1919, no action was taken with respect to co-operatives u n t i l five years later in 1924. In that year the Income Tax Commissioners assessed the Fraser Valley Milk Producers on their net surplus after deducting payment of patronage dividends, and also on divid-1 ends or interest paid to the shareholders on paid-up capital* The assessment covered the f i s c a l year ending December 31, 1923. An appeal was made to the Commissioner, and nothing more was heard by the Association u n t i l 1928 when i t was assessed retroactively for the years 1924 to 1928. The Fraser Valley Milk Producers appealed their 1923 assessment before 2 the Exchequer Court in 1928 and the Supreme. Court of Canada 3 in 1929. Both appeals were dismissed. In handing down i t s decision the Exchequer Court held that the Association must In fact be considered as a commer-c i a l company, and that dividends paid by It to i t s share-holders, as Interest on capital, were profits or gains, liable to assessment as income. The Court disagreed with the conten-tion of the Association that i t was an agent or a factor, and that the dividends paid by i t to shareholders were disburse-ments in the hands of the company as trust moneys. In i t s decision several English cases were referred to. Of particu-lar interest and importance is the reference to the Case of 1. Most of the material in the following paragraphs is taken from the Brief of the Fraser Valley Milk Producers, and the Submission of the Saskatchewan Co-ope.ratlve Producers. Ltd. 2. Fraser Valley Milk Producers Assn. vs. Minister of National ' Revenue 1928, Ex. CR., 215. 3. Fraser Valley Milk Producers Assn. vs. Minister of National Revenue, 1929, S.C.R., 435. - 69 -the Commissioners of Inland Revenue vs The Sparkford Vale Co-operative Society, Limited. The British courts held that since this Society dealt in milk, i t s profits arose from s e l l -ing to the public and not from buying from i t s members, and as a result of this i t xvas not entitled to exemption from British income tax. In the Fraser Valley Milk Producers Association decision, Judge Audette, who presided, wrote: "It is a very commendable action for the producers of milk to combine and form an association, a company, with the object of reducing the costs of collection and distribution, thereby realizing better and larger profits or dividends; but that does not entitle such association or company to discriminate as against the public, the taxpayers, and place It In a position whereby i t would, become exempt from paying the Income tax. The company has been able by combination to secure an advantage measured in money which It could not have enjoyed but for such combination." 1 In the middle twenties, the Saskatchewan Wheat Pool was also being assessed for taxes. In 1926, 1927, 1928 and 1929 the Pool paid taxes levied on Its undistributed surplus and 2 on i t s interest payments. In 1926 i t was also assessed on Its commercial and elevator reserve deductions. The Pool appealed, the latter assessment and in 1930 w o n an Exchequer 3 Court decision. In the opinion of the Court these deductions were held to be loans or advances under contract for the pur-pose of carrying on business. In addition i t was pointed out that these ded.uctions were from the price paid for the wheat 1. Fraser Valley Milk Producers Assn. vs. Minister of National Revenue, 1928, Ex. C.R., 217. 2. Submission of Saskatchewan Co-operative Producers, p.18 3. Minister of National Revenue vs. Saskatchewan Co-operative Producers, Limited, 1930, Ex. C.R., 402. - 70 -and were repayable to the grower, who voluntarily permitted such deductions. Commercial and elevator reserves were not regarded as profit or gain to the association. The presiding judge went on to state: "No one can be held to make a- profit or a gain by dealing with himself only; two parties are needed, and under the pool scheme, the associations being ^ the agent of the farmer, they are one and the same." i. In passing, i t ls interesting to note that in these two important cases that i t was the co-operative that sold i t s products directly to the consumer that lost i t s appeal. The association which was held to be purely a marketing agency, won i t s appeal from assessment. But-we should keep in mind that in dispute on the one hand were dividend payments on capital stock, while the other case revolved around the tax position of allocs/ted reserves. The adverse decision of the courts in the Fraser Valley Milk Producers case gave rise ..to co-operative pressure for an amendment in the Income War Tax Act, lest the decision establish a precedent for the taxing of co-operatives' divid-end payments on paid-up capital. The then Minister of Finance, Mr. Dunning, was interviewed by representatives of co-operat-2 ives from coast to coast, and as a result Section 4 of the Act was amended to provide for the exemption of: "The income of farmers', dairymen's, livestockmen's, f r u i t growers', poultrymen's, fishermen's and other 1. Ibid, p.408 2. Hansard, May -24, 1930, p. 2509. - 71 -like co-operative companies and associations whether with or without share capital, organ-ized and operated on a co-operative basis." 1 It was further provided in the amendment that in order to qualify for exemption 80 per cent of the value of produce, supplies or equipment marketed or purchased had to be done with the members of the association. Apparently the only voice raised in objection to the amendment was that of the Honourable R. B. Hanson. He f i r s t stated that he could see no need for the legislation since the principle of exemption had already been established by 2 the court decision favourable to the Saskatchewan Wheat Pool. However, Mr. Dunning pointed out that this decision did not bear specific relationship to the nature of the organization, ' 3 but rather to certain specific facts involved. Mr. Hanson then went on to state that while he did not object to the principle of exemption as applied to bona fide co-operative associations, he f e l t that there was strong feeling about the exemption of certain provincially owned businesses, and he continued: "I h8.ve no doubt that to a lesser degree there Is the same feeling with respect to co-operative companies." 4 As far as can be ascertained, Mr. Hanson was the f i r s t member of Parliament to ever question the tax exempt status of co-operatives. 1. Statutes of Canada, 1930, An Act to Amend the Income War Tax Act, p.231. 2. Hansard, May 2 4 , 1930, P.2508. 3. Ibid, p .2508. 4. Ibid, p .2508. - 72 -After some research in the f i e l d , I could only f i n * one in the l?3Q-'s occasionA>n which the taxation of co-operative earnings was mentioned. Mr. R. S. Law, president of the United Grain Growers brought up the matter before the Turgeon Grain Inquiry Commission in 1937. He mentioned that the wheat pools were 1 not subject to federal income tax. In 1939 the War broke out bringing with i t a war induced prosperity to most sectors of the economy. To pay for war expenditures taxes increased sharply with the Introduction of the Excess Profits Tax in 1940. The Submission of the Saskatchewan Co-operative Producers in 1945 to the Royal Commission on Co-opere.tives declared that: "following a widespread and well organized campaign directed against the Pool organizations (presumably by competitors of co-operatives) the question of the l i a b i l i t y of the (Saskatchewan) Pool for payment of income tax was again introduced by the Department of National Revenue in 1940". 2 In 1941 agitation from business interests became apparent. The Brief of the North West Line Elevators Association claims that in January, 1941, Pool Insurance Company, the inter-provincial subsidiary of the Pools providing Insurance services was assessed and f i l e d notice of appeal. In May of the same year, for the f i r s t time in eleven years, the Income tax status of co-operatives was raised in the House of Commons. On May 15, Mr. R. B. Hanson Inquired whether the income tax 1. Alberta Wheat Pool, A History of the Events Leading to the Taxation of Co-operatives Calgary, 1946, p.3. 2. Ibid, p.18 ' - 73 -status of those "quasl-co-operatlves", the "pools and grain growers of the West" had been looked into. Mr. Ilsley replied that the matter was being investigated, but that no decision 1 had been reached. In September, the o f f i c i a l organ of the Alberta Wheat Pool, The Budget, mentioned an attack on the tax position of the wheat pools appearing in the Financial  Post. However, throughout 1941, Canadian Business, the organ of the Canadian Chamber of Commerce, ma.de no mention of the tax exempt status of co-operatives. In 1942, increased agitation from private sources and additional Federal Government auction were apparent. According to the Brief of the Alberta Wheat Pool, the decision of the Pools in 1941 to recommence patronage dividend payments may 2 have been in part responsible for the increased agitation. From February to April, Canadian Business ran a series of three articles an co-operatives under the heading "Co-ops: 3 a threat or a promise?" These articles were written by L. L. Knott. The f i r s t a rticle discussed the growth of the Canadian co-operative movement. The second article presented arguments for and against the co-operative movement. The third article reached the conclusion that co-operatives were a threat to other forms of private enterprise, and i t offered 1. Hansard, p.2836 2. Op. Cit. p.33 3. Vol. 15, Feb. 1942, p . 3 0 f f ; March, p.24ff; April, p . 2 6 f f . - 74 -suggestions for combatting them. The author urged an improve-ment in wages, conditions and prices offered by businessmen. In an accompanying news item in the February issue entitled 1 "How Go-ops Escape Taxes", the tax exemption received i t s f i r s t mention. In July, 1942, the Wheat Pools cut their handling charges by half a cent' - a reduction of some 14 per cent - and on July 21 the question of their tax status was 2 again before the House. Ralph Maybank, a Winnipeg member, asked the preseht status of the Wheat Pools in regard to income tax paymentThe Honourable Colin Gibson, Minister of National Revenue, replied that a decision had been rendered by the Department of Justice. He went on: " I do not know that there is any particular secret in the fact that we are going ahead assessing the various pools, and possibly the question w i l l come before the courts whether they are or are not co-operatives." 3 Later in the year the Saskatchewan Pool was assessed for the f i s c a l year 1939-40. The Revenue Department, in making the assessment, claimed that the Pool was no longer acting as selling agent for members' grain, since that function had been assumed by the Canadian Wheat Board. The assessment was appealed, and at the time of the Royal Commission hear-4 ings, was s t i l l before the Revenue Department. 1. Ibid, p.34 2. Hansard, p.4490-1. 3. Ibid. 4. Submission of the Saskatchewan Co-operative Producers. - 75 -In 1943, the Government took further action. This might be partly attributed to the fact that very few farmers were paying income tax. According to the Brief of Professor MacDougall before the Royal.Commission, only 24,000 farmers paid Income tax in 1943 and their total payments amounted to 1 only $7,000,000. Additional evidence of this may be obtained 2 in the Financial Post of March 17, 1945. This paper stated that in 1943 farmers comprised only 1 per cent of a l l income taxpayers and their payments represented only 1.4 per cent of total personal Income tax collections. On February 15, Saskatchewan Pool Elevators were notified that In the opinion of the Justice Department even patronage dividends were a 3 taxable profit. From.February 16 to March 29 an intermittent House of Commons debate on the question of co-operative tax-ation took place. Only two speakers expressed approval of the action taken by the government. In April, The Budget reported that the Saskatchewan Legislature had passed an unanimous resolution favouring the exemption of co-operatives, and the Premier of Manitoba had made a statement opposing the subjection of co-operatives to federal income tax. St this time the Commissioner of Income Tax wrote to the Co-operative Union of Canada saying, in effect, that many accusations had 1. Page . 30.' : 2. Page,!...! 3. Submission of the Saskatchewan Co-operative Producers r>.l9 14, April 10, 1943. '' - 76 -been made in the press and by competitive interests that co-operative associations were receiving more lenient tax treat-ment than was Justified by existing law, and this was result-1 ing in discrimination against other taxpayers. In the middle of April, 1943, Saskatchewan Pool Elevators were advised by the Income Tax Commissioner that co-operatives paying divid-ends on paid-up share capital could not qualify for exemption under the Statutes; in June the Saskatchewan Pool and a l l i t s subsidiaries were assessed Jointly for the f i s c a l year 1939-2 1940. In 1944 agitation increased as a result of absolute co-operative growth, increasing tax burdens on compe,titors of co-operatives and confusion over interpretation of Section 4(p)., At the end of December, 1943, the Canadian Chamber of Commerce had called for the taxation of a l l business, whether publicly, 3 privately or co-oper.atively owned. May and July editorials in Canadian Business called for the same thing. More import-ant for our purposes, however, was the formation of the Income Tax Payers Association by two lawyers, G-.S.Thorvaldson K. C., M.L.A., end Herbert Adamson, both of Winnipeg. Some of the objects of the Income Tax Payers Association were stated to be: 1. The Budget, April 10, 1943. 2. Submission" of the Saskatchewan Co-operative Producers,^ io <3# Canadian Business, December, 1943 - 77 -"-To secure equitable distribution of the income tax burden. -To secure the redress of inequalities In the incidence of the income tax. -To afford income tax payers an opportunity of acting unitedly in making representations to the proper authorities to secure r e l i e f from inequalities in income tax law or administration; and to give public-ity to such inequalities to obtain redress thereof." 3 Inspite of the fact that no specific mention was made of co-operatives, this organization appears to have devoted a very large share of i t s efforts to having the tax exempt status of co-operatives repealed. In October and November the organ-ization printed speeches made by i t s two founders at various luncheon meetings held throughout Canada. These pamphlets, though well written, showed an unmistakable bias against co-operatives. In July, The Retail Merchants Association of Canada issued some literature on the co-operative movement. Over half of the booklet was devoted to the tax position of co-operatives in Canada and other countries. In his concluding paragraph, the author states: "It would, now seem that the question to be deter-mined is as to whether the Canadian Retail Federation, upon i t s own i n i t i a t i v e or by collaboration with other interested parties, should make representations to the appropriate authorities upon the question of equity in taxation which seems the only valid approach which could be made and which has an Important precedent to support i t in the action that has been taken in Great Britain." 1. Hougham,Geo.S., Survey of the Development of the Co- operative Movement in Canada, Toronto, 1944. - 78 -In the same month a delegation from the Co-operative Union of Canada met with the Minister of Finance and proposals iiere submitted by the Minister which the Union f e l t unable to 1 accept. Meantime ln May, the Government had retained Mr. Pitblado, a lawyer employed by the Winnipeg Grain Exchange and various grain companies in the past, to present the Government's case 2 in the pending court action. Then in September came an announcement by the Saskatchewan and Manitoba Pools, that retroactive to August 1, handling charges would be reduced from 3^ to a bushel on a l l grains. The Alberta Wheat 3 Pool followed suit on October 7 to become effective October 10. The significance of this is that the Pools apparently were trying to show that patronage dividends arose from an over-charge and that, ln reality, co-operatives did operate at cost. It appears to have been a threat that, i f they were made subject to taxation, they would cut charges to a minimum in order to avoid paying taxes. On October 21, news came that Exchequer Court hearings on the case of the Wheat Pools 4 were to commence. Hoxvever, on October 23rd, the hearings were cancelled when Finance Minister Ilsley announced that a Royal Commission was being appointed to look ihto the whole question of tax exemption of co-operatives. 1. The Canada Year Book. 1946, p . 6 l 9 -2. The Budge . May b,T 9 4 4 . 3. Brief of the North-West Line Elevators i p.27. 4. The Budget - 79 -That is the history of the Canadian controversy up to the£ time of the appoihtment of the Royal Commission. In examining this history, several things stand out. F i r s t , the agitation for co-operative taxation has centred around the three Wheat Pools. This might be expected, for they are the largest and most powerful co-operative organizations in Canada. Secondly, this agitation aj?ose more particularly at budget time and came from the private line elevator companies who were hit hardest by co-operative business. Thirdly, the chief grievances have been the growth of co-operative business and the exemption of co-operative concerns from the high wartime taxes. For example, the Income Tax Payers Association has regarded this tax exemption as a "weapon" which is used by co-operatives: 1. To take business away from its private competitors through price advantages. 2. By pyramiding earnings as capital a.nd building up reserves for future expansion. 1 3. To buy out private competitors' businesses. Fourthly, criticism of co-operative tax exemption appears to have come largely from western private grain dealers and from eastern business interests. The question started with the grain dealers and was taken up by the Financial Post of Toronto and Canadian Business of Montreal. Criticism of co-operative exemption has come In Parliament mainly from the 1. Thorvaldson, G. S.. How to Avoid Paying Income Taxes} Winnipeg, 19^4, p.9. - 80 -eastern Canadian members. Finally, as we shall now see, ambiguities in Section M p ) led to confusion over the precise status of co-operatives in regard to the federal Income tax. -o-o-o-o-CHAPTER V THE PARTICULAR APPLICATION OF  THE CANADIAN INCOME WAR TAX ACT TO  COOPERATIVE ASSOCIATIONS  BEFORE THE 1946 AMENDMENTS CHAPTER V THE PARTICULAR APPLICATION OF THE CANADIAN INCOME WAR TAX ACT TO CO.OPERATIVE ASSOCIATIONS BEFORE THE 1946 AMENDMENT TheSection in the Income War Tax Act dealing with income tax exemptions is Section 4. In 1930, Section 4 was amended to include subsection (p). Section 4(p), dealing with the exemption of co-operatives, read as follows: "(p) The income of farmers', dairymen's, livestockmen's f r u i t growers', poultrymen's, fishermen's and other like co-operative companies and associations, whether with or without share capital, organized and operated on a co-operative basis, which organizations (a) market the products of the members or shareholders of such co-operative organizations under an obli-gation to pay them the proceeds from the sales on the basis of quantity and quality, less necessary expenses and reserves; (b) purchase supplies and equipment for the use of such members under an obligation to turn such supplies and equipment over to them at cost, plus necessary expenses and reserves. Such companies and associations may market the produce of, or purchase supplies and equipment for non-members of the company or association provided the value thereof does not exceed twenty per centum of the value of the produce, supplies or equipment marketed or purchased for the members or shareholders. This exemption shall extend to companies and associ-ations owned or controlled by such co-operative companies and associations and organized for the purpose of finaro-ing their operations." 1 Upon careful reading, i t is obvious that definite ambiguities exist in the section. First, there is the word "like" in line 2. It is not clear whether "like" refers to the words "organ-1. Statutes of Canada, 1930 Chapter 24, An Act to Amend the Income War Tax Act, p.231. Ized and operated", that i s , to companies and associations organized on a co-operative basis, or, whether i t is used to refer to co-operative companies and associations which are akin to those l i s t e d at the beginning of Section 4(p). Secondly, d i f f i c u l t y arises in the interpretation of the word "co-operative" (line 3), which is nowhere defined in the Act. Thirdly, there Is no definition of the term "market the products" (line 6). Obviously using this phrase as a basis, Senator DeB.Fa.rris, who represented a group of independ-ent Vancouver milk producers, declared that co-operatives which process or manufacture produce received from members are merely 1 "alleged" co-operatives. One may easily interpret the phrs.se in such a way. Fourthly, the word "obligation".(line 8) has an uncertain meaning. It could be interpreted either as a legal obligation, or as a gentleman's agreement. This ambiguity of language has had an apparently pro-found effect upon the particular application of the tax. As far as purchasing co-operatives are concerned, the administra-tion of the tax has varied greatly between provinces. In an interview on July 11, 1947, Mr.George Dolsen, Treasurer of the British Columbia Co-operative Wholesale Society, Informed me that the tax had been far from uniformly administered throughout Canada.. He ind.icated that in his opinion i t had been most leniently administered from the co-operative point 1. Vancouver Sun, January 17, 1945. - 84 -of view, in the Prairie Provinces. On October 1, 1946, Mr. R. J. McMaster wrote to the National Secretary of the Co-operative Union of Canada in part: "If we can force the Dominion Government to make rulings (on the income tax) at the top level of the department which are applicable throughout the country we w i l l avoid the situation which previously existed under 4(p) of different rulings applying in different p o l i t i c a l atmospheres and thereby we should a l l be able to benefit by the weakest link in the Government's chain". 1 Thus, i t would appear that the subjection of co-operative purchasing associations to income tax depended upon the relative strength of the co-operative movement In the parti-cular province in question. Mention has already been made of the application of the income tax to marketing co-operatives, and In particular to the Wheat Pools. Generally, a l l marketing co-operatives Incorporated under provincial or federal law were exempt from taxation during the t h i r t i e s . In 1940 and the years following a more urgent need for revenue was f e l t , and-the Pools appeared to be a large, untapped source. Yet, the Act was not uniformly administered even with respect to marketing co-operatives, for the Ontario Farm Union Brief to the Royal Commission reported that "under the existing law most Ontsrlo co-operatives pay even the income and 2 excess profits taxes". Representatives for the Oxford 1. Mr. R. if. McMaster is the Solicitor of the Br i t i s h Col-umbia Co-operative Wholesale Society. 2. Toronto Star, February 13, 1945. - 85 -Farmers' Co-operative Produce Company, Limited and f o r Ilderton, Middlesex Farmers' Co-operative, both of Ontario, reported 1 that they paid income tax on retained surpluses. I t l s not clear 'for hoxf long a period these statements re f e r to. The ambiguity of the Act has been manifested also i n the way l n which the government has handled the assessment of the Wheat Pools. Judging by their actions, they f i r s t decided that the Saskatchewan Pool should be assessed because i t was no longer acting as a marketing agent f o r i t s members. Then the Pool was informed that a co-operative paying, dividends on share c a p i t a l could not come within the statutory exemption. In t h i s the Revenue Department may have been influenced by the Exchequer Court decision of 1929 In the case of the Fraser Valley Milk Producers. F i n a l l y , the Pool was t o l d that even patronage dividends were to be regarded as taxable income. On the other hand, the Alberta Pool was never 2 assessed u n t i l 1944, and this i n s p i t e of the fact that the operating methods of the two organizations are very similar. Surveying a l l the available facts, i t would appear that there was no such thing as a. uniform application of the In-come War Tax Act to co-operative associations before the 19^6 amendments. 1. Toronto Globe and Mall, February 14, 1945. 2. Submission of the Alberta Wheat Pool^ r>. 36(a). CHAPTER VI THE REPORT OF THE 1919 BRITISH ROYAL COMMISSION ON INCOME TAX  AND THE REPORT OF THE  1932 BRITISH PARLIAMENTARY COMMITTEE  INQUIRING- INTO THE POSITION OF CO-OPERATIVE SOCIETIES IN RELATION TO THE INCOME TAX CHAPTER VI THE REPORT OF THE 1919 BRITISH ROYAL COMMISSION ON INCOME TAX  AND THE REPORT OF THE 1932 BRITISH PARLIAMENTARY COMMITTEE  INQUIRING- INTO THE POSITION OF CO-OPERATIVE SOCIETIES IN  RELATION TO THE INCOME TAX ' Before discussing British history of the taxation of co-operatives It would be well to point out that B r i t i s h co-operatives are financed in a different manner than those in Canada. British co-operative associations finance largely through the sale of additional shares to members, through loan capital from members, and by deposits from members, rather than by the retention of undistributed earnings. The history of the income tax question In Great Britain goes back to the year I867, when co-operatives were required to pay a tax on patronage dividends. However, the amount collected in taxes was not worth the effort, and as a result 1 in l876 co-operatives received exemption. From that time u n t i l the present day arguments have raged pro and con over the tax issue. In 1919 a Royal Commission was appointed to survey the xtfhole income tax f i e l d . The subject of co-operative taxation was dealt with in its report. The Commissioners agreed unanimously that dividends on purchases were not distributed profits, but rebates on the purchase price and therefore not 1. R.C.C., p.2l6. \ - 88 -subject to tax. However, this was the only point of agree-ment. A majority report, signed by eleven of the twenty-two members, recommended that any part of the net proceeds of a society which was not returned to the members in patronage dividends should be subject to income tax. Income from 1 investments was also held to be taxable. Seven members of the Commission presented a minority report which stated In part:. "In our opinion, the proceeds of mutual trade are not profits in any sense of the groups of individuals among whom the trade is carried on. They are no more profits than the payments to a club by i t s members are profits... The majority report ... implies that the question xrtiether or not the receipts of a co-operative constitute a profit depends not on the origin of those receipts but on the use to which they are put. This test ls not employed as regards any other class of receipts, and we cannot agree that i t can properly be applied with regard to this particular class of receipts." 2 Two other members of the Commission agreed that receipts from mutual trading were not taxable profits, whether distributed or put to reserve, but they recommended that as more and more trade in relation to the whole was conducted through co-operative channels, the Government should devise some other 3 special form of taxation to apply to them. The f i n a l two members of the Commission f e l t that the "mutuality" character-i s t i c had pretty well disappeared, and could be disregarded 1. Carr-Saunders, Florence, Peers, Consumers' Co-operation  in Great Britain, London, Allen and Unwin, 1938, p.465. 2. From the Report of theRoyal Commission on the Income Tax T oi o 9 ( ! nrtpt-ofl -in Consumers' Co-operation in Great Britain p. 3. Consumers^ Co-operation in Great Britain, p.466 _ P.Q -for purposes of taxation. They believed surplus arising from mutual trading should be chargeable to income tax, but for practical purposes a distinction x\Tas urged between surplus distributed to the members and undistributed reserves. To make for efficient tax collecting, they suggested exemption of patronage divifle nds, but agreed a tax should be levied on • 1 the reserves of co-operative organizations. Inspite of the fact that the Commission apparently had made a thorough study of co-operative tax exemption from every angle, nothing was done by the Government to implement any of the recommendations. This may be explainable by the obvious disagreement among the ' Commissioners. It might be well to add that the majority report recommended that agricultural co-operatives be treated 2 in exactly the same way as the purchasing societies. In the elections of 1931, although the Conservatives re-ceived a sizeable majority, they formed a National Government with Ramsay MacDonald as Prime Minister. Neville Chamberlain, a man regarded by co-operatives as unfriendly, was given the 3 post of Chancellor of the Exchequer. The appointment of the Raeburn Committee in 1932 for the purpose of Inquiring Into the income tax status of co-operatives Is explainable only because of the large area of disagreement found among the members of the 1919 Royal Commission. From available 1. Loc. c i t . 2. R.CC. .. p.2l6 3. Co-operative Wholesale Society, People's Year Book,1934, P.65. - 90 -Information i t appears that non-co-operative traders had been pressing for the implementation of the majority Report since 1920. This pressure may be attributed to two factors. First, the income tax rates were high. After 1915 income tax rates increased sharply. Before the 1914-18 War the standard rate on undistributed surplus iiras Is. 2d. in the pound. The rate was raised by one-third in 1914 and doubled in the f i s c a l year 1915-16. Since the f i r s t War, except for a period during Mr. Churchill's Chancellorship, i t has never been below 1 4s.2d. The second reason was probably the considerable growth of co-operative membership and sales. In order to examine the fears of non-co-operative traders in this connec-tion, sta t i s t i c s are necessary. Table XXVI shows co-operative r e t a i l distributive societies in England, and numbers of members of r e t a i l societies. It appears that sales roughly 2 doubled from 1897 to 1915 and from 1915 to 1933* However, these figures must be considered in the light of changes In total r e t a i l sales during the period, and for this purpose we shall use national income figures which are a reasonably good measure for showing these changes. From 1894 - 1903 the average national income has been estimated at £1,666,000,000; at £2,339,000,000 in 1913 and at £3,962,000,000 3 in 1933* Although co-operatives show striking relative gains 1. U.K. Hicks, The Finance of the British Government 1920-36 London, Oxford Press, 1938, p.234. 2. Table XXVI 3. Colin Clark, National Income and Outlay f London, MacMlllan, 1938, pp. 232 and 88. - 91 -ln the period from 1897 to 1915, the effect of the increase in national income between 1913 and 1933 is to Indicate very-l i t t l e relative increase in co-operative trade* The Raeburn Committee was a Parliamentary committee con-sisting of three member's. Commenting on the report of the committee, the Rt. Hon. A. V. Alexander stated in 1934 that the committee was anythlhg but impartial, for i t included in i t s membership "a director of companies which had regularly boycotted co-operative societies with regard to supplies, and who was also the president of an Institute of Accountants which had given evidence against co-operative societies before 1 the Royal Commission on Income Tax in 1919". Inspite of this alleged bias, the Committee presented a Report which was virtually the same as that of the majority of the 1919 Royal Commission. The Report of the Committee was presented to Parliament in February, 1933. The Committee obtained evidence from some fifteen bodies. Apart from the specific exemption of the Income Tax Act, the Committee acknowledged that the courts had declared that the part of the surplus of a co-operative association arising from trade with members should not be 2 subject to tax. However, the following was rather interest-ingly added: 1. Co-operative Wholesale Society, People's Year Book. 1934, P. 65 2. Report of the Committee appointed to Inquire into the ;—Present Position of C!6-operative Societies m Relation to Income Tax, London, 1933,P»4. (Hereinafter- called Kaeburn Committee) - 92 -TABLE XXVI - THE GROWTH OF THE BRITISH CO-OPERATIVE RETAIL MOVEMENT Year Members 1. 044, 675 1, ,169 094 1, 274. 994 1, 4 6 5 , 538 1, 613, 461 1, 7 9 3 , 167 1, 987, 423 2, 153, Q15 2, 323, 376 2, 4 6 9 , 396 2, 6 4 0 . 429 2, 878, 296 3, 264, 811 3, 788; 490 4, 131, 477 4, 548, 557 4; 5 6 9 , 256 4, 9 1 0 , 983 5; 579, 038 6, 168, 994 6, 5 9 0 , 020 6 ; 917, 138 7, 4 8 3 , 976 0 8 4 . 990 643, 233 8J 773, 255 9, 0 8 2 , 218 9, 401. 927 Trade £ 599 ,925 900 ,128 ,047 , 7 6 l ,512 ,086 109 ,423 812 ,607 557 ,003 930 780 ,490 584 ,924 967 ,888 ,257 ,429 393 293 246 574 999 1891 1893 1895 1897 1899 1901 1903 1905 1907 1909 1911 1913 1915 1917 1919 1921 1923 1925 1927 1929 1931 1933 1935 1937 1939 1941 1943 1945 30 31 33 40 45 52 61 68 70 74 83 102 142 198 218 165 I 8 3 199 216 207 197 220 251 272 302 331 36O ,401 ,896 674 559 ,446 ,171 ,887 991 376 ,359 ,469 ,043 779 ,612 ,437 384 ,038 ,049 938 ,099 ,'385 ,009 517 ,047 748 329 123 ,519 Source: Co-operative Wholesale Society, People's Year Book. 1947, p . l 6 o . - 93 -"On the other hand i t has been urged that this con-clusion is not to be inferred, from the decisions in question. The arguments on either side have been very f u l l y stated to us and It i s clear that the point is by no means free from doubt and could be f i n a l l y settled only by a court of law." 1 The Committee went on to recommend that co-operative societies should be subject to income tax in respect of a l l trading, whether with members or non-members after making allowances for trade expenses, wear and, tear of plant and. equipment, and necessary repairs and renewals; patronage dividends were to 2 be regarded as a trade expense. However, It was also recommended that co-operatives be freed of the duty of collect-ing the tax on share and loan interest at the source, that i s , the interest would be chargeable in the hands of the individual rather than in the hands of the co-operative association. In reality, what was suggested was the taxation of reserves. The decision was made mainly on legal grounds, for the Committee stated that although associations i n i t i a l l y took the form of "mutual" trading societies, such was no longer the case, for co-operatives were held to be legal entitles apart from their members. 1. Raeburn Committee, p.4. 2. Ibid, p .9-3 . Ibid, p . 10 . k. Ibid, p.8. _ 94 -"...a separate legal entity — the Society — is interposed between the income or surplus and the members, and in our opinion the existence of that entity cannot, as we have already stated, be Ignored, any more than the existence of an entity separate from the shareholders in the case of an Incorporated company. Income tax at the f u l l rate has to be paid on the undistributed profits of a company irrespective of the individual l i a b i l i t i e s of the shareholders, and there must be many companies in which a considerable body of the shareholders are not individually l i a b l e at that rate.» 1 The Committee is probably correct in i t s statement that many shareholders of private companies would not be liable to pay income tax at the rate paid by companies on undistributed surplus. However, the Report as a whole ls not entirely logical, for as The Economist pointed out: "It is one thing to subscribe to a company ln order to build up and share in the surplus of i t s trading; i t is another thing to subscribe to a society to obtain commodities cheaper than elsewhere by virtue of a deferred rebate; and l f a deferred rebate be further deferred, why should this latter be taxable and not the former." 2 The recommendations of the Raeburn Committee were not acceptable to the representatives of the co-operative movement. Attempts of the representatives of the co-operatives and Mr. Chamberlain to work out a compromise agreement were un-successful, and subsequently the Government implemented the Raeburn recommendations. 1. Raeburn Committee, p.9 2. March 4, 1 9 3 3 , CHAPTER VII THE REPORT OF THE CANADIAN ROYAL COMMISSION ON CO OPERATIVES CHAPTER VII THE REPORT OF THE CANADIAN ROYAL COMMISSION ON COOPERATIVES The history leading up to the appointment of a Royal Commission has already been discussed. On November l6, 1944, a Commission was named to inquire into: "(a) the present position of co-operatives in the matter of the application thereto of the Income War Tax Act and the Excess Profits Tax Act, 1940 and (b) the organization and business methods and operations of said co-operatives as well as any other matters relevant to the question of the application of income and profits tax measures thereto, and (c) the comparative position in relation to taxation . under the said Acts of persons engaged in any line of business in direct competition with co-operatives."1 The Commission was directed to report a l l facts which would be relevant in determining an equitable basis for the appllca-2 tion of these two tax Acts to co-operative associations. The Commission consisted of five members under the chairman-ship of Mr. Justice McDougall of Quebec. The report of the Commission deals with virtually every aspect of Canadian co-operatives and contains much valuable s t a t i s t i c a l material. In examining the tax status of co-operatives under Section 4(p), the Commissioners made no distinction betx^een co-operatives and Joint stock companies. One of the reasons for this is that no,one was able to furnish the Commission, nor was the Commission able to find, a suit-1. R.C.C., p.9 2. Ibid, p.9. - 97 -1 able d e f i n i t i o n f o r a co-operative. As was pointed out elsewhere, co-operative associations organized under P r o v i n c i a l co-operative statutes exhibited such a variety of forms and operating methods that no a l l - i n c l u s i v e d e f i n i t i o n cbuld be found. Having regard to the premise of close s i m i l a r i t i e s of organization between co-operative and joint stock companies, and keeping i n mind the d e s i r a b i l i t y of equity In any taxa-t i o n suggestions brought f o r t h , the Commission made several important recommendations. In making these recommendations, i t was held that the operations of a co-operative r e s u l t in income to the co-operative and i t s members. The Commission attempts to d i s t i n g u i s h between that portion of the surplus which i s retained permanently by the co-operative, as compared with that portion which i s paid to, or claimable by, the 2 customers of the co-operative. The Report holds that interest on a loan to, or another Investment i n a co-operative association, provided that the loan or investment i s withdrawable by the member, on condi-t i o n that reasonable notice be given by him to the associa-t i o n , and provided that the loan or Investment has a f i x e d date of maturity, should be deductible as an expense of the association and taxed as income of the member when he receives i t . Interest on a loan or investment i s c l e a r l y 1* Co-operative Union of Saskatchewan, Notes on Royal  Commission Recommendations. Regina, 1945, p.1 2. R*C»C. . p.41 : " 3. R.C.C.. p.41. - 98 -distinguished from "interest" or dividends on share c a p i t a l , declared by the co-operative association at the end of i t s f i n a n c i a l year. The Report holds that a payment of t h i s nature i s analogous to the d i s t r i b u t i o n of p r o f i t s on the basis of investment as i n a Joint stock company. This would be p a r t i c u l a r l y true i n the case of an association paying dividends on shares and not financed i n proportion to the volume of business which each member does through the associa-t i o n . The fact that the rate of dividend may be f i x e d was held to be ir r e l e v a n t . Such amounts are not considered deductable as an expense of the association unless the p r i n c i p a l upon which they are paid has a d e f i n i t e maturity date, and i s withdrawable by the member upon reasonable 1 notice. They are also considered taxable i n the hands of those who receive them. Understandably, contributions made i n the form of share c a p i t a l , loan c a p i t a l , or membership fees, are- not regarded as income of the association, but rather as equities i n .the association. In the case of marketing associations, deduc-tions from the gross proceeds of the sale of a member's product which are applied to further the member's equity i n the association are held to be advances to the co-operative and not income. Deductions made to cover operating expenses 2 are considered as deductible for Income tax purposes. 1. R.C.C. p.42. 2. Ibid, p.42. - 99 -One of the main f i n d i n g s i n the Commission Report was that any sum p a i d i n cash or c r e d i t e d to a member or patron of a co-operative i n such a way that he can withdraw them upon some reasonable n o t i c e , s u b j e c t , however, to the author-i t y of the d i r e c t o r s to p r o t e c t the co-operative against sudden or excessive withdrawals, could not be considered as income of the a s s o c i a t i o n , and could not ther e f o r e be con-s i d e r e d as taxable In I t s hands. Patronage dividends p a i d In cash or c r e d i t e d towards payments f o r shares or other investments are thought of as the Income of the member, or customer and taxable i n h i s 1 hands. These payments are c l e a r l y the income of t h e i r r e c i p i e n t s f o r , t a k i n g the example of a primary producer who markets h i s produce through a co-operative, he r e c e i v e s an i n i t i a l payment at the market p r i c e and then l a t e r r e c e i v e s a patronage rebate, and t h i s rebate i s an increase i n the t o t a l amount r e c e i v e d f o r h i s produce and ther e f o r e an i n -crease i n h i s income. But patronage dividends on consumers' goods were h e l d to be simply a r e d u c t i o n i n the p r i c e of 2 the good r a t h e r than income. To preserve e q u a l i t y of treatment, the Report s t a t e s that where J o i n t stock companies, p a r t n e r s h i p s or i n d i v i d u a l e n t e r p r i s e s h o l d f o r t h the prospect to customers of d i s t r i -b u t i n g earnings i n p r o p o r t i o n to patronage, patronage payments should be allow a b l e as a deduction when a r r i v i n g at taxable income. 1. R.C.C. p . ^ 27 I b i d , p.42. - 100 -The Report concludes that the remaining surplus of the co-operative a s s o c i a t i o n which i s r e t a i n e d by the a s s o c i a -t i o n , e i t h e r as u n d i s t r i b u t e d surplus or as u n a l l o c a t e d r e s e r v e s , or as a l l o c a t e d reserves which are c r e d i t e d to the members, but i n such a way that they are not withdrawable by the member upon some reasonable n o t i c e "should not be allowed as a d e d u c t i b l e expense of the a s s o c i a t i o n when 1 earned", and c o n s t i t u t e taxable income. This i s q u i t e j u s t i f i a b l e , f o r u n d i s t r i b u t e d surplus and reserves which are u n a l l o c a t e d are, f o r a l l p r a c t i c a l purposes, the property of the a s s o c i a t i o n per se. In many cases such earnings are not withdrawable except at the sole d i s c r e t i o n of the Board of D i r e c t o r s . Hoxvever, the Report recommends that u n d i s t r i -buted surplus or reserves be alloitfed as a de d u c t i b l e expense of the a s s o c i a t i o n l n any year i n which they might be r e -turned to the members. The Report holds that i n the d i s t r i b u t i o n of patronage dividends i f the dividends d i s t r i b u t e d to non-members are to be allowed as a d e d u c t i b l e expense of the a s s o c i a t i o n , they must be p a i d at the same r a t e , on the same types or c l a s s e s of goods, to both members and non-members. I f there i s no d i s c r i m i n a t i o n , amounts p a i d to non-members are not 2 h e l d to be ta x a b l e . 1. R.C.C. p.44 2. I b i d , p.45. - 101 -Recognition Is also given to a major weakness of co-operative organizations — their inability to attract In-vestment capital. In view of this, the Report suggests that co-operative organizations, other than federations of co-operatives, should receive exemption from taxation for 1 the f i r s t three years of their operations. This Is a salient point which unfortunately was not taken into consideration by any British body investigating the income tax status of co-operative societies, although we should kenep in mind the fact that British co-operatives are financed largely through the sale of additional shares to each member, through loan capital and by deposits, rather than by retention of patronage dividends. The use of deferred dividends as work-ing capital appears to be the outcome of circumstances ' 2 peculiar to Canadian agricultural conditions. In brief, the recommendations of the Royal Commission provided for the repeal of Section 4(p) of the Income War Tax Act, and the taxation of co-operatives on virt u a l l y the same basis as private companies. But certain basic d i f f e r -ences between joint stock companies and co-operatives x*ere recognized in that patronage dividends were treated as trade expenses, providing certain conditions existed. To be de-ductible i t was held that patronage dividends had to be paid 1. R.C.C. p.45 2. Ibid, p.215. - 1 0 2 -in cash, or an equivalent, within six months after the annual meeting of the association, or that such dividends were credited to the customer within the same period and "exigible 1 by him on giving such notice as may be deemed reasonable". It also was required that the association had to hold forth the prospect of the payment of patronage dividends, and that there be no discrimination in the rate of dividend paid on the same type of item as between members and non-members. Deductions from the gross sale proceeds of a farmer's product were held to be deductible as an expense provided that they were used to purchase shares, or were credited to him and exigible by him upon reasonable notice. On the other hand, patronage dividends and deductions credited to the customer, and used, for capital purposes on the so-called "revolving door" plan, but not paye^ble except at the sole discretion of the directors are held to be taxable ln the period credited to customers. Nevertheless, the Report holds them to be exempt In the period in which they are paid out. Interest on loan capital, or any form of investment ln the associa-tion having a fixed date of maturity, or being withdrawable on reasonable notice, and provided that the Interest is at a fixed' rate and payable by the association annually can be regarded as deductible for tax purposes. The Report recommends 1. R.C.C. p. 68. - 103 -that newly formed associations be exempt from income tax the first-three years of their operations, and that service type co-operatives be given a blanket exemption. Services co-operatives would include associations organized for the purpose of distributing electric power, operating rural telephone lines, providing hospital services and the lik e . 1 Three Commissioners had reservations to make. Mr. B. N.Arnason, dealing with the provision that reasonable notice be given before any member might withdraw amounts credited to him, suggests that "what constitutes reasonable notice must have reference to conditions that prevail in 2 Canada". Here, he would appear to have in mind the largely agricultural basis of the Canadian co-operative movement. Mr. Arnason points out that the Report seeks to distinguish between that part of surplus retained by a co-operative association for i t s e l f , and that part which members may claim, upon reasonable notice, e.s their owh. But there is a third case which may be added, and which is mentioned by Mr. Arnason, though ignored in the recommend.ations of the Report. This third case i s where there i s an Irrevocable obligation providing that deductions from the gross proceeds ofthe sale of a member's produce, or patronage dividends, shall be deferred for a definite period only. Commissioner Arnason feels that payments of this nature cannot be con-1. R. C C , pp 67-72. 2. Ibid, p.68. - 104 -sidered as Income of the association, for they are deferred for a definite period under a definite obligation to pay. The irrevocable obligation to the member is clearly established. This l s an intermediate case between capital which can be withdrawn upon reasonable notice, and capital which i s , for a l l practical purposes, the property of the association per se. He urges that such payments be Considered as deductible 1 in computing taxable income for the association. In my opinion, Mr. Arnason's point is well taken, i f only on the grounds that the obligation has been established and Is Irrevocable. Another poiht raised by Commissioner Arnason takes cognizance of the weak position of co-operatives ln relation to the raising of capital. He suggests that co-operatives be permitted to put aside certain limited tax-free reserves 2 in order to protect the equity of members. Mr. J. M. Nadeau likewise recommends that certain tax-free reserves be put aside in order to maintain the members' 3 equity. On the other hand, Mr. J. J. Vaughan f e l t that the amount of taxation which would be Imposed on co-operatives should the Government accept the recommendations of the Report would not remove existing inequalities. He suggests that either a new special tax be levied on co-operatives, or alternatively, 1. R. C.C, pp. 68-69. 2. Ibid, p. 69. 3. Ibid, p. 70. - 105 -the removal by the Government of part of the t a x a t i o n now 1 Imposed on j o i n t stock companies. By and l a r g e , w i t h the exception of the p r o v i s i o n that the r a t e of patronage refund was to be the same f o r both members and non-member customers, the Report i s q u i t e favorably-disposed to the co-operative p o i n t of view. Co-operative spokesmen s t a t e that t h i s i s one of the most dangerous and a d m i n i s t r a t i v e l y d i f f i c u l t p r o v i s i o n s of the recommendations. They go on to add: "prom a consumer point of view t h i s i n v o l v e s an exhaust-i n g bookkeeping and a d m i n i s t r a t i v e problem. A re c o r d of the name, etc. of every purchaser of goods whether f o r f i v e cents or $100.00 worth must be kept as w e l l as a record of h i s purchases. The problem of producers' co-operatives i n t h i s respect i s much simpler, but i f they have f i r m c o n t r a c t s to supply they w i l l r e q u i r e to beware. Further take note that such p r o v i s i o n w i l l s u r e l y discourage many persons from becoming members and advancing c a p i t a l , p a r t i c u l a r l y i n consumer organ-i z a t i o n s . Why r i s k c a p i t a l i f you can get the same patronage dividends without?" 2 Such a c r i t i c i s m would appear to place an emphasis on c a p i t a l p r e v i o u s l y d i s c l a i m e d by many co-operative members. Judging' by the above, patronage dividends would seem j u s t as much a r e t u r n on c a p i t a l as a rebate or trade expense. However, contentions of co-operatives w i t h regard to the nature of patronage dividends, and the inherent weakness of the co-operative method — l a c k of a t t r a c t l b i l i t y f o r i n v e s t -ment c a p i t a l — were recognized. The l a t t e r was ignored i n 1. R.C.C. p.72. 2. McMaster, R.J., and Dolsen, George, Memorandum of Comments Re Report of thel-toyal Commission on Taxation of Co-operatives, Vancouver, January, 1946, unpublished, p.5« - i o 6 -In the British Parliamentary Committee Report, and i t may be assumed that the Royal Commission took into consideration the nature of Canadian co-operative development and i t s rela-tive position in Canada's economy. Further, contentions of private business organizations that co-operatives be made subject to the Income War Tax Act and the Excess Profits Tax Act on a retroactive basis were unanimously rejected. Undoubtedly provision for retroactive assessment would work an undue hardship on co-operatives, who, in good f a i t h had believed themselves to be exempt under Section Mp). -o-o-o-o-o-CHAPTER VIII THE PRESENT TAX STATUS OF CO-OPERATIVES IN CANADA  AS COMPARED WITH THEIR POSITION IN GREAT BRITAIN AND FOREIGN COUNTRIES CHAPTER VIII THE PRESENT TAX STATUS OF COOPERATIVES IN CANADA AS COMPARED  WITH THEIR POSITION IN GREAT BRITAIN AND FOREIGN COUNTRIES. At the 1946 Sessloh of the Canadian Parliament, the exemption previously accorded co-operative companies and •associations was rescinded effective December 31, 1946. Commencing with the 194? taxation year, a l l co-operatives became subject to tax i f they had a taxable Income. Section 4(p) as amended provides for exemption from Income tax during the f i r s t three taxation years of co-operatives which comply with certain requirements. The co-operative (a) must have commenced business after January 1, 1947, . (b) be incorporated under provincial co-operative legislation, (c) hold, forth the prospect that payments w i l l be made to members and non-members in proportion to patron-age, (d) provide that each member shall have only one vote, (e) have as members individuals only, (f) provide that dividends on shares shall not exceed 5 Pe** cent per annum, (g) do at least 80 per cent of i t s business with members, (h) provide that no member hold, more than 5 per cent of the shares issued, or capital subscribed, (i) must not be a continuation of a previous busi-ness In which a large number of members of the associa-tion had a substantial interest. 1 1. Statutes of Canada, 1946, Chapter 55,pp.290-291 - 109 -With regard to co-operatives o p e r a t i n g before January 1, 1947, the new law puts these a s s o c i a t i o n s i n the same c l a s s as other businesses f o r tax purposes. However, the law as a p p l i e d to co-operatives centers around the now famous 3 per 1 cent p r o v i s i o n . To appraise the f a i r n e s s of the law i t is e s s e n t i a l that t h i s p r o v i s i o n be understood. The 3 per cent p r o v i s i o n was Introduced p a r t l y f o r a d m i n i s t r a t i v e reasons. The Government appears to have feared that had co-operatives been taxed only on net increases i n r e s e r v e s , co-operatives would then have adopted a p o l i c y of paying out i n patronage dividends a l a r g e percentage of what was formerly put to r e s e r v e s . I f co-operatives f o l l o w e d t h i s p o l i c y , nothing would have been done to r e l i e v e e x i s t i n g i n e q u i t i e s . The 3 per cent p r o v i s i o n insures that co-operatives pay on a sum amounting to at l e a s t 3 per cent of t h e i r employed c a p i t a l . I t would seem that the Government holds that c a p i t a l i n any o r g a n i z a t i o n — co-operatives included — earns a r e t u r n . I t f e e l s that a normal r e t u r n on c a p i t a l employed — to be computed l n accordance w i t h the F i r s t Schedule to the Excess P r o f i t s Tax Act, 1940 — i n any co-operative o r g a n i z a t i o n i s 3 per cent. With the i d e a of a d m i n i s t r a t i v e convenience l n mind, the Government's p o s i t i o n appea.rs to be t h a t the income of a marketing co-operative i s made up of income from 1. The m a t e r i a l e x p l a i n i n g present tax status of co-operatives and the 3 per cent p r o v i s i o n , l s found i n P r e l i m i n a r y  Explanatory Brochure re The Income War Tax Act issued by the Department of N a t i o n a l Revenue to a s s i s t co-operative; a s s o c i a t i o n s subject to tax under the Act as amended. - 110 -Investments, underpayments to members and. customers, and a sum equivalent to 3 per cent of the c a p i t a l employed by the business; the Income of a purchasing a s s o c i a t i o n Is made up of income from investments, overcharges to the members and customers, and a sum equivalent to 3 per cent of c a p i t a l employed by the a s s o c i a t i o n . The 3 per cent of c a p i t a l em-ployed might be termed a f l o o r . The Act provides t h a t earnings over and above 3 per cent of the c a p i t a l employed, when paid, i n p r o p o r t i o n to patronage, may be deducted from taxable income. Before patronage payments are considered as d e d u c t i b l e , the prospect that such payments were to be made must have been h e l d f o r t h to member and non-member customers, and a l l o c a t i o n and payment must have been made w i t h i n the t a x a t i o n year, or w i t h i n twelve months t h e r e a f t e r . Patronage refunds are allowed as deductions from taxable income i f paid i n cash, or c r e d i t e d to the customer on h i s w r i t t e n a u t h o r i t y a u t h o r i z i n g the a s s o c i a t i o n to r e t a i n the money on l o a n or to apply the same on purchase of shares, or by the payment of moneys f o r the purchase of c e r t i f i c a t e s of indebtedness or stock or shares of the a s s o c i a t i o n . Refunds may be ma.de to members alone, or to members and non-members, at e i t h e r s i m i l a r or .varying r a t e s . However, the amount of refunds to members which may be exempt from t a x a t i o n must a l l have been obtained from member business. Thus, i f a co-operative - I l l -does 75 per cent of I t s business w i t h members, i t can pay-out any or a l l of i t s surplus to members, but a maximum of 75 per cent of the surplus w i l l be allowed as a deduction i n computing taxable income. The other 25 per cent to be considered as deductible would have to be p a i d out on a patronage b a s i s to non-members. I f part of an o r g a n i z a t i o n ' s surplus i s a l l o c a t e d to members or patrons, but kept by the co-operative f o r f i n a n c -i n g , i t i s t a x a b l e . But, i f i n some l a t e r years i t i s paid out as o r i g i n a l l y a l l o c a t e d , i t i s allowed as a deduction i n computing taxable Income i n the years i n itfhich i t i s p a i d out. Hence, t h i s a p p l i e s to the " r e v o l v i n g door" fund method of f i n a n c i n g . By t h i s p r o v i s i o n , i f a " r e v o l v i n g door" fund l s b u i l t up to $50,000. and kept there, tax has to be pai d on the $50,000, but because the amounts p a i d out i n l a t e r years are d e d u c t i b l e from t a x a b l e income, the $50,000 i s only taxed once, and i t i s not taxed again ea.ch'time i t i s turned over. I t should be pointed out that the f a c t that tax exemption can be claimed f o r patronage refunds to mem-bers only to the amount of the surplus accumulated through members' business does not mean that only t h i s amount can be p a i d to members l n patronage refunds. Subject to taxes, the whole of a co-operative's surplus may be pai d to members, re g a r d l e s s of the non-member patronage. - 112 -Only under one circumstancefmay deductions be made below 3 per cent of the capital employed. There may be deducted the amount of interest paid on borrowed, moneys other than moneys borrowed from a bank or from a. credit union. So far It has been indicated that the 3 per cent provision i s , in effect, a means of setting a minimum taxable income. The above mentioned circumstance i s , of course, an exception. But what of the co-operative association that has annual earnings which are less than 3 per cent of the capital employed? In this case NOTHING- is allowed as a deduction from net earn-ings, except interest on borrowed moneys other than moneys borrowed from banks or credit unions." The Government's logic here Is rather d i f f i c u l t to interpret. One might say that they feel that i f an association is not making a return of at least 3 per cent on employed capital, either the association is being inef f i c i e n t l y managed, or that none of the earnings can be considered as an overcharge or underpayment to the members. The latter appears to be the more correct explanation for the Government in applying the tax seems to regard the earnings of such an association a.s a return on capital and therefore taxable. The Income War Tax Act as applied to co-operatives not making earnings equal to 3 per cent of the capital employed i s , i n my odnion, grossly unfair. In reality the new tax - 113 -provisions h i t small co-operatives the hardest, even allowing fo r the three year tax exemption period. It must also be remembered that the exemption applies only to co-operatives incorporated a f t e r January:!., 194?. The larger co-operative organizations probably have l i t t l e d i f f i c u l t y making a return of 3 per cent on employed c a p i t a l . In addition they are the ones most able to hire e f f i c i e n t management and an e f f i c i e n t labour force. Bedause t h e i r earnings are over 3 Pe** cent, they are e l i g i b l e to deduct patronage dividends from net earnings when computing taxable income. In many cases smaller co-operatives, and In p a r t i c u l a r small purchasing s o c i e t i e s probe.bly do not have earnings equal to, or greater than 3 per cent of c a p i t a l employed. Further, they are l e a s t able to hire an e f f i c i e n t manager and an able labour force. They are unable to o f f e r a good manager a salary which would be commensurate with his a b i l i t i e s . Unfortunately, the tax weighs most heavily on purchasing associations, who i n 1943-44 did only 11 per cent of the t o t a l business of a l l Canadian co-operatives. . Those associ-ations which do not make a return of 3 per cent on c a p i t a l employed, must pay tax at the f u l l rate on t h e i r earnings, and patronage dividends are not considered to be deductible in computing the tax. It i s quite proba.ble that purchasing associations as a whole do not earn as high a return as market-1. R.C.C. , p.29. - 114 -ing associations, and i t is also l i k e l y that many purchasing associations do not earn a 3 per cent return. Marketing 1 co-operatives, who did the remaining 89 per cent appear to have a relative advantage und.er the Act. It would be interesting and helpful to compare the pre-sent tax status of co-operatives in Canada with their position in other countries. Also, i t would be worth noting whetoher the tax treatment of co-operatives shows variety or uniformity as between countries. The British Parliament in 1933 accepted the recommendations of the Parliamentary Committee of Inquiry. As a result co-operative societies are taxed on exactly the same basis as private companies under Schedules A, B, C, and D. That Is, a co-operative must pay tax on the annual value of property owned, rents from property owned and let to tenants, profits from the occupation of land, Interest on government stocks, trading profits, deposit interest and other interest received in f u l l without deduction of tax, dividends and interest on investments and income from foreign securities or foreign 2 possessions. However, the Finance Act of 1933 provides for 3 the treatment of patronage dividends as trade expenses. The same rate of tax as is levied on private competitors Is paid on earnings set aside annually a.s reserves. Interest 1. R. C C , p. 79. 2. Raeburn Committee, p. 6. 3. Report of the Inquiry on Co-operative Enterprise In Europe Washington D.C, Government Printing Office, 1937, P»74. 4. Re§.C p. 218. on loan and share capital is taxable as part of the income of the recipient, while the co-operative i s permitted to deduct from i t s income tax the tax normally payable on share 1 and loan interest. This is the case because many of the recipients of loan and share interest are not in the taxable income brackets. The Canadian Royal Commission regards the Bri t i s h experience as a satisfactory compromise, even l f i t is not entirely logical, while the British experience is of great use, i t is imperative to keep in mind that the British movement is largely a. consumer movement and therefore different from the situation found in Canada. In France, co-operatives must pay the same taxes as their 2 private competitors. Workers' productive societies, however, get a 25 per cent reduction in taxes on their gains. A l l societies whose volume of transactions exceeds a certain 4 figure must pay a special volume of business tax. A Dutch law passed in 1917 makes co-operatives Just as liabl e to taxation on patronage dividends as a corporatloh is liable on stock dividends. Inspite of arguments advanced by co-operative supporters, Government taxation o f f i c i a l s have claimed that members by getting a dividend receive a 1. R.C.C. p.218. 2. Co-operative Enterprise in Europe p.74. 3. Co-operative Enterprise in Europe! p.74 I i . . Co-operative Wholesale Society, People's Year Book, 1934, P. 78. - 116 -p r o f i t at the expense of non-members who are not p a i d a d i v i d e n d . Secondly, they say the d-lvidend i s p a i d on a l l purchases and does not correspond w i t h the surplus on each i n d i v i d u a l a r t i c l e . T h i r d l y , i t Is argued that the a c t u a l amount of the d i v i d e n d depends upon the r e s u l t s of the year's 1 t r a d i n g operations. I t might be concluded that In Holland a b s o l u t e l y no d i s t i n c t i o n i s made between p r o f i t s i n a j o i n t stock company and patronage dividends i n a co-operative. In: Belgium, co-operatives pay the same taxes as other p r i v a t e business o r g a n i z a t i o n s . Patronage dividends are 2 allowed as deductions In computing net taxable income. Danish co-operative a s s o c i a t i o n s are exempt from income tax provided that they trade only w i t h members. Such a s s o c i -a t i o n s may remain exempt by applying a patronage refund due to a. non-member towards h i s membership i n the o r g a n i z a t i o n . S o c i e t i e s that s e l l to non-members, or market the produce of non-members are taxed on the same ba s i s as other p r i v a t e businesses. A tax i s a l s o l e v i e d on annual accumulated 3 s u r p l u s . In Norway, co-operatives pay tax on a presumed income of the property they occupy. The tax has t o be p a i d whether 4 t h e i r a c t i v i t y r e s u l t s In a surplus or not. This appears 1. People's Year Book, 1934, p.73 2. Ibid,pp. 70-72. 3. Co-operative E n t e r p r i s e i n Europe, p.75« 4. People's Year Book,1934, p.85. - 1 1 7 -to bear a slight resemblance to Canada's 3 per cent provision. Full tax l s paid on the income derived from sale to non-members, 1 but no tax is paid on income derived from members. The tax status of co-operatives in Sweden is rather pecu-l i a r . Patronage dividends are not regarded as profits and therefore not taxed. Neither are they taxed in the hands of the individual. However, associations pay tea on dividends on share capital and on surplus allocated to reserves. This tax is on the same basis as that paid by natural persons or foreign companies — the tax is graduated. Domestic joint 2 stock companies pay a.t a lox^er rate than co-operatives. The latter has had the effect of forcing the Swedish Co-operative wholesale Society to organize many of i t s factories on a joint stock conroany basis in order to take advantage of the lower 3 tax rate. Czechoslovakian co-opera/fcives are exempt from profit and capital taxes. Purchasing co-operatives dealing only with members or making only inadvertent sales to non-members pay a tax of two-tenths of 1 per cent on their paid-up capital. Non-co-operative business organizations pay a tax of 8 per cent on their profits. An association that has both members and non-members as regular customers pays the 8 per cent profits tax. A transaction tax is levied on a l l business whether privately or co-operatively owned. However, co-operative wholesalers 1» Co-operative Enterprise in Europe p.75. 2. Ibid, p.75. 3« The People's Year Book, 1934, p.74-75 —118—, do not pay t h i s t r a n s a c t i o n tax si n c e the Government f e e l s that i t w i l l be p a i d by the r e t a i l s o c i e t i e s that they 1 serve. F i n n i s h co-operative d i s t r i b u t i v e s o c i e t i e s pay a munic-i p a l tax on h a l f of t h e i r surplus which a r i s e s from t h e i r 2 business t r a n s a c t i o n s . Domestic s o c i e t i e s promoting produc-t i v e e f f o r t s In primary i n d u s t r i e s , or supp l y i n g members w i t h commodities are allowed to deduct, f o r purposes of n a t i o n a l tax, h a l f of t h e i r net earnings i n c a l c u l a t i n g taxable income. However, to be e l i g i b l e f o r such deduction, a co-operative a s s o c i a t i o n must pay no more than a 6 per cent d i v i d e n d on shares, and non-member customers must have the r i g h t to become members. In p r e - H i t l e r i a n A u s t r i a , co-operatives who d e a l t only w i t h members p a i d a tax of 12 per cent on t h e i r e n t i r e sur-p l u s . Those who a l s o traded w i t h non-members p a i d a tax of 25 per cent on t h e i r e n t i r e s u r p l u s . In c o n t r a s t , p r i v a t e traders p a i d tax on p r o f i t s at progr e s s i v e r a t e s v a r y i n g 4 from 1 per cent to only 7? per cent. In Switzerland., co-operatives g e n e r a l l y pay tax on 5 t h e i r c a p i t a l assets and on earnings t r a n s f e r r e d to reserve. In the United S t a t e s , w i t h regard to f e d e r a l income t a x , urban consumers' co-operatives are allowed to deduct patron-1. Co-operative E n t e r p r i s e In Europe, p.75 2. The People's Year Book. 1934. p.104 3. Co-operative E n t e r p r i s e In Europe, p.75 4. The People's Year Book. 1934, pp.106-107 5. I b i d , p.90. - 119 -a g e r e f u n d s i n c o m p u t i n g t a x a b l e i n c o m e . F a r m e r s ' m a r k e t i n g a n d s u p p l y o r g a n i z a t i o n s a r e t r e a t e d i n a s i m i l a r w a y . On t h e w h o l e , e a r n i n g s t r a n s f e r r e d t o r e s e r v e s , a n d i n t e r e s t o r d i v i d e n d s p a i d o n s h a r e c a p i t a l c o n s t i t u t e t a x a b l e I n c o m e . C o n s u m e r s ' a s s o c i a t i o n s o r g a n i z e d a n d o p e r a t e d b y f a r m e r s r e c e i v e c o m p l e t e e x e m p t i o n b e c a u s e s u c h a s s o c i a t i o n s a r e c o m p o s e d o f f a r m e r s . B y a n d l a r g e , s t a t e c o r p o r a t i o n i n c o m e t a x r u l e s a r e l i k e t h e f e d e r a l i n t h e i r t r e a t m e n t o f c o -1 o p e r a t i v e s . F r o m t h e f o r e g o i n g i n f o r m a t i o n , i t a p p e a r s t h a t t h e t a x s t a t u s o f c o - o p e r a t i v e s i n G r e a t B r i t a i n a n d f o r e i g n c o u n t r i e s o f f e r s n o u n i f o r m p a t t e r n w i t h w h i c h t o c o n t r a s t t h e C a n a d i a n l a w . R o u g h l y , i t s e e m s t h a t t h e m a j o r i t y o f c o u n t r i e s e x -a m i n e d t r e a t t h e p a t r o n a g e d i v i d e n d a s a d e d u c t i o n f r o m t a x -a b l e I n c o m e , a n d a s s e s s c o - o p e r a t i v e s o n e a r n i n g s t r a n s -f e r r e d t o r e s e r v e s . S e v e r a l c o u n t r i e s g i v e s p e c i a l t r e a t m e n t t o a g r i c u l t u r a l c o - o p e r a t i v e s o c i e t i e s . I t i s i n t e r e s t i n g t h a t C z e c h o s l o v a k i e a.nd N o r w a y t a x c o - o p e r a t i v e s o n a b a s i s s o m e w h a t s i m i l a r t o t h e 3 p e r c e n t p r o v i s i o n . 1 . R . C . C . p p . 2 2 8 - 2 2 9 CHAPTER IX AN ANALYSIS OF THE ARGUMENTS PUT FORWARD BY CO_OPERATIVES AND THEIR COMPETITORS REGARDING  THE SUBJECTION OF THE EARNINGS OF CO-OPERATIVE ORGANIZATIONS TO INCOME TAX 0 CHAPTER IX AN ANALYSIS OF THE ARGUMENTS PUT FORWARD BY CO-OPERATIVES  AND THEIR COMPETITORS' REGARDING1 THE SUBJECTION OF1 THE  EARNINGS OF CO-OPERATIVE ORGANIZATIONS TO INCOME TAX This chapter c o n s i s t s of a c r i t i c a l examination of the various main arguments put forward by spokesmen of co-opera-t i v e o r g a n i z a t i o n s and t h e i r competitors i n advocating t h e i r r e s p e c t i v e s o l u t i o n s to the problem of the tax stat u s of co-operatives. Advocates of co-operatives have s t a t e d , as t h e i r p r i n -c i p a l argument f o r exemption, that co-operatives are non-p r o f i t o r g a n i z a t i o n s and that t h e i r aim i s to operate at cost. They, cl a i m that t h e i r motto l s s e r v i c e and not p r o f i t . However, they a l s o admit that a l l of the earnings of a co-operative s o c i e t y are not savings. F i r s t , they admit that that p o r t i o n of net surplus a r i s i n g from non-member business, which i s not d i s t r i b u t e d to non-members at the same r a t e as to members, i s p r o p e r l y taxable as p r o f i t of the a s s o c i a t i o n . To t h i s may be added s e v e r a l t h i n g s . A p o r t i o n of the i n -t e r e s t p a i d on share c a p i t a l i s Income. This i s true i n the case of a s s o c i a t i o n s which are not financed p r o p o r t i o n a l l y to volume of s a l e s earned on by I n d i v i d u a l members through the a s s o c i a t i o n , and which pay i n t e r e s t or dividends on share c a p i t a l . For example, a member who puts up k per cent of the c a p i t a l of an a s s o c i a t i o n and does a volume of t r a n s -- 122 -actions which would warrant him p u t t i n g up only 3 Per cent of the c a p i t a l , c l e a r l y r e c e i v e s income amounting to one-quarter of that member's i n t e r e s t r e c e i p t s . Such an amount i s obviously a r e t u r n on c a p i t a l . The other t h r e e - q u a r t e r s of h i s r e c e i p t s were i n f a c t c o n t r i b u t e d to h i m s e l f . C e r t a i n a l l o c a t e d reserves may a l s o be regarded a,s p r o f i t . Some reserves are h e l d by an a s s o c i a t i o n i n such a way that members, even though they may d i e or move away from thecnnmunlty, f i n d i t impossible to o b t a i n t h e i r p o r t i o n of the r e s e r v e s except at the s o l e d i s c r e t i o n of the Board of D i r e c t o r s or of the A s s o c i a t i o n . Such reserve holdings c l e a r l y must be deemed to be p r o f i t of the A s s o c i a t i o n . To the foregoing must be added moneys r e c e i v e d from r e n t a l s of the property, investments i n Government bonds, and i n p r i v a t e bonds. Manufacturihg and processing a c t i v -i t i e s by a co-operative', which r e c e i v e s I t s raw m a t e r i a l s f o r such a c t i v i t i e s from sources other than members, r e s u l t i n income or p r o f i t to the a s s o c i a t i o n . Thus, w i t h some assurance we can say t h a t income from non-member business, c e r t a i n p o r t i o n s of i n t e r e s t or d i v i d e n d p a i d on share c a p i t a l , c e r t a i n reserves and income from i n -vestments, r e n t a l s and earnings d e r i v e d from some manufactur-i n g ancjprocessing a c t i v i t i e s and c e r t a i n r e t a i l d i s t r i b u t i o n - 123 -may be regarded as p r o f i t s of a s s o c i a t i o n s organized on a co-operative b a s i s . What vie must now decide i n a n a l y s i n g t h i s argument i s whether patronage di v i d e n d s , themselves, are savings, or p r o f i t s , or whether they contain an element of both. Co-operatives maintain that patronage dividends are merely an overcharge or underpayment by an a s s o c i a t i o n to i t s members. Co-operatives, they say, are groups of people who have Joined together that they might supply themselves w i t h s e r v i c e s . Any surpluses which co-operatives may accu-mulate are the savings of the members and not the p r o f i t s of t h e ' a s s o c i a t i o n . A patronage d i v i d e n d i s regarded as a f i n a l settlement between an a s s o c i a t i o n and i t s members, and the net r e s u l t i s the same as i f the s e l l i n g p r i c e l e s s necessary expenses had been o r i g i n a l l y p a i d to the producers, or thecost p r i c e l e s s necessary expenses had been o r i g i n a l l y charged to the consumers. Some p r i v a t e businessmen argue that the whole of the net proceeds of a co-operative i s p r o f i t and a t r r i b u t a b l e to the t a k i n g of r i s k s , the use of c a p i t a l , the employment of labour, managerial s k i l l and the p o o l i n g of marketing and purchasing operations. The co-operative argu-ment i s very w e l l put f o r t h by P r o f e s s o r Pigou when he w r i t e s : "Thosswho contend that even that part of the proceeds of mutual trade which i s returned to members as dividends on purchases c o n s t i t u t e s a p r o f i t are up - 124 -against the awkward fact that co-operative societies havethepower, If they choose, instead, of selling to their members at market price and returning to them a dividend on purchases, to s e l l to them at prices reduced by an amount nearly equivalent to the "divis" andto pay no "divis". The existence of this power not only makes plain the fact that, from the point of view of the revenue, taxation of "divis" would be a f u t i l e proceeding^ but i t also puts in a clear light the essential nature of those "divis". They are, in essence, not a profit in the ordinary sense of that term, but a refund made from an overcharge." 1 It w i l l be observed that Professor Pigou stresses the idea of mutuality — he speaks of "mutual trade". It Is argued by advocates of the taxation of co-operatives that mutuality Is no longer existent, for the association Is a legal entity and members trade through the association so tha.t the idea of clubbing together has been lost. It is also said that true mutual trading would, entail members supplying themselves with only one prod.uct and not many. What is posed here is a problem In Joint costs. A dividend on one product is not simply a return on an overcharge, or an underpayment, on that one pro-duct, but i t is dependent upon the aggregate excess of prices paid for a l l things over the costs of, or receipts from a l l things. However, Professor Pigou replies: "But this fact Is not really relevant. The aggregate sum distributed to members is s t i l l a refund and not a profit". 2 1. Essays in Applied Economics London, King and Son, 1923, PP. 1^2-143. ; ' 2. Ibid, p.142. - 125 - • On the other hand., Professor D. H. MacGregor has r e f u t e d the c l a i m that the d i v i d e n d i s an overcharge. "Suppose i t was s a i d that f i v e men c o n t r i b u t e £10 each f o r a tour the expenses of which come to only £40; i s the £10 which i s returned a p r o f i t ? I f what i s i m p l i e d i s mere purse b e a r i n g by one member of the par t y , who cannot e f f e c t the costs of a predetermined journey, the answer would be no. But, i f "by having £50 i n hand, he i s able to r i s k adventures which t u r n out f o r t u n a t e l y , so that the whole cost i s then only £40, i t i s not so c l e a r ; there has been a l a r g e r r e a l Income than l n the former case. The f u l l c o n t r i b u t i o n was necessary to the e n t e r p r i s e and i t s r e s u l t . " 1 Professor MacG-regor l s c o r r e c t here, f o r i t i s apparent that * part of the surplus of a co-operative s o c i e t y must be due to c a p i t a l , r i s k and other f a c t o r s p r e v i o u s l y mentioned. We should also r e a l i z e when we say that the a s s o c i a t i o n can make r e a l p r o f i t s out of non-members, we not only mean non-member buyers and s e l l e r s , but a l s o labour which does not p a r t i c i p a t e i n dividends. This i s p a r t i c u l a r l y true i n the case of an a s s o c i -a t i o n employing a l a r g e labour f o r c e . However, we must not say that the surplus of a co-opera-t i v e i s due e n t i r e l y to the same f a c t o r s as the surplus of any p r i v a t e company. As the Canadian Royal Commission Report points out, a co-operative o r g a n i z a t i o n i s at l e a s t morally o b l i g a t e d to make a refund to members i n p r o p o r t i o n to patron-2 age. In other words, one of the c h i e f reasons f o r J o i n i n g and p a t r o n i z i n g such an a s s o c i a t i o n i s the prospect of r e c e i v i n g 1. Taxation of Co-operative Dividends Economic J o u r n a l , 1933, V o l . 43, p . 4 7 . ' ' 2« R-C«C« PP 33-34. - 126 -a rebate p r o - r a t a to purchases, or p r o - r a t a to products marketed, through the o r g a n i z a t i o n . With t h i s i n mind, we may-consider part of the patronage dividend, to be a l e g i t i m a t e trade expense. A member of a co-operative expects a patronage refund. In a n a l y s i n g the argument of co-operatives that they are n o n - p r o f i t o r g a n i z a t i o n s and t h e i r surplus a r i s e s from an overcharge or underpayment, we must conclude that t h e i r net surplus over costs at the end of. a f i s c a l p e r i o d a r i s e s p a r t l y from an overcharge, as i n the case of a purchasing a s s o c i a t i o n , or underpayment, as i n the case of a marketing a s s o c i a t i o n , and.partly from the t a k i n g of r i s k , managerial e f f i c i e n c y , the employment of c a p i t a l and p o o l i n g of resources. Spokesmen f o r J o i n t stock companies have argued that the co-operative payment — the patronage di v i d e n d — Is analogous to the d i s t r i b u t i o n of p r o f i t s i n a J o i n t stock company. But before t h i s could be t r u e , patronage dividends must a r i s e i n the same way, and a l s o be d i s t r i b u t e d i n the same manner. We have already seen how the patronage di v i d e n d a r i s e s ; we must now examine i t s d i s t r i b u t i o n . The p r o f i t s of a J o i n t stock company are d i s t r i b u t e d i n p r o p o r t i o n to the number of shares h e l d by each stockholder of the company. I t i s t r u e that a patronage d i v i d e n d i s not d i s t r i b u t e d i n t h i s manner, but i t Is a l s o t r u e that the rebate i s made to the owners of a - 127 -co-operative — those who have c a p i t a l h o l d i n g s . We can even assert that where i n an o r g a n i z a t i o n members1 equity l s kept e x a c t l y p r o p o r t i o n a l to patronage, the refund may be d i s t r i -buted e i t h e r on the b a s i s of patronage, or on the b a s i s of c a p i t a l h o l d i n g s . In a d d i t i o n , where an i n d i v i d u a l deals through an a s s o c i a t i o n , yet has not purchased l n cash or deductions a share i n the a s s o c i a t i o n , i n many cases he does 1 not r e c e i v e a rebate of any kin d . A pamphlet of the B r i t i s h Columbia Co-operative Wholesale Society urges member s o c i e t i e s to pay patronage refunds to member s o c i e t i e s only. By so doing, i t l s argued that non-members w i l l be s t i m u l a t e d to 2 j o i n by the prospect of refunds. In r e a l i t y , a member of a co-operative Organization i s both customer and i n v e s t o r . A patronage refund i s p a r t l y rebate, p a r t l y p r o f i t . I t i s i n t e r e s t i n g to ask why a co-operative a s s o c i a t i o n should pay patronage dividends to only one group of i t s patrons. That l s , why should the Saskatchewan Co-operative Creameries, f o r example, pay a patronage refund to milk pro-ducers only? Why should the savings made by the Creameries go to the producer of m i l k -— r a t h e r than the consumer of milk? Only one l o g i c a l c onclusion may be i n f e r r e d . The patronage rebate i s p a i d to the producer of m i l k because he has put up the- c a p i t a l , h i r e d the management and borne' the r i s k . But,- as was pointed"out i n the case of the Fraser 1. For f u r t h e r proof of t h i s see page 105 2. Suggested P o l i c i e s f o r Consumer Co-operatives w i t h Reference to New Tax L e g i s l a t i o n , Vancouver, 1947T - 128 -V a l l e y M i l k Producers vs. The M i n i s t e r of N a t i o n a l Revenue, 1 not a l l of the surplus belongs to the producer. On the con-t r a r y , much may be a t t r i b u t e d to the consumers of milk. I f one-third of a supposed surplus of two cents a quart I s a c t u a l l y saving, then the other two-thirds i s a c t u a l l y a p r o f i t a r i s i n g from trade w i t h the consumers of milk. This two-thirds might? be p a i d to the consumers but f o r the f a c t that the producers have c o n t r i b u t e d the c a p i t a l . Of course, i n many instances there would be b a r r i e r s In the way of such a d i s t r i b u t i o n of su r p l u s to the consumers. Many marketing a s s o c i a t i o n s do not deal d i r e c t l y w i t h the consumers. A c t u a l l y they f u n c t i o n as one middleman In a chain of middlemen. In these cases an attempt to d i s t r i b u t e a d.lvidend to the u l t i m a t e consumer would be r i d i c u l o u s . We may apply the same a n a l y s i s to a purchasing co-opera-t i v e . There i s no reason why consumers should r e c e i v e a rebate anymore than producers, except that the former c o n t r i -bute the c a p i t a l . A l s o , of course, I t would be impossible f o r a purchasing a s s o c i a t i o n to t r a c e back through l i n e s of middlemen i n order to rebate a producer. These answers to our questions v e r i f y the nature of the patronage dividend. Another argument advanced by proponents of co-operative income t a x a t i o n was that co-operative growth could be l a r g e l y explained by the use of t a x - f r e e reserves f o r c a p i t a l expan-1. 1928, Ex. C.R. 215. - 129 -s i o n . In our approach, I t i s again necessary to emphasize t h a t , while co-operative growth appears huge In the absolute sense, the s i t u a t i o n i s e n t i r e l y d i f f e r e n t i f we examine co-operative growth on a r e l a t i v e b a s i s . This has already been done i n the l a t t e r part of Chapter I I , and the c o n c l u s i o n reached was that r e l a t i v e to the marketings of other p r i v a t e business o r g a n i z a t i o n s , an Increase was shown du r i n g the War years i n the co-operative marketing of p o u l t r y and eggs, d a i r y products and l i v e - s t o c k , and i n co-operative r e t a i l trade. In Chapter I I I , an examination of tax d i s c r i m i n a t i o n on the growth of co-operative p l a n t values was undertaken, and from a v a i l a b l e evidence, i t was apparent that the use of t a x -f r e e reserves f o r c a p i t a l expansion was n o t i c e a b l e only In d a i r y co-operatives. I t must be admitted, that f i g u r e s f o r the l a s t War year and f o r the post-war p e r i o d are u n a v a i l a b l e . P r i v a t e businessmen have expressed p a r t i c u l a r f e a r over the use of these reserves i n the post-war p e r i o d . Any d i s c u s s i o n of the e f f e c t of reserves on co-operative expansion i n the post-war p e r i o d u n f o r t u n a t e l y would be mere s p e c u l a t i o n . An argument of co-operative spokesmen that deserves comment i s t h e i r c l a i m that co-operative o r g a n i z a t i o n s should be exempt from Income t a x a t i o n because membership i n co-opera.-t i v e s comes from the lower Income groups. But t h i s i s complete-l y unsubstantiated by f a c t s . No m a t e r i a l has .ever been - 130 -assembled In Canada to I n d i c a t e i n what income groups co-operative membership l s found. The Danish s i t u a t i o n might be worth n o t i n g . According to f i g u r e s i n the Danish Year Book, the great m a j o r i t y of members of co-operative a g r i c u l t u r a l s o c i e t i e s i n that country own r e l a t i v e l y l a r g e farms. This might very w e l l appear to i n d i c a t e that Danish a g r i c u l t u r a l co-operatives are l a r g e l y supported by middle c l a s s income groups. Fi g u r e s f o r purchasing s o c i e t i e s a l s o i n d i c a t e t h a t strong membership support comes from the same general income 1 groups. The f i n a l major argument advanced by co-operative spokes-men was that they should receive s p e c i a l c o n s i d e r a t i o n on the ground that they are i n the p u b l i c i n t e r e s t . As the Royal Commission Report p o i n t e d out, co-operatives i n r u r a l areas 2 provide e x c e l l e n t t r a i n i n g grounds f o r young people. Often, co-operatives i n these areas are one of the o r g a n i z a t i o n s where young a d u l t s may be given an opportunity t o show t h e i r a b i l -i t i e s and to discharge the r e s p o n s i b i l i t i e s of a d m i n i s t r a t i v e p o s i t i o n s . Other forms of p r i v a t e business o r g a n i z a t i o n s do not o f f e r some of these same o p p o r t u n i t i e s to r u r a l d w e l l e r s . Many i n d i v i d u a l co-operative o r g a n i z a t i o n s render commendable s e r v i c e s . The Saskatchewan Wheat Pool s e l e c t s " j u n i o r co-operators" who supervise a wheat v a r i e t y teBting programme 1. 1937, PP.75-83-2. R.C.C. , p.30. - 131 -l throughout the Province. Results are h e l p f u l i n r e f l e c t i n g every c o n d i t i o n of s o i l and moisture that occurs i n the d i f f e r e n t areas. The programme Is a l s o of e d u c a t i o n a l value to the young people making and s u p e r v i s i n g the t e s t s . The Pool also makes grants to the U n i v e r s i t y of Saskatchewan f o r the maintenance of J u n i o r g r a i n and seed clubs throughout the 2 Province. The Pool provides a c i r c u l a t i n g l i b r a r y of non-f i c t i o n books, t r a v e l l i n g l i b r a r i e s , f a c i l i t i e s f o r the organ-i z a t i o n of study groups by i t s e l f and co-operation w i t h the Canadian A s s o c i a t i o n f o r Adult Education and lends p r a c t i c a l 3 support to e d u c a t i o n a l farm raxLio programmes. The Fraser V a l l e y M i l k Producers c l a i m that through i t s magazine i t has disseminated i n f o r m a t i o n on.methods of improving m i l k 4 production, and has helped farmers e r a d i c a t e the warble f l y . Powerfully supporting t h i s argument i s the experienced recorded at Massett i n the Queen C h a r l o t t e I s l a n d s . In the 1930's the business a f f o r d i n g employment to the people, a f i s h and clam cannery, c l o s e d down. As a r e s u l t unemployment was r i f e u n t i l the o r g a n i z a t i o n of a co-operative i n 1942. The lease of the canning company to the clam beaches was bought up, the cannery equipment was r e p a i r e d , and the clam 1. Saskatchewan Co-operative Producers, Annual Report. 1946. pp. 27-28. 2. I b i d , pp. 28-29. 3' Submission of the Saskatchewan Co-operative Producers.p.22 4. B r i e f of the Fraser V a l l e y M i l k Producers, pp.18-19 - 132 -and salmon packing business r e v i v e d . In the two years previous to the hearings of the Roye.1 Commission, t h i s a s s o c i a t i o n had -become the v i r t u a l means of l i v e l i h o o d f o r the 700 persons l i v i n g i n Massett, and had appreciably r a i s e d t h e i r standard 1 of l i v i n g through the d i s t r i b u t i o n of $150,000 i n wages. In 1935, "the Royal Commission on P r i c e Spreads urged the establishment of co-operatives to check m o n o p o l i s t i c p r a c t i c e s : " I t i s our o p i n i o n that f u r t h e r development of consumers' co-operatives i n Canada would be of general b e n e f i t , i n t r o d u c i n g a r e s t r a i n i n g i n f l u e n c e on the p r a c t i c e s of other merchandising o r g a n i z a t i o n s and a s s i s t i n g i n consumer education, which we f e e l i s most necessary." 2 While i t i s consumers' co-operatives that are r e f e r r e d t o , we may f i n d examples of marketing co-operatives which have acted as r e s t r a i n i n g i n f l u e n c e s on p r i v a t e c o r p o r a t i o n s . The Wheat Pools c l a i m p a r t i a l c r e d i t f o r the e l i m i n a t i o n of u n f a i r 3 p r a c t i c e s l n the g r a i n trade. The Pools a l s o c l a i m c r e d i t f o r the r e d u c t i o n i n hand l i n g charges on g r a i n from a t o t a l of 6^ i n 1924 to 3^ i n 19^3. An eastern example of the b e n e f i t s d e r i v e d from the co-operative form of o r g a n i z a t i o n i s i n d i c a t e d by the experiences at Harbour Boucher i n the Maritimes. In that community, fishermen belonging to a co-operative cannery averaged 19^ f o r 1. B r i e f of The Massett Co-operative A s s o c i a t i o n , Massett. B.C. 2. Report of the RojaJ: Commission on P r i c e Spreads, Ottawa, King's P r i n t e r , 1935, p.220. 5. Submission of the Saskatchewan Co-operative Producers ) p.k,14. 4. Submission of the A l b e r t a Wheat P o o l ) ^.?6a ' - 133 -l i v e l o b s t e r f o r t h e w h o l e s e a s o n , a n d 12J^ f o r c a n n e d , l o b s t e r , w h i l e a c r o s s t h e B a y i n d e p e n d e n t f i s h e r m e n w e r e r e c e i v i n g 9 ^ 1 f r e s h a n d 6^ c a n n e d . A c t u a l l y e c o n o m i c b e n e f i t s o f t h i s t y p e , a n d t h e s o c i a l b e n e f i t s m e n t i o n e d e a r l i e r a r e o f g r e a t v a l u e t o t h e n a t i o n a s a w h o l e . T h e movement may h e l p t o r e l i e v e a f e e l i n g o f e x p l o i t a t i o n a n d f r u s t r a t i o n a m o n g s t p e o p l e s o f d e p r e s s e d r e g i o n s a n d a r e a s . D r . M . M . C o a d y o f S t . F r a n c i s X a v i e r U n i v e r s i t y , N o v a S c o t i a , c l a i m s t h a t c o - o p e r a t i v e s w o u l d a c t u a l l y p r e v e n t C a n a d a f r o m e m b r a c i n g some f o r m o f f a s c i s m o r t o t a l i t a r i a n s o c i a l i s m , a l t h o u g h t h e d a n g e r o f d i c t a t o r s h i p i n c o m p l e t e s o c i a l i z a t i o n i s v e r y q u e s t i o n a b l e . He f e e l s t h a t c o - o p e r a t i o n I s t h e l a s t c o m p l e t e d e m o c r a t i c o b s t a c l e I n t h e way o f s t a t i s m . He u r g e s b u s i n e s s m e n i t o e n c o u r a g e c o - o p e r a t i v e s s i m p l y a s a means o f s a v i n g t h e m s e l v e s . C o - o p e r a t i v e s g i v e a s e n s e o f o w n e r s h i p , and. w h a t i s n e c e s s a r y , h e s a y s , i s J u s t e n o u g h c o - o p e r a t i v e b u s i n e s s " t o d e s t r o y p r o l e t a r i a n i s m " , w h e t h e r i n t h e c i t y o r i n t h e c o u n t r y . He a r g u e s t h a t co--o p e r a t i v e s a r e a S o r t o f e c o n o m i c b r e a k w a t e r , f o r t h e y r e d u c e r e l i a n c e u p o n t h e s t a t e and. t e a c h p e o p l e t o d e p e n d m o r e u p o n 2 t h e i r own i n i t i a t i v e . 1 . D r . C o a d y a s a w i t n e s s b e f o r e t h e S p e c i a l C o m m i t t e e o n R e c o n s t r u c t i o n a n d R e - e s t a b l i s h m e n t , a s q u o t e d i n "Some I n f o r m a t i o n o n t h e C o - o p e r a t i v & M o v e m e n t i n t h e M a r i t i m e F r o v i n c e s " , I . L . O . C o - o p e r a t i v e I n f o r m a t i o n , N o . 7 / 8 , 1 9 4 3 . 2 . T h e S o c i a l S i g n i f i c a n c e o f t h e C o - o p e r a t i v e M o v e m e n t B r i e f o f t h e E x t e n s i o n D e p a r t m e n t o f S t . F r a n c i s Xavier U n i v e r s i t y , p . 2 4 . - 134 -Internationally, the important r o l e that co-operatives can pl'ay has been recognized by the United Nations Conference on Food and Agriculture i n 1943. The Conference urged: "(1) That, i n order to make i t possible for people to help themselves i n lowering costs of production and costs of d i s t r i b u t i o n and marketing: (a) A l l countries study the p o s s i b i l i t i e s of the further establishment of producer and consumer co-operative s o c i e t i e s i n order to render necessary production, pur-chasing, finance and other services; (b) Each nation examine i t s laws, regulations and i n s t i t u -tions to determine i f l e g a l or i n s t i t u t i o n a l obstacles to co-operative development e x i s t , i n order to make de-sir a b l e adjustments..." 1 From available evidence, i t i s apparent that co-operatives generally serve the public interest even i f i t i s only i n the limited case of a rebate to purchasers or consumers. However, i t i s an e n t i r e l y d i f f e r e n t question to give encouragement or assistance to co-operative groups by giving them a blanket tax exemption. As the Report of the Royal Commission correctly comments, i t i s l i k e l y that any advantages gained by encourage-ments of t h i s nature would play ihto the hands of those associ-ations which, need encouragement least — the large, well-2 established bodies. Blanket exemption i n my opinion leads to inequity within the co-operative movement i t s e l f , for the larger associations would receive a benefit at the expense of 1. "United Nations Conference on Food and Agriculture, text of the f i n a l Act", i n International C o n c i l i a t i o n , Documents for the Year 1943, N.Y., Carnegie Endoxfment fo r International Peace, ' D i v i s i o n of Intercourse and Education, 1943, p.496. 2. R.C.C. p.31. - 135 -other smaller groups, who might b e n e f i t more from some other type of a s s i s t a n c e . In c o n s i d e r i n g the b e n e f i t s d e r i v e d from co-operatlyes, we must not f o r g e t that many j o i n t stock companies render s e r v i c e s of equal or i n some cases of even greater b e n e f i t to t h c - p u b l i c as a whole. A l s o , i f co-operatives are perform-i n g the v a l u a b l e and u s e f u l s e r v i c e s which they now c l a i m to be, then they have l i t t l e need of exemption. I f they are able to provide these s e r v i c e s then co-operatives are w e l l q u a l i f i e d to stand on t h e i r own f e e t and they r e q u i r e no s p e c i a l con-s i d e r a t i o n . F i n a l l y , we must remember that any type of subsidy which takes the form of p r i v i l e g e i n t a x a t i o n i s a concealed subsidy. Since co-operatives have enjoyed s u b s i d i z a t i o n i n Canada through a tax exempt s t a t u s i n the past, I t has been impossible to a s c e r t a i n the amount of the subsidy which they r e c e i v e d each year through t h i s instrument of tax exemption. I f we f e e l that co-operatives are s u f f i c i e n t l y i n the p u b l i c i n t e r e s t to warrant Government s u b s i d i z a t i o n , then i t would be b e t t e r l f 0 they were given a d i r e c t subsidy each year. In that way we would knoxf e x a c t l y how much the co-operative movement was being s u b s i d i z e d each year, and as a r e s u l t we would be i n a b e t t e r p o s i t i o n to assess the b e n e f i t s r e c e i v e d from the co-operative movement as against the cost of the s u b s i d i z a t i o n of the movement. CONCLUSIONS CONCLUSIONS The question of the s u b j e c t i o n of the earnings of co-operative a s s o c i a t i o n s to f e d e r a l Income tax has been d i s -cussed and examined from both a s t a t i s t i c a l and a t h e o r e t i c a l point of view. We are now able to draw c e r t a i n c o n c l u s i o n s . Probably our conclusions w i l l s a t i s f y n e i t h e r the outspoken advocate of co-operative t a x a t i o n , nor the ardent defender of the movement from such t a x a t i o n . However, these sugges-t i o n s are submitted i n the b e l i e f that they o f f e r a j u s t and equi t a b l e b a s i s upon which co-operatives may be taxed. Before g i v i n g v o i c e to these recommendations i t i s necessary to segregate and underline the most s a l i e n t of the f a c t s already presented. Our d i s c u s s i o n began w i t h an o u t l i n e of co-operative development i n Canada, i n which co-operative growth r e l a t i v e to th a t of other forms of p r i v a t e o r g a n i z a -t i o n s , more p a r t i c u l a r l y during the War p e r i o d , when taxes were h i g h , was emphasized. In examining these f i g u r e s f o r co-operative growth, s e v e r a l f a c t s stood out. F i r s t , was the r e g i o n a l p a t t e r n of co-operative development. I t i s imposs-i b l e to understand the Canadian movement unless one i s aware of i t s r e g i o n a l p a t t e r n . Secondly, f i g u r e s showed that w h i l e co-operatives r e g i s t e r e d gains over t h e i r competitors i n the marketings of c e r t a i n products, t h i s was not a.lways the case. - 138 -Large co-operative gains over competitors were shown i n the marketing of d a i r y products, l i v e s t o c k , and p o u l t r y and eggs. On a r e g i o n a l b a s i s l a r g e r co-operative marketings of d a i r y products were shown i n every Province. The same i s t r u e of p o u l t r y and eggs, w i t h the exception of the Maritime r e g i o n , Saskatchewan and A l b e r t a . Co-operative marketings of l i v e -stock showed r e l a t i v e gains over the marketings of competi-t o r s i n a l l regions except the Maritimes and Ontario. On the other hand, the marketings of g r a i n and seed, and f r u i t and vegetables through co-operative channels showed n e i t h e r a s i g n i f i c a n t r e l a t i v e increase nor decrease over the market-ings of competitors d u r i n g the War. T h i r d l y , i t i s not co r r e c t to a t t r i b u t e the r e l a t i v e increase i n the co-opera- • t l v e marketings of l i v e s t o c k , and p o u l t r y and eggs to advant-ages which might have been obtained by the use of t a x - f r e e reserves f o r c a p i t a l expansion. Our s t a t i s t i c s showed that the use of t a x - f r e e reserves to expand p l a n t f a c i l i t i e s could have been the case only i n co-operative d a i r y a s s o c i a t i o n s . In d a i r y a s s o c i a t i o n s , the r a t i o of plant values to s a l e s Is high. A l s o , d a i r y a s s o c i a t i o n s showed l a r g e r e l a t i v e gains over the marketings of t h e i r competitors, and secondly, they showed a s i g n i f i c a n t increase i n p l a n t values during the f i r s t years of the War. As f o r p o u l t r y and l i v e s t o c k a s s o c i -ations, their very low ratio of plant values to sales, large increases In numbers of associations, and lack of any signif-icant increases in plant values during the early War years rules out the possibility that they obtained their Increases in marketings at the expense of their competitors through the use of tax-free reserves. However, i t is admitted that poultry and livestock co-operatives might have benefitted from tax privileges by being able to pay out higher refunds than would otherwise have been possible. In examining the financial operations and business methods of co-operatives, one cannot escape the fact that Canadian co-operatives finance in the main by the retention of patronage dividends, or by deductions from the gross pro-ceeds of the sale of members' products. Commenting upon the financial d i f f i c u l t i e s suffered by the Manitoba Wheat Pool in the period following 1928, the Report of the Royal Commission states: "The experience of the elevator company with regard to working capital serves to il l u s t r a t e the d i f f i c u l t i e s of financing some co-operatives and suggests a strong reliance on capital supplied intenally. 11 1 It has been pointed out before that the retention of patronage dividends as the main means of financing appears to be a purely Canadian development. Since this is the case, i t must 1. R.C.C. p.148. - 140 -"be e x p l a i n a b l e only In terms of Canadian a g r i c u l t u r e . The primary producers — the group hardest h i t by p r i c e f l u c t u -a t i ons — c o n s t i t u t e by f a r the l a r g e s t percentage of the members of Canadian co-operatives. This f a c t , i n i t s e l f , i s a l o g i c a l e x planation f o r i n t e r n a l f i n a n c i n g . The method i s made necessary by c o n d i t i o n s p r e v a i l i n g amongst a g r i c u l t u r a l co-operatives where the volume of t r a n s a c t i o n s may f l u c t u a t e sharply from year to year, and where the r a t i o of plant values 1 to sales i s high. The n e c e s s i t y f o r i n t e r n a l f i n a n c i n g i n Canadian co-operative a s s o c i a t i o n s must be recognized In any conclusions that may be advanced. In .my o p i n i o n , co-operative business setbacks or f a i l u r e s ha.ve very s e r i o u s consequences and t h e r e f o r e i t i s e s s e n t i a l that no tax law should, s e r i o u s l y a f f e c t t h e i r method of I n t e r n a l f i n a n c i n g . The present Canadian income tax law w i t h respect to co-o p e r a t i v e s , and f o r e i g n tax laws d e a l i n g w i t h co-operatives have been explained. The 3 per cent p r o v i s i o n i n the present Canadian l e g i s l a t i o n appears u n s a t i s f a c t o r y but can be con-v e n i e n t l y administered. An a r b i t r a r y 3 P e r cent p r o v i s i o n Is anything but e q u i t a b l e . Foreign and B r i t i s h tax laws seem to suggest only a precedent f o r the exemption of patronage d i v i -dends a.nd the s u b j e c t i o n of net increases i n reserves to t a x -a t i o n . I t might be argued that the B r i t i s h law w i t h respect t o co-operatives could, be a p p l i e d s u i t a b l y to the Canadian s l t u a -1. The r a t i o of plant values to sales Is h i g h i n d a i r y , f r u i t and vegetable and g r a i n and seed co-operatives. - 141 -t l o n . However, such a suggestion does not take i n t o consider-a t i o n c e r t a i n b a s i c d i f f e r e n c e s , notably i n membership, stage of development, and f i n a n c i a l and business methods. The nature of patronage dividends has been discussed, and we reached the c o n c l u s l p n that these refunds are p a r t l y r e -bate and p a r t l y p r o f i t . The only l o g i c a l grounds on which these dividends can be exempted from income tax i s that i t i s impossible to determine what percentage of the whole i s p r o f i t . To f i x a c e r t a i n percentage, and t o c a l l i t p r o f i t and the remainder a rebate, i s most u n f a i r and i n e q u i t a b l e . There can be no doubt that co-operatives d i d enjoy advantages over t h e i r p r i v a t e competitors d u r i n g the p e r i o d of high wartime t a x a t i o n . However, t h i s advantage w i l l be g r e a t l y reduced i n the f u t u r e by the a b o l i t i o n , o f the Excess P r o f i t s Tax Act. In s t a t i n g my c o n c l u s i ons, I agree wholeheartedly w i t h the Report of the Royal Commission that the operations of a co-operative r e s u l t i n income to the a s s o c i a t i o n s and t h e i r members. With t h i s , and the other s a l i e n t p o i n t s already discussed, i n mind, I t h e r e f o r e recommend: (1) That co-operatives be taxed on the same basis as j o i n t stock companies, but t h a t the f o l l o w i n g should be considered as d e d u c t i b l e i n computing ta x a b l e income: (a) Patronage dividends, or deductions from the gross proceeds of the sale of a member's product, p a i d i n cash or i n k i n d w i t h i n twelve months a f t e r the annual meeting of the a s s o c i a t i o n , or a p p l i e d toward the f u l -f i l l i n g of an o b l i g a t i o n to purchase shares or other Investment i n the a s s o c i a t i o n . (b) Patronage dividends, or deductions from the gross proceeds of the s a l e of a member's product, de f e r r e d f o r a d e f i n i t e p e r i o d only and where the payment Is set at a s t i p u l a t e d date In the f u t u r e , so that the a s s o c i a t i o n i s und.er an i r r e v o c a b l e o b l i g a -t i o n to make the payment. (2) That patronage di v i d e n d payments to member and non-member customers should be at the, same r a t e on the same c l a s s e s , grades or types of commodities. I f rebates to non-members are l e s s than those p a i d to members on the same c l a s s e s , grades or types of commodities, then income tax at the f u l l r a t e should be p a i d on the earnings r e -s u l t i n g from non-member business. -o-o-o-o-BIBLIOGRAPHY 0 I . B r i e f s submitted t o the Royal Commission on Co-operatives, 1945. B r i e f of the A l b e r t a Wheat Poo l , Calgary, A l b e r t a . 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Canada, Report of the Royal Commission on Co-operatives Ottawa, King's P r i n t e r , 1945. Canada, Report of the Royal Commission on P r i c e Spreads j 011awa, King's P r i n t e r , 1935* : " Canada, Department of N a t i o n a l Revenue, Taxation D i v i -s i o n , P r e l i m i n a r y Explanatory Brochure re the Income  War Tax Act as Ap p l i e d to Co-opere.tlves, C r e d i t  Unions, Mutual Corporations. Allowance of Patronage  Dividends. 194b. Saskatchewan, Department of Co-operation and Co-operative Development, Annual Report, 1946. IV. A l l P r o v i n c i a l Co-operative L e g i s l a t i o n . V. Other O f f i c i a l P u b l i c a t i o n s . A l b e r t a Wheat P o o l , Annual Report, Calgary, A l b e r t a , 1941-45. Saskatchewan Co-operative Producers, L i m i t e d , Annual  Report, Regina, Saskatchewan, 1935-1946. 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