Will Fiscal Reform
in Canada
Affect United States Interests? *
Donald J. Johnston **
On February 24, 1967, the Report of the Canadian Royal Com-
mission on Taxation, generally known as the Carter Report,’ was
tabled in the House of Commons; seldom has the report of any Royal
Commission aroused so much interest in the Canadian public. The
sweeping fiscal reforms recommended therein have been both widely
acclaimed and severely criticized. The oil and mining industries and
insurance companies are gravely concerned; the economists and tax
practitioners, divided; the politicians, uncertain; and the general
public is mystified and perhaps mildly amused at the level of fervour
created by simply another Royal Commission report. Royal Com-
mission findings are significant but they have a habit of not being
implemented in their entirety. To what extent the recommendations
of this Commission will find their way ‘into Canadian fiscal legis-
lation remains a matter of great conjecture.
The Commission was established by the federal government in
September, 1962, and it was charged with a complete review of
Canada’s fiscal legislation at the federal level.
When finally tabled after more than four years of work, the
Report bore testimony to the extensive and considered studies con-
ducted by the Commissioners and their research staff. Their findings
should be of considerable interest to students of fiscal and tax policy
in any country of the Western World. In fact, the Commission drew
heavily upon the experience and legislation of other countries and in
particular upon the experience of the United States and the United
Kingdom.
The mandate under which the Commission operated required it
to consider in depth the role of foreign investment in Canada and
the corresponding role that taxation is to play in creating either a
hostile or a friendly attitude towards such investment.
In considering this question, the Commission proceeded on the
assumption that the free movement of capital among nations would
in the end lead to a more “efficient allocation of capital and greater
This article appeared in the July 1.967 issue of Taxes –
The Tax Magazine.
** Of the Quebec Bar, and the Faculty of Law of McGill University.
‘The Commission was headed by Kenneth Le M. Carter, a chartered accountant.
McGILL LAW JOURNAL
[Vol. 14
world production”2 from which all nations would ultimately prosper,
a worthy objective towards which Canada should work. At the same
time the Commission did, nonetheless, recognize this objective as
somewhat unrealistic because all nations would be obliged to abandon
their fiscal sovereignty and create identical tax systems so that a
person would not suffer a greater or a lesser tax burden by reason
of his nationality or the location of his sources of income. This
ideal situation, which the Commissioners classified as “international
tax neutrality”, cannot exist where there is a multitude of different
national tax systems.
Concluding that international tax neutrality cannot be achieved
in today’s world, the Commission focused its attention on the
treatment that should be accorded foreign investment in all its
forms in Canada which would not be inconsistent with “the gradual
realization of these world objectives.”
The consideration of foreign investment in Canada was and is
a delicate area of study because there is some unmeasured and un-
measurable feeling of hostility in Canada at this time towards foreign
ownership and control of Canadian business and resources, meaning,
of course, United States ownership and control. This feeling is, in
the writer’s view, like many contemporary Canadian issues; it may
have political appeal but no economic or rational foundations.
Nevertheless,
it was a consideration which the Commission felt
obliged to take into account.
Commission’s View
The Commission concluded that foreign investment in all its
forms confers a net economic benefit on the host country and that
the reduction of the inflow of foreign capital into Canada would
reduce the standard of living of Canadians. Foreign investment has
made a marked contribution to the general progress of Canada in
this century and in particular has been largely responsible for the
development of Canada’s natural resources.
The Report points out that Canada’s approach to foreign invest-
ment from a tax point of view has left much to be desired. A
number of piecemeal legislative measures have been introduced in
recent years designed either to discourage certain forms of foreign
investment or to improve the equity position of Canadians in foreign
owned and controlled companies operating in Canada. What effect
these measures have had is difficult to ascertain but the Commission
2 Report of the Royal Commission on Taxation, (Ottawa, 1966),
(Hereinafter
referred to as the Report), Vol. 2, p. 210.
No. 1)
CANADIAN FISCAL REFORM AND U.S. INTERESTS
61
warns that the relatively high level of confidence accorded to Canada
as a place in which to invest can be destroyed through an erratic
and irresponsible approach to the taxation of such investment. The
Report states:
Because it is impossible to estimate reliably how heavily the camel is loaded
at any point in time, the policy maker can never be sure if the straw
he is about to add will be the last one. 3
The Commission found, inter alia, that foreign investment is
highly desirable, that changing the form of foreign investment is
unnecessary and that most of Canada’s problems with respect to
foreign control of its industry and resources are related not so
much to deficiencies in the method of taxation of foreigners but
rather to the discriminatory provisions which discourage Canadian
equity investment.
Commission’s Recommendations
The Commission also believed that some of its recommendations
for the reform of domestic taxation would increase the ownership
of Canadian equities by residents of Canada. The specific recommen-
dations cited in support of this argument were:
(1) Full integration of personal and corporate income taxes for
resident shareholders.
(2) Liberal treatment of business and property losses.
(3) Special incentives for new, small ventures.
In other words, the Commission chose not to discourage foreign
investment but rather to encourage investment by Canadians. This
is a positive approach of which the Commission did not find evidence
in the actions of the federal government in recent years. For ex-
ample, the 1963 federal budget instituted a differential withholding
tax in respect of Canadian subsidiaries of foreign corporations whose
equity shares were held to the extent of 25 per cent by Canadians.
Withholding tax on dividends paid to a foreign parent in respect
of such shares is 10 per cent. If more than a 25 per cent Canadian
equity interest does not exist, the withholding tax is 15 per cent.4
This particular legislation, and all legislation of its kind, was re-
garded as negative by the Commission and its repeal was recom-
mended. The differential withholding tax was found to be repugnant
because:
3 Ibid., p. 217.
4 Income Tax Act, Sec. 106 (a), 189A(1)
(all references to the Income Tax
Act are to the Income Tax Act, R.S.C. 1952, c. 148 as amended).
McGILL LAW JOURNAL
[Vol. 14
(a) It could only be interpreted by non-residents as a desire by
Canadians to reduce foreign direct investment;
(b) The reduction of withholding tax where the sufficient Ca-
nadian equity interest existed tended to increase the capital gain
realized by foreign investors in such companies and tax exigible
upon that increase would accrue to the advantage of foreign treas-
uries only;
(c) The 25 per cent figure was altogether arbitrary, and there
was no basis upon which that particular figure could be justified.
These conclusions seem valid and they lead one to suspect that
very little considered thought underlay the introduction of the dif-
ferential withholding tax.
Commission’s Philosophy Towards Foreign Investment
Indeed, the general statements contained in the Report should
increase the confidence of foreign investors in Canada and should
restore the confidence that may have been lost through the erratic
and discriminatory legislation of the early 1960’s. The Commission’s
philosophy towards foreign investment is well summarized in the
following statement:
investor against
that affect the foreign
Because we are convinced that Canada requires continued foreign investment,
and because we are concerned with the cumulative impact of a sequence
of relatively insignificant events on the confidence of foreign investors, we
emphasize the necessity of weighing carefully the potential gains from
in tax policies
changes
the
potential
losses that could result from a loss of confidence. Frequent
minor changes in tax policy, even though each of them might bring about
small increases in the net benefit Canada derives from foreign investment,
probably should not be attempted. In this area it is important to seek the
maximum
long-term net benefit, and that will often mean foregoing
short-run advantages. We do not wish to imply that tax changes cannot
be made. Indeed, we recommend many sweeping reforms. What we advocate
is that Canada should seek to establish a system of taxing foreign investment
that is consistent with its best long-run interests and then hold to it.
We believe that this requires a tax system that is fair to non-residents as a
group and one that reflects Canada’s desire to encourage the free flow
of goods and capital in the world. No country has more to gain than
Canada from a world where that goal is gradually realized.6
It is against the background of this philosophy that the specific
recommendations of the Commission on the tax treatment of foreign
investment and of foreigners in Canada is to be appraised. Are the
specific recommendations of the Report calculated to carry out this
philosophy ?
5 Report, Vol. 2, p. 220.
6 Ibid., pp. 217-218.
No. 1]
CANADIAN FISCAL REFORM AND U.S. INTERESTS
63
It is upon residents of the United States that the recommendations
regarding foreign investment will have the most impact. The United
States is Canada’s most important trading partner by a wide margin
and it is from the United States that the bulk of foreign investment
has come. In addition, the proliferation of United States subsidiary
companies in Canada and activities of Americans at large in Canada
have resulted in a substantial amount of personnel movement across
the border.
In order to make this analysis meaningful, it is necessary to first
consider the law as it presently exists and, specifically, to deal with
the three kinds of Canadian income normally received by residents
of the United States: that derived either through carrying on busi-
ness in Canada, being employed in Canada or receiving income from
property situated in Canada.
Taxation on World Income
The basis of liability for tax on world income in Canada is
residence. A company or an individual who is considered to be
resident in Canada is taxable on his world income during the period
of residence. 7
Non-residents, on the other hand, are taxable only in respect of
Canadian income, either from being employed in Canada at any
time in the year or in respect of income earned from carrying on
business in Canada at any time in the year.8 In addition, Canadian
withholding tax is exigible in respect of certain kinds of income
received by non-residents from sources in Canada.9
Unfortunately, the concepts of “residence”, “business” and “carry-
ing on business” are difficult to define, yet these concepts are
fundamental to the present system of taxation in Canada.
Residence in Canada
The Income Tax Act provides that where a person sojourns in
Canada for a period of, or periods, the aggregate of which is, 183
days or more in the year, he is deemed to be resident for the entire
year.10 In addition, a person who is “ordinarily resident” in Canada
is deemed to be a resident.” The courts have interpreted the concept
of “ordinarily resident” very broadly to the point where a person
T lncome Tax Act, Sec. 2(1).
Slncome Tax Act, Sec. 2(2).
9ncome Tax Act, Part III.
10 See. 139 (3) (a).
“Sec.
139 (4).
McGILL LAW JOURNAL
[Vol. 14
with a long-established Canadian residence must virtually divest him-
self of any Canadian dwelling, restrict himself to very infrequent
trips to Canada, preferably not for some period of time after resi-
dence has been abandoned and take a variety of other steps to ensure
that a Canadian residence does not exist for income tax purposes.12
It is possible to have two or more residences 13 so that the established
residence outside Canada does not preclude the existence of a Cana-
dian residence. There are no specific criteria to be applied in any
given case. Residence is a question of fact.
In the case of a corporation, the problem is equally difficult
because a corporation is considered resident where its central man-
agement and control are situated. 14 Until 1965 it was possible to
have a company incorporated in Canada which was not a resident
of Canada. 15 Historically, the central management and control rule
dictated that residence be found to be where the directors resided
and held meetings. As in the case of the individual, there can be
more than one residence for a corporation, that is, more than one
place in which the company “keeps house and does business.”’10 How-
ever, more recent judicial decisions have taken a more flexible
approach and it would now seem that where the directors merely
carry out instructions of others, the true residence of the company
may be in the jurisdiction of the person or persons from whom
the instructions emanate.17 Normally, this would be the residence
of the controlling shareholder.
Canadian taxation authorities did not consider the inexact rules
evolved by the jurisprudence adequate for the determination of
residence, so in 1961 legislation was introduced to provide that a
12 See, for example, Thompson v. M.N.R., [1946] C.T.C. 51, [1946] S.C.R. 209,
in which the taxpayer was held to be “ordinarily resident” for the purposes of
the Act. Other cases in which taxpayers have not been held to be resident are
Beament V. M.N.R., [1952] C.T.C. 327, [1052] 2 S.C.R. 486, Schujahn v M.N.R.,
[1962] C.T.C. 364, [1.962] Ex. C.R. 328, Meldrum v. M.N.R., (1950), 2 Tax A.B.C.
63, No. 416 V. M.N.R., (1957), 17 Tax A.B.C. 94.
13 Cooper v. Cadwalader, (1904), 5 T.C. 101, Thompson v. M.N.R., [1946] C.T.C.
51, [1946] S.C.R. 209.
14 De Beers Consolidated Mines Limited v. Howe, (1906), 5 T.C. 198 at p. 213,
[1906] A.C. 455 at p. 458, per Lord Loreburn, L.C., relying on the judgments
delivered by Kelly, C.B., and Huddleston, B., in Calcutta Jute Mills Company V.
Nicholson, (1876), 1 T.C. 83 and in Cesena Sulphur Company v. Nicholson,
(1876), -1 T.C. 86 (both cases were disposed of at the same time).
15 Income Tax Act, Sec. 189 (4a).
16 Swedish Central Railway Company v. Thompson, (1925), 9 T.C. 342, [1925]
A.C. 495.
[1959] 3 All E.R. 831.
17Bullock v. Unit Construction Co. (1959), 38 T.C. 712, [1960] A.C. 351,
No. 1]
CANADIAN FISCAL REFORM AND U.S. INTERESTS
65
company be deemed to be resident in Canada throughout a taxation
year if it was incorporated in Canada and if it carried on business
in Canada at any time during the year. The location of the seat of
central control and management became academic where the fore-
going conditions existed.’ 8 Subsequently, in 1965, the provision was
further amended to provide that any company incorporated after
April 26, 1965 in Canada is a resident of Canada and a company
incorporated before that date which carries on business in Canada
in any taxation year ending after that date loses its non-resident
status forever.
Carrying on Business in Canada and Employed in Canada
What constitutes “carrying on business” in Canada is another
area of difficulty and ambiguity. The Income Tax Act defines business
as including:
a profession, calling, trade, manufacture or undertaking of any kind
whatsoever and includes an adventure or concern in the nature of trade,
but does not include an office or employment.’ 9
The jurisprudence of the United Kingdom determined that carry-
ing on business in a country was not the same thing as carrying on
business with a country.20 It would have been possible within the
framework of the tests laid down by the jurisprudence 2′ to conduct
a substantial trade “with Canada” as opposed to “within Canada”
and to avoid falling within the net of Canadian taxation but for the
following provision of the Income Tax Act 22 which gave an extended
meaning to “carrying on business”:
Where, in a taxation year, a non-resident person (a) produced, grew, mined,
improved, packed, preserved or con-
created, manufactured, fabricated,
structed, in whole or in part, anything in Canada whether or not he exported
that thing without selling it prior to exportation, or (b) solicited orders
or offered anything for sale in Canada through an agent or servant whether
the contract or transaction was to be completed inside or outside Canada or
partly in and partly outside Canada, he shall be deemed, for the purposes
of this Act, to have been carrying on business in Canada in the year.
is Income Tax Act, Sec. 139(4a).
39 Sec. 139(1) (e).
20 Grainger v. Gough, (1896), 3 T.C. 462 at p. 467, [1896] A.C. 325 at p. 335,
per Lord Herschell. His precise words were: “I think there is a broad distinction
between trading with a country, and carrying on a trade within a country.”
(1860), 2 T.C. 149, 5 H. & N. 711, 157 E.R. 1364,
Erichsen v. Last, (1880), 1 T.C. 351, 8 Q.B.D. 414, Smidth (F.L.) & Co. v. Green-
wood, (1922), 8 T.C. 193, [1922] 1 A.C. 417, and Firestone Tyre & Rubber Co. v.
Lewellin, (1956), 37 T.C. 111, [1956] 1 All E.R. 693, aff’d [1957] 1 All E.R.
561 (H.L.).
21 See Sulley v. A.-G.,
22 Sec. 1S9 (7).
McGILL LAW JOURNAL
[Vol. 14
Where a non-resident carries on business in Canada, he is taxable
on his Canadian income in the same manner as a Canadian is taxable
thereon and at the same rates. 23 In computing that income, he is
permitted the deductions that would be permitted to a resident to
the extent that they may reasonably be considered applicable in the
earning of such income.2
The same rules apply to non-resident persons employed
in
Canada 25 and, of course, it is easier to determine whether a person
is employed in Canada than it is to determine whether he is carrying
on business in Canada.
If the person carrying on business in Canada is a non-resident
corporation, then, in addition to the normal corporate rates applicable,
the Income Tax Act imposes a 15 per cent tax on the “after tax
earnings”, meaning the corporation’s taxable income earned
in
Canada less the corporate income tax payable, less any provincial
taxes that were not deducted and credited in computing the taxable
income and less an allowance for net increases in the corporation’s
capital investment in Canada.26 The ostensible purpose of this
provision, added in 1961, was to remove any advantage derived from
conducting a branch operation as opposed to incorporating a Canadian
subsidiary.
Income from Property
Income from property in Canada received by non-residents is
subject to a withholding tax, generally at a rate of 15 per cent. The
kinds of income against which the withholding tax is exigible are
spelled out in Section 106 of the Income Tax Act, the most frequently
encountered being dividends, interest payments, income from estates
or trusts, rents and royalties. As mentioned in the introductory
comments set forth above, where a sufficient degree of Canadian
ownership exists in the equity stock of a foreign-owned and controlled
Canadian subsidiary, the withholding tax on dividends is reduced
from 15 per cent to 10 per cent.27 There are other reduced rates
applicable in respect of certain kinds of interests and royalties but
in no instance is a withholding tax imposed in excess of 15 per cent.28
23 Sec. 2(b).
24 Sec. 31.
25 Sec. 2(a).
2 6 Sec. l0B.
27 See supra at p. 61.
28 Income Tax Act, Part III.
No. 1]
CANADIAN FISCAL REFORM AND U.S. INTERESTS
67
Canada-U. S. Tax Convention
Insofar as residents of the United States are concerned, the general
rules set forth above are modified by the provisions of the Canada-
U. S. Tax Convention and accompanying Protocol which came into
effect as of and from January 1, 1941. It has been amended by
several supplementary conventions. 29 With respect to United States
corporations or individual residents of the United States carrying on
business in Canada, Article I of the Convention exempts industrial
and commercial profits from Canadian income tax except to the
extent that such profits are allocable to a permanent establishment
in Canada. The term “permanent establishment” is defined in Section
3(f) of the Protocol to the Convention. The amount attributable to
the permanent establishment will be
to
the net industrial and commercial profit which it might be expected
derive if it were an independent enterprise engaged in the same or similar
activities under the same or similar conditions. Such net profit will, in
principle, be determined on the basis of the separate accounts pertaining
to such establishment.3 o
In addition, there must be added the 15 per cent tax referred to
above which is exigible under Section 110B of the Canadian Income
Tax Act. By Section 808(3) of the Regulations to the Income Tax
Act, the profits not attributable to the permanent establishment are
exempted from this 15 per cent tax. As a result, the tax is commonly
referred to as a “branch tax.”
Article II of the Convention specifically excludes from the term
“industrial and commercial profits” income in the form of rentals
and royalties, interest, dividends, management charges and gains
derived from the sale or exchange of capital assets. Income of this
kind other than capital gains is subject to withholding tax which
cannot exceed 15 per cent by virtue of Article XI of the Convention.
In Canada’s case, this is the same rate as the normal statutory
withholding tax rate but it is 15 per cent less than the standard
withholding tax rate in force in the United States. Until 1961 it
was further provided in that Article that, subject to certain quali-
fications, dividends paid by a subsidiary in Canada to a parent
company in the United States were to be subject to only a 5 per cent
withholding tax. Although that benefit has been eliminated, the 15
per cent rate can still be reduced to 10 per cent in the event that
29 See Supplementary Conventions of June 12, 1950, August 8, 1956 and October
25, 1666.
30 Article III.
McGILL LAW JOURNAL
[Vol. 14
there is a sufficient degree of Canadian ownership of the capital
stock of the subsidiary company as mentioned above.31
Amounts received from Canadian trusts and estates by residents
of the United States are exempt from Canadian tax to the extent
that the distribution is from income derived from sources outside of
Canada. 32 This provision was added in 1956.
Residents of the United States who receive compensation for
personal services performed in Canada enjoy the benefits provided
by Article VII of the Convention which differ substantially from
the rules normally applicable to non-residents. In brief, there is no
income tax exigible if an individual is present in Canada for a period
or periods not exceeding 183 days during a taxation year and if his
compensation is received as an officer or employee of a United States
resident, corporation or other entity, or of a permanent establishment
in the United States of a Canadian enterprise or his compensation
for such services does not exceed $5,000. However, if his stay in
Canada exceeds 183 days, he will be taxed as a resident of Canada
and the provisions of the Convention will cease to have application.
The sojourning rule mentioned above can raise particular problems
for United States citizens who find themselves in Canada for more
than 183 days in a year because there would be a deemed residence
for the whole year and world income becomes subject to Canadian
income tax. Apparently, the foreign tax credit granted under the
United States Internal Revenue Code 32a would apply only
to
Canadian taxes on income from sources in Canada and it would not
be available in respect of Canadian income tax on income from United
States sources during the year.32b
Pension or annuity income received from Canada by a resident
of the United States is not subject to Canadian tax by virtue of
the Convention.33 This provision is beneficial to many who retire in
the United States after spending their working lives in Canada.
Carter Commission Recommendations
There are numerous recommendations of the Commission which
might have a significant effect on the treatment of Canadian income
received by residents of the United States if the Convention existing
between the two countries is either abolished or amended so as to
31 See supra at p. 61.
32 Article XIII E.
3 2 aAug. 16, 1954, c. 736, 68 A Stat. 895, 26 U.S.C. 33, 901.
32b 26 U.S.C. 931 (g).
33 Article VI A.
No. 1]
CANADIAN FISCAL REFORM AND U.S. INTERESTS
69
reflect the Commission’s proposals. Some effect will be felt even if
the present ‘Convention is allowed to stand. Curiously enough, the
Commission’s views on this subject are somewhat obscure. The possi-
bility of such a step being taken is considered later on. Accordingly,
the following comments on certain specific recommendations are
made on the basis that the Convention will not be applicable, at least
not in its present form.
The brief review of Canada’s existing tax structure as it affects
non-residents indicates that Canada taxes different kinds of income
received by non-residents in different ways. The Commission en-
tertained the possibility of imposing a uniform rate of tax on all
kinds of Canadian source income received by non-residents. The
merits of such a system would be the difficulty of practicing tax
avoidance and the simplicity of administration; however, the Com-
mission rejected the concept of a uniform rate principally because
of the foreign tax credit provisions which may apply in the juris-
diction of the recipient of the income. In order to collect the maximum
amount of tax from foreigners and yet not deter them from either
investing, being employed or carrying on business in Canada, it is
important that the tax exigible by Canada not exceed the credit
against taxes to which the taxpayer is entitled in his own jurisdiction.
On the other hand, if the Canadian tax is less than the amount
of credit available, the Canadian treasury suffers, the foreign tax-
payer’s position is not improved and the only beneficiary is the
treasury of the foreign government concerned. The Commission there-
fore concluded that if foreign governments vary the credits for for-
eign taxes given to their residents, Canada should not impose a tax
at a uniform rate on all types of income. But before deciding how
to tax the different kinds of Canadian income received by foreigners,
the Commission was obliged to consider the fundamental criteria to
be used in determining who is a foreign taxpayer. In other words,
what distinguishes a foreigner from a Canadian for income tax
purposes?
Essentially the Commission recommended that residence continue
to be the basis for determining tax liability on world income. Although
the Commission considered the concept to be illusive and vague, it
was at the same time recognized as the basis of the existing Canadian
practice and the test that has always been applied. Therefore, a “for-
eign investor” will continue to be defined as a non-resident of Canada
even if the Commission’s proposals are implemented.
The Commission reached a similar conclusion with respect to the
concept of “carrying on business” in Canada with the added sug-
McGILL LAW JOURNAL
[Vol. 14
gestion that the concept of “permanent establishment” which is
found in most treaties to which Canada is a party be incorporated
into the domestic legislation so that the existence of such an es-
tablishment would be “conclusive evidence that business was carried
on in Canada.” 34
Therefore, the Commission has not abandoned the principle of
taxing different kinds of income on different bases; nor has it
abandoned the fundamental concepts upon which tax liability of for-
eigners is distinguished from that of Canadians, that is, non-residence
and carrying on business. The following is a brief description of how
the Commission believes the different types of Canadian income most
commonly received by non-residents should be taxed.
Carrying on Business in Canada
Business income should be subject to Canadian income tax to be
determined in the same way for residents and non-residents alike.
To examine all the implications of this proposal, it would be necessary
to discuss the Commission’s proposals with respect to the determi-
nation of business income for Canadian residents in general. Such
a discussion is beyond the scope of this article but some of the more
important suggestions representing departures from the existing
system are singled out for comment.
Generally, the Commission recommended that business income be
computed more in accordance with accounting and business practice
and that most of the statutory rules for the computation of income
which differ from such practice be repealed. The tax base should
be broadened to include all property gains, gifts, windfalls and the
foregiveness or cancellation of debts. This, of course, for Canadians,
is one of the most contentious recommendations of the Commission
because Canadians have never been subjected to a tax of any kind
on capital gains. Another recommendation of particular significance
is that the existing dual corporation tax rate be abolished and be
replaced by a flat rate of 50 per cent. At the present time, corporations
in Canada pay a federal income tax of 21 per cent on the first
$35,000 of taxable income and a tax of 50 per cent on any taxable
income in excess of $35,000.35
Many other significant changes were recommended with respect
to deductibility of expenses, the treatment of business losses, special
concessions for new businesses and so forth. Of the recommendations
3’Report, Vol. 4, p. 545.
35 1Inome Tax Act, See. 39.
No. 1]
CANADIAN FISCAL REFORM AND U.S. INTERESTS
71
just mentioned, the most important for non-residents in general
carrying on business in Canada is probably the suggested flat cor-
porate rate of tax of 50 per cent on all income. The reason for this
importance is discussed further on. All the Commission’s recom-
mendations will of course be equally applicable to Canadian sub-
sidiaries of non-resident corporations. For example, companies,
whether American or Canadian controlled, engaged -in the so-called
extractive industries, such as mining and oil, received a rude shock
when the Commission recommended the abolishment of the favoured
tax treatment which they have received in the past.
In addition to the fact that non-resident corporations carrying
on business in Canada will be taxed at a flat rate of 50 per cent,
the Commission recommended the retention of the special tax imposed
under Section 110B of the Income Tax Act which is referred to above.
As before, the purpose of this provision is to ensure that a non-
resident corporation derives no advantage from carrying on business
in Canada through a branch operation as opposed to carrying on
business through a Canadian subsidiary.
Would the position of a United States corporation carrying on
business in Canada or of an individual resident of the United States
carrying on business in Canada be adversely affected by these
proposals?
A United States corporation carrying on business in Canada
would be able only to repatriate 42.5 per cent of its ,profits before
taxes because of the flat rate of 50 per cent plus the special 15 per
cent tax on after-tax income, which would result in an effective
combined tax rate of 57.5 per cent. The amount repatriated might
be somewhat increased depending upon the figure agair~st which the
15 per cent special tax is applied. As mentioned above, the amount
against which the tax is now applied under Section 110B is subject
to a reduction for non-deductible Provincial taxes and an allowance
for net increases in the corporation’s capital investment in Canada.
However, it is likely that the total tax load would exceed the United
States tax otherwise payable on the Canadian source income, and thus
the credit for foreign taxes provided for in Section 901 of the In-
ternal Revenue Code might be lost in part.
This situation, however, would be very little different from that
presently existing where a United States corporation earns substantial
income in Canada through a permanent establishment. The point is
that where a full credit under Section 901 may now be available
because of the low rate of Canadian income tax, that is, 21 per cent
applying to the first $35,000 of taxable income, smaller operations
McGILL LAW JOURNAL
[Vol. 14
which are conducted by United States corporations in Canada would
become less interesting. Probably many branch operations currently
benefit through the low rate on the initial $35,000 of taxable income.
The same would be true where a United States corporation elects
to carry on business in Canada through a wholly owned Canadian
subsidiary. In such event the indirect credit for Canadian corporate
income tax would be taken by virtue of Section 902 of the Internal
Revenue Code.
It is difficult to estimate reliably the precise impact of the elimi-
nation of the dual rate of corporate income tax in Canada because
of the foreign tax credit system provided for in the Internal Revenue
Code. For example, even where the credit in respect of Canadian
taxes is greater than the United States taxes otherwise payable on
the Canadian source income, the United States taxpayer might elect
to take the “overall limitation” provided for in Section 904 of the
Internal Revenue Code and by this means still absorb the credit
differential through the offsetting effect of lower taxes in other
jurisdictions. Nevertheless, on balance, the position of the United
States corporation carrying on business in Canada and the position
of the United States parent of a Canadian subsidiary would be
worsened by the elimination of the dual rate of Canadian corporate
income tax. Whether the position would be worsened to the point
of discouraging United States companies from carrying on business
as before is doubtful except perhaps, in the case of a small branch or
small subsidiary, where the initial low rate constitutes a real incentive.
In that instance, the Commission may be adding the “last straw.”
Where an individual resident of the United States carries on
business in Canada, the effect of the recommandations is equally
difficult to evaluate. Because the Canadian and United States tax
rates on individuals would approximate each other if the recom-
mendations are implemented, no prejudice of any consequence would
exist because a substantial, if not full, foreign tax credit would be
available to him to offset the Canadian taxes. For example, a married
man in the United States without children and with taxable income
of $25,000 paid a tax of $5,523 in 1966 and his Canadian counterpart
paid a tax of $7,725. Under the proposals, the Canadian tax would
become $5,511.36 Therefore, a full foreign tax credit should be
available to the United States resident.
The special 15 per cent “branch” tax which the Commission wishes
to retain would not apply to individuals.
3 6 Report, Vol. 3, p. 179.
No. 1]
CANADIAN FISCAL REFORM AND U.S. INTERESTS
73
Income from Property in Canada
Income derived by non-residents from property in Canada is taxed
at a flat rate of 15 per cent. In no case is it greater than 15 per cent.
It is irrelevant whether or not there is a treaty with Canada because
Canada’s statutory rate is 15 per cent. The Commission found that:
Statutory withholding rates reflect nothing more than a judgment as to the
best level from which to start the bargaining process with other countries
for mutual reductions. By this process rates of 30% or higher which are
imposed by the laws of some countries have in most treaties become a
bargained rate of 15%. 37
With the exception of dividend payments, the Commission con-
cluded that all other types of property income such as royalties,
rentals, interest and similar payments should be subject to with-
holding tax of 30 per cent which would be reduced “when specific
circumstances warrant a lower rate for certain countries and certain
kinds of payments. 38 The rationale underlining the withholding rate
differential between dividend income and other kinds of income seems
to be that the source of the dividend income has already been subject
to Canadian taxation. Therefore, the Commission recommended that
the statuory rate of 15 per cent not be disturbed and that a reduction
from that amount to perhaps 10 per cent be offered in future treaty
negotiations if reciprocal concessions are obtained.
The Commission also recommended that the exemption from with-
holding tax on interest paid to tax-exempt foreign investors be con-
tinued. These foreign investors represent an important source of
capital in Canada and their tax-exempt status prohibits them from
taking any credit for the Canadian withholding taxes. In the Com-
mission’s opinion, such a tax would only have the effect of increasing
the interest rate payable by the Canadian borrower.
The Commission has proposed that payments made to non-resident
beneficiaries of Canadian estates and trusts be subject to a with-
holding tax of 15 per cent. This is the same as at present, but the
trust or estate itself will be subject to initial tax at the rate of 50
per cent on the income distributable or accumulated for the benefit
of non-resident beneficiaries. This combination of initial and with-
holding taxes could result in total taxes of 57.5 per cent for the
account of the non-resident beneficiary which the Commission ac-
knowledged could be onerous. Accordingly, a non-resident beneficiary
would be entitled to elect to pay tax as “if his allocable share of the
income of the trust had been paid to him directly.” 39 If the income is
37 Report, Vol. 4, p. 546.
38 Ibid., p. 547.
39 Ibid., pp. 200, 554.
McGILL LAW JOURNAL
[Vol. 14
derived from dividends of Canadian corporations, there would be
no advantage in this eection; however, if derived from rents, royal-
ties or similar payments, there would be a considerable advantage
because only a 30 per cent withholding tax would apply and the
excess paid by the trust would be refunded to him. The Commission
recommends that income of the trust from foreign direct invest-
ment 40 be taxable in the same way as similar income received by a
corporation; however, it would seem that the election to be taxed
as if he had received the income directly should also be available to
the beneficiary where income is received by the trust from foreign
direct investments. Had such income been received directly by the
non-resident, there would have been no Canadian tax, so presumably
where an election is made, the non-resident becomes entitled to a
refund of all tax paid by the trust on such income. 41
How these recommendations would affect the United States cor-
porations and individuals deriving income from property in Canada
depends upon a variety of factors including the nature of the recipient
and the foreign tax credit to which the recipient is entitled under
the relevant provisions of the Internal Revenue Code. For example,
if a 30 per cent Canadian withholding tax on interest payments
exceeds the foreign tax credit to which the recipient is entitled under
the per country limitation provision, the “overall limitation” alterna-
tive might be invoked to offset lower foreign taxes paid in other
jurisdictions against the higher Canadian tax. In the case of indi-
viduals, the overall limitation alternative is less likely to be available
and the 30 per cent Canadian tax could be onerous. A married United
States investor without dependent children would require substantial
income before the full credit for Canadian withholding tax of 30
per cent could be obtained. For example, a married person in the
United States without any children paid $11,538 in tax on $40,000
of income at 1966 rates 41
less than 30 per cent. Similarly, cor-
porations in the United States which enjoy a special status, such as
life insurance companies, might have an effective rate of United
States tax lower than the 30 per cent tax withheld and part of the
credit could be lost.
–
40A foreign direct investment should be defined as an investment by a
Canadian resident or associated group of Canadian residents (a)
in a non-
resident corporation in which he or the group holds a 10 per cent or greater
interest in the voting power, in the profits or in the assets distributed on liqui-
dation of the non-resident corporation, or (b) in a foreign property or business
in which he or the group holds a 10 per cent or greater interest.
41Report, Vol. 4, p. 200.
41aReport, Vol. 3, p. 179.
No. 1]
CANADIAN FISCAL REFORM AND U.S. INTERESTS
75
It is difficult to evaluate accurately the effect of these proposals
on United States investors. It is clear that their situation has not
been improved but it is hard to evaluate the extent to which it has
been worsened, if at all.
The Commission has also made a specific proposal to remedy a
problem which exists at the present time and which would continue
to exist even -if the other proposals respecting property income are
implemented. Specifically, the Commission recommended that “inter-
est payments by a Canadian corporation to non-resident investors
with whom it was not dealing at arm’s length should be deemed to
be dividends.” 42
Dividends are not deductible in computing taxable income at the
present time nor would they be under the proposed recommendations.
Generally, interest payments are deductible. Consequently, there is
an incentive for non-resident investors to extract interest payments
from Canadian corporations which they control, thereby avoiding
the application of Canadian corporate income tax. The payments
would simply be subject to the withholding tax which the Com-
mission has recommended be increased from 15 per cent to 30 per cent.
There may therefore be an incentive to a non-resident investor to
change the form of investment in Canadian corporations from equity
to debt. As pointed out above, the repatriation of Canadian corporate
source income by United States investors through dividends can be
subject to an overall tax burden of 57.5 per cent and would continue
to be so under the Commission’s proposals. Moreover, the Com-
mission does not recommend that the integration of corporate and in-
dividual income tax which would be available to resident shareholders
be extended to non-residents. The reaction of United States investors
to this form of discrimination might very well be to reduce the
Canadian corporate tax exigible if possible by extracting payment
in forms other than dividends.
Personal Service Income
Sweeping reforms have been recommended with respect to person-
al service income derived by non-residents of Canada. In lieu of
being taxed as a resident with respect to such Canadian income,
the Commission has recommended the application of a withholding
tax at a flat rate of 30 per cent on income earned in Canada by
non-residents. The Commission’drew upon United States experience
in making this proposal. However, an election would be made avail-
able to such non-residents which would permit them to be taxed as
4 2 Report, Vol. 4, p. 92.
McGILL LAW JOURNAL[
[Vol. 14
residents of Canada should they so choose. Presumably, a non-
resident would then file a return showing his world income and
would be entitled to a refund to the extent that the withholding tax
of 30 per cent exceeds the tax that would otherwise be exigible should
he be taxed as a resident of Canada in respect of the Canadian income.
Because the 30 per cent withholding tax might very well exceed
the United States tax applicable to such income, a substantial portion
of the United States foreign tax credits might be lost. It is therefore
probable that if the recommendation is implemented, many United
States citizens falling into this category may elect to be taxed as
Canadian residents in order to reduce the Canadian tax exigible.43
The Commission has also given consideration to income derived
by non-residents from personal services rendered outside Canada.
These usually take the form of fees for professional services of one
kind or another. Of course, most of this income flows to the United
States and at the present time is rarely subject to Canadian income
tax of any kind. The Commission has recommended that withholding
tax at the rate of 10 per cent be applied to such income.44 The re-
duced rate is in consideration of the fact that such income would
probably not be regarded as foreign source income by the United
States authorities and hence would not be eligible for any foreign
tax credit. The validity of this recommendation is questionable since
it is evident that the fees against which it will be applied will be
increased to take account of the tax. Since such fees would normally
be deductible in computing Canadian taxable income, the Canadian
treasury will suffer because the Canadian income tax of the payor
will be reduced by perhaps as much as 50 per cent, the top marginal
rate proposed for individuals and the flat rate proposed for cor-
porations.
Tax on Capital Gains
Capital gains are not subject to tax in Canada. This is true
whether they are realized by residents or non-residents. In this con-
nection Article VIII of the Canada-United States Tax Convention
provides :
Gains derived in one of the contracting States from the sale or exchange
of capital assets by a resident or a corporation or other entity of the other
contracting State shall be exempt from taxation in the former State, provided
43 The option of filing a Canadian tax return is also recommended for non-
residents receiving gifts, bequests, income portion of pension and annuity pay-
ments. No credit would be given for foreign taxes on Canadian source income.
See Report, Vol. 4, p. 556.
44Ibid., p. 553.
No. 1]
CANADIAN FISCAL REFORM AND U.S. INTERESTS
77
such resident or corporation or other entity has no permanent establishment
in the former State.
To date, even having a permanent establishment in Canada did
not create any liability for tax on capital gains realized by non-
residents because no such tax is provided for in the Canadian domestic
legislation. The Commission has now recommended a tax at the full
rates applicable to ordinary income on capital gains. In other words,
with few exceptions, capital profits will be treated in the same manner
as business profits.
In this area the Commission has given the non-resident a sub-
stantial benefit by recommending that the proposed capital gains tax
not apply to property gains of non-residents unless the non-resident
carries on business in Canada through a “permanent establishment”
and the gain is realized on property employed in that business. The
recommendation also seeks to broaden the definition of “permanent
establishment” to include real property and mining and petroleum
rights as well as the shares of closely held companies which in turn
hold real property.
Vis-A-vis residents and corporations of the United States, this
recommendation creates somewhat of an enigma in view of the
provisions of the existing Convention. Under the Convention, Canada
has the right to tax capital gains of residents or corporations of
the United States when there is a permanent establishment in
Canada. The proposal of the Commission does not go that far because
the tax is to be imposed only where the asset upon which the gain
is realized is used in a business carried on through a permanent
establishment. On the other hand, the proposed definition of “perma-
nent establishment” is broader than the definition found in Section
3(f) of the Protocol to the Convention. Whether or not the Con-
vention will be terminated or amended is discussed below.
The proposed exemption of foreigners from the capital gains
tax is based upon practical considerations only. The Report makes
it clear that the recommendation would be otherwise if enforceable
procedures were available to effectively impose the tax on non-
residents.
Canada-U. S. Tax Convention
The Commission’s intentions with respect to the future of the
existing Convention are not clear. Article XXII of the Convention
permits either party to terminate the Convention and Protocol and
subsequent Amendments upon giving at least six months’ prior
notice to that effect. The termination then becomes effective on
the January 1st following the expiration of the six-month period.
McGILL LAW JOURNAL[
[Vol. 14
The Commission did not suggest that this step be taken by
Canada and in fact specifically approved the “present extent of
Canada’s treaty arrangements” and recommended that more be
negotiated.45
Also, when considering the effect of the increased withholding
tax, the Report states:
Initially this change would adversely affect very few non-resident investors
because most are residents of countries with which Canada has tax treaties
that provide for a 15 per cent rate.4 6
This is a clear indication that there should be no immediate
attempt to terminate the various treaties.
Elsewhere the Report suggests that the higher level of with-
holding tax would be useful in future treaty negotiations. Presumably
the withholding tax would be reduced against reciprocal concessions.
It would therefore appear from the Report that, at least for the
present, all the provisions for the Convention between Canada and
the United States will continue to apply even if the Commission’s
recommendations are implemented. However, if the existing con-
ventions, and in particular the one with the United States, are
allowed to stand without at least substantial amendments, the pro-
posed reforms will have no value other than curiosity pieces because
Canada has tax treaties with almost every country having substan-
tial commercial dealings with Canada. At the same time, Section 2
of the Protocol to the Convention requires the governments of the
United States and Canada to “consult together” in the event of
“appreciable changes in the fiscal laws” of either country.
Canada would no doubt at least seek amendments to the Con-
vention and Protocol to implement the increased withholding tax
proposal and the proposed capital gains tax (which, as pointed out
above, would require only a new definition of “permanent establish-
ment?’) and perhaps to change the basis of taxation of personal service
income received by residents of the United States.
In addition, the loophole whereby United States parent companies
of Canadian subsidiaries might extract payments of interest in lieu
of dividends would probably be closed.
However, the foregoing is pure speculation. Perhaps the govern-
ment will prefer to leave the Convention intact in order to forestall
any retaliation by the United States. Yet the implementation of a
capital gains tax in Canada without applying the same rules to
46 Ibid., p. 569.
46 Ibid., p. 540.
No. 1]
CANADIAN FISCAL REFORM AND U.S. INTERESTS
79
Americans holding Canadian property other than securities would
likely create great resentment among Canadian taxpayers. Immediate
amendments to the Convention as a minimum step would therefore
seem inevitable.
Non-resident-Owned Investment Corporations
and Foreign Business Corporations
These companies are creatures of Canadian statute law which enjoy
special status and many of which are of particular interest to United
States corporations and citizens.
The non-resident-owned investment corporation status requires
that 95 per cent of the corporation’s issued shares, bonds, debentures
and other funded indebtedness be beneficially owned by non-resi-
dents. Its income must be derived from certain kinds of investments
as defined in Section 70 of the Income Tax Act. Where the necessary
qualifications exist, the company may elect to pay a tax of 15 per
cent on its income. Subsequent distributions to the non-resident
owners are tax free.
Basically, the Commission did not see this kind of company as
encouraging investment in Canada because most of the qualified
investments would be subject only to a 15 per cent rate of tax if
held directly by the non-residents; however, the Commission regarded
it as a vehicle for the practice of tax avoidance by the non-resident
investor in his own jurisdiction because it permits him to accumu-
late funds in a foreign jurisdiction, that is, Canada, in a corpo-
ration which is subject only to the modest withholding rate of tax
of 15 per cent.
The Commission recommended the repeal of these provisions
over a period of time because they ‘are offensive to the philosophy
adopted by the Commission “not to facilitate international tax avoid-
ance.” The suggestion is that after the effective date of the repealing
legislation, these companies be required to reduce their net assets
by 10 per cent per year so that in ten years the provisions can be
completely withdrawn.
As far as United States interests are concerned, this recommen-
dation is somewhat anticlimatic in view of the far-reaching provisions
of the Revenue Act of 1962 47 as it affected accumulations in foreign
companies controlled from the United States; however, the last ves-
tiges of tax avoidance through the use of these vehicles would be
eliminated through the implementation of this recommendation.
47 Oct. 16, 1662, 76 Stat. 960.
McGILL LAW JOURNAL
[Vol. 14
The foreign business corporation is another vehicle which the
Commission viewed as an instrument for the practice of inter-
national tax avoidance. The companies are normally incorporated in
Canada and resident, that is, managed and controlled, in Canada.
All the business of such companies must be carried on outside of
Canada. They pay no Canadian income tax. Their numbers have in
fact diminished considerably because the status could not be obtained
after 1959 but those corporations existing at that time continue to
exist unless they have since been disqualified. According to the
Commission, these companies have facilitated “international tax
avoidance on a grand scale.., principally through purchases of
goods in the United States and their sale in other countries under
the protection of Canada’s treaties.1 48 Apparently they were used
in this manner by residents of the United States. Remembering that
under Canada’s treaties there would be no income tax in either the
country of purchase or sale in the absence of permanent establish-
ments in both jurisdictions, the profits realized could be repatriated
to the United States after payment of only the nominal Canadian
withholding tax of 15 per cent. This is an example of Canada’s being
used as a tax haven.
The Commission recommends the gradual repeal of these provi-
sions over a period of five years in the case of foreign business
corporations whose shares are listed on a recognized Canadian stock
exchange and immediate repeal in all other cases.
Domestic Tax Reform
Other recommendations of the Commission on domestic taxation
would dramatically affect many special interest groups in the United
States and in particular the extractive industries. Most of the gener-
ous concessions made to the petroleum and mining industries in
various provisions of the Income Tax Act would be eliminated. For
example, the present depletion allowances accorded to the mining
and petroleum industries would be eliminated together with the
three-year tax holiday for new mines. Inasmuch as both these in-
dustries are in large measure controlled from the United States,
these specific proposals have already attracted much attention and
criticism south of the border.
Life insurance companies have also been unpleasantly surprised
by the Report. Under existing legislation, life insurance companies
are taxed only on the amounts credited to shareholders’ accounts or
48Report, Vol. 4, p. 558.
No. 1]
CANADIAN FISCAL REFORM AND U.S. INTERESTS
81
otherwise appropriated to shareholders less certain defined amounts.
Consequently Canadian life insurance companies have paid very little
income tax because the amounts credited rarely exceed the amount
required to pay dividends on the outstanding shares. Because foreign
insurance companies with branch operations in Canada have no
shareholders’ accounts in Canada, they do not pay any tax under
the Income Tax Act on their Canadian business income.
Subject to special provisions designed to accommodate the par-
ticular status of life insurance companies, the Commission recom-
mends that their business income be determined and taxed in the
6ame way as the business income of companies in general. This
recommendation includes the branch operations of non-resident compa-
nies which would, under the recommendation, become subject to
the special branch tax of 15 per cent as well.
The proposed treatment of the extractive industries and life
insurance companies briefly touched upon represent only two of
many areas where special interest groups in the United States may
be affected by the Commission’s recommendations for domestic tax-
ation reform. A discussion of the many areas in depth would be like
opening the proverbial “Pandora’s pox” and is well beyond the scope
of these comments which are specifically directed to the -international
aspects of the Report.
However, the examples cited illustrate the extent to which United
States interests with branch or subsidiary operations in Canada are
or should be interested in the domestic reforms recommended. We
have already considered how the elimination of the dual rate of
corporate income tax may affect the yield to be realized through
subsidiary or branch operations in Canada. That proposal would of
course affect all operations of United States companies in Canada.
There is, however, another recommendation which has aroused great
interest among Canadians but which will not be extended to non-
residents, namely, the full integration of personal and corporation
taxes. This represents one of the most novel and least expected recom-
mendations of the Report. Under the proposal all corporations
would be taxed at a flat rate of 50 per cent. The income of indi-
viduals and families would be taxed at progressive rates as before
but the top marginal rate would be 50 per cent. The shareholder
would gross up all dividends received to include the 50 per cent tax
paid by the corporation and include the grossed up amount in his
income. He would then receive a credit against his own tax for the
full amount of the corporate tax paid. A refund would be given for
the excess which would exist unless the taxpayer is in the top
marginal rate of 50 per cent.
McGILL LAW JOURNAL
[Vol. 14
The obvious benefits of this proposal are not to be extended to
non-residents because, in the Commission’s opinion, the benefit would
not accrue as much to the non-resident shareholder as it would to
foreign treasuries. The Commission doubted that this proposal would
adversely affect the attitude of foreign investors because their over-
all position is not much different from that existing at the present
time. The position of Canadian shareholders would of course be
improved and United States residents might be induced to sell some
of their present shareholdings to Canadians. Some critics have re-
ferred to this as an attempt “to buy back Canada”. Actually,
Canadian shareholders already enjoy a substantial benefit over their
United States counterparts by virtue of the dividends received from
taxable Canadian corporations. This credit was introduced in 1949
at a rate of 10 per cent 49 and was increased in 1953 to 20 per
cent 90 The recipient of the dividend may deduct 20 per cent thereof
from his tax. This represents a very substantial benefit to Canadians
but there is no recorded evidence of a rush by United States share-
holders to dispose of their Canadian shareholdings when this measure
was introduced. Although the credit would be greater under the
proposal it is unlikely that the attitude of United States share-
holders would be any different than before. Their attitude will be
determined largely if not solely by the extent to which foreign tax
credits can be obtained in the United States against the Canadian
tax exigible. The philosophy of the investor is pragmatic.
Conclusion
The Commission’s recommendations with respect to foreign in-
come derived from Canadian sources are many and varied, but
their immediate impact either on the attitude of the foreigners con-
cerned or the benefits to accrue to the Canadian treasury are very
difficult to evaluate. Undoubtedly the purpose of the proposed reforms
is to maximize the tax obtainable from foreign interests at the
expense of foreign treasuries where possible and at the same time
make Canada sufficiently interesting to attract foreign capital. From
the standpoint of Canadians these are worthy objectives but the fair
balance to be struck between them will be difficult to attain.
From the point of view of United States interests, the implemen-
tation of the suggestions discussed herein should not create any
serious problems or necessitate major readjustments to existing
49 13 Geo. VI, S.C. 1949 (2nd Sess.), c. 25, s. 17.
0 1-2 Eliz. II, S.C. 1952-53, c. 40, s. 12(1).
No. 1]
CANADIAN FISCAL REFORM AND U.S. INTERESTS
83
arrangements. In fact, unless and until a new treaty as negotiated,
most of the recommendations concerning the treatment of inter-
national income will have no effect at all.
Will the recommendations of the Carter Report be implemented?
At first the outlook for implementation was pessimistic because of
the publicized statements of the Commission to the effect that it
was a “package deal”; all or nothing at all. That position has since
been modified and government spokesmen have stated that legis-
lation will be introduced to implement substantial portions of the
Report in 1968.51 Despite these statements, it is evident that the
Report has not yet received general acceptance in many important
areas and the resistance to its early implementation may well be
stronger than the forces in support of it.
51 Honourable M. Sharp, Minister of Finance addressing Canada Tax Foun-
dation in Toronto on April 26, 1967.
