B. Additional rate of tax applicable to all persons, other than corporations and joint stock companies, in receipt of income in excess of $5,000.—In respect of incomes in excess of $5,000 (excluding incomes exempt under sec. 4): Five percent of the amount of the tax as hereinbefore provided for. (Applies to the amount of investment income surtax as well as to general tax.)

C. Rate of tax applicable to corporations and joint stock companies, except as hereinafter provided.-On the income of the company, 15 percent.

D. Rate of tax applicable to corporations and joint stock companies which file a return consolidating their profit and loss with that of their subsidiaries as provided for by subsection 3 of section 35.-On the consolidated income of such company and its subsidiaries, 17 percent.

E. Rate of tax applicable to non-resident-owned investment corporations.— On the income of a company which elects under subsection 4 of section 9 of this act, one-half the rate of tax provided for by paragraph C of this schedule.

PERSONAL EXEMPTIONS

A personal exemption of $2,000 is granted to a married person, but where both husband and wife have separate incomes in excess of $1,000, whether taxable or not, each receives an exemption of $1,000 only. The exemption of $2,000 is also granted to: a widow or widower with a son or daughter under 21 years of age who is dependent upon such parent for support, or if 21 years of age or over is likewise dependent on account of mental or physical infirmity; an individual who maintains a self-contained domestic establishment and who actually supports therein one or more individuals connected with him by blood relationship, marriage, or adoption; and a minister or clergymen in charge of a diocese, congregation, or parish, whose duties require him to maintain at his own and sole expense a self-contained domestic establishment and who employs therein on full time a housekeeper or servant. All other persons, except corporations, are entitled to an exemption of $1,000. Every taxpayer is entitled in addition to an exemption of $400 for each child or grandchild (except one in the case of a widow or widower, or person maintaining a self-contained domestic establishment referred to above) under 21 years of age who is dependent on him for support or who being 21 years of age or over is incapable of self-support on account of mental or physical infirmity.

EXEMPTIONS FOR INVESTMENT INCOME SURTAX PURPOSES

Income for surtax purposes is determined in the same manner as the income for the general tax-that is, the "net income" first should be ascertained irrespective of its source or character. From this net income, the following may be deducted as an exemption from the surtax, whichever affords the greatest exemption to which the taxpayer is entitled:

(a) All income up to $5,000, or

(b) "Earned income" up to but not exceeding $14,000, or

(c) Income equal in amount to the $2,000 or $1,000 exemption to which a married or single person is entitled, plus the $400 allowances for dependents. The total income of the taxpayer is compiled by having the earned income form the base, above which is placed the investment income, and according thereto the appropriate rate of tax on investment income is applied. For example, where earned income is $11,000 and investment income $4,000 the surtax is 3 percent on $4,000 and not 2

percent. (See appendix for a number of examples showing application of the surtaxes on various classes of income.)

TRANSFERS TO EVADE TAXATION

Where a person transfers property to a minor, 18 years of age or under, either directly or indirectly or through the intervention of a trust or by any other means whatsoever such person is nevertheless liable to be taxed on the income from such property or from property substituted therefor, as if the transfer had not been made; this provision applies during the period of said minority, and also thereafter unless the Minister is satisfied that the transfer was not made for the purposes of evading taxation. If the husband transfers property to his wife, or vice versa, the husband or wife, as the case may be, is nevertheless liable to be taxed on the income derived from such property or from property substituted therefor as if the transfer had not been made. (Sec. 32.)

EXCEPTED INCOMES

The following organizations are totally exempt from tax: Any company, commission, or association of which not less than 90 percent of the stock or capital is owned by a Province or municipality; any religious, charitable, agricultural, and educational institution, board of trade, and chamber of commerce, no part of the profit of which inures to the personal profit of any proprietor or shareholder; labor organizations and societies and benevolent and fraternal beneficiary societies; mutual corporations not having a capital represented by shares, no part of the income of which inures to the profit of any member thereof and of life-insurance companies except such amount as is credited to shareholders' account; clubs, societies, and associations organized and operated solely for social welfare, civic improvement, pleasure, recreation, or other nonprofitable purposes; insurance, mortgage, and loan associations operated entirely for the benefit of farmers, as approved by the Minister; any banking institution organized under cooperative provincial legislation which derives its revenues from loans made ordinarily to members residing within the Province; and cooperative companies and associations which market the products of members or shareholders and paying them the proceeds of the sales on a quantity and quality basis, less necessary expenses and reserves, or which purchase supplies for members at cost, plus necessary expenses and reserves-they may conduct these operations for nonmembers provided the value thereof does not exceed 20 percent of the value of such operations for members. (Sec. 4.)

SHIPPING PROFITS

Income from the operation of ships owned or operated by a nonresident person or corporation is exempt, if the country where such person or corporation resides grants a similar exemption to Canadians which in the opinion of the Minister is fairly reciprocal to the Canadian provision. Equivalent exemptions in this regard exist between the United States and Canada.

DEDUCTIONS

In determining the amount of profits or gains to be assessed, section 6 lays down the general proposition that a deduction shall not be allowed for disbursements or expenses not wholly, exclusively, and necessarily laid out or expended for the purpose of earning the income. Among the items specifically stated by the Act as not deductible from income are: Outlay, loss, or replacement of capital; annual value of property, real or personal, except rent actually paid for the use of such property used in connection with the business to earn the income; amounts credited to a reserve, contingent account, or sinking fund, except such an amount for bad debts as the Minister is satisfied is reasonable; carrying charges of unproductive property not incurred in connection with a trade, business, or calling; carrying charges of property the income from which is exempt, except to the extent that such carrying charges exceed the exempt income; and personal and living expenses. Where there are no specific provisions in the law, the general test to be applied in partícular cases is whether they are revenue or capital expenditures, the former being allowed and the latter not allowed as deductions from income.

INTEREST

A deduction is allowed of such reasonable rate of interest on borrowed capital used in the business to earn the income as the Minister in his discretion may allow. Even though the rate of interest payable by a taxpayer is higher than that allowed by the Minister, the excess is not allowed as a deduction, and in no case may the rate exceed that payable under the borrowing agreement. (Sec. 5 (b).) It has been held 55 that dividends paid on the fixed cumulative 8 percent redeemable preferred shares of a company are not interest on borrowed capital and consequently not an allowable deduction.

The distribution of earnings by a corporation to holders of its income bonds or income debentures is not deductible from income. This provision does not apply where such bonds or debentures or the income provisions thereof have been adopted since 1930, in consequence of an adjustment of previously existing bonds or debentures bearing an unconditioned fixed rate of interest, if it is shown to the satisfaction. of the Minister that the adjustment was occasioned by financial difficulties of the debtor corporation or its predecessor and was intended to afford some relief to the said debtor corporation or its predecessor. Furthermore, this provision does not apply in determining the income of "personal corporations" taxable against their shareholders. (Sec. 6 (k).)

SALARIES

Payments made to employees are as a general rule deductible as being expenses necessary to earn the income. The Minister, however, is given the authority to disallow as an expense the whole or any portion of any salary, bonus, commission, or director's fee which in his opinion is in excess of what is reasonable for the services performed.

Dupuis Frères v. Minister of Customs and Excise 1927 Ex. C. R. 207.

To prevent the evasion of surtaxes on investment income, the Minister is empowered by subsection 3 of section 6 to reduce the amount of earned income from any salary, wages, fees, bonuses, gratuities, or honoraria, which, in his opinion, are not commensurate with the services actually rendered, and to treat the amount of such reduction as investment income; the Minister's decision on this question is final and conclusive.

Traveling expenses, including the entire amount expended for meals and lodging, while away from home are deductible if incurred in the pursuit of a trade or business. The traveling expenses of directors to directors' meetings have been held by an English case 56 not to be deductible, because not incurred necessarily in the pursuit of the business.

CHARITABLE CONTRIBUTIONS

An abatement of not more than 10 percent of the net taxable income of a taxpayer is granted for donations to, and receipted for as such by, any charitable institution in Canada operated exclusively as such, and not operated for the benefit or private gain or profit of any person, member, or shareholder thereof.

ANNUITIES

An exemption of $1,200 is allowed on income derived from annuity contracts with the Dominion Government, or any Provincial government or any company incorporated or licensed to do business in Canada. Where husband and wife each have annuity income, the exemption may be taken by either or apportioned between them.

PENSION FUNDS

A deduction from income may be made for any part of the remuneration of a taxpayer retained by his employer in connection with an employee's superannuation or pension fund. However, this exemption is not allowed for such pension deductions in cases where a trust is established or a corporation is incorporated for the administration of such funds and the trustee or corporation elects to have the income from the investment of such funds exempted from tax; in such event any payment to an employee out of the fund is exempt according to the proportion that the sum of the amount paid by the employee into the fund after the effective date of the election bears to the total amount paid by him into the fund. The election is effected by writing, addressed to the Minister, signed by the trustee or corporation in control of the fund.

PROVINCIAL INCOME TAXES

Although a provincial income-tax act may allow, as a deduction, the income tax paid to the Dominion, the Federal Act does not make a similar allowance for income tax paid to a Province, as it is not an expense wholly, exclusively, and necessarily incurred for the purpose of earning the income.57

50 Revell v. Directors of Elsworthy Brothers, 3, T. C. 12.

57 Roenisch v. Minister of National Revenue (1931) Ex. C. R. I.

DEPRECIATION AND DEPLETION

The Minister, in his discretion, may allow reasonable amounts as deductions for depreciation (sec. 5 (a)). While allowances for depreciation resulting from the use of property are a matter of discretion with the Minister, they are based on what is reasonable in the light of commercial practice, and are calculated on the basis of original cost. Among the usual depreciation allowances are the following: Concrete or steel buildings 2 percent of cost price, brick buildings 214 percent, frame buildings 5 percent, office furniture and fixtures 10 percent. On automobiles and trucks used exclusively in business, depreciation is allowed at the following rates: First year's use, 25 percent of cost; second, third, and fourth years, 20 percent. "The deduction for an allowance for depreciation does not in practice preclude the taxpayer from claiming to deduct expenditures made on account of repairs. The allowance for depreciation is by way of statutory relief, while the allowance for repairs is deducted by commercial practice. Nevertheless the Minister in the exercise of his discretion might possibly disallow in whole or in part an allowance for depreciation if he is satisfied that the expenditures on account of repairs have resulted in the maintenance of the property in as good condition at the end as at the beginning of the year.'

*

9958

Under the provisions of section 5 (a) the Minister, in determining the income derived from mining and from oil and gas wells and timber limits, is also empowered to make such allowances for exhaustion of the properties as he may deem just and fair. In the case of leases of mines, oil and gas wells, and timber limits, the lessor and lessee may by agreement divide the deduction for exhaustion, and if they fail to agree the Minister has full power to apportion the deduction between them.

Until 1935 the following allowances were permitted by the Minister: Gold and silver mines, 50 percent of the net profits, and in addition 50 percent of the dividends received by shareholders were exempt; copper, nickel, lead, and zinc, 333 percent; and coal mines, 10 cents per ton. However, the depletion allowances to gold and silver mining companies under the 1935 regulations have been reduced to 333 percent, and the allowance on dividends received by shareholders has been reduced to 20 percent. For oil wells and timber limits there are no fixed allowances, each case being determined on its own merits.

DOUBLE-TAX RELIEF

A person resident in Canada, or who for other reasons, such as having sojourned in Canada for 183 days, is subject to tax on his total income from all sources, must include foreign profits in making an income-tax return. However, relief is granted under the provisions of section 8 which permits a taxpayer to deduct from the tax that would otherwise be payable by him (a) the amount paid to Great Britain or any of its self-governing colonies or dependencies for income tax on the income of the taxpayer derived therein; and (b) the amount paid to any foreign country for income tax on the income of the taxpayer derived from sources therein, if such foreign

Plaxton & Varcoe, p. 235.