tion as defined by paragraph (p) of section 2 of the act, and has been throughout any past fiscal period or periods, or part thereof, in respect of which the election is being made. Such affidavit must be made by an authorized officer of the company holding such position that he, by his own personal knowledge, is aware of the facts contained in the affidavit.

(b) A certified copy of the resolution of directors of any such company authorizing the election to be made.

(c) The election itself, which shall state the first period to which the rates of tax laid down in paragraph E of the first schedule of the act shall apply.

5. The resolution of the directors of the company authorizing the election and the election itself must be confirmed at the next succeeding annual meeting of the shareholders of the company by an appropriate resolution to that effect, and a certified copy of such resolution, in duplicate, must be filed within 1 year from the date of mailing of the said registered letter containing the election.

PERSONAL CORPORATIONS

Special provisions exist with respect to the manner of taxing corporations, formed to hold the investments of persons with large incomes, whereby whenever a corporation comes within the definition of a "personal corporation" the income-tax rate for corporations is not levied but instead there is a presumed distribution of profits and each shareholder is taxed on his proportionate share of the profits as dividend income.

"Personal corporation" is defined as a corporation or joint stock company, irrespective of when or where created, whether in Canada or elsewhere, and irrespective of where it carries on its business or where its assets are situate, controlled, directly or indirectly, by one individual who resides in Canada, or by one such individual and his wife or any member of his family, or by any combination of them on his or their behalf, and whether through holding a majority of the stock of such corporation or in any other manner whatsoever, the gross revenue of which is to the extent of one-quarter or more derived · from one or more of the following sources, namely: (1) From the ownership of or the trading or dealing in bonds, stocks, or shares, debentures, mortgages, hypothecs, bills, notes, or other similar property, (2) from the lending of money with or without security, or by way of rent, annuity, royalty, interest, or dividend, or (3) from or by virtue of any right title or in interest in or to any estate or trust. (Par. (i) of sec. 2.)

According to the provisions of section 21, the income of a personal corporation, whether actually distributed or not, is deemed to be distributed on the last day of each year as a dividend and each shareholder is taxable each year on his portion, which is such percentage of the income of the corporation as the value of all property transferred or loaned by such shareholder or his predecessor in title to the corporation is of the total value of all property of the corporation acquired from the corporation. It is provided that the value of the property transferred shall be the fair value at the date of the transfer to the corporation, and that the total value of the property of the corporation for the purpose of determining the percentage shall be taken as at the date of acquisition. Where one personal corporation succeeds another personal corporation, the shareholders are deemed to have transferred to the succeeding corporation the property which they transferred to the first corporation, and where one shareholder succeeds another he assumes the liability of his vendor for income

tax. Dividends actually declared by a personal corporation after December 31, 1934, are deemed to be paid out of income earned after that date, so far as the same is available and to that extent is not liable to further taxation in the hands of the shareholders.

The shareholder who controls a personal corporation is required to file with his income-tax return a statement of the assets, liabilities, and income of the corporation, and on failure to file such a statement he is liable to be taxed on double the amount of his proportion of the income.

A personal corporation is required to pay the corporation tax rates on that portion only of its income which is deemed to be distributed to nonresidents.

MINING CORPORATIONS

For the purpose of encouraging the development of the mining industry, section 89 was added to the Income Tax Act by the 1936 Amendment and provides that the income of a company derived from the operation of any metalliferous mine which comes into production after May 1, 1936, and prior to January 1, 1940, shall be exempt from the corporation tax for its first three fiscal periods following the commencement of production. The Minister, having regard to the production of ore in reasonable quantities, shall determine which mines, whether new or old, qualify for the exemption. The Minister is authorized to issue a certificate stating the date upon which the mine is deemed to have come into production and establish such fiscal periods of 12 months each, during which the income derived from any such mine shall be exempt.

TAXATION OF DIVIDENDS

The taxation of dividends may be summarized as follows: Those paid to resident individuals are included in other income for ordinary tax and investment income surtax purposes; those received by one Canadian company from another Canadian company which has paid a tax on its profits are ordinarily not taxable; while those paid to nonresident individuals and companies are only subject to a 5 percent tax withheld at source. Modifications of these general principles will be noted in the detailed discussion below.

RESIDENT INDIVIDUALS

All dividends or shareholders' bonuses are taxable income of the resident individual in the year in which they are paid or distributed and are included in any other income he may receive (sec. 12). Where a corporation redeems its shares at a premium, the premium is deemed to be a dividend and to be income received by the shareholder (sec. 17). The capitalization of undistributed income (sec. 15), capital stock reductions or redemptions 62 to the extent to which undistributed income is involved (sec. 16), loans to shareholders (which are not incidental to the business of the corporation or those

62 "The provisions of this section shall not apply to any class of stock which, by the instrument authorizing the issue of such class, is not entitled on being reduced or redeemed to participate in the assets of the corporation beyond the amount paid up thereon plus any fixed premium and a defined rate of dividend nor to a reduction of capital effected before April 16, 1926." (Sec. 16 (2).)

made by a corporation not lawfully empowered to make such loans) from undistributed income (sec. 18), and distribution of undistributed income on winding up or reorganization (sec. 19) are deemed to be a dividend received by the shareholder. When any corporation has undivided or undistributed profits, which in the opinion of the Minister constitute an accumulation of such profits in excess of what is reasonably required for the purposes of the business, he may notify the corporation by registered letter of the amount of such accumulation which he considers excessive, and if such amount is not distributed during the fiscal period of the corporation in which notice is given, the shareholders may be deemed to have received such amount of profits as a dividend on the last day of the fiscal period and shall be taxable accordingly (sec. 13). Indirect distribution is made taxable by section 14 which provides that when a person owning shares of a corporation transfers any of them to a second corporation which is his agent, trustee, or attorney or which is promoted or controlled by him, and the second corporation later receives a dividend from the first corporation which it applies on the payment of any liability to or incurred in behalf of the person transferring the shares, such person is taxable on such dividends as if he had received them in the year in which declared by the first corporation. Such liability must relate to the acquisition of the shares in question by the second corporation.

NONRESIDENTS

Dividends paid to nonresidents ordinarily are not taxable. (This statement refers only to the ordinary income tax. The special 5percent tax on such income received by nonresidents will be discussed subsequently.) However, a person residing outside Canada who renders services in Canada as a director, officer, or employee of any company carrying on business in Canada may be required to pay income tax to the same extent as a resident on dividends or interest he may receive from such company or a subsidiary thereof. To render such income of the nonresident liable to tax, the majority of the voting stock of the corporation must be owned or controlled by such person or a combination of such persons, or any trustee acting on his or their behalf (25A). According to the explanatory note to this section when it was presented in the 1930 income-tax amendment bill, it was stated that it had been found that many persons, having substantial interest in Canadian companies, who reside abroad and more or less habitually come to Canada, forego any claim for salary and take their remuneration by way of dividends and thus escape tax in Canada. This amendment was designed to render such persons liable to the income tax.

DIVIDENDS PAID TO CORPORATIONS

Dividends paid to an incorporated company by a company incorporated in Canada, the profits of which have been taxed, are exempt from tax (par. (n) of sec. 4), with two exceptions. One exception applies in the case of the taxable income of nonresident

es Dividends paid to nonresident companies are, however, subject to the 5-percent tax withheld at source.

owned investment corporations which have made the election to be taxed at one-half the ordinary corporate rate. A second exception is the provision that when the business of an incorporated company is wound up, discontinued, or reorganized, the distribution in any form of the property to the extent that the company has on hand undistributed income is deemed to be a dividend and taxable income received by the corporation holding stock therein. Where such a dividend is deemed paid to a company incorporated outside of Canada and not carrying on business in Canada, the company which is being wound up, discontinued or reorganized (excepting nonresidentowned investment corporations and companies specified in par. (k) of sec. 4) is required to deduct a tax therefrom at rate in force for corporations in the year in which the dividend is paid and to remit the tax to the Receiver General of Canada. (Sec. 19.)

The undistributed income of a corporation which has been capitalized by the issuance of redeemable stocks, bonds, notes, etc., of a second corporation is subject to a tax of 4 percent of the amount of such investments payable at the time of redemption. (Sec. 19A.)

5-PERCENT TAX ON DIVIDENDS AND INTEREST PAYABLE TO

NONRESIDENTS

Prior to 1933 dividends and interest received by nonresidents from Canadian investments were not under ordinary circumstances subject to the Canadian income tax, but subsection 2 of section 9B of the 1933 act as modified by the 1934, 1935, and 1936 acts provides that in addition to any other tax imposed by the act a 5-percent tax to be withheld at source is payable by all nonresidents in respect of:

(a) All dividends received from Canadian debtors irrespective of the currency in which the payment is made.

(b) All interest received from Canadian debtors if payable solely in Canadian funds except the interest from all bonds of, or guaranteed by, the Dominion of Canada, and

(c) All interest received by a nonresident parent company from a Canadian subsidiary company irrespective of the currency in which the payment is made except where an agreement existed prior to April 1, 1933, providing for the payment of such interest in a currency other than Canadian.

(d) All income for any taxation period received from any Canadian estate or trust, including all income accruing to the credit of nonresident beneficiaries, whether received by them or not during such taxation period. The tax payable by virtue of this paragraph must be deducted by the trustee from the amount paid or credited to the beneficiary at the time of paying or crediting and reinitted by him to the Receiver General of Canada.

However, those dividends paid to a nonresdient company by a Canadian company are exempt from the 5 percent tax when all the shares of the Canadian company (less director's qualifying shares) which have under all circumstances full voting rights, are beneficially owned by such nonresident company: Provided that not more than onequarter of the gross income of the Canadiar company is derived from interest and dividends other than interest and dividends received from any wholly owned subsidiary company: Provided further, that such nonresident company is not a company incorporated since April 1, 1933; but this proviso does not apply if the Minister is satisfied that such incorporation was not made for the purpose of evading the tax. (Subsec. 11 of sec. 9B.)

64 Supra, p. 91.

In the case of bearer coupons or warrants, whether representing interest or dividends, the 5-percent tax must be collected and withheld by the encashing agent or debtor. In the case of interest or dividends in respect of fully registered shares, bonds, debentures, mortgages, or any other obligations, the tax must be withheld by the debtor. If an agent of a nonresident should receive payment of any interest or dividend from which the tax has not been withheld, he is required to deduct the tax from his principal and remit the same to the Receiver General. Every agreement for the payment of interest or dividends in full without allowing any deduction or withholding is void. Every Canadian resident who directly or indirectly conceals the fact of Canadian residence for the purpose of evading this tax is made liable for double the amount of the tax and for interest thereon at the rate of 10 percent per annum from the date on which the tax should have been paid.

This tax is viewed as a special tax independent of the general principles of the Income Tax Act. Thus it has been held 65 that dividends paid to nonresident shareholders are subject to the tax deduction of 5 percent, no matter whence derived-that is, whether the distribution was made from capital or profits.

An additional income tax of 5 percent is imposed on resident persons (including companies) in respect of all interest and dividends paid by Canadian debtors in a currency which is at a premium of 5 percent or more in terms of Canadian funds. (Subsec. 1 of sec. 9B.)

Dividends and interest paid by nonresident-owned investment corporations are under certain conditions made exempt from the 5 percent tax by the following new subsections added by the 1936 act to section 9B:

(12) (a) Dividends paid or deemed to be paid by nonresident-owned investment corporations shall not be taxed under subsection 2 of this section, provided that there has been paid in respect of the income earned between the 1932 fiscal period and the fiscal period first taxed by reason of election under subsection 4 of section 9 of this act, or in respect of dividends equal in amount to the said income, an amount of tax equal, in the aggregate, to 5 percentum of the said income.

(b) Any dividends paid after the 1932 taxation period shall be deemed to have been a distribution of income earned after such period.

(c) Interest payable by nonresident-owned investment corporations and falling due after the effective date of election under subsection 4 of section 9 of this act shall not be subject to the tax imposed by this section.

(13) Where a company whose business operations are of an investment or financial nature and whose shares have not been offered for public subscription or are not listed on any recognized stock exchange in Canada or elsewhere, redeems its shares, bonds, debentures, or other securities or evidences of funded indebtedness, such redemption shall be deemed to be a dividend for the purposes of subsection 2 of this section to the extent that such company has earned income after the 1932 fiscal period, which income has, or dividends equal in amount thereto have, not borne a tax under this act equal to 5 percentum of the said income. Provided, however, that this subsection shall not operate to make the income of such company upon distribution liable a second time for the tax imposed by subsection 2 of this section.

P.ECIPROCAL TAX CONVENTION WITH THE UNITED STATES

A reciprocal tax convention between the United States and Canada. was ratified on August 13, 1937, the provisions of which are retro

Northern Securities Co. v. The King (1935) Ex. C. R. 156.