James A. Maxwell

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National
Bureau of Economic Research
Volume Title: Recent Developments in Dominion-Provincial Fiscal Relations
in Canada
Volume Author/Editor: James A. Maxwell
Volume Publisher: NBER
Volume ISBN: 0-87014-340-9
Volume URL: http://www.nber.org/books/maxw48-1
Publication Date: 1948
Chapter Title: The Wartime Tax Agreements
Chapter Author: James A. Maxwell
Chapter URL: http://www.nber.org/chapters/c5630
Chapter pages in book: (p. 11 - 13)ments to meet in Conference "in order to secure, if possible,
the adoption of the Commission's recommendations".'3
Soon after the Conference assembled on January 14, 1941,
it became evident that the Premiers of Ontario, Alberta, and
British Columbia were sharply averse to proceeding upon the
basis of the Report of the Royal Commission. It is not merely
coincidence that if the Report had been followed, these three
provinces wouldhave not received any national adjustment
grants. However, Premier Hepburn of Ontario based his opposi-
tion upon the contention that the Report was a peacetime
measure and that the exigencies of war should not be made
the cloak for hasty action. Premier Aberhart of Alberta and
Premier Pattullo of British Columbia took asimilar stand
(although the views of the former were somewhat obscured
by his advocacy of social credit). In the face of this dissent, the
Conference brokethe next day.
It had, however, served a In a blunt speech the
federal Minister of Finance, J. L.lisley, had indicated the
severity of the financial measures he intended to utilize, and
the provincial Premiers had declared their willingness to help
"in every conceivable manner so far as prosecuting this war is
concerned".'4 This commitment was soon to push the provinces
along the road the Commission had marked out.
TI-IE WARTIME TAX AGREEMENTS
On April 29, 1941 Mr. lisley proposed that the provincial gov-
ernments surrender to the federal government, for the duration
of the war and one year after, the field of income taxation,
both personal and corporation. As compensation they were
offered either the revenue they actually collected from this
source in 1940 or the net cost of debt service in 1940 (less
their revenue from succession duties), and also a subsidy based
on fiscal need if need could be shown. All the provinces accepted
the offer and signed 'tax suspension agreements'. Four provinces
—Prince Edward Island, Nova Scotia, New Brunswick, and
13Dominion-ProvincialConference, January 11-15, 1942'(King's Printer, Ottawa,
1941), p. V.
14Ibid.,p. 101.
11Saskatchewan—took the debt option, and five—Prince Edward
Island, Nova Scotia, New Brunswick, Manitoba, and Saskatche-
wan—were paid fiscal need subsidies.15 The federal government
made two further concessions:itguaranteed the provincial
governments the amount of their gasoline tax revenues in 1940
and their liquor revenues in the amount collected in the twelve
months ended June 30, 1942. The second guarantee did not
subsequently involve the federal government in any payments;
the first required payments of $11,621,000 in 1943.
The overwhelming factor that made possible the prompt
negotiation of the tax agreements was the war. The federal
government had clearly in mind the fiscal policy it intended to
pursue, and its wartime constitutional right to do so could not
be questioned. Drastic use of income taxation would impair
provincial revenue from this source.'6 Any protest was silenced
by the patriotic desire to implement the total war effort of the
Dominion.
What would happen when the war was over? Would war-
time 'occupancy' by the federal government be made permanent
or would reversion be possible? In his budget speech of 1941
Mr. lisley spoke of the occupancy "as a temporary step, for
the duration of the war". "It was not," he declared, "an attempt
to get the provinces out of those tax fields permanently."7
And in each. agreement the federal government promised in
the year after termination "to reduce its rates of taxes by such
an amount as will enable the Province again to use the income
tax and corporation tax fields, and in particular the Dominion
undertakes to reduce itsrate of tax on corporation incomes
by at least ten percent of such incomes."18 The preamble to
15Albertasigned an agreement on the tax option basis, but in 1945 was permitted
to shift to the debt option basis (Dominion-Provincial Conference on Reconstruction
(hereafter referred to as Conference), Dominion SubsidiesProvinces, pp. 28-29).
In 1943 the fiscal need subsidies were $3,234,000: Prince Edward Island, $4.37,000;
Nova Scotia, $326,000; New Brunswick, $372,000; Manitoba, $600,000; Saskatche-
wan, $1,500,000.
10Ontario,Manitoba, and Prince Edward Island allowed as a deduction from the
ineome of their taxpayers the amount of the income tax paid to the federal govern-
ment.
17Conference,Personal Income Taxes, p.9.
iSSeeConference, Dominion Subsidies to Provinces, p. 66.
12each agreement stated that a province should not "he deemed
to have surrendered, abandoned, or given over to the Dominion
any of the powers, rights, privileges or authority" vested in
As far as words went, no doubt could exist that provincial power
had not been impaired. No great perspicacity was required,
however, to forsee that the forces that made for federal occu-
pancy during, the war would not be spent after the war, that
taxpayers might wish to retain the luxury of one law and one
return, and that those provincial governments which received
more by way of subsidies than from provincial collections might
prefer to continue the agreements.
The income tax was an important element in the wartime fiscal
effort of Canada. Canadian rates of personal income tax were
well above those of the United States, especially in the middle
brackets. Federal revenue from the personal income taxin
1944 was five times greater than in 1941, and' that fro.m corpora-
tion taxes three and one-half times.
THE DOMINION-PROVINCIAL CONFERENCES OF 1945-1946
On August 6, 1945 a Dominion-Provincial Conference on Re-
construction assembled at Ottawa. The purpose was to work out
a scheme that would "ensure the maximum of cooperation
between the Federal government and the governments of the
provinces in order that the Canadian people, working together,
may achieve the constructive goals of peace as effectively as they
have carried on theessential, though inevitably destructive,
tasks of war".2° To this end the federal government laid before
the provinces an extensive and explicit set of proposals.2' These
were not simply financial; they covered, in addition, the broad
fields of "public investment policy" and "social security". The
details of the proposals are examined below. In essence the
federal government offered to all the provinces, in return for
their relinquishment of the right to levy the income tax and
succession duties for a term of years, unconditional subsidies
p. 61.
20 Dominion-Provincial Conference, 1945, Dominion and Provincial Submissions and
Plenary Conference Discussions (King's Printer, Ottawa, 1946), p. 2. The words are
those of Mr. King.
21 Conference, Proposals of the Government of Canada. August 1945.
13

Recent Developments in Dominion-Provincial Fiscal Relations in Canada

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