Kingdom. In special or emergency circumstances, representation in the United Kingdom may not be necessary, but the circumstances in which direct participation from abroad may be feasible vary too widely to admit any practical outline of procedure which would be generally applicable. Each individual case would require separate consideration. LIST OF NOTICES PUBLISHED BY THE DIVISION OF COMMERCIAL LAWS GENERAL CUBA GENERAL CANADA CUBA Veracruz, Real Property, Registration of Titles. - Unemployment Insurance. Commerce Rehorts for Sebtember 23, 1939. - United Kingdom Passes Emergency Powers (Defense) Act. - Price Control, Foodstuffs. GERMANY GREAT BRITAIN CANADIAN TAX MODIFICATION By J. H. Barkmeier, Division of Commercial Laws INTRODUCTION A detailed analysis of the Canadian income taxation is contained in Trade Promotion Series No. 176, entitled Trading under the Laws of Canada (1938) which may be purchased from the Superintendent of Documents, Washington, D. C., or from the District Offices of the Bureau, for 20 cents. The purpose of this article is to supplement the tax information provided by the afore-mentioned publication. During the current year the Dominion Government enacted an Excess Profits Tax Act on September 13, 1939, and amendments to the Income War Tax Act on June 3, 1939, and September 13, 1939. EXCESS PROFITS TAX The Excess Profits Tax Act of September 13, 1939 provides for the assessment of a tax upon the profits in excess of 5 percent of capital derived from the carrying on of any trade or business by every person, whether incorporated or otherwise, residing or ordinarily resident in Canada, or who, not being a resident, is carrying on business in Canada. The taxpayer is given the option of paying either Rates A or Rate B quoted below: RATES A On profits not in excess of 5 percent of the amount of the capital employed by the taxpayer in the business_ On profits in excess of 5 percent but not exceeding 10 percent of the capital employed_ On profits exceeding 10 percent but not exceeding 15 percent of the capital employed_ On profits exceeding 15 percent but not exceeding 20 percent of the capital employed_ On profits exceeding 20 percent but not exceeding 25 percent RATE B Fifty percent on the profits in excess of the average annual income of the taxpayer as determined under the Income War Tax Act for the 4 years 1938, 1937, 1938, 1939, or for the 4 fiscal periods of the taxpayer ending in such years, or for such of such years or fiscal periods during which the taxpayer may have been in business, taking into account profits and deficits. DEFINITION OF CAPITAL Capital, in the case of a company incorporated in Canada, is defined as: The share capital paid up in cash or if issued for consideration other than cash the fair equivalent at the date of issue as the Minister may determine, and in any event shall not exceed the par value thereof, and the actual unimpaired reserve, rest or accumulated profits held at the commencement of an accounting period, reduced by one-half of the dividends paid during the period or deemed to have been received by the shareholders under section 13 of the Income War Tax Act (see page 95)1. Capital does not include borrowed money and capital stock to the extent that it represents Trade Promotion Series No. 176; all subsequent page notations appearing in this article refer to f.P.S. No. 176. the value of good will, other intangible assets, whether paid for in cash or not, or appreciation in value of assets used in the business unless the Minister is satisfied that capital values should be recognized in whole or in part to the extent that cash was used in the purchase of good will or other intangible asset. In the case of a company not incorporated in Canada, the capital shall be determined as provided for in the case of companies incorporated in Canada but shall be only that proportion of the said capital which the value of assets in Canada used in the business bears to the value of the total assets of the company. In the case of taxpayers other than corporations, capital embraces only the fair value of all assets, real and personal, used in the business, less borrowed money and the value of intangible assets referred to above. PROFITS Profits are to be determined in the same manner as for incometax purposes. Under the provisions of section 4, the taxpayer is entitled to deduct from the profits the following: (a) The income tax payable by corporations upon the income for corresponding periods to the extent that the income tax is based upon income derived from businesses subject to excess profits tax; (b) in the case of a sole proprietor, an amount equal to that portion of the income tax paid that the income from the business taxed herein bears to his total income from all sources; (c) amounts paid for corresponding periods under Part III of the Special War Revenue Act (tax on insurance companies and banks page 124); (d) amounts provided in paragraphs (a), (b), (j), and (n) of subsection 1 of section 5 of the Income War Tax Act (i.e. depreciation and depletion, interest on borrowed capital, up to 10 percent of taxable income for donations to charitable institutions and up to 50 percent of taxable income for donations to approved patriotic organizations); and dividends received from any company incorporated in Canada. The Governor in Council may provide by regulation for depreciation of plant and equipment built or acquired to fulfill orders for war purposes. Among the businesses not liable to the excess profits tax are the profits from any professional activity and certain businesses excepted under the Income War Tax Act such as municipal undertakings, charitable institutions, farmers' associations, etc., (see page 84). RETURNS AND PAYMENT The Excess Profits Tax Act applies to the profits of the year 1940 and of all periods ending therein after March 31, 1940, and to all subsequent periods. The returns must be made in forms to be prescribed by the Minister and filed in the same manner, time, and place as required for income-tax returns. Persons liable to pay the excess profits tax must estimate the amount of tax payable and send with the return not less than one-third of the aggregate amount of such tax and may pay the balance within 4 months thereafter, together with interest at the rate of 5 percent per annum, upon such balance, from the last day prescribed for the filing of the return. INCOME TAX AMENDMENTS Rate Increases. The Amendment Act of September 13, 1939, provides that each of the rates in paragraph A (see page 81) shall be increased by 20 percent, so that the basic rates on individuals will range from 3.60 to 67.20 percent; that rates under paragraph AA (see page 82) shall be increased by 20 percent, resulting in investment income rates of 2.40 to 12 percent; and that the rate in paragraph B shall be increased by 20 percent so that where individuals have an income in excess of $5,000 the 5 percent additional rate on the amount of the tax will now be 6 percent. These new rates will apply to incomes of the 1939 taxation period and subsequent periods. The rate tax on corporations and joint stock companies provided by paragraph C is increased from 15 to 18 percent, and that provided by paragraph D for consolidated corporate returns is advanced from 17 to 20 percent. These new corporate rates apply to the income of the 1940 taxation period and of fiscal periods ending therein after March 31, 1940, and of subsequent periods. PATRIOTIC DONATIONS Paragraph (n) has been added to subsection 1 of section 5 and provides that a deduction may be made of: "Not more than fifty per centum of the net taxable income of any taxpayer which has been actually paid within the taxation period to, and receipted for as such by, and patriotic organization or institution in Canada which hereafter recdives the written approval of the Secretary of State of the Dominion of Canada." This provision applies to the incomes of the 1939 taxation period, and of subsequent periods. CAPITAL EXPENDITURE ALLOWANCE The Amendment Act of June 3, 1939 (chapter 46), adds a new section, which grants an income-tax credit for capital expenditures; reading as follows: 90. (1) A taxpayer shall be entitled to deduct from the taxes otherwise payable under this Act an amount up to ten per centum of the capital costs hereinafter in this section mentioned in the manner provided. One-third of the said ten per centum must be taken in each of the first three taxable fiscal periods occurring within the first six fiscal periods of twelve months each ending on or after the 30th April, 1940, provided however, that should the said one-third exceed the tax otherwise payable in any one taxable period, the excess may be offset against taxes otherwise payable in the remaining period or periods of the said taxable periods. Further provided, in any event, that no deductions shall be allowed against any tax payable for periods ending after 29th April, 1946. (2) The capital costs on which the ten per centum shall be calculated are those costs incurred and paid by the taxpayer in the period beginning the first day of May, 1939, and ending the thirtieth day of April, 1940, in respect of work actually done in Canada during the said period, on the construction, manufacture, installation, betterment, replacement, or extension of buildings, machinery, or equipment in the said period from the first day of May, 1939, to the thirtieth day of April, 1940, provided such buildings, machinery or equipment are to be used in the earning of the income of the taxpayer. (3) All costs and expenditures for labour, wages, salaries, fees, administration or other like expenses and for purchase of material and equipment shall be considered as a cost herein in such amount as the Minister may determine having regard to the prevailing rates and fair market price and any excess over such determination shall not be allowed. (4) For the purposes of this section "capital costs" shall not include: I, The cost of land; II, the cost of leases of or licenses to work oil or mineral lands or other mining lands; III, the cost of, or rentals under, leases of any buildings, machinery or equipment; IV, the cost of any patent, goodwill, intangible right or incorporeal hereditament, whether or not an integral part of the price of any property; V, the cost of any buildings, machinery or equipment used and situated outside of Canada; VI, the cost of any building constructed prior to the first day of May, 1939, or the cost of any building which has already been used by any other person; VII, the cost of any machinery or equipment which has been used at any time prior to the date of acquisition by the taxpayer; VIII, the cost of any office equipment or furnishing; IX, the cost of a house, including a duplex and an apartment house; X, undue or excessive costs incurred in connection with the purchase, manufacture or construction of any building, machinery or equipment (the Minister shall have power to determine the costs which are undue or excessive in any case); XI, all costs incurred in the continuation of capital works or projects commenced prior to the first day of May, 1939; XII, all costs incurred by a company the income of which is exempt under the provisions of section eighty-nine of this Act; XIII, all costs incurred by any bank, insurance company, trust company, or any company primarily engaged in lending money (with or without security), making investments, dealing in securities or any other like financial business; and XIV, interest paid by the taxpayer on borrowed capital. (5) For the purposes of this section the Minister shall have power to determine whether capital costs fall within the provisions of subsection 2 or within the types of capital costs excluded by subsection 4 of this section and they shall be dealt with accordingly. (6) (a) The Minister may make such regulations and prescribe such information forms as may be required for carrying this section into effect. (b) Any person failing to file an interim information form within the prescribed time shall lose not more than 50 dollars of the benefit of the first annual deduction herein, or to the extent thereof, provided in any case the penalty shall be not less than 10 dollars, which may be assessed against the taxpayer. (c) No deduction shall be allowed unless the taxpayer files the final form as prescribed on or before the thirtieth day of June, 1940. |