Last summer, the Minister of National Health and Welfare drew the attention of our Department to the fact that, pursuant to a ruling issued by the United States Treasury Department, a U.S. transportation tax was being collected in Canada on rail travel tickets purchased in Canada by residents of the United States intending to travel in the U.S.A. Mr. Martin had been made aware of this situation by one of his Windsor constituents who is a ticket agent employed by the New York Central Railroad. What actually takes place is, for example, that a resident of Detroit, wishing to travel to Dallas, crosses the border to Windsor and buys his ticket in that city, so as to avoid payment of the U.S. tax to which he would normally be liable. To counteract this practice, the U.S. Revenue authorities issued a ruling instructing American railroads to collect the U.S. transportation tax through their agents in Canada from purchasers resident in the U.S.

The tax is imposed by virtue of the U.S. Internal Revenue Code and "applies to amounts paid without the United States on or after November 1, 1950, for the transportation of persons on or after such data by rail, motor vehicle, water, or air which begins and ends in the U.S. ...". In this connection we have ascertained that at least one Canadian carrier (T.C.A.) collects the U.S. tax on tickets sold by them in Canada for transportation between two points in the U.S.A. when the said trip does not begin in Canada. For example, a resident of Ottawa intends to motor in his own car to New York and to fly from N.Y. to Miami; if he buys the air ticket from T.C.A. in Canada, T.C.A. collects from him the U.S. transportation tax.

The collecting of United States excise tax on Canadian territory can be regarded as an endeavour to establish a part of the U.S. fiscal system on Canadian territory, and as such, is contrary to widely recognized principles of international law. As a matter of fact, when our Embassy at Washington raised the matter informally with them, State Department officials agreed that any formal complaint we might make would be justified on the basis of international law.

The advisability of our lodging such a protest, and its possible effects, were considered this month by officials of our Department, Finance and National Revenue. The conclusion was reached that a protest might well create difficulties for our own citizens greater than the advantages derived from the assertion of the principle involved. For instance, it might become impossible for Canadians to purchase, in Canada, transportation between two points in the U.S., or again the U.S. might establish a system of collecting on the U.S. side of border points, in some way or another, from both Canadian and U.S. residents, the U.S. tax on the U.S. portion of any trip begun in Canada.

In the view of the representative of the Department of Finance (Dr. Eaton) such a situation would likely come about if we formally protested to the U.S. Government: that Government in turn would probably then ask the Canadian Government for permission to collect the tax in Canada, and in Dr. Eaton's view the Canadian Government would be bound to refuse on grounds of principle.

On balance, it appears to the officials concerned to be preferable to close our eyes, for the time being at least, to the practice followed by the U.S. authorities. This is the suggestion which I am recommending to you today and I should be grateful if you would let me know whether it is agreeable to you. A similar recommendation is being made to the Ministers of Finance and National Revenue by their officials.¹⁶³ In addition, I am attaching for your signature if you approve, letters? to Mr. Martin and Mr. Marler enclosing copies of this memorandum for their consideration.

J. L[ÉGER]