You received this morning the following representatives of this company, D.J. Burchell, Q.C. of Halifax, C.F. Elliott, Q.C. and D.K. MacTavish, Q.C. of Ottawa. Also present was Mr. Benidickson, M.P., Parliamentary Assistant to the Minister of Finance.

2. Mr. Burchell handed to you two letters addressed to you - one dated May 11 from the Vice-President of the company and the other dated May 14? from Mr. Burchell. The letter from the Vice-President asks the Canadian Government to protest against the attempt by the United States tax authorities to levy certain taxes against the company, which I shall hereafter refer to as Premium. Mr. Burchell's letter asks you specifically to ask the United States Government for a conference on this matter pursuant to Articles XIII and XVIII of the Double Taxation Convention of 1942 ( Treaty Series 1942, No. 2), Premium would like you to take this action almost immediately, in the hope that it would have the result of causing the United States authorities to delay the opening of the trial of their court action against Premium, which is scheduled to start on May 28 in the United States Court of Tax Appeals.

3. From what these gentlemen told you, and from what they told me after you had to leave, I gather that they are not asserting that the United States taxing effort constitutes a breach of the 1942 Convention. They do argue that it is an unfair and unreasonable action against a Canadian company, in view of the history of the transaction which the letters explain. They also argue that, if the United States Government succeeds in enforcing the claim for the proposed taxes on Premium, this will lead to similar unjustifiable proceedings against other Canadian companies, which would or could have a serious effect on Canadian industry especially in the mining field.

4. I understand that the Minister of National Revenue, Dr. McCann, did once intervene at the request of Premium to the extent of asking the United States Commissioner of Internal Revenue to postpone the trial of the case in order to allow time for the Department of National Revenue to study their grievance. This was referred to in the House of Commons on February 24, 1956.¹²⁸ I gather from what the representatives of Premium said today that subsequently Dr. McCann decided, on the advice of his Deputy Minister, that he would not make any further representation to the Commissioner of Internal Revenue. I should point out that the Convention itself specifies the Minister of National Revenue and the Commissioner as the competent authorities who may ask to confer with each other on problems arising under the Convention. (see paragraph 4 of Protocol).

5. According to Mr. Elliott the United States Secretary of the Treasury has legal authority, even after a court case has been started, to withdraw or compromise a tax claim of this kind. I got the impression that, although Premium would like the Canadian Government to take action immediately in order that the trial on May 28 may be postponed again, Premium would be glad to have Canadian Government intervention even after the trial has started. It is obvious that the trial and possible appeals from it will last a long time.

6. I suggest that you might consult the Minister of National Revenue and the Minister of Trade and Commerce in the first instance. If you then considered that there is a case to be made for Canadian Government intervention through the diplomatic channel, you might wish to have the matter considered in Cabinet. I suggest Mr. Howe in addition to Dr. McCann because Mr. Howe as Minister of Munitions and Supplies would have known all about the Premium and Steep Rock project during the war. Also, as Minister of Trade and Commerce, he might be in a position to assess the validity of the argument by the representatives of Premium that many other important Canadian companies will be badly hurt if the United States Government succeeds in enforcing the present tax claim against Premium.

7. After you left the meeting Mr. Burchell gave me the annexed copy of the 1943 agreement between Steep Rock and Premium.?

8. Annexed for signature are letters? to Dr. McCann and Mr. Howe.¹²⁹

M.H. W[ERSHOF]
for Deputy Under-Secretary of State
for External Affairs

[PIÈCE JOINTE/ENCLOSURE]

Le vice-président de la société
Consolidated Premium Iron Ores Limited
au secrétaire d'État aux Affaires extérieures

Vice-President of Consolidated Premium Iron Ores Limited
to Secretary of State for External Affairs

Toronto, May 11, 1956

Dear Mr. Pearson,

Consolidated Premium Iron Ores Limited, a Company incorporated under the laws of the Province of Ontario with Head Office at the City of Toronto, hereby requests that the Canadian government protest against the attempt by the United States taxing authorities to levy taxes against income falsely alleged to have been earned by Premium.

Premium was organized under the laws of Ontario in 1942 for the purpose of assisting in the financing, development and sales of Steep Rock Iron Mines Limited. Its officers and directors were all Canadian citizens. While owned largely by United States citizens, it was required by the Canadian authorities to be organized as a Canadian corporation so that its income would be taxable in Canada, and its transactions subject to Canadian control.

On January 15, 1943, Premium entered into a contract with Steep Rock Iron Mines Limited, a Canadian Corporation, whereby Premium agreed among other things to:

1. Guarantee the sale of 10 million tons of iron ore in a ten year period, and not less than 500,000 tons in each year;

2. Provide $1,000,000 of additional cash to Steep Rock if the financing already arranged proved insufficient to complete the development. (This amount was required and Premium furnished it plus additional large sums);

3. Arrange for shipping, collections and similar matters in connection with the sale and delivery of the iron ore.

The contract included a subscription by Premium for 1,437,500 shares of Steep Rock Iron Mines Limited capital stock at a nominal price.

The United States is attempting to levy a tax on the difference between the nominal price and the quoted market price of similar shares. The following history of the transaction will demonstrate the injustice and the illegality of this attempt.

At the time this contract was made, the Second World War was at its height, the visible supply of iron ore was dangerously low, and both the United States and Canadian governments urged all possible speed in the Steep Rock development, and co-operated wholeheartedly with Steep Rock and Premium in the development.

The Canadian government advanced the necessary funds to the Canadian National Railways to provide railroad and dock facilities and a subsidy on the freight rates during the first years of delivery of the ore.

The Ontario government provided the power facilities for the development and operation of the property.

The United States government through the Reconstruction Finance Corporation made a loan of $5,000,000 to Steep Rock for the development.

The arrangement covered by this contract was submitted to various departments of our government, including the Department of National Defence, the Department of Commerce, the Department of Finance, the Department of Transport, the Department of Munitions and Supply, and the Department of External Affairs, and the contract itself was specifically approved by the Foreign Exchange Control Board and the Department of National Revenue.

These Departments co-operated to implement performance of the contract and the Department of National Revenue specifically ruled that no taxable income would result from the receipt by Premium of these shares of Steep Rock stock.

This contract between Steep Rock and Premium was submitted to and approved by the Reconstruction Finance Corporation.

Otis & Co., a United States banking firm, provided $2,250,000 of junior money to Steep Rock and in connection therewith filed this contract with the Securities and Exchange Commission which was open for public inspection and given wide circulation.

Premium undertook to finance and develop the Steep Rock properties after numerous steel and mining companies in both the United States and Canada rejected it as impossible. The U.S. and Canada governments expressed their pleasure when Premium agreed to undertake it because of the crisis caused by the shortage of iron ore, and co-operated in many ways to assist in the development. The development proved to be a great success and means much to our Canadian economy.

In 1953, ten years after the contract was executed, delivered to the various governmental authorities in Canada and the United States, and made public, and after the success of the project was fully demonstrated, the United States taxing authorities sought to levy a tax against Premium on the spread between the nominal price and the then quoted market on similar shares which, with penalties and interest, amount to more than $3,000,000. The tax claimed amounted to more than the total market value of the shares which Premium was entitled to retain.

The United States taxing authorities are also attempting to tax the two major stockholders of Premium, viz., Cyrus S. Eaton and Wm. R. Daley, on the identical alleged income arising out of the same transaction. This assessment against these individuals occurred nearly one and one-half years after the attempted assessment against Premium. While ordinarily Canada would not interfere in the assessment of taxes by the United States government against United States citizens, however unjust, the assessment is so obviously an attempt to force a settlement by Premium of this improper tax claim that it is at least shocking to Canadians if not a matter for representations by our government to the United States.

If this attempt by the United States to tax this transaction is successful, it will pave the way for many attacks against Canadian corporations which have been organized with the aid of U.S. capital to develop the natural resources of Canada. Certainly, it will deter future participation by U.S. capital in our development.

We regard this action by the United States government as an unfriendly act and it certainly is one which will not improve relations which are so necessary between our countries.

We will not attempt to explain the motives behind this unusual action by the United States government. We do, however, most sincerely and vigorously protest against this arrogant attempt to subject us to the jurisdiction of the United States tax authorities and their courts, and we respectfully request your assistance in bringing this to the attention of the United States government so that an end will be put to this continued harassment and unfair publicity against our Company.

The enclosed editorials from various Canadian publications illustrate the indignation of the Canadian public in this matter. Respectfully yours,

[D.O. MUNGOVAN]