TORONTO, March 8 /CNW/ - During the recent 2006 federal election, Stephen
Harper campaigned on an explicit policy to "never tax income trusts". That
solemn pledge resulted in many Canadians voting for the conservatives, many
for the first time. This explicit promise also brought renewed certainty to
the $200 billion Income Trust market and many investment decisions, on the
part of domestic and foreign investors, were premised on that solemn pledge.
All of that certainty came to an abrupt end on October 31, 2006 when
Finance Minister Jim Flaherty announced a 31.5% tax on income trusts. This
crackdown on income trusts was further exacerbated by his placing growth
restrictions on these companies during the proposed phase in period.
This entire tax policy was premised on the Finance Minster's belief that
income trusts caused "tax leakage", namely a reduction in the total taxes that
would be collected if these same businesses were corporations instead of
trusts. Corporations in Canada pay, on average, taxes at the rate of 6.2%, so
clearly the intent of a 31.5% tax was to shut down income trusts in favour of
This sudden reversal in tax policy on the part of the Conservative
government resulted in the immediate loss of $35 billion in the hard earned
retirement savings of over 2.5 million Canadians and countless foreign
investors. It has also cast a pall over the integrity of Canada's capital
markets and has left these now significantly undervalued Canadian businesses
at risk of foreign takeover. This inevitable takeover consequence has already
begun with the recent announcement of seven takeovers totaling $5.5 billion,
six of which were by foreign acquirers.
Public Hearings were recently held in Ottawa to determine the veracity of
this tax leakage allegation. The resulting report entitled: "Reconcilable or
Irreconcilable Differences" states in its dissenting opinion that; "Members of
the committee are deeply concerned about the Minister of Finance's refusal to
release the data that supports his assertions regarding tax leakage despite
the Committee's repeated requests for it. In the absence of such data, Members
have had to rely solely on the advice of outside experts, who have calculated
the amount to be as low as $32 million or 14 times less than the Minister's
In light of these public findings many in Canada's financial services
industry, including many of Canada's major banks are distancing themselves
from the very foundations of the Finance Minister's reasons to tax income
trusts, namely his assumption that they cause leakage.
In a letter yesterday addressed to many of its clients who are members of
CAITI, the TD Bank commented on the value of having market certainty for
income trusts and referred to tax leakage as being "based on assertion" and
leakage from future conversions being a "belief".
No doubt many Canadian and foreign investors seek reasons that exceed the
standard of mere assertions and belief to justify their loss of $35 billion in
hard earned savings and the ongoing loss of an important investment choice
that many rely upon for adequate retirement income.
Similar views concerning the Finance Minister's underlying assumption
about leakage have also been previously expressed by leading research analysts
from BMO Capital Markets and RBC Capital Markets who gave testimony at the
Public Hearings to the effect that: "Forget everything else you've heard about
the trust and alleged loopholes. Trusts exist today because Canadians were fed
up with receiving less than their fair share."
Perhaps the work of PricewaterhouseCoopers best sums up the situation in
stating; "the various sources of economic activity stemming from the income
trust market and the effective disciplined capital re-investment structure it
encourages, outweigh the potential tax consequences of income trusts. Moreover
the government's proposal could have substantial unintended consequences. The
most prominent of these is a potential wave of acquisitions of former income
trusts by foreign private equity firms, leading to the economic benefits of
Canada's small and medium size firms flowing into private equity coffers
rather than to Canadian retirees and investors."
CAITI notes that the inevitable acquisition of income trusts by foreign
buyers will be financed by debt and will therefore result in the pretax
cashflows of these businesses flowing free of tax out of Canada and into
foreign tax jurisdictions. Cashflows that were otherwise fully taxed in the
hands of Canadians seeking retirement income. The very policy that sought to
stem tax leakage, leakage that did not exist in the first place, will only
serve to induce that very tax leakage outcome.
The legislation to tax income trusts has not been voted into law. At
present the legislation has been supported by the Conservatives and
surprisingly the NDP. The Liberals have proposed an alternative 10% tax that
has received widespread endorsement from many groups, including the 400,000
member Canadian Association of Retired Persons.
For further information:
For further information: Brent Fullard, President & CEO, Canadian
Association of Income Trust Investors (CAITI), firstname.lastname@example.org, (647)