CI ponders trust structure as feds announce study

Does the tax advantage of FTEs relative to public corporations have a significant impact on how businesses are organized in Canada? Does the tax advantage of FTEs relative to public corporations have a significant impact on how businesses are organized in Canada? Have FTEs had a significant impact on tax revenues? Is there potential for […]

By Kate McCaffery | September 8, 2005 | Last updated on September 8, 2005

4 min read

Does the tax advantage of FTEs relative to public corporations have a significant impact on how businesses are organized in Canada?

Have FTEs had a significant impact on tax revenues? Is there potential for revenue losses to grow in the years to come?

What impacts are FTEs having on investment decisions and the allocation of capital in Canada? Is the overall impact on the economy positive or negative?

Given the important role that tax-exempt investors play in Canadian capital markets, and could play in the FTE market, what impact could this have on government revenues and economic efficiency?

Overall, are there public policy concerns about FTEs and how the tax system influences their existence, and if so, what actions should be considered to address these concerns?

Deadline for submissions to the Department of Finance is December 31, 2005.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com

(09/08/05)

Kate McCaffery

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Does the tax advantage of FTEs relative to public corporations have a significant impact on how businesses are organized in Canada?
Have FTEs had a significant impact on tax revenues? Is there potential for revenue losses to grow in the years to come?
What impacts are FTEs having on investment decisions and the allocation of capital in Canada? Is the overall impact on the economy positive or negative?
Given the important role that tax-exempt investors play in Canadian capital markets, and could play in the FTE market, what impact could this have on government revenues and economic efficiency?
Overall, are there public policy concerns about FTEs and how the tax system influences their existence, and if so, what actions should be considered to address these concerns?

Deadline for submissions to the Department of Finance is December 31, 2005.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com

(09/08/05)

(September 8, 2005) CI Financial is revisiting plans to convert the fund company to an income trust. To kick off this latest attempt, the company announced today that it plans to request an advance tax ruling from the Canada Revenue Agency later this week.

With the tax ruling in hand, the company will put the idea to CI’s board of directors early next month. If approved by the board, CI’s shareholders will get a chance to vote on the move at the annual meeting of shareholders in November. CI’s shares jumped sharply following the announcement and ended the day 12% higher in heavy trading.

“Tax rulings are generally not required for transactions of this nature, but we feel it is prudent, given the size of CI, even though the structure we are contemplating is similar to existing income trust structures,” William Holland, CI’s CEO, said in a statement. He says many favorable changes to the long-term environment for income trusts that have occurred since the company last considered converting to a trust back in 2003.

“These include the withdrawal of restrictions on the ownership of trusts by pension funds, the addition of trusts to the S&P/TSX Composite Index, the elimination of limited liability concerns and the development of an asset class that is close to $200 billion and growing.”

Policy changes however, could throw a wrench into the works for CI. While these “favorable changes” and their effect on demand make income trust conversion an attractive option for businesses, explosive growth in this area has also attracted the federal government’s attention.

The Department of Finance today launched consultations and has called for submissions responding to its paper, entitled Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trusts and Limited Partnerships).

The paper’s focus is to assess the tax and economic efficiency implications of flow-through entities (FTEs) and determine if the current tax system is appropriate or if it should be modified.

The consultation paper says it is estimated that federal tax revenues in 2004 were $300 million lower than they would have been if FTEs were structured as corporations. Future tax implications, they say will depend on a number of factors, but growth in the FTE market will reduce future tax revenues. In general, a 10% increase in the FTE market capitalization would reduce federal tax revenues by about $35 million each year.

Simplified examples show total taxes paid under the corporate structure are higher than total taxes under FTE structures. The paper says arguments have been made on both sides of this issue, with some arguing that the tax treatment of FTEs leads to greater economic efficiency, while others argue that this tax treatment distorts investment decisions and leads to reduced economic efficiency.

The consultation paper provides a detailed discussion of the way business structures are taxed, gives side-by-side comparisons and examples of the various tax implications. The paper also outlines international and regional differences, compares different products, structures and tax treatments in Canada, Australia, Britain and the U.S.

The authors say similar publicly listed investment vehicles in different companies are usually more restricted to specific sectors than they are in Canada. Comparing countries helped to highlight the fact that tax systems and tax treatment of FTEs varies by jurisdiction. “Therefore direct comparisons with Canada are difficult to make.”

Finally, the paper briefly contemplates the economic fallout and effects FTEs could have on the Canadian economy, and lists a number of possible policy approaches, including limiting company’s deduction of interest expenses, taxing FTEs in a manner similar to corporations or better integrating the personal and corporate income tax systems.

The paper follows up this year’s federal budget announcement that the government would undertake a consultation process on tax issues related to business income trusts and other FTEs. The paper asks for input on a number of key questions.

Does the tax advantage of FTEs relative to public corporations have a significant impact on how businesses are organized in Canada?
Have FTEs had a significant impact on tax revenues? Is there potential for revenue losses to grow in the years to come?
What impacts are FTEs having on investment decisions and the allocation of capital in Canada? Is the overall impact on the economy positive or negative?
Given the important role that tax-exempt investors play in Canadian capital markets, and could play in the FTE market, what impact could this have on government revenues and economic efficiency?
Overall, are there public policy concerns about FTEs and how the tax system influences their existence, and if so, what actions should be considered to address these concerns?

Deadline for submissions to the Department of Finance is December 31, 2005.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com

(09/08/05)

(September 8, 2005) CI Financial is revisiting plans to convert the fund company to an income trust. To kick off this latest attempt, the company announced today that it plans to request an advance tax ruling from the Canada Revenue Agency later this week.

With the tax ruling in hand, the company will put the idea to CI’s board of directors early next month. If approved by the board, CI’s shareholders will get a chance to vote on the move at the annual meeting of shareholders in November. CI’s shares jumped sharply following the announcement and ended the day 12% higher in heavy trading.

“Tax rulings are generally not required for transactions of this nature, but we feel it is prudent, given the size of CI, even though the structure we are contemplating is similar to existing income trust structures,” William Holland, CI’s CEO, said in a statement. He says many favorable changes to the long-term environment for income trusts that have occurred since the company last considered converting to a trust back in 2003.

“These include the withdrawal of restrictions on the ownership of trusts by pension funds, the addition of trusts to the S&P/TSX Composite Index, the elimination of limited liability concerns and the development of an asset class that is close to $200 billion and growing.”

Policy changes however, could throw a wrench into the works for CI. While these “favorable changes” and their effect on demand make income trust conversion an attractive option for businesses, explosive growth in this area has also attracted the federal government’s attention.

The Department of Finance today launched consultations and has called for submissions responding to its paper, entitled Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trusts and Limited Partnerships).

The paper’s focus is to assess the tax and economic efficiency implications of flow-through entities (FTEs) and determine if the current tax system is appropriate or if it should be modified.

The consultation paper says it is estimated that federal tax revenues in 2004 were $300 million lower than they would have been if FTEs were structured as corporations. Future tax implications, they say will depend on a number of factors, but growth in the FTE market will reduce future tax revenues. In general, a 10% increase in the FTE market capitalization would reduce federal tax revenues by about $35 million each year.

Simplified examples show total taxes paid under the corporate structure are higher than total taxes under FTE structures. The paper says arguments have been made on both sides of this issue, with some arguing that the tax treatment of FTEs leads to greater economic efficiency, while others argue that this tax treatment distorts investment decisions and leads to reduced economic efficiency.

The consultation paper provides a detailed discussion of the way business structures are taxed, gives side-by-side comparisons and examples of the various tax implications. The paper also outlines international and regional differences, compares different products, structures and tax treatments in Canada, Australia, Britain and the U.S.

The authors say similar publicly listed investment vehicles in different companies are usually more restricted to specific sectors than they are in Canada. Comparing countries helped to highlight the fact that tax systems and tax treatment of FTEs varies by jurisdiction. “Therefore direct comparisons with Canada are difficult to make.”

Finally, the paper briefly contemplates the economic fallout and effects FTEs could have on the Canadian economy, and lists a number of possible policy approaches, including limiting company’s deduction of interest expenses, taxing FTEs in a manner similar to corporations or better integrating the personal and corporate income tax systems.

The paper follows up this year’s federal budget announcement that the government would undertake a consultation process on tax issues related to business income trusts and other FTEs. The paper asks for input on a number of key questions.

Does the tax advantage of FTEs relative to public corporations have a significant impact on how businesses are organized in Canada?
Have FTEs had a significant impact on tax revenues? Is there potential for revenue losses to grow in the years to come?
What impacts are FTEs having on investment decisions and the allocation of capital in Canada? Is the overall impact on the economy positive or negative?
Given the important role that tax-exempt investors play in Canadian capital markets, and could play in the FTE market, what impact could this have on government revenues and economic efficiency?
Overall, are there public policy concerns about FTEs and how the tax system influences their existence, and if so, what actions should be considered to address these concerns?

Deadline for submissions to the Department of Finance is December 31, 2005.

Filed by Kate McCaffery, Advisor.ca, kate.mccaffery@advisor.rogers.com

(09/08/05)

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