Flaherty defends income-trust tax scheme

Ever since the federal government announced its plan to impose taxes on the distributions of income trusts, the finance minister has faced questions over the amount of tax leakage trusts actually represent.

Official documents recently released by Finance were of little use, as most of the numbers were blacked out. Various academic studies had arrived at numbers ranging from several hundred million dollars to zero.

Speaking before the Commons Finance Committee today, Finance Minister Jim Flaherty finally placed a dollar value on trust-related tax leakage.

“We estimate the federal revenue loss was about $500 million in 2006 and growing, and this is a conservative estimate,” he told the committee. “I will also point out the hundreds of millions of dollars in tax loss to the provinces.”

Flaherty admitted that the sudden announcement on October 31, 2006, had a negative impact on many Canadian investors but said he stood by the decision.

“I am not prepared to sacrifice the interests of millions of hard-working Canadians who pay their taxes and play by the rules so that a select group of special interests can enjoy a tax holiday,” said Flaherty, reaffirming that the policy is based on fairness to taxpayers.

The real problem, he says, is that the amount of money being lost by Ottawa was bound to grow dramatically, as both Telus and BCE had announced they would convert to a trust structure. The loss of tax revenues from these two conversions alone was estimated to be up to $2.3 billion per year.

Flaherty claimed that if these conversions had been allowed, they would have soon been followed by conversions of major energy producers and the big banks, the largest sources of corporate tax revenues.

“Evidence was mounting that we were running a real risk of turning into an income-trust economy,” he told the committee, “an economy where tax avoidance drove business investment decisions and foreign investors stood to make significant gains at the expense of Canadian taxpayers. No responsible government could stand by and let this happen.”

Flaherty also closed the door on carving out an exception for energy trusts — as was done for REITs — citing the spectre of a giant like Encana converting to a trust structure.

He also ruled out any extension of the 2011 deadline for imposing the new tax regime — the Liberals have suggested 2017 — pointing out that the additional six years would cost the federal government about $3 billion, while the hardest hit province, Alberta, would lose over $2 billion.

A new advocacy group announced itself to the public late yesterday, vowing to fight the taxation of trusts. The Canadian Retired & Income Investors’ Association (CRIIA) says the move to tax trusts hurts “ordinary” Canadians the most.

The group claims that two-thirds of the taxpayers do not have an employer-sponsored pension plan, leaving them to fend for themselves when it comes to generating retirement income.

“When you follow the effects through, the two-thirds of Canadians without employer pensions will have to either save a lot more for retirement or work a lot longer before retiring,” says Alexander Irwin, director and general secretary of CRIIA. “It’s bad news either way.”

He says the government’s decision has caused up to $30 billion in market losses for income investors at a time when low interest rates leave few options to replace trusts.

“As a practical matter, most seniors can’t get by on GICs and bonds that pay only 3 to 4% per annum,” he says. “What are people going to do? It’s a real problem.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(01/30/07)

Steven Lamb