Liberals send valentine to trust investors

Canada must be getting close to another federal election — the opposition Liberal party has unveiled its platform regarding income trusts. Not surprisingly, it is being warmly met by at least one lobby group that sprang to life after the Conservative government’s decision to tax trust distributions.

“The Liberals’ policy is a major improvement over the ill-conceived, highly damaging Conservative plan,” says Alexander Irwin, general secretary of the Canadian Retired & Income Investors’ Association. “We applaud them for caring about seniors and other ordinary Canadians who have been badly hurt by this, and for considering the future needs of millions of aging Canadians.”

The Liberal plan would scrap the 31.5% tax included in the Conservative plan and replace it with a far less onerous 10% rate. That cash, however, would be refunded to Canadian unitholders, essentially nullifying the tax from the perspective of the government coffers.

Foreign holders of income trust units are already subject to withholding tax.

Whatever government revenue is generated by the 10% tax would be “shared equitably with provincial governments.” The Liberals claim the effect would be the return of as much as two-thirds of the losses caused by the Conservative announcement.

“When this minority Conservative government undertook what it knew would be a harmful action to Canadians, it should have taken the utmost care to minimize the damage it would cause its citizens,” Liberal leader Stéphane Dion said in a press release yesterday. “The government broke a promise and imposed a radically higher tax that resulted in a $25-billion blow to the savings of hard-working Canadians.”

The government move to level the playing field between trusts and dividend-paying corporations was driven by a fear that large corporations would adopt the trust structure, resulting in a massive loss of corporate tax revenue for Ottawa.

Such cash cows as Telus and BCE were already in the process of converting, but a far greater threat was the spectre of energy giants such as Encana and Nexen converting — there are even rumours on Bay Street that the government was spurred into immediate action by inquiries for a tax ruling from one of the big banks.

To prevent the conversion of Canada’s most profitable companies, the Liberal plan includes continuing the current ban on new trust conversions but that “the government should commit to considering representations from sectors which can conform to policy objectives.”

“Rather than considering what is best for Canadians, the prime minister simply decided that he was going to put an end to the income trust sector,” said Liberal finance critic John McCallum. “After hearing from dozens of expert witnesses, we have developed a proposal that is fair to Canadian investors, to corporations and the income trust sector as well as federal and provincial governments.”

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