Questions raised over possible trust loophole

(April 16, 2004) The federal budget issued in March could contain a massive loophole which will benefit pension plan members in Quebec only, according to a well-known financial author.

Gordon Pape says the Caisse de dépôt — and by extension any pension funds administered by it — will be exempt from the rules governing business trust ownership. Calls to the Department of Finance were not returned.

In the budget, the federal government capped pension ownership of trusts at 1% of total assets. This rule did not apply to real estate investment trusts or resource royalty trusts. The move was made to minimize any revenue loss the government may face as a result of the “tax advantaged” trust structure, which pays no corporate tax.

But since the Caisse is structured as an “agent of the Crown,” it is not subject to taxation in the first place, nor is it subject to any penalties laid out in the budget.

“This is a real shocker and could seriously undermine the finance minister’s position on this issue,” Pape said. “The Caisse administers about $140 billion in assets. That’s a loophole big enough to drive a fleet of Brinks trucks through.”

The Canada Pension Plan Investment Board (CPIB), which invests in the capital markets on behalf of the CPP, is not exempt. The CPPIB was set up as an arm’s-length, independent entity — not an agent of the Crown.

“This means that the administrators of the biggest pension plans in Quebec will be playing under a different set of rules from those that apply in the rest of Canada,” said Pape.

“Given the fact that some pension funds have been quite vociferous in their opposition to the budget proposal I would be surprised if they did not use this information to bolster their argument that the whole concept has serious flaws,” he says. “If Goodale is forced to scrap the budget proposal, I think they will have to revisit the whole problem and may be forced to take another tack.”

Shortly after the federal budget was released, the Ontario Teachers Pension Plan (Teachers) issued a statement decrying the proposed 1% cap. Teachers is already one of the larger players in the business trust market, with holdings worth more than $1 billion — beyond the prescribed limit.

“The proposed cap on income trusts seriously discriminates against the 250,000 teachers and the millions of Canadian workers whose retirement income is managed by pension plans,” Teachers’ president and CEO Claude Lamoureux said in the March release. “This proposal would unfairly exclude them from benefiting from the growth and stable cash flows income trusts are expected to provide.”

Teachers says the limit is unfair as it will put it and other pension funds at a disadvantage to other institutional investors which are not subject to the restrictions. Now it appears they will be at a disadvantage to other pension funds as well.

“The proposed caps are unnecessary. The federal government receives tax revenue from teachers’ pension income,” said Lamoureux. “Our retirees received $3.2 billion in pensions in 2003 and paid $800 million in tax to governments.”

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