R elated Stories Income trust expert says “lost tax” issue is overblown Regulators closely watching income trusts Regulators want more disclosure from income trusts Income trust market still hot The study also found the tax reduction was minimized by the capital gains realized when the companies converted to the trust structure. Because investors were assigning […]
By Steven Lamb|
March 11, 2004 |
Last updated on March 11, 2004
The study also found the tax reduction was minimized by the capital gains realized when the companies converted to the trust structure. Because investors were assigning such high valuations to trusts, the conversion process generated large capital gains tax revenues the government would otherwise not have collected.
These capital gains taxes reduced the immediate revenue loss to $217 million, from $250 million to $280 million.
The way income trusts are being used by investors further reduces the revenue hit the government was presumed to suffer.
According to Dennis Bruce, vice-president of Canadian operations at HLB, only 30% of trust units were held in tax-deferred accounts, such as RRSPs and RESPs, while the remaining 70% were in taxable accounts, generating income for immediate use by the unitholder. Of that 70%, 55% of the holdings were taxable at the full marginal tax rate.
There were reports last week the federal government was examining the current tax-treatment of income funds, apparently with an eye toward tightening the rules. Probyn thinks the government is unlikely to take any such step, though.
“Our sense is that we probably will not see anything in the budget,” said Probyn. “I think we’re talking about the savings of millions of Canadians, because of the strong retail nature of the market, people tend to hold these in their RSPs and a government seeking re-election would be ill-advised to cause a reduction in value to the voters’ RSPs.”
The study also found the tax reduction was minimized by the capital gains realized when the companies converted to the trust structure. Because investors were assigning such high valuations to trusts, the conversion process generated large capital gains tax revenues the government would otherwise not have collected.
These capital gains taxes reduced the immediate revenue loss to $217 million, from $250 million to $280 million.
The way income trusts are being used by investors further reduces the revenue hit the government was presumed to suffer.
According to Dennis Bruce, vice-president of Canadian operations at HLB, only 30% of trust units were held in tax-deferred accounts, such as RRSPs and RESPs, while the remaining 70% were in taxable accounts, generating income for immediate use by the unitholder. Of that 70%, 55% of the holdings were taxable at the full marginal tax rate.
There were reports last week the federal government was examining the current tax-treatment of income funds, apparently with an eye toward tightening the rules. Probyn thinks the government is unlikely to take any such step, though.
“Our sense is that we probably will not see anything in the budget,” said Probyn. “I think we’re talking about the savings of millions of Canadians, because of the strong retail nature of the market, people tend to hold these in their RSPs and a government seeking re-election would be ill-advised to cause a reduction in value to the voters’ RSPs.”
(March 11, 2004) The popularity of exchange-traded income funds — either income trusts or limited liability partnerships — has not made a significant impact on government coffers, according to a study released today by HLB Decision Economics.
Responding to various studies, which have offered opinions ranging from trusts being revenue-neutral, to the loss of $600 million or even $1 billion, the Canadian Association of Income Funds (CAIF) and the Canadian Institute of Public and Private Real Estate Companies (CIPPREC) commissioned the study.
“This is a comprehensive and thorough study that not only provides a benchmark for determining the tax effects of income trusts on government revenue, but shows it to be largely a non-issue,” said CAIF chair Stephen Probyn.
The study found that there was an immediate tax-leakage of about $217 million, but taxation of the gains made by unitholders would negate this loss over time. One example which would trigger such negation would be the withdrawal of funds from a registered account.
“We looked at the reality of actual taxes paid by organizations which converted to become trusts prior to their conversion and taxes received from corporations in the form of capital gains and post conversion,” said Dr. David Lewis, president of HLB Decision Economics. “It turns out corporations that converted paid rather less in taxes than the industry average.”
The report says these companies tended to be highly leveraged, allowing for greater tax write-offs and lower tax payments than their industry average. The authors of the report say past studies had used these averages when calculating the tax leakage.
While trusts pay lower taxes than corporations, the report’s authors point out that they do not avoid taxation altogether and that the distributions paid to unitholders are taxable as well.
For trust units currently held in registered, tax-deferred accounts, Lewis said the study found a present-day value for the future stream of tax revenue to be $268 million — more than offsetting the $217 million apparently lost. When these accounts are eventually tapped, the taxes will become payable.
The study also found the tax reduction was minimized by the capital gains realized when the companies converted to the trust structure. Because investors were assigning such high valuations to trusts, the conversion process generated large capital gains tax revenues the government would otherwise not have collected.
These capital gains taxes reduced the immediate revenue loss to $217 million, from $250 million to $280 million.
The way income trusts are being used by investors further reduces the revenue hit the government was presumed to suffer.
According to Dennis Bruce, vice-president of Canadian operations at HLB, only 30% of trust units were held in tax-deferred accounts, such as RRSPs and RESPs, while the remaining 70% were in taxable accounts, generating income for immediate use by the unitholder. Of that 70%, 55% of the holdings were taxable at the full marginal tax rate.
There were reports last week the federal government was examining the current tax-treatment of income funds, apparently with an eye toward tightening the rules. Probyn thinks the government is unlikely to take any such step, though.
“Our sense is that we probably will not see anything in the budget,” said Probyn. “I think we’re talking about the savings of millions of Canadians, because of the strong retail nature of the market, people tend to hold these in their RSPs and a government seeking re-election would be ill-advised to cause a reduction in value to the voters’ RSPs.”
(March 11, 2004) The popularity of exchange-traded income funds — either income trusts or limited liability partnerships — has not made a significant impact on government coffers, according to a study released today by HLB Decision Economics.
Responding to various studies, which have offered opinions ranging from trusts being revenue-neutral, to the loss of $600 million or even $1 billion, the Canadian Association of Income Funds (CAIF) and the Canadian Institute of Public and Private Real Estate Companies (CIPPREC) commissioned the study.
“This is a comprehensive and thorough study that not only provides a benchmark for determining the tax effects of income trusts on government revenue, but shows it to be largely a non-issue,” said CAIF chair Stephen Probyn.
The study found that there was an immediate tax-leakage of about $217 million, but taxation of the gains made by unitholders would negate this loss over time. One example which would trigger such negation would be the withdrawal of funds from a registered account.
“We looked at the reality of actual taxes paid by organizations which converted to become trusts prior to their conversion and taxes received from corporations in the form of capital gains and post conversion,” said Dr. David Lewis, president of HLB Decision Economics. “It turns out corporations that converted paid rather less in taxes than the industry average.”
The report says these companies tended to be highly leveraged, allowing for greater tax write-offs and lower tax payments than their industry average. The authors of the report say past studies had used these averages when calculating the tax leakage.
While trusts pay lower taxes than corporations, the report’s authors point out that they do not avoid taxation altogether and that the distributions paid to unitholders are taxable as well.
For trust units currently held in registered, tax-deferred accounts, Lewis said the study found a present-day value for the future stream of tax revenue to be $268 million — more than offsetting the $217 million apparently lost. When these accounts are eventually tapped, the taxes will become payable.
The study also found the tax reduction was minimized by the capital gains realized when the companies converted to the trust structure. Because investors were assigning such high valuations to trusts, the conversion process generated large capital gains tax revenues the government would otherwise not have collected.
These capital gains taxes reduced the immediate revenue loss to $217 million, from $250 million to $280 million.
The way income trusts are being used by investors further reduces the revenue hit the government was presumed to suffer.
According to Dennis Bruce, vice-president of Canadian operations at HLB, only 30% of trust units were held in tax-deferred accounts, such as RRSPs and RESPs, while the remaining 70% were in taxable accounts, generating income for immediate use by the unitholder. Of that 70%, 55% of the holdings were taxable at the full marginal tax rate.
There were reports last week the federal government was examining the current tax-treatment of income funds, apparently with an eye toward tightening the rules. Probyn thinks the government is unlikely to take any such step, though.
“Our sense is that we probably will not see anything in the budget,” said Probyn. “I think we’re talking about the savings of millions of Canadians, because of the strong retail nature of the market, people tend to hold these in their RSPs and a government seeking re-election would be ill-advised to cause a reduction in value to the voters’ RSPs.”
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