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Trusts cost $1.1-billion in lost tax
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Author:  fatbasturd [ Tue Oct 17, 2006 3:13 am ]
Post subject:  Trusts cost $1.1-billion in lost tax

Trusts cost $1.1-billion in lost tax
STEVEN CHASE, From Tuesday's Globe and Mail

OTTAWA — Income trusts will cost Ottawa and the provinces $1.1-billion in lost tax revenue annually once Telus Corp. and BCE Inc. convert to the corporate-tax-avoidance structure, a new study says.

The report by tax expert Jack Mintz shows that Canada's tax-leakage problem has doubled in two years — from $540-million annually in 2004 — despite efforts to solve it.

“This is becoming a bigger headache for Ottawa and the provinces,” said Professor Mintz, of the University of Toronto's Rotman School of Management.

“It's also becoming what amounts to a sizable tax break, and the question that governments had better ask themselves is whether this is the sort of tax cut they want to be handing out to boost economic growth.”

Income trusts pay little or no corporate taxes, but instead shovel out the bulk of earnings and cash flow to investors.

Prime Minister Stephen Harper's government has been loath to comment since controversy over the trusts re-erupted this fall. The issue is back in the national spotlight after Telus and BCE announced plans to convert holdings into the biggest trusts in Canadian history. The Conservative minority government is saying little because it fears reopening the politically explosive file that injured former prime minister Paul Martin's Liberal government in late 2005.

Trusts cost Ottawa and the provinces in forgone corporate taxes. Prof. Mintz estimated the amount will total $2.8-billion a year once Telus and BCE convert their operations into income trusts. But Canadian governments will recoup about $1.7-billion of that from personal taxes on higher payouts from pension plans and registered retirement savings plans, as well as from withholding taxes on foreign investors owning Canada's income trusts.

About two-thirds of the $1.1-billion in tax revenue losses, or $726-million, will be borne by Ottawa.

The remaining one third, or $374-million, will be shared by the provinces and territories, the business economics professor estimates.

According to Prof. Mintz's report — Income Trust Conversions: Estimated Federal and Provincial Revenue Impacts — the single biggest tax loss occurs from one particular group of investors: pension plans and owners of RRSPs, who do not pay tax on income from trusts held in their portfolios.

Also known as tax-deferred investors, they hold about 39 per cent of Canada's trust units. It is from this group that Ottawa and the provinces recoup the least in terms of lost corporate tax revenue. Its share of corporate taxes lost through income trusts amounts to $1.1-billion and governments get back only $300-million in greater tax revenue on income paid from pension plans and RRSPS, for a net loss of $800-million annually.

The second-biggest source of tax leakage is foreign investors, who hold about 22 per cent of trust units, Prof. Mintz said. They cost Ottawa and the provinces about $300-million in lost corporate taxes even after withholding taxes recoup some of the revenue, he said.

The prevalence of income trusts has grown steadily over the past six years to reach a market capitalization of more than $210-billion today.

As of August, trusts comprised 11 per cent of the Toronto Stock Exchange by value and 16 per cent by number of listings.

Experts say the potential for new trust conversions is vast because companies can also spin off assets into a trust rather than converting the whole corporation.

Still, the $1.1-billion in lost tax revenue is minor in the context of nearly $50-billion that Ottawa and the provinces reap each from corporate income taxes.

Alberta — home to many energy income trusts — is likely the hardest hit among provinces when it comes to tax revenue lost from trust formations, Prof. Mintz said. The province's share of Canada's corporate tax base exceeds 20 per cent, but Alberta-based investors hold only about 10 per cent of income-trust units.

Last year, the former federal Liberal government moved to reduce the tax advantages of income trusts by cutting the effective tax rate on dividends, a measure that affected only taxable Canadian investors. Provinces followed suit. Prof. Mintz's study shows this removed any tax advantages for Canadian investors holding income trusts outside pension plans and RRSPs.

He said 39 per cent of trust units are held by these taxable Canadian investors, adding that higher revenue from federal and provincial taxes on income from trusts held by this group makes up for any lost corporate income-tax revenue.

British Columbia Premier Gordon Campbell said Monday that he is unfazed by the loss of Telus's corporate tax revenue or the continuing trend toward income trusts.

Separately, the Quebec government said the income-trust issue is high on the agenda for the next finance ministers meeting, scheduled for this fall.

Federal Finance Minister Jim Flaherty again refused to discuss income-trust market developments, as he has since Telus announced Sept. 11 that it was converting. “We're concerned and we're watching and we're monitoring the situation,” is all that he would say.

He refused to comment when asked whether he would be comfortable seeing increasing numbers of Canadian companies embrace the trust structure.

Author:  ridenrain [ Mon Oct 29, 2007 12:30 pm ]
Post subject: 

Now one year later:

Trust treat
Terence Corcoran, Financial Post
Published: Saturday, October 27, 2007

Get ready for incessant milking of the Halloween angle to mark the anniversary of Finance Minister Jim Flaherty's income trust announcement of Oct. 31 last year. Call in the arts and graphic team. Okay, everybody, I've got an idea: We illustrate Flaherty dressed up as Dumbledore, but instead of him jumping out to say, "Ha ha, bet you didn't know: I'm gay!", he says: "Ha ha, surprise, I'm a gay income trust destroyer," as he waves a fire rope over the burning assets of trust investors and the vaporizing form of Brent Fullard.

Or maybe Flaherty can be decked out as the Grim Reaper, swinging his scythe through a crowd of investors and shearing off 35% of their trust portfolios. Whatever the image, Flaherty could be in for a tough week as the Finance Minister's trust decision gets a ritual anniversary pummelling at the hands of critics and trust industry activists.

Needless to say, whatever one's views of the trust decision, vaporizing Brent Fullard would be a good idea, no matter what the occasion. As the founder of an alleged organization called the Canadian Association of Income Trust Investors, Fullard (a former BMO Nesbitt Burns investment executive) has turned himself into a low-level Voldemort, a purveyor of bad ideas and maliciously partisan messages from out of the dark recesses of his e-mail-fevered brow.

One source familiar with the Fullardmort operation says CAITI now receives no money from his original deep-pocketed backers and is just spending his own dime and time cranking out ugly political commentary. CAITI is a shell from which Fullard fulminates -- The Fullminator. There have been many low points in CAITI's output, but the lowest may well have been his attempt to portray Prime Minister Stephen Harper as a Canadian Hitler. After news broke of the Conservatives' plan to appeal to ethnic voters, Fullard sent out notes bearing the headlines "Hitler was a strong leader too" and "Heil mein Harper."

Well, enough of witches and the forces of darkness. Whatever political trouble Flaherty's income trust decision causes the Conservatives -- the government did something Mr. Harper promised they would not do-- the decision remains the right one.

Investors who were hit by the decision simply will not let the issue rest -- even though the damage to any patient and balanced portfolio would have been minimal. The graphs below tell at least part of the tale, which is that while removing the income trusts' unfair tax preference did take value off the market price of trust units, the scale of the decline is nowhere near the 35% claimed by the Fullardmorts. The greater destroyer of value in the trust market over the period was damaging swings in energy markets, sending the energy trust sector into sharper decline. (See the bottom graph below.)

Another measure of trust performance, the CIBC World Markets business trust total return index, excludes energy trusts. It shows a total return of 9.3% over the last year. (See top graph below.) That's not up to the overall S&P/TSX composite's 16%, but it's hardly an investors' Armageddon -- unless, of course, you were among the investors who were overinvested in trusts and then sold out in a panic in the days immediately after Flaherty's announcement.

The case against trusts, leaving aside the government's badly put argument about tax leakage, was never clearly stated and, it must be said, it's an argument nobody wanted to accept. Any tax policy that shapes business, investment and structural decisions throughout the economy -- at the disadvantage of other sectors and structures -- is undesirable. The trust industry grew to a great size solely on the basis of unfair tax advantages. The fact that these tax advantages would come home to roost at later dates seemed not to matter.

The trust industry's backers, moreover, mounted fanciful arguments about the motivation behind the creation of business structures that were different from the existing corporate model. All kinds of phony arguments were put forward, including the canards that the existing taxable corporate model promoted corporate waste and hoarding of cash, and gave CEOs blank cheques to feather their own nests.

It was all nonsense. The fact is that the trust structure had become a vehicle for the capitalization of the tax preference by corporate reorganizers, making a lot of people rich but not really adding anything to the overall economy or, in the long run, the wealth of investors. The risks in trusts were rarely noted by the dealers who sold them, and investors galvanized by cash flow were often quite willing to turn a blind eye to what was really going on.

Some people will never let this issue die, even as interest rate trends, trust takeovers and conversions, and business fundamentals keep pushing trust values up. One trust fund manager was quoted the other day by Dow Jones as saying that she "did not think we would suffer a lot of takeover activity" in the trust field. "Suffer" takeovers? At 30% premiums, as in PrimeWest Energy Trust; or 54%, as in E.D. Smith; or 49% for Spinrite. What's to suffer?

Come Halloween, instead of hounding Mr. Flaherty, drink a toast to the man who cleaned up at least one bit of bad tax policy.

Author:  hurley_108 [ Mon Oct 29, 2007 12:36 pm ]
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One more and I'm nominating you for a necroposter medal!

Author:  ridenrain [ Mon Oct 29, 2007 12:42 pm ]
Post subject: 

I wanted to tag this onto one of the original threads to show the sillyness of the original post. It gives a better context to the post.

Author:  ryan29 [ Mon Oct 29, 2007 2:00 pm ]
Post subject: 

the trust issue has been one which has disappeared for average canadians but the former income trust investors are trying to keep the issue alive , but i'm not sure anyone still cares .

Author:  hurley_108 [ Mon Oct 29, 2007 8:48 pm ]
Post subject: 

ridenrain wrote:
I wanted to tag this onto one of the original threads to show the sillyness of the original post. It gives a better context to the post.

If it walks like a necro and talks like a necro, it's a necro...

Author:  Daovonnaex [ Wed Dec 26, 2007 5:44 pm ]
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$1.1 billion in lost taxes means $1.1 billion more hard earned dollars people got to keep. Excellent news all around, especially when you consider that Canada runs a primary budget surplus.

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