More OUTRAGE:
http://www.caif.ca/content/CAIF_OP-ED_Nov2.pdf
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THE FEDERAL GOVERNMENT HAS BROKEN TRUST WITH CANADIANS
By George Kesteven
President, The Canadian Association of Income Funds
The federal governmentâs punitive and unwarranted decision to tax income trusts has
unnecessarily thrown Canadaâs financial markets into turmoil and jeopardized the
retirement savings of millions of Canadians â young and old.
Finance Minister Jim Flahertyâs reckless decision to tax income trusts has already had a
devastating impact on this countryâs economy â and the widespread fallout will continue
for the foreseeable future.
As a direct result of the federal governmentâs move to tax income trusts, the Toronto
Stock Exchange recorded its biggest loss in more than two years, destroying in excess
of $30 billion of capital in two days.
The most acute pain is being felt by individual Canadians of all ages who have seen
their savings irreversibly damaged. Many people lost more than $100,000 of their
savings in one day as a result of Mr. Flahertyâs announcement, and some retirees have
said they may be forced to return to work to recoup the losses.
The federal government and Mr. Flaherty took action against income trusts without
consulting the industry. Not only does the decision to tax trusts represent a reversal from
the Conservativeâs election promise not to impose a tax, it is a flagrant betrayal of this
countryâs corporate culture, financial markets and the hard working Canadians who
invested in income trusts.
Mr. Flaherty and his government explicitly promised that they would not tax trusts.
Instead, the government said it would focus on âleveling the playing fieldâ for
corporations. The Conservative government has chosen to break that promise and the
trust of Canadians.
The Conservative government could have made other choices on income trusts that
would have achieved tax neutrality and avoided the market devastation we are now
witnessing. Alternative options could have included increasing the withholding tax on
income trusts and phasing-in the tax on trusts over a decade as the U.S. government
did. However, rather then take a measured approach to protect the industry and
individual investors, this government chose to take heavy handed action against the
income trust sector and the public.
Going forward, the governmentâs reversal on income trusts will continue to hurt the
savings of Canadians, hamper the ability of small and medium-sized businesses to raise
capital, and prevent foreign investment in this country.
The finance minister has claimed he took action against income trusts to stem a
corporate tax loss of $500 million. However, his decision to tax income trusts is likely to
destroy $25 billion of wealth, according to an analysis by BMO Capital Markets. As
Gordon Tait, a BMO analyst, wrote, âA $25 billion hammer to fix a $500 million problem
does not look like a very equitable solution.â
Furthermore, the federal government persists in grossly underestimating its budget
surpluses. In the first five months of the current fiscal year, Ottawa achieved a budget
surplus of $6.7 billion, nearly double the $3.6 billion budget surplus it forecast for the
entire 2006/07 fiscal year. Can Ottawa legitimately claim that it needs more corporate
tax dollars when its budget surpluses continue to surpass expectations?
Mr. Flaherty has also said that he was concerned that the income trust structure
prevents reinvestment and hurts productivity. However, the majority of income trusts are
small to medium-sized businesses that use the trust structure to raise the capital they
need to reinvest, grow and remain Canadian. The new income trust tax will make it
prohibitively expensive for these small and medium-sized companies to tap capital
markets. As a result, many of theses businesses could end up as subsidiaries of U.S.
and other foreign companies.
Ironically, the governmentâs tax on income trusts will make it easier for foreign-owned
companies â particularly in the natural resources sector â to bid against Canadianowned
trusts for ownership of this countryâs assets. The new tax treatment will likely lead
to greater foreign ownership of Canadaâs natural resource entities, either through direct
takeovers of Canadian trusts weakened by the new tax, or through the inability of trusts
to acquire assets on their own.
Mr. Flahertyâs tax on income trusts stands in sharp contrast to the findings of the Bank of
Canada, which wrote in a June 2006 report that: âAvailable evidence suggests that
income trusts may enhance financial market completeness.â Bank of Canada Governor
David Dodge recently said income trusts make capital markets âmore efficient."
As for Canadians, they will continue to feel the fallout from Mr. Flahertyâs tax on income
trusts. Currently, two-thirds of trust units are held in non-registered accounts, meaning
these people are likely using the money they receive from income trust distributions to
help cover living expenses. Many of these people can no longer rely on the distribution
payments of income trusts to help with their expenses. These peopleâs quality of life has
been diminished by this governmentâs decision to tax income trusts.
The issue of retirement savings will have to be reevaluated as a growing number of
Canadians enters retirement. By 2025, seven million Canadians â almost one-quarter of
the population â are forecast to be over age 65. Many of these people had viewed
income trusts as a reliable investment vehicle to help fund their retirement. What is the
alternative now?
Looking at the damage that has been caused to Canadaâs financial markets and
investors, it is clear to the income trust sector that Mr. Flaherty has made a poorly
informed and costly decision on income trusts. Options other than a punitive tax were
available to Mr. Flaherty. The finance minister and his government chose to ignore those
options, and Canadians are now paying the price.
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