THE TRUTH AOUT INCOME TRUSTS #7

Healing The Wounds:
Recognizing & Restoring The Good In Income Trusts

Canada’s Prime Minister, Stephen Harper, calls his new income-trust proposals "tax fairness". But these measures are actually unfair and regressive, because they unnecessarily take away, from retirees and self-employed workers, an enhanced income source for coping with today's oft-ignored rising costs of living -- for example, escalating costs for fresh food, heating, electricity, education, realty taxes, insurance, and auto fuel.

For retirees, in particular, coping with today's escalating costs of living is particularly difficult in the new financial environment of low interest rates paid by GICs, bonds and other traditional savings vehicles.

As well, the onerous taxation regimen proposed by the Harper government, for energy trusts (originally called royalty trusts), threatens to suppress a key engine of wealth, prosperity and jobs in the Western oil patch -- particularly in local Western rural communities that depend upon energy-trust companies for jobs, spending on equipment, and local tax revenues.

All of these negative consequences contrast strongly with the increased business profits that ultimately will be directed to financial institutions in Central Canada by the Conservative’s hastily-conceived trust legislation.

New Equitable Legislative Adjustments Required

Consequently, new equitable "adjustments" need to be made to the Harper government's current income-trusts tax proposal, whether by the current government or by a brand new Liberal or coalition government.

First of all, it's easy to see why Mr. Harper and his Finance Minister felt it was necessary to end "conversions' of large Canadian corporations into income trusts whenever such conversions are intended strictly for tax-avoidance purposes -- especially in regard to publicly-traded corporations unsuited to the traditional income-trust financial structure.

It's disappointing that the Prime Minister didn't recognize such an eventuality when he originally promised not to tax trusts in any way. But it's not difficult to recognize his present desire to respond to emerging economic realities and take some kind of concerted action.

However, there was, and is, a less destabilizing route which Mr.Harper's government (or a new Liberal or coalition government) could take to achieve the primary goal of preventing further trust conversions by unsuitable corporations seeking only to avoid corporate taxes.

To avoid the financial suffering that has been arbitrarily and retroactively imposed on millions of Canadian investors in existing income trusts (4 million Canadians according to an autumn Ipsos-Reid poll), the government could crack down on future trust conversions for tax-avoidance purposes, but permanently exempt existing trusts from its new tax provisions (often referred to as "grandfathering" existing trusts from the new tax).

Or this government (or a future Liberal or coalition government) could minimally make adjustments to the proposed trust legislation and follow the same path taken by the American Congress when a similar perceived tax-avoidance phenomenon began to occur in the United States in the late 1980's. In the U.S., trust-like entities (public traded partnerships), with a few exceptions, were given a ten-year exemption before they were taxed at conventional corporate tax rates.

And even more preferable treatment was accorded to trust-like, resource-based MLPs in the U.S. (for example, energy MLPs). After industry-wide consultations, legislated criteria were created to exempt, from conventional corporate taxes, “mature” resource MLPs which could benefit from the advantages of the tax-exempt “flow-through” structure.

Australia, in most cases, followed the same path of exempting resource companies (e.g., energy producers) when attempting to end unnecessary corporate conversions into trust-like entities in that country.

End Bay St. Excesses, But Restore Trust Market Stability

Either of the above tax exemption solutions would still allow the government to crack down on conversions of corporations into trusts strictly for tax-avoidance purposes. But each type of tax "moratorium" would also permit the survival of today's existing income trusts and ensure a more equitable outcome for the millions of innocent Canadians who believed Mr. Harper's original promise to protect their savings and not tax income trusts.

In that regard, it's important to remember that most victims of Mr. Harper's present "all or nothing" attack on income trusts are not rich "fat cats". Rather, they usually are ordinary Canadians, from all age groups and walks of life, trying to cope financially with today's very high cost of living -- including cash-starved seniors just trying to scrape by, and desperate young parents saving up for their children's education or for their own retirement.

Both retirees, and the self-employed working class, have found the challenge of generating ample savings income for retirement or education goals difficult to accomplish in today's low interest-rate savings environment.

A truly fair government trust tax policy should enhance the financial well-being of such Canadians -- not penalize or bankrupt them.

A Positive & Fair Solution

In that regard, politicians in Ottawa should permanently extend the exemption of existing income trusts from corporate taxes, or minimally extend the current tax exemption until the year 2017 -- as well as completely exempting traditional energy trusts from corporate taxes (just as the current government has proposed exempting most real-estate investment trusts).