Trust taxissue becomes political
KALAWSKY
Finance Minister Ralph Goodale faces tough choices on the income trust sector.
“There are not many people in Canada who like the big banks. And when the banks are seen to be taking advantage of tax shelters and tax loopholes, that’s when people start to sit up and take notice,” said David Perry, senior research associate with the Canadian Tax Foundation.
The tax rulings aren’t mandatory or necessary, in the opinion of some companies. But investors think it could be riskier for some to proceed without them, as shown yesterday by the plunging share prices of income-trust wannaCI Financial retreated, falling 11%, GMP Capital Corp. slid 6% and Cinram International Inc. lost more than 8%. There are nine companies with tax rulings on hold.
Any company angling to convert is now at the mercy of Ralph Goodale, the Finance Minister, and his murky timetable. The consultations end Dec. 31. But with an election on the horizon, only a psychic could predict when the federal government will decide the fate of income trusts.
Goodale would never admit being spooked by Nixon’s comments, although the six-largest banks paid $7.6-billion in taxes in 2004. Instead, the minister says he’s concerned about trusts hurting the economy.
“We have a viable and productive corporate sector that invests, creates jobs and contributes its fair share of tax. I want to make sure that government tax revenues are appropriately safeguarded, but even more importantly I want strong and vibrant Canadian enterprises of all sizes in all sectors contributing to a dynamic and growing economy,” he said in a statement on Monday.
Clearly, companies are gravitating to the trust model to avoid paying taxes. But it is a stretch to argue, as many have, that income trusts are toxic to our economy because they siphon capital from faster-growing sectors.
In reality, the rise of trusts has allowed companies in unpopular, mature industries to raise capital (at a lower cost) they otherwise wouldn’t get, giving them an opportunity to expand, acquire, innovate and create jobs.
The trust sector has also fuelled the exploration and development efforts of energy firms, providing a massive boost to the Canadian economy.
The oil and gas trust sector is now generating enough cash to pay distributions to unitholders and finance capital expenditures for growth, according to a recent report from Scotia Capital Inc.
Trusts also benefit pensions and retirement savings, said Geoffrey Hale, a professor at the University of Lethbridge. Trust investments may help to offset Canada’s plummeting savings rate, he noted, while providing Baby Boomers with taxable retirement income down the road. The taxation of these savings could stave off government deficits in the future, as our population ages and economic growth slows.
It’s also unclear why it’s preferable to leave corporate profits in the hands of company management instead of individual investors. If that was the case, why have institutional investors, stung by scandals and mismanagement, banded together to fight weak corporate governance? Always deferring to executives, thinking they best know how to deploy corporate profits, is hazardous. Whether it’s BCE Inc. or Nortel Networks Corp., we should remember how much cash has been wasted on poor management decisions.
Ottawa’s ban on tax rulings has only created confusion for trust investors, while discriminating against companies and sectors that didn’t convert quickly enough.
While Goodale has temporarily halted the proliferation of trusts, he faces some tough decisions now that the asset class has swelled to a market value of $170-billion.
To discourage trust conversions, Goodale could cut corporate taxes, but that would be politically unpopular.
He could ban new trusts or certain types of trusts and grandfather existing ones, but that would provide an unfair advantage to those that have already adopted the structure.
Or, he could overhaul our inefficient tax system and eliminate the double taxation of dividends.
There is no perfect solution, but it is clear that Ottawa is paying the price for sitting on its hands.
In 1998, a committee studying business taxation warned then-finance minister Paul Martin about the growth of business income trusts, recalls Jack Mintz, president of C.D. Howe Institute. “I think Finance waited too long,” he said.
Goodale might argue that trusts are bad for the economy and the government’s tax base, but all we know for sure is that Ottawa could have acted much earlier instead of blindsiding investors and companies with decisions fueled by panic, not logic.
Financial Post kkalawsky@ nationalpost. com