Feds to study income trust boom
The finance department paper concedes that the economy might benefit if trust unit holders, including major pension funds, find a more productive use for cash flow than a slowgrowing business. But retail investors may not know best how to reinvest the cash, and the tax gimmick may drive businesses that need capital for growth to convert to an income trust before they become mature. They would then need to do a costly issue of new trust units. Ottawa had proposed in the 2004 budget to limit holdings of income trusts in pension plans, whose members might not pay tax on trust distributions for decades, then later backed off under pressure. The estimates of $255 million in tax revenue lost due to income trusts in 2004, and $45 million due to limited partnerships, assumes that 39 per cent of trust units are held within tax-exempt pension plans or other registered plans. But the authors admit they have little data to support that estimate. An industry- sponsored study last year by HLB Decision Economics Inc. estimated the immediate tax loss at $217 million on $85 billion worth of income trusts would be largely offset by higher tax revenue in future.
Possible measures put up for discussion include limiting the deduction of interest expenses by operating companies, taxing flow- through entities like corporations, or better integrating the personal
and corporate income
tax system. These
changes could all hurt
the price of trust units.
( A larger tax credit for
corporation dividends received outside of a tax-deferred savings plan would help level the playing field with trust. No corporate income would then be taxed twice, at the corporate level and partly in the hands of investors.) The Ontario Teachers’ Pension Plan said it made more than $900 million on income trusts last year — enough to pay 25,000 taxable retirees their 2005 pensions. It welcomed discussion before any changes.
‘‘ We will continue to advocate on behalf of teachers and other working Canadians to ensure there is no discrimination against pension plans and RRSPs as participants in the Canadian capital markets,” said executive VP Bob Bertram.
Ottawa did not estimate provincial tax losses, which would vary by the number of local businesses converted into trusts. Ottawa collected an estimated $27 billion from corporate income taxes last year.