Trusts cost $1.1-billion in lost tax

“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 tax

The Globe and Mail
October 17, 2006

Trusts cost $1.1-billion in lost tax
Steven Chase

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.

With reports from Heather Scoffield in Toronto and Rhéal Séguin in Quebec City


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