The man shows his courage

The truth is that corporations paid the equivalent of 60 per cent of all individual taxes collected in the early 1960s, according to national accounts. Since then, the figure has dropped to about 30 per cent. In other words, the relative tax burden on the individual has doubled, while on corporations it has been halved.

The Globe and Mail
November 1, 2006

The man shows his courage
Eric Reguly

Jim Flaherty is exceedingly brave. He may also be politically suicidal. But the man did the right thing.

Last night, the federal Finance Minister shocked investors with the announcement he would slap a tax on distributions from new trusts starting next year in a bid to curtail a market that threatens to swamp the Toronto Stock Exchange and forever shift the tax burden from corporations to individuals. He called the endless conversions "a growing trend to corporate tax avoidance."

The move was a shock because no one, not even U of T tax guru and income trust critic Jack Mintz, saw it coming. On a conference call last week, he said the chances of the Tories clamping down on trusts were "zero" or close to it.

Why? Because trusts are hugely popular with large groups of investors, notably pensioners.

And the Stephen Harper government would not risk alienating them ahead of an election.

But Mr. Flaherty both found courage and had courage thrust upon from an unlikely source — one Michael Sabia. Mr. Sabia is the chief executive officer of BCE Inc., the owner of Bell Canada. A few weeks ago, in response to the September announcement that telephone rival Telus would convert into a $22-billion trust, BCE said it would administer the same treatment to Bell Canada. There were already some $200-billion of trusts on the TSX; the addition of Telus and BCE would take the figure to $250-billion, up from a mere $20-billion a few years ago. Mr. Flaherty said nothing at the time, though political insiders such as former finance minister John Manley said he was half-crazed with the desire to stop the trust market before it became a $500-billion monster. If Telus and BCE could convert, there was nothing to prevent the entire TSX from doing the same.

Mr. Flaherty appears concerned about three things. The first is tax leakage, the second is national competitiveness (because trusts pay out almost all their profits, leaving little behind for reinvestment in the business), the third is tax balance. The last point is the one he stressed in his statement.

Tax balance — the relative proportion paid by corporations and individuals — was already in trouble in Canada. The rising trust market threatened to kill it. The impression given by corporations, with their lobbyists and PR men and speechwriters, is they pay the lion's share of the taxes in this country, and that the tax burden is making them uncompetitive in the global market. Nothing could be further from the truth. The truth is that corporations paid the equivalent of 60 per cent of all individual taxes collected in the early 1960s, according to national accounts. Since then, the figure has dropped to about 30 per cent. In other words, the relative tax burden on the individual has doubled, while on corporations it has been halved.

The trust market could theoretically shift the corporate tax burden to zero. In time, the individual, like Sisyphus, would have to push the tax stone up the hill all by himself. Fair and balanced? Forget it.

Mr. Flaherty will take enormous heat from pensioners, from pension funds and from the fat Bay Street firms that have made obscene profits from trust IPOs and conversions. They will try to massacre him.

But if the Minister is smart, as well as brave, he will say taxing trusts gives him more scope to reduce taxes on individuals. The economy will benefit. What trust investors lose may be more than offset by gains from lower individual taxes. If Mr. Flaherty gets this message across — more corporate tax burden means less individual tax burden — the Tories could win more votes than they lose. Go for it, Mr. Flaherty. And bravo.

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