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Douglas Brown's Submission in Response to Finance Canada's Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trusts and Limited Partnerships) consultation:


The Minister of Finance has indicated that he is more concerned about economic growth and jobs than the media reported lost tax revenue issue related to income trusts.

This implies that the multiplier effect from non-trust corporate spending is somehow more beneficial to the Canadian economy than increased spending by consumers and investors resulting from an increase in income trust distributions. There is much to suggest that such a conclusion might either be false or that the perceived differences are in fact modest.

Important sectors of the corporate industry in Canada are increasingly investing abroad; for example, witness the offshore investment shifts taking place in the mining, automotive and banking sectors to countries such as Chile, China and the USA respectively.  Such decisions neither add to aggregate demand or tax revenues in the short-medium term in this country. Other such notables as Nortel and Bombardier have imploded to the detriment of both the economy and jobs, when huge sums were spent on uneconomic investments, mostly offshore. I suspect the multiplier effect to aggregate demand in Canada from the collective of such corporate entities to be flat or slightly negative at best.

On the other hand, Canadian consumers receiving monthly distribution payments from income trusts and limited partnerships are either spending that money on Canadian goods and services and paying higher income taxes, or investing it in RRSP's where the vast majority is reinvested with Canadian corporations, income trusts or limited partnerships, including IPO's. Excluding the saved investment portion, the spending portion is spent and re-spent over and over again by Canadian providers of  goods and services. The resulting  multiplier effect of that spending should be very positive and add significantly to both overall aggregate demand and tax revenues. Benefits from the saved RRSP portion will be deferred, but still mimic the spent portion in the future when they are converted to income. These benefits are real and some recognition must be given to the fact that trust and partnership distributions may well account for the recent and substantial ,year-over-year, increases in overall government revenues.

The tax revenue issue related  to income trusts  and limited partnerships appears to be very insignificant by almost any measure; however, for retirees and pensioners the monthly income and unit share values which they provide are vitally important for their well-being. For the first time, because of the their monthly distribution payment mechanism, retirees can now manage their own investment income streams without the need of assistance from paid advisors to derive a monthly paycheque from their investments. Comparable income streams from corporate dividends and government bonds are paid quarterly and bi-annually and would require portfolios that are at least 2-3 times greater in size, and even then, the percentage returns would barely cover core inflation. Core inflation may still be low because of certain exclusions, and the major items excluded such as municipal and provincial taxes, insurances and gas/water/electricity/fuel bills have risen much faster than core CPI, and collectively they will represent a very large share of retirees' income.

Many income trusts have, and are still expanding, and do so in large part  because of  low payout ratios or by issuing new units to investors. Many corporations could have made better investment decisions had they gone to the capital markets for the funding of new investments, because doing so would have screened out many of the bad decisions that have been made, and in this category, there are countless examples. The quid pro quo is that the decision making model of income trusts and limited partnerships could be argued to be superior to that of corporations because of their greater dependence on capital markets for growth equity, and their discipline of maintaining monthly cash distributions to investors, both of which could  be considered a strong plus for improving productivity in Canada.

In light of the above, I would strongly urge the Dept. of Finance to keep the current rules for income trusts and limited partnerships exactly as they are.

Kindly communicate with me in English should you wish to do so, and as requested, I herewith grant you permission to post this response to the Finance Canada Website.

Yours truly,

Douglas Brown
Oakville, Ontario