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Ravi Desai'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:
1. Does the tax advantage of FTEs relative to public corporations have a significant impact on how businesses are organized in Canada?
Yes, businesses will organize themselves in any manner as to increase the profits getting into the hands of their owners at the end of the day (after-tax profits).
2. Have FTEs had a significant impact on tax revenues? Is there potential for revenue losses to grow in the years to come?
FTEs have only had a significant impact on corporate tax revenues. However, taxes are being made from individuals. Also, the increased "disposable income" that the public gets exposes it to an increase in sales tax and other income tax (interest, capital gains on succesive investments) revenues. An increase in disposable income means that the public is liable to invest more in the business sector and thereby improve the total absolute (dollar-value) tax revenues to the government.
3. What impacts are FTEs having on investment decisions and the allocation of capital in Canada? Is the overall impact on the economy positive or negative?
Due to the favourable tax treatment of FTEs, more capital flows to them than in the past. This figure is still not a great amount, since corporations are the most popular means of running a business. The argument that this tax treatment "distorts investment decisions and leads to reduced economic efficiency" is unsupportable. The favourable tax treatment of FTEs only affects the ownership type of the business, it does not affect what the business is dealing in. The dollar amount invested in the business will continue to remain the same and the business will continue to run as before. The impact on the economy is positive, though slight.
4. Given the important role that tax-exempt investors play in Canadian capital markets, and could play in the FTE market, what impact could this have on government revenues and economic efficiency?
Due to the flow-through nature of the FTE and the tax-exempt state of the investor, their will be a decrease in the income tax from this source of taxation. But tax free money equals more money (disposable income), and so there is an increase in the velocity of money in the economy. Also, since pensioners will be getting more income, the reduction of entitlement payments due to the fall in tax revenues would be a minor issue.
5. Overall, are there public policy concerns about FTEs and how the tax system influences their existence, and if so, what actions should be considered to address these concerns?
Given the arguments in Answer 4, there should not be a limit of pension fund investments in business income trusts. Such a limit would mean that the pensioners do not gain much more disposable income than right now and at the same time the government will not have the revenues to pay them their entitlements. Such a situation might prove financially unsound. The Department of Finance, Canada has my permission to post this submission on it's website. Any communication with me should be in English.