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Andrew and Sharon Adams' Submission in Response to Finance Canada's Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trusts and Limited Partnerships) consultation:
Andrew and Sharon Adams
First let me say that we think that the government has handled this issue in the wrong way in that it first suspended all rulings on new trusts thus creating market uncertainty and substantial capital losses and THEN started this consultation process. The correct way to approach this would have been to go ahead with the consultation process, consider the feedback, THEN make a policy decision and make a public announcement of the implementation of the policy.
We think that the trust market has gotten too frothy in recent months with many businesses converting to trusts (business trusts) that should not be in the trust format. However these would have straightened out in time as the improper trusts would eventually fail and the assets would likely be purchased by regular companies and we would be back at square one. This frothiness has been partially the result of the inequity of tax treatment of the two types of businesses as you point out in the consultation article. This inequality does need to be addressed, hopefully by giving better tax treatment to dividends paid by regular corporations rather than introducing double taxation to the trusts.
We think that the government's tax "loss" argument is not really valid in that it is really just tax "deferral" because all the distributions paid by trusts on units that are held in RRSPs will eventually be taxable when the RRSPs become RRIFs. In fact every year as people turn 69 the government enjoys taxation on new RIFF withdrawals.
We think that having more companies convert to trusts from corporations could indeed hurt the competitiveness of Canadian companies overall since trusts are more focused on delivering steady revenue and distributions than they are on growing the business. That is why we hope that you will level the playing field by giving better tax treatment to regular dividend paying corporations which will make it less attractive for these corporations to convert to trusts.
We believe that Income Trusts are an important component of may Canadians (including ourselves) retirement investment plans and we feel that making these trusts produce lower distributions by taxing them at the trust level would be harmful to anyone hoping to retire with a reasonable level of investment income. We hope that you also appreciate that these same investors are also conscientious voters who would not take kindly to a decision that harms their retirement plans.
Thanks for allowing us to comment on this important topic.