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

To whom it may concern:

I am writing to express my serious concerns about the Liberal Party of Canada's apparent intention to introduce legislation to increase taxation on income trusts.

Income trusts have proven to be one of the very few investment vehicles that can provide a predictable and significant income stream to keep Canadians less dependent on government upon retirement. Current rates of return on lower risk investments are insufficient for many retirees to sustain themselves from their own financial resources. Without a predictable, independent income stream, retirees will have to rely more and more on government programs for support and in doing so, will increase the burden on government funding.

Both federal and provincial governments have endorsed and indeed encouraged the growth in the income trust sector by endorsing or implementing limited liability legislation. And federal taxation laws which exert double taxation on dividends, first on corporate profits and then on dividend payments to shareholders, have discouraged investment in this area. Ironically, the Canada Pension Plan along with many other pension plans have invested in income trusts for the same reasons as individual Canadian citizens, to get a reasonable and predictable income stream to support retirement.

The damage to be done by implementing taxation on income trusts has and will continue to be extensive:

1. Government speculation on this matter has already taken approximately $20 billion out of the income trust sector due largely to investor fear that the government will once again change taxation rules in mid-stream.  This is a loss suffered by most Canadians citizens from either their personal or from their group pension plan investments including the CPP.     

2. The public invested in excess of $150 billion in low dividend companies thereby stimulating their growth and boosting the Canadian economy. This would not likely have happened without income trust opportunities. The risk to return ratio would have been too high.

3. Increased income trust taxation has and will continue to put at risk, government tax income from the billions of dollars in accrued, taxable gains that have resulted from income trust investments.

4. Income trusts have stimulated the acquisition of millions of dollars of international assets again boosting the Canadian economy.

5. Income trusts have encouraged corporations to distribute more of their profits to individual unit holders thus stimulating the economy. Without income trusts and given current federal taxation law, corporations would be more inclined to hold onto their cash.

Increasing taxation on income trusts to capture so-called tax leakage is therefore a flawed strategy for the reasons provided above. It lacks a full and credible cost/benefit analysis. It is a short sighted strategy that will harm more than it will help Canadians.

I strongly urge the Government of Canada not initiate increased taxation on the income trust sector.

Grahame Farquhar
Waterloo, Ontario