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Brent Fullard'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:

September 22, 2005 edition of the Globe and Mail's Report on Business in an article entitled; "Ottawa tries to resolve income trust confusion" Mr. Goodale is quoted as saying that "Ottawa has to weigh its (income trust) effect on productivity..."whether or not you could be embedding a kind of sluggishness in the economy"..and the "long term implications of a business vehicle that essentially pulls off a revenue stream, leaving little flexibility for reinvestment in future growth and development"".

Firstly I would be extremely disappointed if Ottawa's internal debate about income trusts is veiled under the guise of a false concern relating to productivity, reinvestment and growth. The growth of Canada's economy is not going to be affected by the conversion of a selective subset of Canadian businesses into the income trust model. The Canadian capital markets and Canadian investors have proven themselves sophisticated enough to differentiate between business models that are "eligible" for conversion into income trusts and business models that are not. Businesses that exhibit a sufficient stability of cash flow and the promise of intrinsic growth (as distinct from capital induced growth) have proven to be businesses that are embraced by Canadian investors. The obligation to pay a steady (and increasing) monthly stream of income to investors under an income trust model brings an important degree of fiscal discipline to the governance of these public companies, analogous to the fiscal discipline associated with balancing the federal budget on an annual basis. The Enron and Worldcom scandals would unlikely have been perpetrated under the discipline of an income trust model, since it is easy to "cook the books" but quite another thing to falsify an ongoing dividend payment.

Secondly, Ottawa need not concern itself about the "sluggishness" in the economy that might be associated with income trusts. Income trusts are able to tap the deep demand in the Canadian income trust market should they wish to grow through acquisition or capital investments. Income trusts have a currency in the capital markets that equals or exceeds that of common share companies, the examples of this are numerous.

Thirdly at present there are approximately $180 billion in Income Trusts outstanding. I would hazard to guess that the aggregate ACB (adjusted cost base) of the outstanding income trusts would be no more than $140 billion, resulting in a potential unrecognized capital gain of $40 billion. Capital gains are taxable at approximately 24%. This unrecognized capital gain of $40 billion represents deferred revenue for the Government of $10 billion. This deferred tax revenue will evaporate should the Government impose a new tax on Income Trusts. Assuming the tax "leakage" of Income Trusts is $600 million (using the highest number cited by the Government), and assuming the Government imposes a new tax on income trust distributions, the Government will forego $10 billion in capital gains tax and realize $600 million in annual "savings". It will take 16 years for this tax policy to bear fruit. This doesn't strike me as prudent fiscal policy in light of the social policy impact to investors.

Finally, if Ottawa were to do something to alter the economics to an investor of income trust securities (of which I am one), I would consider this to be a capricious act. I together with thousands of other Canadians have made a significant "bet" ( to the tune of $180 billion plus) on Income Trusts. The only reason I have referred to this investment as a "bet" is because of the lingering uncertainty that Ottawa may choose to arbitrarily change the fiscal framework of Income Trusts. As an investor I can mitigate risk in many ways such as hiring the services of a proven professional money manager or by creating a diversified portfolio, however no amount of prudence on my part can mitigate the risk of an arbitrary change in tax law.

Thank you for your attention. You have my permission to post this submission on your website

Yours truly,

Brent Fullard
Toronto, Ontario