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The Independent Accountants' Investment Counsel Inc. Submission in Response to Finance Canada's Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trusts and Limited Partnerships) consultation:

November 8th, 2005

Minister of Finance

Government of Canada

Dear Mr. Goodale,

Thank-you for taking the time to consult with and review the concerns of stakeholders in the "income trust" policy issue that is now before the Department of Finance. We are a small boutique investment firm managing segregated portfolios for approximately 500 families with an average portfolio value of approximately $600,000. Many of our clients have acquired their personal wealth through family businesses. The majority of our clients are focused on capital preservation and income generation as they are retired or near the age of retirement. We hold approximately 8 – 10% of our asset base in income trusts and REITs.

We wish to express our concerns over the announcement that you made in early September regarding your government's position on income trusts and your intention to address the issue in the coming months.

Our concerns are threefold:

First

, we have many clients who depend on a steady income stream from their investments. As you can appreciate, the low interest rate environment that has persisted over the past decade has had a negative impact on fixed income investors. Income trusts operating in mature businesses, returning their earnings and distributable cash to their unit holders have been a life line for those seeking more income from their portfolio. We would also point out that this income is fully taxed in the hands of the unit holders.

Many pensioners will be directly affected by any policy changes that effect either:

  • The flow through characteristics of investment trusts;
  • The amount of cash available for distribution to investors.

Secondly

, we are concerned about the uncertainty that the government has now created in this sector. Uncertainty itself is a major source of risk, which is logically offset by a demand for higher returns leading to weakness in the value of the underlying securities, as we have seen in the past eight weeks. This has led to the erosion of over $20 billion in value from the investment portfolios of hard working Canadians. One can argue that the weakness we have seen has been caused by rising interest rates and volatile energy costs. In the past however, the markets have quickly absorbed these changes. Investors understand the impact and probability of these occurrences and factor them into the returns that they demand. Nothing however is more damaging to an efficient market than uncertainty caused by the indecision of governments with the power to counter market forces. We urge the government to provide clarity regarding its position on income trusts as soon as possible.

Thirdly

, we would urge the government to stop focusing on the symptoms and turn its attention to the cause of the problem it now faces. Income trusts have become a popular tool for Canadian investors because of the tax system and the failure of the Ministry of Finance to put in place a fair system of integration. The rising popularity of income trusts is merely a result of an uncompetitive tax system. Compounding the issue even further is the perception of a government that is "overtaxing" the average Canadian and failing to deliver value in the services that it provides.

We are thus urging you and the Department of Finance to:

1. Recognize that the system of integration needs to be addressed before policy changes are contemplated for income trusts.

2. Resist the temptation to implement policy changes based upon weak and unsubstantiated arguments regarding tax leakage and the rhetoric put forth and driven by socialist agendas.

3. Recognize that income trusts are a legitimate business structure.

4. Recognize that distribution of a larger portion of earnings is prudent in mature businesses that have limited and unattractive re-investment opportunities.

5. Make this position clear to the markets immediately.

Yours Truly,

M.H. Williams, P.Eng., MBA, MTax
Associate Portfolio Manager

The Independent Accountants' Investment Counsel Inc.
145 Main Street East
Listowel, Ontario
N4W 2B5

(519)-291-2817


November 9th, 2005

Minister of Finance

Government of Canada

Dear Mr. Goodale,

I have read the Department of Finance's Consultation Paper (September 2005) entitled "Tax and Other Issues Related Publicly Listed Flow-Through Entities (Income Trusts and Limited Partnerships)". I have a few questions and concerns that I would appreciate clarification on.

First, page 39 identifies approximately $300 million tax leakage in 2004 due to the FTE structures. Based upon the figures provided and my calculations, this assumes that all earnings are paid out immediately either as dividends or as a capital gain under the "corporate structure" and thus the tax imposed on those distributions (dividends and capital gains) will be received in the current year.

The corporate structure typically retains earnings and delivers this back to the shareholder in the way of a capital gain (as you have identified). I believe that the calculation is misleading and fails to recognize that there is deferral of the tax to be paid by shareholders on the capital gain.

Obviously some discount factor to deal with the timing issue (time value) should be applied to the taxes paid by shareholders under the corporate structure ($405 million). If this discount factor is 75% (which would represent a holding period of approximately 4 –5 years and a retention rate of 70%), then I would suggest that the total tax leakage for 2004 may actually be $200 million rather than the $300 million identified in the paper.

Secondly, it is also my understanding that one of the key opponents to Income Trusts within the Ministry of Finance was an architect of the changes that halted the growth of the income trust structure in Australia. The table on page 24 indicates that Australia has a full system of integration. It is not clear from the discussion in the paper if this was in place before the changes or if full integration was implemented as a part of the changes undertaken.

I would appreciate a detailed to response to my concerns and questions.

Yours Truly,

M.H. Williams, P.Eng., MBA, MTax
Associate Portfolio Manager

The Independent Accountants' Investment Counsel Inc.
145 Main Street East
Listowel, Ontario, N4W 2B5
(519)-291-2817