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Barry Kington'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:
Submission to Consultation on Flow-Through Entities
November 3, 2005
Thank you for the opportunity to participate in this consultation process. As a retiree on a rather moderate, non-indexed, pension, income trusts and limited partnerships have become very important to my wife and me in maintaining a reasonable income, particularly as we are also supporting an adult grandchild. I will not belabour this point any further, as I am sure that it has been made by hundreds of other participants. I would, however, like to raise a few questions, which I hope you will consider in your review.
Any references to gains or losses of taxes cover only federal tax, recognizing that in most cases there will be proportionate gains or losses in provincial taxes.
(1) In the Consultation Paper comparisons are made of the taxes that would be levied on $100 of income from corporate dividends vs. $100 of trust distributions, leading eventually to the conclusion that $300 million may be lost per year. This is correct as far as it goes. However, this assumes that the corporation would pay out $65 ($100 minus $35 of taxes) while the trust would pay out $100. In fact, trust yields are normally 7-12%, compared to maybe 3% for corporate dividends, a ratio much higher that 100:65. May not that suggest that trusts are paying out a much higher proportion of earnings, and that the government has a much larger tax base from trust distributions than it would if only corporations existed, and that the apparent loss of taxes may be much less than you have estimated? It is my understanding that tax revenues have been increasing, resulting in larger than expected budgetary surpluses. Is it not possible that this is at least partly due to increased income flows as a result of the rapid growth in the trust sector?
(2) Is sufficient consideration being given to the downstream tax revenue accruing from the formation of wealth, be it paper or real, in trust and LP valuations? The very fact that the government has initiated this review has caused valuations to drop by $25-30 billion, depending on who one believes. If no further damage is done, my rough calculation indicates that this alone could result, over a number of years, in a tax loss of $4-5 billion in RRSP/RRIF and capital gains taxes, a high price to pay for a $300 million per year saving. Any action which further undermines the sector could result in significantly higher tax losses. Is it reasonable to expect that this loss of value would magically transfer to the corporate sector?
Consider my family situation. Since September 30, the value of our IT and LP holdings has dropped by some $26,000, ($5,000 in a RRIF, $21,000 in non-registered accounts). This can result in a tax loss of about $4,500 when we die in a few years time, and we are only one of maybe a million families affected.
(3) Concern is expressed about tax-exempt entities such as pension funds. Is account taken of the fact that pensions are eventually paid to retirees who then have to pay taxes on them? With the move to defined contribution, rather than defined benefit pension plans, the more money they make the more taxes the government eventually collects. Any move to reduce this capital accumulation is an obvious loser for the government. The corporate tax lost on a 3% dividend is more than made up by the personal tax on a 9% trust dividend.
(4) The fact that non-resident unit-holders are effectively getting a free ride should not result in a change that penalizes domestic unit holders. I would hope that you would give priority to increasing foreign withholding rates in preference to imposing a domestic tax assessment in order to balance this advantage. I am sure that the U.S. would do the same.
(5) It is unfortunate that the concept of "partisan politics" has been brought into these considerations. As a voter, I expect any government, whether or not I voted for them, to accept the stewardship of the nation's economic welfare and to ensure that all segments are treated fairly. This matter of the taxation of FTE's is not just an argument between the Finance Department and Bay Street. Both will survive regardless of what decisions are reached. The ones who have the most to lose are the small investors, mainly retirees, and those preparing for retirement, who have invested in their future to a greater or lesser extent in income trusts, which they were led to believe were secure entities. I would hope that their interests would be uppermost in your minds as you proceed through this review.
(6) One final though - $30 billion is an enormous amount of money. When a hurricane causes this much damage it is considered a national catastrophe. I hope the government will think long and hard before it assumes responsibility for a similar, or larger, loss.
Niagara Falls, Ontario