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Alan Lazzari'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:

Comments on Publicly Listed Flow Through Entities

By way of introduction, I am a Chartered Accountant of 25 years, most of which has been as a tax consultant. My comments will be brief and are made as an individual and not on behalf of any organization.

Your focus in this consultation appears to be to prevent the revenue 'loss' resulting from the use of FTE's. If you want to understand the growth of these forms of business entities, simply look at the amount of tax that is taken from every dollar of taxable profit earned by Canadian public companies. Here is an example:


Profit before tax 1,000
Corporate tax (36%) (360)
Net profit available for dividends 640
Tax paid shareholders on dividends (31.5%) (202)
Remaining profit after all income taxes 438
Total federal and provincial income taxes 562

Individual rates are for a high rate earner in BC

If the individual receiving the dividend in this example, spent her $438 she could then pay a further $61 dollars in tax to federal and provincial governments by way of sales taxes.

The total tax paid on the original $1,000 of profit then rises to $623 or 62.3% of profits generated by a Canadian public company. This rate of tax has in fact decreased in the last few years.

Is it any wonder that high income individuals in Canada feel frustrated by the level of tax paid to our governments? This frustration is the cause for the willingness of many Canadians to buy into tax shelters, to put their money into off-shore entities and to increase the popularity of FTE's.

Now that Canada seems to have its budgets under control and producing annual surpluses, the taxing authorities should try to find ways of reducing their bite into Canadian productivity. The tax take should not be 62.3% of Canadian profit.

Instead of producing new and ever more complex tax rules to discourage the use of FTE's, the government should look for ways of reducing the tax burden on profits earned through Canadian public companies. This could be done simply by increasing the Dividend Tax Credit applicable to dividends paid by Canadian public companies. In doing so, an investment in a Canadian public company would become as or more attractive than FTE's. (In fact, the same should be done for private companies that pay the same rates of tax as public companies.)

I believe that all Canadians accept the need for a reasonable level of tax revenue to support the many services provided by governments to all Canadians and in particular to those less fortunate. Despite recent efforts by both federal and provincial governments to reduce tax levels, the burden of taxation on Canadians is still too high. One doesn't have to do complex economic studies to determine this state of affairs. Canadian taxpayers feel the pinch of high taxation and express it by their attraction to any investment vehicle that they expect will allow them to reduce their taxes. FTE's are the current beneficiaries of this reaction.

If you reduce the tax burden you will reduce the attraction to FTE's and also to other forms of tax minimizing investments.

Finally, I recognize that there are other reasons for the popularity of FTE's, but I believe that high tax rates are the prime factor for their emergence as a publicly traded investment.

Alan Lazzari
New Westminster, B.C.