- Consulting with Canadians -

Archived

Archived information

Archived information is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.

Robert John Patten'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:

R.J. Patten
Orleans, Ontario

To: Department of Finance 

The following correspondence is submitted in response to Department of Finance Canada's discussion titled "Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trusts and Limited Partnerships)" dated September 2005.

Thank you for the opportunity to make this submission on a subject that is critical to well being of pensioners, retirees and seniors. . I do not speak for any organization nor am I a formally trained financial expert. However, as a senior/pensioner/retiree, a person who spent over 40 years in the workforce, managing a home, bringing up family and preparing for retirement I do believe that I have some qualifications to comment on financial matters. I am quite aware of how changes to public policy (particularly taxation) and how the influence of special interests can affect an individual's financial planning. I am acutely aware of how changes to long standing income trust rules can have a devastating effect on my finances and those of other investors, particularly pensioners, retirees and seniors. I am alarmed and vexed that changes are even being considered that could upset 40 years of planning for my retirement.

I am responding to the Department of Finance's discussion because statements related to "advance tax rulings on income trusts" made by the Minister of Finance, in mid September, have already cost my wife and me considerable financial loss through devalued income trust investments. We fear that ill thought action on the part of the Department of Finance and therefore the Government can jeopardize our retirements. This fear is not unfounded since past Government initiatives have had negative impacts on our financial health. Fortunately we were working then and able to recover from the setbacks. Now we are retired and recovery, if possible, will be considerably more problematic if the Government introduces measures causing further significant investment losses.

I hope the Government will be extremely cautious in this matter and carefully consider all the potential damage it can cause to pensioners, retirees and seniors if it chooses to proceed with ill considered, sudden and radical changes to income trust rules.

This submission may be posted on your web-site.

Robert John Patten

English is the preferred language for contact.


Tax and Issues Related to Flow-Through Entities

Comments have been made on items of interest as they were encountered on the Department of Finance discussion.

Foreign Property Rule Elimination

1. Budget 2005 Foreign Property Rule Elemination: The elimination of the foreign property content in pension funds, RRSPs and RRIFs was clearly a mistake on the part of the Government for the following reasons:

a) It allows more money to flow out of the country in support of foreign businesses which are in competition with Canadian businesses;

b) This outflow of money is tax deductible which means the Government is actually funding foreign competition to the detriment of Canadian companies at the expense of Canadian taxpayers;

c) It takes away funding from Canadian businesses and makes it harder for them to expand at home. This reduces employment opportunities in Canada and results in higher public assistance requirements and is a self-induced Government waste of tax dollars. Some innovations that may have occurred in Canada will not take place and any benefits from them will be foregone. Corporate and personal taxes expected from expanding businesses will be foregone. Canadian standards of living will remain static or decline;

d) It encourages businesses to set up foreign branches in an effort to tap the money going outside of the country. Therefore Canadian jobs are exported out of Canada causing a negative effect on the Canadian job market. Corporate and personal taxes expected in foreign countries will benefit them and increase the standards of living there but not the living standards for the majority of Canadians; and

e) There was nothing to prevent Canadians from investing off shore prior to the change in foreign content limits. However, why the Government would allow tax deductions when money in pension funds, RRSPs and RRIFs is invested on foreign soil is very puzzling. Why does the Government actually fund foreign competition to Canadian businesses? Even though the Canadian market represents only a small part of the total world market it seems far more logical to allow zero foreign content when the Canadian taxpayer is providing, through tax deductible contributions, subsidization of the pension funds, RRSPs and RRIFs. It would be better for the Government to eliminate tax deductions for pension funds, RRSPs and RRIFs completely than to deliberately encourage investment out of the country.

Tax Exempt Investors

2. Reference is made to investors that put investments in such things as pension funds, RRSPs and RRIFs and pension funds;

a) If there are going to be changes then they should be done in an incremental manner so there is no sudden disruption of the trust market. Changes that depart radically from current laws could result in sudden, sharp reductions in the value and distributions of Canadians investments; and

b) Changes that purposely undermine the worth of trusts are unfair since Canadians made their investment decisions under a certain set of rules. To cause Canadians economic hardship is unjust simply for the reason that the Government of the day did not foresee potential problems with trusts when they first came into existence and later when they became increasingly more popular. Income trusts have existed for over 25 years and have become popular with investors. Sudden insight on the Government's part that there may be some foregone tax revenues does not justify throwing the income trust market into chaos. It will also have the same chaotic effect on investors who put money into them based on a set of rules in place at the time they considered the investment.

Tax Revenues

3. Tax Revenues – foregone revenues, real areas for concern:

a) The effect on tax revenues is minimal. Even though there is immediate foregone tax of $300 million much will be recouped as FTEs are traded and distributions are taxed and spent. At some point distributions will be taxed as income. They will generate GST and PST revenues to the federal and provincial governments. They will also be counted as income for tax purposes by businesses when those distributions are spent at restaurants, stores and a host of other concerns;

b) When compared to the Federal Government budget of $200+ billion the $300 million in foregone taxes is insignificant. The $300 million is equal to about 0.15% of the Federal budget, or less than one sixth of one percent;

c) Of far greater problem than the $300 million should be the $40 billion in debt servicing charges for the Federal debt of around $500 billion. However, there seems to be little concern over this even though it represents an amount over 130 times greater than the perceived losses due to FTEs. It should be noted that every time the Bank of Canada raises interest rates by 0.25% the cost of servicing the debt rises by about $1,25 billion each year, an amount over four times the tax losses attributed to FTEs. However, the Bank of Canada has in fact raised interest rates twice (0.25% each time) in recent months and has actually caused debt servicing charges to rise by about $2.5 billion per year over what it was this past summer (more than 8 times the losses attributed to FTEs). Furthermore the Bank of Canada may not yet be content to leave interest rates where they are and numerous financial commentators are projecting at least two more increases in the coming months. Should these increases materialize the federal debt servicing costs will be up by about $5 billion a year, or about 17 times greater than the losses due to FTEs. When comparing the foregone tax due to FTEs to the cost of servicing the debt it makes one wonder if the Government's concerns are actually focussed in the right direction. Huge revenue gains achievable through debt reduction make losses due to FTEs virtually insignificant. Debt reduction appears to be far more fertile ground to till than does changing the rules for FTEs;

d) Furthermore, the Government shows little hesitation in allocating billions of tax dollars to businesses of all stripes for various programs aimed at improving technology, innovation, encouraging expansions, etc, in the hope of improving the economy even though quite often the returns do not seem to justify the expenditures. If the Government finds itself in a cash crunch there are certainly programs of questionable effectiveness that could be cancelled that would easily make up for the short fall being attributed to income trusts; and

e) Foreign aid should also be reviewed. Canada provides aid to China even though it maintains huge military forces and nuclear weapons and space programs. Canada also provides funding to corrupt regimes where foreign aid is used to build palaces and support European shopping trips for corrupt leaders and their families. Such aid should be stopped and only be sent to places where the money is going to benefit the recipient countries and their citizens as a whole.

Impact of FTEs

4. Impacts of FTEs on investment decisions and capital allocation in Canada. Is the overall economic impact positive or negative?

a) As an individual investor and a pensioner FTEs have become an attractive investment vehicle, particularly since the liability issue has been addressed to some degree;

b) Bonds and GICs do not pay enough to make them useful outside of an RRSP, RRIF or pension since inflation and taxes take up more of their value than they actually gain unless they are protected within RRSPs, RRIFs and pension plans. They do not provide a useful return on investment that can actually be used to buy a loaf of bread or a tank of gas if they are expected to form the basis of daily financial support, or a supplement to pension incomes, for a person's every day living;

c) Stocks quite often do not pay dividends and therefore investors have to depend on them increasing in value if they are to be used to provide for daily living expenses. Unfortunately there is no guarantee that stock values will consistently climb and provide a consistent income stream. In the year 2000, for example, they did just the opposite;

d) Stocks that do pay dividends, more often than not, pay at rates less than GICs and Bonds (Loblaws pays about one percent) and so are often no more useful than GICs and Bonds as far as providing funding for daily living expenses;

e) Mutual funds are another investment choice. However, for the most part their distributions, if they have any, are small. Mutual funds also suffer from losses due to management fees, which, whether the funds make money or not they are paid to the managers. In fact mutual funds sometimes seem merely to be vehicles to transfer wealth from investors to managers. How many mutual fund managers are driving expensive cars and yachts compared to investors? I personally don't know any mutual fund investors who own yachts but I do read about mutual fund mangers who enjoy their yachts;

f) This leaves income trusts, which generally pay distributions at rates in excess of what is available through Bonds, GICs, stocks and mutual funds. Income trusts can experience problems and reduce or stop paying distributions or they can simply go broke and leave investors with nothing. However, with some skill and a little luck or good advice it is possible to accumulate a stable of income trusts that are more financially beneficial than stocks, bonds, GICs or mutual funds;

g) Therefore, FTEs have had an impact on my personal investment decisions and allocation of capital. I prefer them to stocks, GICs, bonds and mutual funds. This doesn't mean that I do not own stocks, GICs, bonds or mutual funds but I prefer income trusts; and

h) Overall the economic impact on my wife and me has been positive. Since we spend our income trust distributions, for the most part, at local businesses, or other parts of Canada, the economic impact on them is also positive. We also pay income taxes on our distributions, PST and GST on our purchases and businesses pay income taxes on money (derived from income trusts) that we spend in their establishments. I have to conclude, therefore, that the economic impact of income trusts is positive.

Public Policy Concerns

5. Public policy concerns about FTEs and how the tax system influences their existence. Actions to be considered to address these concerns if there are any:

a) As an investor in income trusts my concern is that the Government does nothing that will cause the value of my investments or their distributions, to decline. My income trust distributions are important supplements to my wife's and my own pension and CPP payments. Loss or severe depletion of income trust distributions would have a significant negative effect on our economic well being. Economic stress would result in more reliance on Government assistance and introduce health and mental stresses which, as retirees, we prefer to avoid;

b) I want no action to be taken that will cause the value of income trusts and their distributions to decline. However, if action is taken it should be well thought out and be done in small increments over a long period of time so that the income trust market is not thrown into sudden turmoil. I am concerned that the Government may take precipitous action without due regard to how it will effect the economic well being of investors, particularly the hundreds of thousands of retirees and pensioners whose economic well being is dependant on a healthy income trust market. Many retirees and pensioners are past the point where they can weather a financial upset. They will not be able to find a job to make up for their financial losses or they will be unable, due to physical or mental degeneration, to take a job even if it were available. To cause such an event in the lives of pensioners and retirees would be a breach of trust on the part of the Government. It would show that the Government has no care and compassion for the well being of Canadians;

c) In a recent e-mail from the Finance Minister's office I learned that there has been considerable interest in this matter. Managers of pension funds and investors have shown support for income trusts. Some entrepreneurs and managers of corporations say changes are required. However, entrepreneurs and corporate managers are employed and/or will not have to suffer the consequences of changes that may cause devaluation of income trusts or their distributions; and

d) I was also informed in the Finance Minister's e-mail that some Governments are complaining about income trusts. However, I suspect the complainers have buried themselves in huge debt after years of deficit spending and have only themselves to blame for their financial problems. Radical changes to the rules could cause serious economic harm to a large group of people (pensioners/retirees/seniors) who are unlikely to look at entrepreneurs and high placed corporate managers as the authors of their distress. They will look at governments, particularly the Federal Government, as the architects of their misery. There seems to be considerable potential for many very cranky voters in the coming election.

Conclusions

Foreign Property Content

Elimination of the Foreign Property Content rule for pensions, RRSPs and RRIFs costs the Government money and costs Canadians some measure of prosperity. Less money is available to domestic businesses as more investments are made out of the country. Canadian businesses expand less at home and some may move off shore costing Canadians jobs and the Government increased support requirements.

Recommendation: Reintroduce a "Foreign Property Content" rule for pensions, RRSPs and RRIFs. Suggested foreign property content is zero since there are no valid reasons to support foreign businesses through Canadian taxes. Care should be taken to ensure that "clone funds" and their like are not acceptable.

Tax Exempt Investors

Tax Exempt Investors have been investing under a fairly consistent set of rules for about 25 years as far as FTEs are concerned. Radical changes have the potential to cause chaos in the income trust market. The Finance Minister's intemperate mid September 2005 remarks (which were only a hint that something "might" happen) cost income trust investors about $20 billion. Much of this loss was borne by retirees and seniors.

Recommendations: Any changes should be made incrementally over a long period of time so the income trust market is not thrown into chaos. Changes should not be made which cause the value and distributions of income trusts to decline. Should the Government act in a precipitous manner directly causing a negative impact on income trusts then a program to provide full financial compensation back to the September 2005 levels should be introduced.

Tax Revenues

Tax Revenues may be foregone in a minor way due to FTEs. However, there are far greater tax revenues to be recouped in other areas. The Federal debt currently costs about $40 billion a year. This is over 130 times more than the $300 million the Government "thinks" FTEs are costing. The Government also spends billions on businesses each year with seemingly little return (Partners in Technology).

Recommendations: Paying off the Federal debt completely frees up about $40 billion in tax dollars and therefore a defined program to pay it off as quickly as possible should be a top Government priority. The Government should also review all programs that provide little benefit to the country. Foreign aid should be included in this review and funding should be cut off where it does not help recipient countries and their citizens as a whole.

Public Policies

There are concerns the Government will implement Public Policies that cause damage to the income trust market. Entrepreneurs and corporate managers concerned with income trusts will not suffer the consequences of a diminishment of the income trust market, however investors will. Governments expressing concerns with income trusts have only themselves to blame. Years of deficit spending have put them in a hole and they are looking for a way to get out. Considerable skepticism should be applied when considering the validity of entrepreneurs, corporate mangers and governments concerns about income trusts. Damage to the income trust market is a direct assault on investors, particularly pensioners, retirees and seniors, many of whom have come to rely on steady distributions. Tampering with long established rules thereby causing investment devaluation and declining distributions will cause definite financial hardships to a large group of people, many of whom may not be able to make up the losses at this stage in their lives. Pensioners, retirees and seniors do not deserve intentional sabotaging of their financial health by uncaring Governments.

Recommendation: Do not make changes that will have a negative impact on the large number of ivestors in FTEs. There has potential to cause extreme economic hardship for many pensioners, retirees and seniors.

Investment Decisions/Capital Allocations

Investment decisions and capital allocations are impacted by FTEs. Numerous investors probably consider the impact positive since there is often little to gain from GICs, Bonds, stocks and mutual funds. There seems to be more certainty in receiving a useful income stream from FTEs than in other investments even if they are not without risk.

Recommendations: Do not make any changes that will have a negative impact on the large number of ivestors in FTEs. There is potential to cause extreme economic hardship for many pensioners, retirees and seniors.