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Andy Pool'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:
Honorable Ralph Goodale
House of Commons
I am writing to request that you support the continuation of the current tax treatment of income trusts. The benefits of the business trust and taxation model have been well articulated before the Senate Committee by supporters of income trusts.
1. Support for Canadian Seniors: The income derived from trust investment is heavily relied on by many seniors who have little or no pension income aside from that provided by government. Removing this income source will create hardship and anguish for many Canadians, and in many cases the government itself will have to make up the shortfall through, for example, higher OAS payments.
2. Support of Pension Funds: The higher returns typically offered by trusts will allow pension funds to more readily meet their funding obligations. This will better protect the future pensions of Canadians, and give corporations additional capital to invest for growth, and the government additional capital to invest in health, education and other social programs.
3. Fairness to Investors: Monthly trust distributions to unit holder investors include both return of and return on capital. Investors can decide on an ongoing basis whether and how to redeploy their capital. Typically non-trust companies retain all cash related to return of and on capital for reinvestment. Having an excess of capital relative to their core business needs, they attempt to diversify into other businesses in which they have little competency, often with disastrous results. The huge destruction of shareholder value which recently occurred at CIBC is only the most recent of many similar occurrences of asset write downs by corporations having too much cash, and not using it wisely.
4. More Efficient Use of Capital: With capital being returned to investors on a continuing basis, there is more competition among companies for this capital. Investors will make better risk/reward decisions and the capital markets will be more efficient.
Against these benefits, lies the concern that the government will lose significant tax revenue if the trust conversion trend continues. Taken in a longer term context this is unlikely since:
1. Trust distributions to pension funds are not taxable, but the pension payments to individuals, when made, are fully taxable as income.
2. Trust distributions to individuals are taxable as income at the full marginal tax rate, as opposed to dividends which are taxed at a much lower rate.
3. The tax rate paid by many individuals on trust distributions is much higher than the corporate tax rate.
4. Corporations try hard to reduce their tax costs by capital re-investment, often destroying capital in the process.
5. Governments at all levels will have to continue shifting revenue collection towards taxes on consumption, rather than production. In the context of current budget surpluses and of future government revenue collection issues, the concerns related to trusts are inconsequential.
In summary, my expectation is that your government will positively and proactively support the continuation of the current income trust regime.
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Retiree this year, angry investor and voter