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Ian T. Scott'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:

Denis Normand
Tax Policy Branch, Business Income Tax Division
Department of Finance,
17th floor, East Tower,
140 O'Connor St.
Ottawa, Ontario
K1A 0G5

I would like my submission posted on the Department of Finance Web site. For purposes of posting, I am providing an original source document in MS Word in addition to any other materials.

RE: Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trusts and Limited Partnerships)

Dear Sirs:

Recent statements by the Finance Minister indicate that the government is considering the imposition of punitive measures on income trusts. These statements have roiled the markets and confused investors. In order to insure a fair tax policy and stable policy regime, my wife and I urge the Minister not to impose new taxes or other measures that could damage the vitality and growth of income trusts.

Whether tax revenue is lost due to income trusts is a very complex issue. The Department of Finance claims that $300 million in tax revenues were lost in 2004-05. This claim did not include a forecast of deferred tax collections from income trusts held in retirement plans. Nor does this claim consider foreign capital that has flowed into this sector and generated additional revenue. Even if we assumed the government estimate to be accurate, it represents only 15/100ths of 1 percent (.0015321) of the $195.8-billion in tax revenue reported by the Department as income for that year.

No available data supports the Minister's contention that distributions made by income trusts harm either trusts or the economy. Rather, the profitable performance and growth of flow-through entities over more than ten years provides dramatic proof that this form of equity is an effective use of capital. A thorough analysis of income trusts' total effects on the economy is needed before government intervention can be considered prudent.

Canada has created an innovative addition to equity markets in the form of income trusts. They are receiving international recognition and investment as a valuable form of security that offers the public opportunity to participate in the growth of Canadian wealth. They are uniquely accessible, high-yield, asset-backed equities that are priced in the market to reward investors for risk capital.

With their emphasis on ownership of productive assets, profitability and cash flow, many income trusts have enhanced standards of corporate accountability to investors and fiscal discipline by management. Flow-through entities have revived investor confidence in financial markets while attracting low-cost capital to develop Canadian enterprise. The vitality of these securities is reflected in their growth and increasing value. As an investor in Canadian income trusts, I want to ensure the continued health, competitiveness and growth of our markets and economy.

Mr. Goodale said there is concern that the large number of income trusts could prove harmful to the infrastructure of the Canadian economy because trusts pay out all excess cash to investors, and don't retain much to reinvest in their businesses. But on closer inspection, most of the income trusts that have come to market over the past few years would not have been growing their businesses rapidly as private companies anyway. Their excess cash would merely have gone to a few people – their owners – rather than to a broader group of investors. That's because the type of business suitable for trusts is generally in a mature industry and has low capital expenditure requirements.

So the trust structure doesn't damage the financial infrastructure -- and the broader distribution of excess cash allows more investors to receive a share of the profits. Whether that money is spent or saved for retirement, it will still be taxed at some point. And putting money into people's pockets helps the economy, while cash saved for retirement plans offsets potential government costs in the future -- a big concern given the aging Canadian population

I am one of those retirees paying plenty of income tax and GST in large part thanks to the income trust distributions and mandatory RRIF withdrawals. I've paid my dues over 40 years of working. Don't retroactively tax income trust distributions and threaten my wife's and my survival. Likewise, my 97 year old mother-in-law is able to maintain her financial independence due to trust distributions.


Ian T. Scott, CFA
Parry Sound, Ontario