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Derek Speirs' Submission in Response to Finance Canada's Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trusts and Limited Partnerships) consultation:
Minster of Finance Canada
I understand your concern about corporations converting themselves into income trusts with the consequent tax drainage and capital reduction. My solution is to level the combined corporate/individual tax rates so there is negligible long term tax advantages to the income trust over the corporation for Canadians and yet not do harm to the economy in the process.
There is permanent tax leakage on income trust income paid to foreigners.
Canadian pension funds will eventually pay taxable pensions. Virtually all Canadians will have to pay tax on their RRSP/RRIF withdrawals. Of course, tax paying individual and corporate holders already pay tax on income trust income. The net taxes lost -- versus taxing dividends from tax paying corporations -- are mainly duplicative and should be eliminated anyway. The non duplicative long term exception is for the portion of business income received directly by foreigners and not taxed via the combination of corporate taxes and dividend withholding tax.
What is the simplest way of taxing foreign holders? A flat percentage withdrawal at source at the equivalent of a full corporate rate wherever the holders reside outside Canada. There should be no special 10% or 15% withholding tax treaty rates as with dividends or interest income earned by some foreigners.
If the federal government taxes income trust income received by Canadians -- pension funds(already under funded), RRSP/RRIF's, individuals and corporations -- a major income trust market crash will cause a significant consequent adverse impact on virtually the entire Canadian population. Taxing only the foreign holders will only be a minor income trust market price dampener which Canadians and their economy can likely survive without major adverse ramifications.
To help put income trusts and corporations on a level taxation basis:
a) establish a withholding tax on income trust cash distributions to foreigners to least the top corporate level and, preferably, the top individual bracket level;
b) increase the dividend tax credit to Canadians so that the corporate and Canadian individual's combined tax rate
is proportionately no more than what top tax bracket individuals would pay on trust income.
If you wish to discuss this more, I would be pleased to do so.