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Mr. J. David Strathern'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:
Does the tax advantage of FTEs relative to public corporations have a significant impact on how businesses are organized in Canada?
Yes. The FTE structure and business objectives are different than public corporation yet complimentary to achieving a strong and vital Canadian economy.
Public corporations have a more restricted use of capital that focuses on high return projects. Projects that do not meet the corporations target cost of capital do not get approved. Cost of capital targets that are set at corporate levels are restricting the implementation of projects throughout the business sector and are slowing the productivity of the economy.
FTE structures have a lower threshold to meet when capital deployment is made. FTE structures can focus on a part of a public corporation's business and extract value. The public corporation is unable to access this value due to its close attention to the core business and its inability to focus on new ideas outside the company's area of expertise.
Have FTEs had a significant impact on tax revenues? Is there potential for revenue losses to grow in the years to come?
The exponential growth of FTEs has generated wealth for unit holders. This wealth has occurred in the form of attractive monthly dividends that are taxable in the hands of the investor as well as significant capital gains which will be taxable in the future as the sector matures and the selling of positions currently held takes place.
FTE business units have promoted employment and capital spending. This in turn has raised GST revenues and personal income tax revenues. Canada has ranked highly over the past several years in comparison to the other members of the G8 nations. The growth in FTEs has no doubt played a role in this success.
I see only more potential for tax revenue gains as the economy prospers in part due to the unique business structure afforded by the FTEs.
What impacts are FTEs having on investment decisions and the allocation of capital in Canada? Is the overall impact on the economy positive or negative?
The growth of FTEs as part of our business structure in Canada has been a positive for the economy and for our country. FTEs extract value from existing corporate structures.
A mining claim may have a large gold structure buried underground. Gold in this form is of little value until it is brought to the surface and refined into finished bars. At this point the gold can be sold at market and realize its full value.
FTEs provide a similar opportunity. They are able to extract value from an existing business and market that untouched value for the benefit of the business and the FTE unit-holders.
We read much about the unfunded pension liabilities of many of Canada's large corporations. The creation of FTEs by spinning off parts of a corporation is a potential cash generator to the corporation and a potential solution to this unfunded pension liability problem.
Given the important role that tax-exempt investors play in Canadian capital markets, and could play in the FTE market, what impact could this have on government revenues and economic efficiency?
Tax-exempt investors are defined as pension funds.
The pension savings of Canadian citizens is tax protected as it accumulates in the name of individuals and is fully taxable on withdrawal. Our government should support citizens efforts and the efforts of their investment agents in maximizing the value of dedicated pension money targeted to individual accounts.
The "Baby-boomer" cohort that is about to retire in the coming years does not have adequate retirement savings to fund their expected life span. The reduced number of workers entering the workplace cannot fund the programs that the "boomer" generation expect.
The growth in the FTE market place and the monthly cash flow that has been generated by these income trusts has been well ahead of interest rates available in the government bond market. It is essential that an investment and tax climate be maintained
to achieve continued success so that our citizens can become more self-sufficient in their retirement planning.
FTEs should not be restricted from any sector of the investment community. Pension funds should be allowed to invest in this sector of the market in an unrestricted fashion. The value of an investment position must not be compromised by government ownership regulations.
Overall, are there public policy concerns about FTEs and how the tax system influences their existence, and if so, what actions should be considered to address these concerns?
Double taxation of public corporation profits at the business level and at the shareholder level is wrong. The government should modify the tax structure of public corporations to bring them more in line with the tax structure of FTEs.
FTEs are an important segment in the portfolios of our Canadian investors. It would be regressive to alter the tax structure of this group of businesses. These structures encourage our citizens to participate in the capital investment marketplace. This has strengthened our economy as it has provided a significant new source of capital for business expansion.
FTE structures have demonstrated their ability to unlock hidden value in public corporations. The significant capital gains realized by investors in this sector will be taxable at some time in the future. This additional tax revenue is not mentioned or accounted for in the examples used in the consultation paper.
FTEs are a segment of the economy that have been very successful in unlocking hidden value; their future growth should be encouraged.
Mr. J. David Strathern
Niagara Falls, Ontario