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B. E. Biggs Submission in Response to Finance Canada's Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trusts and Limited Partnerships) consultation:
Federal Taxation Department
Feedback on income trusts
November 9, 2005
My feedback only relates to me and my friends who are mostly retired people with small pensions and limited funds who have finally found a way of getting a decent return from an investment through distributions from Income Trusts. I forwarded your reply to 7 of my friends all of whom have money in Income trusts.
Other income producing vehicles such as bonds, bank stocks etc. have dividends in the 4% range and when viewed from the point of view of inflation 2+-, income taxes, etc, etc, I end up with very very little left. In addition to returning practically nothing, they are very expensive to buy so all I could afford are a few shares. My wife and I assumed that after 40 years of work in junior Government positions that we would be able to live our final years in some degree of comfort. This is proving not to be the case despite the fact that we were savers all our working life.
Does the tax advantage of income trusts relative to public corporations have significant impact on how businesses are organized in Canada?
When my friends and I decided to invest in Income Trusts, very little thought was given to the tax issues. We considered a number of questions:
Type of Industry the Company was in?
What kind of track record did the Company have?
Who were the managers of the Company?
Was the sector they were in conducive to long term stability and growth or was it cyclical and a one trick pony?
Was the Company Canadian or foreign and where were their operations?
Was the Company expanding and providing jobs in Canada or not?
What was the distribution of the Company? If high could it be sustained and what was the pay out ratio?
Only after these questions were satisfied did tax issues come into play.
It is our opinion that the type of business and the stability of the distributions have more of an impact for the millions of us retail investors than taxes. Most of us never know what the tax implications are until we go to our accountants. The accountants usually tell us not to worry about the tax situation if we are making a buck ,just pay the tax.
I cannot comment on the institutional investors but there are major differences between the hundreds of thousands of us small retail people and those big institutional investors.
Should there be a different tax structure for retail investors compared to institutional investors? I doubt that this will be rocket science.
Do Income Trusts have a significant impact on Government tax revenues?
The key word here is significant.
Whether our returns on investments are RRSP related or not, the tax will be paid. RRSP's simply defer the tax until a later date and perhaps at that date the tax rate will be less (no guarantees).
You and Mr. Martin continually tell us what a wonderful position we are in so far as the Country's finances are concern. You and we both know that this wonderful position is only because you tax the hell out of us as there is no other source of Government income.
Does deferred tax equate to tax leakage? For us retail investors the answer is no except for the fact that you will not be able to spend the tax revenue now and will have to wait a bit.
There maybe some impact but this is not significant to a government with the surpluses you tell us you have and is only tax deferred.
Do Income Trusts have an impact on business investment decisions and the allocation of capital in Canada? Is that impact positive or negative?
Once again I can only speak to the small retail investor.
Income Trusts definitely have an impact on our business decisions and the allocation of capital.
Impact on retail investor:
Many thousands of us had no involvement in the stock market prior to Income Trusts. We could not afford to lose a lot of money and the available stocks that paid dividends were well out of our range.(too pricy). This left us with only one option and that was mutual funds with their high MER's, trailer fees and poor returns. I personally lost thousands on mutual funds and one in them it is very hard to get out unless you pay huge withdrawal fees.
Then along comes Income Trusts with their distributions in the 8-10% range and they looked too good to be true. As it turned out many of them were too good to be true and lots of money was lost.
In the last few years there have been many Income Trusts with low payout ratios who are paying decent distributions and when filtered through the questions as I state above are the only game in town for most of us.
On the other side of the coin are the Companies. It is our belief that Income trusts have been beneficially for the Companies as well as I doubt that there would be the expansion of many businesses, the acquisitions, the increased exploration without them. Billions of dollars have been placed into these Companies from the small retail investors both here and the States which would not normally happen.
All of these activities provide jobs, increased tax revenues resulting from those jobs, reduced impact on the social support system in the country resulting from those jobs and investments. The Income trust structure has been the impetus needed to place many of these Companies in the public spotlight both here and abroad.
Had millions of us not decided to invest in Income Trusts we sure would not have had the returns we are getting and therefore the tax payable would be far less.
Have investment funds been redirected from large companies such as Banks etc. I suspect the answer here is yes but more from the large investors than the millions of us small guys who could not afford those stocks anyway. If there was not double taxation on the Bank and large Company dividends I doubt that investment diversion would be that great.
Income trusts have had a very positive impact on the retail investors, the Companies and also it is no stretch to say Governments in this country, both municipal, Provincial and Federal have also benefited.
What impact do tax-exempt investors, such as pension plans, have on government revenues and economic efficiency in relation to income trusts?
I am no expert on this type of high finance and can only provide my opinion on this question.
It is my belief that your use of the term "tax – exempt" explains the type of thinking going on in your Department. In Canada there is no such thing as tax-exempt. Tax deferred yes, but you will always get your pound of flesh.
Try and keep in mind that pension plans are simply the collective future financial incomes for millions of Canadians. Pension Plans are vehicles through which people attempt to accomplish some degree of financial stability and security for their retirement years. Your Department has been telling us to not rely solely on Government pensions but to save and manage our own retirements. This is what we are attempting to do through RRSP's, Pension Plans and Investments like Income Trusts.
We are required (us lucky ones) to contribute to Pension Plans, higher managers of the Plans who we hope and pray will wisely invest those funds and ensure the health of the Plans.
The Plans invest in Real Estate (nobody from Gov. says boo), Corporate Bonds and Government Bonds (nobody from Gov. says boo), on these investments we get a very small return and some of the pension plans as a result are not too healthy and the down stream payouts to retires are in question.
The more my pension is from these plans the more you get in tax revenue. Double taxation is more the rule than the exception I am told.
There are a few Pension Plans that are obscenely large and have a huge impact on anything they go into, whether it be Real Estate of what have you. The Ontario Teachers Plan is one that comes to mind. Maybe you need to look into the size of some of these plans but on the other hand they are hugely successful and provide their retirees with very nice retirements.
My employer has been clawing back benefits (dental coverage, extended benefits etc.) as they say they cannot ensure the stability of the plans, over and above the defined benefits. I am also informed that the British Columbia Government retirees have recently lost their dental plan for the same reason.
If Income trusts are a mechanism whereby the Pension Plans can receive a decent return and improve the health of the Plans which will ensure the decent retirement of Millions of Canadians and stability in the taxation of those pensions more power to them.
Overall, are there public concerns about income trusts and how the tax system influences their existence? If so, what actions should be considered to address these concerns?
The question is also is there an unfairness to the average Canadian by allowing us to defer the tax on distributions etc. from Income Trusts. I say no and Income Trusts are a vehicle that every Canadian can use and the deferring of the tax does not cause hardship to anybody. As we all get older and pass on. or withdraw our funds from the Income trusts we will be taxed and this will provide a steady stream of tax money. Keep in mind that a considerable amount of the investment in Income Trusts are RRSP funds.
You have already determined that tax deferral is acceptable through allowing RRSPs, RESPs, RIFS etc. Income trusts are no more a Public Problem than these vehicles.
Yes there are public concerns regarding our tax system and the Income Trust issues have simply spotlighted those concerns. Double taxation has been so ingrained in Canada that it is almost impossible for your Department to even consider that it might be flawed tax policy.
The truly amazing thing is that this country has done as well as it has despite the tax system.
We have been hearing for some time about the lack of productivity in Canada compared to other Western Countries. I ask myself why is this so? I believe the answer is that there is very little incentive in Canada to work hard, save your money and invest in the country. The Tax system kills any incentive we have.
I could not begin to tell you of the number of trades people who I have had dealings with recently who are outright avoiding taxes through cash under the counter transactions. Discounts for cash are the norm now not the exception and this is directly related to the flawed tax policies (GST etc).
When we first heard about Income Trusts and the rulings from Ottawa Tax Department the feeling was that there must be some mistake. Ottawa never passes up a chance to nail us and do it immediately and often was the thinking.
Then the thinking changed to shock that Ottawa might actually be trying to stimulate the economy, help small business, improve the job situation and allow us the opportunity to receive a decent return. This was not through tax exemption but tax deferral, and actually allowed by Ottawa (incredible if true).
This of course brought cries of anguish from the Banks and other large outfits who see themselves as the poor victims of Ottawa's brief lapse into sanity. This will never do and in the usual Canadian thinking, instead of trying to get their own tax structure changed decided to cry foul. When they were making the hundreds of millions of dollars profit, it never occurred to them to return some of it to their shareholders. They did not need the small retail investor as they had the institutional investors, mutual funds, and pension plans and to hell with us.
The Public policy concerns are as follows from our point of view:
A need to review the taxation on dividends for regular corporate entities, no more double taxation. I believe that it is your tax polices on these companies that to some extent have prevented them from becoming truly large international players, which would attract foreign investment and recreate jobs in this country.
The Income Trust Companies have attracted considerable foreign investment and attention to Canada and this permitted the Trusts to expand and are becoming a force both here and internationally. From a public policy point of view this can only be good for Canada.
Income Trusts have been extremely beneficial for Canada, Canadians and Canadian Business.
There is nothing wrong with success and your Government needs to use the Income Trust tax model as a springboard to review the tax structure for other Companies. I seldom have anything good to say about Ottawa and the handling of this review has been terrible but the original decisions on Income Trusts was one small step in the right direction.
It is hoped that the current tax treatment of Income Trusts was not just a temporary lapse into sanity but a deliberate effort on your part to makes changes for the better.
B. E. Biggs
Surrey, British Columbia