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Kenneth 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:

October 31, 2005

The Honourable Ralph Goodale
Minister of Finance
Department of Finance Canada
140 O'Connor Street
Ottawa, Ontario, K1A 0G5 

Subject: Discussion Paper on Flow-Through Entities

Dear Sir:

There are a few comments I would like to offer regarding the review of Income Trusts and other flow-through entities. I am a senior, a retired financial executive and have followed closely the numerous comments by those in the investment community and in the press in the past month.

I recognize the complexity of the tax system and the difficulty in devising a completely equitable manner of obtaining the needed tax revenues. Income Trusts have a broad appear in particular to the seniors who see these instruments as a solution to their need for income in a time of very low yielding fixed income alternatives. Thus any move that reduces the attractiveness of income trusts will be met with very deep resentment by the million or more retail trust investors.

Making a change in the system of taxation to address alleged 'leakage' without consideration of all of the implications involved is probably not a wise course, particularly when our major trading partner, the USA, is on the verge of considering a major overhaul of their system of taxation. The USA tax panel proposal in front of the legislators would eliminate tax on dividend income and reduce taxable capital gains (on stocks held for more than one year) to one quarter of the gain recorded. For Canadians, already taxed at levels above the USA and many other nations, the unfavorable gap would be widened.

So there are a good many reasons to not do anything that adds to the tax burden at this time and to undertake a broad tax reform study with the aim of ensuring the tax system will encourage investment in companies paying higher dividends or to reinvest to build corporate value.

Much has been written since the Discussion Paper was issued about the calculation of tax 'leakage' as shown therein. It is quite likely that if a comprehensive study of this matter was undertaken, the finding would confirm the work of several other studies to show that income trusts are overall tax accretive. Should that be the case, it supports the position of withholding, at this time, any action to impose a tax on these securities and wrap such consideration into a broad tax reform study.

The action that is now urgently required is a removal of the current uncertainty created since the release of the Discussion Paper.

Some 18% of market values have been lost by holders of issued Income Trusts since early September. A clear statement should be made that there will not be a tax placed on Income Trusts and that a full review of the complete system of taxation will be undertaken to ensure Canada and Canadians can compete globally given changes contemplated by its trading partners. If there are other legitimate concerns regarding Income Trusts, other than that of tax 'leakage', a freeze on new entities or a tax specific to new entrants to this category could be considered. REITS and resource-based trusts would, however, need to be exempted to enable acquisition of like assets to replace depleting assets so as to maintain distributions. In this manner, current trust holders would be able to recover some of the considerable drop in value of their holdings since the Discussion Paper was released. 

Another concern expressed was the impact on productivity of the rise in popularity of Income Trusts. As a long term holder of Canadian Oil Sands and Superior Plus Income Funds, it is clear that being an income trust does not mean the capital is necessarily tied up in low-growth businesses that do not create jobs and build values for investors. Both used the lower cost of capital under an Income Trust format to expand the business, creating new jobs, contributing to growth of the economy as well as increasing unitholder values, all of which are taxable at some point when distributed to unitholders.

The growth in the Income Trust sector is the result of deficiencies in the tax system that places emphasis on corporate tax revenues and the double taxation of distributions from corporations. The resolution of that problem could be linked to the full review of the system of taxation suggested in the foregoing paragraph.

Respectfully,

Kenneth Biggs
FCA, FCMA
Edmonton, Alberta

c.c Hon. Anne McLellan
Minister for Public Safety