Friday, November 03, 2006

Income Trusts

I don't have a whole lot of insight to add in the discussion of the income trust issue. The Conservative government was right to close down income trusts as non-taxable entities, but wrong to close them down as they did.

In short, the income trust loophole needed to be closed. Eric Reguly, in the Globe & Mail, describes it thusly.

Tax balance -- the relative proportion paid by corporations and individuals -- was already in trouble in Canada. The rising trust market threatened to kill it. The impression given by corporations, with their lobbyists and PR men and speechwriters, is they pay the lion's share of the taxes in this country, and that the tax burden is making them uncompetitive in the global market. Nothing could be further from the truth. The truth is that corporations paid the equivalent of 60 per cent of all individual taxes collected in the early 1960s, according to national accounts. Since then, the figure has dropped to about 30 per cent. In other words, the relative tax burden on the individual has doubled, while on corporations it has been halved.

The trust market could theoretically shift the corporate tax burden to zero. In time, the individual, like Sisyphus, would have to push the tax stone up the hill all by himself. Fair and balanced? Forget it.

It was only a matter of time before a government (any government) would have shut them down. If you had income trusts as the cornerstone of your investment portfolio, you were an accident waiting to happen. It's unfortunate too - they were attractive - high regular dividend payments at a preferred tax rate made them far more attractive than GICs and bonds, and certainly more so than regular equities.

So, the Conservative government was right to shut them down.

At the same time, the Conservative Party promised [PDF] not to shut them down.

Stop the Liberal attack on retirement savings and preserve income trusts by not imposing any new taxes on them.

What the Conservative government has effectively done is attacked retirement savings (and savings in general) and did nothing to preserve income trusts. What's worse politically, is they have validated the Liberal "attack" on them.

Garth Turner had a better solution to handling the income trust closure:

I think the minister of finance could have declared a moratorium on new conversions, struck a blue ribbon panel to study the industry and eased in regs over the past few months making it crystal what direction the feds were going in. That would have allowed for a more orderly, less panicked correction, and kept from scaring the crap out of a few million seniors. It would have been a kinder blow. But if you’re a prime minister planning an election in a few months, and want nasty things done now so people will forget about them, well, you pick another route.

Which leads me to my final comment.

I think everyone concedes that the federal government had to close down income trusts as a non-taxable entity. I'm just surprised it happened now and in this manner. This is usually one of those "got to do" policies that a government does in the first year of a majority mandate so that people forget it by the time you go to the polls again. We may be headed back early next year and I think this is going to be fresh on everyone's mind.

What's unfortunate too is, lost in this income trust outrage, is the positive announcement about income splitting for seniors.

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1 comment:

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