NEWS WATCH
Advocis, the Canadian association for financial advisors and Certified Financial Planners has published an article Breach of Trust in FORUM Magazine for December 2006.
Written by Leslie Hayman as President of iTrust Institute, the article went to publication the week the first week of November, the week in which the Government of Canada announced new taxes on income trusts.
The article provides a fundamental perspective on the income trust market and the state in its development at the time the new tax was put in place, also exploring considerations of security and investment risks and returns for financial professionals working to advise clients in regard to trust investments.
A professional engineer working with a major gas producer writes: Imagine a nation whose citizens took pride in owning dynamic businesses that formed a significant part of its own economy - businesses dedicated to running efficiently and giving the resulting profits back to the people: A people who enjoyed a level of income from investment that afforded them a decent standard of living, replacing or supplementing their employment income, and topping up social security and pension income from their Government as they entered retirement. Until recently, Canada was this nation…
And he concludes a well-informed letter to suggest that the Canadian, ”government has just launched a devastating attack on the standard living and quality of life after retirement of most Canadians. The brunt of the attack is borne immediately by senior citizens, and those who for various and valid reasons cannot or choose not to enter the workforce. For the rest of us the effect will be delayed, but should start becoming apparent when the November financial statements arrive.
In summary, income trusts do not represent a significant tax issue to the government. More income generally means more income tax! More income in the hands of individual Canadians means a higher standard of living...and isn’t raising the standard of living of everyone really what it’s all about?
Two new studies, one from BMO Nesbitt Burns and another from PriceWaterhouseCoopers have shown the inherent flaws and misinformation on which the Department of Finance has based its decision to tax trust distributions and to “say no” to the “Income Trust Economy”.
First BMO Nesbitt Burns issued a study: Trusts Provide Tax Gain for Government, written by Gordon Tait, an income trust analyst. He said, “We looked at 126 businesses that converted from equities to trusts between 2001 and 2005 to prove that Ottawa reaped more, not less, tax revenue after firms converted to income trusts...We found that on average the government stood to collect 2.2 times more in taxes by taxing the distributions of the trust than had been paid by the corporations prior to their conversion.”
And then a few days later, we see a fresh report out from PriceWaterhouse. Their findings were reported to suggest that, “A review of Canada’s more than 250 income trusts indicates that trusts have been making an important contribution to the economy, investing their capital and growing their businesses at impressive rates.”
Significant specific new conclusions included the idea that, among the 250 diverse trusts studied, there was the net income reinvestment rate with more than 200% in 2005 and almost 400% in 2004.
The author concluded that, “The data clearly refutes the notion that the income trust structure is best suited to mature, low-growth companies in stable industries.”
Pierre Paquette, Finance Critic for the Bloc Quebecois Party and MP for Joliette, asked Finance Minister Jim Flaherty to extend the transition period for existing limited partnerships from 4 up to 10 years.
Mr. Paquette suggested that it would have been “irrepsonsible” for the government not to take action.
In 2005, the Canadian Association of Retired Persons (CARP), otherwise known as Canada’s Association for the Fifty-Plus, did not come out with a terrible strong call for protection of income trusts against new tax. Now in 2006, seeing the consequences of new taxes on the savings of Canadians, CARP has changed its position.
iTrust Institute is studying the key features, perceived potential & benefits of income trusts starting from the premise that:
Equities managed and structured like income trusts to flow net gains through to owners by way of frequent and regular distributions of cash can offer superior rates of overall return, support market growth, enhance economic productivity and contribute to growth of the tax base with less risk than other equities given honest managers and a fully competitive market supported by open communications.
We will test this notion and explore related questions.