According to a research report by RBC Dominion Securities Inc., the Telus Corp. decision to convert into an income trust will deliver more taxes, not less to Revenue Canada.

The RBC report suggests that, “far from being a source of tax leakage, the government stands to collect as much, if not more taxes, from the Telus trust.”

Looking at the five years following a potential conversion, analysts Jonathan Allen and Dirk Lever calculated that federal government tax coffers will see as much as $1.7-billion in tax revenue. The large tax bill includes $1.4-billion in capital gains deferred gains from converting common shares into trust units next year.

Under Canadian tax rules, a trust conversion like the one proposed by Telus is treated as a sale of shares for which investors must pay capital gains taxes.

The analysts assumed that some Telus investors might sell shares in coming years, but didn’t factor in capital gains that might be taxed if Telus remained a corporation.

Even without capital gains, the Telus conversion would produce $369-million more in taxes between 2007 and 2012 than it would if it stayed as a corporation. Any corporate taxes lost will be offset by increased taxes paid by investors on distributions received from the telecommunications giant.

The RBC conclusion differs from conclusions drawn by Prof. Jack Mintz at the University of Toronto, Rotman School of Management. He calculated that looking at just income tax on distributions, pending business trust conversion by Telus and BCE might lead to a tax loss of more than $1-billion each year for the federal and provincial governments. Prof. Mintz did not articulate the taxes on capital gains due from Telus conversion, let alone the proposed conversion by much larger BCE.

A trust conversion allows companies to pay most of their net cash flow to unitholders in whose hands the income is considered taxable.

Analysts looking at tax losses often miss the taxes paid due to capital gains on conversoin of company to trust. The RBC analysts’ report helps provide perspective beyond narrowly defined tax losses. They make a more comprehensive estimate of the net tax scenario on income trust conversions.