After the third day of public hearings by the Standing Committee on Finance, the Liberal Opposition announced a plan that involves a repeal of the 31.5 per cent tax on income tax distributions in 2011.  The Finance Critic for the Liberals, John McCallum proposed that it be immediately replaced by a 10% that will be paid by the companies and would be refundable to Canadian residents. Furthermore, the Liberals are proposing that the tax revenue be shared equitably with provincial governments.

Liberal Opposition Leader Stéphane Dion used the opportunity to say that his Party’s plan could return as much as two thirds of the losses suffered by investors “in the wake of the Conservatives’ broken promise on income trusts”.

He said that, “When this minority Conservative government undertook what it knew would be a harmful action to Canadians, it should have taken the utmost care to minimize the damage it would cause its citizens. The government broke a promise and imposed a radically higher tax that resulted in a $25-billion blow to the savings of hard-working Canadians.”

Mr. McCallum added that, “Rather than considering what is best for Canadians, the Prime Minister simply decided that he was going to put an end to the income trust sector. After hearing from dozens of expert witnesses we have developed a proposal that is fair to Canadian investors, to corporations and the income trust sector as well as federal and provincial governments.”

The Liberals suggested that the four main policy objectives that should have been considered by the government include:

1) Minimizing the loss of savings for Canadians invested in income trusts;

2) Preserving the strengths of the income trust sector;

3) Creating tax fairness by eliminating tax leakage caused by income trusts; and,

4) Creating tax neutrality by eliminating incentives to convert from a corporation into a trust.

The strengths of the income trust sector were described in terms of “high-yield instrument for savers” and the energy sector.

The Liberals proposed that “the ban on new trust formations be continued, but that the government should commit to considering representations from sectors which can conform to the policy objectives listed above.”

Various expert witnesses at the Finance Committee hearings on income trusts were featured in the Liberal press release to express support for the plan and to provide views that suggest it is workable.  Supporters included Gordon Tait, an analyst with BMO Capital Markets and Dirk Lever, and analyst at RBC Capital Markets. In addition, the economist Yves Fortin, who formerly worked for the Department of Finance, indicated that the proposal would put an end to alleged tax leakage.