COPY OF LETTER TO MEMBERS OF PARLIAMENT

I am writing to you as the volunteer President of a not-for-profit, non-partisan research and education organization, iTrust Institute.  The Institute was formed in response to the Department of Finance Consultation on Flow-through Entities in 2005 in the interest of supporting informed policy formulation and decision-making.

We have both observed with interest and have further explored and researched a range of considerations raised for public discussion and expert input in regard to income trusts, their market and role in the Canadian economy, during the 2005 Consultation process. As important, we have followed up on that potentially valuable exercise to better understand the economic merits and risks of income trusts in the Canadian and global context.

In regard to your current considerations of tax rules imposed on new income trusts, existing trusts starting in 2011, as well as the active and foreign operations of Canadian REITs, I believe that it is essential that you understand a few of our findings and conclusions.

We observe:

1) Public responses, including expert opinions, provided as input for the 2005 public Consultation process provided significant argument against new taxes and against the rationale proposed at that time by the Department of Finance. In fact, you and the Canadian public have not had the benefit of formal findings from the Department of Finance and from its useful Consultation process, nor have we had full disclosure and publication of public perspective intended to help inform the policy making process;

2) There is no objective or substantial basis in fact for the government to make the arguments made in its policies that impose such taxes and equity-restricting rules considering the various public and independent studies published during 2006. The only public and independent study to raise concerns about the quality of income trusts as an investment vehicle and brought to the public attention through an NDP press conference, is a study that might support enhancement of regulations and enforcement of rules for sellers in our self-regulated financial markets.  But the assessment of flow-through entities drew conclusions based on faulty assumptions and a narrowing in the scope of study to feature only financially-struggling public companies while ignoring the full range of growing and productive enterprise found in the trust and REIT sector. The study was either misdirected in its conclusions or discriminatory in its intent;

3) New taxes on flow-through entities have been shaped around a policy promoted as if saving individual Canadians from tax leakage through an addition of taxation on corporations.  This is either a false proposition or a blatant mistake:

a) The tax on distributions from income trusts has little effect on the many productive and growing Canadian corporations with equity issues structured to pay investors cash returns, other than restricting their ability to issue new equity rather than debt. The tax takes money out of the hands of investors to whom those company managers had fiduciary responsibility.  The government has destroyed a legal relationship and added tax to the Canadians it claims to protect from tax loss;

b) With announcement of the new taxes, a $220 billion equity market was priced down to less than $200 billion in value.  And pending taxes may reduce that market value to less than $100 billion in 4 years time.  More than $20 billion has been taken off the Canadian tax base with another $100 billion in destruction of tax base identified as the government objective before 2011. Evidence that the new distribution tax has really been a way to reduce taxes can be seen in the positive response to the tax by such anti-tax organizations as the Canadian Tax Federation.

4) A participatory market for equity is quickly transforming into a highly levered public market ripe for unfair domination by private interests. Investor and financial alternatives that provide the basis for choice in a competitive market and for an equitable relationship between buyers and sellers, are all positive market qualities being destroyed by the new rules and taxes;

5) Given the high risk of inequity in the market that results from these new taxes, the government has had to make new allowances for submissions by companies to ensure their particular circumstances are heard in decisions about new equity issues. A financial market that helped Canadian businesses raise equity and compete in an increasingly competitive global market and that was shaped around commitment by corporate operators to deliver net returns to owners is being crippled by new taxes and rules to such an extent that the policy administrators are required to make decisions on a case-by-case basis. 

As a result, we can only conclude that:

d) Tax and financial rules intended to help Canadians have terrible implications that have and further promise to hurt us, our markets and economy.

Given our research and study of these matters, we suggest that there is urgent need for an objective, factual and public review of these matters, policies and consequences. Only the Finance Committee can ensure that Canadians and our elected officials are sufficiently informed to shape policy of benefit to Canadians today and tomorrow.

Thank you for your thoughtful consideration of these important matters. If further submission of background or detailed information would be helpful to you in these matters, I would be prepared to travel to Ottawa at my personal expense to share our findings and perspective with you.

Sincerely,

Ms. Leslie Hayman
President
iTrust Institute