When the Minister of Finance announced a new form of tax on Canadian income trust owners, Jim Flaherty caused a stir as many finance professionals anticipated that a consequence of his policy would be the buyout of income trusts by foreign buyers. The implication of that occurrence was that Canadians federal tax revenues would shrink with loss of taxable Canadian ownership. 

They and others observed that if the intent of Mr. Flaherty’s policy was to end the income trust market, because he deemed trusts somehow “bad”, then his policy was not about making policy to protect Canadians from tax losses at all.  His policy was focused on “putting an end” to a growing public market and so was intended to destroy a tax once worth $200 billion with annual income streams of close to $20 billion that was ultimately taxable.

National newspapers are beginning to report on the current situation in the Canadian trust market to show that such anticipation of outcome has already been seen in measurable reality. This is news in so far as, with rare exception, the national newspapers have doggedly reported the Conservative Party line on the justification for tax policy and frustrated the interests of informed citizens and professionals in the process.

The tide may have turned towards factual reporting. And the news confirms the problem that Minister Flaherty has created for Canadians with his policies. For example, the Globe & Mail reporter, Steven Chase, has just reported that “Resulting takeovers could cost Ottawa as much as it hoped to recoup, critics say”.

He reported that, “Ottawa will see as much as $73.2-million in annual tax revenue drained from its coffers as a result of 11 trust takeovers since the trust levy was announced on Halloween last year, calculates Sandy McIntyre, a senior vice-president at Sentry Select Capital Corp.” And he goes on to show the basis for Mr. McIntyre’s observations which include trust buyouts announced only following the tax policy news as if a consequence of the policy:

TARGET - FOREIGN BUYER
Halterm Income Fund - Australian private equity
Lakeport Brewing Income Fund - foreign company
Norcast Income Fund - Swiss private equity
Entertainment One Income Fund - U.K. private equity firm
Amtelecom Income Fund - Canadian income trust
Great Lakes Carbon Income Fund - U.S. private equity
Associated Brands Income Fund - Canadian private equity
KCP Income Fund - U.S. private equity group
Gateway Casinos - Australian private equity firm
Calpine Power Income Fund - U.S. hedge fund

Mr. McIntyre is reported to estimate that the tax losses include both an explicit loss of $60-million in tax revenues and another $9.4-million in deferred taxes that remain “unpaid until some indefinite later date” so fall within Minister Flaherty’s definition of “tax leakage”.

The facts according to Mr. McIntyre suggest that an “additional 5 per cent of the existing income trust sector snapped up by such investors would cost Ottawa another $165-million in annual lost revenue” and take approximately “15 per cent of the trust sector to be bought out” by foreign firms “before Ottawa was losing annual tax revenue equivalent to what it said eluded its grasp before the trust tax.”

Numerous experts have been heard supporting Mr. McIntyre’s form of thinking.  And some suggested then and again now that his measures are still too conservative in favor of government tax policy working the way it was intended.

It is not news that many think that the 31.5% tax on income trust distributions and the stop to new equity issues will sap Canadian tax coffers rather than protect them as proposed as reason to add the new tax.

It is news that the proof of policy detractors’ arguments has now been reported in a clear way to the public.

Such useful measures of policy remains, however, in the business pages of major newspapers like the Globe & Mail. Members of the iTrust Institute suggest that Canadians might understand policy implications and be proud of their major news media at the point that such facts about tax losses caused by government policy are shown on the same front pages in which stories were placed to promote Conservative policy.

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