With the early 2007 study of income trusts by the Finance Committee, testimony detailed expert opinion to show that income trusts might be tax generators for the federal government, not the source of “tax leakage” at all. 

Testimony also confirmed the thesis proposed by Leslie Hayman, Editor of TrustInvestor.com in 2005 during the hearings held by Ralph Goodale. There appeared to be a problem with tax on trusts in so far as the federal government was collecting money from individuals who owned these securities. But without there being a tax on the corporation, there was little way for the Provincial government to collect revenue from these productive companies. The loss of tax on income trusts, therefore, related to a relative shift of taxes from Provincial coffers to Federal coffers.  Regardless of whether tax revenues were really growing as a result of income trusts, it was the Provincial governments that had the most to lose. And it is only those provinces without a small resident population that had the most to lose because it was the individual who was taxed on earnings from income trusts.

The public hearings in 2007 confirmed this very point. In particular, the public heard from P.E.I. Treasurer Mitchell Murphy.

He testified that , “the province was upset when P.E.I.-based Aliant (owned by Bell Canada Enterprises) became an income trust. This meant, as an income trust, Aliant would no longer pay provincial income taxes, but would flow through its profits to income trust unitholders, most of whom were not living in P.E.I. and were, therefore, not paying P.E.I. provincial income taxes.”

Diane Francis summarized his stance in the National Post on March 2’nd 2007, by writing that, “income trusts may generate more taxes than do corporations, but not to the provinces in which they are headquartered. In that sense, they represent a redistribution of the tax dollars from P.E.I., Alberta, Manitoba and others to Ontario and Quebec, where most of the income trust unitholders reside and pay taxes. Or to foreigners, who pay a 15% withholding tax to Ottawa only.”

She goes on to quote Mr. Murphy who said, “This helps explain why talk about tax leakage is so confusing. Mr. Flaherty was addressing tax leakage to certain provincial treasurers, not to government coffers as a whole...This situation has had a severe, detrimental effect on smaller provinces in particular, as they have seen the corporate tax revenues from some of their largest corporate taxpayers dry up, while the personal provincial income tax receipts are being collected by the larger provinces.”

Investors and citizens have heard it before, but Ms. Francis highlighted the issue again in a national newspaper. She wrote, “So instead of adjusting equalization payments or kicking back foreign withholding taxes to these provinces, Mr. Flaherty took an axe to a huge sector retroactively...This isn’t about helping a few million investors recoup their losses (now estimated at $22-billion) or respecting existing incomes trusts while stopping new ones...This is about respecting investors’ rights and election promises.”

The Federal-Provincial concerns about tax are due consideration in general and seem to confuse the income trust tax discussion in particular.

But there is little public confusion by people familiar with income trusts: The income trust issue is about trust and what it means to individuals and the country when that trust is broken. For many Canadians and foreign investors, it is also therefore about hope for remedy if not justice for bad or immoral behavior. It would appear that the Conservative leaders must be prepared to face the growing challenge in regaining confidence from Canadians if they are to win the next election.