FINA Committee Report

Having listened to all the witnesses, the Liberal Members of the Finance Committee believe that the government’s decision to tax income trusts was reactionary and ill conceived and reflects a poorly executed policy initiative.

The Committee heard from witnesses who made investment decisions based on a promise made by the Prime Minister not to tax income trusts, and lost substantial amounts of their savings when the Prime Minister broke that promise. The Liberal Members of the committee believe that the government acted recklessly and as a result ordinary Canadians have suffered unnecessarily.

The Finance Minister was unable to confirm that an impact analysis was conducted on the effect the new tax on income trusts would have on investors. Liberal Members of the committee believe that such a study should have been conducted and the results of that study considered when developing the government’s policy on income trusts.

The Minister of Finance justified the exemption of Canadian Real Estate Income Trusts by pointing out that they were exempted in the United States, but dismissed a similar American exemption for the energy income trust sector as irrelevant. The Liberal Members of the committee are concerned that such a contradictory approach to public policy is dangerous and not in the best economic interests of Canadians.

The Liberal Members of the committee are deeply concerned about the Minister of Finance refusal to release the data that supports his assertions regarding tax leakage, despite the Committee’s repeated requests for it. In the absence of such data, committee Members have had to rely solely on the advice of outside experts, who have calculated the amount of ‘tax leakage’ to be as low as $32 million or 14 times less than the Minister’s estimate.

While 70% of Canadians are not part of a defined benefit pension plan, the Liberal Members of the Committee recognize that income trust distributions provided many seniors with the regular income they require to maintain their lifestyle. There is no other high-yield investment vehicle available to average Canadian investors. (I’m not sure where John wanted the following comment added in, but he did remark: “The contrast of 25 billion market loss is painful and incomprehensible to investors.”

The Liberal Members of the committee recognize that not all corporations are well suited to the income trust structure. That said, several witnesses clearly indicated that certain sectors have used the income trust structure successfully to make reinvestments and increase their productivity. The Governor of the Bank of Canada has suggested that income trusts have been useful as a high yield savings vehicle, especially for seniors, and in contributing to the success and productivity of certain industries, notably in the energy sector.

The Liberal Members of the committee believe that reducing the 31.5% tax to 10% and making it refundable to Canadian investors is a better alternative to the plan proposed by the Minister, and the other alternatives discussed in committee. While a ten year “grandfathering” or extension would return some of the value to hurt investors’ portfolios, the former proposal would return far more of that which was lost.

Furthermore, the 10% proposal would ensure that entities that are well suited to the income trust structure can continue to grow and invest in themselves, while the 10 year phase out would simply delay their death sentence.

As compared to the government proposal, the 10% tax proposal is clearly superior. Experts agree that it would return some two thirds of the losses suffered by investors, would preserve Canada’s only high yield savings vehicle that is so valuable to seniors, and it would preserve a productivity-enhancing energy-sector. At the same time, expert testimony confirms that a 10 per cent tax that is refundable to Canadians would be enough to capture off shore leakage and ensure tax fairness. The income trust sector would not reduce government revenues or impose a higher tax burden on Canadian households.

Finally, under this proposal the moratorium on new trusts would be maintained for the time being while the government began consultations with sectors that feel they are well suited to the income trust structure. It is clear to the Liberal Members of the committee that the government did not think through the consequences of its ill-advised policy before taking action.