Talk:Income trust

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Contents 1 Bell Canada Enterprises commentary in "New proposed rules for income trusts" section 2 Use of YouTube Material on Canadian Income Trust Issue 3 When would you do an income trust? 4 Canadian laws for 2011 5 Neutrality of "New proposed rules for income trusts" section 6 Fortin Testimony at February 1, 2007 Income Trust Hearings

[edit] Bell Canada Enterprises commentary in "New proposed rules for income trusts" section

"Following announcements by telecommunications giants Telus and Bell Canada Enterprises of their intentions to convert to income trusts, on October 31, 2006, Finance Minister Jim Flaherty proposed new rules that will effectively end the tax benefits of the income trust structure for most trusts."

This statement will need to be modified based on the following information: With the income trust option off the table, BCE has sharpened its tax planning pencil and figured out ways to delay full cash taxation until after 2010. The expectation for cash taxes in 2008 has dropped to ~$300 million from ~$800 million. So much for the Government's move to increase tax revenues by shutting down new trust conversions. It will be interesting to see if TELUS can announce similar tax "deferral" strategies on its guidance call on December 14.

This is from TD Waterhouse. I expect to see it reported thru the media in the coming days.

[edit] Use of YouTube Material on Canadian Income Trust Issue

I'm not sure its appropriate for this material to be posted on Wikipedia so I won't insert it into the article until I get a ruling.

The two clips are on YouTube and show Prime Minister Steven Harper promising not to tax income trusts. On October 31 Harper's broke that promise and this lead to Trust Investor capital losses of approximately $25-30 Billion Canadian Dollars.

I think the YouTube material is relevant and newsworthy but I want other points of view before I insert it into the main article.

http://www.youtube.com/watch?v=U9mibZYpVPY

http://www.youtube.com/watch?v=Xtiykp-WDG4

http://www.youtube.com/watch?v=8SD9rfeZxLE

Regards DSatYVR 17:49, 20 November 2006 (UTC)

[edit] When would you do an income trust?

For a company with stable, predictable profits in a mature industry such as a Utility or a Real Estate Company. An Income Trust or Real Estate Investment Trust structure allows the company to earn income without being subject to corporate income tax. This allows the Income Trust to pay dividends to shareholders (referred to as unitholders) without "double taxation". That is, without the profits being first taxed to a corporation and then to a shareholder.

It is generally not appropriate when a company is growing and reinvesting it's profits because such companies pay no or low dividends to shareholders and the double taxation issue is not as important.

As an investor deciding whether to purchase shares in an income trust or taxable corporation, it depends on whether the investor needs cash flow from their investments (such as a retiree) or is investing for longer term capital gains.

[edit] Canadian laws for 2011

From the article: "income flowed out to investors will be subject to a new 34% tax" Shouldn't the number be "31.5%" from table 2 in the link? Shawnc 21:01, 1 November 2006 (UTC)

• clarified. 34% now. 31.5% in 2001. Ground Zero | t 22:16, 1 November 2006 (UTC)

[edit] Neutrality of "New proposed rules for income trusts" section

This section appears to be heavily weighted with arguments against the Canadian income trust rule changes. —The preceding unsigned comment was added by 68.144.179.91 (talk) 04:15, 25 February 2007 (UTC).

The challenge is too find sources that a writer can cite and support the taxation of Income Trusts. Although the proposed taxation is supported by the Conservatives and New Democratic Party, they have to date, offered no research, or other information to support the notion of tax leakage that is central to the debate. In fact just the opposite, the documents supplied by Department of Finance to the Commons Finance Committee during the Jan-Feb hearings were blacked out. Perhaps someone can supply an image of the blacked out Department of Finance Documents? The only image I am aware of is the Canadian Association of Income Trust Investors ads. I certainly don't think you want to see the ads in the article. 66.48.168.195 22:44, 26 February 2007 (UTC)

The statement above seems to be a case of not looking very hard to find other points of view. In about two minutes on the web you can find numerous comments like this: " Many observers have argued that this change was inevitable. Certainly things could not continue on as they were. Income Trusts were not subject to corporate tax, so companies that were not Income Trusts had a huge incentive to convert to a Trust. In fact, it is not hard to argue that company directors had an obligation to consider conversion to an Income Trust in order to maximize shareholder value and income. When BCE and Telus recently made their moves to convert to Trusts the government had to act. It was time to level the playing field between Trusts and corporations or face the potential of every company in Canada converting into an Income Trust." In case this should sound overly measured, it is from the Ottawa Business Journal, an investment advisor [[1]] with a CFA writing for individual investors. Note the writer then goes on to say that individuals still have plenty of reasons to be angry with the Cdn government. The arguments most frequently cited are not just about tax leakage, but about incentives to choose a specific corporate form being driven primarily by valuations driven by tax preferences. The argument does not have to be made or supported by having the government's tax leakage estimates, and there are outside sources that made tax leakage estimates that are also pretty significant.--Gregalton 23:07, 26 February 2007 (UTC)

Hi Gregalton, the article you cited is from Nov 10, 2006. 10 days after the October 31 'Halloween Massacre' announcement. There has been a significant amount of research done since then by other analysts which makes one wonder where the Conservative Government got it's 'tax leakage' numbers from. It's impossible to make an assessment of where the 'Tax Leakage' numbers are coming from because the Conservative Government won't release their data, even at the request of the House Finance Committee during the Jan-Feb Meetings.

One of the quotes from the article you cited is especially interesting because it's been later proven to be wrong. The author quotes "When BCE and Telus recently made their moves to convert to Trusts the government had to act. It was time to level the playing field between Trusts and corporations or face the potential of every company in Canada converting into an Income Trust."

However, from the first paragraph of the New proposed rules for income trusts Brent Fullard of CAITI points out that "at the time of the announcement Telus and Bell Canada Enterprises did not pay any corporate taxes nor would they for for several years. Had Bell Canada Enterprises converted to a trust it would have paid $2.6 billion in the next 4 years versus no taxes as a corporation." The tax is in the hands of the individual investors at their marginal tax rate. You would think the government would encourage a sector which brought higher taxes to the government wouldn't you? I agree with you that Income trusts like every other entity are valuation driven, but to say that ITs cause tax leakage hasn't been proven by the Conservative Government. I would like to see some of your references from sources that prove significant tax leakage. Up to date information please. Not from last November. Cheers, DSatYVR 06:39, 27 February 2007 (UTC)

The statement above that I was responding to was that "The challenge is to find sources that a writer can cite and support the taxation of Income Trusts." If that statement was to be limited to tax leakage issues only, then perhaps the point may be accurate. But there were and are lots of sources that cite other issues, such as the stampede to convert to income trust due to a (perceived) large valuation premium that was based primarily on (perceived) tax advantages. My point is simply that there are lots of sources that support the move to remove the (perceived) tax advantages; saying that there aren't would seem to demonstrate a lack of effort to express a neutral point of view. I have seen several quotes from CEOs/CFOs saying they felt forced to choose an income trust structure despite serious misgivings about its appropriateness for their business. To at least some degree this market impetus was based on perceived tax savings - and I won't attempt to debate whether tax savings for corporations is the same as tax leakage for the government, there are too many uncertainties.

And actually I disagree with your point about Bell/Telus. Demonstrating that they would not pay more taxes is not the same as demonstrating that they were not choosing a corporate structure based on market reactions. Bell and Telus were proposing to convert to get a higher valuation - and, judging by stock bounces when announced and after the govt's tax changes, this is how the market saw it too. Whether that market perception (about potential tax savings) was accurate is not exactly the same.--Gregalton 08:22, 27 February 2007 (UTC)

Gregalton, I'm not sure what your point is regarding CEO reaction to the market and enhancing market value of the businesses they run. This happens across the entire equity market. Every board should and is looking for ways to enhance the market value of their business entity, at least they should be.

Put yourself in the place of a Canadian CEO during the 2006 Federal Election. Put yourself in the place of a Canadian Investor at the same time. Look for a moment at the greatest salesman of income trust conversions and decide what you would do:

• Would you think Income trusts are safe based on this commitment?

• How about this commitment? The great Income Trust Salesman at work

When the Prime Minister of Canada gives the sector a green light in a very public and committed way is it any wonder that every CEO and Investor took notice? I expect after the October 31st announcement many felt betrayed by Harper. My point is that there is a cause and effect. And there are economic consequences to those who believed and invested based on Harpers comments. The article is an attempt to portray the explain some of that. Cheers, DSatYVR 15:55, 27 February 2007 (UTC)

The point on CEO reaction is this: very prominent business people believed that they had no choice but to choose one form of corporate legal structure (income trusts) even though they had grave concerns about it. They believe they had no choice because the market accorded a substantial premium to any business converting. As you say, every board has to seek value - and the value choice was driven by the perceived tax advantages, in the view of some.

But again, I'm not claiming that Flaherty did the right thing, that the government is good, that it should have been done, etc. I'm simply saying: there are currently about 9 of 12 or 13 paras in this section giving the "con" of Flaherty's decision. The other paras are mostly factual about the announcement. So, it does not appear that there has been much attempt to maintain NPOV, nor to finding and stating other points of view (and they are out there!). It currently reads like a diatribe against the government and not a balanced encyclopedia-like article.--Gregalton 17:25, 27 February 2007 (UTC)

To use an extreme example, I would also find it difficult to write the 'pro' POV of an article on genocide. How would one do it especially using credible references? In a similar way I find it a challenge to write a informed 'pro' article when the evidence weighs against the 'tax leakage' theory as put forward by the Conservative Government. The Conservatives have not released the Department of Finance research to rebut the 'con' arguments within the article. All I have to work with is blacked out documents. I'm sure many Canadian Investors who lost money would like to see the research behind the Conservative decision. To be clear, I am not the sole 'keeper' of the article. I invite you to provide the balance you seek by adding additional factual information with citations. If there is credible and up-to-date research on this subject that supports the 'pro' POV please bring it forward. Cheers DSatYVR 18:17, 28 February 2007 (UTC)

Well, now that we've got the genocide comparison, Godwin's Law is in force. ;)

The point basically stands: this section of the article is really not NPOV, so I'll flag it as such and hope a good-natured soul can find time to make an attempt to establish some balance (I might at some point). Suggestions could include cutting some of the nine paras supporting one point of view and try to find any quotes/citations that support a different POV. Best regards.--Gregalton 20:31, 28 February 2007 (UTC)

So you're saying because you can't readily find any references to support your point of view you will suppress/cut-out the information that you find not to your liking, even if there are cited references and the information is useful to users? Is this a correct assessment of your train of thought Gregalton?

I suggest that you put some energy into finding citable references that support your POV and insert them into the article. You said there were many references out there on the 'net so this shouldn't be a problem, should it? I'm open to working towards an article that looks on both sides of the issue and working in good faith with anyone who does the same. I take issue with anyone who thinks they will suppress information they disagree with just because they disagree with it. In good faith I've asked you to provide citable references and research to provide the balance you seek. Will you work in good faith towards this goal? Regards, DSatYVR 23:58, 28 February 2007 (UTC)

You seem to misinterpret my comment. By "deletion," I was suggesting that the nine paras on one point of view seem to make the point ... repeatedly, repetitively, redundantly, and not neutrally. They could be edited down ("delete SOME of the nine paras", I believe I wrote) and make substantially the same point, but I did not actually cut them. I would have thought that making a suggestion about how to reduce the POV imbalance - explicitly, on a talk page - might be interpreted as discussion in good faith. So, no, your statement is not at all a correct assessment of my train of thought.

I'll try to source references, when I have time, as stated. But let's stop the accusations of "suppressing info", "taking issue," etc. It's unfounded.--Gregalton 00:55, 1 March 2007 (UTC)

As noted, here are some references. Searching for "income trust unfair advantage" in google gets most of these hits fairly easily:

[2]; 58% of CEOs and the like in G&M survey support the tax change. Quote "“I just don't see the logic in allowing a group of companies to pay dramatically lower taxes than private companies or companies that aren't organized that way,” Mr. Smith said. “I really don't see how [the government] had any choice.”

[3] Letters of support from provincial finance ministers.

[4] Quotes supporting the move (various sources).

And please note, I've not emphasized what I believe. Different points of view are possible, and a balanced article would present some of those points of view, particularly since some were directly mentioned by government, media, pundits, businesspeople, etc.--Gregalton 01:45, 1 March 2007 (UTC)

OK, I'll look at an edit of the material. Give me a couple days. I've attempted to summarize the research reports in 1-2 sentences so I don't see much room to re-edit there but some of the quotes can probably go. I would also like to add some other elements:

• the DoF backgrounder contains the statements:Canadian tax-exempt investors, such as Canadian pensions and RRSPs, are subject to tax neither on FTE income nor on dividend income. and A registered pension plan, a registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) will not be taxed on the distribution. (For these unitholders the treatment of the distribution as a dividend has no direct effect). This statement is incorrect. Pensions and RRSPs are not tax-exempt, but tax-deferred. If memory serves correctly testimony at the Finance Committee hearing showed RRSP redemptions were $51 Billion vs $30 Billion in RRSP deposits in 2004 (I need to reference the StatsCan data - bear with me, I won't add it to the article until I can cite it). So the net effect is higher tax to the government, not less as the backgrounder indicates.

• Liberals Propose New Income Trust Policy

• Commons committee calls for trust tax changes

• TAXING INCOME TRUSTS: RECONCILABLE OR IRRECONCILABLE DIFFERENCES? Feb 28/07 Finance Committee Report

I think if we cooperate we can build an article which meets the expectations of all users. Regards, DSatYVR 05:38, 1 March 2007 (UTC)

Fair enough, and thanks for looking at this with an open mind. While I agree with your point about tax deferred vs tax exempt, it is worth bearing in mind that tax deferrals are usually believed to result in lower overall taxation, because a) time value of money considerations, and b) any time a taxpayer can choose the time when tax is paid, they will likely withdraw at a time when they face lower marginal rates. Although everyone recognizes that in theory, and possibly in practice, the amounts accumulated could result in higher overall taxes due to growth in the value of the portfolio, there is a large amount of uncertainty. Muddying the waters is that it's also difficult to compare to capital gains taxes which provide a lot of flexibility to choose the time of taxation. So estimating how much more/less taxes are being paid is exceedingly difficult (and prone to vary widely depending on assumptions).Best, --Gregalton 15:38, 1 March 2007 (UTC)

I understand what you are saying re:deferred vs exempt accounts but if there is evidence that total Deferred Plan (RRSP, RRIF, Pension) withdrawals exceed total Deferred Plan contributions doesn't that verify that the government is actually benefiting from the Deferred Plans? I realize taxpayers will generally withdraw when it is to their advantage to do so but I don't agree that RRSPs, RRIFs, and Pension plan withdrawals should be ignored completely as appears to be the case in the DoF Backgrounder. Tax is paid on withdrawal. I remember this point being made during the Hearing testimony--The current government is benefiting from Deferred Plan withdrawals today made by Canadians who made Deferred Plan deposits 20 years ago. To ignore these Deferred Plan withdrawals made today is misleading. The numbers will tell the tale when I find them. At any rate I'll be busy for the next few days but I will commit to a re-edit. Regards, DSatYVR 17:34, 1 March 2007 (UTC)

You're correct, it is of course relevant how much is withdrawn in total. But, to take a very rough stab at the type of calculation that has to be done (for the entire population) purely as an illustration. Assume (just for the sake of argument) $51 bln relates to $25 bln in deposits 25 years ago. Assume tax deferred at that time was 40%, or $10 bln. Of that $26 bln gain, assume interest, dividends and capital gains would have been received, but taxed at a lower rate of 20%, or about $5 bln (not in lump sum, but as a kind of annuity to the government over 20 years). So the govt "gave up" $15 bln in taxes in the past, or $12.5 bln in 20-year ago money (I allow, these tax rates may be a bit high). Now, the $51 bln is withdrawn, but due to most people withdrawing when they are in a much lower tax bracket, assume they only pay 25% tax on this (probably this tax rate is a high estimate, since most people will save on RRSP contributions at the highest marginal rate, but pay on a graduated rate when withdrawing). Govt gets about $10 bln now. Discount this $10 bln back 20 years at 6% - present value of $10 bln today was about $3.1 bln then. Net loss in constant dollars is (rough estimate) $9-10 bln.

Of course, the assumptions define the magnitude of the issue. If the original contributions that grew to $50 bln were $3 bln, no biggie. Length of time in contributions (20? 30 years?) makes a big difference. Discount rate chosen is also significant. Tax rates depend on income brackets of contributors and withdrawers, and we know RRSP holders tend to be in high income brackets (and, all else equal, to have lower pensions from other sources, and hence be in lower brackets after retirement). And so on, etc. Devilishly hard to make assumptions anyone could agree on, and any estimate subject to very large margin of error (and assumptions tested only over a generation).

Then there are the second-order effects: deferring taxes means higher taxes must be charged to other income now, which affects productivity. Allowing individuals to provide for pensions reduces risk, creates pool of investment funds, etc. Essentially, any economist could find any number of answers as to overall effect.

But biggest question that remains unanswered: what is the effect of allowing some companies to pay less tax now (even if overall taxes paid by recipients are higher)? If it creates unfair advantage, basis of competitive market economy is undermined. If it creates disincentives to reinvest profits, productivity may be harmed. And so on, etc.

Short form response is: I am heartily skeptical of all of the numbers and studies (including MinFin) due to the inherent uncertainties and magnitude of margin or error in estimates. But disadvantages of "unfair advantages" for some companies over others is a legitimate and major concern, particularly if no-one can say with certainty the long-term tax implications. Note that, of course, there is a major school of thought that says companies should not be taxed at all, and it has some validity (as do those that say only property should be taxed); what no school of thought suggests, however, is switching part-way for some companies and not for others. The implications are thought to be somewhat like switching to driving to the right side of the road, but phasing it in over a few years. Good luck with the thinking cap/research exercise, and I hope these (ill-formed) thoughts help.--Gregalton 18:47, 1 March 2007 (UTC)

I'm tight on time today so I didnt read thru our comments completely. WRT your comment So the govt "gave up" $15 bln in taxes in the past, or $12.5 bln in 20-year ago money (I allow, these tax rates may be a bit high) I have to ask 1 question.

• Why did past governments decide to allow Deferred plans such as RRSPs and RRIFs to exist? I think governments want Canadians to take responsibility for their retirement planning. Governments also "get back" funds by clawing back Retirement Benefits thru Government sponsored plans if Retiree income is deemed too high. The clawed back amount doesnt need to be funded either does it?

If I've taken your comments out of context I apologize. Got to go. DSatYVR 21:21, 2 March 2007 (UTC)

Both good points, and undoubtedly there are other issues I haven't thought of. There is no question that the goal of allowing deferred plans was to encourage saving for retirement in a way that is sort of "locked up" (and harder to use for short-term needs). So that is an intended outcome, but of course the assumption when deferred plans were created was that money going in would be post-corporate and other taxes. So my analysis above is not really addressing the question of the "differential" tax leakage between income trusts and other companies - it was really about the issue of government getting "more" tax income in future from RRSPs (which I think unlikely). And there is some claw-back that should be calculated - my hunch is that this would not be significant (due to timing issues and the income levels it kicks in at), but I don't know enough about the levels the clawback kicks in at.--Gregalton 23:05, 2 March 2007 (UTC)

I made some edits/moves to this section, but don't believe any constitute major changes.--Gregalton 23:44, 2 March 2007 (UTC)

I should note that I'm also spending a bit of time looking at the papers cited. Despite the tone of the article, most of these papers are a lot more ambiguous than it would seem - with quite a bit of recognition of the issues Flaherty faced (while highly critical of both the details of thee final decision and the way it was done). I'm doing a bit of editing to add this flavour back. The CAIF papers, however, appear to be quite a bit less nuanced. In short, I look forward to any other points of view and research. I also note that I split the section into for and against, but perhaps that was not the best approach (thematic would be better, I think now). Best,--Gregalton 00:06, 3 March 2007 (UTC)

One additional question: the claim that the Bell/Telus proposed conversions would result in higher taxes and specifically "representing a substantial loss of shareholder value" seems dubious and needs checking. It seems to me that executives at these companies would be opening themselves up to significant, actionable legal claims if this assertion were true.--Gregalton 00:32, 3 March 2007 (UTC)

Paragraph 1 - I'm not sure the market agrees with this statement either judging by the price action of Telus after they called off the conversion ... but would have lost the benefit of accumulated tax losses carried on their balance sheets, and the balance sheets of their subsidiaries, representing a substantial loss of shareholder value. Delete of modify? There is no reference to this in the originally cited reference in the paragraph.

Paragraph 2 - His report has been largely derided in the financial community as being inaccurate and prone to the mistake of not considering the taxes paid by owners of debt issued by corporations. No reference either. I'm inclined to delete unless a user can back this up with a reference. Any thoughts?

I havent had a chance to look at the FINA report yet. I think the FINA report, the Liberal plan and the DOF backgrounder deferred vs exempt arguments are worthy of mention. The links are further up the page. I'm having a rather busy few days here but I'll have a look in periodically. Regards, DSatYVR 07:17, 3 March 2007 (UTC)

[edit] Fortin Testimony at February 1, 2007 Income Trust Hearings

I would like to direct attention to Yves Fortin's Testimony of Feb 1 2007 to explain why the tax exempt and tax leakage assumptions in the DoF Backgrounder make no sense. DSatYVR 17:27, 4 March 2007 (UTC)

---

Mr. Yves Fortin (As an Individual): Thank you, Mr. Chairman. I would like to ask the committee members to refer to the written statement and the papers that I have tabled to better understand the very telegraphic points I will make.

My thesis is that it is the implementation of the legislative proposals, and not the existence of the trusts, that will lead to a loss of tax revenue. The attempts to quantify the alleged tax leakage go back to the 2005 consultation paper. That study suffered from fundamental flaws. Because of its many incorrect assumptions, the study overestimated the taxes collected from corporations, and underestimated the taxes paid on trust distributions. The outdated numbers released by the minister and earlier by Mintz, are based on the same faulty methodology used in the consultation paper.

The worst source of leakage, according to the minister, are the RRSPs and the pension funds, because he treats them as tax-exempt, rather than tax deferred entities as they are under the law. In the medium- and long-term context, there could only be tax leakage if the present value of taxes paid in the future were inferior to the taxes foregone at the present time. This cannot be, since the yield on trust units is 8% or 10%, while the rate of inflation is about 2%.

The minister says he has to look at the issue from the point of view of the annual budget. This cash accounting method cannot be used to pretend that taxes are not paid, and that this causes him a problem. In 2004, Canadians contributed $38 billion to their tax deferred accounts, but we drew $52.5 billion of income fully taxed at their IS marginal rate. There is clearly no leakage, even on the basis of the current fiscal year.

The measures contained in the draft legislation will lead to a substantial loss of tax revenue for the following reasons.

The non-tax-deferred investors pay more taxes on trust distribution than they would if the trusts were corporations. This is because their taxes are calculated at the higher tax base and paid at higher tax personal rates. If most or all trusts be converted to corporations, as is clearly the intention of the minister, the taxes collected will be reduced substantially. Because of nearly double taxation of distributions, RRSP/RRIF-holders and pension funds will have to shift their investment to assets with lower yield. This will lead to lower retirement income year after year on top of the heavy capital losses they suffered. Less retirement income will lead to lower tax revenue, and more pressure on the social welfare system.

In view of this, there is clearly a need to adopt a package of measures to truly compensate people who lost a chunk of their retirement savings. The increase in the age tax credit worth $150 a year is pretty useless for a person who has lost $15,000. Pension income splitting is welcome, but it is highly discriminatory, and its linkage with the trust issue is purely artificial. Due to much higher taxation, non-residents will divest away from their trust units, and the government will lose the quasi-totality of the withholding taxes presently collected. The minister thinks these investors don't pay enough taxes, so his solution is to make sure that they will pay none.

Most provinces will be affected negatively, not only due to a global lower tax base, but also by the fact that trust distributions will be taxed by the province where the trust resides, and not by the provinces where the investors reside, as is now the case. Provinces like Quebec, B.C. and Manitoba that have an active investment community but host few or no trusts will be losers.

My overall conclusion, Mr. Chairman, is that the legislative proposals should be put on hold until:

1) a credible study based on sound methodology made by a neutral party is made to determine their impact on tax revenue; 2) a set of measures is put forward to truly compensate the losses suffered by persons saving for their retirement. The attitude of the minister is callous. 3) a set of criteria and regulations is proposed to determine which types of enterprise should be allowed to convert and those which should not.

It is the absence of such criteria, Mr. Chairman, and regulations that has led to the destructive overkill and the damage that we are witnessing. The minister did not have to destroy the trust sector in order to prevent the undesirable proliferation of conversions, such as EnCana, Hibernia, [Inaudible--Editor] and TELUS. Thank you, Mr. Chairman.