Conservatives Plans News Tax on Trusts

[jdobbin]

http://www.ctv.ca/servlet/ArticleNews/stor...?hub=TopStories

Didn't they attack Liberals for planning the same thing?

[Riverwind]

http://www.ctv.ca/servlet/ArticleNews/stor...?hub=TopStories

Didn't they attack Liberals for planning the same thing?

That was before BCE and Telus decided to convert to trusts. The Conservatives had to do something or every profitable company in the country would do the same.

I suspect the conservatives would have preferred to cut taxes on corporations completely but that would be impossible to sell to the public so the decided to close the loop hole like the US did years ago.

[watching&waiting]

No sane person thought that the governments would let all the big companies go the Income trust route. It was only a matter of time before the loophole was closed. I do not think it will bother too many that this has happened, but you never can tell. I am pretty sure most thought it would be closed soon but maybe not this soon.

[jdobbin]

That was before BCE and Telus decided to convert to trusts. The Conservatives had to do something or every profitable company in the country would do the same.

I suspect the conservatives would have preferred to cut taxes on corporations completely but that would be impossible to sell to the public so the decided to close the loop hole like the US did years ago.

I suspect they had the hell scared out of them when some of the big banks began thinking about doing this. No rules in place and they could hardly blame the banks for thinking about it.

[jdobbin]

No sane person thought that the governments would let all the big companies go the Income trust route. It was only a matter of time before the loophole was closed. I do not think it will bother too many that this has happened, but you never can tell. I am pretty sure most thought it would be closed soon but maybe not this soon.

I agree. It didn't stop the Conservatives from calling the Liberals anti-business when they considered rules on trusts. Now they fear the same backlash but it will come from their business supporters.

The stock market is going to drop like a stone tomorrow.

[August1991]

From CTV article:

He's setting out a transition plan over four years to tighten some of the loopholes, while at the same time reducing corporate taxes.

Income trusts are a complex way to avoid corporate taxes. Bay Street lawyers love income trusts because setting one up requires some complex legal advice. Firms do it because the legal fees are less than the corporate tax to be paid.

Flaherty (and Goodale) understand this perfectly well. Even Brison in typical Liberal fashion understood it. But the solution is not so obvious - hence I understand Flaherty's (and Goodale's) trepidation. If it weren't income trusts, it would be something else. Corporations and people are going to find ways to avoid taxes.

If I think "long term, big picture", we may be moving into an era (early 21st century) when it will be increasingly difficult for governments to collect taxes. Governments have had an easy ride for the past six or seven decades since the 1930s. It couldn't last and it likely won't.

[gerryhatrick]

Didn't they promise not to do this in the last election?

[Cameron]

Jesus Gerry...they've been in for less than a year...give them a break will you. This stuff takes time...it doesn't happen overnight. Maybe if the Liberals knew how to run a country we wouldn't be in this predicament.

[gc1765]

Didn't they promise not to do this in the last election?

Yep, they did. It's in their platform:

Stop the Liberal attack on retirement savings and preserve income trusts by not imposing any new taxes

on them.

Platform

[Cameron]

Yea, from that article I gained a lot....stop reading this crap form the MSM. Look at the whole plan first, what is actually written down from the Finance department. If any of you are CA's, please stand up and give us your professional opinion.

[jdobbin]

Income trusts are a complex way to avoid corporate taxes. Bay Street lawyers love income trusts because setting one up requires some complex legal advice. Firms do it because the legal fees are less than the corporate tax to be paid.

Flaherty (and Goodale) understand this perfectly well. Even Brison in typical Liberal fashion understood it. But the solution is not so obvious - hence I understand Flaherty's (and Goodale's) trepidation. If it weren't income trusts, it would be something else. Corporations and people are going to find ways to avoid taxes.

If I think "long term, big picture", we may be moving into an era (early 21st century) when it will be increasingly difficult for governments to collect taxes. Governments have had an easy ride for the past six or seven decades since the 1930s. It couldn't last and it likely won't.

The Conservatives basically ripped the Liberals on this when they looked at it. Tomorrow all hell is going to break loose on the stock market.

[August1991]

Tomorrow all hell is going to break loose on the stock market.

The only market where there'll be maybe a blip is in the market for Bay Street lawyers.

But if that blip extends to the TSX, I'd say "who cares". A stock market should move on real changes, not regulatory changes.

Cameron, your comment is dead accurate.

Here's the official Finance press release from Flaherty:

"The measures I am bringing forward today are necessary to restore balance and fairness to Canada's tax system, to ensure our economy continues to grow and prosper and to bring Canada in line with other jurisdictions," said Minister Flaherty. "Our plan is the result of months of careful consideration and evaluation. Our actions are clear, decisive and in the best interest of all Canadians."

For months there has been a growing trend toward corporate tax avoidance. Top Canadian companies, operating within the current rules, have announced their intention to convert to income trusts. They feel compelled to seek more favorable tax treatment by capitalizing on an available tax rule.

Reuters

With all that said, I don't think Flaherty's press release will solve the problem.

A one half of one percent cut in the corporate tax rate in 2011 along with other age/pensioner credits won't kill this elephant in the living room.

Is Flaherty another Rona Ambrose?

[geoffrey]

Didn't they promise not to do this in the last election?

Yep, they did. It's in their platform:

Stop the Liberal attack on retirement savings and preserve income trusts by not imposing any new taxes

on them.

Platform

I can't find that in the platform as quoted, but I'm unimpressed by the policy none the less. I lost alot of money today, and the CPC may have lost my vote with it.

Yea, from that article I gained a lot....stop reading this crap form the MSM. Look at the whole plan first, what is actually written down from the Finance department. If any of you are CA's, please stand up and give us your professional opinion.

Cam... I'm not a CA, but I haven't heard any CA's stand up so as a senior accounting student (on path to be a CA) and someone that works at a professional level in the accounting department of a trust company, I'll give ya the low down as likely the most qualified voice here.

This deal sucks for income trust investors and companies that are planning to go income trust. Flat out.

Let me give you a backgrounder, based on the Finance report in more reasonable and less spun language.

Imagine it this way, you likely know how a partnership works. You and I decide to go into business. We form a partnership and earn $100k in income first year (we make no other earnings). That income is split between us for taxation purposes (a little more complex at times, but this is basic). Let's say there is a flat-tax of 30% for ease of calculation. We each receive $50k in cash, and give Stephen Harper $15,000. Easy. Imagine the money entering the partnership as never being in the partnership, but always in the hands of the partners.

Where as if we decided to incorporate, we'd pay the small business rate of (let's say 10% to ease calculations again) 10% so $10,000... and we are left with $90,000 to bring out of the company as dividends to us as shareholders. We pay a small bit of tax on that, but not much. Not really a big deal hey, not saving much money by having our FTE (flow through entity) partnership rather than the corporation... if saving at all.

The big difference is when we deal with big companies, BCE for example. They make billions in income, and their tax shelters from previous losses are nearly gone. Is it cheaper tax wise for you and I to pay our 25% tax on $100,000 in trust payouts.... or the corporation to pay their tax on $5b then have us pay taxes again on the dividends (to some extent, there are loopholes)? That's what income trusts are doing. We bare the tax for the corporation.

ABC Corp wants to be formed into an Income Trust. They form ABC Trust LP, where ABC Corp owns 1% and us trust unit holders hold 99%. ABC Corp is the general partner (so is liable) and we are limited partners (only liable for our investment). ABC Corp does the actually managing, while ABC LP does the money making (receives payment). We directly get that money, it isn't taxed corporately because it's a partnership. (This is all very elementary). What this plan is doing is taxing that income before it's distributed to the unit holders, essientally like any other corporation gets taxed. Then we pay a similar dividend tax.

The end result, FTE's and traditional dividends are taxed similarly. The government makes more money (otherwise it wouldn't do this), we get screwed. FTE's were completely reasonable ways for a company to wind down... once their chosen growth was reached, just pay shareholders the cash.

The playing around with numbers that the government did with this to make it seem like taxes weren't going up is just that... fudging it to make it look good. Cutting the loopholes is costly to all of us that invested in these companies (and who didn't?).

The government makes it seem like ooo, look at you, your not a tax-exempt investor, it has nothing to do with you! Bullshit! I've never seen such arrogant mis-statement in a report. Do you have an RRSP... a pension? These were making killings off FTE's as you paid NO tax at all on the money. None. Zero. Now you pay the full corporate rate. That's a HUGE loss to your RRSP FTE investments. That's what a tax-exempt investor is!! ALL OF US! You just got a 31.5% (in itself understated because it includes some reductions already in place) tax hike on your RRSP FTE income!!!

I'd be right pissed if I were any of you, I am myself. This has cost me alot of money, and all of us that had RRSP's or pensions that included FTE's (most) just got a nice big juicy tax hike.

This is the bottom line:

"Any amount that becomes payable by a SIFT trust to a beneficiary of the trust, and that the trust is, as a result of these measures, prevented from deducting in computing its income, will be taxed in the hands of the beneficiary (the unitholder) as though it were a taxable dividend from a taxable Canadian corporation."

If government revenues go up, it's from us being taxed more, and that's what is happening here. You just got screwed by the government that was supposed to cut taxes, not hurt investors. This is a major step backwards for a country facing a shortage of investment (savings).

[geoffrey]

"The measures I am bringing forward today are necessary to restore balance and fairness to Canada's tax system, to ensure our economy continues to grow and prosper and to bring Canada in line with other jurisdictions," said Minister Flaherty. "Our plan is the result of months of careful consideration and evaluation. Our actions are clear, decisive and in the best interest of all Canadians."

Hopefully no one believes that bullshit. It is so far against the best interests of Canadians it's not even funny. It's not about 'corporate tax avoidance'. I'll say it one final time, corporations can't pay tax... their shareholders bare the burden and I hope you all have investments... you just got a tax hike, not any company.

[gc1765]

I can't find that in the platform as quoted...

Page 32 of the platform (which is page 17 in my adobe reader). Under the section Stand Up For Families, subsection Security For Seniors.

[geoffrey]

I can't find that in the platform as quoted...

Page 32 of the platform (which is page 17 in my adobe reader). Under the section Stand Up For Families, subsection Security For Seniors.

Great, so they lied to. See ya Stephen.

[August1991]

Hopefully no one believes that bullshit. It is so far against the best interests of Canadians it's not even funny. It's not about 'corporate tax avoidance'. I'll say it one final time, corporations can't pay tax... their shareholders bare the burden and I hope you all have investments... you just got a tax hike, not any company.

You'll have no argument from me, Geoffrey.

Corporate taxes fall on shareholders and amount to "double taxation". Well, we have other forms of double if not triple taxation. Taxation is only partly about fairness but it's primarily about nonsense. Corporate taxes are nonsense because they are (relatively) easy to avoid. Geoffrey, you are disturbed by the unfairness of it all. I am disturbed by the wastefulness of it.

For political reasons, no Canadian government can abolish corporate taxes and so we are left with increasing numbers of income trusts. Flaherty seems to be trying to do something albeit in a half-assed way.

"Any amount that becomes payable by a SIFT trust to a beneficiary of the trust, and that the trust is, as a result of these measures, prevented from deducting in computing its income, will be taxed in the hands of the beneficiary (the unitholder) as though it were a taxable dividend from a taxable Canadian corporation."

Geoffrey, do you have a link to that quote to provide context?

[Cameron]

There has to be something more to this. I'm going to email the party to try and get more information on this. Because, as it stands, this does look like a contradiction to their platform....

[geoffrey]

Hopefully no one believes that bullshit. It is so far against the best interests of Canadians it's not even funny. It's not about 'corporate tax avoidance'. I'll say it one final time, corporations can't pay tax... their shareholders bare the burden and I hope you all have investments... you just got a tax hike, not any company.

You'll have no argument from me, Geoffrey.

Corporate taxes fall on shareholders and amount to "double taxation". Well, we have other forms of double if not triple taxation. Taxation is only partly about fairness but it's primarily about nonsense. Corporate taxes are nonsense because they are (relatively) easy to avoid. Geoffrey, you are disturbed by the unfairness of it all. I am disturbed by the wastefulness of it.

For political reasons, no Canadian government can abolish corporate taxes and so we are left with increasing numbers of income tax. Flaherty seems to be trying to do something albeit in a half-assed way.

I'm disturbed by the wastefulness of it as well August. A government that is making $13b surpluses has no right to a massive 31.5% RRSP tax hike. In BCE alone the government could stand to regain over $400mil in taxes. Why do they need that money?

I don't quite comprehend your last statement. Are you suggesting Flaherty is trying to reduce corporate taxes... taxes overall? Or that he's increasing the numbers (types?) of income tax? I agree with the later.

There has to be something more to this. I'm going to email the party to try and get more information on this. Because, as it stands, this does look like a contradiction to their platform....

It's a massive contradiction to their platform and they've lost my vote because of it. Who I'll vote for now, I really have no idea...

[August1991]

I don't quite comprehend your last statement. Are you suggesting Flaherty is trying to reduce corporate taxes... taxes overall? Or that he's increasing the numbers (types?) of income tax? I agree with the later.

That was a typo. I meant that to avoid corporate taxes, there has been a proliferation of income trusts.

The only way to stop this proliferation is to cut corporate taxes (as Ireland has done) but that is politically impossible in Canada now. Flaherty seems to be trying another route and you have chosen to portray his plan in the worst light possible.

Let's wait and see what's involved. For example, from the Reuters article above:

For existing income trusts and limited partnerships the government is proposing a four-year transition period. They will not be subject to the new measures until their 2011 taxation year.

[geoffrey]

I don't quite comprehend your last statement. Are you suggesting Flaherty is trying to reduce corporate taxes... taxes overall? Or that he's increasing the numbers (types?) of income tax? I agree with the later.

That was a typo. I meant that to avoid corporate taxes, there has been a proliferation of income trusts.

The only way to stop this proliferation is to cut corporate taxes (as Ireland has done) but that is politically impossible in Canada now. Flaherty seems to be trying another route and you have chosen to portray his plan in the worst light possible.

Let's wait and see what's involved.

Ireland is a brilliant example of the sucess of the low corporate tax concept I've always strongly advocated. That's the way to do it. Flaherty is raising taxes... it's not quite the same destination in my opinion.

He may be trying to look down the road and sees a threat of economic stagnation caused by everyone converting to trusts. That's all the positive I can see in such a choice.

Did I portray it in the worst possible light? I feel like I portrayed it quite accurately. It's as simple as on investments in your RRSP or pension that you paid no tax on before, you now pay 31.5% tax on. That's a sizeable tax hit for anyone... I don't know how I could spin that positively without lying or misleading. This is a tax hike from a government that was supposed to reduce spending and taxes.

More of my money goes to the government, and that's not acceptable to me.

[August1991]

Despite the provisions in Budget 2006 to reduce the level of taxation on corporate dividends, the landscape has changed dramatically in the short time I have been Minister of Finance. This year alone there’s been almost $70 billion in new trust conversion announcements. We have seen a growing trend toward corporate tax avoidance. Top Canadian corporations operating within the current rules have announced their intention to convert to income trusts. They feel compelled to seek more favourable tax treatment by capitalizing on an available tax rule. This trend has now moved into the core of our industrial and knowledge-based economy.

National Post Transcript

It looks like BCE provoked this.

[Higgly]

The only market where there'll be maybe a blip is in the market for Bay Street lawyers.

D'oh!

Well 'honest' Jim Flaherty is at it again isn't he? This is the guy who delivered a rigged (sorry, 'balanced') budget before he and the Conservatives were kicked out of office in Ontario and then whined about the Liberals not keeping their promises. It's like Dalton McGuinty said recently... 'Remember those guys who used to run the Ontario government? Well they're back and they're running the federal government.'

Dropping this like a bomb out of the blue after having promised not to do so, is a stab in the back not only to the corporate world but to an entire class of investors. The Globe and Mail describes this as breaking a major campaign promise. Nice timing guys.

[Argus]

"The measures I am bringing forward today are necessary to restore balance and fairness to Canada's tax system, to ensure our economy continues to grow and prosper and to bring Canada in line with other jurisdictions," said Minister Flaherty. "Our plan is the result of months of careful consideration and evaluation. Our actions are clear, decisive and in the best interest of all Canadians."

Hopefully no one believes that bullshit. It is so far against the best interests of Canadians it's not even funny.

I don't see it that way.

It's not about 'corporate tax avoidance'.

Seems that way to me.

I'll say it one final time, corporations can't pay tax...

Sure they can.

their shareholders bare the burden and I hope you all have investments... you just got a tax hike, not any company.

As the owners then ultimately the shareholders bare the burden, of course. However, under income trusts, the overall tax burden is considerably lower than if the corporation paid the taxes itself. It was already costing the feds a billion dollars. That would have continued to go up. They had to do something about it.

Their promise regarding income trusts was for seniors' retirement funds, not for the likes of BCE. That is why they also added in tax savings for seniors while taking away the tax immunity income trusts conferred on large corporations.

[theloniusfleabag]

Dear geoffrey,

He may be trying to look down the road and sees a threat of economic stagnation caused by everyone converting to trusts. That's all the positive I can see in such a choice.

That's what it looks like to me, a sort of 'use it or lose it' cajoling.