Income Trusts

[Who's Doing What?]

Why single out out IT's for taxation?

You are missing the point: income trusts were given a special break that put non-income trust companies at a disadvantage. Taxing income trusts levels the playing field and brings some sanity to the tax policy in this country.

If you believe that lower corporate taxes is good for the economy then you should be calling for the reduction or elimination of taxes on _all_ corporations. It makes no sense to demand that income trusts be given a special tax exemption.

From reading a little of what geoffrey posted, I think I would rather see the companies operated as income trusts, than see no taxes on corporations.

[Riverwind]

From reading a little of what geoffrey posted, I think I would rather see the companies operated as income trusts, than see no taxes on corporations.

I don't think that is Geoffrey's argument - he wants all corporate taxes eliminated and only sees exempting income trusts as a short term politically possible objective. I think the decision on whether to become a trust or a corporation should only be based on the needs of the business. A tax regime that encourages companies to adopt less than ideal corporate structures because of the tax advantages will hurt the economy in the long run. That is why income trusts and corporations should be treated exactly the same as far as corporate tax goes.

[geoffrey]

From reading a little of what geoffrey posted, I think I would rather see the companies operated as income trusts, than see no taxes on corporations.

Well, be careful.

If we had a reasonable corporate tax structure, then income trusts are unneccessary.

The deal is that no foreigners want to invest in Canada because we have horrifically oppressive corporate rates. Trusts avoided this, and drew in foreign investment and therefore R&D spending.

I'd be ok with taxing trusts equally if we saw a reduction of 8 or 9 percent or more in corporate rates to be competitive with nations like Ireland or even more competitive than the Americans.

You see, if we're not the most competitive nation in the world on taxes, no one will invest here. A tax is a cost of doing business. Why would you throw money in Canada where the government effectively takes 30% of your profit, versus Ireland where they take 4%?

If we eliminated all corporate taxes, it would be a much more fair system, and we'd be an investment mecca, moving our economy from merely average in the OECD to the top in investment, likely spuring growth in Canada's extremely disappointing productivity numbers as well.

--

Bottom line, taxing trusts and doing nothing else is seriously damaging to Canada's economy long term.

[Who's Doing What?]

From reading a little of what geoffrey posted, I think I would rather see the companies operated as income trusts, than see no taxes on corporations.

I don't think that is Geoffrey's argument - he wants all corporate taxes eliminated and only sees exempting income trusts as a short term politically possible objective. I think the decision on whether to become a trust or a corporation should only be based on the needs of the business. A tax regime that encourages companies to adopt less than ideal corporate structures because of the tax advantages will hurt the economy in the long run. That is why income trusts and corporations should be treated exactly the same as far as corporate tax goes.

I didn't say that was Geoffrey's argument. I said that I would rather see it that way.

[Who's Doing What?]

You see, if we're not the most competitive nation in the world on taxes, no one will invest here. A tax is a cost of doing business. Why would you throw money in Canada where the government effectively takes 30% of your profit, versus Ireland where they take 4%?

Just want to get this straight.

Now with a trust, the money paid out wasn't taxed until after it was already given to the individual. Whereas in a regular corporation the profits are taxed before dividends are paid out. This correct?

[Riverwind]

Now with a trust, the money paid out wasn't taxed until after it was already given to the individual. Whereas in a regular corporation the profits are taxed before dividends are paid out. This correct?

It is not that simple. When a Canadian receives dividends from a Canadian corporation they get a large tax credit which means they pay much less income tax that they would pay if the received the income from a trust. The liberals increased the value of this credit to ensure it completely cancels out the effect of corporate tax as far as the shareholders are concerned. When they bring in a tax on trusts they will likely provide a similar tax credit on trust income. This means that people receiving income from trusts may find that they end up with almost the same after tax income even if the trust is paying taxes.

[geoffrey]

Now with a trust, the money paid out wasn't taxed until after it was already given to the individual. Whereas in a regular corporation the profits are taxed before dividends are paid out. This correct?

Essientially that description is correct. Riverwind does point out some tax credits on dividends correctly, and to a shareholder (or unitholder in a trust) the effective rate on THEIR money is similar. The difference is the LP in the case of a trust pays zero tax (zero for the sake of the argument) and the corporation pays a considerable amount on their earnings. So the shareholder actually pays a higher effective rate than the unitholder because wealth from the corporation (a part of return to a shareholder, even if it's not in cash) is being transfered to the government, where as all profit is generally disbursed to unitholders or reinvested under some capital investment tax benefit.

The withholding tax is essientially the same for all foreign investors, so obviously to a foreign investor, the IT structure is far preferable.

[Who's Doing What?]

Essientially that description is correct. Riverwind does point out some tax credits on dividends correctly, and to a shareholder (or unitholder in a trust) the effective rate on THEIR money is similar. The difference is the LP in the case of a trust pays zero tax (zero for the sake of the argument) and the corporation pays a considerable amount on their earnings. So the shareholder actually pays a higher effective rate than the unitholder because wealth from the corporation (a part of return to a shareholder, even if it's not in cash) is being transfered to the government, where as all profit is generally disbursed to unitholders or reinvested under some capital investment tax benefit.

The withholding tax is essientially the same for all foreign investors, so obviously to a foreign investor, the IT structure is far preferable.

It is not that simple. When a Canadian receives dividends from a Canadian corporation they get a large tax credit which means they pay much less income tax that they would pay if the received the income from a trust. The liberals increased the value of this credit to ensure it completely cancels out the effect of corporate tax as far as the shareholders are concerned. When they bring in a tax on trusts they will likely provide a similar tax credit on trust income. This means that people receiving income from trusts may find that they end up with almost the same after tax income even if the trust is paying taxes.

OK thank you both. Now onto my next questions.

How does ownership work and differ between the two?

Are there a limited number of units for an income trust, like there is for stock in a company?

Do IT unit holders get any input towards the company like a shareholder gets to vote at a shareholders meeting?

[geoffrey]

How does ownership work and differ between the two?

Ok, I'll start with corporate ownership because that's easy. There are 'x' number of voting shares in a company, called common shares. They get paid dividends or have that money reinvested in projects that hopefully have a rate of return that boost dividends (or worth, retained earnings if you may) later on. There are also sometimes preferred shares, which are essientially shares that instead get first dibs on an insolvent company's assets or on dividends and stuff like that. Essientially though, it's best to just think of one share, one vote... and a proportion chunk of the company's worth.

With trusts, I'm going to use the most basic structure, though you can get as complex as you wish.

Essientially there is the operating corporation, X Corporation. It owns a 1% share in X Limited Partnership, as the general partner. Now the general partner assumes all liability for the company, so that the other partners don't expose their personal assets to risk upon some kind of legal action or insolvency. The unit holders are 'limited partners' in the trust, where they get a disbursement for each share they own. They have no financial responsibility beyond their original investment.

It's really a bugger to get into more details in text, I could explain better in person. Hopefully that makes sense.

Are there a limited number of units for an income trust, like there is for stock in a company?

Actually there is no limit on stock in a company, or a trust. Both can generally (unless said otherwise in their articles of incorporation), issue as much as they wish, as long as it complies with securities regulations.

However, you do see trusts issue units far more often as they sometimes run into cash flow issues with constant distributions. They essientially need to have more equity investment to build assets, unless they debt finance. So the only way to get more equity, as they can't really retain cashflows for future use, is to issue more equity.

Do IT unit holders get any input towards the company like a shareholder gets to vote at a shareholders meeting?

There is a bazillion ways to setup voting privledges, but for all reasonable purposes, yes.

[jdobbin]

Looks like one Calgary MP is still taking flack for the income trust flip flop.

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

Conservative MP Jason Kenney was berated by dozens of his Calgary constituents angry over Ottawa's new tax on income trusts during a town hall meeting on Saturday.

Police watched over the crowd while plain-clothed officers sat amongst the attendees.

People pressed Kenney over the federal government's flip-flop on income trust taxation by constituents worried about what kind of effect such a tax could have on the economic future of the country.

During his election campaign, Prime Minister Stephen Harper made the promise that if elected he would not propose new taxes for income trusts.

Many who showed up for the Calgary meeting had lost substantial amounts from their retirement savings.

"You lost the trust of Canadians, Albertans, Calgarians and worst yet, your constituents," one man said during the meeting.

Probably just a bunch of unhappy Liberals, huh?

[madmax]

Probably just a bunch of unhappy Liberals, huh?

There in Central Nova.

Things don't look good in the world of politics. But Jason Kenny seat is safe.

[jdobbin]

There in Central Nova.

Things don't look good in the world of politics. But Jason Kenny seat is safe.

There have been unhappy Liberals in Central Nova since 1968. Even when they had a Liberal there, they were unhappy with that MP.

As far as Jason Kenney goes, I think that the Tories will win every seat in Alberta for the next ten years or more.

[scribblet]

Can't believe the Red Star said this and to think I agree with them :

http://www.thestar.com/article/205638

Tax changes never win applause from people who lose tax advantages, even when such advantages are considered to be patently unfair.

And the anger of such taxpayers is all the more palpable when restoring fairness means breaking an election promise, as happened last fall when Finance Minister Jim Flaherty slapped a new tax on income trusts.

But the backlash is even greater when the government gets hit by opposition parties seeking to curry political favour with disgruntled taxpayers, despite the finance minister's attempt to do the right thing.

Unfortunately, Liberal Leader Stephane Dion is trying to capitalize on that backlash, and he is doing it by turning his back on sound tax policy.

-snip-

Defending tax unfairness will not win him the next election.

[M.Dancer]

By next year there will be less than 40 income trusts left as the M&A world look at them a prizes....

[geoffrey]

It's not sound tax policy, I have presented a few independant studies here that show the overall effect was quite negative on investment, R&D and productivity. The CPC has yet to produce ANYTHING at all that shows otherwise.

I eagerly await a study that says this. "It's common sense" doesn't really work for me when an overwelming amount of industry and academic evidence describes a situation much to the contrary.

M. Dancer is right. I wouldn't say 40, but the private equity market is jumping at these companies. Cash flow is the primary concern for them (I saw an article today about them looking at TransAlta of all companies, very poor income, but high cash flow)... and most flow through entities are high cash flow companies. Investors are increasingly shut out of high cash flow companies that provide stable income for retirees and others requiring such assets in their portfolios.

[jdobbin]

M. Dancer is right. I wouldn't say 40, but the private equity market is jumping at these companies. Cash flow is the primary concern for them (I saw an article today about them looking at TransAlta of all companies, very poor income, but high cash flow)... and most flow through entities are high cash flow companies. Investors are increasingly shut out of high cash flow companies that provide stable income for retirees and others requiring such assets in their portfolios.

I think they said on Report on Business that 40 might be a lowball number.

[Figleaf]

The irony is that a large proportion of the income trusts were based in western Canada. They provided employment and knowhow at the highest levels of business management that will not be available in a branch plant economy. A transforming city like Calgary needed the income trusts for corporate heft. The Harper government betrayal has probably set the city back a generation.

[geoffrey]

The irony is that a large proportion of the income trusts were based in western Canada. They provided employment and knowhow at the highest levels of business management that will not be available in a branch plant economy. A transforming city like Calgary needed the income trusts for corporate heft. The Harper government betrayal has probably set the city back a generation.

Couldn't agree more. Also no more of a reason to vote Liberal, by the way.

[August1991]

Let's be honest. Income trusts are a way to avoid corporate tax.

In general, corporate taxes are bad because they create a distortion. With corporate taxes, firms have an incentive to retain earnings, grow larger and increase shareholder value through a capital gain rather than pay out earnings as after corporate tax dividends. Because of corporate tax, firms are larger than they would otherwise be and they invest in projects they would otherwise refuse.

An income trust (like an offshore entity) avoids this distortion and hence, an income trust (like setting up an offshore entity) is a "good" thing.

Unfortunately, setting up an income trust (like setting up an offshore entity) is complicated and requires some sophisticated legal advice and takes up management's time. Income trusts were an invitation to waste alot of effort to avoid a tax that shouldn't exist.

In an ideal world, we'd have a federal government with the fortitude to reform our tax system. It would eliminate corporate taxes, eliminate payroll taxes (CPP, EI), raise the personal exemption, raise the GST and impose environmental taxes. If government spent less, it wouldn't have to tax so much.

This government does not have the courage to do any of this. (I'm reminded that Mulroney's government had the courage to institute a federal sales tax and negotiate a US free trade agreement. It tried to solve the Quebec problem and reform unemployment insurance. This Harper government has no courage to do anything.)

Income trusts are not a way station on the road to reform. Either the government cuts or eliminates corporate tax or it applies such taxes to all.

The irony is that a large proportion of the income trusts were based in western Canada. They provided employment and knowhow at the highest levels of business management that will not be available in a branch plant economy.

Huh?

You may be right that many Albertan businesses became income trusts but I think that's because they are willing to take risks, particularly when it concerns government regulation. It was Bay Street that organized (and charged hefty fees) to do the conversions.

BTW, Albertan businesses are generally not suitable candidates for an income trust. Income trusts are ideal for cash cows.

[geoffrey]

BTW, Albertan businesses are generally not suitable candidates for an income trust. Income trusts are ideal for cash cows.

Royalty trusts are ideal high cash flow companies. Not all oil companies are ideal trusts... then again, not all oil companies converted to trusts. Ideally, you want a company that has a massive capital expediture early, then high cash flow (low income due to high amortization, which is really irrelevant in a trust) later on. That's a winner for a flow-through entity.

Income trusts, before the taxation, actually produced more revenue by taxing individuals instead of the company. This is transfers the burden to someone else, ideally, to the company's income statement so that people don't see how much the government takes from them. A company can find many more ways to find expenses and deferrals than an individual can.

People that think that taxing trusts will bring in a great deal more revenue are sadly mistaken about the way taxes work in Canada... and the reality of the government revenues post-tax will easily prove that.

Oh well.