Liberals Wrong on Income Trust

[Keepitsimple]

I know we had a long running topic on Income Trusts a few months back but today's Star Editorial caught me by surprise. It's worth a read because now that much of the emotion has left the argument, there's nothing left except the facts...and this Editorial does a pretty good job in explaining where we stand today and why.

If the Liberals hope to defeat the Tories in the next election, they must devise public policy that is fair and benefits all Canadians, instead of the cynical policy they are suggesting on income trusts.

Link: http://www.thestar.com/printArticle/253578

[geoffrey]

Taxing trusts cost the government revenues. It also cost the economy productivity and growth. This article is written by someone with no clue about the realities of the financial situation in Canada or tax law. I really hate when journalists get in over their heads, and use their 'authority' to lead others astray.

[Keepitsimple]

Taxing trusts cost the government revenues. It also cost the economy productivity and growth. This article is written by someone with no clue about the realities of the financial situation in Canada or tax law. I really hate when journalists get in over their heads, and use their 'authority' to lead others astray.

Since this is coming from the Toronto Star and is knocking the Liberals, I would imagine they did quite a bit of homerwork. The Star doesn't take a bullet out of the Liberal election gun without good reason. Geoffrey - may I ask what general background you have to critique the article?..........it seems pretty bang-on to me - kind of damned if you do and damned if you don't but in the end, as it implies - it's done, it seems fair and let's move on.

[Michael Bluth]

Since this is coming from the Toronto Star and is knocking the Liberals, I would imagine they did quite a bit of homerwork. The Star doesn't take a bullet out of the Liberal election gun without good reason. Geoffrey - may I ask what general background you have to critique the article?..........it seems pretty bang-on to me - kind of damned if you do and damned if you don't but in the end, as it implies - it's done, it seems fair and let's move on.

Geoff has the technical background to understand the issues surrounding the income trust issue.

He differs with most on the philosophical underpinnings of government.

Had the income trust rules stayed as they were companies in a number of industries would have joined the conversion stampede.

Such a move was not in the best interest of Canadians. Even the Toronto Star recognizes that.

They are also bang on in questioning the motives of the Liberals in appealing to the oil patch.

There is only one seat out of the 28 in Alberta that could be in play in the next election. The NDP are already working Edmonton Strathcona. But that riding won't swing on income trust.

[geoffrey]

Since this is coming from the Toronto Star and is knocking the Liberals, I would imagine they did quite a bit of homerwork. The Star doesn't take a bullet out of the Liberal election gun without good reason. Geoffrey - may I ask what general background you have to critique the article?..........it seems pretty bang-on to me - kind of damned if you do and damned if you don't but in the end, as it implies - it's done, it seems fair and let's move on.

I'm in my last semester of a Bachelors of Commerce with double concentration in finance and accounting with a minor in applied energy economics. I work in industry right now involved in large scale planning, development and reporting for capital projects.

My honest belief is that it went about the situation in the entirely wrong way. Instead of proposing a more transparent and equitable tax solution for business in Canada, we took a step backwards towards the status quo. We suffer under a monsterous, adminstratively heavy tax regime that impedes our productivity and growth.

Geoff has the technical background to understand the issues surrounding the income trust issue.

Thank you. As do you, but we both arrive at different conclusions on this one.

Had the income trust rules stayed as they were companies in a number of industries would have joined the conversion stampede.

Good. They increase tax revenues while increasing productivity and growth. Why not?

They are also bang on in questioning the motives of the Liberals in appealing to the oil patch.

Agreed. The Liberals should also start questioning themselves on wasting time and political capital on a market that will never be interested in them.

There is only one seat out of the 28 in Alberta that could be in play in the next election. The NDP are already working Edmonton Strathcona. But that riding won't swing on income trust.

Perhaps they are aiming for Calgary South-East, Fort McMurray-Athabasca, Vegreville-Wainwright or maybe even Macleod and Yellowhead?

What the Liberals don't realise is that we have no stomach for interventionist economics out here. The CPC better be careful to understand that as well... Mulroney let that one slip a little far at times and it cost him and the conservative movement dearly for over a decade.

[gc1765]

The Liberals should also start questioning themselves on wasting time and political capital on a market that will never be interested in them.

I thought you were the one arguing that the Liberals need to be more Alberta-friendly?

[geoffrey]

I thought you were the one arguing that the Liberals need to be more Alberta-friendly?

Oh sure, they can be. There is a group for them in Alberta, and they can get elected. It's not oilmen though.

[jbg]

The tax base should be as broad as possible, the rates as low as possible. The income trusts were a dodge, pure and simple.

Harper and Flaherty did the right thing.

[geoffrey]

How can you dodge taxes when the trust structure in fact provided higher revenues to government?

[jdobbin]

I thought you were the one arguing that the Liberals need to be more Alberta-friendly?

Certainly members of the oil patch are paying attention.

At this point, I think the Liberals may do better with a series of corporate and personal income tax decreases rather than resurrecting the income trusts.

[geoffrey]

At this point, I think the Liberals may do better with a series of corporate and personal income tax decreases rather than resurrecting the income trusts.

I think your right.

[jdobbin]

I think your right.

I've been quite concerned about how the Liberals have been flirting with income trusts and income splitting. Hopefully, this is just casting about for ideas in a consultative phase.

I think a stick to your knitting proposal of decreases in personal and corporate taxes and no GST cut will be looked on more favourably and deliver economic growth.

[August1991]

Taxing trusts cost the government revenues. It also cost the economy productivity and growth. This article is written by someone with no clue about the realities of the financial situation in Canada or tax law. I really hate when journalists get in over their heads, and use their 'authority' to lead others astray.

WTF?

Geoffrey, would you agree to a corporate tax policy that eliminated all corporate taxes in 2008 for any company whose name started with the letter A and eliminated them for any company whose name started with the letter B in 2009 and so on for each subsequent year. In 2033, when Zircon Inc. no longer has to pay corporate taxes, we'll have eliminated all corporate taxes (and have improved Canada's productivity and growth).

Good idea, no?

Edited September 7, 2007 by August1991

[geoffrey]

I think a stick to your knitting proposal of decreases in personal and corporate taxes and no GST cut will be looked on more favourably and deliver economic growth.

It's not enough jdobbin. Our tax system is way out of date. Reducing rates is not enough. We need wholesale change, at least on the level of Ireland. No politican in the House of Commons today has the balls to do it. And that's why no party represented will get my vote. Someone has to have the nerve to take the risk and go for it.

The income trust structure isn't just a 'tax avoidance measure' (I argue it doesn't even do that). The income trust structure is a plea from corporate Canada for any scrap of a competitive edge, something we need to give them if we want to be a world economic power. Shutting it down appeases most Canadians that don't understand the higher level dynamics of international finance and business. It also appease many that do understand it but come from different political viewpoints.

The bottom line is that we need massive tax reform, completely tossing out what we have now. Why can't the Liberals give that to us? They are the party of big business and economic growth. Let's see it. Why can't the Conservatives give this to us? They are the party of small government, of tax cuts and the fighter for small business. Yet we see nothing.

It's an issue that we don't have the political will to do it. We don't have a Brian Mulroney on NAFTA or a Trudeau on the Charter. Brian Mulroney won the largest majority in Canadian history not by playing the polls but by taking a gamble and winning. It's unfortunate we don't have more politicans today like Mulroney.

I am excited when I see people like Mr. Bernier in cabinet, a real outspoken critic of our current tax system... someone from the Montreal Economic Institute where I've seen some great research and papers on bringing us foward in international competitiveness. I like hearing people like Gerard Kennedy speaking about small business, and moving Canadians towards an enterprising economy. But I have yet to see policies from either party that reflect this, and it's truly unfortunate for all Canadians.

We will be second rate until someone takes the gamble to be at the top.

[jdobbin]

It's not enough jdobbin. Our tax system is way out of date. Reducing rates is not enough. We need wholesale change, at least on the level of Ireland. No politican in the House of Commons today has the balls to do it. And that's why no party represented will get my vote. Someone has to have the nerve to take the risk and go for it.

The income trust structure isn't just a 'tax avoidance measure' (I argue it doesn't even do that). The income trust structure is a plea from corporate Canada for any scrap of a competitive edge, something we need to give them if we want to be a world economic power. Shutting it down appeases most Canadians that don't understand the higher level dynamics of international finance and business. It also appease many that do understand it but come from different political viewpoints.

The bottom line is that we need massive tax reform, completely tossing out what we have now. Why can't the Liberals give that to us? They are the party of big business and economic growth. Let's see it. Why can't the Conservatives give this to us? They are the party of small government, of tax cuts and the fighter for small business. Yet we see nothing.

It's an issue that we don't have the political will to do it. We don't have a Brian Mulroney on NAFTA or a Trudeau on the Charter. Brian Mulroney won the largest majority in Canadian history not by playing the polls but by taking a gamble and winning. It's unfortunate we don't have more politicans today like Mulroney.

I am excited when I see people like Mr. Bernier in cabinet, a real outspoken critic of our current tax system... someone from the Montreal Economic Institute where I've seen some great research and papers on bringing us foward in international competitiveness. I like hearing people like Gerard Kennedy speaking about small business, and moving Canadians towards an enterprising economy. But I have yet to see policies from either party that reflect this, and it's truly unfortunate for all Canadians.

We will be second rate until someone takes the gamble to be at the top.

I don't disagree with large tax reform.

I also know that once Mulroney and Trudeau left office, they left their parties devastated. The Liberals were reduced to 40 seats and the Tories were reduced to two seats. Such as the desire to kick out the rascals following their rule.

I think you know from most of my posts that I want tax decreases done in the fairest and more effective way. They come part and parcel with cuts in government operations. And all the while, they are done in way to avoid inflation and to keep growth steady.

I think Dion needs someone strong as his Finance critic and who will help shape an economic policy that will keep Canada competitive. That is why I say a stick to your knitting series of tax decreases will be a good thing and manageable for the party in terms of selling it to the public.

Edited September 7, 2007 by jdobbin

[M.Dancer]

I really hate when journalists get in over their heads, and use their 'authority' to lead others astray.

I was once asked by a client why they shouldn't allocate ad dollars to the Toronto Star. The client was a business service provider. With a straight face I told him that they didn't have a business section. He laughed and took out the business section. Great I thought, so I went through the section with him, story by story, We found a number of stories about personal finance (RRSPs, mortgages, insurance) a story about fining a better job, and a story covering the top business story of the day, continued from the front page.

He has never advertised in the Star. I wouold trust the Star to come up with a list of the top performing mutual funds, or the top tax shelter strategies, but not an article explaining the rationale of the portfolio managers or an explanation of tax shelter law.

[Pliny]

I know we had a long running topic on Income Trusts a few months back but today's Star Editorial caught me by surprise. It's worth a read because now that much of the emotion has left the argument, there's nothing left except the facts...and this Editorial does a pretty good job in explaining where we stand today and why.

Link: http://www.thestar.com/printArticle/253578

I didn't find this article particularly anti-Liberal as you seem to have interpreted it. It appears to exalt the Liberals in that taxing income trusts was their idea originally and the Conservatives implemented it. The problem the Conservatives have is that they campaigned on a promise not to implement it. This article seems to me to be a reminder of The Conservatives betrayal and a vindication of the Liberals and their policy.

The article isn't really about economics. I agree with geoffery as to the economic ramifications of the tax. People personally or professionally will move to toward tax avoidance if at all possible. This was the reason for businesses moving to income trusts. If fairness in corporate taxation were the concern the Conservatives could have given Corporations a tax incentive to remain as they were. It would have cost them revenues though so it was an unthinkable alternative.

[jdobbin]

I had suggested yesterday that the Liberals were casting about for ideas in a consultative phase regarding taxation and economic development. Today, the National Post also believes this is what the strategy is.

http://www.canada.com/nationalpost/financi...6a0&k=27632

But this week's musings in Calgary likely portend something else -- the Stephane Dion led Liberal Party's attempt to diversify its platform and position itself as the economic champion for Canada.

Mr. Dion has identified boosting productivity and competitiveness as one of four priorities the Liberals will push when Parliament resumes next month. In keeping with that theme, the party is hosting a one-day conference in Montreal on Monday at which experts with divergent economic views will speak about policy.

John McCallum, the Liberal finance critic, said it is hoped the conference will generate ideas from which the party can forge an economic platform superior to that of the Conservative government.

"Perhaps we are putting more emphasis on the economic agenda. It is not like we have been ignoring the economy," said Mr. McCallum, a former chief economist at Royal Bank of Canada. "Any political party has to have a strong focus on the economy and show competence in managing the economy."

Privately, Liberal Party insiders say they are worried that under Mr. Dion's leadership the party would focus too heavily on the environment and become pegged as a one-trick pony. So there is some relief to hear economic policy appears to be on the radar.

"We have to broaden our policy focus, to show Canadians we are thinking about other issues other than the environment and [the war in] Afghanistan," said one party insider, who spoke on condition of anonymity.

This, the insider explained, is why the party continues to raise the income-trust issue even though it may result in little headway in the polls. The purpose is to differentiate the party from the Conservatives. But there may be another reason, said Darrell Bricker, president of Ipsos-Reid Public Affairs. "The Liberals are trying to find something to remind people that [Prime Minister] Stephen Harper flip-flops on issues. And this is a really good issue and they are trying to do it in the heartland of Conservative Alberta, where they haven't got a hope anyway."

[Fortunata]

In keeping with that theme, the party is hosting a one-day conference in Montreal on Monday at which experts with divergent economic views will speak about policy.

Divergent - an important distinction. This "new" government invites only opinions that agree with their own as has been shown by their committee antics. Maybe, just maybe, the Libs have learned from this and has discovered to do the best they have to listen to all sides.

Or not.

[Michael Bluth]

It's an issue that we don't have the political will to do it. We don't have a Brian Mulroney on NAFTA or a Trudeau on the Charter. Brian Mulroney won the largest majority in Canadian history not by playing the polls but by taking a gamble and winning. It's unfortunate we don't have more politicans today like Mulroney.

What are you talking about?

Mulroney won the largest majority in Canadian history in the 1984 election. That election turned on Trudeau-fatigue, Quebec being pissed off at the patriation of the Constitution, Western anger at the NEP and a very rusty John Turner.

The 1988 election was the FTA election. Is that the gamble you are talking about?

[geoffrey]

The 1988 election was the FTA election. Is that the gamble you are talking about?

Pardon me, you are correct. Mulroney still secured more support in '88 than Chretien or Martin ever did.

[Pliny]

Divergent - an important distinction. This "new" government invites only opinions that agree with their own as has been shown by their committee antics. Maybe, just maybe, the Libs have learned from this and has discovered to do the best they have to listen to all sides.

Or not.

Listen to all sides? Doubtful!

[Michael Bluth]

Listen to all sides? Doubtful!

Exactly.

Why would Canada's natural governing party change their style now.

[kimmy]

Had the income trust rules stayed as they were companies in a number of industries would have joined the conversion stampede.

Good. They increase tax revenues while increasing productivity and growth. Why not?

How can you dodge taxes when the trust structure in fact provided higher revenues to government?

Please help me out. All of this seems rather contradictory to me.

How do trusts provide higher revenue to the government? If trusts actually result in more taxes, then why do companies convert to trusts? Surely they would do their homework pretty carefully and not do something that would result in them paying more taxes? Likewise, why would the government be so concerned about income trusts as to actually break their election promise, if trusts actually produce more revenue?

I'm so confused.

-k

[geoffrey]

How do trusts provide higher revenue to the government?

Individuals can deduct less against income than corporations, that is the short answer. I can give a long one too. Read on.

If trusts actually result in more taxes, then why do companies convert to trusts?

Because their bottom line and returns to shareholders appear higher. It also gives shareholders (unitholders rather) increased flexibility in how they want to deal with their procedes in terms of tax payment and deferral.

Surely they would do their homework pretty carefully and not do something that would result in them paying more taxes?

Companies pay less, individuals pay more (for increased tax flexibility).

Likewise, why would the government be so concerned about income trusts as to actually break their election promise, if trusts actually produce more revenue?

Because it wins over votes. You, like 99.9% of other Canadians, have no idea about income trusts and say, "hmm, well, it sounds like companies are avoiding taxes, meaning somehow I pay more, let's fix this!" and then vote conservative thinking they are the saviors of everything.

Essientially, it was a move to buy Quebec through saying 'oh, look at us go after Alberta oil!'

I'm so confused.

You have every right to be. No one knows all the impacts of this decision and only a handful of people know much about the Trust structure to begin with. Your dealing with one of the most advanced areas of corporate taxation and commercial law.

If you are genuinely interested and can spare an hour or so reading an independant industry publication that sets the record straight, try this:

http://www.pwc.com/ca/eng/ins-sol/publications/itr_1206.pdf

Otherwise it has nice graphs and figures that can provide a quick overview.