There is a bit of a debate on whether the government collects less taxes overall from the income tax sector. Part of the debate is over whether income trusts held in pension funds and tax-deferred accounts like RRSPs result in less taxes collected by the government. I am neutral on this point because both sides have valid arguments.
The tax issue that really bugs me is the free ride that foreign investors get from owning these securities. As shown in the latest report from Leith Wheeler, a US investor would pay 44% of earnings as taxes in the corporate form and only 15% in the trust form. Some reports estimate that 22% of all income trusts are held by foreign investors. Why should Canadians subsidize the returns of foreign investors at the expense of their income taxes?
Mr. John McCallum, Liberal finance critic attacked the Government’s decision to tax income trusts as “Black Wednesday”. While the TSX Composite fell 294 points or 2.38% and income trusts suffered a blood bath with the sector falling 12%, the fall in the TSX Composite doesn’t qualify for the epithet reserved for October 19, 1987. On that “Black Monday”, the Dow Jones Industrial Average fell a stunning 22.6% and markets around the world fell equally sharply. A similar fall today would have meant that the TSX closed 2789 points lower.
Today’s market action shows the importance (yet again) of constructing a diversified portfolio. Unless you had an extremely overweight position in income trusts, your portfolio would have emerged relatively unscathed. The S&P 500 closed down 0.74%, the Canadian dollar dropped, EAFE markets treaded water and bonds went up a bit.
Do you think the howls from Bay Street seem to be louder this time around because they did not get hints about an upcoming decision from their friends in Government? And yeah, these are the same people who brought such wonderful trusts as Spinrite, Hot House Growers, Gienow Windows & Doors public and pocketed millions in investment banking fees.
I was surprised that the NDP and the Bloc support the Government decision which likely means that the new proposal will easily gain Parliamentary approval. But then, Mr. Layton probably has never seen a tax proposal he did not like.
Check out this column in The Globe and Mail website on how the trust changes will affect income taxes.