Time for Liberals to play catch up with Gord Tait, or have they abandoned income trust investors?

A wee tax change would be stimulating

DEREK DeCLOET

Globe and Mail Update

December 16, 2008 at 6:00 AM EST

A recession can alter lives and dreams. It can also take a man's best-laid plans and destroy them with the speed of an industrial shredder. Take Jim Flaherty, fiscal hawk. “I'm not going to be the finance minister that puts our country back into deficit,” he vowed in February. Come Jan. 27, he'll be the Finance Minister who puts the country back into deficit.

Mr. Flaherty so hated the idea of subsidizing the auto companies that he got into a mud-slinging contest with the Premier of Ontario about it. “What Dalton McGuinty is doing is the short-term, ad hoc, subsidy thinking … the kind of old-fashioned thinking that's proven to be a failure of short term, Band-Aid fixes for specific companies.” Last Friday, the Conservative government promised an ad hoc, old-fashioned, Band-Aid solution for the auto industry.

And there's plenty more where that came from. This, a wise economist told me recently, is the problem with deficits: Once you've tossed aside your fealty to balanced budgets, it becomes open season on the treasury. Everybody wants a piece, and it becomes harder to say no. After all, if a $5-billion deficit is good, isn't $10-billion better? And if $10-billion, why not $15-billion? And if the auto makers get money, why not lumber companies or miners? Industry Minister Tony Clement is now hinting that those groups may get aid, too, in Mr. Flaherty's upcoming budget.

Few would argue with Mr. Clement's description of the resource sector as “under distress.” One of the largest mining companies, Teck Cominco, is strapped for cash and has begun shutting down mines. Teck has about 7,000 Canadian employees, nearly as many as Chrysler. If jobs are your yardstick, then bailing out Teck is every bit as important. (Though Mr. Flaherty warned us that “politicians aren't very good at picking business winners and losers.”)

Who wins with all of this industrial aid? Those who work in the favoured industries, sure. But – no politician wants to admit this – that's a slim percentage of the working population. Auto manufacturing employs about 110,000 in Canada. Resource companies employ another 350,000. Put together, that's about 4 per cent of private sector jobs in the country. Both provide a lot of spinoffs (in trucking, financial services, and so on), but still, they're far less important than, say, the construction business.
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No, if Grim Jim is going to become Generous Jim, there are better – and fairer – ways to do it. Most Canadians will never set foot on the floor of a truck assembly plant. But all hope to retire some day. And what group could be more “under distress,” to use Mr. Clement's phrase, than investors?

The market value of all stocks on the Toronto Stock Exchange had plunged by about $800-billion this year, through November. Corporate bond values have dropped. What's now obvious is that even people who are close to retirement have plenty of exposure to both.

A Statistics Canada survey published in February found that most Canadians hold some mix of mutual funds, stocks, bonds and income trusts in their RRSPs. The surprise was this is true even of those 65 to 69 years old. Just four in 10 had stuffed all their money in GICs and short-term government bonds, where they'd have been sheltered from a market crash. Why? Presumably because the rates were too low. They needed growth, or more income, or both.

Where will they get it? Let's return for a moment to Mr. Flaherty's decision in 2006 to tax income trusts. He did it to stop large, taxable companies like Telus and EnCana from becoming trusts and to cure the tax inequity between trusts and corporations. But in the process, he made worse the double taxation of retirement savings.

An investor who gets a dividend paid to his RRSP has to pay full income tax on it when he withdraws it, not the lower rate of tax usually applied to dividends. This means the taxman gets up to 63 cents on the dollar, calculates BMO Nesbitt Burns analyst Gordon Tait – because it's taxed once in the hands of the company, and again at a higher rate in the investor's. (The same will be true of income trusts by 2011.)

That has always been absurd. But at a time when the bear market has burrowed a gaping hole into retirement accounts and pension funds, it's unconscionable. The solution is simple, Mr. Tait says. When investors take dividends (or trust distributions) out of their retirement accounts, tax them as dividends – not as income.

Yes, it would cost the treasury hundreds of millions, if not billions. But retirees could use the money they might save – there's stimulus for the economy right away – and all investors would benefit. It would lift the markets, ease the pressure on pensions, and cut the cost of capital for dividend-paying companies, like banks, which need it. Most important, Mr. Tait says, “it would be righting a wrong.” He has sent his proposal to the Finance Department. Mr. Flaherty, big spender that he is, should listen.