Diane Francis on Rescind. Restore. Rejuvenate.

Still time for Harper to fix trusts mistake

Diane Francis,
Financial Post
April 25, 2009

It's been two and a half years, and a Great Recession, since the income trust tax of 31.5% was announced by Finance Minister Jim Flaherty and the Prime Minister.

At the time, I said: Prove the case that trusts should be shut down with this tax because they are a tax drain, or drop the tax.

Today we know that the tax, to start in 2010, has not prevented leakage but has caused it as income trust values collapsed by $35-billion. Foreigners bought nearly $100-billion worth of trusts with large bank loans. The interest on these loans is written off against profits, allowing them to duck taxes altogether.

This has been, and will be, a drain to taxpayers of billions and was predictable.

It's been a huge mistake, so what should be done? Scrap the tax immediately to correct the situation as well as to help the country get through this economic collapse. In fact, I believe income trusts are a superior model to other corporate structures for many companies.

-The income trust is more accountable because up to 95% of profits flow through to unitholders, preventing inept managements and boards from indulging in excessive bonuses, stock options and stupid takeovers.

-Income trusts are also superior because they provide Canadian corporations (big or small) with a capital advantage, thus enhancing the possibility they will survive and thrive later on.

-Income trusts provide a superior investment vehicle for investors, both retail and institutional, big and small, which has been missing since they were attacked.

Scrapping the tax is also a form of stimulus, which is badly needed as a result of the market meltdown worldwide, because it will:

-Stimulate the stock markets by bringing investors back into the fold by not sandbagging the popular and profitable income trust sector.

-Restore the integrity of investment rules in Canada that were applied retroactively to attack income trusts.

-Restore the Prime Minister's reputation, which was sullied after he broke his promise in 2006 to leave income trusts alone. Demonstrate a flexibility and wisdom that he realizes being correct outweighs defensiveness or merely being tied to consistency.

-Remove the advantage foreigners have enjoyed by picking off the income trusts, which lost $35-billion in value after the tax was announced.

-Reverse the Harper/Flaherty income trust tax leakage problem caused by leveraged buyouts of trusts.

-Provide or restore an important investment vehicle for 75% of Canadian seniors and investors who do not have a company or public-sector pension.

-Eliminate over-reliance on derivative or synthetic type products that were billed as "retirement safe" or equities paying dividends but that have been clobbered more than the existing income trusts.

-Level the playing field with U. S. trusts (called MLPs and REITs) by letting Canadian real estate and energy trusts continue under the old rules.

As anyone who understands business realizes, the Tories made a mistake with their income trust taxation and there's no time like the present emergency to correct the situation to help Canadian companies and investors.

dfrancis@nationalpost.com - Diane Francis blogs at financialpost.com/dianefrancis