November 7, 2006
Dear Mr. Fullard
Ira [Gluskin] forwarded your piece [ Income Trusts - Tax Leakage or Tax Neutral?] to me. It's interesting, but I think most of your points have actually been well covered in our pages. And as for the "tax leakage" calculations, it depends greatly on assumptions -- but there is a reasonable range of forecasts that we have, I believe, published.
That said, I am copying your piece to my deputy editor Cathryn Motherwell, who oversees -- among many other things -- our new online trusts page. She may want to post it there.
Thanks again, and regards
Editor, Report on Business
This was my reply:
Dear Mr. Stackhouse:
Thank you for your prompt reply.
Let me start off by saying that I am not an advocate of tax leakage policies. I am, however, a strong advocate of public policies being founded on fact-based analysis and public input.
This whole income trust issue turns on the question of tax leakage.
I rely exclusively on the ROB and to a lesser extent ROB TV for my Canadian business news, and yes the ROB has published a range of "reasonable"(your term) estimates. The key issue is what constitutes "reasonable".
By reasonable I assume that you mean that these estimates are based on sound methodological frameworks and are performed on a rigorous basis. I am only aware of two studies that meet this latter test....the study performed by the Department of Finance and the work undertaken by HDR/HLB Decision Economics.
These two studies do however differ fundamentally as to their methodological framework, in that the Department of Finance (incredulously) chooses to ignore the tax it receives on the distributions paid on no less than 31% of all outstanding income trusts. i.e those trusts held in RRSPs/Pension plans. As I stated in my earlier letter, the $390 billion that Canadians have saved in RRSPs as their retirement nest eggs is nothing more than a nest egg for the government, as all monies withdrawn from RRSPs are taxed, and yet Finance ignores it.
This difference in analytical approach is not some esoteric concept that is above Canadian's heads, afterall, if this were a divorce court, the judge would chastise the Department of Finance for attempting to conceal communal assets for its personal gain.
The issue of tax leakage turns on this very central point.
Unlike the Liberal Government, who under Ralph Goodale, began a formal process of public input, that was abandoned mid way through the process in the Liberal's haste to prepare for last years election (following a non -confidence vote), the Conservatives after campaigning on a pro-income trust platform, reversed their course 180 degrees and did not see fit to at least finish the consultative process that the Liberals began.
Rather than discussing this issue in a fact based way with public input, it is being dealt with through a process of political expediency. No doubt the average Canadian intuitively thinks trusts are "tax dodge" designed to avoid paying corporate taxes at the statutory rates of 21% for non-resource companies and 25% for resource companies.
Do you not think that the average Canadian would be surprised to learn that (according to Statistics Canada), corporations on average pay only 6.2% of earnings in taxes? Are Canadians aware that two-thirds of trust distributions are interest which is taxed at the full personal income tax rates, in contrast to the 72% of corporate income which is taxed at half the personal tax rates. Would Canadians be surprised to learn that even if they were to accept the Department of Finance's flawed analytical methodology, that the "tax leakage" numbers they are promulgating in the public, have only a 9% chance of occurring and that there is a 91% chance that they will actually be materially less?
Perhaps you are aware of the "Downing Street Memo Affair" in the UK where Tony Blair's government was accused of "sexing up" (not my term) the intelligence reports to justify the ill-fated invasion of IRAQ? This revelation uncovered by the British press severely diminished Tony Blair's standing, and is widely attributed as being the reason he will not seek another term.
What does this have to do with Income Trusts? Based on the observations I made above, is it not possible that Finance, if not guilty of "sexing up" the data, is at least participating in "massaging" the data to assist in making the case that happens to resonate with the average Canadians' intuition , notwithstanding the fundamentally flawed analytical framework and notwithstanding the negative economic repercussions it will induce?
There are a hole host of secondary considerations/repercussions that arise from such a change in tax policy, some of which I attempted to address in my letter, such as limiting the investment choices of Canadians as they face the difficult task of providing for their retirement and the potential "hollowing out" effect of Canadian business, just to name the ones I am most concerned about.
Unlike our elected politicians, all of whom have Government indexed pension plans (actually, three in the Flaherty household), most Canadians have no such pension plan and many of those that are privileged to have company pension plans need to concern themselves with a serious level of under funding which from time to time Ottawa voices concern about.
There is a very perplexing circularity of injustice in what is going on here. By virtue of the fact that so many Canadians do not participate in a formal pension plan, they have to participate in the difficult task of making their own investment choices...meanwhile Income Trusts emerged as a prudent and sought after investment alternative that many Canadians have chosen for inclusion in their RRSPs as they plan for retirement, and now we have the Government taking this very investment choice away from Canadians because the Governments analysis that supports the notion of tax leakage ignores the taxes on the very place where most Canadians hold these securities, namely their RRSPs. Circular logic or circular injustice?
Very little of this has been reported on in the ROB. All of my observations are fact-based. Given that the Government has not seen fit to provide a formal process of public input on this important economic issue, the press becomes the only means for doing so.
Tuesday, April 21, 2009
Posted by Fillibluster at 3:42 PM