Tuesday, June 9, 2009

Review of Jack Mintz’ Estimates of the Tax Revenue Losses Attributed to Income Trusts

By W.T. Stanbury, Professor Emeritus, University of B.C.
June 9, 2009


The purpose of this paper is to examine carefully the papers by Prof. Jack Mintz (formerly of the University of Toronto, now at the University of Calgary) in which he made estimates of the tax revenues lost due to the income trust form of business organization compared to the standard business corporation. I do this largely because Mintz’ estimates in 2004 and 2006 appear to have been influential in shaping the federal government’s policies toward income trusts. Certainly his 2006 estimate was much cited by the Minister of Finance as justification for the 31.5% tax on income trusts announced on October 31, 2006. As I will make clear, Mintz’ estimates are flawed and some of the flaws are serious indeed.

The paper is organized as follows. Section 2 briefly explains why the estimation of revenue losses due to income trusts (if any) is a difficult task. Section 3 provides a critique of Aggarwal and Mintz estimate of the revenue losses said to be attributable to income trusts in 2004. Section 4 examines Mintz’ revised estimates of revenue losses for 2006,including those claimed due to the proposed conversion of BCE Inc. and Telus Corp. to income trusts.. Section 5 presents my conclusions. The references follow.


The calculation of the effect on tax revenues of two different forms of business organization is technically difficult. It requires deep knowledge of a complex (and dynamic) system.

First, one needs to assemble large amounts of data—see HLB Decision Economics (2004) which was able to do this without calling on the Department of of Finance. (see footnote 2)

Second, the results are sensitive to the assumptions (uncertainty). It is essential to examine the effects on the revenue loss of different assumptions. (HLB Decision Economics, 2004, was exemplary in this regard.)

Third, the estimated losses should be based on the effective (not nominal) rate for the corporate income tax. It varies considerably by sector. There was a big difference between the overall average rate used by Aggarwal and Mintz (2004) and HLB Decision Economics (2004), for example.

Fourth, the analysis needs to differentiate between at least three kinds of unitholders for tax purposes. For example, foreigners pay only 15% on the income from income trusts, while Canadians holding units outside an RRSP must pay the full marginal personal income tax rate—often over 40%. There are other problems which I omit for reasons of space.

In addition, there are conceptual roadblocks to understanding the problem of the different revenue stream for two different forms of business organization. Initially, one is inclined to accept the “tax leakage” argument because income trusts—which function essentially like a corporation-- pay no tax at source in contrast to business corporations. A careful policy analysis, however, indicates that with the inclusion of deferred taxes, the net difference in tax revenues at the federal level was far less than claimed by the Minister of Finance or by Prof. Mintz in his two studies. Indeed, as noted below, there may have been no leakage at all if it was properly measured.

3. Aggarwal and Mintz Study, 2004

In September 2004 , Lalit Aggarwal and Jack Mintz, published, “Income Trusts and Shareholder Taxation: Getting It Right,” in the Canadian Tax Journal, Vol. 52(3), May 2004, pp.792-818. I now describe the key points that need to appreciate about this paper.

First, the main focus of the paper was on “whether income trust arrangements that have exploited the non-neutral treatment of equity and other financial flows create specific economic distortions that undermine the efficiency of capital markets in Canada” (Aggarwal and Mintz, 2004, p.794). The much cited estimates of so-called “tax leakage” were only part of the paper, although they are the focus of my comments. Aggarwal and Mintz(2004,p.801) emphasized that “ numerous complexities are inherent in estimating the integrated tax impact of income trusts; the HLB [Decision Economics,2004]study emphasizes that estimates are highly uncertain and difficult to make.”

Second, the Aggarwal and Mintz (hereafter A&M) estimate of revenue losses is for both federal and provincial governments and for 2004. Neither of these facts are stated in any of the tables, nor in the conclusion. One gleans these crucial facts from the abstract at the start of the paper. The fact that the A&M estimate is for BOTH levels of government is never mentioned by any one who uses their estimate of tax revenue losses said to be attributable to income trusts. They attribute the losses solely to the federal government ---and that includes the Minister of Finance and his officials when they testified before the Commons Finance Committee on January 28, 2007. The significance of this point came two years later when Mintz (2006a, p. 690) stated: “Overall, the tax revenue loss to government is not large compared with current annual federal and provincial revenues of almost $500 billion.” Thus he is making it clear that his estimate is for both levels of government!

Third, A&M argue that deferred tax revenues related to income trusts ought to be included in the estimate of the tax consequences of income trusts. “An analysis of the tax revenue impact of income trusts must extend beyond the evident reduction of the corporate tax base. There is a commensurate increase in the personal income tax base because trusts distribute pre-tax cash flow as more highly taxed interest rather than as dividends or capital gains to unitholders. These distributions are taxable at personal marginal income tax rates that are substantially higher than the otherwise applicable corporate tax rates” (Aggarwal and Mintz, 2004, p. 802).
This point is ignored by the proponents of the A&M estimate of revenue losses. The inclusion of deferred taxes was NOT the position of the Department of Finance which Dennis Bruce points out is a based on a short- term, annual budget perspective, and not that of a broader and longer-term policy analysis---see HLB Decision Economics (2004).

Fourth, A&M make a serious error in the calculation of deferred taxes. They state: “As long as tax rates do not vary over time and the income trust’s risk-adjusted returns are no different from returns on alternative investments, the present value of taxes owing on registered savings plans is zero, implying that the income is equivalently exempt. We assume this to be the case when we empirically assess the tax implications of income trust arrangements” (Aggarwal and Mintz, 2004, p 799).
The effect of A&M’s assumptions is to assign a value of zero to the present value of deferred taxes. The authors cause confusion when they do not record this amount in their summary table and when they do not discuss the point when summing- up their results.

But a key assumption here is almost certainly wrong. The growth in the value of assets within RRSPs (and other tax deferral accounts) will almost certainly exceed the appropriate discount rate. That means that the present value of deferred taxes is positive. Dennis Bruce’s analysis shows that the inclusion of these deferred taxes make a huge differences in the estimate of the tax consequences of income trusts (HLB Decision Economics, 2004).

Fifth, A&M’s best guess estimate of “tax leakage” due to income trusts at $ 400 million to $600 million for 2004 for federal and provincial governments combined. The authors properly do a sensitivity analysis. They show that the estimate is very sensitive to the assumptions about the vale of certain data, notably the effective rate of the corporate income tax. A&M use a much higher effective rate than does HLB Decision Economics (2004). The effect of that choice is to increase A&M’s estimate of the revenue losses. The uncertainty is important as Aggarwal and Mintz (2004,p811) indicate in their conclusions: “Although we have arrived at an estimate of $400 million to $600 million in tax benefits associated with income trust structures, we believe that there is a wider range of possible numbers.”

Sixth, A&M mis-state a very important result of Bruce’s study. A&M (2004, p.801) state that Bruce estimates the revenue loss for 2003 at $213 million if deferred taxes are ignored, and $150 million if they are included. Table 8 in Bruce’s study (HLB Decision Economics, 2004), however, indicates that for 2003, the revenue loss for the federal and provincial governments is $154 million ignoring deferred taxes and plus $72 million if deferred taxes are included. That means income trusts did not create net revenue losses of the federal government in 2003 (or 2002 or 2004) - they had a net positive effect on revenues when referred taxes are taken into account, as they should be. Thus A&M made a serious error in describing contrary results by another researcher.

Seventh, A&M do not separate the tax consequences for federal as opposed to provincial governments. That is most unfortunate, because their estimate of the revenue loss is usually attributed solely to the federal government. Bruce failed to do this as well in HLB Decision Economics (2004). This was to result in much confusion in the subsequent debates because the Department of Finance much-cited estimates of revenue loss were only for the federal government.


Introduction: In October 2006, Prof. Mintz published a new estimate for tax revenues losses for federal and provincial governments for 2006 in the Canadian Tax Journal (Mintz 2006a). In that piece he also extended that estimate to assume that Telus and BCE converted to income trusts as they had announced they would in September and October 2006, respectively. The editor stated that, “The article was written on the eve of the government’s decision to discourage conversions of incorporated businesses to income trusts, announced on October 31, 2006.”

Mintz (2006b) published an op ed. in the Globe and Mail on October 18, 2006 summarizing Mintz (2006a). The day before, Mintz was interviewed by a reporter for the Globe and Mail in an article published on October 17, 2006. A few weeks later, Mintz (2006c) published another summary of Mintz (2006a).

Mintz (2006a): Here are my comments on this article. First, Mintz emphasizes the growth in the income trust market since 2004: “(EBITDA) of income trusts are estimated to be $18.7 billion by September 2006, based on growth in income trust issuances. Payments to third parties are estimated to be $3.1 billion, and to unitholders, $11.9 billion. With the Telus and BCE conversions, EBITDA are estimated to be $29.1 billion; third-party payments, $4.8 billion; and payments to unitholders, $18.5 billion.” Thus he estimated that the planned conversion of the two telephone companies would increase trust EBITDA by 55.6%.

Second, Mintz states that the estimate for federal plus provincial revenue losses in 2004 was $500 million. In Aggarwal and Mintz (2004) the “best guess estimate” was put at $400 million to $600 million.

Third, Mintz (2006a) estimated the federal plus provincial tax revenues losses for 2006 (but excluding the effects of announced plans of Telus Corp and BCE Inc. to convert to trusts made on September 11 and October 11, 2006, respectively) to be $700 million.

Fourth, when he discusses the differential tax treatment of three types of trust unit holders, he notes that 39% of the value of units are held by Canadians in RRSPs and other tax deferral accounts. He then indicates that the gross revenue losses in this category “could be offset by an annualized revenue gain arising from a higher yield on trust investments and larger pension and RRSP withdrawals.” Notice the tentative nature of this very important statement by use of the word “could”. In fact, Mintz did this in his calculations of the net revenue losses. Later, Mintz (2006a) states: “if it is assumed that a higher yield on units of income trusts provides greater retirement income in the future for investors, additional personal tax revenues, on an annualized basis, would be $200 million for current trust conversions, resulting in a net loss of $500 million annually” for this category of unitholders. However, he does not state what discount rate he used for this calculation. This suggests that Mintz took the present value of personal income taxes applied to withdrawals from tax deferred accounts into his calculation of net revenue losses. But the point is not clear.

In the view of a former Finance official, “Mintz failed miserably to address this crucial issue,” i.e. deferred taxes (Fortin, 2009). (For a more detailed discussion, see Fortin, 2006.) Yet Mintz was critical of the Department of Finance’s failure to include deferred income taxes in its estimate of “tax leakage.” In an e-mail to Brent Fullard, the president of CAITI, on November 28, 2006, Mintz said: “I do want to point out that there is a serious flaw in some analyses especially on the taxation of pension and RRSP accounts. Finance was not right to treat the impact as zero.” Most interesting—because I could not find anything in print by Mintz to this effect. Yet Mintz evidently made a considerable effort to get his negative views about income trusts into the public domain.

Fifth, it appears, however, that Mintz (2006a) had changed the way he deals with the deferred personal income taxes on units in RRSPs. Recall that in Aggarwal and Mintz (2004), the assumptions for these deferred taxes resulted in a present value of zero. Now, they amount is $200 million per year annualized. Quite a difference. Yet, there is no discussion of this important change in methodology and /or assumptions. Why? Surely, this point should be made clear to one’s academic and professional colleagues.

Sixth, Mintz (2006a) states that the combined federal and provincial tax revenue losses in 2006 – if both Telus and BCE become income trusts as planned —would be $1.1 billion. This estimate is hugely overstated as the superior work of Dennis Bruce (2007) makes clear. Both Telus and BCE stated that they expected to pay little or no corporate income taxes for the next several years. That means that if the two companies converted, the revenue loss would be much smaller than Mintz suggests. Apparently, he applied the average effective rate of corporate income tax for his previous set of companies to the two huge additions to his data base. Given their size, and the availability of company-specific data, these two corporations merited being handled by examining their specific situations. If he had done so, he would have reported a vastly lower estimate for revenue losses because the two corporations expected to pay little or nothing in corporate income taxes. The inclusion of BCE and Telus would have lowered the average a great deal. Professor Yves Fortin, on behalf of CAIF, estimated in December 2006 that “it might well be that no tax leakage would be found if such a study was done properly” (Globe and Mail, December 19, 2006). Dennis Bruce made essentially the same point based on extensive research—see below.

Seventh, Mintz said that in his estimates that “federal and provincial corporate taxes are estimated to be 9.7 percent of EBITDA, taking into account corporate tax changes and provincial capital taxes.” Note that this is lower than the figure of 14.7% used in Aggarwal and Mintz (2004, p. 801). Mintz (2006a) provided no explanation, but it may reflect the reductions made in the federal corporate income tax between 2004 and 2006.

Eighth, Mintz (2006a) does not provide a breakdown between federal and provincial tax revenue losses. This distinction was lost on the Minister of Finance who later repeatedly claimed that with the expected conversion of Telus and BCE, the federal government would have suffered “tax leakage” of $1.1 billion in 2006. Finance Minister Flaherty was careless with these numbers—and always on the side of exaggerating the revenue losses. I could find no published comments by Mintz correcting the Minister.

Ninth, Mintz (2006a, p.690), very usefully put the claimed tax revenue losses into perspective as follows: “Overall, the tax revenue loss to government is not large compared with current annual federal and provincial revenues of almost $500 billion. However, as the income trust sector grows, it will be important to evaluate whether this tax cut [the claimed $1.1 billion] is more efficient than other growth-oriented policies…” PricewaterhouseCoopers (2006, pp. 22-23) pointed out that Canada was running a budgetary surplus and – more important – it appeared to have a “structural surplus.”

Fortin (2009) noted that Mintz (2006a) failed to properly address the important difference between nominal tax rates and the actual or effective rates; that Mintz repeated the error in the Consultation Paper by ignoring the fact that income trust distributions are based on cash flow rather than profits and that the taxes later collected from unitholders is on a higher amount of income. Further, Fortin (2009) noted that Mintz (and Finance) ignored the fact that the Government of Canada had moved from cash to full accrual accounting in the Budget of February 2003. Thus deferred taxes do not adversely affect the budget position, but they may affect its cash position.

Mintz (2006b): The Globe and Mail op ed. by Mintz added a new piece of data not contained in Mintz (2006a), namely that about $726 million of the $1.1 billion in tax revenue losses in 2006 would be lost by Ottawa, the rest by the provinces. Note that this was less than two weeks before the new tax on income trust was announced.
To put the estimates of revenues losses into perspective, Mintz (2006b) noted that the market capitalization of Canadian income trusts was $210 billion or 11% of the total capitalization of the Toronto Stock Exchange at the time. Further, he noted that Ottawa and the provinces annually collect $50 billion in corporate income taxes.
Mintz(2006b) said the previous Liberal government’s reduction in the effective tax rates on dividends (which affected only taxable Canadian investors) with which the provinces followed suit – removed any tax advantages for Canadians holding trust units outside pension plans, RRSPs or RRIFs. Taxable Canadian investors hold 39% of income trust units. The income taxes they pay makes up for any losses in corporate income taxes. But still Mintz made no reference to deferred personal income tax revenues as an offset to corporate income tax losses in estimating federal revenue losses. Yet, as noted above, Mintz privately criticized Finance for failing to include deferred taxes in its estimate of tax leakage.


Mintz’ much-quoted estimate of tax revenue losses for 2006 assuming that both Telus and BCE converted to income trusts ($1.1 billion) was highly questionable for two reasons. First, that figure was for both federal and provincial governments. Mintz (2006b) stated that his estimate for the federal government was $726 million (compared to Finance’s estimate of $500 million). Second, even that figure was grossly over-estimated because—as noted above-- both BCE and Telus had said publicly that they expected to pay little or no cash taxes over the next few years. Given their size, and the availability of data, an individual calculation should have been used for each company.
Perhaps the best summary response to Mintz’ (2006a) is the testimony of Dennis Bruce before the House of Commons Finance Committee on February 1, 2007. Based on his much superior methodology, Bruce (2007a) told the Committee that the Department of Finance (whose estimate for 2006 was smaller than Mintz’) was “sharply overstating the tax leakage.” He said, “based on our overall analysis, we conclude the following: federal tax leakage for income trusts for 2006 was $164 million, not the almost $0.5 billion [$500 million] stated by the department; and ongoing tax leakage for income trusts post-2010, after taking into account the legislated tax changes, is approximately $32 million a year, about 5% of the department's estimate.”

Note that in a memo dated September 21,2006, Bruce concluded that when deferred taxes and the latest changes in corporate income taxes are taken into account, ”more taxes will be received (on a present value basis) from income trust conversions than would have been received under the corporate form” (HRD/HLB Decision Economics (2006b).
After the Minister of Finance announced further reductions in the corporate income tax in October 2007, Dennis Bruce (2007b) pointed out that had the reductions come a year earlier, they “would have all but eliminated the perceived tax leakage issue without the punitive distribution tax on income trusts.”

It appears that with respect to the estimation of the federal revenue losses claimed to be attributable to income trusts, a sort of Gresham’s Law prevailed. The notably flawed estimates of Jack Mintz were far more influential in the Department of Finance in 2006, and in the newspapers, compared to the professionally far better ones by Dennis Bruce of HDR/HLB Decision Economics. This may have contributed to the public policy train wreck that was the high tax on income trusts (Stanbury, 2008). Of course, there is still the possibility that the “tax leakage” argument was merely a diversion to conceal the real motivation for the tax.


1. HDR, a leading architectural-engineering-consulting firm, acquired HLB Decision Economics Inc. in March 2005. On published studies after that point relating to income trusts, HLB conducted business as HDR|HLB Decision Economics, Inc.

2. HLB Decision Economics collaborated with the Department of Finance in the summer of 2005 to come up with core set of assumptions and data that both could use in future studies.Finance used that data in coming up with the estimates reported in the Consultation Paper of September 2005. Bruce states that HRD/HLB used the data (with one adjustment) to publish its November 2005 report.The difference in the estimates of revenue losses was due to (i) deferred taxes and (ii) an update to the assumptions by HDR?HLB to fix a reporting error.He notes that it was a collaborative effort to come up with the assumptions for preparing estimates of revenue losses, but his firm’s work wasdone for industry as input to the public consultation process established by Finance Minister Goodale (e-mail to author,June 10,2009).

Note that the paper is labeled as being in the May 2004 issue of the Journal, but it was not available until September. It is common for academic journals to come out later than the date stated on the cover. An earlier version was Aggarwal and Mintz (2003).

3. See the Department of Finance’s “Consultation Paper” of September 8,2005 which describes its methodology and provides an estimate of $300 million for federal tax revenue losses for 2004.

4. More precisely, Bruce refers to “governments” throughout his study (HLB Decision Economics, 2004). Given the types of taxes under review, local governments would not be included.

5. The Department of Finance produced an estimate of $300 million for 2004 (released on September 8, 2005) and $500 million for 2006 (in the “Backgrounder” published on October 31, 2006). While the former study cited HLB Decision Economics (2004), the latter one did not, but cited Mintz’ work instead. Yet, Finance’s estimate for 2004 was based very largely on HLB’s methodology—except for the matter of deferred taxes which Finance refused to include. Further, Finance’s estimate for 2006 also relied on the basic methodology devised by HLB Decision Economics (2004).

6. I note that Mintz (2006a) did not provide the rich detail that was provided in the HLB Decision Economics (2004) or HDR/HLB Decision Economics (2005).

7. In addition, 39% are held by what he calls taxable Canadians, and 22% are held by foreigners. Each of the three categories is subject to different taxes and/or different tax rates. There is no question that there was true tax leakage in the case of foreigners’ holding trust units. They paid only 15% on the distributions they received—far less than Canadians. See Fortin (2006).

8. A close observer of the income trust tax, who insisted on anonymity, said: “Mintz came to change his views on such leakage---but he did so only at gatherings of tax specialists. He has never published anything revising what he said.”

9. The company sources on cash taxes that would have been available to Mintz in September 2006 when he was doing his paper were the following: Telus: the last update for “annual guidance” was August 4, 2006 BCE’s latest formal guidance for 2006 prior to October 2006 was dated August 1, 2006 in the “Management Discussion and Analyses” associated with the second quarter financial statements.


Aggarwal, Lalit and Jack Mintz (2003) “Income Trusts and Shareholder Taxation: Getting It Right” (Working Paper presented at a Capital Markets Institute Conference, University of Toronto, September 2003).
Aggarwal, Lalit and Jack Mintz (2004) “Income Trusts and Shareholder Taxation: Getting It Right,” Canadian Tax Journal, Vol. 52(3), May, pp. 792-818.
Bruce, Dennis (2007a) Testimony Before the House of Commons Finance Committee, February 1,2007 (summarized in a news release the next day by HDR/HLB Decision Economics Inc.)
Bruce, Dennis (2007b) “Trusts Redux: Tax Policy for Halloween,” (unpublished op ed., October 31, 2007; available on the Canadian Association of Income Trust Investors website).
Fortin, Yves (2006) “TAXATION OF INCOME TRUSTS: IS IT WORTH THE COST AND THE TURMOIL?” (Unpublished paper, November 2006; this paper was posted on the websites of the Canadian Association of Income Funds (CAIF) in Toronto and the Coalition of Energy Trusts in Calgary. It was also distributed at the hearings of the House Committee on Finance on February 1, 2007).
Fortin, Yves (2009) E-mails to the author, June 1, 2009.
HLB Decision Economics (2004) “Risk Analysis of Tax Revenue Implications of Income Trusts,” (March 11, 2004) Appendix in HLB Decision Economics Inc., “Tax Revenue Impacts of Pension Fund Investments in Business Trusts,” (Study for the Pension Investment Association of Canada, April 14, 2004).
HDR/HLB Decision Economics Inc (2005) “Tax Revenue Implications of Income Trusts,” Report Commissioned by the Canadian Association of Income Funds, November 23, 2005.
HDR/HLB Decision Economics Inc (2006a) “Income Trusts and the National Economy,” Report commissioned by the Canadian Association of Income Trusts, April 2006.
HDR/HLB Decision Economics (2006b) “Chronology of Income Trust Tax Leakage Estimates, September 21, 2006 (Memo prepared for Canadian Association of Income Funds).
Mintz, Jack (2006a) “Policy Forum: Income Trust Conversions – Estimated Federal and Provincial Revenue Effects,” Canadian Tax Journal, Vol. 54(3), pp. 685-690.
Mintz, Jack (2006b) “Income Trust Conversions: Estimated Federal and Provincial Revenue Effects,” Globe and Mail, October 18, 2006.
PricewaterhouseCoopers (2006) “Income Trust Report” (Toronto, December 11, 2006). [www.pwc.com/ca/eng/ins_sol/publications/itr_1206.pdf], 46 pp.
Stanbury, W.T. (2008) “Leadership? Here’s Ten Reasons Why the Tax on Income Trusts Was a Public Policy ‘Train Wreck,’” The Hill Times, Sept.22, 2008, p12.


Dr Mike said...

We got shafted.

The Cons framed it as a response to what has turned-out to be a figment of the imagination of Revenue Canada--they screamed "tax leakage" , they are "not paying their fair share".

They fed it to the public as "Tax fairness" & everyone loved tax fairness.

As I said , we got shafted.

Dr Mike

Anonymous said...

Very interesting. "Of course, there is still the possibility that the “tax leakage” argument was merely a diversion to conceal the real motivation for the tax." What do you think this was then?


Anonymous said...

IMHO, The real motivation came from the big life insurance companies that could not compete for capital agains Trusts that paid investors well over 10%.

Manulife was first out the door with their new product called Income Plus within a week of the Halloween announcement....coincidence? Not likely.

Follow the money and you'll see where the motivation came from. It had nothing to do with tax leakage.


Anonymous said...

This conclusion seems to best summarize the entire debacle:
"The notably flawed estimates of Jack Mintz were far more influential in the Department of Finance in 2006, and in the newspapers, compared to the professionally far better ones by Dennis Bruce of HDR/HLB Decision Economics. This may have contributed to the public policy train wreck that was the high tax on income trusts (Stanbury, 2008). Of course, there is still the possibility that the “tax leakage” argument was merely a diversion to conceal the real motivation for the tax."

So the question is this:  If the tax on ITs were the result of Mintz's flawed estimates, why do we still have the %*&@* tax?


1) There was indeed another motivation,


2)  Harper/Flaherty will never admit to such a horrible mistake!

CAITI said...

My answer: 1) There was another motivation.....assuaging corporate executives as per this account from the Globe on November 2, 2006:

High-profile directors and CEOs, meanwhile, had approached Mr. Flaherty personally to express their concerns: Many felt they were being pressed into trusts because of their duty to maximize shareholder value, despite their misgivings about the structure. Paul Desmarais Jr., the well-connected chairman of Power Corp. of Canada, even railed against trusts in a conversation with Prime Minister Stephen Harper during a trip to Mexico,