Today’s Hill Times: Harper-Layton Income Trust Tax: Time to ditch it

Your income trust tax is causing wholesale foreign takeovers and billions in lost tax revenue

By: Brent Fullard
Hill Times
November 16, 2009

State-owned Korea National Oil Company’s $4 billion takeover of Harvest Energy Income Trust announced last week, is but the latest example of what many experts predicted would occur in response to Stephen Harper and Jack Layton’s income trust tax, namely a wholesale foreign takeover of Canadian businesses and the resultant loss of billions in annual tax revenues to Canadians taxpayers.

To date, this policy has caused over $100 billion in takeovers, the vast majority by foreigners and/or through structures that evade taxes, and the loss of over $1 billion in annual tax revenue. A number that will rise to $7.5 billion in lost annual tax revenue, if Canadians’ paid elected Members of Parliament, from all four political parties, continue to do nothing about it, in their collective conspiracy of silence and neglect, concerning these adverse outcomes which are totally counter to the policy’s original stated intent.

By taxing income trusts distribution at 31.5% on top of the average tax rate of 38% paid on income trust distributions, for a combined tax burden of 62%, the true insidious intent of this policy from the very outset was to destroy the income trust market and eliminate this investment option for Canadians saving for retirement, especially the 75% of Canadians without pensions who had embraced this investment alternative, giving rise to its tremendous success.

Meanwhile, a deliberate loophole was created for the pension funds to evade this 31.5% tax and hold income trusts on a tax advantaged basis relative to RRSPs, defying the very principle upon which RRSPs were created in the first place over 50 years ago.

Success in Canada, such as the emergence of the income trust market, is something to be avoided and torn down by those who are guardians of the status quo and driven by self interest and greed. In this instance, it was the insurance industry, who were intent on destroying the competition for their retirement income products, and the CEOs of corporations who sought to perpetuate their gold plated compensation schemes assured them under the corporate model.

It is not of trivial importance to point out that the principle and foremost fiduciary duty of CEOs and Directors is to their shareholders, and to maximize shareholder value. And yet, here we have these very people charged with such a responsibility acting in a manner that is completely contrary to this principle fiduciary duty by lobbying the government to sabotage the very alternative that they know would achieve that end. This act of sabotage is a disgrace, that is only superceded by the disgrace of the Harper government complying with their wishes by falsely invoking the hoax argument that “income trust cause tax leakage”.

Harper’s tax leakage argument has been subsequently disproved by any number of highly credible groups including BMO. RBC, PwC, Deloitte and HLB Decision Economics. Meanwhile, the only “proof” offered up by Finance Minister Jim Flaherty is 18 pages of blacked out documents.

Layton’s blind acceptance of Harper’s income trust policy is the complete antithesis of everything the NDP party ostensibly purports to stand for:

First, this policy’s premise of tax leakage and the proof provided is an affront to government transparency and therefore accountability.

Second, the policy’s known outcome was that it would drive the loss of billions in tax revenue that is essential to fund needed social programs.

Third, the policy and its false pretenses were foisted on Canadians by corporations who were intent on maintaining their abusive practices of the past that were threatened by the income trust model.

Fourth, the policy was destined to hollow out the Canadian economy and leave these arbitrarily devalued trusts vulnerable to foreign takeovers and burdened by imprudent levels of debt by their new owners, as part of a larger tax avoidance scheme.

Fifth, the policy created an unlevel playing field between RRSPs and pension funds, thereby creating gross inequities between the 75% of Canadians without pension versus the 25% with pensions, who would exploit this “tax arbitrage” to make predatory purchases of income trusts.

Sixth, the policy imposed a $35 billion permanent loss in the life savings of over 2.5 million Canadians, causing many to lose the very means for their retirement income and making them more dependent on government assistance and social programs in old age.

These highly adverse outcomes are the shared responsibility of those who created them, namely Stephen Harper and Jack Layton and those who are passively allowing them to persist, namely Michael Ignatieff and Gilles Duceppe., whose total inaction makes willing accomplices of them both.

What do any of these “leaders” intend to do about it, apart from continuing to kow-tow to the insurance companies and corporate CEOs who foisted this nonsense on an unsuspecting public in the first place?

That’s not leadership. It is incumbent of each of these “leaders” to act on this matter, lest they be accused of “just visiting”, as Canada gets swallowed up by foreigners and taxpayers get stuck with the enormous ongoing bill borne out of sheer incompetence and benign neglect.

Brent Fullard is the President of the Canadian Association of Income Trust Investors/Taxpayers
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