Saturday, December 18, 2010

Canadian Bankers Association disputes Flaherty’s claims of tax leakage

In a submission to the Department of Finance dated November 21, 2005, the Canadian Bankers Association wrote:

We do not believe that income trusts have had a significant impact on tax revenues. By the government’s own estimates, anticipated federal corporate tax reductions from 21% to 19% will reduce the estimated annual tax revenue loss from $300 million to $135 million. Further, after accounting for the value of deferred tax on tax-exempt income trust holdings, we believe the government is likely to have a modest gain in tax revenues. The Canadian banks are also of the view that the tax deferral on retirement investments is beneficial to the Canadian economy because the deferred tax will be realized at the same time that there is increased demand on public funds, particularly for retirement and social security programs as well as health care costs, and relatively fewer working Canadians, effectively creating a “revenue match” for this projected increase in government expenditures. Moreover, some experts have argued that our tax-deferred retirement savings system puts Canada in the enviable position of being one of the best equipped among OECD countries to face population aging.

The experience of our member banks is that, in most instances, the average amount of taxes paid post-income trust conversion was significantly higher than the amount paid as a corporate entity due to the higher levels of tax on a larger tax base than corporate investors. In any event, the government’s estimated tax leakage of $300 million in 2004 is relatively insignificant as compared to total annual federal income tax revenue of $122 billion and the $30 billion paid by corporate Canada. Moreover the tax revenue loss must be balanced against the economic benefits of new growth and productivity that arise from increased investment and more efficient Canadian capital markets.

We also believe that the decision to pursue a corporate structure or an income trust structure are legitimate business strategies that should be based on financial and economic factors and not on tax arbitrage considerations. We are of the view that income trusts have contributed in a positive way to the Canadian economy. For example, income trusts have attracted significant investment in Canada, provided access to capital for small and medium-sized companies that would not otherwise have this opportunity, and provided solid investment returns in a relatively low yield investment environment. As well, contrary to popular belief, it is reported that income trusts have reinvested significant amounts (on average, 27% of their annual earnings) in their business operations, largely on growth capital expenditures, in addition to making the necessary capital expenditures to maintain operations at their current levels. It is also reported that income trusts have raised over $10 billion in additional capital in the market thus far in 2005. These offerings demonstrate that income trusts do not inherently inhibit growth, they just involve the markets as well as management in assessing the appropriateness of the strategy. We believe that this type of investment in income growth strategies will ultimately lead to productivity and efficiency gains.

The CBA also believes that both the corporate structure and the income trust structure are effective financing vehicles for certain companies. While the corporate structure may be best suited to growing businesses, income trusts are an effective financing structure for companies in more mature stages of development. The income trust structure widens the pool of investors to these companies and lowers the cost of capital. The income trust structure also provides an alternative to the common share IPO for launching small companies into the public market. We are of the view that both business structures should exist and that similar regulatory obligations should be applied to these entities.

The Canadian banks are opposed to any new tax in income trust distributions. As evidenced by the data from the TSX, the income trust market has contributed significantly to the economic growth in Canada over the past few years. The income trust structure has offered a viable investment vehicle for smaller companies that would not otherwise have access to the capital markets, has attracted US companies to issue in Canada and income trust distributions ($11 billion per annum) have provided significant retirement income returns for Canadians with relatively few investment options given the low interest rate environment. Increasing taxes on income trusts or income trust distributions will reduce investment, increase demands on public retirement and social security programs, particularly in the coming years, and ultimately dampen the overall economic growth of Canada.

The following is a list of banks that are members of the Canadian Bankers Association

Domestic Banks: Schedule I:

BMO Financial Group
The Bank of Nova Scotia
Canadian Tire Bank
Canadian Western Bank
Citizens Bank of Canada
Dundee Bank Canada
Laurentian Bank of Canada
Manulife Bank of Canada
National Bank of Canada
Pacific & Western Bank of Canada
President's Choice Bank
Royal Bank of Canada
TD Bank Financial Group


Dr Mike said...

It appears that the Manulifes & the Power Corps have a lot more juice than the BMOs & Royals.

Or maybe , it was just the Mark Carney effect letting his Goldman buddies have the upper hand.

No matter who was behind this atrocity , it was just the poor little sot investors who took the screw to the head & we all know how much those clowns in Ottatwa care about them.

Dr Mike Popovich

Anonymous said...

A copy of this bank statement should be sent by registered mail to the government just in case they didn't see it before.... BB

Anonymous said...

We are within a few weeks of 2011, and the imposition of the 31.5% double-tax on retirement savings. So now is a good time to ask 'How much new corporate tax will the elimination of business income trusts bring?'

Or does Finance even care to know?

It seems in Canada that economics is not the dismal science; instead in Canada economics is just dismal. The so-called economist can spin any Mince-myth he wants, and the gullible Judge Q Public tells innocent investors to go to Hades.

What's the point of using Mince-models if you're not going to test the model against the results it was supposed to achieve?

Or is this too un-postmodern?


Bruce Benson said...

It's easy to see why the Banks had no influence on the Income Trust file. Seems there was some discussion that the Banks were considering conversion to the Trust Structure just like BCE and Telus. That was a NO NO because the CON's were intent on killing the Trust structure and those banks thinking of joining it had to be ignored and blown off just like us little saps for investors. CON deceit knows no bounds.

Anonymous said...

Its December 20th, 2010 and 2011 is around the corner.
Who says this issue is dead.
The cracks on this issue on the Harper/Flaherty decision on income trusts is starting to leak.
This was a fraud, and lie and the proof of tax leakage is confirmed
there was no tax leakage and their reckless policy caused a $35B market loss and hurt personal pension portfolio's looking for income.

This roof has a hole and its getting bigger everyday !!


Anonymous said...

Great blogs. The Canada bankers , why are they coming out now ?

Brent Fullard said...


You asked "he Canada bankers , why are they coming out now ?"

Because this piece has only NOW come to light. Note the date is November 21, 2005. I ask the same question. Why have I not seen this before? Was it because Goodale shut down the process on November 23rd and this document was never posted for public viewing here:

Anonymous said...

This whole Income Trust fiasco
was an inside job and a cover up !

To all the folks who say this issue is dead, we are only getting started!!


Anonymous said...

Politicians never want to have the facts get in the way of a good opinion.