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
CIBC
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