Trusts to be Taxed - Tory Halloween Bombshell

[mykalberta]

Just mused over the Platform,

The only mention of Income Trusts is 2 times, both in regards to security for seniors.

It does say in there that there will be no new taxes on trusts - I will be interested in seeing what the changes are and how they play this about face.

Under anything regardeing business growth in Canada there is no promise to leave the trusts alone, that alone falls under the Protecting Seniors so as long as they have a seniors amendment in there I believe they have covered themselves.

Also they are coming at this from the morale high ground, when people (who most have a distrust of large corporations) see that Bell plans to save 800 mil per year in taxes by converting - who benefits most, the employee, the average investor, likely the execs with the stock options.

I dont like the fact that they are going back on this, but you have to look at the contexts of the promise, it was directed toward seniors.

Interesting to see the details on this one - I initially thought it was to take the wind out of Layton's sails but there is no way the Libs topple the government in the middle of their own leadership campaign unless they believe they will have so much media coverage that it will be like free publicity.

MYK

[ericschand]

Originally Posted by Lurch

Does it really? Just my take, but it is the little guy that is probably most angry at this decision. Around the office, I've pretty much heard "Who the ** am I supposed to vote for now?" as a lot of people just lost 20% of their wealth as a direct result of a broken election promise. Meet the new boss, same as the old boss is pretty much the theme.

So, let me get this straight. All of these people had stocks/bonds/etc
in a company. The company converts to an income trust, temporarily
making the investors "richer". The government closes the income trust
loophole, or is attempting to, the income trusts lose value, and now
they are angry.

Essentially, they tied up some money, or perhaps some "gifts" into a
financial market, and boo hoo, they are losing some of their accumulated
wealth.

They still have their wealth, as their initial investment isn't lost.

So....why should anyone be angry?

ers

[Wookie]

Originally Posted by ericschand

So, let me get this straight. All of these people had stocks/bonds/etc
in a company. The company converts to an income trust, temporarily
making the investors "richer". The government closes the income trust
loophole, or is attempting to, the income trusts lose value, and now
they are angry.

Essentially, they tied up some money, or perhaps some "gifts" into a
financial market, and boo hoo, they are losing some of their accumulated
wealth.

They still have their wealth, as their initial investment isn't lost.

So....why should anyone be angry?

ers

People who bought when they were higher then the 10% loss they've just taken.

People who purchased Telus above $55.00 who are now at a substantial loss..

People who bought some of these trusts for the high dividend and capital appreciation.

That said it's still not without risk...

[photon]

BTW thanks Wookie et al for the good info in this thread; I've been out of this kind of investment for a while (into real estate for now) but I find this very interesting.

[photon]

And actually I had a question.. if the government falls over Jack and the clean air stuff, does this change die on the table?

[Agamemnon]

Originally Posted by photon

And actually I had a question.. if the government falls over Jack and the clean air stuff, does this change die on the table?

I wouldn't be surprised to see any government, current or future, continuing with this move. It means millions (billions?) in future tax revenue, and these super-huge trusts are really just working the system in a way that I doubt was originally intended. I can't see the Liberals/NDP maintaining these great tax breaks, especially now that the Conservatives have started the ball rolling.

[Mccree]

The NDP are threatening a non -condifidence vote on Thrusday. This could all be a moot point anyways!!

I agree is sucks but you have to understand that ALOT of investors in these oil and gas trusts are foreign investors that pay no tax in Canada other than the 15% withholding. So we are allowing foreign investors to take our resouces for 15% tax. While a Canadain in the top tax bracket pays 39% in Alberta.

Why should a foreign investor get a tax break? So what if a Trust pays alittle tax, Canadians will be getting better value for our resources.

[Wookie]

Wrote a bit as well about how some guy on ROBTV this am was saying that income trust units were still considered equity investments and people who bought them primarily for the income aspect were lacking understanding and were probably misinformed or confused. I got signed out and didn't feel like retyping it all

[I-Hate-Hulse]

Originally Posted by photon

BTW thanks Wookie et al for the good info in this thread; I've been out of this kind of investment for a while (into real estate for now) but I find this very interesting.

http://www.cbc.ca/news/background/pe...ometrusts.html

Here's a good article on Trusts and the reasoning behind this latest move. I see a lot of "Trusts don't pay taxes!!! Corporations suck!" posts above - people should read this article to get better insight as to the taxation model of Trusts.

Originally Posted by mcree

Why should a foreign investor get a tax break? So what if a Trust pays alittle tax, Canadians will be getting better value for our resources.

So why not levy a tax on foreign distributions? I'm not a tax expert by any means, just wondering why such a broad based approach was taken, and not something more surgical.

[Wookie]

Originally Posted by Mccree

The NDP are threatening a non -condifidence vote on Thrusday. This could all be a moot point anyways!!

I agree is sucks but you have to understand that ALOT of investors in these oil and gas trusts are foreign investors that pay no tax in Canada other than the 15% withholding. So we are allowing foreign investors to take our resouces for 15% tax. While a Canadain in the top tax bracket pays 39% in Alberta.

Why should a foreign investor get a tax break? So what if a Trust pays alittle tax, Canadians will be getting better value for our resources.

foreign ownership some O&G

advantage 53%
ARC 35%
Baytex 38%
Bonavista 23%
Canetic 30%
Crescent Point 10%
Daylight 30%
Enerplus 72%
Focus 11%
Harvest 45%
Pengrowth 50%
Penn West 52%
PrimeWest 72%
Progress 19%
Vermilion 34%

[Hakan]

Well, I know Ottawa was looking for a way to chill the Alberta economy while maintaining everyone else's - looks like they found one. The devaluation of 10-15% of trusts plus the impact on the oil and gas sector is going to put a sizeable dent in the Alberta Economy. Housing prices will certainly recede further.

Larf. I knew this was coming.

Get over yourself. This has absolutely nothing to do with Ottawa sticking it to Alberta. Why is every Albertan transfixed on the gross injustices of that fascist regime next to Hull?

Please.

The fact of the matter was that if giant corporations such as Bell and Telus were converting to income trusts there would be theoretically nothing stoping the chartered banks and giant insurance firms from doing so too. That would have been a major problem for the tax base and as much as some of you hicks hate taxes, they actually serve society quite well. Billions lost in the tax base is billions not left spent on program transfers such as health and post-secondary.

Not to mention the isssues that lurch has all brought which nobody has done an even remotely decent job of refuting. Yeah yeah yeah, taxes are bad and they're ineffecient. Lets get our brains out of first year micro-econ and actually use some mental capacity here.

Ugh.

[Hakan]

Originally Posted by fotze

If the NDP kill this, the the world is truely gone mad. This is the equivalent of granola for all or free hemp necklaces and rastahaircuts for students.

NDP is considering mobilizing against the Clean Air Act. Lets not confuse two completely seperate issues.

[Mccree]

Originally Posted by I-Hate-Hulse

So why not levy a tax on foreign distributions? I'm not a tax expert by any means, just wondering why such a broad based approach was taken, and not something more surgical.

I think it is just out of easy plus it also moves some of the tax burden from the individual to the corproation.

[flamesfever]

If any good comes out of this, it will be that people learn to understand what they are buying when they invest in an income trust. I believe there is a lot more risk in them than most are aware.

Of course its always wise to limit your exposure to any single investment, particularly income trusts in general i.e. don't put all your eggs in one basket.

[Agamemnon]

Originally Posted by I-Hate-Hulse

So why not levy a tax on foreign distributions? I'm not a tax expert by any means, just wondering why such a broad based approach was taken, and not something more surgical.

That might look 'anti-foreign-investment', something I doubt the government wants to do. A tax levied solely against foreign investors might appear different than changing the tax code for all trusts. Besides, I don't think foreign investors are the issue here; conversion to trusts to avoid paying taxes is.

[nfotiu]

Originally Posted by I-Hate-Hulse

http://www.cbc.ca/news/background/pe...ometrusts.html

Here's a good article on Trusts and the reasoning behind this latest move. I see a lot of "Trusts don't pay taxes!!! Corporations suck!" posts above - people should read this article to get better insight as to the taxation model of Trusts.

It is a good article. To me it seems like it is a good thing to get rid of its tax advantage. The way it is now, it provides incentive for the companies to simply pay out their earnings instead of re-investing them. This is really the opposite of what they should be trying to encourage.

I still don't believe in corporate taxes though, but don't agree that income taxes should be excluded from them if they are to exist. Corporate taxes are just a way of making people pay taxes without people realizing they are paying them, IMO.

[I-Hate-Hulse]

Originally Posted by Hakan

Get over yourself. This has absolutely nothing to do with Ottawa sticking it to Alberta. Why is every Albertan transfixed on the gross injustices of that fascist regime next to Hull?

OK, to be fair - do I think this was a deliberate malicious act by Ottawa? No. I've stated before that it's hand was forced by Bell. Do I think the Bank of Canada is doing a jig because it's primary tool of changing prime rates to control economic activity would have caused regional disparity and now it doesn't have to do anything? Yes.

And to address Lurch's excellent comments and keep Hakan happy....

You may want to ease your position just a little on this - as put, it's simply silly. There are a multitude of reasons corporations should be taxed, but I'll throw out just a few.

1. With no corporate tax, a corporate shell becomes an indefinite tax shelter. Anyone with money and brains could effectively avoid tax permanently, shifting tax burden onto middle and lower class.
2. Foreign held corporations would pay no tax to Canada. They benefit from the infrastructure, legal system, free health care for workers, etc yet would pay no tax.
3. As a legal entity, corporations are no different than a person. Why should they have special standing wrt to taxation? For example, if I'm self-employed why should I pay any tax?
4. Why should retained earnings be given indefinite tax-free status? Without corporate tax, corporate earnings would accrue tax free until paid out as dividends.

1) Isn't quite true. A trust typically has a "Trust on Corporation" structure where "earnings" from the corporation are flowed upwards to the Trust via intercompany debt. The trust distributes the earnings. "Earnings" flowed via this method do not get taxed. Earnings that do NOT get flowed up to the Trust get taxed at the corporate rate. So you can't shell earnings forever...at this level of the structure anyways.



2) As someone pointed out, the 15% witholding tax for foreign ownership is the big leakage point for the Feds. I'm not sure why you couldn't just address this with a specific tax, but that doesn't address the second major leakage point with trusts. RRSPs. Joe Canadian can hold trusts in one of these and not pay taxes on income paid into his RRSP. Again. Big leakage point.

3) I agree that the concept of taxation burden being equally shared by corporations and individuals is valid. Thing is, a corporation is typically far more complex than an individual, and with complexity, comes different means of taxation. Trusts don't pay zero taxes necessarily, the taxation comes at the unitholder level (with admittedly some holes in the current system)

4) See 1) above. You can't hold the earnings in the Corporation without paying taxes. If it goes to the trust it has to be paid out to unitholders.


I've attended meetings on Trust structure and even though I have some training in the world of finance, it truly was mind boggling / overwhelming as to the particulars. One part law, 2 parts three card monty. Bottom line - Trusts are incredibly complex items and not a black / white issue as some would like to think.

[mykalberta]

Originally Posted by photon

And actually I had a question.. if the government falls over Jack and the clean air stuff, does this change die on the table?

Jack would need the Liberals approval to topple the Cons, its unlikely the Libs would vote for it for two reasons:

(1) No one wants to go to an election in the Winter - the NDP and Libs rely on low income voters who are less likely to vote in the winter than a more affluent voter (simple facts).

(2) The Libs are in the middle of their leadership campaign and they know that if a confidence motion was lost on Friday, Harper would likely call an election Friday which means a mid-late December vote.

This is all grand standing form Laytons perspective, he knows it will never go through and it allows him to rally his base about this issue. He opportunistically saw a report that threw outlandish figures at an issue that no one knows the real cost (cost of both World Wars and the Great Depression - possibly the worst worst case scenario I have never seen any GW forecasting) but that grabbed headlines. He is playing the game form a position that will at best hold the vote balance in a minority goverment - he reminds me of the NDP in Alberta, no chance of winning so they attempt to throw whatever outlandish statement out there they can so they can protect their base from Liberal leaching.

Also, on the off chance the Liberals are too drunk to show up and vote out the Cons becuase of the leadership campaing, the Bloc is not in a great position at the moment given Bouchard's recent comments and the fact that their provincial arm isnt doing so well at the moment (Charest also isnt doning so well but not so bad as to win the election for the Bloc) there is absolutely no chance we see an election call in the immediate future.

I will quit posting on Calgary Puck (I will still lurk) if there is an election call within the next 10 days.

MYK

[mykalberta]

Originally Posted by nfotiu

It is a good article. To me it seems like it is a good thing to get rid of its tax advantage. The way it is now, it provides incentive for the companies to simply pay out their earnings instead of re-investing them. This is really the opposite of what they should be trying to encourage.

I still don't believe in corporate taxes though, but don't agree that income taxes should be excluded from them if they are to exist. Corporate taxes are just a way of making people pay taxes without people realizing they are paying them, IMO.

The problem of course is that alot of Trusts were started becuase of non growth but high revenue buisnesses.

Example

(1) Yellow Pages - once the buisness is established their isnt alot of inter country available core growth available so no need to reinvest.
(2) Small O&G's - alot have been buying up more mature plays because there is a forecasted earnings amount - example purchasing more mature well(s) becuase they dont have to spend money on exploration.

The problem with this whole thing is Telus/Bell - technically they are now non growth/limited growth companies. Their core market is being eaten away by low cost startups and their isnt much core speciality growth room left within Canada - every +1 customer Bell gets is likely a result of a -1 on Telus and so forth.

Telus/Bell are the perfect example of why their should be trusts but it also is the perfect example of why there shouldnt.

Until we actually see the details on what will happen its all mute anyways.

MYK

[Lurch]

And to address Lurch's excellent comments and keep Hakan happy....

Thanks. Acually though, I was more responding to someone's comment that corporations should not pay taxes period, rather than the Trust structure specifically. I'm relatively well versed on Trusts, though as you noted there are a myriad of bizarre structures and rules that muddy every issue. Really, this entire announcement highlights the need to dramatically simplify the tax code.

From a "what should the gov't do" perspective, I think the Conservatives have messed the sheets horribly. Though it is simplistic, I think the rational response to the trust issue is to simply eliminate the structure except for those already existing. What they did with this announcement was third world politics - screw foreign investors with an overnight change in policy. It really hurts Canada's image as a stable investment environment.

Further, trying to justify the whole change as a way to plug tax leakages is hokey, IMO. The much better argument is that trusts hurt long-term productivity growth by providing a tax environment for firms that do not retain and try to grow earnings. Trusts are really a taxation incentive vehicle towards turning Canada into a quasi developed economy with no long-term capital investment, and justifiably this should be fixed. Just not this way.