Trust no one

images.jpegIt’s been 16 months since the great Hallowe’en caper of 2006, when Jim Flaherty announced just as kids began making their candy runs that the tax treatment of income trusts was changing immediately.

The decision came amid fears that BCE and Telus would both convert into trusts, avoiding corporate tax as a result. (Of course, BCE wasn’t paying any at the time anyway, and its dividends are taxed at a lower rate in investors’ hands than trust distributions — but why let facts get in the way of decisive action.) The announcement identified the $70 billion in income trust conversions (planned or completed) in 2006 as the tipping point. In interviews, it was suggested that this would lead to massive, unsustainable annual tax leakage of about $500 million per year.

The decision came not at the end of a review underway to consider options in the treatment of income trusts, but completely out of the blue, as part of a “tax fairness plan” oddly unconnected to the federal budget. How were the calculations about tax leakage made? Whose advice was considered? Well, an Access to Information request turned up this handy 18-page document. Before you click to follow along, though, a warning — almost every single number is blacked out.

Meanwhile, the two points knocked off the GST are estimated to cost about $10 to $12 billion in lost tax revenue. And then there’s the lost taxes from the $65 billion in Canadian corporations and income trusts taken over by foreign interests in the last year or two — another billion and a half a year, but who’s counting? Not Jim Flaherty, who has now demonstrated on a national stage the troubling inummeracy Ontarians know so well.

The Canadian public bought, to a surprising degree, the Conservative spin that the immediate axe to the trust sector was a difficult, but necessary decision, with admiration even crossing party lines. However, investors were not happy, and a former head of equity capital markets at BMO, Brent Fullard, took up the cause, forming the Canadian Association of Income Trust Investors (CAITI).

CAITI is a phenomenal advocate for its cause: a slick website, well-designed ads and billboards, outreach activities, constant lobbying, and now a blog covering much more than just the income trust issue itself.

There’s no question that the preferential tax structure of income trusts was leading companies that should have maintained a corporate structure into converting into trusts. They couldn’t afford not to. But the trust structure does make a lot of sense for businesses in mature industries that have steady customers but few growth prospects (something Ontario, for one, has a lot of). The fact that some companies were taking advantage of the trust structure doesn’t mean the decision to kill the format altogether was the right one, or that it was made in the right way, or that it was based on good information.

The Liberal members of the House of Commons Finance Committee sent a letter on Friday asking Auditor-General Sheila Fraser to investigate the income trust decision. That could bring the issue back to the front pages once again — and with public skepticism about the trustworthiness of the current government ever growing, coverage could take a much more critical slant.