The Globe & Mail – Thursday, November 17, 2005 Page B2
CALGARY -- Ever since Ottawa began making noises about
tweaking the trust structure, documents have been flying all over Calgary
between industry executives, tax experts and investment bankers on how best to
counsel Paul Martin about what not to do. There have also been hastily
convened dinners in the private rooms of certain upscale restaurants, where the
decor includes an erasable whiteboard alongside the wine collection.
The oil patch accounts for about 40 per cent of the trusts traded on the
S&P/TSX and any change in the structure could potentially have an adverse
impact on how these companies are valued, not to mention their ability to raise
capital.
What's apparent in all this is that the federal government is unwilling to
look at the bigger issue that has resulted in the proliferation of royalty and
income trusts.
That would be tax policy.
Let's be honest. Taking a swipe at trusts -- which account for about
$160-billion in value on the S&P/TSX, and on which many seniors have come
to rely for their monthly cash distributions -- is entirely misguided.
It would make far more sense to focus attention on corporate tax rates, how
dividends are treated and decrease the barriers to saving for retirement.
A study by the C.D. Howe Institute earlier this year pointed out the
following weaknesses in the Canadian tax system.
When it comes to being competitive from a tax perspective,
Another area where
Even with Ralph Goodale eliminating the corporate
capital tax next year, two years ahead of schedule, it isn't coming down fast
enough relative to what our trading partners are doing.
Then there is the issue of personal taxes. The way things sit now -- even
with the pre-Christmas goodies handed out on Monday -- the high tax rates act
as a disincentive to work because the tax paid for the extra dollars earned
erode the benefit of the added income.
This also has an effect on savings rates because there is not as much left
over. Taking this one step further, the looming retirement bulge in the next
five years only increases the urgency for individuals to boost savings rates.
The C.D. Howe study suggests increasing the RRSP limits in terms of maximum
contributions and percentage of annual income that can be set aside. In fact,
Jack Mintz, president and CEO of C.D. Howe, says the
government should be allowing the working population to accumulate more in a
shorter time frame.
The reality, he says, is the combination of boomers retiring and the
shrinking population makes it incumbent on the government to facilitate higher
savings rates because the smaller work force won't generate enough to support
all the retirees. The study also suggests increasing the age limit for
contributions to 73 from 69 in recognition of the fact Canadians are working
longer -- partly because they want to and partly because they need to.
The fact Mr. Goodale sees the trusts as fair game
is akin to the Aesop fable about killing the goose that laid the golden egg.
This is a sector that has indeed been productive from an economic standpoint
in the past five years. There were 73 trusts listed on the TSX in 2000 valued
at $22-billion at the time and today there are 224 valued at $160-billion. Last
year, they raised a total of $38.4-billion from investors. And this doesn't
include the fees paid to the investment bankers, accountants and lawyers.
In the world of energy, the trusts have spawned the creation of many small
junior oil and gas companies, while also providing an exit strategy for these
companies when they hit growth constraints from a production standpoint. And
it's no longer confined just to energy -- there are all sorts of businesses
that run more efficiently under this model.
It's also a segment of the economy that has attracted a new breed of
investor.
It used to be that oil and gas investments were considered high risk and not
appropriate for retired folk; the only thing they could hope for was capital
appreciation in the stock market. Today millions of retirees rely on income
generated by oil and gas (and other) trusts to supplement their income.
If the federal government is truly worried about the number of companies looking
to turn into trusts and the potential for erosion of its tax base, it must look
at what drives corporations to choose this route in the first place.
Here's a place to start.
The combination of the general corporate income tax rate puts the effective
tax rate on dividends at 56 per cent. No wonder companies are looking at the
trust structure instead of the standard corporate one.
Royalty and income trusts are nothing more than a response to an inequitable
tax system that taxes dividends at a higher rate than any other form of income.
If corporate taxes were 25 per cent and there wasn't a double taxation on
dividends, there might not be the same incentive to convert from a corporation
into a trust.
So it's not about the trusts. It's about