The Canadian Department of Finance has launched consultations on tax and other issues related to business income trusts and other flow-through entities (FTEs).
Last Thursday's launch of the consultations follows through on a Budget 2005 pledge that the government would have "open and transparent consultations with stakeholders on tax issues related to FTEs". The purpose of the paper is to promote discussion and third-party input on a number of key issues such as economic efficiency, international comparison, and the impact of FTEs on federal tax revenues.
According to the Finance Department, the federal government has foregone about C$300 million in potential corporate tax payments in the last year because of income trusts.
Trusts and limited partnerships have been used by investors for several decades. However, in the last 10 years, publicly listed income trusts have gained popularity as investment vehicles and this growth has accelerated sharply in the last five years. Since 2000, the market capitalization of income trusts in Canada has jumped from C$18 billion in 2000 to C$118.7 billion by the end of 2004.
The trusts have become attractive because they can pass their cash flows through to investors free from corporate tax, who are then taxed later on the distributions they receive.
"Revenue loss is an issue when it gets into the order of magnitude of some hundreds of millions of dollars, but that's not the only issue," Goodale was quoted as noting following a speech in Vancouver.
"There are productivity and growth issues, there are fairness issues, there are tax efficiency issues, all of which need to be examined," he added.
The consultation period is scheduled to end on December 31, 2005. An additional vehicle for public input will be symposiums, to be organized and hosted by the Canadian Tax Foundation, an independent non-profit organization devoted to education and research in the fields of taxation and public finance in Canada.
The full text of the Canadian government's consultation on income trust tax issues can be found in the Tax News Resources section.
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