Canada's Energy Trusts Demand Rethink On Income Trust Tax

by Mike Godfrey, Tax-News.com, Washington

02 July 2007

Canada's energy trusts have formed a coalition to demand that the federal government rethink its controversial decision to impose a distribution tax on income trusts.

"When the Conservatives broke their promise not to tax trusts, it came as a total surprise to millions of hard working Canadians - and it will have severe negative economic impacts for all of them," argued John Dielwart, Co-Chair of the Coalition of Canadian Energy Trusts and President and CEO of ARC Energy Trust.

"The government continues to ignore their concerns and has advanced their broken promise into Budget 2007," he added.

Finance Minister Jim Flaherty included the distribution tax on income trusts in the Budget Implementation Bill, which was passed by the House of Commons last month. The tax is, in Flaherty's words, designed to tackle a "growing trend toward corporate tax avoidance" caused by the vehicle's more favourable tax treatment compared with the conventional company structure.

According to Flaherty, the estimated federal revenue loss for 2006 due to the special tax advantage for income trusts would be C$500 million (US$424 million) - a burden he argued was unfairly being shifted to ordinary taxpayers and other tax-paying corporations.

The new tax, which was devised largely without consultation and announced without warning, caused consternation in Canada's business and investment sector, and several corporations with well-advanced plans towards converting to trust status were forced to rethink their strategies.

"Our Coalition has made every attempt to understand how government arrived at their tax leakage calculation," continued Mr. Dielwart. "The Committee's previous investigation into the trust decision has revealed that the government has intentionally prevented this information from coming to light."

"In the absence of information, Canadians have no alternative but to believe the government's decision was ill-informed and not well thought out," he added.

During a presentation for the Federal Standing Committee on Finance he argued that energy trusts do not cause tax leakage and that far from being avoided, taxes are transferred to unit holders. He also told MPs that small oil and gas companies have reduced access to capital as a result of the trust tax announcement, and the increased cost of capital imposed on the energy trust sector has negatively impacted the economics of important projects including those utilizing carbon dioxide capture and storage.

The coalition, which represents 30 energy trusts headquartered in Canada, claims that unit holders have seen the value of their investments drop by C$35 billion since Flaherty announced the new tax on October 31 last year.

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