Canadian Government Losing Tax Revenue Through Income Trusts

by Mike Godfrey, Tax-News.com, Washington

26 September 2003

The popularity of income trust funds is depriving the Canadian federal and provincial governments of million in tax revenue and distorting the nation's capital market, according to a study commissioned by the Capital Markets Institute of the University of Toronto.

The report's author, Jack Mintz (also chief executive officer of the C D Howe Institute), is calling on the government to lower dividend taxes across the board to level the playing field in the capital sector, so that firms are less inclined to take advantage of the more tax-friendly trusts.

Mintz proposes a cut in the top rate of tax on dividend income to 20% from 32%. However, many in the industry fear that the government will take the opposite approach of making the income trusts less attractive by increasing tax, or through some other disincentive, in order to claw back some of the revenue that it is losing as a result of the popularity of the trusts.

Estimates vary of the amount that the federal government foregos through income trusts, but some observers have calculated a figure of $1 billion in lost revenues. Mr Mintz, meanwhile puts the figure at between $500 million and $700 million, with corporate tax breaks on income trusts depriving federal and provincial governments of $1.4 billion. However, this is offset by tax receipts on trust distributions.

The Canadian markets can be made more efficient, Mintz argues in the report, if the dividend tax credit is increased, thereby removing some of the tax advantage of the income trusts. This should be done in conjunction with a cut in dividend tax rates to create a better environment for equity financing for growth-minded companies.

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