Income Trust Popularity Evidence Of Distortions In Canada's Tax Regime

by Mike Godfrey, Tax-News.com, Washington

21 April 2005

The current boom in income trusts in Canada is evidence that the country's tax system is distorting investment decisions and is in need of major reform, the head of free market think tank, the C D Howe Institute, has argued.

In a speech to financial analysts at a meeting of the Toronto CFA Society on Tuesday, Jack Mintz, the organisation's president and chief executive observed:

"We have a tax system that is creating a significant problem vis-a-vis productivity by creating distortions amongst the choices of business organizations in Canada, in particular income trusts."

Under Canada's tax rules trusts are required to distribute most of their profit to individual unit holders or face large tax penalties - a system which Mintz noted leaves little money left over to fuel an expanding business.

Whilst he praised the government for its recent corporate tax reforms and its pledge to eliminate the corporate surtax, Mintz argued that more far-reaching reforms are essential to Canada's prosperity.

However, he expressed optimism that the current tax reform debate taking place in the United States would also spill over to Canada and eventually crystallize into talks towards major tax reform.

Mintz also observed that the current Canadian tax system discouraged saving and encouraged spending, a situation that he warned is storing up troubles for the future with the the population ageing and the demographic time bomb ticking.

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