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Canadian Investors Call For Legal Scrutiny Of Income Trust Tax

by Mike Godfrey,, Washington

17 January 2007

A recently-formed investor advocacy group has called on Canada's Auditor General to scrutinise the decision of Finance Minister Jim Flaherty to impose a new distribution tax on Income Trusts.

The Canadian Association of Income Trust Investors (CAITI) claimed in a statement that it is in possession of information and studies that call into question the veracity of the Minister of Finance's assertion that Income Trusts cause "tax leakage".

Flaherty's Tax Fairness Plan (TFP), which has yet to be legislated, is designed to "ensure that taxes are not unfairly shifted onto the shoulders of Canadian taxpayers".

However, CAITI noted that Flaherty's assertion of tax leakage and the analysis that supports such a notion has never been made public, audited, or been subject to peer review.

"Given the far-reaching consequences to all Canadians, in particular those who either today or at some point in the future make choices about providing retirement income, this matter needs to be thoroughly understood and investigated before a rush to legislation," the Association said.

"The market consequences associated with the announcement of the TFP have been responsible for the loss in value of Canadians' hard-earned savings in the amount of $30 to $35 billion. This loss is the equivalent of 6.5 Softwood Lumber Disputes, however it was not the capricious act of a foreign government," it added.

CAITI claims that one million Canadian investors have been directly negatively affected and 2.5 million Canadians have been directly or indirectly (through mutual fund investments) negatively affected by the TFP. Each of these investors suffered average losses of between $20,000 to $25,000, a demographically disproportionate number of whom are seniors providing for retirement income and those saving for retirement.

"It is for these reasons that CAITI is calling upon the Auditor General to undertake a comprehensive public review and audit of these tax leakage and tax shifting assertions," the Association continued.

Flaherty shocked Canada's financial markets on October 31 last year with his announcement that all new Income Trusts would be subject to a distribution tax. The Finance Minister claimed that the growing preference of corporations to convert to income trusts was motivated out of a desire to avoid tax, rather than for the benefit of investors. The Income Trust sector is now worth about $200 million, but the new tax plan has forced many large companies to rethink plans to convert into trusts.

However, CAITI disputed Flaherty's arguments, suggesting that the rapid growth of Income Trusts has been brought about more by "investors pull" rather than "issuer push".

"Income Trusts, particularly in today's protracted low rate interest environment, have proven popular with many Canadians as an investment choice providing unique debt/equity attributes and regular, often monthly, distributions. Flaherty's policy would eliminate this 'made in Canada capital' choice," the Association stated.

"If the Minister's assertion of tax leakage cannot be fully substantiated following a thorough audit by the Auditor General and a comprehensive public peer review by independent experts with proven expertise in the workings of the Canadian capital markets, then CAITI will be calling for a full repudiation of the TFP in the name of fairness and good governance," it asserted.

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