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Canadian Liberals Pitch Alternative Trust Tax Plan

by Mike Godfrey,, Washington

15 February 2007

Canada's Liberal Opposition has announced a plan that it claims could return as much as two thirds of the losses suffered by investors as a result of the Conservative government's decision to tax income trusts.

“When this minority Conservative government undertook what it knew would be a harmful action to Canadians, it should have taken the utmost care to minimize the damage it would cause its citizens,” argued Liberal Leader Stephane Dion on Tuesday, adding that: “The government broke a promise and imposed a radically higher tax that resulted in a $25-billion blow to the savings of hard-working Canadians.”

The Liberals are proposing that the government repeal its planned 31.5% tax regime and replace it with a 10% tax, to be paid by the companies, that would be refundable to Canadian residents. The tax would be imposed immediately, with the revenue shared equitably with provincial governments.

“Rather than considering what is best for Canadians, the Prime Minister simply decided that he was going to put an end to the income trust sector,” stated Liberal Finance Critic John McCallum. “After hearing from dozens of expert witnesses we have developed a proposal that is fair to Canadian investors, to corporations and the income trust sector as well as federal and provincial governments.”

The Liberals say that their proposals are underpinned by four main policy objectives: minimizing the loss of savings for Canadians who invested in income trusts; preserving the strengths of the income trust sector, notably a high-yield instrument for savers and for the energy sector; creating tax fairness by eliminating any tax leakage caused by the income trust sector; and creating tax neutrality by eliminating any incentive to convert from a corporation to an income trust purely for tax purposes.

The Liberals also propose that the ban on new trust formations be continued, but that the government should commit to considering representations from sectors which can conform to the policy objectives listed above.

According to the Liberals, the proposal has already received support from Gordon Tait, an analyst with BMO Capital Markets, who had previously told members of the Finance Committee that extending the phase-out period to ten years would likely return one-third of the lost savings. The current phase-out period is set at four years.

“This new proposal would likely return at least two-thirds of the losses experienced by the holders of income trusts after the October 31 announcement,” observed Tait. “It would also ensure that Canadian investors continue to have a high-yield investment vehicle available to them.”

Dirk Lever, Managing Director for RBC Capital Markets, agreed with Tait's assessment.

“I would concur with Gordon Tait’s view that at least two thirds of the lost value will be recovered,” said Lever. “It could be more.”

Yves Fortin, a noted economist who formerly worked for the Department of Finance, indicated that the proposal would put an end to any tax leakage alleged by the government.

“While I am not convinced that there is tax leakage, and expert opinions differ as to the existence or the extent of the tax leakage, this proposed 10% tax would more than cover the problem,” stated Fortin.

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