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Flaherty Stands By Decision To Tax Income Trusts

by Mike Godfrey,, Washington

01 February 2007

Before a special hearing of the House of Commons Standing Committee on Finance on Tuesday, Jim Flaherty, Minister of Finance, stated that Canada’s government intends to proceed with his controversial 'Tax Fairness Plan', despite widespread opposition to a new tax on income trusts.

"Make no mistake, the decision that was taken on October 31 is all about fairness—fairness in our tax system, fairness for hard-working Canadian taxpayers and their families, fairness for seniors, for business and other levels of government," Flaherty told MPs.

"I am not prepared to sacrifice the interests of millions of hard-working Canadians who pay their taxes and play by the rules so that a select group of special interests can enjoy a tax holiday," he remarked.

Under the tax plan, a 'Distribution Tax' will be applied beginning in 2007 to distributions from publicly traded income trusts and limited partnerships set up after the October 31 announcement. Trusts formed prior to this date will benefit from a four-year transition period.

The Canadian government has decided to tax income trusts in an attempt to tackle what it considers a "growing trend toward corporate tax avoidance" caused by the vehicle's more favourable tax treatment compared with the more conventional company structure.

However, the new tax, which was devised largely without consultation and announced without warning, has caused consternation in Canada's business and investment sector. Several corporations with well-advanced plans towards converting to trust status have been forced to rethink their strategies in the wake of the announcement, with some demanding that at the very least, the transition period be extended to all trusts.

The tax plan has also provoked strong criticism from opposition parties including the Liberals and Bloc Quebecois, both of which called for the parliamentary committee hearing to examine the legislation.

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 Finance Minister said that extending the 4-year transition period for existing trusts to 10 years would cost the federal treasury approximately C$3 billion. It would also cost provincial treasuries, with Alberta set to lose over $2 billion and Quebec to lose hundreds of millions, he claimed.

Flaherty noted that provincial and territorial governments unanimously supported the Tax Fairness Plan at the December 2006 meeting of federal-provincial-territorial finance ministers in Vancouver, given the negative impact of income trusts on provincial revenues and their economies.

"It is regrettable that some investors suffered financial losses," he said.

"Although it was a very difficult decision, it was an absolutely necessary decision for the country and for future generations of Canadians, our children and grandchildren. At the same time, we have proposed to further reduce the general corporate income tax rate, increase the age credit amount by $1,000 and, for the first time ever, allow Canadians to split their pension income beginning this year," Flaherty concluded.

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