TORONTO, December 12, 2006 — Two positive and painless adjustments to the federal government’s new policy on the taxation of income trusts could help the Minister of Finance steer Canada toward greater tax fairness, remove the disadvantage currently faced by the country’s pension plans and RRSP-holders, and put conventional companies and income trusts on a level playing field, a new discussion paper from PricewaterhouseCoopers (PwC) suggests.
The paper, entitled PricewaterhouseCoopers Income Trust Report, includes a review of the relevant economic literature and concludes that not only is there no consensus on estimates of corporate tax leakage, but there is no evidence supporting the hypothesis that income trusts hinder capital expenditure, productivity or economic growth. In fact, much of the available research would point to the opposite conclusion. Accordingly, a more open process of consultation with interested parties before implementing major tax policy changes is warranted.
PwC proposes two adjustments to the October 31, 2006, federal Tax Fairness Plan:
- Make the proposed tax on income trusts refundable to all Canadian investors (including pension plans and RRSP-holders); and
- Eliminate double taxation by making the dividend tax credit fully refundable to all Canadian investors (including pension plans and RRSP-holders).
“Not only could we improve the fairness of the Canadian tax system, but also streamline the performance of our capital markets and provide our businesses with an opportunity for more disciplined capital reinvestment while helping them be more competitive. This can enhance returns for tax-exempt investors like pension funds and RRSP-holders,” the report said.
The report was published today and is available on the PwC Canada Web site at www.pwc.com/ca/incometrusts.
“We believe these recommendations will help steer around some of the unintended consequences of the October 31 policy announcement,” said Rod Johnston, one of the authors of the paper and a partner and advisory services leader with PwC in Vancouver. “The fix is positive and painless and the time is right to make these changes.”
The paper makes several specific tax recommendations:
- In accepting the government's proposal to tax trusts, the paper suggests the use of an existing tax rule rather than development of complex new rules.
- Sector-specific exemptions such as those proposed for certain Real Estate Investment Trusts (REITs) should be considered for sectors like energy and infrastructure which require access to large pools of foreign capital.
- The paper suggests that any tax paid by income trusts be fully creditable or refundable to all Canadian investors (including pension plans and RRSPs). This change would provide neither income trusts nor corporations with an advantage and would help level the playing field.
- Finally, the paper advocates the introduction of a tax provision which would allow for the tax-deferred conversion of an income trust into a corporation.
Included in the paper are the results of a survey published last week by PwC that shows that Canadian income trusts have been reinvesting a great deal of their money to grow their businesses, contrary to some groups’ contention that they represent an impediment to growth and innovation for business in the country.
The paper also points out that a number of growing Canadian companies were dramatically impacted by the new federal policy and are now at risk to offshore private equity funds which see them as vulnerable while Canadian capital markets are in turmoil. Ready access to capital at lower rates meant greater investment and improved competitiveness for income trusts, the paper said.
Canada’s pension funds were particularly hard hit by the federal decision to treat trusts like other corporations for tax purposes. Without the offsetting dividend tax credit enjoyed by shareholders receiving dividends, the distributions of income trusts would be fully taxed before they reached the pension fund and taxed again when they were paid to pensioners — a cumulative tax load greater than that paid on taxable dividends. The PwC recommendation would help remedy that disparity.
The PwC proposal would still allow the government to achieve objectives like ensuring that all classes of investors in income trusts pay a fair share of tax on the profits of Canadian trusts, said Doug Frost, the Canadian leader of the PwC mergers and acquisitions tax services group.
“We believe a confluence of events has delivered a rare opportunity for our capital markets,” said Ross Sinclair, PwC national leader for the IPO and income trust services group. “Not only could we improve the fairness of the Canadian tax system, but also streamline the performance of our capital markets and enhance returns for tax-exempt investors like pension funds and RRSPs.”
About PricewaterhouseCoopers
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 130,000 people in 148 countries work collaboratively using Connected Thinking to develop fresh perspectives and practical advice. In Canada, PricewaterhouseCoopers LLP (www.pwc.com/ca) and its related entities have more than 4,300 partners and staff in offices across the country.
(Unless otherwise indicated, “PricewaterhouseCoopers” refers to PricewaterhouseCoopers LLP, Canada, an Ontario limited liability partnership. PricewaterhouseCoopers LLP, Canada, is a member firm of PricewaterhouseCoopers International Limited.)
