An American on Income Trusts

[BitWhys]

Not being an active investor, my attention to the Income Trusts flip-flop has been limited to chalking it up to Harper's lack of credibility and leaving it at that but this letter on Garth Turner's blog has given me pause to think.

Garth,

I am an American citizen. I am retired and have invested in income trust for the last 5 years.
I took quite a hit on my porfolio on October 31st.

I read your blog and watch your MPtv video’s. Its the best information I can find on whats happening in Canadian politics.

I know a lot of people say American investors are a problem because we are only taxed 15 percent which is half what Canadians are taxed on investments. But we are not using any Canadian services. No health care, no social services, etc. So when 4 years are up and US investors are taxed at 31.5 percent plus the 15 percent. We will all sell our Canadian investments and leave. Since about 50% of trust investors are American, what will happen then? How much will the market collapse again? Where will the investment capital come for Canada’s Energy buisness? But by that time all the Canadian trusts will be owned by US private capital.

I hope you are sucessful in getting this madness stopped. Canada needs more people like you.

Thank you for all your efforts…

Michael Bourassa
Dallas, Texas

P.S. As you can see by the name, I come from a family with 11 generations in Canada.

I can't vouch for its accuracy or even verify the tax rates he's talking about, but it does give pause to think.

Some feedback from the informed on this?

 

[Liberalman]

The Income Trust was a good decision and had to be dealt with but it was a red herring which means who ever dealt with it would pay the price.

The problem is the Conservatives promised that they would not touch the Income Trust so a lot of investors put a lot of money in it.

The Liberals were called on their handling of the Income Trust when they back peddled on their decision but what the Conservative party did was criminal.

When the Conservative party was in opposition they knew what was going on and they told the Liberals to do something about it.

In the election the Conservatives gave an ironclad guarantee that the Income Trust will not be touched and it was big time.

If you look at the total amount of money lost by investors in the Income Trust makes the amount of money that was involved in Sponsor Gate look like pocket change.

In recent poll that I saw on CBC the political parties in Conservative rich Alberta the Conservative party is down by 13%.

When a government causes a loss of funds of it’s own taxpayers then it’s time for the government to go.

If this happened in the private sector the CEO would be dropped like a hot potato.

 

[BitWhys]

My understanding is that the Income Trusts wasn't so much a matter of tax leakage as it was various sectors and configurations taking advantage of the opportunity in unforseen ways.

Could it have been handled better by way of changing the regulations to better define the range of participants?

 

[Toro]

Harper certainly handled the issue ham-handedly, but it was probably the correct decision, unless you believe there should be no corporate income tax. And politically, I can understand the fall-out. But if you're a Leftie, I cannot imagine you not supporting this decision. The decision effectively raised the corporate income tax in Canada.

There is a very cogent argument that corporate profits are double-taxed and should not be, since corporate profits are taxed within the corporation then taxed at the individual level when profits are distributed as dividends. However, I've never really understood why capital should be taxed differently for corporations and income trusts. Besides, if capital is used to generate a steady stream of income rather than used as growth capital, frankly, shouldn't growth capital be taxed less?

I'm not sure where the source of taxation will occur. Does it happen before distributions from the trust or afterwards? If it is afterwards, then the American is correct, they will be taxed at a rate of nearly 50%. However, the sharp sell-off in the trusts means that Americans are already selling. And if the taxation occurs after the distribution, Canadians should be buying these things hand over fist in their RRSPs. But like I said, I'm unaware of the source of the taxation. If someone knows, please post it.

Oh, I forgot, the US and Canadian governments will, in the next year or two, agree to scrap the 15% withholding tax between the two countries. And about time, to. Its a silly tax when you are trying to attract foreign capital.

 

[Kreskin]

The Chartered Banks were going to convert to income trusts. Unless a government believes it can operate with very little corporate tax base the decision seemed inevitable.

The withholding tax is simply withholding tax. It all comes out in the wash when a taxpayer files a tax return -withholding tax or not. Getting rid of that step is at least getting rid of red tape and more government cost.

I guess presently it's tax in the hands of the unitholder - hence flow through shares. I suppose in 4 years it will be taxed like a corporation and unitholders will receive the equivalent of a dividend.

 

[BitWhys]

thanks for the input, folks.

I really don't know whether this tax leakage thing was true. From what I understand for the sort of sectors the break was designed for what's being described as a tax dodge really amounted to a tax deferral.

The thought of foreign investors bailing when the yeilds go sour is pretty spooky.

The Chartered Banks were going to convert to income trusts...

seems to me they may have thrown the baby out with the bathwater. I think Cabinet has all the power it needed to declare a moratorium on new funds until everything was sorted out.