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Income Trust Changes
November 1, 2006 3:13 PM   Subscribe

The lefty party handled the issue by cutting taxes on dividends. And Canada's party on the right decided to tackle the thorny issue of income trusts^ by... taxing them. A response to a "clear and present danger" or the destruction of retirement savings? Issues involving corporate structure and tax law rarely appear make the front page, but Canadians just can't get enough of them.
posted by GuyZero (41 comments total)

 
Yes, I repeated a link in there. Sorry about that.
posted by GuyZero at 3:15 PM on November 1, 2006


It was unexpected, it was strange, and I never vote for the Tories, but I think this was a very sensible thing to do. The Liberal response to this just before the previous election was very definitely not.
posted by blacklite at 3:32 PM on November 1, 2006


Heh, just saw the news and they were making a big kerfuffle about Telus and Bell losing 15% value today... sounds like a good chance to buy!
posted by furtive at 3:33 PM on November 1, 2006


A lot of income trust investments had been discounted in expectation of this. I bought a bunch at $5 that went up to $12 then tanked when the taxman started sniffing around. I sold them at $8 or so.
posted by unSane at 3:37 PM on November 1, 2006


Yeah, I didn't want to make the FPP into an essay about the government's hand being forced by some of the country's biggest companies planning on converting to income trusts and how the feds stand to lose millions of dollars in taxes once you total everything up. But for you non-Canucks, Telus and Bell, the country's telecom duopoly, were both planning on converting to income trusts which would have been been seen as the tipping point towards every company doing it to avoid taxes.

That plus I am tired of US election posts and I need to help maintain the federally mandated Canadian content guidelines.
posted by GuyZero at 3:38 PM on November 1, 2006


It's a good move, though it does hurt retirement savings plans for us working canucks. Allowing particularly the telecoms to hollow-out their businesses would have been criminally stupid. With retiree tax-splitting now allowed, which is pretty major, the implications for seniors shouldn't be too bad.

The big losers will probably be the oil and gas sectors. This is a backhanded way to get more revenue (a lot more revenue) from the petroleum extraction sector.
posted by bonehead at 3:56 PM on November 1, 2006


Well, if the corporations were being the "good corporate citizens" they claim to be, they wouldn't have tried (and some succeeded) to avoid taxes by abusing this law.

Yet another bit of stupidity from the Liberals, who now bitch and moan about it 'hurting Canadians', when their policy continuing would have hurt Canadians more.
posted by Kickstart70 at 3:58 PM on November 1, 2006


It was a scheme that twisted a legitimate tax structure for certain business models into a sandbox for corporate welfare bums, giving them a tax break for doing absolutely nothing beneficial to the public interest. Good riddance to this dodge, and tough titty to folks who lost money on the stockmarket.
posted by Rumple at 3:58 PM on November 1, 2006


Don't think I would call the Liberals the "lefty party". That's like calling the Democrats in the US socialists. In fact, if Michael Ignatieff wins the leadership, we will have 2 conservative parties.
posted by dithered at 4:01 PM on November 1, 2006


Go Canadian Content Laws!

I hate this government, but I can't really see anything wrong with this decision. Telus's plan to convert to a trust scheme was what rang the alarm bells for me. It was becoming clear that something would have to be done about it once Canada's largest corporations suddenly no longer had to pay any taxes.

On a tangent, is anyone else sick of the term "double taxation" as it refers to corporate income tax and dividends? It continues to amaze me how easily people are fooled into thinking it is somehow unfair that rich capital owners should have to pay taxes like everyone else.
posted by [expletive deleted] at 4:12 PM on November 1, 2006


dithered: From what I can tell, left to right, it's NDP, Bloc, Liberals, Democrats and Conservatives right around the same point, and then way out in a field somewhere the Republicans.

But the Conservatives are just a shade more organized than the Democratic party. A friend's brother works for the Dems, and, well, it's pretty sad. At least the Tories are coming along - I don't agree with their policies most of the time, but at least it keeps things healthy.
posted by blacklite at 4:15 PM on November 1, 2006


On a tangent, is anyone else sick of the term "double taxation" as it refers to corporate income tax and dividends?

To their credit, the Tories didn't buy this argument. The comments from McCallum today, however, make me wonder if the Liberals still see this as a-"what's good for Bay street is good for us"-kinda-deal. Rather skanky, the comments from the opposition benches today.
posted by bonehead at 4:22 PM on November 1, 2006


Governments, as you can see, don't take well to having their tax base eviscerated.

They claim that BCE and Telus converting would have cost them 1.1 billion/yr.... they couldn't make it up through the personal taxation on the increased dividends?
posted by Malor at 4:45 PM on November 1, 2006


Governments, as you can see, don't take well to having their tax base eviscerated.

CBC Radio reports a total loss of about $25 Billion CDN from income trusts on the markets today after the announcement. The expect loss in tax revenue was $800 Million, which included losses from Bell's and Telus' conversions.

Some would argue the change was overkill. Others would counter that the markets will recover. All I know is that they sure didn't let people warm up for this one. It's pretty much gym class on the hill: "drop and give me 25 billion".
posted by GuyZero at 5:38 PM on November 1, 2006


No no no no no no. No taxation was being avoided, but the distributions that were being put into the RRSPs and pension plans of Canadians. I thought that was supposed to be a good thing. Irrespective of that, I thought the federales had a $13 billion dollar surplus. Why now???? Why, after promising again and again not to do this? Income trusts will now be taxed at the corporate rate of ~30% instead of the distributions from those trusts being taxed at the recipients personal income tax level. This does nothing, repeat nothing to increase the tax collected by government, and destroys a creative and unique taxation system that was generating invesment in Canadian companies and keeping Canadian's investment dollars in the country. If this plan goes through (and I'm not at all certain it will), the first thing that will happen is that many Canadian companies (especially resource companies) will sell themselves to Americans for the higher valuations they will receive (now that the trust structure is no longer a viable option) and for the tax benefits that come from having an American partner.

This is a terrible decision, one that will be felt in Canada for a long long time. Capital flight has already occured and will for some time, as foreign investors lose any confidence in our financial system. Citizens lost an average of 12% of their income trust investments overnight. A government that promised not to touch this corporate structure lost all credibility. This is not good for Bay Street (although it will be fine), it's not good for the average citizen, it's not good for corporations, it's not good for Canada.
posted by loquax at 5:44 PM on November 1, 2006 [1 favorite]


Others would counter that the markets will recover

No. The trusts that fell today are now properly valued by the market (for the most part) due to the coming tax burden in four years. There's no reason they should trade up, their future cash flows were just killed by the government. Business didn't change, nothing changed, the government just shifted the tax burden from citizens receiving the distributions (who can shield themselves with RRSPs) back to the companies, who are far more effective at sheilding themselves from the taxman and pay less tax anyways.
posted by loquax at 5:51 PM on November 1, 2006


Speaking of those corporate fat cats and rich elite that deserve whatever's coming to them, know who got killed today? The Ontario Teacher's Pension Plan and the Hospital Worker's Pension Plan and most of the large public employee pension plans that were extremely levered to trusts because of the stability of the distributions. Eat that grade school teachers!

(by the way, thanks for the post, I've been wanting to rant about this all day long...)
posted by loquax at 6:06 PM on November 1, 2006


If *I* knew that this was in the pipeline, then the pension funds should have as well. If they just got killed, then their fund managers should be fired for not having hedged this.

re double taxation, it is actually set up very well for non-income trust corporations. I own a Canadian corporation, and the system is so finely balanced that there is basically no difference (in terms of taxation) between declaring a dividend and taking money out of the company that way, or taking it as pure income. That is as it should be.

I'll tell you who this *did* hurt, to my knowledge, and that is

a) a bunch of Bay St (think Wall St) execs and fund managers who had hoped that income trusts would provide their fuck-you money

b) the lawyers and financiers who make an amazing amount of money every time a corporation restructures into a fund.
posted by unSane at 6:26 PM on November 1, 2006


If *I* knew that this was in the pipeline, then the pension funds should have as well. If they just got killed, then their fund managers should be fired for not having hedged this.

A month ago the government said they were not going to do anything like this. They attacked the liberals for mentioning they might end the trust structure last year. It was an election promise. Nobody knew this was coming, nobody. At least this soon, and with a conservative government. If anyone did know, BCE and Telus would have never gone through the excercise they did.

a) a bunch of Bay St (think Wall St) execs and fund managers who had hoped that income trusts would provide their fuck-you money

Nobody was getting flithy rich off trusts. By definition these companies were predictable, steady, non-sexy businesses with reliable distributions. In fact, most trusts were down in value before this announcement.

b) the lawyers and financiers who make an amazing amount of money every time a corporation restructures into a fund.


They'll now just make a ton of money when these companies de-trust or get bought out by foreign companies. Or just leave Canada altogether.
posted by loquax at 6:44 PM on November 1, 2006


I heard a great argument for high corporate taxes today..

If the corporate tax rate is high, companies will choose to reinvest profits instead of taking the money out as dividends or income streams, or whatever other mechanism.

Cool..
posted by Chuckles at 6:55 PM on November 1, 2006


Correct me if I'm wrong - I had heard that one of the negative things about trusts is/was that they discourage re-investment in long-term infrastructure, research and general engineering improvement.

Is that right, or did I hear it wrong?
posted by jkaczor at 6:58 PM on November 1, 2006


That's what I heard, too.

...the first thing that will happen is that many Canadian companies...will sell themselves to Americans...for the tax benefits that come from having an American partner.

Ah. Well, then, BINGO!

Assuming you are talking sensibly.
posted by five fresh fish at 7:23 PM on November 1, 2006


Correct me if I'm wrong - I had heard that one of the negative things about trusts is/was that they discourage re-investment in long-term infrastructure, research and general engineering improvement.

It depends. Not all trusts distribute all cash, and the cash they don't distribute is taxed at the normal corporate rate.

Some companies simply don't need to re-invest profits. Like the water heater trusts, or aeroplan, or yellow pages, etc, etc, etc. In fact, with many trusts, distributing cash is much better than hoarding it and wasting it on stupid acquisitions or projects that are tangetial to the business (hint hint, BCE). Trusting does not prevent companies from acqusitions for the right reasons, or growing the business. Distributions don't need to be increased if the money could be better used for other things, and trusts can always issue more units to fund anything they may need to do. Good managment can very effectively work within a trust structure to maintain and grow a business.

Ah. Well, then, BINGO!

Not that I subscribe to the theory that the conservatives did this to sell out Canadian businesses, but the trusts that are most vulnerable are natgas, oil sands and energy service trusts.
posted by loquax at 7:39 PM on November 1, 2006


Nobody knew this was coming, nobody. At least this soon, and with a conservative government. If anyone did know, BCE and Telus would have never gone through the excercise they did.

Rrrrriiiiggghttt... cause it's not like the government, especially one like Harper's, is likely to CHANGE any time, is it? You know, to a party who were committed to changing the tax status of these structures? Oh, hang on...

Nobody was getting flithy rich off trusts. By definition these companies were predictable, steady, non-sexy businesses with reliable distributions. In fact, most trusts were down in value before this announcement.

The trusts were down precisely because they had been discounted in anticipation of tax changes at some point. Nobody was getting filthy rich off spinning off blue chip corps into trusts, but I can tell you from direct first hand knowledge that income trusts were being used as vehicles for some very, um, creative dealmaking which people of my acquaintance were counting on to make themselves very rich indeed. Several of my acquaintances mortgaged their houses, invested several hundred thousand dollars, and more than doubled their money. I hung back because of the tax issue but did invest a little money as described above.
posted by unSane at 7:49 PM on November 1, 2006


jkaczor: Correct me if I'm wrong - I had heard that one of the negative things about trusts is/was that they discourage re-investment in long-term infrastructure, research and general engineering improvement.

That is pretty much what I was talking about :P

loquax: It depends. Not all trusts distribute all cash, and the cash they don't distribute is taxed at the normal corporate rate.

Which is zero, if the money is reinvested. Because profit = income - cost, and reinvestment makes your costs increase and eat into the profit. Corporate tax only applies to profit, so.. Stop me if this is too pedantic - okay, I stopped myself :P

What I'm not sure about, is how economics theory thinks about this. Obviously you can't have 100% corporate income tax, because investors would have reduced incentive to invest in the companies stock. There must be a pretty well established sensible zone for the corporate tax rate.

How does this encourage more foreign ownership? Is it just that you anticipate bookkeeping shenanigans between the American owners and the Canadian subsidiary, or is it something more direct?

My understanding was that income trusts themselves were a problem due to foreign investment, because profits would go straight into the pockets of the investor with no taxation happening in Canada at all. I might have that completely wrong..
posted by Chuckles at 7:50 PM on November 1, 2006


Rrrrriiiiggghttt... cause it's not like the government, especially one like Harper's, is likely to CHANGE any time, is it? You know, to a party who were committed to changing the tax status of these structures? Oh, hang on...

The liberals (under a different leader) suggested it last year, and backed down almost instantly. There was no reason to suspect anything yesterday, or this year, or next, or at any time until another election, I suppose. What, is everyone supposed to factor in potential military juntas and nationalization of resources in Canada now? Sure, anything's possible, but fundamental changes to the tax code that affect the economy to this degree don't usually pop up overnight. At least, they're not supposed to in a "developed" economy.

The trusts were down precisely because they had been discounted in anticipation of tax changes at some point.


What? So those double digit spikes that BCE and Telus saw since announcing their trusting intentions were because the market was anticpating that they would never happen?? Are we talking about the same thing here? The trusts that were down over the last few years were mostly companies that shouldn't have trusted, or ones that comitted to distributions that were too high. Many other trusts were up and solid. Teranet, Aeroplan, the oil sands trusts, plenty of winners, but roughly in line with the rest of the market. Plenty of people mortgage their houses to invest in stocks, trusts or otherwise. I guarantee you that there were better investments in North America over the last few years than Canadian income trusts.

I don't know what you're insinuating with respect to "creative dealmaking" but income trusts were and are completey above board investments, regulated by the OSC and the government and trade just like any stock. If your friends did well picking good investments, great, but it had nothing to do with the structure of the investment, unless there's something I'm not understanding, or they were insiders. And I can tell you that in the resource market that Canada has been experiencing over the last few years, doubling one's money if one knows what they're doing is not that outstanding (no offense). Gold, oil, zinc, nickle, uranium, copper, all at record levels, tripling, quadrupling some of the levels they were at even a year or two ago. A basket of gold stocks would have doubled your money over the last year or so.

Which is zero, if the money is reinvested.

Sure, right, of course, I was trying to make two points at once.

How does this encourage more foreign ownership?

Recently, many small Canadian companies that were vulnerable to takeovers, foreign and domestic, were able to use the trust structure as leverage in buyout negotiatians to obtain a better price, or as a protective mechanism to remain independant. That leverage (the increased valuation) is now gone, and the incentive to continue managing small, growing trusts is diminished. The reduced valuations make many of these companies much easier pickings, and the desire to avoid (at least some) taxation in four years will be great enough for some to sell to foreign companies to preserve shareholder value (or get some back that was lost today).

because profits would go straight into the pockets of the investor with no taxation happening in Canada at all.


Foreign investors in Canadian income trusts (or any investment, as far as I know) pay a 15% withholding tax. The new rules don't change this, again, as far as I know.
posted by loquax at 8:17 PM on November 1, 2006


Foreign investors ... pay a 15% withholding tax

Okay, but withholding tax isn't tax. At least tax withheld by the Canadian government isn't tax for a Canadian. It is just the nanny state helping people manage their finances.

Tourists get a tax refund for sales tax (did I hear this is going to be dropped?). So, do foreign investors get to claim the withholding tax back? Regardless, 15% is a pretty low rate!

Recently, many small Canadian companies that were vulnerable to takeovers, foreign and domestic, were able to use the trust structure as leverage in buyout negotiatians to obtain a better price,

Judging by Telus and Bell, that is worth about 10% of valuation. In absolute terms it could be a lot of money, but takeover offers often change by more than 10% during negotiations. I can see that it provides a slight disincentive, but if that is the only effect, it doesn't seem particularly significant..
posted by Chuckles at 9:05 PM on November 1, 2006


Erm...am I understanding this? Telus and Bell wanted to become IKEA?
posted by QIbHom at 9:22 PM on November 1, 2006


Okay, but withholding tax isn't tax. At least tax withheld by the Canadian government isn't tax for a Canadian. It is just the nanny state helping people manage their finances.

That 15% is withheld by the Canadian government as revenue when a foreign investor receives distributions. That investor will have to pay any other tax in their own jurisdiciton on the remaining 85%.

It may be a "low" rate, but it's higher than the 0% tax paid by most Canadians who hold trust units in RRSP or pension plans (or at least have the ability to). Keep in mind that the federal corporate tax rate (the one that will be paid in four years by current trusts) is between 15-20%, and that Canadians receiving distributions are taxed at their personal income tax rate, which can vary from 30-45%. Also, it encourages foreign investment and capitalizes industry in Canada that, by and large because of the resource-intense nature of the economy, requires large amounts of capital to develop and grow. The alternative is obtaining capital via takeouts from foreign firms. Which I argue will now happen with greater frequency. Which doesn't bother me greatly, I should say, but seems to run contrary to popular opinion.

Judging by Telus and Bell, that is worth about 10% of valuation. In absolute terms it could be a lot of money, but takeover offers often change by more than 10% during negotiations. I can see that it provides a slight disincentive, but if that is the only effect, it doesn't seem particularly significant..

Business trusts are a bit of a different animal than resource trusts (which have very different tax situtations than mature, stable telecoms, etc), which I was mostly referring to. First, the announcement that T and BCE were trusting was worth more like 20% to both. Second, when we're talking about small cap exploration or junior producing mining companies or oil companies, a 30% boost in valuation from trusting can be enough to stave off the intermediates or majors until the junior itself becomes a full producer, or alternatively, peg the takeover price at, say 50% above the pre-trust value of the company, generating much better returns for the (primarily) Canadian shareholders.
posted by loquax at 9:28 PM on November 1, 2006


Individual income taxes should be eliminated, replacing the income with a "progressive corperate incomes tax", i.e. a tax making larger companies pay more, thus discouraging monopolies.
posted by jeffburdges at 4:03 AM on November 2, 2006


... cause it's not like the government, especially one like Harper's, is likely to CHANGE any time, is it? You know, to a party who were committed to changing the tax status of these structures?

unSane, I just don't get why you think this. The PM made this an election promise. There's a federal surplus. He's cutting spending all over the place. Harper is the last guy in the country to introduce a new tax.

If you saw it, then I'm surprised you hadn't been shorting trusts all over the place. You should be rich and having a butler posting for you here.

I absolutely think that too many companies are planning to convert to income trusts and more importantly, the wrong kind of companies are planning the change. But ultimately, if you're a company that issues regular, large dividends, the benefits were too attractive to ignore.

The government could have prevented further changes a lot of other ways, like creating better (more expensive) income trust governance structures or simply required companies to get federal approval to covert. But after yesterday's market reaction, to me it's obvious that Flaherty used a sledgehammer to kill a fly on this issue.
posted by GuyZero at 6:35 AM on November 2, 2006


If you saw it, then I'm surprised you hadn't been shorting trusts all over the place.

I don't think you can actually short an income trust, as far as I know. But boy would it have been nice to have options on them.

I agree re: unSane's kind of ridiculous statement that the pension fund managers should have known this was coming, or that they should have sold off their trust holdings based on the talk that was in the air. It's one thing for an individual to sell off their trust holdings (I had thought about it) but another for a fund that's holding however many hundreds of thousands of units of a trust to start selling off. It's not like this was some kind of definite thing until yesterday -- most fund managers don't sell on rumour and speculation.
posted by Big Fat Tycoon at 7:20 AM on November 2, 2006


In fact, the globe has a peice today asserting that government staff was monitoring trust activity on the 31st, looking for suspicious selling, ready to pull the plug on the announcement should there be indication of a leak. There was none and the announcement went ahead. Nobody "knew" this was coming, certainly not so soon or so dramatically.

(and yes, you can short trust units, they trade like any other equity)
posted by loquax at 7:53 AM on November 2, 2006


Question: what other countries allow income trusts (or similar) ? Is it something done most often in mature diverse economies, or is it a Cayman Islands type of shell game?

I have regarded income trusts as a mildly bad thing, but if even the Conservatives felt the need to act quickly, maybe it's more of a bad thing for the country than i thought. or maybe i still have the wrong idea...

It must have been some sort of windfall for corporations, or else there wouldn't have been so much of a market reaction to yeaterday's announcement, right?
posted by Artful Codger at 8:26 AM on November 2, 2006


It must have been some sort of windfall for corporations, or else there wouldn't have been so much of a market reaction to yeaterday's announcement, right?

All the changes do is shift the tax burden to the corporation instead of the shareholder. Tax was still being paid on the profits generated by income trusts, only it wasn't the company paying tax, it was the shareholders that were receiving the distributions. On the surface, it appears as though the corporations weren't being taxed, the reality was that the profits they generated were - except if they were held in an RRSP (tax-free retirement account, like a 401k), which they often were.

There was no windfall, as by definition, all (or most) of the profits generated by a trust were being paid out. The devaluation that is now occuring is simply a correction account for future tax payable that did not exist a few days ago.

The whole thing is more complicated than that, but suffice it to say that taxes were still being collected, and it's grossly inaccurate to simply say that "income trusts weren't taxed". There can be debate over whether or not trusts result in less net tax being collected by the government, but even that can only be discussed in the broader context of the economy and the stock market as a whole, including foreign investment, corporate governance and the entire tax code.

Question: what other countries allow income trusts (or similar) ? Is it something done most often in mature diverse economies, or is it a Cayman Islands type of shell game?


Whether or not one believes trusts are "bad" for the eocnomy/country, they are/were not a shell game or a scam. They were completely above board, regulated, publicly traded entities that fully disclosed all of their activities as required by stock market and government rules. Again, taxes were still collected by the government on the profits resulting from a trust, only they were collected from the shareholders at their personal income tax rate instead of from the company at a (lower) corporate rate.

This structure was more or less unique to Canada (certainly to this degree), meaning that it encouraged a lot of foreign direct capital investment in the country and it's companies and people because of its advantageous tax structure. Much of that capital will now disappear.
posted by loquax at 8:44 AM on November 2, 2006


All the changes do is shift the tax burden to the corporation instead of the shareholder. Tax was still being paid on the profits generated by income trusts, only it wasn't the company paying tax, it was the shareholders that were receiving the distributions.

That isn't exactly accurate.. With corporate profits, something around 40% is taxed up front, and then the dividends (now only 60% of the money) are taxed at the personal income rate of the people receiving the money. This is complicated by the fact that dividends are taxed more lightly than regular income, as far as I can tell, because they are considered capital gains. Overall, the government is collecting about 60% of corporate profits, and it forces corporations to consider the 40% tax versus the value of reinvesting.

With an income trust there is no initial 40% tax. I presume on the personal tax side, the income is not considered capital gain, so it is taxed a bit higher. Overall, the government is collecting about (well, probably less than) 40% of corporate profits, and there is no incentive to reinvest.

At least that is what the stories seem to be saying. I don't have personal experience with any of this..
posted by Chuckles at 9:32 AM on November 2, 2006


Canada's Trust Tax May Spark Oil Industry Takeovers

``Canadian Oil Sands is in play. Who would not want to buy it if it's down 15 to 20 percent,' said John Priestman, who helps manage about $5.3 billion in income trusts at Guardian Capital LP in Toronto.
A surge in foreign takeovers of income trusts would mean the government's attempt to stem a decline in tax revenue by taxing trusts may have the opposite affect, said Lee Goldman, a money manager at First Asset Funds Inc. in Toronto.
``They get too cheap and they get taken out, so you have a whole stream of companies moving south of the border, and you lose the tax from that company anyway,' said Goldman, who helps manage $971 million at First Asset.

``It could come back to bite the government.'
The decline in Canadian energy income trusts will make them more attractive to foreign companies interested in acquiring natural gas and crude oil assets, BMO Capital Markets analyst Gordon Tait said. The new tax structure also removes a disadvantage foreigners faced when buying a Canadian trust. Under the current rules, a trust would lose its tax exemption if it were controlled by non-Canadians, meaning buyers would be paying for a benefit they couldn't use.
``As some of these assets get sold off and some of these good companies get sold down, you could see more foreign takeovers, in which case you could see a lot of income stripping coming out of Canada,' Tait said.

``Let us be clear on one thing: to many the next few weeks or months may provide an opportunity, perhaps of a lifetime, to acquire great Canadian businesses at potential fire-sale prices,' Dirk Lever, analyst at RBC Capital Markets, said in a report to clients. ``Canadian oil and gas trusts, some with incredible assets, could find themselves very, very, vulnerable.'


Fine work, Canada. Fine work.

Chuckles: I'm not sure what you're getting at, but the situation as you've stated it is not correct, unless I've misunderstood what you're saying. Not all, in fact relatively few, non-trust public companies in Canada have dividends. Those are, in fact, taxed at different rates, both for the corporation and the recipient of the dividend. I don't know what you mean by initial 40% tax or the 60/40 split. Dividends can range in value. Distributions from a trust are not taxed at all until they are declared as income by the recipient.
posted by loquax at 12:03 PM on November 2, 2006


so you have a whole stream of companies moving south of the border, and you lose the tax from that company anyway,

That doesn't make a lot of sense.. How does Canadian tax law deal with taxation of Canadian branches of companies? Presumably profits are taxed at the corporate tax rate either way. I certainly see a problem with foreign ownership, but saying the taxes will disappear.. Well, why are we allowing any foreign buyouts, if that is the case?
Actually, the taxes do disappear, through shenanigans. Sell goods from one branch company to another at vastly inflated prices as a mechanism for laundering profits, for example. "Sorry Canada, we got bought out, and then are profits dropped to one third.", or something. Completely beside the point though..

Not all, in fact relatively few, non-trust public companies in Canada have dividends.

Profits are profits. How else does a publicly traded company disperse profits but dividends? (I seriously want to know the answer!) I'm just trying to use common sense to get to the bottom of what is actually happening.

I don't know what you mean by initial 40% tax or the 60/40 split.

I don't know the corporate tax rate, but I'm guessing that it on average it is about 40% (the last time I took an economics course, ten years ago, we used 50% for general problems and rough figuring). I heard it was going to be cut back in the next ten (five?) years, to something like 34% (30%?). Of course there are various rates, but I think that just obfuscates. I'm trying to pin things down a bit, to see what is really happening.

As for the 60/40.. My assumption is that the marginal tax rate on most individual taxpayers is about 40%. Admittedly this is variable, but not nearly as variable as you think before running the numbers - especially so if you restrict it to people who have any chance of having investments at all - income substantially above $30,000/year, or something. So, if you tax initially at a corporate rate, estimated to be 40%, and then you tax the remainder at a rate for individuals, around 2/3rds of the estimated individual marginal tax rate (because it is capital gains, not income), you end up with an overall taxation of 60% on profits. If you just tax it at the individual end, and if the income is not considered capital gains, the rate would be the estimated individual marginal tax rate of 40%.
posted by Chuckles at 12:42 PM on November 2, 2006


How else does a publicly traded company disperse profits but dividends?

They don't have to. Google doesn't issue dividends (AFAIK). They re-invest it or simply hold onto it, increasing the amount of assets that underly each share. Also, they can buy back shares on the market which increases the price of the remaining shares (I believe Imperial Oil spends a good chunk of its profits buying back shares for example).

Also, my knowledge is limited to small companies, but small businesses pay less tax on profits (something like 18%) and from a small business owner's perspective, paying yourself salary or issuing dividends works out to be almost equal, with dividends being only the tinyest bit better. So I've never understood the doube-taxation of dividends issue, but I'm not a corporate finance guy.

The big deal with income trusts is when the income flows into a tax-free entity, like a RRSP. The trust pays no tax on profits and all that money grows tax free (until it's withdrawn) in RRSPs. Also, trusts are one of the few high-interest vehicles around. No one wants to retire with their money in a 2% GIC. Trusts have been generating yields of 8% and up.

All this reminds me of Rae's heyday in Ontario... a party that has been in opposition so long that they've forgotten how to govern effectively and they piss everyone off everytime they turn around. Chretien may never have done anything, but that's how he stayed in power so long.

Nice knowing you, Jim.
posted by GuyZero at 12:55 PM on November 2, 2006


The reaction by the liberals could only be considered ill-thought. They had a pretty good chance of getting a vote from me next election, but have lost that chance over this. What, did they think they will get the Bay street vote by doing this? It is ridiculous. They will alienate the any of the left-leaning centrists they have (or could get back after the last debacle) and will gain nothing, because the conservatives will still be more right-friendly then they are.

You know you've lost you're political head when your opposing something the Bloc, NDP and tories are supporting. I dont agree with them on this one and what is worse, it shows them as incompetent politcally which is (for me) even worse then a bad position.
posted by Bovine Love at 1:10 PM on November 2, 2006


Profits are profits. How else does a publicly traded company disperse profits but dividends?

GuyZero is right. Share buybacks, acqusitions, investment, CEO bonuses, whatever. Companies that do not distribute profits, either via dividend or via distribution (in the case of a trust) generate value for shareholders primarily by increasing the value of the investment the shareholder has made in the company.

I don't know the corporate tax rate, but I'm guessing that it on average it is about 40%.

In Canada, the relevant corporate tax number for this situation is 31.5% in 2011, which includes both federal and province taxes. It varies, like you said, but that's the basic number.

Now I get what you're saying, sorry. The problem with your logic is that normal corporations do not distribute profits, so the individuals are only paying capital gains tax on the increase (or decrease) in value of the underlying equity, not on corporate profits. So the net tax to the government is the ~30% collected from the company, assuming it even pays tax (many companies carry forward tax losses via creative accounting to reduce their liabilities).

With an income trust, (say) the entire profit of a trust is paid out to individuals, resulting in *income tax* liabilities on the part of the shareholders at the marginal rate of ~40%, as you said. Similar to how "normal" corporations can shield themselves from full tax liabilities, so can individuals by keeping trust shares in an RRSP, which many people did.

The financial arguement then comes down to which model generates more tax revenue for the government. Either way those profits are being taxed. I would argue that the associated benefits of the trust model (foreign investment without takeovers, financial flexibility, RRSP savings, etc) materially outweight any apples to apples comparison of net tax collected. As the article I linked to states, even less tax may be collected now as the existing trusts get bought, reduce distributions, or get pounded on the market.

What, did they think they will get the Bay street vote by doing this?

It makes me sick to my stomach to say this, but as someone who has never voted Liberal (let alone NDP) before, I will not vote for the conservatives next election, and I will support anyone who repeals the current plan. The conservatives just lost the election by alienating their base, screwing over anyone with an RRSP or Pension plan and not picking up a single vote from the Bloc or NDP. Hell, I'll even vote for Ignatieff at this point.
posted by loquax at 1:32 PM on November 2, 2006


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