Canadian Income Funds Pay No Corporate Taxff

Income trusts such as Connor’s Income Fund, which recently acquired U.S. based Bumble Bee Seafood, pay no corporate tax in Canada. Instead, they pass their profits to their unitholders, who may pay a different tax rate than the corporation would have, or may shelter the income in RRSPs or other tax-deferral vehicles.

According to critics, the Canadian Income trusts are draining government coffers of billions of dollars in tax revenues and sapping the future economic vitality of the country - or are they?

Estimates of the fiscal impact of income trusts vary widely, from nil to $1 billion or more of the government's $180-billion-plus annual inflow.

The Canadian Association of Income Funds, an industry organization, commissioned a sophisticated study which reported in March that the sector in fact probably adds slightly to federal revenue - although the study acknowledged a 10 per cent probability that income funds cut annual tax receipts by $400 million or more.

A study last year by University of Toronto tax professor Jack Mintz estimated the federal and provincial governments lose $600 million a year to income trusts.

Mintz also warned that the trust boom distorts capital markets by diverting investment to enterprises with slower growth and lower rates of return.

In his March budget, Liberal Finance Minister Ralph Goodale took an initial step to limit the growth of the trust sector, whose market capitalization has increased six-fold since 1999 to about $90 billion. The budget imposed strict limits on investment in income trusts by pension funds, by far the biggest capital pools in the country.

But Goodale backtracked in May in the face of lobbying by the pension funds, which say they need new income to pay future benefits, and Bay Street, which reaps rich commissions from converting corporations into trusts.

But this concern is “utter nonsense,” declares Stephen Probyn, chairman of the income fund association. He argues that in the energy industry, well-capitalized trusts have modernized mid-tier production and enhanced oil and gas recovery. “That’s only one example of where trust investment has improved productivity.”

Probyn also points to “quite interesting results” when formerly slow-growth companies expand their access to capital by becoming trusts. He cites this spring's $385-million-US takeover by Connors Bros. Income Fund, a New Brunswick sardine canner, of U.S. tuna packer Bumble Bee.

The association's formal position is that income funds are “tax-neutral,” and Probyn says the sector still has two outstanding political worries.

First, it wants formalization of the rights of pension funds, which are poised to jump into trusts as provincial governments change their laws to eliminate the possibility that unitholders could be sued over actions of a trust.

Second, it wants an end to restrictions on foreign ownership of income funds, currently held to under 50 per cent.

“We need, as a nation, to invest,” Probyn said. “We need to invest in our resources, our businesses, and when you have these restrictions, it makes it increasingly difficult.”

Source: Canadian Press