- Consulting with Canadians
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Douglas Brown's Submission in Response to Finance Canada's Tax and Other Issues Related to Publicly Listed
Flow-Through Entities (Income Trusts and Limited Partnerships) consultation:
Gentlemen,
The Minister of Finance has indicated that he is more concerned about
economic growth and jobs than the media reported lost tax revenue
issue related to income trusts.
This implies that the multiplier effect from non-trust corporate
spending is somehow more beneficial to the Canadian economy than increased
spending by consumers and investors resulting from an increase in income
trust distributions. There is much to suggest that such a
conclusion might either be false or that the perceived
differences are in fact modest.
Important sectors of the corporate industry in Canada are
increasingly investing abroad; for example, witness the offshore
investment shifts taking place in the mining, automotive and
banking sectors to countries such as Chile, China and the USA
respectively. Such decisions neither add to aggregate demand or tax
revenues in the short-medium term in this country. Other such
notables as Nortel and Bombardier have imploded to the detriment of
both the economy and jobs, when huge sums were spent on
uneconomic investments, mostly offshore. I suspect the multiplier effect
to aggregate demand in Canada from the collective of such corporate
entities to be flat or slightly negative at best.
On the other hand, Canadian consumers receiving monthly distribution
payments from income trusts and limited partnerships are either
spending that money on Canadian goods and services and
paying higher income taxes, or investing it in RRSP's where the
vast majority is reinvested with Canadian corporations, income trusts
or limited partnerships, including IPO's. Excluding the saved
investment portion, the spending portion is spent and re-spent over and
over again by Canadian providers of goods and services. The
resulting multiplier effect of that spending should be very
positive and add significantly to both overall aggregate demand and
tax revenues. Benefits from the saved RRSP portion will be deferred,
but still mimic the spent portion in the future when they are converted to
income. These benefits are real and some recognition must be given to
the fact that trust and partnership distributions may well account
for the recent and substantial ,year-over-year, increases in overall
government revenues.
The tax revenue issue related to income trusts and limited
partnerships appears to be very insignificant by almost any measure;
however, for retirees and pensioners the monthly income and unit share
values which they provide are vitally important for their
well-being. For the first time, because of the their monthly
distribution payment mechanism, retirees can now manage their own
investment income streams without the need of assistance
from paid advisors to derive a monthly paycheque from their
investments. Comparable income streams from corporate dividends and
government bonds are paid quarterly and bi-annually and would require
portfolios that are at least 2-3 times greater in size, and even
then, the percentage returns would barely cover core inflation. Core
inflation may still be low because of certain exclusions, and the major
items excluded such as municipal and provincial taxes, insurances and
gas/water/electricity/fuel bills have risen much faster than
core CPI, and collectively they will represent a very large share of
retirees' income.
Many income trusts have, and are still expanding, and do so in large
part because of low payout ratios or by issuing new units to
investors. Many corporations could have made better investment decisions
had they gone to the capital markets for the funding of new investments,
because doing so would have screened out many of the bad decisions that
have been made, and in this category, there are countless examples. The
quid pro quo is that the decision making model of income trusts and
limited partnerships could be argued to be superior to that of
corporations because of their greater dependence on capital markets for
growth equity, and their discipline of maintaining monthly cash
distributions to investors, both of which could be considered a
strong plus for improving productivity in Canada.
In light of the above, I would strongly urge the Dept. of
Finance to keep the current rules for income trusts and limited
partnerships exactly as they are.
Kindly communicate with me in English should you wish to do so, and as
requested, I herewith grant you permission to post this response to the
Finance Canada Website.
Yours truly,
Douglas Brown
Oakville, Ontario
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