- Consulting with Canadians
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Daniel Ferguson'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:
September 29, 2005
Department of Finance
17th Floor East Tower
140 O’Connor Street
Ottawa, Ont
K1A 0G5
Dear Sirs:
Re: Department of Finance’s FTEs Consultation Paper
This letter represents my submission with respect to the referenced
issue and I submit same in my capacity as a Canadian citizen and resident
of Ontario.
I must begin by congratulating the Department of Finance on undertaking
this consultative process and soliciting input from all concerned. I
sincerely hope that the Department of Finance will follow through on this
positive start by ensuring that the process remains transparent and
constructive until completion.
I have the following general observations on the FTEs issue as defined
and the Department of Finance’s related consultation paper.
1. I have very little confidence in the tax dollar amounts contained
within the consultation paper. This reflects the very poor track record which
the Department of Finance has exhibited in financial forecasting
matters over the past decade (eg, projected federal surplus amounts) as well as
the multi-variable assumptions built into the forecasts discussed within the
consultation paper. While I am sure that there will be no lack of
submissions which will address this issue in much greater technical detail, I
would much prefer the analysis to be based on facts rather than assumptions.
To the best of my knowledge, each of the public FTEs existed in some non FTE
corporate form before their conversions into FTEs. Surely, one form of
analysis would be to look at the taxes paid by said companies, their lenders and
their owners pre the conversion and compare same to taxes paid post
conversion. While some normalization would be required to ensure an
apples to apples comparison, this type of analysis would by its nature
add a great deal of credibility (or otherwise) to the related
forecasting models.
2. Business FTEs, as defined within the consultation paper, are still
in their relative infancy and have not yet undergone underlying major stress
conditions such as high interest rates, high inflation rates, etc.,
which would test how the managers of the FTEs would perform and how investors
in the relevant FTE securities would react. Underlying conditions have
generally ranged from benign to positive for Canadian FTEs over the past 5
years and the Department of Finance’s analysis should extend to considering
a range of outcomes including those arising in a material economic downturn.
3. The underlying fundamental issue relates to the individual
taxpayer more so than legal business organization forms. Said individual taxpayer
is the one who ultimately owns shares in corporations or income
trust units and who is the contributor to and beneficiary of pension
plans and registered retirement savings plans and who is the owner of units in mutual funds which
purchase securities. In my opinion, this fact is as certain as death and
taxes and the Department of Finance must ensure that it addresses
the issue from the end investor’s perspective and not simply as a
legal and accounting issue related to organizational form.
My specific observations on the FTEs issue are as follows:
1. At a time when so many macro financial variables are negative
insofar as Canadians are concerned (eg, consumer debt, savings rates,
underfunded corporate pension plans, massive governmental spending,
low relative productivity growth), the recent performance of the FTEs has been
outstanding as reflected in their absolute and relative growth. While
the underlying economic conditions have materially assisted same, I
believe that the investor’s ability to obtain a generally stable to
increasing monthly/quarterly cash distribution from individual FTE
investments have allowed investors to increase their confidence that
they will be able to successfully manage their ongoing or future
retirements.
2. The discipline on FTEs managers of having to make a regular cash
distribution (together with the perception that the ongoing rate of
distribution will remain stable) appears to have materially
sharpened their focus on ensuring that any capital expenditure
and/or business acquisition must prove itself worthy. This
managerial discipline must be positive with respect to improving efficiencies and productivity. The FTEs investor’s
ability to influence management by participating or declining to be
involved in a follow-on units offering provides more tangible
empowerment to an FTE investor and reduces the chances of an inefficient/unproductive
investment decision by management.
3. The Department of Finance itself refers to double taxation in its
discussion of the current dividend tax credit rules. I do not
believe that the concept of double taxation is consistent with
efficiency and productivity concepts and that it is more logical to
reform the corporate dividend tax rules to reflect the existing FTEs tax treatment than it is to impair the FTEs tax rules
to match the inefficient dividend tax approach.
4. Given the ever increasing economic and financial convergence
between Canada and the United States, a modification of the dividend tax
rules as opposed to the FTEs tax rules would be more consistent with
the tax landscape applicable to American investors. This approach
would likely make Canadian securities more attractive to foreign
buyers which would be a positive development for Canada’s economic
health.
5. If Canada continues to build on the productivity and efficiencies
inherent within the FTEs, it will likely be very positive insofar as
capital market revenues are concerned and may provide an actual competitive
advantage. Today’s announcements by IPL.UN and SPF.UN of material
business acquisitions in the U.K. and the U.S. respectively are but
one day’s examples of what would likely be an expanding trend.
In conclusion, I believe that the Department of Finance has performed
admirably in facilitating the material growth of the Canadian FTEs market
to date and in laying the groundwork for the further expansion of same.
The revision of the dividend tax credit rules to reflect the FTEs approach
so as to level the playing field is the only material tax modification
which I view as being necessary. A congruent FTEs / dividend tax credit
approach would be good for Canada’s competitive position and engender
greater productivity and more liquid and vibrant capital markets. These
outcomes must be directionally positive for governmental revenue
generation in general and specifically given the Department of Finance’s
own recognition that income retained within a corporate entity generally
bears less tax than income earned at the personal level. The ongoing
distribution of cash by FTEs directly to individuals on a current or
deferred basis (ie via pension plans and/or RSPs) ensures that the
government maintains overall control of tax revenues at the personal level
which appears to me as completely congruent with a one person / one vote
form of government.
Thank you for your attention to this matter and the best of luck in
your deliberations the outcome of which will likely be of significant
economic and political import.
Yours truly,
Daniel Ferguson
Oakville, Ontario
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