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Robert John Patten'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:
R.J. Patten
Orleans, Ontario
To: Department of Finance
The following correspondence is submitted in response to
Department of Finance Canada’s discussion titled "Tax and Other
Issues Related to Publicly Listed Flow-Through Entities (Income Trusts
and Limited Partnerships)" dated September 2005.
Thank you for the opportunity to make this submission on
a subject that is critical to well being of pensioners, retirees and
seniors. . I do not speak for any organization nor am I a formally
trained financial expert. However, as a senior/pensioner/retiree, a
person who spent over 40 years in the workforce, managing a home,
bringing up family and preparing for retirement I do believe that I have
some qualifications to comment on financial matters. I am quite aware of
how changes to public policy (particularly taxation) and how the
influence of special interests can affect an individual’s financial
planning. I am acutely aware of how changes to long standing income
trust rules can have a devastating effect on my finances and those of
other investors, particularly pensioners, retirees and seniors. I am
alarmed and vexed that changes are even being considered that could
upset 40 years of planning for my retirement.
I am responding to the Department of Finance’s
discussion because statements related to "advance tax rulings on
income trusts" made by the Minister of Finance, in mid September,
have already cost my wife and me considerable financial loss through
devalued income trust investments. We fear that ill thought action on
the part of the Department of Finance and therefore the Government can
jeopardize our retirements. This fear is not unfounded since past
Government initiatives have had negative impacts on our financial
health. Fortunately we were working then and able to recover from the
setbacks. Now we are retired and recovery, if possible, will be
considerably more problematic if the Government introduces measures
causing further significant investment losses.
I hope the Government will be extremely cautious in this
matter and carefully consider all the potential damage it can cause to
pensioners, retirees and seniors if it chooses to proceed with ill
considered, sudden and radical changes to income trust rules.
This submission may be posted on your web-site.
Robert John Patten
English is the preferred language for contact.
Tax and Issues Related to Flow-Through Entities
Comments have been made on items of interest as they were
encountered on the Department of Finance discussion.
Foreign Property Rule Elimination
1. Budget 2005 Foreign Property Rule Elemination: The elimination of the
foreign property content in pension funds, RRSPs and RRIFs was clearly a
mistake on the part of the Government for the following reasons:
a) It allows more money to flow out of the country in support of
foreign businesses which are in competition with Canadian businesses;
b) This outflow of money is tax deductible which means the Government
is actually funding foreign competition to the detriment of Canadian
companies at the expense of Canadian taxpayers;
c) It takes away funding from Canadian businesses and makes it harder
for them to expand at home. This reduces employment opportunities in
Canada and results in higher public assistance requirements and is a
self-induced Government waste of tax dollars. Some innovations that
may have occurred in Canada will not take place and any benefits from
them will be foregone. Corporate and personal taxes expected from
expanding businesses will be foregone. Canadian standards of living
will remain static or decline;
d) It encourages businesses to set up foreign branches in an effort to
tap the money going outside of the country. Therefore Canadian jobs
are exported out of Canada causing a negative effect on the Canadian
job market. Corporate and personal taxes expected in foreign countries
will benefit them and increase the standards of living there but not
the living standards for the majority of Canadians; and
e) There was nothing to prevent Canadians from investing off shore
prior to the change in foreign content limits. However, why the
Government would allow tax deductions when money in pension funds,
RRSPs and RRIFs is invested on foreign soil is very puzzling. Why does
the Government actually fund foreign competition to Canadian
businesses? Even though the Canadian market represents only a small
part of the total world market it seems far more logical to allow zero
foreign content when the Canadian taxpayer is providing, through tax
deductible contributions, subsidization of the pension funds, RRSPs
and RRIFs. It would be better for the Government to eliminate tax
deductions for pension funds, RRSPs and RRIFs completely than to
deliberately encourage investment out of the country.
Tax Exempt Investors
2. Reference is made to investors that put investments in
such things as pension funds, RRSPs and RRIFs and pension funds;
a) If there are going to be changes then they should be done in an
incremental manner so there is no sudden disruption of the trust
market. Changes that depart radically from current laws could result
in sudden, sharp reductions in the value and distributions of
Canadians investments; and
b) Changes that purposely undermine the worth of trusts are unfair
since Canadians made their investment decisions under a certain set of
rules. To cause Canadians economic hardship is unjust simply for the
reason that the Government of the day did not foresee potential
problems with trusts when they first came into existence and later
when they became increasingly more popular. Income trusts have existed
for over 25 years and have become popular with investors. Sudden
insight on the Government’s part that there may be some foregone tax
revenues does not justify throwing the income trust market into chaos.
It will also have the same chaotic effect on investors who put money
into them based on a set of rules in place at the time they considered
the investment.
Tax Revenues
3. Tax Revenues – foregone revenues, real areas for concern:
a) The effect on tax revenues is minimal. Even though there is
immediate foregone tax of $300 million much will be recouped as FTEs
are traded and distributions are taxed and spent. At some point
distributions will be taxed as income. They will generate GST and PST
revenues to the federal and provincial governments. They will also be
counted as income for tax purposes by businesses when those
distributions are spent at restaurants, stores and a host of other
concerns;
b) When compared to the Federal Government budget of $200+ billion the
$300 million in foregone taxes is insignificant. The $300 million is
equal to about 0.15% of the Federal budget, or less than one sixth of
one percent;
c) Of far greater problem than the $300 million should be the $40
billion in debt servicing charges for the Federal debt of around $500
billion. However, there seems to be little concern over this even
though it represents an amount over 130 times greater than the
perceived losses due to FTEs. It should be noted that every time the
Bank of Canada raises interest rates by 0.25% the cost of servicing
the debt rises by about $1,25 billion each year, an amount over four
times the tax losses attributed to FTEs. However, the Bank of Canada
has in fact raised interest rates twice (0.25% each time) in recent
months and has actually caused debt servicing charges to rise by about
$2.5 billion per year over what it was this past summer (more than 8
times the losses attributed to FTEs). Furthermore the Bank of Canada
may not yet be content to leave interest rates where they are and
numerous financial commentators are projecting at least two more
increases in the coming months. Should these increases materialize the
federal debt servicing costs will be up by about $5 billion a year, or
about 17 times greater than the losses due to FTEs. When comparing the
foregone tax due to FTEs to the cost of servicing the debt it makes
one wonder if the Government’s concerns are actually focussed in the
right direction. Huge revenue gains achievable through debt reduction
make losses due to FTEs virtually insignificant. Debt reduction
appears to be far more fertile ground to till than does changing the
rules for FTEs;
d) Furthermore, the Government shows little hesitation in allocating
billions of tax dollars to businesses of all stripes for various
programs aimed at improving technology, innovation, encouraging
expansions, etc, in the hope of improving the economy even though
quite often the returns do not seem to justify the expenditures. If
the Government finds itself in a cash crunch there are certainly
programs of questionable effectiveness that could be cancelled that
would easily make up for the short fall being attributed to income
trusts; and
e) Foreign aid should also be reviewed. Canada provides aid to China
even though it maintains huge military forces and nuclear weapons and
space programs. Canada also provides funding to corrupt regimes where
foreign aid is used to build palaces and support European shopping
trips for corrupt leaders and their families. Such aid should be
stopped and only be sent to places where the money is going to benefit
the recipient countries and their citizens as a whole.
Impact of FTEs
4. Impacts of FTEs on investment decisions and capital allocation in
Canada. Is the overall economic impact positive or negative?
a) As an individual investor and a pensioner FTEs have become an
attractive investment vehicle, particularly since the liability issue
has been addressed to some degree;
b) Bonds and GICs do not pay enough to make them useful outside of an
RRSP, RRIF or pension since inflation and taxes take up more of their
value than they actually gain unless they are protected within RRSPs,
RRIFs and pension plans. They do not provide a useful return on
investment that can actually be used to buy a loaf of bread or a tank
of gas if they are expected to form the basis of daily financial
support, or a supplement to pension incomes, for a person’s every
day living;
c) Stocks quite often do not pay dividends and therefore investors have
to depend on them increasing in value if they are to be used to
provide for daily living expenses. Unfortunately there is no guarantee
that stock values will consistently climb and provide a consistent
income stream. In the year 2000, for example, they did just the
opposite;
d) Stocks that do pay dividends, more often than not, pay at rates less
than GICs and Bonds (Loblaws pays about one percent) and so are often
no more useful than GICs and Bonds as far as providing funding for
daily living expenses;
e) Mutual funds are another investment choice. However, for the most
part their distributions, if they have any, are small. Mutual funds
also suffer from losses due to management fees, which, whether the
funds make money or not they are paid to the managers. In fact mutual
funds sometimes seem merely to be vehicles to transfer wealth from
investors to managers. How many mutual fund managers are driving
expensive cars and yachts compared to investors? I personally don’t
know any mutual fund investors who own yachts but I do read about
mutual fund mangers who enjoy their yachts;
f) This leaves income trusts, which generally pay distributions at
rates in excess of what is available through Bonds, GICs, stocks and
mutual funds. Income trusts can experience problems and reduce or stop
paying distributions or they can simply go broke and leave investors
with nothing. However, with some skill and a little luck or good
advice it is possible to accumulate a stable of income trusts that are
more financially beneficial than stocks, bonds, GICs or mutual funds;
g) Therefore, FTEs have had an impact on my personal investment
decisions and allocation of capital. I prefer them to stocks, GICs,
bonds and mutual funds. This doesn’t mean that I do not own stocks,
GICs, bonds or mutual funds but I prefer income trusts; and
h) Overall the economic impact on my wife and me has been positive.
Since we spend our income trust distributions, for the most part, at
local businesses, or other parts of Canada, the economic impact on
them is also positive. We also pay income taxes on our distributions,
PST and GST on our purchases and businesses pay income taxes on money
(derived from income trusts) that we spend in their establishments. I
have to conclude, therefore, that the economic impact of income trusts
is positive.
Public Policy Concerns
5. Public policy concerns about FTEs and how the tax system influences
their existence. Actions to be considered to address these concerns if
there are any:
a) As an investor in income trusts my concern is that the Government
does nothing that will cause the value of my investments or their
distributions, to decline. My income trust distributions are important
supplements to my wife’s and my own pension and CPP payments. Loss
or severe depletion of income trust distributions would have a
significant negative effect on our economic well being. Economic
stress would result in more reliance on Government assistance and
introduce health and mental stresses which, as retirees, we prefer to
avoid;
b) I want no action to be taken that will cause the value of income
trusts and their distributions to decline. However, if action is taken
it should be well thought out and be done in small increments over a
long period of time so that the income trust market is not thrown into
sudden turmoil. I am concerned that the Government may take
precipitous action without due regard to how it will effect the
economic well being of investors, particularly the hundreds of
thousands of retirees and pensioners whose economic well being is
dependant on a healthy income trust market. Many retirees and
pensioners are past the point where they can weather a financial
upset. They will not be able to find a job to make up for their
financial losses or they will be unable, due to physical or mental
degeneration, to take a job even if it were available. To cause such
an event in the lives of pensioners and retirees would be a breach of
trust on the part of the Government. It would show that the Government
has no care and compassion for the well being of Canadians;
c) In a recent e-mail from the Finance Minister’s office I learned
that there has been considerable interest in this matter. Managers of
pension funds and investors have shown support for income trusts. Some
entrepreneurs and managers of corporations say changes are required.
However, entrepreneurs and corporate managers are employed and/or will
not have to suffer the consequences of changes that may cause
devaluation of income trusts or their distributions; and
d) I was also informed in the Finance Minister’s e-mail that some
Governments are complaining about income trusts. However, I suspect
the complainers have buried themselves in huge debt after years of
deficit spending and have only themselves to blame for their financial
problems. Radical changes to the rules could cause serious economic
harm to a large group of people (pensioners/retirees/seniors) who are
unlikely to look at entrepreneurs and high placed corporate managers
as the authors of their distress. They will look at governments,
particularly the Federal Government, as the architects of their
misery. There seems to be considerable potential for many very cranky
voters in the coming election.
Conclusions
Foreign Property Content
Elimination of the Foreign Property Content rule for
pensions, RRSPs and RRIFs costs the Government money and costs Canadians
some measure of prosperity. Less money is available to domestic businesses
as more investments are made out of the country. Canadian businesses
expand less at home and some may move off shore costing Canadians jobs and
the Government increased support requirements.
Recommendation: Reintroduce a "Foreign Property
Content" rule for pensions, RRSPs and RRIFs. Suggested foreign
property content is zero since there are no valid reasons to support
foreign businesses through Canadian taxes. Care should be taken to ensure
that "clone funds" and their like are not acceptable.
Tax Exempt Investors
Tax Exempt Investors have been investing under a fairly
consistent set of rules for about 25 years as far as FTEs are concerned.
Radical changes have the potential to cause chaos in the income trust
market. The Finance Minister’s intemperate mid September 2005 remarks
(which were only a hint that something "might" happen) cost
income trust investors about $20 billion. Much of this loss was borne by
retirees and seniors.
Recommendations: Any changes should be made incrementally
over a long period of time so the income trust market is not thrown into
chaos. Changes should not be made which cause the value and distributions
of income trusts to decline. Should the Government act in a precipitous
manner directly causing a negative impact on income trusts then a program
to provide full financial compensation back to the September 2005 levels
should be introduced.
Tax Revenues
Tax Revenues may be foregone in a minor way due to FTEs.
However, there are far greater tax revenues to be recouped in other areas.
The Federal debt currently costs about $40 billion a year. This is over
130 times more than the $300 million the Government "thinks"
FTEs are costing. The Government also spends billions on businesses each
year with seemingly little return (Partners in Technology).
Recommendations: Paying off the Federal debt completely
frees up about $40 billion in tax dollars and therefore a defined program
to pay it off as quickly as possible should be a top Government priority.
The Government should also review all programs that provide little benefit
to the country. Foreign aid should be included in this review and funding
should be cut off where it does not help recipient countries and their
citizens as a whole.
Public Policies
There are concerns the Government will implement Public
Policies that cause damage to the income trust market. Entrepreneurs and
corporate managers concerned with income trusts will not suffer the
consequences of a diminishment of the income trust market, however
investors will. Governments expressing concerns with income trusts have
only themselves to blame. Years of deficit spending have put them in a
hole and they are looking for a way to get out. Considerable skepticism
should be applied when considering the validity of entrepreneurs,
corporate mangers and governments concerns about income trusts. Damage to
the income trust market is a direct assault on investors, particularly
pensioners, retirees and seniors, many of whom have come to rely on steady
distributions. Tampering with long established rules thereby causing
investment devaluation and declining distributions will cause definite
financial hardships to a large group of people, many of whom may not be
able to make up the losses at this stage in their lives. Pensioners,
retirees and seniors do not deserve intentional sabotaging of their
financial health by uncaring Governments.
Recommendation: Do not make changes that will have a
negative impact on the large number of ivestors in FTEs. There has
potential to cause extreme economic hardship for many pensioners, retirees
and seniors.
Investment Decisions/Capital Allocations
Investment decisions and capital allocations are impacted
by FTEs. Numerous investors probably consider the impact positive since
there is often little to gain from GICs, Bonds, stocks and mutual funds.
There seems to be more certainty in receiving a useful income stream from
FTEs than in other investments even if they are not without risk.
Recommendations: Do not make any changes that will have a
negative impact on the large number of ivestors in FTEs. There is
potential to cause extreme economic hardship for many pensioners, retirees
and seniors.
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