As two of Canada’s biggest telephone companies prepare to enter the income trust fold and avoid paying corporate income taxes, the pressure on the Canadian government to intervene and stem the loss of revenues is intensifying.
In a new study released Oct. 16, University of Toronto tax economist Jack Mintz estimates federal and provincial governments will lose C$1.1 billion a year if both Telus and BCE convert to the trust structure, more than doubling the trust-related tax losses of C$540 million in 2004.
He said the question facing all governments is “whether this is the sort of tax cut they want to be handing out to boost economic growth.”
“The difficulty is I am not sure they know where they want to stand,” he said.
Federal Finance Minister Jim Flaherty has reinforced that view over the last five weeks by saying nothing since Telus unveiled its conversion plans or since Oct. 11 when rival BCE joined the movement.
Assuming shareholder approval, the two companies would create trusts worth about C$22 billion and C$27 billion, respectively.
In the process they would pay little or no corporate taxes by directing the bulk of their earnings and cash flow to unit holders, who would then carry the tax load.
Energy sector has led trust growth
Led by the energy sector, the trusts have exploded in popularity over the past six years, reaching a market capitalization of about C$210 billion, making up 11 percent of the Toronto Stock Exchange by value and 16 percent by the number of listings.
They have also attracted a strong international following, with foreign investors — by far the bulk from the United States — holding close to one-quarter of the trust units.
The prospects for further additions to the trust ranks are virtually unlimited if companies decide to spin off assets rather than converting the whole corporation.
But the government of Prime Minister Stephen Harper has given no hint of its thinking beyond its campaign promise this year not to meddle with retirement savings plans, many of which are fueled by trusts.
Harper and Flaherty have indicated they are concerned about the pace of developments and are “monitoring” the situation.
Mintz said Flaherty will have no choice but to “come clear in the next short while about whether he plans to take any actions” given the prospect of forgone corporate taxes of C$2.8 billion a year if Telus and BCE switch to trust ranks, even though C$1.7 billion of the lost corporate taxes could be recouped from personal taxes on higher payouts from pension funds and retirement savings plans as well as from withholding taxes on foreign investors.
The foreign investors cost the federal and provincial governments about C$300 million a year and have been seen as one of the easiest targets to stop some of the leakage.
If the Harper government remains tight-lipped, the next public airing of the issue is likely to take place later in the fall when Canada’s finance ministers hold their annual meeting.
