Canadian government suspends plan to stop trust ‘tax bleed’

Gary Park

The Canadian government, after intense lobbying from the petroleum and investment industries, has suspended plans to put a cap on foreign investment in energy income trusts.

But Finance Minister Ralph Goodale said Dec. 7 that there is still “an issue to be dealt with” and trust executives were reluctant to declare a victory.

For the time being, he said the government does not want to “unfairly or unreasonably” cut off a source of capital, although it will look for other ways to prevent an erosion of Canada’s tax base.

Goodale’s department said there will be discussions with the oil and natural gas industry to figure out an “appropriate” way to handle the government’s concern about a “tax bleed” from the trusts.

While putting aside its proposal for a 50 percent limit on foreign ownership, the government will continue to collect a 15 percent withholding tax on trust distributions to foreigners — a measure the trust sector believes more than offsets any loss of tax revenues.

Stephen Probyn, chairman of the Canadian Association of Income Funds, said his organization was pleased to have won its case that there is no substantial leakage from federal tax revenues.

Some concern decision merely deferred

The Canadian Association of Income Funds has estimated that Canada’s income trust sector has a combined market value of more than C$120 billion and accounted for 80 percent of the initial public offerings in 2003.

Energy trusts have raised about C$4 billion in equity and convertible debt so far this year, helping fund 24 acquisitions costing C$5.1 billion.

In addition to the business they generate, the trusts said the federal measures forcing them to constantly monitor their foreign ownership levels would have been time-consuming and cut off their access to large pools of capital in the United States.

Breaching the ownership limits would also have made trusts ineligible for tax-sheltered retirement savings plans.