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Precision Drilling CEO: Hit U.S. investors Canadian trust sector loses C$20 billion in value, government mulls tax reforms; Canada-U.S. treaty limits trust tax rate By Gary Park Petroleum News Canadian Contributing Writer
Amid a C$20 billion bloodletting in the market value of Canada’s income trust sector over the past month, while the Canadian government mulls potential tax reforms, the chief of Precision Drilling says the simplest answer is to put a tighter squeeze on U.S. investors.
Hank Swartout, chairman, president and chief executive officer of Precision Drilling — whose shareholders voted 93 percent Oct. 31 to join the trust ranks — said U.S. investors have a far sweeter deal than their Canadian counterparts.
He noted that U.S. shareholders face only a 15 percent withholding tax in Canada, while Canadians are paying 40 percent.
“Why should they have 15 percent?” Swartout asked. “Something has to come to pass sooner or later to handle that … it’s just kind of basic.”
As debate over the future tax status of trusts moves into higher gear, there is a growing chorus from the investment community to hike the tax burden on U.S. investors as one way to staunch the loss of tax revenues, which the federal government projects at C$300 million this year and others think will be closer to C$600 million. Treaty limit is 15% However, implementing change to end what the government calls “tax leakage” will involve more than a signature. Under Article 22 of a 1980 Canada-U.S. tax treaty, taxation of income from trusts is limited to 15 percent, although the government could tax cash distributions from trusts that are classified as a return of capital rather than as income.
Meanwhile, Finance Minister Ralph Goodale has urged the investment community to submit its views on trust reform as quickly as possible so that he can “bring the uncertainty to a rapid conclusion.”
He promised a swift decision following a Dec. 31 deadline for the government’s consultation period.
Under heat from many directions, notably from retirees who count on trusts for a large portion of their income, Goodale said it was not his intention to damage the investments of thousands of Canadians.
“I didn’t wake up one morning in September and decide I wanted to inflict grievous harm on one group of investors,” he said. Critics: consultation a 'sham,' sector 'rattled' Critics think Goodale has blundered, with the investment house of Canaccord Capital describing the consultation process as a “sham,” and urging its clients to call Members of Parliament to complain.
Air Canada Chief Executive Officer Robert Milton said the trust sector has been “rattled” by the trust review and BCE, Canada’s largest telecommunications company, has shelved a plan to spin off its rural telephone lines into a trust.
After watching more than C$23 billion get wiped off the market value of trusts in one month, leaders of 33 trusts representing C$80 billion worth of market capitalization gathered in Calgary late in October to launch their own campaign by mobilizing their unit holders and turning up the heat on government.
Undeterred, Goodale insists his consultations have generated a “very constructive, useful discussion on the pros and cons (of changing trust rules).”
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