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Pressure builds on foreigners: U.S. target Alberta government proposes tax on non-resident trust investors; Ottawa faces backlash from mutual fund, pension sectors Gary Park Petroleum News Canadian Contributing Writer
The Alberta government would like to put a chokehold on non-resident investors — primarily Americans who have been enthusiastic players in the income trust field — to stem a loss of tax dollars from the petroleum industry.
That puts Alberta in the rare position of agreeing with the Canadian government that the trusts are due for reform.
But the federal government of Prime Minister Paul Martin is being cautioned against meddling with the trust industry that has an estimated 1 million Canadian investors, many of them either retired or close to retirement who feel their financial security is being threatened.
Two government Members of Parliament have written to Finance Minister Ralph Goodale urging him to disperse the storm clouds gathering over trusts, while the government grapples with the impact of trusts on the economy and ponder including changes in the 2006 budget to narrow the tax gap between trusts and conventional companies.
A federal review of the tax treatment of Canadian and foreign trust investors is scheduled for completion by Dec. 31. Alberta considering taxation With the debate raging, Alberta Energy Minister Greg Melchin added a fresh wrinkle by announcing that his government is considering taxing income trust distributions outside Canada.
Although Alberta would prefer that the Martin government lower taxes on corporate dividends, negating the advantages of the trust structure, he said the energy trusts are siphoning hefty corporate tax revenues to eastern Canada and the United States.
Goodale said one province — widely assumed to be Alberta — had told him it was forgoing C$350 million a year in lost taxes.
Without conceding whether it was his government, Melchin described the estimate as a “plausible” figure, although he noted that Alberta benefits when investors buy trust units and the trusts put that capital to work in the oil patch.
He said Alberta is contemplating imposing a minimum tax on trusts, copying the federal government’s 15 percent withholding tax on distributions to trust investors outside Canada. Federal assistance needed But Melchin agreed that Alberta will not be able to levy corporate taxes outside Canada without the help of the federal government and both governments would have to take care not to violate Canada-U.S. tax treaties that set a limit on withholding taxes.
The Investment Dealers Association of Canada said it agreed with the principle underlying Alberta’s thinking, especially if it meant that any decision to tax trust distributions did not put Canadians at a disadvantage against foreign investors.
Stephen Probyn, chairman of the Canadian Association of Income Funds, said Alberta is being forced to respond to possible federal moves when his association does not believe that trusts are a threat to the Canadian economy because they divert cash flow away from capital investment.
For now mutual fund managers are troubled by the uncertainty, which has some of them accumulating cash positions while they wait for clarification from Ottawa.
Meanwhile, there are reports that investment dealers and pension plans are enlisting the help of stockbrokers across Canada to aggressively lobby Members of Parliament, explaining that the loss of C$18 billion in the value of the Toronto Stock Exchange’s income trust index is battering retirement incomes.
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