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Canada out to bust the trusts? Secretive pre-budget meetings raise fears government about to lower tax boom Gary Park Petroleum News Calgary Correspondent
Clandestine high-level meetings of Canadian Finance Department officials and the private sector have set off alarm bells that the government is preparing to stage a tax grab in the income trust sector.
With studies estimating that the government is losing as much as C$1 billion a year in tax revenue because of the special treatment afforded the booming trusts, there is a fear that the issue might be addressed in a March 23 budget.
Finance officials either refuse to comment on what might be in store or dismiss the secretive meetings as just a normal part of pre-budget talks.
Sources indicate that the options range from taxing trusts at the same 33 percent level as other corporations to doing nothing at all.
The government is also said to be closely tracking the rising level of foreign ownership of trusts.
Because foreigners are not taxed at the same level as Canadians, there is a concern that sizeable tax revenues are draining out of Canada.
At another level, the government is trying to determine to what extent the trusts are siphoning investment away from conventional firms.
Meanwhile, the Alberta and Ontario governments have started exploring ways to make trusts, which currently have no limited liability, more appealing to pension funds. Trust sector growing rapidly All this is taking place amid a meteoric expansion of the trust sector, which has more than tripled in value on the Toronto Stock Exchange over the last five years to C$63 billion (US$47 billion), with oil and natural gas trusts making up 36 percent of the total market.
Jack Mintz, who co-authored a study last year for the C.D. Howe Institute on the impact of trusts, said the government has to take a serious view of the lost tax revenues.
He has calculated that the Canadian and provincial governments are losing between C$500 million and C$700 million a year, stemming from the fact that trusts convert equity into debt and redistribute profits to unit holders.
Other studies have estimated the losses are nothing at all or as high as C$1 billion.
The Canadian Association of Income Funds said the mature companies that comprise the bulk of trusts are the job creators of the Canadian economy.
The oil and gas trusts, which generated average returns last year of about 17 percent, insist they are in a different league from other trusts.
While the royalty trusts pay a large portion of their profits to unit holders, they also continue to raise capital to invest in exploration and development.
In contrast to the conventional oil and gas company that is owned 60-70 percent by institutional investors, trusts say they are owned 80 percent by individuals.
John Dielwart, chief executive officer of ARC Energy Trust, said 90 percent of units of his own trust are in the hands of Canadians, raising doubts in his own mind that those investors would be punished by the government.
Other trust executives don’t believe the upcoming budget will contain changes, arguing that Canada’s new Prime Minister Paul Martin would be unlikely to take such drastic measures without open discussions.
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