The Stephen Harper government mounted an aggressive defence Wednesday of its decision to break an election promise by taxing income trusts, saying the economic landscape had changed dramatically since this year's ballot.
Both the Prime Minister and his Finance Minister, Jim Flaherty, were forced to justify the tax as investors anxious about the measure drove the benchmark Standard & Poors/TSX composite down 294.2 points, or 2.4 per cent, to 12,050.39, and Opposition Liberals accused the Tories of lying because they reneged on a pledge to avoid taxing trusts.
The income-trust sector, meanwhile, warned that the tax could spell the end of an investment vehicle that until this week had a market value of more than $200-billion.
Mr. Harper told the House of Commons that his party's campaign promise didn't take into account the latest wave of companies converting to trusts.
“Lots has changed with income trusts in the past year, including tax holidays for major corporations that this government does not and will not support,” Mr. Harper said. “The commitment of this party was not that we would have no taxes for Telus. It was not that we would have no taxes for BCE.”
But federal Liberals blasted the Tory decision, calling it a breach of trust, and said Canadians will suffer heavy financial losses. The Liberals also threw back at Mr. Harper his own words during the election campaign, when he said a Conservative government would not impose any new taxes.
“Canadians who voted for the Prime Minister did so based on a deception. What is equally concerning, they invested their life savings based on a false promise,” said Opposition Leader Bill Graham.
Mr. Flaherty defended the stock market-shaking tax as the only way to stop a domino effect of mass corporate conversions to trusts, which pay few corporate taxes. “It was not entirely speculative to think, ‘Well, if one of the banks [converts] to an income trust, they all will.' Then where will we be?” he told The Globe and Mail's editorial board.
He said Telus Corp. and BCE Inc.'s decisions to convert to trusts were the last straw.
Investor reaction to the trust tax drove down the unit prices of trusts and share prices of companies such as Telus and BCE. Shares of Telus fell $8.78 to close at $56.15 a share on the Toronto Stock Exchange, and BCE's shares dropped $3.60 to $28.10 a share.
Mr. Flaherty said the Tories were worried about more major conversions — perhaps including a financial institution or an energy company — and had been lobbied by chief executives who didn't want to be forced to convert to trusts.
“They were reluctantly and regretfully doing this,” Mr. Flaherty said.
Income trusts pay little or no corporate tax, instead shovelling out the bulk of earnings to investors, who are taxed individually. Critics said Ottawa and the provinces never recouped all the lost revenue and ended up losing hundreds of millions of dollars in revenue each year.
The income-trust sector warned that the Conservative move could mean extinction for this investment vehicle.
“It could potentially shut it down,” said George Kesteven, president of the Canadian Association of Income Funds. “I don't think they understand entirely the consequence of what they have done.”
Despite the opposition outrage, the Liberals were not willing to say how they would vote on the legislation, while the NDP and the Bloc Québécois appeared to offer qualified backing for the idea.
Mr. Harper later accused the Liberals of not supporting tax relief for seniors, a policy Mr. Flaherty also announced Tuesday in an effort to cushion the blow of the new trusts tax, which is being absorbed in large part by Canadian senior citizens.
But the announcement still sparked complaints to MPs' offices.
Lee Richardson, the Conservative member for Calgary Centre, said he has received a number of calls from brokers and trusts alike who are upset with the decision.
“We've been getting a lot of e-mails and a lot of calls all day and the majority are opposed,” he said.
He added that the move was the right one and that large corporations should have assumed that the government would move, particularly after large corporations started getting into the game.
The move drew praise from Bank of Canada Governor David Dodge, who said it levelled the playing field between trusts and corporations.
“The actions that the government took regarding the tax treatment of income trusts would appear to eliminate the tax incentive to use one form of corporate organization over another,” he said. “Businesses now face a level playing field in choosing the form of corporate organization that allows capital to be allocated to its most efficient use.”
