Rumours that income trust conversions deals could spread into other sectors of the Canadian economy prompted the Tories' surprise decision to slap new taxes on trust distributions, Finance Minister Jim Flaherty said Wednesday.
Speaking to the editorial board of The Globe and Mail, Mr. Flaherty said that when BCE announced plans to follow Telus' decision to convert to an income trust, the government feared a domino effect would occur in other sectors of the economy.
“Both companies had indicated that the primary reason they were converting was the tax situation, not business reasons,” Mr. Flaherty said.
“We see them converting solely to avoid paying corporate taxes and that's a clear and present danger to fairness in the Canadian tax system. I felt we needed to act.”
Finance Minister Jim Flaherty speaking to the editorial board of The Globe and Mail Wednesday morning about income trusts. (Louie Palu/The Globe and Mail)
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But, the Finance Minister wouldn't go into details about which companies or sectors were rumoured to be considering the move.
“I can't say with certainty, because I don't make these decisions,” Mr. Flaherty said. “We had concerns in other sectors in the Canadian economy, including financial institutions and the energy sector that would be large.”
While the move was lauded by both the Bloc Quebecois and the NDP, it was panned Wednesday by the opposition Liberals, who criticized the government for breaking a central election promise and for betraying the trust of Canadians.
The Tories promised in their election platform to preserve income trusts by not imposing any new taxes on them, after accusing the Liberals of attacking retirement savings.
“The Prime Minister broke a core electoral promise,” said Liberal finance critic John McCallum. “As a direct consequence of breaking that promise, in the space of less than an hour, he has destroyed literally billions of dollars of the wealth of Canadians.”
Mr. McCallum later said the move was the “single biggest blow” to Canadians' wealth ever dealt by a finance minister, referring to the day as “Black Wednesday.”
The TSX opened dramatically lower on the news before clawing back at least some of the losses.
On Tuesday, the Conservatives announced they would start taxing trusts as corporations, effective immediately for new trusts and beginning in the 2011 tax year for existing trusts.
The effective tax rate to be paid by trusts on distributions will start at 34 per cent, to mirror federal and provincial taxes on companies, and drops to 31.5 per cent by 2011. Ottawa will remit to the provinces a 13-percentage-point share of the revenue.
Mr. Flaherty acknowledged the move would force Telus and BCE to reconsider their plans to convert to trusts that would have ranked as the largest in Canadian history. The federal government stood to lose $1.1-billion from its tax base as a result of the proposed deals.
The trust tax is certain to hurt the retirement savings of millions of Canadians who rely on returns from trusts, including many seniors, whom the Tories consider a key voting group.
In order to cushion the blow, the Tories also announced $1-billion in annual tax breaks for seniors by allowing them to split their pension incomes and by increasing tax credits for low-and middle income seniors.
Prime Minister Stephen Harper defended the government's decision to break its election promise during a raucous Question Period Wednesday.
“The commitment of this party is not that we would have no taxes for Telus. It wasn't that we would have no taxes for BCE. It wasn't that we would have no taxes for foreign investors or no taxes for major corporations. It was a commitment to protect the income of seniors,” Mr. Harper said.
In speaking with the Globe, the Finance Minister acknowledged the political risk in making the move, but he said it was necessary.
“For a minority government, it would have been much easier to duck an issue like this,” Mr. Flaherty said. “It just reinforces our degree of commitment.”
The Finance Minister acknowledged Wednesday that the government could refuse to let financial institutions convert to trusts under the Bank Act.
“We could say no, but then why would we say no to one sector of the economy when other sectors of the economy are going down that road?”
He also said he was hearing from business leaders that they were being pushed to convert to an income trust in order to maximize returns for their stakeholders.
“It was not entirely speculative to think, ‘Well, if one of the banks goes, they all will,'” he said. “Then where will we be?”
Mr. Flaherty said he will unveil the Tories' economic plan alongside its fiscal update in coming weeks and that an income-trust model for the Canadian economy would run counter to the productivity and competitiveness plan he has in the works.
He said he had no choice but to move on the tax issue because he feared that increasing numbers of corporations preparing to convert to trusts threatened Ottawa's tax base.
The Finance Minister also said the decision was motivated by the issue of tax fairness and the fear that Canada's economy slipping further into the income-trust model would be out of step with global economic trends.
“Increasingly, individuals and families in Canada are shouldering the burden,” Mr. Flaherty said. “Income trust acceleration would significantly increase that.”
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