Ottawa's decision to start taxing income trusts has opened up a sharp fault line in the executive suites of Corporate Canada.
The ruling has emerged as a divisive issue, pitting those who run trusts against those in non-trust businesses, according to a new survey of top executives.
The quarterly survey of 175 chief executive officers, chief financial officers and chief operating officers shows a dramatic split among those who back Ottawa's move and those who dislike it. The quarterly C-Suite survey was conducted by the Gandalf Group for Report on Business and ROB-TV.
About 58 per cent of those surveyed support or strongly support the decision, while 40 per cent oppose or strongly oppose it.
Trust executives are most angry about the changes, and they share a sense of betrayal because of the Conservatives' earlier promise not to change the trust rule.
“Either they didn't do their homework [about trusts] and didn't understand the issue, which means they are incompetent, or they did look at it and they flat out lied,” said Kelly Drader, CEO of Calgary's Advantage Energy Income Fund. “You've either got an incompetent government or a bunch of liars.”
Mr. Drader insists that the income trust structure is a “very good business model,” particularly for many energy firms, and that those executives who support Ottawa's tax changes “just don't understand” income trusts.
“We're angry about the change, particularly with the suddenness and the lack of any forewarning or consultation,” said Kenneth Bagan, CEO of Calgary-based oil field services company Wellco Energy Services Trust. “I'm pissed and my shareholders are pissed. Thirty-five million dollars [in shareholder value] is gone.”
The other camp has equally strong views.
“Something had to be done,” said Donald Clarke, CEO of Newfoundland-based electronic equipment manufacturer Rutter Inc. “You can't create a false economy based on a taxation scheme, which is what was happening.”
Geoff Smith, president of London, Ont.-based construction firm EllisDon Corp., said he understands why trust executives are upset, but he thinks the old rules made taxation unfair.
“I just don't see the logic in allowing a group of companies to pay dramatically lower taxes than private companies or companies that aren't organized that way,” Mr. Smith said. “I really don't see how [the government] had any choice.”
The survey results demonstrate just how polarized trust and non-trust executives are on the trust issue.
Among trusts, a total of 82 per cent of executives don't like Ottawa's decision, with 56 per cent saying they are strongly opposed.
But 74 per cent of bosses of non-trusts support the move, with 30 per cent calling themselves strongly supportive.
One view that's shared by many executives on both sides of the issue is that the Conservatives blindsided the business community by making the trust changes without consultation, and lost credibility by reversing earlier promises.
About 60 per cent of the executives surveyed said the government should consult with business before making these kinds of tax changes.
Almost one-third of the non-trust executives said they felt betrayed by the government's about-face, while two-thirds of trust bosses were in that category.
“For the long-term health of the Canadian economy, it's probably the right decision,” said John Sleeman, CEO of Sleeman Breweries Ltd. in Guelph, Ont. “I just don't like politicians who make promises and don't keep them.”
There are a lot of stakeholders who were affected by the trust changes, said Susan Riddell Rose, CEO of Calgary's Paramount Energy Trust, so “the government should be making the right decision with the right information for the right reasons. Without consultation how can they have all those things?”
Over all, the executives' views of Finance Minister Jim Flaherty have altered sharply since the last survey.
In September, only a tiny fraction of those surveyed — 2 per cent — said they had an unfavourable impression of Mr. Flaherty in his role as minister. In the November survey, 13 per cent said they had a “somewhat unfavourable” impression while 19 per cent said their feelings were “very unfavourable.”
There is concern about Mr. Flaherty's credibility going forward as a result of the trust decision, Ms. Rose said.
“Who knows how he's going to handle the next issue?” she said. “The decision has not been made in a prudent fashion, and we don't know if that's a reflection of his general decision-making style.”
While some executives say the tax changes will help maintain the government's tax revenue and make Canada more productive, many others — about 57 per cent of those surveyed — are worried the precipitous move will hurt Canada's reputation among foreign investors.
“It's certainly going to affect people's desire to invest money in businesses in this country and take risks, because you have no assurance that the rules are going to be the same tomorrow morning,” Mr. Sleeman said.
Mr. Drader, of Advantage Energy, said he would not be surprised if U.S. investors headed for the exits because of the trust decision. “It makes [Canada] look like a two-bit small-time outfit,” he said. “It's very detrimental.”
The quarterly C-Suite Survey was conducted for Report on Business and Report on Business Television by Gandalf Group, and sponsored by KPMG and law firm Davies Ward Phillips & Vineberg.
The survey interviewed 175 executives across the country between Nov. 7 and 23. Respondents were split evenly by company size, and represent all parts of the country. Executives in service industries represent 47 per cent of the sample, manufacturing industries 25 per cent, and resources 26 per cent.
Each quarter, a charitable contribution is made on behalf of a survey participant. Last quarter a donation has been made to The Huntington Society of Canada on behalf of Anne Brace, chief financial officer of Softchoice Corp.
Want to know more about what the nation's leaders think about income trusts? Join host Michael Hainsworth on Report on Business Television at 8:30 p.m. (EST) Monday.
On Tuesday, go to globeandmail.com at 2 p.m. to join an online discussion with KPMG's Bruce Flexman and John Krukowski of KPMG, and Jay Swartz of Davies Ward Phillips & Vineberg.
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