Pebbles Take

Tuesday, November 07, 2006

In Defence of Income Trusts

Corporations and trusts do not own themselves. They are owned by people, either in this country or outside. Even if a corporation is owned by another, eventually down the line they are owned by someone.

This someone pays income tax on their income. If this person owns a business that is not incorporated, a sole-proprietorship, the entire profit of the business is counted as personal income. It is not taxed at the corporate level. It is taxed as personal income.

When an individual owned a trust unit, it entitled them to a payout of their portion of profit every quarter, or year depending. The trust, could not keep cash on hand besides the amount needed to keep operating. Since 100% of the profit is given directly to the investors, there is no reason to tax the corporation, it would just decrease the amount given to the investors.

When the profit returns to investors, they have to pay taxes on it. When the profits went outside the country they were subject to a withholding tax similar to the rate individual investors pay at home.

This avoids the problem economists describe as double taxation, when profits are taxed at the corporate level and individual level. Double taxation requires an overall higher tax rate (combined) to capture the same amount of money as single taxation, and results in some dead weight loss (really bad).

So if people were still paying taxes on the corporate earnings, why was action taken? The totally symbolic reason that the tax balance would shift more towards individuals and away from corporations.(economists know this measure is pointless, since all taxes are borne by individuals) This measure would then be used by labour, and likely the NDP to attack the government on giving corporate fat cats tax relief while raising the burden on individuals. (which is false, but the perception is there)

This government public relations move led to a loss of almost $20 billion dollars. Bad economics (Harper should know better), bad optics (promise made, promise kept?) and in the end bad strategy (pissing off seniors and the oil patch, their base)

3 Comments:

  • A couple of things to consider which seem to be overlooked:
    * dividends from income trust tended to be paid to individuals who are not subject to tax (certain seniors) thus government loses immediate tax revenue
    * when an trust pays out it retained earnings to its unit holders (to avoid trust taxation at the highest rates) it no longer has the fund need to reinvest in long term infrastructure such as R&D, capital projects, etc. This can create a lack of future taxable base.
    I don't defend removing the income trusts but do take offense that Harper blatently lied about his intent during the last election. That's not fair.

    By Blogger WestmountLiberal, at 10:03 AM  

  • Encana was planning to become an income trust.

    PRESENT SCENERIO: The past 9 months it had a profit of $5B and paid $1.5B in corporate taxes. The remaining $3.5B is available for dividends which individuals receive and pay taxes on.

    Let's say that the average shareholder is in the 26% tax bracket (making between $72,756 and $118,285), another $900M in individual taxes is collected.

    So Encana's 9-month $5B profit puts $2.4B ($1.5B + $900M) in the government treasuries to pay for services you and I enjoy daily.

    INCOME TRUST SCENERIO: If Encana had been an income trust the past 9 months, $5B would have been available for unit reimbursements which indiviuals receive and pay taxes on.

    Let's gain say that the average shareholder is in the 26% tax bracket (making between $72,756 and $118,285), $1.3B in individual taxes would be collected.

    So Encana's 9-month $5B profit would put $1.3B in the government treasuries to pay for services you and I enjoy daily. That is over $1B less than if Encana had not been an income trust!

    POSSIBLE FUTURE INCOME TRUST SCENERIO: If Encana was an income trust and purchased by Warren Buffett or some other foreign multinational, only 15% of that $5B ($750M) would be collected.

    So Encana’s 9-month $5B profit would put $750M in the government treasuries to pay for services you and I enjoy daily. That is over $1.6B less than if Encana had not been an income trust!

    Now think of all the Canadian oil companies that would be quickly snatched up by Shell and Exxon if they were income trusts.

    Now imagine $15B-$25B in higher personal taxes because of the changed income trust policy many Liberals and you are against.

    PLEASE RETHINK YOUR POST WITHOUT THE LIBERAL SPIN.

    MississaugaPeter

    By Blogger Peter, at 10:50 AM  

  • If you want to lower corporate taxes to zero, then have the balls to run on that platform.

    People who poured their life savings into an obscure tax dodge were greedy and stupid and got what they deserved.

    By Blogger Nick, at 4:18 PM  

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