The $1.1 billion solution -- and that's just the phone companies

During the last election, there was a bit of a tussle when the Liberals decided to improve the tax treatment of dividends received by indivduals so they were taxed at roughly the same level as distributions from income trusts. (Full disclosure: The parent company of my current employer, a major pizza chain, reorganized itself from a privately held company to a royalty income trust last year). That's because some major trusts, such as the Canadian division of the Yellow Pages, had some unusually high trading in the hours before the announcement was made from the Department of Finance.

The income trust setup, originally designed for real estate groups, sounds like a sensible one on the surface. It changes the concept of how to deal with cash flow. Rather than a corporation paying taxes at a very high corporate rate, it flows though most of the income to its shareholders who pay taxes at a lower rate. In fact, there had been some speculation that Dofasco was going to convert to a trust for that very reason, before it was bought by Arcelor in a hostile takeover. Most of the holders of units are pension funds which already get pretty good treatment under the system; but many individuals were beginning to see how a trust unit could have a better payoff than a share paying a dividend even after taxes.

Companies of all sizes have made the switch, which probably precipitated the move by the Liberals last year, and which the Conservatives reluctantly are moving forward with. I don't think either party, however, anticipated the announcements by Telus (the major telephone company in Western Canada) and Bell Canada (Central Canada, as well as the Atlantic through its Aliant division) they would reorganize into income trusts. A study out today suggests the federal government and the provinces and territories stand to lose about $1.1 billion per year in taxes from just those two companies. (This number comes from the fact corporate income taxes will drop about $2.8 billion but personal taxes will increase $1.7 billion.) Complicating the matter is that Bell is a federally chartered company through an Act of Parliament so it will be MPs and Senators who will have to pass judgment on the issue.

Quite bluntly, this is a good idea gone rather awry. No one, I suppose, anticipated that what were once near monopolies would go this route; and it's only a matter of time before the oligopoly of oil companies get the hint. It also suggests that we need to revisit the issue of tax reform, twenty years after the last overhaul. I'm not against profits, I'm for them. Given shareholders have traditionally gotten shafted on dividend payouts, income trusts are actually not a bad concept.

But I also believe governments need sufficient revenues to provide services for the greater good. The only reasonable way to make the whole arrangement work as for any major cuts in corporate income taxes, as I argued back in July, is to eliminate corporate welfare; and I don't see a willingness from any of the parties in Parliament to do that.

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