Wednesday, November 1, 2006

Harper clamps down on trusts, helps seniors -- sort of

A little while back, I wrote that while income trusts were a good idea in principle, the decisions by Telus and Bell Canada to convert their corporate structures to flow-through entities was probably too clever by half. Well, in one of the few signs of common sense the Harper Government has shown so far, they have said enough is enough.

Last night, the government announced that distributions from income trusts set up today or hereafter will be subject to a new income tax, while those already existing will be exempt from the tax until 2011. This pretty much puts a damper on corporations who were hoping to stiff the government, and ensures there will be a level playing field between those who get dividends and those who get distributions. It's a matter of fairness and a welcome one. Still, I am perplexed by the fact it took the government nearly a year to figure out what the Liberals did last year -- that this was getting out of hand. I don't get the four year holiday for current trusts either -- and it's almost certainly open to a Charter challenge.

Flow through entities, what was meant to be a way to make it easier for Joe and Jane Schmos to get into commercial real estate, has become the ultimate tax shelter -- with less of the risks associated with traditional tax-avoidance measures. Simply put, because individuals are taxed at lower rates than corporations, it's government that gets shafted. Furthermore, people are taxed in the province of residence which may not be the same as where the company hangs its shingle. And the provinces and territories set their tax rates deliberately to ensure a level playing field between companies and people. Something had to be done. So hereafter, distributions will be taxed as if they were dividends. More importantly, flow-throughs that are not partnerships but trusts will no longer be able to deduct distribtuions just as corporations can't deduct dividends.

To offset some of the negative impact, the government is also cutting the corporate tax rate -- which is also a good thing. It allows companies to hire more people, who in turn pay taxes. Pretty much revenue neutral, from what I see.

In addition, the Harper Government is going to allow greater income splitting between couples that are seniors, and will raise the age exemption by a thousand bucks. Frankly, income splitting should go across the board -- I have long favoured eliminating the so-called marriage penalty. As far as the deduction goes, it's a backhanded move which saves the average senior $153 a year in taxes. I'd rather see the government raise Old Age Security by a thousand bucks a year per person -- about $83 a month -- and let the seniors spend the money in the economy. Still, anything that saves my pop a few bucks is something he'll take. The income splitting doesn't do much for him as he's divorced but it'll go a long way.

Maybe the government is realizing that targeted tax cuts are a better idea than broad based trial balloons that serve no one but to raise the stakes come the next election. But taken in its entirety this is heading in a more reasonable path, overall. The four year holiday for current trusts, however, is unacceptable, so I give it a B-. Adequate, but still not up to par.

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(no name)06/11/2006 9:29:14 PM
We have started a blog intebted as a meeting place and information resource for like-minded former members of the Conservative Party of Canada who are disillusioned with Stephen Harper and Jim Flaherty over their Income Trust betrayal.

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