Trust yourself?

Posted by Michael Kane on February 3, 2009

I recently asked viewers to send in blog topic ideas and one citizen of Business News Nation said he wanted to know my opinion on income trusts.

That got me thinking about the so-called Halloween Surprise – Oct. 31, 2006 – when federal Finance Minister Jim Flaherty revealed a stunning reversal of government policy by announcing income trusts would be taxed just like ordinary corporations.

Until that point, investors had been pouring money into trusts, which were expected to receive special tax treatment and distribute most of their earnings to unitholders.

But what frightened the government was the prospect of some huge Canadian corporations – huge tax-paying corporations – converting to trust status to avoid paying those taxes. It was the intent of BCE Incorporated to convert into an income trust, an event that would have been a disaster for the government. BCE pays enormous corporate taxes and Ottawa did not want to lose that revenue stream.

OK, that's the history.

Here's what I wonder: suppose the government had not reversed its policy. Suppose it had yielded to the cries of investors who felt they'd been duped.  Suppose the government had decided to be fair and stick to a policy that would have seen the loss of billions in tax revenues.

Then the global banking community freezes and shatters.

We all hear the gnashing of teeth over Ottawa's plans to run a deficit, a necessary situation for us now. But imagine the jackpot we'd be in if Canada's largest tax-paying companies had been allowed to avoid most of those taxes.

The hole would be much deeper… the muskeg much stickier.

A lot of people lost a lot of money when the income trust sector sold off following Oct. 31, 2006, and the way it happened is regrettable.

But, without the Halloween Surprise back then, we could very well be living a nightmare now.

 

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