Poor Excuses for the Finance Minister’s Actions

Bay Street income trust analysts are having a tough time with Federal Finance Minister Jim Flaherty. Apparently, our fearless financial leader is using the Access to Information Act as a shield against having to release key data used to calculate how much income trusts are costing Ottawa in lost tax revenues. Mind you, loss of tax revenues was the main reason why Conservatives pulled a 180-degree spin from their election promises and decided to impose taxes on trust distributions.

And how is the Finance Minister justifying using the Information Act? Well, he says that releasing this data and the resulting calculations would be detrimental to Ottawa’s financial interests, that it could adversely impact how the country’s economy is managed, revealing certain “trade” secrets.

To me this reads like a drugstore variety novel in which there are poor excuses for the protagonist’s actions. Why else would Mr. Flaherty refuse to release this information other than, perhaps, (oh, do I dare say it?), that the reasoning behind the decision to tax trust distributions cannot really be justified?

Let me remind you of Ottawa’s claims. Because income trusts pay negligible corporate taxes, their EBIT (earnings before taxes) is a much closer figure to net earnings than is the case with regular corporations. This enables the company to streamline most of its profits into distributions.


But, on last Halloween, Ottawa said, (well, it actually screamed), “Hey, hang on a minute! We’re hemorrhaging money here!” As per Minister Flaherty’s claims, every year federal coffers are deprived of about half a billion dollars in tax revenues from income trusts. And, if BCE Inc. and Telus had been given a chance to convert, that “leakage” could have gone up to about $800.0 million.

But, when asked to support their claims with factual data, the Finance Department is not at all loud. Ottawa’s spokespersons are even more timid when they are confronted with income trust experts’ calculations, which largely reject Ottawa’s calculations.

So who is right and who is righteous? Well, it will matter very little in the end. The income trust bill has been passed into law and even if there is a change in government, I don’t remember Ottawa, or any other government for that matter, ever going back on a piece of legislature that increased its tax revenues. Canadians are sure to remember the GST saga.

So, short of Ottawa winning some miracle government-size lottery, income trusts will have to find a way to survive in the new tax environment, experts will eventually have to put their calculators away, and investors will have to accept lower trust income in their portfolios. There are 13 pages of calculations in Jim Flaherty’s report supporting the bill. Everything else being equal, the public is not likely to see them fully disclosed until everyone forgets what the quarrel was even all about.