Income Trusts

Fresh from a four day caucus retreat in St. John’s, NL, Stéphane Dion’s Liberals have hinted that their party would consider scraping a moratorium on the creation of new income trusts if they win office – but perhaps only for a limited number of industries including the oil sands.

Income trusts are investors’ greatest friends. By allowing firms to pass profits down to shareholders, thereby avoiding most forms of corporate taxes, they allow for monstrous dividends that easily outperform those of traditional publicly trades corporations. The decision to proscribe them was a good one. A tax system with a loophole of that size is by definition inefficient, and, in the case of income trusts, encourages firms to pass pay dividends instead of reinvesting profits.

But the Liberal proposal still has some merit, provided that it only apply to certain industries like the oil patch where the government already makes profits from drilling royalties. It’s a matter of keeping Canadian capital markets competitive. In the globalising world, we must increasingly ask ourselves the question: why would foreigners choose to invest in Canada over another country? At the moment, they have no particular reason for doing so. Canada has its stock exchanges, but they are of the conventional sort that can be found in every developed country. As one investor pointed out: “we really don't have a Canadian capital markets story. We don't have an AIM [London's Alternative Investment Market], we don't have a Nasdaq. What is particularly distinct about the Canadian capital markets?

There’s well publicised court proceeding going on in the States involving an angry stockbroker who sent Finance Minister Flaherty death threats after he announcement the moratorium on income trusts. He had invested millions on his clients’ money in stocks of Canadian income trusts, and had seen their value plummet. But let me ask you this: if these trusts hadn’t been allowed, were would these millions have gone? Not likely to Canada.