Thursday, November 02, 2006
So wait a minute, when the Liberals faced the problem of corporations dodging taxes by using income trusts, their solution was to cut the dividend tax, and now the Conservatives are the ones who are actually doing the sensible thing and eliminating the huge gaping hole and forcing BCE and Telus and all of the Alberta oil extraction companies that are currently set up that way to suck iit up and pay their fair share of taxes?
I still hate the Cons, but this was pretty big of them. With the Liberals still remaining the party of Canadian big business and Bay St. I wouldn't imagine them actually doing this. On the other hand, hopefully the new rules against corporate campaign donations might free both parties a little so that they might act more in the best interest of voters and not donors.
But they're likely so used to doing the opposite by now that it just seems natural.
Quick background for those scratching their heads: An income trust is a special corporate structure where the shareholders draw profits directly from the company, where the company doesn't pay corporate taxes on their own profits. Rather, the owners, mostly pension funds and institutional investors, receive a large share of the earnings and the person who ends up receiving the profits pays personal income tax on this money. The change shifts the tax burden from individuals onto corporations, but takes away a big form of income generation that pension funds have relied on pretty heavily. A normal corporation has less incentive to pay out profits in the form of dividends and instead use the money on internal R&D and acquisitions, since re-investments aren't taxed and it can go towards growth and innovation. Income trusts tend to be more stable, far less sexy companies that generate a steady income but don't really do much beyond their core business. The problem is the large tax hole that Bell Canada and Telus were looking at exploiting by turning their whole businesses into income trusts.
There is fear now that this removes the incentive for these companies to remain in Canadian hands, but I would argue that now that huge pension funds like the Ontario Teachers fund won't e so tied up in these income trusts that this frees up more capital to be spread around the Canadian market, making Canadian ownership more robust generally. These fund managers should have hedged against this announcement as soon as the tax man started sniffing around BCE and Telus's future plans, the big losses on the market today show that a lot of people weren't paying attention, or were counting on the Conservatives to be just as corporate-friendly as the Liberals and not do anything to derail the easy profits train.
Update: God damn why the hell does CBC have a right-wing robo-commentator on every week on Island Morning? Michael Holinka I think his name was, was on and said "what we need to do is tax all corporations at 0%." I'm pretty sure the Fraser Institute doesn't even have such an extremist point of view.