By Goodwin Ginger


On the face of it the Conservatives’ move to tax income trusts appears to be a revolutionary move which indicates an end to investor’s blackmail of the public purse via regulatory arbitrage. Such a conclusion we think would be remiss.

If you read the financial press carefully particularly the article in todays Globe and Mail you will discover that the real reason behind the move was that CEO’s did not like trusts. Indeed, they were apparently dancing in the halls over at BCE when they heard the news. Why? Because the trust structure gives unit holder much more power to force CEO’s to hand over retained earnings. Retained earnings are a key source of corporate capital. Without retained earnings CEO’s are severely restricted in their degrees of freedom. What is clear is that Conservatives were being lobbied by corporate heavy-weights to close the tax advantage of trusts so that shareholder demands to convert could be effectively countered.

Surely this is a good thing for Canada and fairness in the tax system no matter what the motive you must be saying. Do not be so sure. The other shoe has yet to drop and when it does the NDP is going to realize that they were, along with everyone else, sucked into a very shrewd and cynical move by the Conservative government.

The NDP is now on record as supporting the conservative move to bring fairness to the tax system by taxing trusts. What will the NDP have to say when the conservatives announce their other major piece of tax reform legislation: an across the board massive decrease in capital gains. Current estimates place the value of the Conservative capital gains tax proposal that sits on the drawing board at between 2.5 and 6 billion dollars annually.

To put things in perspective the most generous estimate of the cost to government from trusts was 1.5 billion dollars. The capital gains will be a much broader gift to owners of capital then any potential payoff from trust conversion and ownership ever was. Reducing capital gains will presumably effect every single asset class and as such will make the tax loss from trusts look like chicken feed. What will the NDP say when this major piece of legislation hits the floor? They will end having to say that it represents a massive giveaway to capital. But then all the financial press along with the government will have to say is that the NDP hates tax cuts and then point to the old saw that decreased taxes on capital stimulate investment.

In the end the Conservatives are going to be dishing out massive slices of pie to the owners. Still feasting on their populist cake the peasants will be too distracted to notice.