Trust bust

I've not had a chance to look at this very closely, but on first glance it doesn't look good:

Federal Finance Minister Jim Flaherty has announced tough new rules designed to curb the growing corporate move toward income trusts.
Mr. Flaherty says the trend is worrying, and if left unchecked could shift billions of dollars of the tax burden onto individuals and away from corporations.
“This trend has now moved into the core of our industrial and knowledge-based economy,” Mr. Flaherty said at a surprise news conference late Tuesday, shortly after financial markets had closed.
“It is a trend that has caused me growing concern. If corporations don't pay their share of taxes, this tax burden will shift onto the shoulders of hardworking individuals and their families.”
The minister said the move toward income trusts has been so swift and dramatic that it threatens Canada's economy, as well as government priorities such as health care and tax relief.
“Left unchecked, such corporate decisions would result in billions of dollars in less revenue for the federal government to invest in the priorities of Canadians,” Mr. Flaherty said.

This is typical Conservative demagoguery, in the sense that it is now typical of them to ape the NDP. No corporation ever paid a dime of tax. All taxes are paid by people: the people who own the corporation, or the people who work for it, or the people who buy its products. A corporation is just a piece of paper, a legal document on file at the registrar's office.

The reason income trusts are such a pressing concern is not because they are an inferior form of corporate organization (that's for management and shareholders to work out between them) or because of the cost to the treasury. It's the combination of the two: the incentive for the corporation to organize itself a certain way, not because it makes economic sense, but purely for the tax savings.

Rather than ban income trusts, the solution is clearly to equalize the tax treatment of trusts and ordinary corporations. There are two ways to do this: lower the tax on the dividends corporations pay their shareholders (which face a higher effective rate because of the tax already paid at the corporate level, even with the dividend tax credit) or raise the tax on the interest trusts pay out. The Martin Liberals went some way down the former road. The Conservatives appear to have taken the latter, though there is some mention of a half-point cut in corporate tax rates five years out.

But that's just my first cut at it. Should probably read the plan first. AFTERTHOUGHT: Still, say this for them -- I don't think anyone saw this coming. AFTERTHOUGHTER: As I feared, I spoke too soon. As Finance's background paper explains, the tax differential for most investors had already been closed as of the 2006 budget (I had thought there was still a gap). The problem is foreign and tax-exempt investors -- for example, those holding shares in their RSPs -- for whom the personal tax "layer" of the combined corporate-and-person tax rate on investment income ceases to be a factor. The advantage to them in holding income trusts is strictly owing to the fact that income trusts pay no corporate tax. So the only way to level the playing field was to tax the trusts like corporations, and tax the payments unitholders receive like dividends.