In an appearance on Monday before the House of Commons Finance Committee, George Kesteven, president of the Canadian Association of Income Funds, intends to call on the federal government to amend draft legislation pertaining to the taxation of income trusts.

Kesteven will stress that “clear gaps” exist in Bill C-52, the legislation that imposes a punitive 31.5% tax on income trusts, and ask that the following clarifications be made:
– clearly define how income trusts will be treated in legislative terms during the transition period to the new tax; and
– ensure that there is a legislative framework in Bill C-52 to facilitate conversion to corporate status on a tax-deferred basis similar to subsection 85(1) of the Income Tax Act.

“We respectfully submit that the Finance Committee follows its own advice to the government earlier this year in its report on income trusts, by producing a separate piece of legislation that is comprehensive and includes the guidelines and conversion rules – and is not so broad as to have application to partnerships that are not listed on a public exchange,” Kesteven will say in his prepared remarks. “Only then would all Parliamentarians and Canadians have a clear opportunity to see this issue on its own merits and properly address the income trust issues in this bill.”

Kesteven will also highlight a litany of “unintended negative consequences” that have impacted Canada’s income trust sector since Ottawa announced the new tax last Halloween. These impacts include the destruction of billions of dollars of investor value; impairing valuations, cutting off access to capital; and prompting the takeover of close to 15 trusts in the last six months, with more than 20 other trusts announcing that they are currently for sale.

“These consequences do not amount to tax fairness but rather the wholesale destruction of a valuable structure in the Canadian economy,” Kesteven will state. “It is not tax fairness to impose a 31.5% tax when corporations on an effective basis pay only 5% to 10%.”

Kesteven will also take issue with claims by government officials that they were prompted to impose the new tax on income trusts to stop “tax leakage.”

“It is our contention that federal and provincial tax revenue will not be increased in any way under this Bill,” he will say. “The playing field has not been leveled but in fact has been tilted in favour of private equity, foreign equity and pension funds – none of which pay taxes to governments, federal or provincial… At the end of the day, it is not tax fairness when Canadian investors have been disadvantaged and cut off from an investment vehicle that provides them with the cash flow needed for retirement.”