Federal finance minister Jim Flaherty’s so-called “tax fairness plan,” which will effectively kill the public income trust market, is a good example of both bad legislation and equally bad advertising.

“Fairness” is a very evocative word, and those in Ottawa who are big on spin know this. However, this particular spin is painfully deficient when it comes to anything remotely resembling fact.

The debate about income trusts is based on quantifiable truths. All five provisions of the Notice of Ways and Means Motion, the enabling legislation, are based on quantifiable and verifiable constructs. Yet our finance minister has, to date, resisted all requests for the release of studies and analyses that lie at the heart of these constructs. Applications made by prominent investment research analysts under the Freedom of Information Act have revealed nothing and have, therefore, been in vain. Without factual evidence, these five provisions are nothing more than mere assertions.

Are these assertions sufficient grounds for the loss of $35 billion of Canadians’ hard-earned savings? Are they grounds for the loss of an important investment vehicle that many Canadians willingly embraced as a prudent choice for retirement saving and for providing retirement income?

If the situation weren’t bad enough, two of the five assertions that underlie Flaherty’s tax policy are predicated on the notion of tax leakage. It can easily be proven that it is Flaherty’s flawed analysis, not income trusts, that causes tax leakage. A 2005 study published by HLB Decision Economics Inc. , entitled Tax Revenue Implications of Income Trusts, proves this. Unlike the widely reported analyses of self-acclaimed experts, HLB actually sat down with the officials at the Department of Finance to undertake a complete bottom-up analysis of this key matter.

In doing so, HLB compared its methodologies and assumptions with those of Finance. Each was able to replicate the other’s results in all respects except one — the tax treatment of retirement savings accounts. Finance considers retirement savings accounts to be tax-exempt, assuming no taxes are paid on withdrawals.

This, we know, is patently false. In fact, retirement income is the second-largest source of personal income to Ottawa, second only to income from employment. In 2004, Canadians paid $9 billion in taxes on $54 billion in retirement income. Therefore, to build a construct on the false belief that retirement savings are not taxed renders that construct to be a hollow one.

It gets worse. Flaherty must think Canada is an economic island unto itself, free from any of the forces that govern the global economy. As such, Flaherty has given no thought to the many unintended yet foreseeable consequences of his painfully misguided policy.

Flaherty’s protestations that Canada will not become a “nation of coupon clippers” will do nothing to abate Canadians’ need for retirement income. Denying Cana-dians the use of income trusts — this very “made in Canada” investment choice that they had willingly embraced — will only force a flight of investment capital outside Canada to other markets with near-investment alternatives.

Unlike the U.S., which Flaherty is fond of pointing to, Canada does not have the enormous U.S. high-yield market, nor do we have the tax-free municipal bond market or the master limited partnership market to fall back on. And, even though Flaherty would lead us to believe the MLP market was shut down in 1987, today it is a vibrant and growing market with total capitalization of US$465 billion.

For a further in-depth explanation of the many other unintended consequences of Flaherty’s tax fairness plan, visit the Canadian Association of Income Trust Investors’ Web site (www.caiti.info). There, among other things, visitors can learn how the threat of hostile takeover of the income trust market by foreign private equity has had a hollowing-out effect on Canadian business. You can also read about the gross inequity Flaherty created with the special “carve out” he granted to Canada’s largest pension plans — which, incidentally, was not part of the Liberals’ brand of fairness. The public-service workers who concocted this “carve out” are beneficiaries of this exemption through their participation in the public-sector pension plan. Not being slow to take advantage of this exemption, the Public Sector Pension Investment Board will make good use of it in its recently announced purchase of a 36% stake in Telesat Canada from BCE Inc. Telesat will be the financial equivalent of an income trust and will be held in the pension plan’s growing private-equity portfolio.

@page_break@One question stemming from all this is how something that is being denied to the average Canadian on the grounds of its presumed negative effect on Ottawa’s tax base is allowed to persist for the benefit of those employed in the public sector.

Perhaps that is as good a point as any to begin the “debate” on income trusts. IE



Brent Fullard is president and CEO of the Canadian Association of Income Trust Investors.