Trust tax an election issue

As I predicted a couple of weeks ago, the Liberals are trying to make income trusts
an issue in the election campaign. As part of their platform, which was unveiled
on Sept. 22, they resurrected the trust tax alternative they originally floated
a few months after Finance Minister Jack Flaherty announced he would effectively
shut down the sector on Halloween, 2006.

The Liberal plan calls for a 10 per cent trust tax (down from about 30 per cent under the current
law) which would be refundable to Canadians. Existing trusts would be grandfathered
but there would be a moratorium on new ones at least for a while.

There had been virtually no mention of income trusts in the campaign prior
to the platform announcement. But the revival of the old pledge had the desired
effect, prompting several newspaper articles, an editorial in The Globe and
Mail, and even earning a mention on CBC’s flagship newscast, The National.

The question is: does anyone still care? There was a lot of anger at the time
the tax was announced but almost two years have gone by and it would seem that
most people have moved on. Will the Liberal Party’s attempt to rekindle the
sense of outrage that was so widespread in 2006 translate into any votes today?

The National found one voter who said he would cast his ballot for the Liberal
candidate in his riding because of their trust policy. But are there enough
like him to make any real difference?

Realistically, there appears to be very little chance that the Liberals will
gain power on Oct. 14, at least if the polls are any guide. So we should assume
the tax will go ahead in its present form. However, there is one move that the
Conservatives could make that would ease the pain a lot and I would like to
see it debated before we vote.

As things stand now, the biggest losers from the tax will be foreign investors
who own income trusts and Canadians who hold them in registered plans (RRSPs.
RRIFs, etc.). Payments made from trusts in non-registered accounts will be eligible
for the dividend tax credit once the tax takes effect in 2011. As a result,
the after-tax impact on those investors will be negligible.

But distributions paid to registered plans do not qualify for the dividend
tax credit. This means retirees and those saving for retirement will bear the
full brunt of the tax and then some. The payments going into their accounts
will be lower because of the application of the tax on the trust and they’ll
have to pay tax again when they withdraw the distributions from the plan. There
is something seriously wrong with this picture.

Mr. Flaherty could create a level playing field, and perhaps win himself some
votes, by announcing that he intends to make the dividend tax credit applicable
to eligible payments made to registered plans. Yes, there is some complexity
involved but what else is new when it comes to the tax system? Not only would
such a move go a long way towards placating those who are still upset about
the tax but it would be fair, equitable, and would cost nothing for at least
the next couple of years. At a time when the government is cash-strapped, it
should be a no-brainer.

This article originally appeared in the Internet Wealth Builder,
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