Thank you very much for the opportunity to present today.
I'm a chartered accountant and have been a research analyst in the trust sector for over seven years. My work is focused on trust structure, taxation issues, and evaluations. Like Gordon Tait, I am a research analyst, and my comments will represent my own views and not necessarily the views of the Royal Bank of Canada.
We have looked at the trust proposals put forth by the federal government and analyzed the expected financial impact of the proposals in the hands of investors, primarily Canadian investors. We've compared the trust proposals against current corporate tax legislation.
During 2006 the federal government took a step in the right direction when it eliminated double taxation of Canadian corporate dividends received by Canadian individuals. Unfortunately, double taxation of Canadian corporate dividends still exists in Canada today, and with the federal government's proposed trust taxation, a second instance of double taxation of Canadians will be introduced. We think the double taxation of Canadians should be eliminated because it is unfair.
Double taxation exists when an investor receives less income after tax than if the income had been received directly and then taxed. For example, if you receive a dollar of income and your tax rate is 30%, something is wrong with the system if you end up with less than 70¢. When that happens, rational investors look for ways to ensure they get their 70¢, and not less. Forget everything else you've heard today about the trust and alleged loopholes; trusts exist today because Canadians were fed up with receiving less than their fair share.
How does double taxation still crop up today? Quite simply, a Canadian corporation paying a dividend pays that dividend after corporate income taxes. Canadian shareholders receiving that dividend expect to be given a dividend tax credit for the corporate taxes paid on their behalf by the corporation.
Today, Canadian individuals are given a tax credit to ensure double taxation is eliminated. However, Canadian pension funds are not given a dividend tax credit. As well, although the Canadian pension fund makes distributions to the Canadian pension beneficiaries with after-tax dollars, that same Canadian pension recipient is subject to full taxes on the pension benefit; no tax credit is passed along to the Canadian pensioner, and taxes are paid a second time on that same income.
The problem of double taxation does not exist with interest income, so why should it with dividend income? Consider that interest paid by a Canadian corporation or government is paid without first being subject to tax. A Canadian pension fund can then distribute the pre-tax income to Canadian pension beneficiaries, who will then pay tax on the interest income for the first time.
From this example, you can understand that from the perspective of the Canadian pension beneficiary, the dollar is worth less if it starts off as Canadian corporate income rather than if it starts off as interest from a Canadian corporation or government. In this instance, a dollar is not a dollar because it's subject to double taxation.
The proposed trust taxation will do the same thing to trust distributions. The distributions will be subject to double taxation in the hands of Canadian pension beneficiaries. We typically refer to Canadian pension beneficiaries as pensioners.
What's the solution? It is simple--and we have to thank Professor Jack Mintz and Price Waterhouse Coopers for their collective work on this: it is to provide all Canadians with a full tax credit for taxes collected from a Canadian corporation on dividends paid, and a full tax credit for taxes collected from Canadian trusts on distributions paid. For some low-tax-rate Canadians, this will mean an actual tax refund; for Canadian registered pension plans, this will mean a full tax refund. In this way Canadians can be assured they will not be taxed twice on income received from their retirement funds and plans. We believe our amendment will help make the current proposal fair.
Canada, like other countries, has underlying problems with underfunded pension plans, and we can not understand how policies that effectively tax Canadian pension plans can possibly solve this problem. The Minister of Finance talked about having cash today to pay for the bills today, but we also must keep an eye to the future so that we do not saddle our children with financial problems we know of today. That is not fair.
The trust market has been a viable source of capital for many small and medium-sized Canadian businesses. Trusts are part of our everyday life, and Canadians buy goods and services from them daily. Trusts employ thousands of hardworking Canadians who take pride in their work and in their businesses. Trusts can live alongside corporations. Our amendments will put trusts and corporations, as well as Canadian investors, on equal footing. We believe trusts can and will succeed if they're given a fair chance to prove themselves. Let us not let Canadian businesses fall prey to those who conceive the values.
We believe our amendments are simple and fair. We have other recommendations we believe will help amend the current trust proposals on technical issues, and we'd be pleased to provide the information to the committee for consideration.
Thank you.