Good morning. Thank you for the opportunity to present to you and your committee today.
At the outset let me emphasize that I am a strong supporter of lower taxation policies in both the corporate and personal sectors and generally believe in free markets with less government intervention. At the same time, I'm generally supportive of the government's pursuit of policies that level the playing field from a tax perspective between trusts and corporations.
A key reason for this view is that I believe that fundamentally important decisions such as corporate or ownership structures should not be exclusively or primarily driven by tax factors. This perspective is not dissimilar to the notion that investment decisions should not be exclusively or primarily driven by tax factors.
To underscore this point, one might recall quotes in the financial press over the past two years from CEOs of major Canadian public corporations considering the transformation from a corporation to a trust, along the lines of “I have some reluctance to move to a trust, but the tax savings are just too significant and compelling.” My concern, and the reason CEOs have made comments like this, is that a corporate structure provides much greater flexibility for boards of directors and their management teams to manage the business affairs of the entity than do trusts.
This is particularly the case with respect to the rules governing trusts that require the payout of 100% of their taxable income in order to avoid the payment of tax at the trust level. Of course, many trusts pay out distributions that exceed their taxable income in order to be “competitive” from a yield perspective.
Accordingly, many business models may not be best suited to a trust structure, but they may be drawn to this structure simply because of the tax savings. As a result, trusts may have less internal capital available to pursue growth initiatives or reinvestment in capital expenditures. This could be quite detrimental to the long-term interests of the entity or the economy in general. At the same time, the substantial payout of a trust's cashflow positions it to be much more reliant on investment dealers, and in turn, institutional and retail investors to fund these growth and other capital initiatives.
Some stakeholders in this debate have argued this as being a good thing. I do not agree. These comments reflect an overplayed cynicism regarding the role and responsibility of corporate directors versus the influence of shareholders more directly. For example, if a trust needs to raise capital to pursue growth or reinvestment initiatives at a time when investor interest may have temporarily rotated to a different industry sector that is more in favour, or if the institutional unitholder base of that trust is experiencing redemptions from its own fund, the trust may be stymied from tapping capital markets at a critical time, and relative to a corporation, would not have the same availability of internal funds to pursue these initiatives. This undue reliance on and influence of capital markets on the management of a business is another key reason that CEOs and their boards have been reluctant travellers on their path to transform to trusts.
To move forward, what capital markets need, perhaps more than any other dynamic, is certainty. The rules upon which the government's proposals will be put in place need to be clarified and implemented. As one example, the government stated its intention to provide exemptions for REITs, real estate investment trusts, which would enable Canadian REITs to operate in a similar fashion to REITs in other jurisdictions, notably the United States. I strongly agree with this proposal, yet much uncertainty and confusion exists with potential divergence between the stated goals and proposed details of implementation.
To highlight this, I have brought and tabled the publicly available prospectus of a very recent public offering of a Canadian REIT. In it is some language, which I've highlighted for ease of reference, that may be unnecessarily alarming to investors. My recommendation in this regard is that if the public policy intent is to provide an important exemption for REITs, then let's get on with it and do so. Let's stop worrying about refrigerators, parking lots, and fences, rather than the bigger picture factor of property ownership and management.
Finally, it is folly to believe that there are not alternatives for investors, including seniors, to receive predictable yield-driven returns from investments that provide cashflow in excess of GICs or bonds. One example is convertible debentures, which not only provide a regular distribution of interest income, together with upside potential, but compared to income trusts would generally be a less risky investment, since debenture holders have an entitlement to a corporation's cashflow in preference to equity holders.
With respect to the most basic question of tax leakage, while I personally would place more faith in the work done by individuals such as Jack Mintz, as well as the finance department's analyses, than other analyses proferred—some of which have even suggested a net increase in overall taxes paid—I believe this question should be considered on a more fundamental and perhaps intuitive basis.
The responsibility that a board of directors holds is to consider the interests of the corporation not in isolation of its shareholders, but rather to serve the interests of its shareholders.