Thank you.
Mr. Chair and members of the committee, on behalf of Canada's 71,000 chartered accountants, thank you for the opportunity to speak to you today on the issue of income trusts.
One of the goals of Canada's chartered accountants is to enhance the quality of financial information that is used in the private and public sectors to measure and enhance organizational performance. We do this through our support of the setting of both accounting and auditing standards, as well as providing guidance on a range of financial reporting issues.
In this context, last fall we issued guidance for income trusts that recommended standardized reporting for the term “distributable cash”. This guidance calls for enhanced disclosure of the strategies used by management to determine what percentage of a trust's cash is distributable to investors. The focus is on two specific questions: where did the cash come from, and is the cashflow sustainable? The guidance addresses the concerns of regulators, analysts, and rating agencies that there was no consistency in this reporting and is important for the millions of Canadians who own or acquire trust units.
While our focus in the income trust area has been on financial reporting, I will focus today on the tax issue. In my brief remarks, I will set up my perspective on the key points in this debate. So let me begin.
First, some key principles are that the tax system should promote the growth and competitiveness of our economy, generally through the broadest base possible and lowest possible rates; second, the tax system should be neutral; and third, the tax system should be fair.
The tax system, as it related to income trusts before October 31, did not meet these criteria. Why? There are two reasons. First, the tax system was not neutral, as there was a significant incentive to use a trust, rather than a corporation, for tax purposes, and business structure should be created and selected for good business reasons, not for tax reasons. Second, there was tax leakage with respect to both the units held by tax-exempts and non-residents, and this leakage was growing.
The most important of these two points is that the tax system was not neutral. There was a strong incentive—i.e., a tax saving—for businesses to convert into trusts. This tax saving was not available to corporations. This was neither a stable nor neutral tax system. Accordingly, action had to be taken, and the government should be commended for taking action. The status quo was not an option.
The next issue is whether the solution proposed on October 31 was the right one. In my view, it was an important step in the right direction that had to be done now. Why? First, it levelled the playing field between corporations and trusts; and second, it addressed the tax leakage issue.
That said, I believe there's one additional change that could be considered and should be studied by the Department of Finance in the future to make the system even more neutral and more fair, because improving the tax system is always a journey.
Let me explain. I believe trusts have a role to play in rounding out Canada's capital markets. Trusts are appropriate for some businesses. Trusts offer a source of financing that might not otherwise be available, especially for smaller and mid-sized companies.
I also believe it is important to put the growth of income trusts into context. They were arrangements to avoid the double taxation that still exists in Canada's tax system.
By double tax, I mean the fact that corporate and personal taxes are not fully integrated in Canada. The ultimate tax burden is different, depending on which business structure is chosen. Our tax system is partially integrated, for example, for individual Canadian investors in higher tax brackets, but not for all Canadian investors and certainly not for tax exempts like pension plans and RRSPs.
A solution that would make our system fully integrated so there's no discrimination among different Canadian investors would be to make the government's proposed tax on trust distributions, as well as the dividend tax credit, fully refundable to all Canadian investors, including RRSPs and pension plans.
There are a number of issues the Department of Finance would have to consider in studying this issue. These include the fiscal and interprovincial implications; whether there would be the same need for sector-specific exemptions like REITs; and ensuring mid-sized and small businesses that want to go public still have adequate sources of financing.
We believe this option should be considered in the future, along with other options, to make our tax system even more effective in supporting the growth of Canadian businesses.
In conclusion, the government needed to take action on the income trust file. Secondly, the government's proposal is a significant step in the right direction. These changes need to be implemented now. These proposals level the playing field between trusts and corporations and address the tax leakage issue.
Finally, to make Canada's tax system even more competitive, the Department of Finance should study in the future the option of making the proposed tax on distributions, as well as the dividend tax credit, fully refundable to all Canadian investors, including RRSPs and pension plans.
Thank you.