Thank you very much, Mr. Chairman, and my thanks to the committee members for inviting me here today to provide my province's views on income trusts, as part of your current examination of the issue.
I will begin by saying that I have written the federal Minister of Finance, expressing my support for the proposed tax fairness plans as announced on October 31, 2006. This letter is the latest in a series of correspondence we've been having regarding the income trust issue. As early as March 2006, I wrote to the federal minister, expressing Prince Edward Island's concerns. The letter reiterates my government's support for Minister Flaherty's proposed tax treatment of income trusts, including the four-year transition period for current income trusts. A copy of this letter, as well as those of similar letters from other provincial governments, were provided to the committee members by the federal minister on Tuesday.
I'm here today to further lend my support for the measures proposed in the new tax fairness plan of October 31, and I urge this committee to endorse this plan as it is currently proposed.
As Provincial Treasurer for Prince Edward Island, I have a responsibility to manage and protect the public finances as well as the economy of our province. We, like you, also have an obligation to provide public services, especially in the areas of health care, education, and infrastructure. It became abundantly clear in 2006 that the sudden increase in income trust conversions was becoming a threat to both.
In Canada, the income trust structure has been permitted for the last few decades, but their impact on Canada's corporate structure, the economy, and government tax revenues was relatively modest for that period. Until relatively recently, companies that converted to income trusts did so because that corporate structure fit their business model. However, in 2006, the number, size, and, importantly, the types of companies that were either becoming or were proposing to convert their operations to an income trust structure began to increase significantly. This was in large part due to significant tax advantages that income trusts had over traditional corporate organization. It was becoming increasingly evident that something had to be done.
I have personally seen and heard the pressures that corporate managers were under to convert their businesses to income trusts even when the income trust corporate structure did not make sense for their business model. My colleagues across Canada heard of similar pressures.
Minister Flaherty spoke Tuesday as well about the damaging effect that income trust conversions have had on the balance of the tax burden between both corporations and individuals. The rising popularity of the income trust structure and subsequent conversions was beginning to significantly shift the tax burden in this country toward the average Canadian. This situation needed to be rectified, and the tax fairness plan achieves that. We cannot have a sustainable economy in which corporations do not pay tax, and this situation would also not be socially just.
There is another very important issue relating to the distortional tax effects of income trusts at the provincial level that I would like to raise with the committee. This issue was less of a concern at the federal level, but very relevant to most provinces. It has been one of the primary concerns of my government with the income trust model.
When a company converts to an income trust, it no longer pays provincial corporate income tax to the province or provinces in which it operates. The resulting increased payments to trust unit holders are taxed provincially through the personal income tax system of the province in which the unit holder resides as long as they reside in Canada. If a company operated in one province and all of its unit holders lived in the same province, this would not be a significant issue. However, this is not the typical scenario for large companies in Canada. Many of the companies that have converted to trusts, or were planning to, typically operate in many provinces, but their unit holders, for the most part, reside in the larger provinces, as well as outside of the country altogether. When a unit holder resides in another country, federal non-resident tax applies to the income a foreign investor earns from a trust, but that same income is not subject to tax in any province. In contrast, the dividends that a foreign shareholder of a Canadian corporation receives are paid out of corporate income that has already been taxed federally and provincially.
This situation has had a severe detrimental effect on smaller provinces in particular, as they have seen the corporate tax revenues from some of their largest corporate taxpayers dry up, while the personal provincial income tax receipts are being collected by the larger provinces. This is less of an issue for the federal government, as a Canadian unit-holder will pay federal personal income tax regardless of which province they reside in, and non-resident unit-holders also pay their federal tax.
My case in point is a conversion of Aliant by Bell Canada Enterprises during the first half of 2006. Aliant was one of Prince Edward Island's largest corporate taxpayers, as well as a very significant one for all of Atlantic Canada. However, a vast majority of shareholders in the company do not reside in the region, so relatively little provincial personal income tax was recovered to offset the loss of provincial corporate tax.