CALGARY and OTTAWA -- Alberta is considering its own levy on income trusts -- as soon as next year -- to stanch the outflow of tax dollars from the oil patch, a senior cabinet minister says.
Greg Melchin, Alberta's Energy Minister and its former revenue minister, says the provincial government is concerned about the gap between the taxation of corporations and trusts, including the effect on the province's tax base.
Mr. Melchin said he has written to Finance Minister Shirley McClellan urging action on the trust issue, which has been seen as largely a federal concern. Mr. Melchin said the proliferation of trusts is a concern for Alberta as well, since it means a substantial loss to Edmonton because unitholders -- largely outside of Alberta -- are getting cash that used to be taxed inside the province. "It's going to shift a lot of it east and to the U.S."
Alberta has never publicly estimated how much corporate tax has been lost to the trust sector, but federal Finance Minister Ralph Goodale said last month that one Canadian province had told him privately that it was forgoing $350-million a year. Observers in the private sector say that province has to be Alberta, and Mr. Melchin said yesterday that the $350-million figure was a "plausible" estimate. (However, he said it is only half of the story, since Alberta also gains when investors purchase more trust units and when the trusts then put that capital to work.)
Mr. Melchin said the ideal solution is for Ottawa to lower the taxes on dividends to negate the advantages of the trust structure. But if that is not in the cards, he said Alberta will look at imposing a minimum tax on trusts that will mimic the federal withholding tax of 15 per cent on distributions to unitholders outside the country.
The goal would be to boost the tax take from non-residents of Canada, while accepting the outflow to other provinces. "We ought to have a withholding tax for foreign ownership, a provincial portion," he said.
There are technical and legal hurdles for Alberta. The province has the constitutional right to levy corporate taxes within its boundaries, but not outside the country. Mr. Melchin acknowledged that Alberta would need the co-operation of the federal government.
Both governments would have to avoid violating tax treaties with the United States that spell out the level of withholding taxes that can be imposed on trust distributions.
Calgary lawyer John Brussa, who helped to create the original income trust structure 20 years ago, said he believes the central issue in the debate over income trusts is the taxation of distributions flowing outside the country. "All roads lead to the non-resident."
There are ways to accomplish Alberta's goal without violating tax agreements, he said. One method would be to simply levy a minimum tax on a trust, but then allow it to distribute credits to unitholders that could be applied against Canadian income taxes. For Canadian residents who pay income tax, the change would mean a slight bit of paperwork. For others, the effective tax rate would rise, although they too would have credits available for use, if ever they incurred Canadian income tax.
Toronto-Dominion Bank chief economist Don Drummond said he is intrigued by the possibility of energy trusts being affected, since he got the impression during a trip to Calgary last week that the "complacent" oil patch believes it will be spared in any clampdown. "I told them I wouldn't have that belief myself."
Saskatchewan has already moved to tax trusts, introducing measures in the spring that subject resource trusts to the province's capital tax surcharge. That means trusts, like corporations, must pay between 2 and 3.6 per cent of the value of their production each year. Since that amount is deducted from revenue before expenses, it is effectively a much higher corporate tax, although the province's Finance Department said it is not able to pinpoint an equivalent rate.
Trust tax facts
How trusts don't pay corporate tax: A corporate subsidiary set up to run a trust's business pays a liability that reduces its tax bill, preferably to zero -- making those payments to the trust unitholders.
How reform might work: Alberta is contemplating a withholding tax that could see a minimum tax placed on trusts, with the effect being to raise the taxes that non-residents pay on distributions. One way to do this is to allow trusts to issue credits against Canadian income taxes, giving domestic unitholders the same payout, made up of part cash and part income tax credit.
© The Globe and Mail
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