CALGARY, OTTAWA -- Alberta's plan to consider taxing income trust distributions outside the country is winning cautious praise from the Investment Dealers Association of Canada.
The national organization for the securities industry says it supports the principle underlying that move, namely that the taxation of trust distributions shouldn't put Canadians at a disadvantage compared with non-residents.
"Canadian activities should be taxed in Canada, there's no reason why non-residents should get a break from that," said Jon Cockerline, director of capital markets at the IDA, adding that the specifics of any Alberta proposal would need to be considered.
The Globe and Mail reported on Saturday that Alberta is considering a move to introduce a provincial withholding tax -- similar to an existing federal levy -- on income trust distributions, as a way to stanch the outflow of tax dollars from the oil patch created by the proliferation of trusts.
Energy Minister Greg Melchin said that, while he would prefer that Ottawa lower taxes on dividends, Alberta could instead introduce its own tax on trusts that would target distributions outside of Canada.
The spread of energy trusts has transferred a large amount of corporate tax revenue out of Alberta and to eastern Canada and the United States, a fiscal leak that Mr. Melchin believes needs to be plugged. A withholding tax would not stop the leakage entirely, he acknowledged, but the overall effect of trusts on Alberta would then be neutral, given the benefit the province also reaps from them.
Any such tax will need the co-operation of Ottawa, which itself is considering whether to clamp down on the tax treatment of trusts. A review by the federal government, slated to end Dec. 31, includes a probe of the tax treatment of Canadian unit holders, foreign investors and tax-exempt investors of trusts, such as pension funds.
"Are the distributions being taxed in a fair and equitable way? You've got basically the three categories: taxable Canadians, tax exempts and non-residents. We're pretty clear that those are the groups, and, is the taxation, in that context, fair and equitable? And I think that's part and parcel of what the considerations are," a Finance Department official explained.
One of the options under consideration since the beginning of Ottawa's review is a tax on income trusts distributions. Ottawa has made no decisions on whether to proceed with such a tax, but analysts have pointed out that such a levy, if it were refunded to Canadian residents, but not foreign investors, would also succeed in recouping more distributions leaving Canada.
The IDA plans to submit a position paper as part of the federal government's review of the tax treatment of income trusts. Mr. Cockerline said the association is still fine-tuning its official stance, but added that the IDA is worried about the uncertainty surrounding the trust sector. He said he does not think that changes to the withholding tax would deal with the entire range of Ottawa's concerns.
Stephen Probyn, chairman of the Canadian Association of Income Funds, said his group continues to believe that income trusts are not a threat to Ottawa or to the Canadian economy. As for Alberta's consideration of a trust tax, he said the province is being forced to react to possible moves by Ottawa. The Alberta government -- particularly Mr. Melchin when he was revenue minister -- have been supporters of income trusts, he said, adding that the province was the first jurisdiction to pass legislation granting limited liability to unitholders.
© The Globe and Mail
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