CALGARY -- The easiest answer to the trust taxation question is to increase the burden on investors from the United States, says the chief of Precision Drilling Corp., whose shareholders approved a trust conversion yesterday.
Hank Swartout, Precision Drilling chairman, president and chief executive officer, said U.S. investors holding Canadian trusts face a far lower tax bill than Canadian investors.
"U.S. shareholders win big-time with the trusts. A 15-per-cent [with]holding tax, I mean we're paying 40 per cent as a person, why should they have 15 per cent?" Mr. Swartout told reporters after a 10-minute meeting to approve the Precision conversion.
"Let's be realistic, something has to come to pass sooner or later to handle that, wouldn't you agree?" he said. "It's just kind of basic."
About 93 per cent of votes cast by shareholders supported Precision's conversion to a trust. About four million shares -- 7 per cent of the total -- were cast against, and about 20 per cent of those are held by Ontario Teachers Pension Plan, which last week said it was against the conversion.
In the intensifying debate over the tax status of trusts -- which now are mostly untaxed -- the idea of increasing the tax burden on U.S. investors has been the one solution that many people have agreed upon, including those in the trust business.
It is a viable option for Ottawa, which has expressed concern about revenue lost through "tax leakage," though implementing it could be tricky. Article 22 of a 1980 tax treaty between Canada and the United States indicates that income from trusts cannot be taxed at more than 15 per cent. However, Canada could tax distributions from trusts that have been classified as return of capital rather than as income.
Mr. Swartout didn't have a comment on what would happen to Precision Drilling Trust -- set to begin trading Nov. 7 -- if the federal government imposes taxes on trusts.
"There's some things being thought of and said, but I have no idea what's going to happen. I certainly can't read Ottawa's mind," Mr. Swartout said.
Gene Stahl, president of Precision Drilling Trust and Mr. Swartout's son-in-law, said the risk of taxation had been considered. "The board evaluated that, and decided that we would carry forward with the trust," Mr. Stahl said to reporters.
Shares of Precision rose $1.30 or 2.5 per cent to $54.30 yesterday on the Toronto Stock Exchange.
© The Globe and Mail
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