The last time Ralph Goodale took on the pension funds over income trusts, the Finance Minister found himself in an unexpected battle from which he quickly retreated.
With a dust-up over trusts again in the offing, the Ontario Teachers Pension Plan is making sure it gets in the opening shots against Ottawa.
Mr. Goodale has launched a consultation on income funds that runs through the end of the year, and the influential $88-billion teachers' fund wants to ensure that pension funds and Registered Retirement Savings Plans don't bear the weight of any changes to the system.
The government is said to be considering two possible tax changes that could hurt retirement savings: a cap on pension fund holdings of trusts -- an idea that was introduced then dropped in last year's federal budget -- or a tax on income from the sector that would be paid by pension funds and RRSPs.
Teachers' senior vice-president James Leech said both concepts can only hurt a retirement system that's actually working well.
"Levies on retirement savings would fly in the face of a successful public policy to get people to save for retirement, something Canadians do far better than Americans," Mr. Leech said. "If you say trust income is the one form of retirement income you will tax, that's the thin edge of the wedge in trying to tax RRSPs and pensions."
An estimated one million Canadians own income trusts directly and indirectly, and an increasing number of pension funds are expected to buy into the $160-billion sector as trusts join the benchmark S&P/TSX equity index, beginning next month. Ottawa is concerned that if more companies become tax-efficient trusts, its revenue will shrink. A number of market participants have said that making trusts unattractive to pensions would slow the sector's exponential growth and halt conversions, as one of the country's biggest pools of capital would no longer be buying trusts.
"Step back and think about the goal. Do you want to tell the pension plans that they can't invest in the best possible assets, that they have to always put up with suboptimal results?" Mr. Leech asked.
"Trusts have allowed many small to mid-sized Canadian companies to raise capital that they could not otherwise access. These companies are employing an increasing number of people," Mr. Leech said. "By capping trust holdings, the government would be saying it doesn't want the pension funds to back these Canadian companies."
The Teachers fund owns $2.5-billion worth of trusts and generated $900-million of income from the sector last year, enough to pay 25,000 teachers a pension.
"If the government says no to this income, then where does a pension plan go?" Mr. Leech said. "In our case, any potential shortfalls have to be made up by the provincial government and the teachers themselves."
Like most financial players, the Teachers fund plans to make a submission to Ottawa, and is encouraging others to do the same. One key message is that the government should level the playing field between trusts and traditional corporations by cutting corporate taxes. The other message Teachers will try to get across is that trusts don't cost the government revenue, they simply shift the source of tax income from corporations to individuals.
"There's this urban myth that pension funds and RRSPs are tax-exempt. It's absolutely false. At best, we're tax deferred," Mr. Leech said. He added that with 100,000 retired teachers already on its payroll, the Ontario plan hands out $4.5-billion a year in taxable income.
The federal Finance Department is expected to signal its plans on trusts early in the new year, possibly in a pre-election budget that's expected in February.
Mr. Leech said that while consultation on trusts is a good idea, "pension plans and RRSPs have not caused this problem, so don't put the solution on our backs."
© The Globe and Mail
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