OTTAWA -- Ottawa's hefty income trust tax is making trusts more vulnerable to takeovers -- but that's not necessarily a bad thing, because ownership changes tend to usher in better management, a leading Canadian tax expert says.
Jack Mintz, a business economics professor at the University of Toronto's Rotman School of Management, says trusts were shielded, to some extent, from takeovers prior to the federal trust tax announcement because their relatively high market values made purchases more prohibitive.
"It allowed managers maybe to avoid the threat of takeover -- and therefore encouraged inefficiency," said Mr. Mintz, who's not a fan of the trust structure.
"There's a lot of Statistics Canada evidence now to show that even foreign companies have done a pretty good job of running Canadian companies and improving their productivity -- that maybe this is all not such a negative thing after all."
There have been 12 takeovers of trusts announced or proposed in the five months since the Harper government announced a surprise 31.5-per-cent tax on income trusts, according to Deloitte & Touche.
The measure put downward pressure on income trust unit values, increasing the incentive for outside buyers to scoop them up. It has also made access to capital for these business more difficult.
Prof. Mintz says trusts could end up being run more efficiently and productively by new management.
"When you are operating as an income trust and have the high valuations at that point -- and the very high distributions -- it made it difficult for someone to come in and do a takeover based on such a very high valuation," Mr. Mintz said.
Finance Minister Jim Flaherty sold the trust tax as a way to recoup tax revenue that these corporate structures were not paying, but critics say the measure will ultimately cost Ottawa money as takeovers put trusts in the hands of entities, including foreign private equity funds, that won't pay Canadian federal taxes.
New foreign owners of trusts would pay less Canadian tax, says Ogilvy Renault LLP's Leonard Farber, a former Finance official. "Foreign takeover will result in less tax at both the federal and provincial levels," he said yesterday.
First, he said, there'd be no more tax revenue from Canadian investors, who generally pay tax at a higher rate than corporations.
"[Also], private equity will load up debt in Canada on the strength of the Canadian asset base, rendering the operation basically non-taxable in Canada, and interest crossing the border will be free of withholding tax."
© The Globe and Mail
