Business and Finance

Income trust investors are not ready to take their Liberal election promise to the bank.

Trust units fell in price along with the rest of the stock market yesterday despite the Liberals releasing their 68-page election platform, including the plan to reverse a tax on income trust distributions that is to apply starting in 2011.

The document lends greater formality to the promise Markham MP John McCallum announced a year ago to reverse Finance Minister Jim Flaherty’s much bemoaned Halloween trick of 2006 – at least for the remaining income trusts that have not already converted back to conventional corporations or been taken over by pension plans and private-equity concerns.

But it’s small wonder the market did not respond excitedly after the broken political promises and switched gears of the past. The muted response could also be a commentary on the party’s election prospects.

The Liberals have committed to replace the Tories’ "punitive 31.5 per cent tax" on fund distributions with a "10 per cent tax that is refundable for Canadian investors."

So, in effect, trust distributions would only be reduced by 10 per cent for foreign investors, who would also continue to pay a 15 per cent withholding tax, resulting in a combined tax hit of 23.5 per cent.

But despite the importance of the issue to an embittered group of mainly elderly investors, the platform includes only a single, long sentence on page 18. There the promise is ranked fourth in priority, behind three relatively small promises regarding extra funding for research and development.

McCallum said yesterday he could not explain why the promise was not given more prominence, except that the details can seem rather technical to the average voter and "those hit already know who they are."

It’s estimated that the market value of a couple of hundred business and energy income trusts fell by nearly $35 billion in the couple of weeks after Flaherty moved to prevent more large public companies from converting to the income trust structure.

Flaherty won the applause of some economists, who argued that tax policy favouring the income trust model over conventional tax-paying corporations was not sound public policy cash advances. But his claims that the Treasury was losing hundreds of millions in revenues were derided as a gross exaggeration.

It’s possible, said McCallum, that his party will mention the income trust issue in advertising with various other broken Tory promises, including the fixed election date and the sharing of resource royalties with Atlantic provinces.

In the last election, Tory leader Stephen Harper attacked former finance minister Ralph Goodale for even considering a tax on income trusts, and said a Conservative government would never let the Liberals get away with "raiding seniors’ hard-earned assets."

McCallum admits he is not getting questions from Markham voters on the issue.

But it’s the first topic raised by Brent Fullard, the wealthy, retired Bay Street executive who became a voluntary attack dog for income trust investors before winning the Liberal nomination in Oshawa-Whitby.

Fullard says he doesn’t hide the fact he heads the Canadian Association for Income Trust Investors (CAITI), but is quick to raise other topics like nuclear and food safety that he argues have suffered under the Tories.

He says he has received campaign donations from across the country because of the income trust issue, and he will have the same maximum spending allowance permitted by law as Flaherty.

James Daw, CFP, can be reached at 416-945-8633; or jdaw@thestar.ca

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