In this recent newspaper article, the Bank of Canada Governer David Dodge showed his support (although the statements were rather weak, if you ask me) for the Conservative Government’s decision to start taxing income trust funds. The tax regulation revolving the income trust funds were rather biased and could be viewed by some as unfair. But that’s not the point, I’m not talking about the validity of taxes. I’d like to point out a few things here that will raise your eyebrows!

First of all, here is a paragraph from Wikipedia explaining the tax advantages of an income trust fund.

In a typical income trust structure, the income paid to an income trust by the operating entity may take the form of interest, royalty or lease payments, which are normally deductible in computing the operating entity’s income for tax purposes. These deductions can reduce the operating entity’s tax to nil. The trust in turn, “flows” all of its income received from the operating entity out to unitholders. The distributions paid or payable to unitholders reduces a trust’s taxable income, so the net result is that a trust would also pay little to no income tax. The net effect is that the interest, royalty or lease payments are taxed at the unitholder level.

During the election time, from which the Conservatives came out with a victory (although they only formed a minority government, thank God), the conservatives promised that they will NOT touch the laws regarding the income trust funds. This was part of their election campaign, and many people who had money in income trust fund investments were pleased by this and wanted to stick with it. The tax advantages were great!

Also, 2 of our major corporations, Telus and BCE decided to convert to income trust funds. From the stock holders’ point of view, and from the company’s point of view, this was such an advantageous way to convert more investments in to profit. And since the Conservative Government, who is currently in power, chose to give the advantage of preserving the laws, it was a perfect move!

WRONG.

The Conservatives turned it around. That meant $500 Million more a year in taxes for them, if they can prevent these two from converting. Of course the result was about $20 Billion in stock value dissipating at the time. Many investors were shocked at how much they could lose overnight. It was devastating for those people.

There is another reason why the Conservatives pushed things in this direction and that is the fact that they cut the GST from 7% to 6%. That’s a lot of taxes if you think about it in a national scale. I even had some friends of mine say “Well they’re cutting the taxes, so I’m voting for them.” It’s a stupid and ignorant way to vote but then it works from a political perspective. Why? Because most people will not recognize the fact that the Federal government has their budget, and if they cut the taxes, it results in either a reduction of government provided funding for important projects and services, or they will raise the taxes in another department in a sneaky way.

The Convervatives took the second route. They lied about their plans, they enticed people with the GST cut, and then they backtracked on their own words and decided to make up for the Federal reserve by changing the income trust fund laws. They cut one tax and made up for it through another! As far as I’m concerned that is purely deceptive and cheap.