Income trust investors were villified as the "wealthy" few, making use of a "tax loophole" to justify the move. Nothing could be further from the truth.
An income trust is like a corporation with one major difference. Instead of paying dividends to shareholders once a year, trusts pay out all of their profits to the unit holders on a monthly basis. The rate of return is much higher with trusts, with 10 - 20 percent being the norm. If that sounds like profit sharing, that's exactly what it is.
But Flaherty claimed there was "tax leakage", because the trusts' profits were not taxed. Again, that's not true*. The profits were taxed as income to those who actually received them, ie the unit holders. Taxed at the personal rate, which is higher than the corporate rate. So in fact, Revenue Canada was actually netting more from income trusts than it was from regular corporations.
So what's not to like? Ordinary people get to participate in profit sharing. Pensioners receive a monthly income in the form of distributions. More taxes are collected. Everybody's happy.
Well no, not everybody. The big life insurance companies were upset. Retirees were becoming more and more enthusiastic about income trusts, and less so about the Lifecos' products, namely income annuities. I worked briefly selling life insurance. Annuities suck.
Security and Prosperity Partnership and planning strategy with the Finance Minister.
In the wake of the announcement that trusts would be effectively double-taxed, the sector plummeted overnight, and $35 Billion went up in smoke. There was also a rash of foreign takeovers, predatory leveraged buy-outs by Goldman Sachs and the like, layoffs and the impoverishment of many ordinary Canadians who took the government at their word. So much for trying to provide for your own retirement.
Flaherty's justification was that he didn't want a nation of coupon clippers. No, a nation of Walmart greeters is so much better.
* Requests for proof of tax leakage were fulfilled by the now-familiar blacked-out documents.
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