The 75% of Canadians without pensions already have enough of a challenge ahead of them in providing for a secure and hopefully dignified retirement, without Canada’s Finance Minister making things more difficult for them, as follows:
Unlevel Playing Field – Income Trusts:
Jim Flaherty made things more difficult for Canadians’ retirement security by creating an unlevel playing field between the 75% of Canadians without pensions who rely on the RRSP to save for retirement and the 25% of Canadians who have pensions, by taxing public income trusts held within RRSPs at 31.5% and yet pension funds can own those very same income trusts privately and pay zero taxes. This creates a grossly unlevel playing field and defiles the very nature of why RRSPs were created 50 years ago, in the first place. This grossly unfair situation of taxing RRSPs but not pensions funds creates what is known as a “tax arbitrage”, which is defined as”
“Trading that takes advantage of a difference in tax rates or tax systems as the basis for profit”
In this case, “trading” takes the form of government sponsored pension funds taking advantage of the situation and preying on public investors who are faced with the 31.5% tax by making (often hostile) bids to acquire these devalued income trust at their artificially depressed market values, and taking these trust private, which gives rise to a windfall “profit”. Examples include:
OMERs: Teranet Income Fund $2 billion (September 2009)
Caisse: Legacy Hotel Income Fund $815 million (August, 2007)
OMERs: Golf Town Income Fund $237 million (August 2007)
PSP: Thunder Energy Trust $419 million (April 2007)
BCIMC: CHIP Income Fund: $1,265 million (August 2007)
To own an income trust is to own a form of profit sharing investment vehicle that provides the investor with a fractional ownership of that businesses’ pre-tax cash flow, on which the investor then pays taxes. In the case of income trusts, Canadians pay taxes at the average rate of 38% for trusts held inside RRSPs as well as outside of RRSPs. The 31.5% tax that they are now faced with , means that income trust are double taxed at rates as high as 62%, whereas pension funds have a special exemption that Jim Flaherty gave them to avoid this double taxation.
So the question becomes, what is possibly fair about a “Tax Fairness Plan” that puts the 75% of Canadians without pensions at a distinct disadvantage to the 25% of Canadians with pensions, in which pensions can own trusts that provide them with direct access to a company’s pre-tax income, but RRSPs are denied this important investment alternative? This is nothing more than gross economic discrimination and is completely arbitrary and unfair, especially given the manner in which these pensions funds are behaving in the market place and acting like predatory investors, which is exactly what they are.
Unlevel Playing Field – Income Splitting:
Pension income splitting was offered up by Jim Flaherty along with the income trust tax as if it were some type of salve for the immense financial damage that had been inflicted on income trusts investors, without warning and without justification, (given that tax leakage did not actually exist.) Rather than acting as a salve, the manner in which this income splitting for seniors has been administered is grossly unfair to seniors, as it only benefits 14% of seniors to the exclusion of 86% of seniors, and requires that a senior have qualifying pension income. Qualifying “pension income” is something that income trust investors are least likely to have, as income trust investors are almost exclusively without pensions and therefore without pension income to split and reduce the tax burden between spouses.
This pension income splitting benefit is worth up to $12,000 in after tax income for those senior couples lucky enough to benefit from it.
This is another instance where Jim Flaherty created a grossly unfair situation and a unlevel playing field as between the 75% of Canadians without pensions, who are now without the ability to own profit sharing income trusts and who are without the huge tax savings that can arise from income splitting and the 25% of Canadians who have pensions, and can own income trusts without the 31.5% tax and who can benefit from the huge tax savings associated with pension income splitting.
Jim Flaherty and Stephen Harper have , in so doing, created a two tiered pension system in this country, with the minority getting all the spoils and the majority left holding the bag and at a significant economic and risk disadvantage,
The Effects of the Marshall Savings Plan on the 75% of Canadians without pensions
The effect of the Marshall Savings Plan will be to level the playing field once again as between RRSPs and pension funds, by allowing income trusts to be held inside a new investment vehicle, the Marshall Savings Plan, that is identical in all respects to an RRSPs, except income trust distributions are taken into income in the year received and taxes are remitted to the government each year and the distributions can be paid out to the account holder in order to create supplementary income and to service the taxes owing. This feature of the MSP eliminate any argument that income trusts cause tax leakage.
In order to ensure that the MSP has truly leveled the playing field between the 75% of Canadians without pensions who save via their RRSP/MSP and the 25% of Canadians with pensions, the tax regime for income trusts has to be designed in a way that $1.00 of distributions paid by, let’s say, Teranet into an RRSP has to be the exact same amount of money that OMERs presently receives from Teranet while held privately within OMERs.
The effect of such a tax regime will eliminate any tax arbitrage and hence any predatory purchases by pension funds preying on public investors and will restore the vitality of the income trust market, which will have the effect of protecting pubic income trusts from unwanted foreign takeovers and the associated loss of tax revenue. It will be a win win win outcome.
The matter of the unlevel playing field arising from the narrow definition of pension income for splitting is something that needs to be addressed in the short term, but is not specifically provided for in the Marshall Savings Plan, however payments from a Marshall Savings Plan should be made eligible for income splitting for seniors. No reason that it could not be made eligible in order to address this income splitting form of unfairness.
Importance of Income Trusts to the 75% of Canadians without pensions:
As Stephen Harper himself said in a National Post editorial, income trusts are an essential means to provide for income during retirement. Stephen Harper wrote:
"Income trusts are popular with seniors because they provide regular payments that are used by many to cover the costs of groceries, heating bills and medicine."
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