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The Companion Advisor: Fixed Income
Income Trusts: Investors Need Certainty, Tax Efficient Income

Provided by The Knowledge Bureau Inc.
A Companion Advisor Article

There is one simple fact as it relates to Canadian investors today: investors need tax effective income, says Douglas Nelson, Lifecycle Coach with The Knowledge Bureau and author of the certificate course Advising Family Businesses. Whether the need for income relates to the current market environment or whether the need for income relates to the current situation in the life of the investor, a consistent stream of tax effective income is of paramount importance.

"In light of the recent instability of the income trust market caused by the questions raised by the Federal Government, the key question today is how should the Federal Government address their concerns?" says Doug. "The irony, as it relates to the role of the Federal Government, is that many things influenced by the government are working against investors". Citing four examples, Douglas explains:

1) The RRIF Rules: The forced minimum RRIF withdrawal by a young active 72 year old exceeds 7%. In a low interest rate environment the investor must begin to take considerable risk to maintain their capital. Are these rules inappropriate for our aging population? Absolutely Yes. Is the government motivated by a great sense of urgency to correct this situation? It doesn't appear that way.

2) Double Taxation on Dividends: It is a well known fact that this form of double taxation is inappropriate and uncompetitive compared to other jurisdictions. Is this the real problem that relates to the popularity of income trusts (ie: the fact that the income trust structure is more tax efficient, thus exposing the real problem with this dividend taxation policy)?

3) RRSP Contribution Limits: It has long been recognized that individuals are unable to save the same amount of money inside of their RRSP as compared to someone who belongs to a defined benefit pension plan. These inconsistencies have been gradually addressed and often frozen to meet the short term needs of the government. Every year in which a delay is made in equalizing the rules for all citizens takes money and compounded growth from those investors who are not on an equal footing. Has the government, over the years, been highly motivated to instantly correct identified problems or do they gradually chip away at a problem giving the appearance of addressing the problem? Is this in the best interest of investors and all citizens?

4) Old Age Security Clawback: When dividend income is received the grossed up amount of the income is recorded as total net income, which is the same figure used to determine the clawback for Old Age Security. It is important to note that the grossed up amount on the dividends is not actual income received, but it is treated as such and negatively impacts investors and their old age security payments.

5) Deductibility of Interest: This issue has been a hot topic for many years and yet the rules still are not clear. Is the government highly motivated to clarify this issue for the benefit of the investor?

With these observations in mind, what is the real problem with the income trust structure? Is there a problem at all? Perhaps the only problem is one that Canadians face every single day: uncertainty over income and their future.

This information is used with the permission of its publisher, The Knowledge Bureau Inc. For more information go to www.knowledgebureau.com.

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