Memo to Finance Dept.: hire the RBC Equity Research Team

For all the trees that have been felled of late, you’d think that the various media outlets would have the income trust tax leakage story right at this point. Wrong. And that fellow Prof. Jack Mintz, too. And me.

I’m referring, of course, to the equity research piece released by RBC Capital Markets’ Telus Research Analyst. In summary, his analysis suggests a tax windfall from the Telus conversion, not a leakage. Rather than bring in BCG or Mercer to do the consulting work for the Dept. of Finance around tax leakage, just call the smart guys in the gold-coloured building. The following is an excerpt of the fascinating report:

So, Where’s The Leakage? Far From It, We See a Nearly $2 Billion Windfall to the Government. Comparing the tax scenarios in Exhibit 4 below, we show that total estimated tax collectable between 2007-2012E excluding tax-deferred accounts leans marginally ($300MM) in favour of the trust structure ($3.0 billion collectable as a corporation; $3.3 billion as a trust). However, after considering the deferred tax potential (which we arbitrarily used a 2-year lag, though we note the assumed lag does not impact the potential collectable tax from tax-deferred accounts), we estimate the Government should collect $5.0 billion from the TELUS trust and its shareholders, compared with only $3.4 billion as an ongoing corporation – a windfall of $1.7 billion from the conversion process.

It is fair to point out (and often goes unsaid) that the deemed disposition of the conversion will generate some capital gains taxes, but it seems like a stretch to nail the figures down given the murkiness regarding the tax profiles of current shareholders.

What is more interesting is how this will play in Ottawa. If the Minister of Finance is truly looking to avoid the income trust topic until after the next election (if even then), I’d expect Mr. Flaherty or his deputies to refer to this report in the days ahead. So long as the Income Trust proponents can keep us all confused on tax leakage, there’s little risk to the feds shutting the door on the sector.

MRM