New research suggests that the use of income trusts diverts about $600 million in taxes from government coffers, compared with conventional corporate structures. Income trusts also push capital markets to favour slow-growth companies.

In a presentation to a conference held by the University of Toronto’s Capital Markets Institute, Lalit Aggarwal, a policy analyst at the C.D. Howe Institute and Jack Mintz, who is also with the C.D. Howe and the J. L. Rotman School of Management, argue that, “Income trust financing is in part a reaction to high taxes levied on equity financing due to the lack of full integration of corporate and personal taxes.”

They say that two economic efficiency issues arise from the use of income trust financings: they create a lower cost of capital for businesses due to tax benefits received by investors, and income trusts favour certain types of businesses that are best able to take advantage of the financing structure.

The study estimates that the tax benefits of using the income trust structure are $600 million. Although, they say allowing for sensitivity in assumptions, the likely range is $500 to $700 million.

Typically, the businesses that are best organized as income trusts are those with stable earnings. However, Mintz and Aggarwal also find that, “the industries that benefit the most from the income trust arrangements are ones with lower economic performance, suggesting that the income trust financing is distorting capital markets towards slower growth companies.”

They conclude that, “Governments should seek tax policies that are neutral amongst different forms of financing. We suggest that cutting dividend taxes by enhancing the dividend tax credit for distributions from high tax sources of income should be considered as an approach to improve efficiency of capital markets.”