In the decade that preceded the Great Recession Canada eliminated its budget deficit and began to reduce its debt–without relying on tax increases. In fact, once the country returned to surplus in 2002 corporate and personal tax rates were cut.

On one hand, Canada stands out among the OECD (Organization for Economic Co-operation and Development) countries for reducing deficits and debts through deep and permanent cuts to social programs and public services–services that are often critical to low-income families and at-risk individuals.

On the other hand, the federal government was in great position once it had to step in with extraordinary spending measures to make up for drastically reduced private-sector demand during the global economic crash that followed Lehman Brothers’ September 2008 implosion. That’s the broad view.

The in-the-weeds view is obscured by the tax controversy that unites our two countries like no other. As disgruntled as we Americans were in the wage of Finance Minister Jim Flaherty’s Oct. 31, 2006, announcement that “specified investment flow-through” vehicles would be taxed at the entity level beginning Jan. 1, 2011, Canadian investors must have felt doubly burned.

They suffered horrible capital losses because of an effort to solve a theoretical “tax leakage” problem. This leakage accrued to the benefit of US investors, who were taxed at a lower rate on the same distribution paid to Canadian investors. To boot, not a year prior a previous federal regime had promised to leave the income and royalty trust structure alone.

There are many different ways to compare tax systems of different countries, from aggregate measures to measures that focus on individuals, levels of government or particular taxes. Each has strengths and weaknesses, none tells the whole story. Together they paint a picture of how taxation systems in different countries compare. They also need to be evaluated in the overall context of the countries being compared as well as in consideration of broader economic issues.

It’s not my place to scold Canadians, or other Americans, for that matter, for your scorn for Mr. Flaherty or Prime Minister Stephen Harper. I would point out, however, that the view of Canada from our side of the border is–or should be–quite enticing indeed, particularly for investors focused on generating income and enjoying sustainable growth as well.

That is to say, the big picture looks to us a lot like it did on Oct. 30, 2006.

Conversion

The Canadian income and royalty trust saga is resolving much better than the majority of investors forecast in the immediate aftermath of Mr. Flaherty’s Halloween Massacre almost four years ago.

First, the sector, as measured by the S&P/Toronto Stock Exchange Income Trust Index, has endured the challenges presented by the Great Recession in far better fashion than either the broad based S&P/Toronto Stock Exchange Composite Index or the S&P 500. For those businesses suited to the model, clearly identifiable cash streams and the discipline of meeting a monthly obligation were pillars of their success.

These traits have withstood the worst economic conditions in 80 years, and, it must be said, the Canadian government provided mechanisms by which their long-term survival as high-dividend-paying investments is assured.

Simply, Harper & Co, whether by sheer chance or actual design, gave savvy companies three-plus years to observe the actions of and reactions to those that moved quickly to either sell out or convert. As Roger Conrad noted at the time, there are as many possibilities for post-2010 life as there are trusts and funds; we’re seeing that play out as each company presents its conversion case.

But we can make general observations such as the trend as the critical hour approaches is toward preserving as much of a trust-level distribution as on-the-ground conditions support. And the market’s reactions to those that have kept on keepin’ on with high distributions have justified their generosity–no, their prudence: Higher share prices have reduced capital costs, which means growth-driving acquisitions are cheaper. And thus begins a cycle that ends with a dividend increase.

As for mechanics, the Tax Fairness Act and subsequent clarifying language made it as easy and cheap as possible for trusts to convert, so long as they accomplish the feat by 2013. For investors, this primarily means a one-for-one units-for-shares exchange is tax deferred: Your cost basis is preserved, and you’ll have a taxable event only when you dispose of your shares.

And taxes on Canadians will drop dramatically as trusts convert to corporations.

Corporate Rates

Recent headlines out of Australia, another Commonwealth country rich with resources, provide more perspective for the Canadian investor. The liberal government Down Under proposed a new 40 percent tax on Australia’s resources industry, which could be a huge competitive advantage for Canada. The continued decline of Canadian corporate rates is already a significant attraction for investors. Corporations in most of Canada will face a combined 25 percent tax rate by 2012– the lowest statutory corporate income tax rate in the G7.

Canada also boasts of “the lowest overall tax rate on new business investment in the G7,” as well as “an overall tax rate on new business investment that is lower than the average of the Organization for Economic Co-operation and Development.”

The Canadian government has also changed the capital gains tax law to ease red tape on international investors, particularly venture capitalists. Non-resident investors are taxable in Canada on gains realized from dispositions of “taxable Canadian property” (TCP), subject to treaty protection. They are also generally required to obtain a “section 116 clearance certificate” from the Canadian tax authorities in connection with dispositions of TCP. The process of obtaining a clearance certificate (even for treaty-exempt dispositions) typically takes many months, and has been a major irritant in many cross-border transactions. A purchaser will typically withhold 25 percent of the purchase price until a certificate is obtained.

The federal budget includes language that changes the definition of TCP to exclude shares of Canadian private companies where not more than 50 percent of their value is derived from real property in Canada, Canadian resource property or timber resource property.

In the vast majority of cases, non-residents who weren’t taxable on the disposition of their investments in such shares due to Canada’s broad international tax treaty network are now exempt from tax under Canadian domestic law. Being exempt means they won’t have to apply for treaty relief. They are no longer required to comply with burdensome tax clearance certificate procedures or file a Canadian income tax return.

Venture capitalists considered the previous administrative requirements and concomitant economic delays strong deterrents to investing in Canada. This is another move that cements Canada’s status as one of the most investor-friendly jurisdictions on Earth.