Trust in Greed … Income Trusts lose tax benefits

The Canadian Conservative minority government announced something of a surprise move yesterday.  While there’s been rumblings of discontent over income trusts in Canada for some time now, after the Conservatives pretty clearly stated a “hands off” policy towards the trusts during the election campaign it was assumed by most Canadians that things would continue pretty much according to the status quo.  Instead, the government yesterday announced sweeping reforms to the tax situation that income trusts afforded to business.

Essentially, income trusts were devised as a tax relief scheme for Canadian business, one that shifted much of the tax burden from the corporation itself to the holders of the trust.  Taxes on income are not paid directly by an income trust … instead, income is distributed to holders of the trust and the trust holders pay the tax on that income.  In this way, corporate taxes can be shifted off of company books, and tax re-payment tends to fall under consumer tax law rather than corporate tax law.

With the new regulations, income trusts will not get the same tax benefits they have till this point.  Initially, there is likely to be a rather large impact to investors who have invested heavily in trusts because of the rate of return.  That rate of return is set to drop fairly significantly, and the overall value of RRSP’s with high levels of trust money is also likely to drop in the short term.  How it will all play out in the long run remains to be seen, but the basic idea of re-structuring the tax burden in Canada seems a sound one.  On the face, income trusts looked to have a major impact on where the burden sits, especially as more and more businesses in diverse (and core) industries like banking were looking to convert to income trusts.  In the face of giant corporate conversions like BCE and Telus, it seems clear that the government was simply stepping up in advance to ensure that future conversions don’t cause massive tax issues.

The most surprising thing, perhaps, is that this all comes from a Conservative government, one that in campaigning promised not to impose any new taxes on income trusts.  While the early evidence shows this to likely be a good move (despite the initial volatility of Canadian stock markets … the TSX was down some 300 points early in the day following the announcementTSE Value) in the long run, its a move more typical of a Liberal or a New Democrat legislative agenda than a typical Conservative one.  Its not likely to win many friends among the traditional Conservative base of Bay Street (Canada’s version of Wall Street essentially), but its nice to see the Conservative party looking more at what needs to be done, rather than looking at what will impress their supporters.

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