Income trusts in Canada to be taxed after all

The Canadian Federal government announced on Halloween that income trusts will now be subject to income tax of 34% in line with corporate income taxes in the country. You might remember that many corporations were converting or considering conversion to income trusts to take advantage of the flow-through nature of the structure recently.

I argued that the tax corporations would save upon conversion could be considered unfair tax anyway since it was entirely consisting of double tax. The government seemed to disagree with me or not care, and made the announcement to the apparent chagrin of many people, which is strange considering how much heat the government was taking to close the loophole and maintain their base.

What I was thinking today is that the government could end up enlarging their base with this move. They wanted to take away the incentive for companies to convert, and they’ve done that. Bell Canada is reconsidering the move to income trust and probably won’t do it after all. Telus may reverse plans to convert. So things will stay the same on that front, only now income trusts that were always income trusts (ie. mutual funds) will also be taxed.

This is probably going to only increase the already-embarrassing federal surplus in the country, which was recently in the news because it was much higher than forecasted.

I’m not sure this is the most elegant solution to the problem, but it’s a solution when one was needed, and for that the government should be applauded. Perhaps introducing some rules that made income trusts even more restricted would’ve been a way to discourage corporate conversions while not introducing a whole new tax on trusts. After all, there are still some pretty fundamental differences between a mutual fund and an operating company.

3 replies on “Income trusts in Canada to be taxed after all”

  1. We here at Canadian Observer would gloat that we called it right and you well… But it would be pyrric victory. The Cons are now going to introduce an accross the board capital gains reduction which will make the tax benifit to income trusts look like chump change. We will blog about it somtime in the next 24 hours

  2. You called the trust tax?

    All I’ve heard about capital gains is the possibility of eliminating the tax on gains that are re-invested within six months, which seems like a reasonable thing to do that will help every investor.

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