Canada Postpones Advanced Tax Rulings On Income Trusts

by Mike Godfrey, Tax-News.com, Washington

21 September 2005

Minister of Finance Ralph Goodale has requested the postponement of advance rulings respecting income trusts and other flow-through entities (FTEs) with immediate effect whilst the government undertakes a review of the consequences on taxation of these vehicles.

Fearful that the growing use of income trusts and FTEs is costing the government substantial amounts of tax revenues, on September 8, the Government issued a paper and launched consultations on the economic and fiscal implications of FTEs.

According to the Finance Department, the federal government has foregone about C$300 million in potential corporate tax payments in the last year because of income trusts.

Trusts and limited partnerships have been used by investors for several decades. However, in the last 10 years, publicly listed income trusts have gained popularity as investment vehicles and this growth has accelerated sharply in the last five years. Since 2000, the market capitalization of income trusts in Canada has jumped from C$18 billion in 2000 to C$118.7 billion by the end of 2004.

"We launched consultations because of our concern about how the increased use of this type of business vehicle may affect economic growth," said Minister Goodale.

"We have a viable and productive corporate sector that invests, creates jobs and contributes its fair share of tax. I want to make sure that government tax revenues are appropriately safeguarded, but even more importantly I want strong and vibrant Canadian enterprises of all sizes in all sectors contributing to a dynamic and growing economy," he added.

The Minister explained that, while these consultations are underway and until the Government announces what action it may take, it would be inappropriate for the Government to issue advance tax rulings on these matters.

Minister Goodale encouraged the public to participate fully in the consultation process, which runs until December 31, 2005. He added that the Department of Finance is closely monitoring developments in the FTE market with a view to proposing measures in response to the consultations. The Government will then consider what, if any, transitional measures would be appropriate.

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