Canada To Tax Income Trusts

by Mike Godfrey, Tax-News.com, Washington

02 November 2006

The Canadian government has decided to tax income trusts in an attempt to tackle what it considers a "growing trend toward corporate tax avoidance" caused by the vehicle's more favourable tax treatment compared with the more conventional company structure.

Finance Minister Jim Flaherty announced on Tuesday that the 'Tax Fairness Plan for Canadians' aims to "restore balance and fairness to the federal tax system" by creating a level playing field between income trusts and corporations.

"The measures I am bringing forward today are necessary to ensure our economy continues to grow and prosper and to bring Canada in line with other jurisdictions," said Flaherty.

"Our plan is the result of months of careful consideration and evaluation. Our actions are clear, decisive and in the best interest of all Canadians," he added.

The changes have been prompted by a string of income trust conversions by top Canadian companies, such as Telus Corporation, Canada’s second-largest telecommunications company. The government wants to shut off this "growing trend toward corporate tax avoidance" claiming that the short-term tax breaks created are causing "an economic distortion that is threatening Canada’s long-term economic growth and shifting any future tax burden onto hardworking individuals and families".

"If left unchecked, these corporate decisions would result in billions of dollars less revenue for the federal government to invest in the priorities of Canadians, including more personal income tax relief. These decisions would also mean less revenue for the provinces and territories," Flaherty argued.

There has been some C$70 billion (US$61.83 billion) worth of income trust announcements this year alone, a situation Flaherty said was "not right and not fair".

"It is the responsibility of the Government of Canada to set our nation’s tax policy, not corporate tax planners," he remarked.

Under the plan, a 'Distribution Tax' will be applied to distributions from publicly traded income trusts and limited partnerships. This will be partially offset by a 0.5% reduction in the general corporate income tax rate as of January 1, 2011. The changes also increase the Age Credit Amount by C$1,000 from C$4,066 to C$5,066 effective January 1, 2006 in a bid to benefit low and middle-income seniors.

For income trusts that begin trading after October 31, these measures will apply beginning with their 2007 taxation year. For existing income trusts and limited partnerships the government is proposing a four-year transition period. They will not be subject to the new measures until their 2011 taxation year.

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