Canada's Income Trust Tax Jumps First Legislative Hurdle

by Mike Godfrey, Tax-News.com, Washington

09 November 2006

As the furore surrounding the recent announcement by Canadian Finance Minister Jim Flaherty to tax income trusts continues, the nascent legislation passed its first parliamentary hurdle on Tuesday.

Although the ruling Conservative Party has only 124 seats in the 308-seat House of Commons, it could count on support for the measure from Bloc Quebecois and New Democratic Party MPs, seeing off opposition from the Liberal Party, which has 101 seats.

The measure means that the tax change will become legally effective from 2007, but further enabling legislation will not be introduced into Parliament by Flaherty until later.

Consequently, new trusts formed after Flaherty's October 31 announcement will be subject to the new Distribution Tax. Trusts in existence before this date have until 2011 before the tax becomes fully applicable to them.

The new tax, which came somewhat out of the blue, has angered the financial community, which wasn't consulted on the move. It has also thrown into disarray the plans of many large companies which had announced plans to convert into income trusts.

It emerged earlier this week that EnCana Corp., Canada's largest natural gas supplier, had planned to convert into an income trust worth $20 billion, but scrapped the idea following Flaherty's announcement.

Canada's two largest telecommunications companies, BCE and Telus, are also reviewing decisions to convert into trusts.

Despite admitting he received an "earful" of complaints about the policy from several people at an event in Toronto recently, Flaherty said he was standing by the decision, arguing that a change of heart would merely de-stabilise markets further.

"If the question is, will we change any of the announcements that we made last week in the motion before the house? The answer is 'no', and the reason is market certainty," Canada's Financial Post quoted him as saying.

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