Canada's Liberal Party Would Reform Tory Trust Tax

by Mike Godfrey, Tax-News.com, Washington

07 September 2007

Canada's opposition Liberal Party are developing new plans to alleviate the tax burden on income trusts, in preparation for the possibility of an early general election later this year.

According to Liberal finance spokesman John McCallum the party would, if elected, replace a controversial 31.5% tax on income trust distributions brought in by the present Conservative government with a reduced 10% tax on all income trust distributions, which would be refundable to Canadian residents.

"The aim is to have our policy developed and in budget-ready form by the time we have an election campaign," explained McCallum.

The Liberals are also said to be exploring the idea of a "toll" on companies converting into trusts, to reduce the number of trust conversions undertaken purely for tax reasons. The party is also considering banning certain sectors from forming trusts, such as federally regulated industries, including banks, telephone companies, railways and airlines. This represents a shift in the Liberals' thinking on the issue; initially, they were in favour of lifting all restrictions on the income trust sector.

The income trust distribution tax, which was devised largely without consultation and announced without warning on October 31, 2006, caused consternation in Canada's business and investment sector. While companies that had converted to trusts before the announcement have until 2011 before the new tax regime comes into force, new conversions immediately fall under the new regime, and several corporations with well-advanced plans towards converting to trust status have been forced to rethink their strategies.

The tax is, according to Finance Minister Jim Flaherty, designed to tackle a "growing trend toward corporate tax avoidance" caused by the vehicle's more favourable tax treatment compared with the conventional company structure.

Flaherty has estimated that the federal revenue loss for 2006 due to the special tax advantage for income trusts would be C$500 million (US$424 million) - a burden he argued was unfairly being shifted to ordinary taxpayers and other tax-paying corporations.

McCallum, however, says the Liberal plan would be tax neutral and enough to prevent tax leakage.

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