Corporate Canada Up In Arms Over Flaherty's Tax Bombshell

by Mike Godfrey, Tax-News.com, Washington

06 November 2006

The Canadian government's decision to tax income trusts has sparked an angry response from the corporate world and the funds industry, after panic selling wiped billions of dollars off the value of shares in the wake of the shock announcement.

In its response to the move, the Canadian Association of Income Funds (CAIF) said that the proposed tax will risk the financial security of millions of Canadians, after the Toronto Stock Exchange (TSX) fell more than 300 points on the back of the announcement, which caught most by surprise.

"The government is directly attacking millions of Canadians who purchased income trusts in good faith based on the Conservative government's promise to leave these important investment vehicles alone," argued George Kesteven, CAIF President.

"The decision was made without consulting the industry, but we would welcome the chance to meet with Finance Minister Jim Flaherty to express our deep concerns and seek a more equitable solution. The government definitely had other options than to impose this punitive tax," he added.

CAIF is urging Canadian investors to contact their Members of Parliament to register their concerns over the proposed legislation.

Meanwhile Telus, Canada's second largest telecoms company, has expressed bemusement over the decision by Finance Minister Jim Flaherty to tax income trusts created after his October 31 announcement from 2007. Under the plan, income trusts created prior to this date will have a four-year period of transition before paying tax in 2011.

"The decision has been prejudicial to Telus," chief financial officer Robert McFarlane told Canada's Globe and Mail newspaper last week.

"If you're going to treat trusts in a certain manner, all trusts should be treated similarly," he added, noting that investors in Telus would be put at a disadvantage.

Telus announced its plans to convert into an income trust in September, primarily to continue benefiting from a long-standing tax break. With a market capitalization of US$16 billion, the conversion would create Canada's largest income trust company when complete. The company's shares fell 13.5% after last Wednesday's announcement.

Under the proposed legislation, a 'Distribution Tax' will be applied to distributions from publicly traded income trusts and limited partnerships in a bid to stem what Flaherty described as a "growing trend toward corporate tax avoidance".

Flaherty has so far ruled out any changes to the proposals and draft legislation is expected to be published by the end of the year and introduced into the Commons early in 2007. However, with the Conservative government unable to count on a majority it is uncertain whether the plan will be approved.

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