Tax Review Leaves Canadian Investors Fearful Over Future Of Income Trusts

by Mike Godfrey, Tax-News.com, Washington

30 September 2005

The Canadian Association of Income Funds has told a Senate banking committee hearing that it is being inundated by enquiries from investors worried about their retirement savings after the government's decision to review the taxation of income trusts cast doubt on the future of the savings vehicles.

"Over the past few days, we have been inundated by phone calls, letters, faxes and e-mails from individual Canadians who are frightened and worried,” Stephen Probyn, chairman of the CAIF, told the Senate banking, trade and commerce committee.

“We know that one million Canadians across the country are direct owners of units, and many more millions across the country own units through their mutual funds,” he added.

The Federal government shocked the income trust market last week when it announced a halt to advance tax rulings on income trust offerings, a sign that many have taken as the first step towards a reduction in the tax advantages of the vehicle, an action which prompted a sell off in the income trust market.

Fearful that the growing use of income trusts and FTEs is costing the government substantial amounts of tax revenues, on September 8, a consultation was issued 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. Finance Minister Ralph Goodale has also expressed concern that the current income trust set up is eroding Canadian productivity by encouraging firms to pass earnings on to investors rather than reinvest the gains.

However, the CAIF stated that it is "puzzled" by the government's decision to suspend advanced tax rulings so soon after the launch of the consultation.

"In our view this announcement was premature given that the government just embarked on a formal consultative process earlier this month," the association commented in a statement.

"It leaves the impression that the Government is pre-empting its own process," it added.

Nonetheless, Mr Goodale has refused to be drawn on the possible outcomes of the review, although he has acknowledged that a change in the dividend tax rules is emerging as one option.

“Some people have said in this context they'd like to talk about dividends as part of the examination,” he told Reuters.

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