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Goodale Announces Surprise Dividend Tax Cut

by Mike Godfrey,, Washington

25 November 2005

Canada's Minister of Finance Ralph Goodale has made the surprising decision to respond to concerns regarding income trusts and other flow-through entities by announcing a reduction in personal income taxes on dividends, which the government believes will help level the playing field between corporations and income trusts.

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 the increasing use of income trusts, and on September 8, the Government issued a paper and launched consultations on the economic and fiscal implications of FTEs.

Later that month, Goodale announced that advanced tax rulings in relation to income trusts would be terminated forthwith, but with the government hanging on to power by a thread and an election imminent, the Finance Minister has decided to step in and to remove uncertainty from the investment industry regarding taxation.

“Given the uncertainty surrounding how long this session of Parliament will last, as well as the need for greater certainty and stability in the income trust market, there is a clear case for immediate action," Goodale stated.

The tax reduction will take the form of an enhanced dividend “gross-up” and tax credit to make the total tax on dividends received from large Canadian corporations more comparable to the tax paid on distributions of income trusts, and to eliminate the double taxation of dividends at the federal level.

On Wednesday, Goodale tabled in the House of Commons a Notice of Ways and Means Motion to implement these measures.

“Reducing the tax individuals pay on dividends will encourage savings and investment and will help establish a better balance between the tax treatment of large corporations and that of income trusts,” explained Minister Goodale.

“This action will benefit Canadians and result in bottom-line tax savings for them," he added.

Minister of National Revenue John McCallum is set to resume providing advance tax rulings on flow-through entity structures.

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