The Globe and Mail, National Post and business groups expect a rough trading day tomorrow after Federal Finance Minister Jim Flaherty hastily announced a new tax on income trust distributions. The tax, which would apply to new trusts in 2007 and existing trusts in 2011, is a bid to stem the growing number of companies that are converting to trusts. Trusts do not pay income tax, rather their unitholders pay taxes on the distributions they receive.
The corporate income tax rate will also be cut by one half a percent point as of January 2011 to further reduce the advantage of converting to trusts.
The rate of the tax on distributions was not announced but in his press conference Flaherty basically stated that by 2011 the tax advantages of income trusts would be eliminated. From a transcript:
Question: Could you explain a little bit more the distribution tax on distributions, what the rate will be and how it’s determined? I haven’t had a chance to look at the backgrounder.
Hon. Jim Flaherty: No, and I’m not sure you’ll find all that in the backgrounder. You may have to speak to some of the Finance Department folks who are here specifically to give technical detail. But the plan is to go out five years and -- I’m sorry, after four full years so in year five we will have tax equity between corporations and income trusts. Corporations will continue to do business in Canada. Income trusts will continue to do business in Canada. One would hope that the tax reason for creating income trusts will no longer exist. That’s why we’ve designed the distribution tax in the way we’ve designed it and that’s also why we’re reducing the corporate income tax rate by another half a percent point four years out so that the corporate revenues, the revenues from business that the Government of Canada receives will not increase as a result of these tax measures. So, as I say, some businesses will choose to continue as income trusts. It may suit their business model and others may well not do so.
The Tories promised not to change the income trust tax structure prior to the last election in January and attacked the Liberals for suggesting that changes were needed.
Looks like the Telus and Bell trust conversions were the straw the broke the camel's back.