Slapping a tax on income trusts

Surprise! Income trusts will be taxed. Minister of Finance Jim Flaherty made the announcement yesterday of a phase-in over four years. The plan includes an attempt to soften the blow to seniors by offering a tax break. Details on the MoF web site.

The economic benefits of income trusts that I explored in a previous post aren't popular with many, but this announcement is a surprise all the same.

Some individuals felt that the trusts were a Trojan horse for corporate tax cuts. Well, in a small way they are. The Liberal government previously dropped taxes on corporate dividends to entice individuals away from income trusts and into stocks. Now the Conservative government is coupling its tax on income trusts with the announcement of a ½ per cent drop in corporate tax in 2011.

Obviously some poor suckers felt that income trusts had a future.

From Reuters:

One of the largest Canadian trusts, CI Financial Income Fund (CIX_u.TO: Quote, Profile, Research), savaged the surprise move.

"This is the most bizarre, Third-World policy that I could imagine," CEO Bill Holland told Reuters. "It doesn't even make sense to me -- how can they keep changing the rules?"

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“I think this is a huge, huge surprise. Huge. I don't think they consulted with anyone," said Calgary lawyer John Brussa, considered the father of the income trust format.

"To do this seems quite troubling, and for a government that's supposed to be encouraging of business. This arbitrary action is not very conducive to business. This is going to cost a bunch of people a lot of money tomorrow."

I'm not going to try to predict what will happen at the bell, but I highly recommend that the loudspeakers play the beautiful 'Funerarius for Michael Wise Esquire' by Orlando Addleston, as can currently be heard on the NPR web site.

Some facts from Reuters:

- More than 220 income funds are now listed on the Toronto Stock Exchange and TSX Venture Exchange, with a total market capitalization of about C$200 billion ($180 billion).
- More than one million Canadians own units in income funds and several million more invest in income trusts through their mutual funds.
- Large institutional investors, such as the Canada Pension Plan and Ontario Teachers' Pension Plan Board, invest in income trusts on behalf of their clients.