See? They are reading my thoughts! Time for the tinfoil hat!

Income Trusts: Party's over

The federal government slapped a tax yesterday on distributions from income trusts to stem a growing revenue bleed and curb the growth of a vehicle it says threatens Canada's economy. The surprise move breaks a major Conservative campaign promise to avoid taxing trusts. Finance Minister Jim Flaherty said he had no choice because he feared that increasing numbers of corporations were preparing to convert to trusts - a trend he said threatened Ottawa's tax base. “Quite frankly, things changed a great deal this year and we're faced with a situation where Canada was moving to an income trust economy,” Flaherty said, noting that in 2006 alone, the market value of companies converting to trusts was approaching $70-billion. “Left unchecked, such corporate decisions would result in billions of dollars in less revenue for the federal government to invest in the priorities of Canadians.”

Ottawa was prompted to act after telecommunications giants Telus and BCE announced their conversion plans, according to a source familiar with the deliberations. The Tories also worried that those moves could pave the way for financial institutions such as banks, or portions of bank assets, to be converted to trusts. Income trusts pay little or no corporate tax, instead shovelling out the bulk of earnings to investors, who are taxed individually. Critics said Ottawa and the provinces never recouped all the lost revenue and ended up losing hundreds of millions of dollars in revenue each year. Flaherty announced that Ottawa will essentially start taxing trusts as corporations, effective immediately for new trusts and beginning in the 2011 tax year for existing trusts. He acknowledged this will force Telus and BCE to reconsider their plans to convert to trusts that would have ranked as the largest in Canadian history. The measure is expected to roil markets today, driving down the unit prices of most trusts and hammering the shares of Telus and BCE.

The effective tax rate to be paid by trusts on distributions will start at 34%, to mirror federal and provincial taxes on companies, and drops to 31.5% by 2011. Ottawa will remit to the provinces a 13-percentage-point share of the revenue. This effectively ends any tax advantages for investors in trusts over corporations. Finance watchers said they expect the measure to stop almost all corporate conversions to trusts - and may encourage some that have already converted to rethink the move. “Perhaps over the next four years, some who have already converted may go back to a corporate structure,” Toronto Dominion Bank chief economist Don Drummond said. Flaherty said this will restrain a wave of conversions that he said threatens corporate productivity, because pressure on trusts to distribute all profits cramps Canadian productivity by eroding trusts' ability to reinvest and innovate. The trust tax is certain to hammer the retirement savings of millions of Canadians who've come to rely on trusts for hefty returns, including many seniors, whom the Tories consider a key voting group. The Conservatives tried to cushion the blow of the trust tax by unveiling more than $1-billion in annual tax breaks for seniors and enacting a half-percentage-point rate cut in the general corporate tax rate, to take place in 2011. The corporate tax cut will “ensure there will not be more government revenue generated from the corporate sector,” Flaherty said. The senior-targeted tax relief, which goes into effect in 2007, takes two forms. Ottawa will allow senior couples to split their pension income and thereby reduce their income tax bill. It's also boosting a tax credit for low-and middle-income seniors called the Age Credit Amount by $1,000, to $5,066.
(Globe and Mail 0611101)

Whaddya know? I've been posting a few news articles on this, and now the government is taking decisive action on regulating income trusts. There are a large number of groups that are incensed about this, since up to the past few months the government has been heavily promoting income trusts as a popular option for retirement funds. Some people think this is a very bad move by the government, but there are even more that think it is crucial to slowing down the insidious (and apparently relentless) movement of tax burden from corporations to individuals.