Crying “Foul” Not Likely to Help Canadian Income Trusts

Monday, November 20th, 2006
By Inya Ivkovic, MA for Profit Confidential

Income trusts in Canada are still fuming over Federal Finance Minister Jim Flaherty’s decision to tax trust distributions. They are counteracting the Minister’s so-called intervention at leveling the playing field by saying that income trusts are now labeled as pariahs when accessing money pools, which is ultimately likely to smother growth of the overall economy.

So, existing trusts are circling the wagons, trying to get Ottawa to give them the grandfathering option, which is to exclude at least the existing trusts from the legislation. Naively, if I might add, income trusts believe Jim Flaherty’s decision is not set in stone, and that certain avenues were left open for exploring.

I guess they could be right if the Minister’s true motive was leveling the playing field. But, we all know that is not exactly the case. The reason why the government slapped income trusts with taxes are–well–taxes! Or rather, the lack thereof. The government just got tired of more corporations wanting to jump on the tax- exempt income trust boat and resented the shrinking of its coffers.

Now, income trusts are crying foul and they are justified–to an extent. Namely, in its election campaign, the Prime Minister Stephen Harper promised not to touch income trusts. This may partly explain why Bay Street voted Conservative. And, now they feel very naive for believing his promises, (as if an election promise has ever stopped a politician from doing exactly the opposite or, worse, nothing at all).

Most Canadians who are not of a certain age to benefit from the new tax advantages are also fuming. Quite a few of them have structured their retirement plans around income trust distributions. And now, the “cookie jar,” which is what Bay Street has dubbed the income trusts, has been shut firmly and without warning.

At this point, who thinks what is all moot. It is not the question whether the decision to tax trust distributions is fair or not, or whether election promises were broken or not. The only relevant point is that the government got spooked upon realizing that more Canadian corporations planned getting out of corporate tax trappings and restructuring into much more tax flexible income trusts.

This is also why investors and Bay Street in particular, should not be surprised that the bottom line has prevailed yet again. More income trusts mean less tax money for the government. So, forget election promises, level playing fields, and fair play, and let’s make sure everyone pays their dues. It is as simple as that.

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