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Canada's surprise change in income trust tax laws

Companies / Canadian Stock Market Nov 05, 2006 - 12:29 PM GMT

By: Shahla_Walayat

Companies

Canada's "Conservative" government recently announced a surprise change in the tax laws that could have come straight from the Kremlin's playbook. The tax change regards a new plan to tax Canada's income trusts. Not only does it come out of the blue, it breaks a pledge made by Canada's Conservative government not to change the trust taxation rules.

Trusts, unlike corporations, pay little or no corporate tax because they were set up to take advantage of a loophole in tax rules. The supposedly offsetting factor is that owners of trust units pay higher tax on income from the trust because a break for corporate dividends doesn't apply. With trusts paying no corporate income tax to Canada or to their province of residence, foreigners paid 15-per-cent withholding tax on investment income going out of Canada.


Canada's rationale for doing this is that they are missing out on too much revenue as the income trust sector expands. But this rationale is self-defeating; because of the message Canada's government sends with the arbitrary change: If you do business in Canada, you are liable to confiscatory changes in tax policy at government whim - even if we promise no such changes beforehand.

This weekend, the group that represents Canada's 250 income trusts will launch a national campaign against Ottawa's plans to tax trusts. The Canadian Association of Income Funds will run newspaper ads urging Canadians to contact their MP's and "ask them to take immediate action to stop the destruction of their hard-earned savings."

"We strongly urge the minister of finance to listen to the outcries of Canadians before enacting this legislation," said CAIF president George Kesteven.

The TSX income trust index was up 3.8 per cent on Friday. The index had lost 12 per cent of its value on Wednesday and another 4.3 per cent on Thursday after federal Finance Minister Jim Flaherty announced a new distribution tax on income trust payouts.


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