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Trust tax ruling promised for early ’06
With Canada’s income trusts shedding billions of dollars in market value and starting to trim their cash distributions, Canada’s Finance Minister Ralph Goodale has promised to issue a ruling by late January on the future tax treatment of the trusts.
He plans to meet that target even if, as widely expected, Canada is in the thick of a federal election campaign.
The uncertainty is exacting a heavy toll on the trusts and creating deepening anger in the investment community.
Over the past two months, six trusts from a wide range of sectors have joined the ranks of so-called “fallen angels” by cutting cash payouts, although some are blaming sharp cost increases in their businesses which they can’t offset with matching price hikes.
McLean & Partners Wealth Management has listed 83 of Canada’s 230 trusts (which have a combined market value of about C$160 billion) that it believes will reduce or suspended distributions.
Ontario Teachers Pension Plan, which manages C$88 billion of investments, has put the pressure on Goodale to ensure his policy changes don’t harm pension funds or retirement savings plans. Measures could hurt retirement system Teachers’ Senior Vice President James Leech said two measures could hurt what is a successful retirement system — a cap on pension fund holdings in trusts or a tax on income from the sector.
He said taking those steps would deny pension plans the right to invest in the “best possible assets.”
Leech argued that trusts have given many small- and mid-sized Canadian companies access to capital that would otherwise have been outside their reach.
Canaccord Capital analysts in a mid-November report said it is “quite clear the uncertainty over potential government changes has negatively impacted income trusts,” adding it “doesn’t have a clue” what the government will do.
Douglas Porter, deputy chief economist at BMO Nesbitt Burns, offered one theory based on a small reference in a Finance Department document.
He said Ottawa could lower tax rates on corporate dividends to slow the spread of income trusts and turn down the taps on tax losses estimated at C$300 million in 2004.
The government document noted that dividends paid to individuals by large corporations are currently faced with double-taxation — corporate and personal.
Porter conceded the reference is subtle, but is consistent with what his firm suspects is part of Ottawa’s solution.
—Gary Park
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