Finance Minister makes surprise announcement on income trusts

Facing a non-confidence motion that could bring down the federal government as soon as next week, the finance minister has announced major changes to the taxation of income trusts. In order to level the playing field between corporations and income trusts, Ralph Goodale is reducing personal income taxes on dividends.

“Given the uncertainty surrounding how long this session of Parliament will last, as well as the need for greater certainty and stability in the income trust market, there is a clear case for immediate action. The overwhelming consensus of submissions received in our consultation process was to reduce personal income tax on dividends,” said Goodale. “Today’s announcement acts on that consensus and ends the consultation process.”

The announcement comes a full five weeks before the end of the consultation process was to end and contravenes an earlier statement from the minister that he would not make decision before that process was complete.

According to the minister, the tax changes will eliminate the double taxation of dividends. The tax reduction will take the form of an enhanced dividend “gross-up” and tax credit to make the total tax on dividends received from large Canadian corporations to make it more comparable to the tax paid on distributions of income trusts.

“Reducing the tax individuals pay on dividends will encourage savings and investment and will help establish a better balance between the tax treatment of large corporations and that of income trusts,” said Minister Goodale. “This action will benefit Canadians and result in bottom-line tax savings for them.”

As a result of this surprise announcement the Canada Revenue Agency will resume providing advance tax rulings on flow-through entity structures.

Filed by Mark Brown, Advisor.ca, mark.brown@advisor.rogers.com

(11/23/05)