Income trusts could take another hit

Just when you thought things couldn’t get worse for the income trust sector, here comes an American initiative to increase taxes on Canadian income trust dividends.

The U.S. House of Representatives Committee on Ways and Means introduced a bill recently that would force investors to pay the personal income tax rate of 35% on income trust payouts. Right now, Canadian trusts are taxed as qualified foreign dividends at a rate of 15%.

“It’s going to be another nail in the preverbal coffin,” says Kevin Hibbert, director and chief accountant at Standard & Poor’s Canada.

Hibbert thinks the tax change could have a significant impact on Canadian trusts, since there would be less motivation for Americans to invest. “If you’re removing the tax benefit, there’s less of an incentive for you to want to buy into a trust,” he says. “It’ll be more difficult to raise equity.”

Jack Mintz, a professor of business economics at the University of Toronto agrees with Hibbert. “If it goes ahead, this could have a pretty important impact on trust shares.”

If the bill passes, Hibbert says it’s still in the early stages, Mintz says Canadian trusts shouldn’t be hit as hard as they were after finance minister Jim Flaherty’s Halloween announcement. “There will be some loss, but it may not be as much as the October 31 tax, as it increases tax on only one type of owner, American owners. There are other people who hold trusts, such as the Canadian Pension Plan and investors in other countries.”

However, without American owners, who make up about 33% of the total investments in the trust market, it’s going to be tough for the Canadian trust market to rebound. “I can’t really see a significant light at the end of the tunnel,” says Hibbert. “At this stage all the stars seem to be aligned towards conversions back to corporations and acquisition.”

While there’s no indication when or if the bill will be passed, Hibbert expects the Canadian income trust lobby to maintain a vocal presence in the U.S. while the proceedings take place. “You’ll have the same level of lobbying you had with the income trust issuers in Canada. I expect to see a lot of lobbying from the oil and gas trusts, as they tend to be the larger beneficiary of U.S. investors than any other sector.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com