Industry largely pleased with trust outcome

Finance Minister Ralph Goodale’s surprise announcement Wednesday night on the tax treatment of income trusts is being cheered by institutional investors and issuers alike.

Income trusts have been in a funk since late September, when Goodale announced the federal government would review the tax efficiencies built into the structures and CRA would no longer issue advance rulings on the structures.

But last night, Goodale said tax hikes on trusts were not in the cards and instead promised to cut corporate and personal taxes on dividends, thereby placing dividend-paying corporations on a level playing field and making conversion to a trust structure less appealing.

“The government’s move to avoid taxing income trusts in Canada provides some relief to the sector that had suffered under the uncertainty of its tax status,” wrote Stewart Hall, fixed income dealer, HSBC Securities, in his daily commentary. “The Finance Department decided to level the playing field for regular dividend paying stocks by reducing the tax paid by the investor.”

“Today, Canadian real estate capital markets are much stronger than they were yesterday and provide Canadians with the opportunity to participate in real estate investments,” said Michael Brooks, executive director of the Real Property Association of Canada (RealPac).

RealPac applauded the move, saying it benefited not only its REIT members, but also pension funds and both private and public dividend paying real estate operating companies.

“This will go a long way towards eliminating the current arbitrage between businesses organized as corporations and those organized in trust form,” added Jim Leech, senior vice-president of the Ontario Teachers’ Pension Plan. “We have been advocating for some time for an integration of personal and corporate income tax through the lowering of corporate tax and raising of dividend tax credits on common shares.”

There has been some criticism, not for the announcement, but the way it was made, with many calling it rushed and blatant electioneering.

“Canada is set to enter an election cycle and the negative optics associated with taxing the income trust market — a market leaned on by retirees and pension plans for income streams — proved too daunting for the Liberal minority government,” said HSBC’s Hall.

Others question the numbers that Ottawa had been assuming as tax-leakage in the first place. Forensic accountant Al Rosen is a long-time critic of the income trust structure, saying they lack accounting transparency.

“I am not at all convinced that this levels the playing field. There are just too many loose ends and too much missing information” Rosen says. “I think this whole thing will have to be re-examined by a new government after it gets in and gets settled.”

He says that it is difficult to assess how much of a trust distribution really is income, and what percentage is actually a return of capital. He uses the example of a $10 per year trust distribution, where 30% of the payout is actually return of capital. In this case, he argues, the unitholder is likely paying too much tax, rather than too little.

“What we don’t know is whether that quoted $300 million [tax leakage] was net of the extra tax people were paying or whether it was not even factored in,” he says. “There’s not enough data around to really say if there has been a leveling of the playing field.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com