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Canadian Trust Funds to be Taxed - Discussed

 
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Canadian Trust Funds to be Taxed - Discussed Can't Post
Uh oh, trouble in the finance sector and for the Conservatives. Finance Minister Jim Flaherty will clamp down on income trusts, saying the tax system is "not fair and is a corporate tax havens."

He's setting out a transition plan over four years to tighten some of the loopholes, while at the same time reducing corporate taxes. Flaherty said Tuesday at an Ottawa news conference that if he didn't act, the trend would shift billions of dollars in tax burden off corporations and onto individuals.

In 2006, there have been $70 billion worth of corporate conversions to income trusts. Those include Telus Corp. and BCE who are now clamouring to find new ways to hide their money :P

Canada has about 250 income trusts work about $200 billion. They exist in real estate, oil and gas, telecom, industrial, manufacturing and food sectors. While they are a popular investment, they can be risky if business conditions deteriorate and companies cut payments in response.

Flaherty's proposed rules would apply a new tax on the money distributed to shareholders by newly formed income trusts. Existing income trusts would be given a four-year transition period, ending in 2011, that would allow them to adjust to the new rules.

So the bad news? The conservatives reneged on an election promise. The pros? Corporate income taxes would be cut by 2011 to remove some of the market incentives to form income trusts.

Some have said Canada's tax-leakage problem has doubled in two years, from $540 million annually in 2004. Income trusts will cost Ottawa and the provinces $1.1 billion a year in lost tax dollars once Telus Corp. and BCE Inc. convert to the increasingly popular corporate structure. The tax burden is instead shifting to individuals, who would have to pay more on the higher payouts from pension plans and registered retirement savings plans. Apparently the Liberals are Ok with that and most in Ontario would rather see Liberals win elections than pay lower taxes.

Ottawa will bear about two-thirds of the $1.1-billion in tax revenue losses, or $726-million; the remaining one third, or $374-million, will be shared by the provinces and territories, Mintz estimates. Analysts say the Tories fear a backlash like the one suffered by the former Liberal government when it tried to tinker with the politically-explosive file.

Interim Liberal Leader Bill Graham called the move a flip-flop.

"All I can remember is that during the election, Mr. Flaherty and the prime minister said under no condition would they touch income trusts," he said.

On their side, analyst Sandy MacIntyre suggested these changes will hurt the little guys in the investment game. "The losers are retail investors, and unfortunately, retail investors don't have a strong lobby in Ottawa," MacIntyre said.

Flaherty made the following other changes. He announced the government would:

"We will permit income splitting for pensioners beginning in 2007,'' Flaherty said. "This will significantly enhance the incentives to save and invest for family retirement security.''

While retired couples can split Canada and Quebec pension payments, they can't split other incomes; for example, company pensions or retirement funds. As a result, income gets concentrated in the hands of the higher earner, leading to a greater tax bite. Flaherty put a $1.24-billion price annual tag on all the changes when they fully come into effect by 2011. The finance minister also hinted the Conservative government would be cutting personal income taxes.

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Barry
Mr. Do It All


Nov 2, 2006, 11:38 AM

Post #1 of 3 (756 views)

Re: [Barry] Canadian Trust Funds to be Taxed - Discussed [In reply to] Can't Post
Stock markets have recovered slightly after Nov 1st reaction to the decision by Ottawa to start taxing income trusts like corporations. The TSX climbed 19 points to 12,0695. Yesterday, it tumbled 294 points -- the market's biggest one day drop in two and a-half years. So hedonists are gone, and pragmatic investors are still around--fancy that.

However, the income trust sector fell a further 1.5 per cent, while the energy trust sector lost another 2.35 per cent. After yesterday's dump of income trusts and blue-chip companies planning to convert in the wake of the federal government's announcement of tax changes.

The huge changes are perhaps necessary, "there are some CEOs who say this was a necessary step, this had to happen," ROBTv's Bridgitte Anderson said. A lot of people are saying we've seen the worst of it; other people are saying there's more volatility to come today, that some of the units weren't hit very hard yesterday and could see some more downside."

The announcement sent Canadian stocks plunging yesterday as the anticipation of trust conversions among companies such as BCE Inc. and Telus Corp. had sent shares jumping in value in this fall. Early casualties included the two telecom giants, which both announced plans to convert in the last two months.

Converting to income trusts would have saved BCE and Telus a combined $1.5 billion in taxes in 2008 alone. BCE Inc. says Flaherty's decision could have a "significant impact" on its plans. Telus echoed. The dollar also took a hit from the new regulations, falling 0.84 of a cent to 88.2 cents US, but this will certainly rebound.

One of the reasons for the downward trend is that foreign investors are selling their income trusts. They hold about 20 per cent of all income trust units. Those who held income trusts within RRSPs will be hit twice, by the drop in value and the drop in yields.

Starting in 2011, income trusts will be taxed more like corporations, although the Tories plan to cut corporate taxes by then. And some experts say without the tax advantage, income trusts will wither away.

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Barry
Mr. Do It All


Nov 2, 2006, 11:45 AM

Post #2 of 3 (752 views)

Re: [Barry] Canadian Trust Funds to be Taxed - Discussed [In reply to] Can't Post
Takeovers and consolidation will be common themes for income trusts over the next 12 months as the industry copes with the reality of the four-year phase-out of its tax-free status.
Private equity firms have begun to move in to pick up trust assets they view as undervalued or struggling. U.S.-based Harbinger Capital Partners made an $831-million hostile takeover bid for Calpine Power Income Trust on Dec. 19.The industry maintains Ottawa didn't properly investigate the ramifications of its Oct. 31 decision, which sent trust values spiralling down billions of dollars. Guidelines released Dec. 15 indicate the government will allow individual trusts to double in size without forfeiting their tax-free status and merge without penalty, but that may not provide enough access to growth capital for some.
The income funds have been around since 1984, launched as a way for energy companies to sell aging wells no longer growing in production to companies focused on squeezing the most oil or gas out of the ground.
But the explosion in popularity of trusts as an investment vehicle has been fairly recent. Trusts were worth $20 billion in capital market volume in 2000, an amount which had grown to $200 billion just prior to the Oct. 31 announcement. Planned trust conversions by Telus, Bell, and EnCana Corp. would have seen that value swell to $300 billion.
Ottawa balked as it saw the trust market poised to embrace the corporate giants, worried that such moves could impact the tax system and corporate competitiveness.
The biggest concentration in 2007 will likely occur in the oil patch, where energy trusts are an important link in the food chain between small junior exploration companies and the major players, who are focused on developing resource plays that often require billions of dollars in capital.
Although energy trust assets often complement each other, they require constant growth to replenish their declining reserves. Calgary-based oil and gas trusts claimed six of the Top 10 funds on the Toronto Stock Exchange — all of which lost heavily in the wake of what the investment community has dubbed the ”Halloween massacre.”
Energy officials doubt a mid-sized sector will spring up to fill the role played by the trusts. That sector all but evaporated several years ago when companies, for varying reasons, hit a point where they could no longer grow profitably.
The trusts have refused to accept defeat and aren't going quietly. So-called ”education campaigns” will be rolled out early in the new year to try and convince Canadians that the government's decision was wrong — lobbying efforts estimated to cost millions. Those campaigns will focus on the Harper government's minority status and hope to make it an election issue.
Trust officials note that most investors only truly became aware of the extent of their losses after receiving financial statements in mid December. Those values will continue to fall as a steady stream of mergers, acquisitions and conversions into corporations occur in 2007 and beyond, said Mr. Dunn, who also predicts far fewer initial public offerings without the trusts.Income trusts make regular cash distributions to unitholders, shifting the tax burden to those investors. They have been immensely popular with many investors because the distributions are often higher and more regular than dividends paid by corporations.

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Barry
Mr. Do It All


Dec 28, 2006, 1:27 PM

Post #3 of 3 (642 views)

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