INCOME TRUSTS: PARTY'S OVER
Date: Thursday, November 02 2006
INCOME TRUST CRACKDOWN
INCOME TRUSTS: PARTY'S OVER
Tories break key election promise with sudden distribution tax to plug hole in its revenues
With reports from Simon Tuck and Alex Dobrota
OTTAWA -- The federal government slapped a tax yesterday on distributions from income trusts to stem a growing revenue bleed and curb the growth of a vehicle it says threatens Canada's economy.
The surprise move breaks a major Conservative campaign promise to avoid taxing trusts.
Finance Minister Jim Flaherty said he had no choice because he feared that increasing numbers of corporations were preparing to convert to trusts -- a trend he said threatened Ottawa's tax base.
"Quite frankly, things changed a great deal this year and we're faced with a situation where Canada was moving to an income trust economy," Mr. Flaherty said, noting that in 2006 alone, the market value of companies converting to trusts was approaching $70-billion.
"Left unchecked, such corporate decisions would result in billions of dollars in less revenue for the federal government to invest in the priorities of Canadians."
Ottawa was prompted to act after telecommunications giants Telus and BCE announced their conversion plans, according to a source familiar with the deliberations. The Tories also worried that those moves could pave the way for financial institutions such as banks, or portions of bank assets, to be converted to trusts.
Income trusts pay little or no corporate tax, instead shovelling out the bulk of earnings to investors, who are taxed individually.
4Canada also submitted:
Nov. 2, 2006. 01:00 AM
Finance Minister Jim Flaherty's decision to clamp down on the corporate tax dodges known as income trusts has thrown Bay Street into a tizzy. Across the country, angry investors who have been cashing in on Canada's number one tax avoidance scheme are squealing in anger.
But in the long run, another element of the Flaherty on-the-fly tax reforms may be far more significant. That is the government's decision to open the door to a controversial tax change — long sought by the socially conservative right — that, if fully implemented, would affect every married or common-law couple in the land.
In the antiseptic lingo of tax professionals, the measure is known as income splitting. Quite simply, it means that couples — if they wish — get to total up their total earnings each year, divide them down the middle and pay their income taxes accordingly.
Income splitting provides a windfall financial benefit to families where only one partner works outside the home. For that reason, it is favoured by those, like the anti-feminist organization R.E.A.L Women, who promote the concept of stay-at-home moms.
It also benefits couples where one spouse earns significantly more than the other. The reason? High-income individuals face higher income tax rates. If a big earner can transfer some of his income to a spouse facing a lower tax rate, the couple as a whole saves money.