Ottawa announces new policy on income trusts

The CBC reports that Ottawa has announced new policy on popular income trusts:

On the eve of an anticipated federal election, the governing Liberals announced new tax guidelines Wednesday that make dividends more attractive for investors but leave tax policy on income trusts unchanged. . . . The federal changes . . . would reduce personal income taxes on dividends, which the Finance Department says will help level the playing field between corporations and income trusts.

Note that it says they are only reducing personal income taxes on dividends, which was made more clear later in the article where Monte Solberg, Conservative finance critic is quoted as saying “pension plans will not benefit by this tax break that will go to individual investors.” The article continues:

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 more comparable to the tax paid on distributions of income trusts, and to eliminate the “double taxation” of dividends at the federal level.

The article also provides some important warnings about income trust that should be heeded:

A study released Wednesday says that despite the recent bloodbath in income trusts, the sector may still be overvalued by 28 per cent, or $20 billion. ‘Much of the overvaluation stems from abuses in the financial reporting, valuation and marketing of business trusts,’ concludes Accountability Research Corp., an affiliate of Rosen and Associates forensic accountants. . . . The study says the tax advantage of the trust structure has been overstated as the motivation for the mass conversion into trusts of corporations outside the energy and real estate sectors. ‘Rather, it has been the opportunity for selling owners to receive inflated prices well above what strategic industry buyers and professional investors alone would be willing to pay. Investment bankers have been motivated by the $1.4 billion of inflated underwriting fees that they have received since Jan. 1, 2001. Many have taken advantage of ill-informed investors seeking higher cash-yielding investments.’

This came as no surprise to me, as it was something my advisor told me about a while back. And one further blow to the non-energy, non-real-estate trusts:

Accountability Research said its examination of the 50 biggest income trusts outside the energy and real estate industries found that less than two-thirds of their cash distributions are actual income. The rest is a return of investors’ own capital.

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