Anyone lose their burro today?
All DIVE. DIVE.
All DIVE. DIVE.
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Flash Alert for November 1, 2006
Dear Subscribers,
As many of you have heard, the Canadian Finance Minister Jim
Flaherty has announced that Canadian trusts will now be taxed.
At Personal Finance, we’ve consistently evaluated the income
trusts recommended within the Growth and Income Portfolios
solely on the merits of their respective businesses. We’re
still comfortable with what those businesses are doing on an
operational level. And they’re free to operate within the
pre-announcement rules for the next four years.
But there’s a big difference between the businesses behind the
trusts and the trust shares themselves. This means that the
knee-jerk reaction by many in the Canadian market as well as
other markets in- and outside the US who are trading the trust
shares may well see a continued exodus, resulting in further
price losses.
At this point, the tax issue is still being flushed out and
isn’t set in stone. However, there are some initial items on
which we should focus. First, the proposed tax is focused on
distributions, meaning the trusts may have the incentive to
reduce payouts in favor of retaining more cash flows for
reinvestment and further expansion or acquisitions. This may
mean that the dividends will be slashed in the pending years.
Even if we’re willing to suck up the additional tax, the
dividend flows could be brought down so that the trusts no
longer fit our criteria as good, solid shareholder-focused
companies.
Second, even though there’s a proposed phase in of the
taxation, the market’s reaction will be to take that into
immediate consideration and discount pending changes rather
than wait for them to occur in the coming years. The trusts
themselves will also be expected to change their own business
models and management sooner rather than later.
Third, right now the loophole involves real estate trusts,
which means that some of our trusts, such as Canadian
Apartment Properties, could become the better deal for the
longer haul.
Here’s what we’re doing right now: We’re not panicking. We’re
placing all of our trusts on watch.
We’re contacting the industry lobbying groups and
representatives of the trust industry as well as many of our
trust management teams. We’re watching the market closely and
will keep you appraised as the tax issue and the potential
impact on our current and prospective holdings unfolds.
Keep an eye on your e-mail inbox for more from me; and look to
the Personal Finance Web site (www.pfnewsletter.com) for
additional pending details and judgments in the After The Bell
Wrapup section.
Last, the following is the statement from the Canadian Dept of
Finance concerning its proposed tax changes on trusts:
“The Honorable Jim Flaherty, Minister of Finance today
announced a Tax Fairness Plan for Canadians. The plan will
restore balance and fairness to the federal tax system by
creating a level playing field between income trusts and
corporations.
“‘The measures I am bringing forward today are necessary to
restore balance and fairness to Canada’s tax system, to ensure
our economy continues to grow and prosper and to bring Canada
in line with other jurisdictions,’ said Minister Flaherty.
‘Our plan is the result of months of careful consideration and
evaluation. Our actions are clear, decisive and in the best
interest of all Canadians.’
“For months there has been a growing trend toward corporate
tax avoidance. Top Canadian companies, operating within the
current rules, have announced their intention to convert to
income trusts. They feel compelled to seek more favourable tax
treatment by capitalizing on an available tax rule.
“While these decisions offer corporations short-term tax
benefits, they are creating an economic distortion that is
threatening Canada’s long-term economic growth and shifting
any future tax burden onto hardworking individuals and
families. If left unchecked, these corporate decisions would
result in billions of dollars in less revenue for the federal
government to invest in the priorities of Canadians, including
more personal income tax relief. These decisions would also
mean less revenue for the provinces and territories.
“Canada stands alone in its treatment of income trusts. The
structure being used in this country was shut down in the
United States and Australia.
“‘The landscape has changed dramatically in the short time I
have been Minister of Finance, and in fact, this year we have
seen nearly $70 billion in new trust announcements,’ said
Minister Flaherty. ‘The current situation is not right and is
not fair. It is the responsibility of the Government of Canada
to set our nation’s tax policy, not corporate tax planners.’
“The measures in the Tax Fairness Plan include:
1) A Distribution Tax on distributions from publicly traded
income trusts and limited partnerships.
2) A reduction in the general corporate income tax rate of
one-half percentage point as of January 1, 2011.
3) An increase in the Age Credit Amount by $1000 from $4,066
to $5,066 effective January 1, 2006. This will benefit low and
middle-income seniors.
4) A major positive change in tax policy for pensioners. The
government will permit income splitting for pensioners
beginning in 2007.
“These measures represent a major tax reduction. Our Tax
Fairness Plan will deliver over one billion dollars of new tax
relief annually for Canadians.
“For income trusts that begin trading after today, these
measures will apply beginning with their 2007 taxation year.
For existing income trusts and limited partnerships the
government is proposing a four-year transition period. They
will not be subject to the new measures until their 2011
taxation year.
“‘The time has come for Canada’s New Government to act,’ said
Minister Flaherty. ‘By introducing our Tax Fairness Plan today
we are acting in the national interest, doing what’s right for
all Canadians, and significantly enhancing the incentives to
save and invest for family retirement security.’
“The Tax Fairness Plan will build on the steps taken in Budget
2006. In that document Canada’s New Government delivered
significant tax relief for Canadians with 29 tax cuts
amounting to $20 billion in tax relief over the next two
years.
“Additional details are available in the attached backgrounder
or on the Department of Finance web site at www.fin.gc.ca. Or
by contacting Dan Miles, Director of Communications Office of
the Minister of Finance at 613-996-7861 or David Gamble at
613-996-8080.”
My colleague, Roger Conrad, editor of Personal Finance’s
sister publication Canadian Edge, sent out a similar message
this morning about the new changes with Canadian trust
taxation. Below, you’ll find the piece Roger has written up
detailing the changes, as well as additional information and
advice that I feel is particularly important for Personal
Finance readers.
“The Canadian Finance Minister Jim Flaherty has blindsided the
income trust sector with his announcement after the close of
trading Tuesday that Ottawa is planning to essentially start
taxing most income trusts as corporations, effective
immediately for new trusts and beginning in the 2011 tax year
for existing trusts outside of real estate investment income
trusts.
“The effective tax rate to be paid by trusts on distributions
will start at 34 percent, to mirror federal and provincial
taxes on companies, and will drop to 31.5 per cent by 2011.
“The income trust sector has lost about CD18 billion of its
value as of 10:30 am Wednesday morning. The Toronto Stock
Exchange’s capped income trust sub-index is down 11.5 percent.
The value of the sector yesterday was worth about CD157
billion, according to Bloomberg.
“In the fall of 2005, the government's consultation on trusts
caused enough market uncertainty to shave CD23.3 billion in
market cap from Sept. 19 to Oct. 21, according to a note from
Canaccord. Canaccord expects a CD25 billion decline in trusts
as a result of Tuesday's announcement.
“The announcement will immediately impact Telus and BCE, which
recently announced plans to convert to the income trust
structure. Those plans almost certainly will not go forward.”
Regards,
Neil George,
Editor, Personal Finance
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