Feds face anger as income trusts to be taxed
By Bill Rea

There are very obvious short-term implications from last week's announcement that the federal government will be imposing a distribution tax on publicly traded income trusts and limited partnerships.

This was one of the more prominent announcements from Finance Minister Jim Flaherty last Tuesday. Others included reducing the corporate income tax rate by half a per cent effective in 2011 (the year taxes on income trusts kick in), increasing the age credit amount by $1,000 and allowing income splitting for pensioners, beginning next year.

"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," Flaherty said. "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."

"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," he added. "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."

Media reports all week have been reflecting an angry reaction to Flaherty's announcement, with stories of people seeing the worth of their investments sink by thousands of dollars as the market values dropped. That didn't come as much of a surprise to Oak Ridges - Markham MP Lui Temelkovski.

"I've been hearing a lot of feedback," he remarked. "People are quite upset."

Temelkovski, who worked in the financial sector before being elected to Parliament, agreed with the government's move on the level that the federal tax base was being eroded because of the tax breaks these trusts offered. On the other hand, he pointed out the Conservative government had left people the impression they weren't going to take this step.

"They led the people on," he charged, adding they were saying one thing, "then come Halloween, pull the trick on them."

He said he heard from one constituent, who said he lost hundreds of thousands of dollars, who stated he wouldn't have minded so much if it had been the result of poor investment decisions. This was a case of government making the decisions.

Temelkovski also predicted the Tories are going to have a hard time putting this behind them.

"It is going to be remembered," he said. "We'll do our best to bring it up. They broke a promise."

Although the market tumble might be seen as a short-term reaction, Temelkovski said the results will have a longer effect. He pointed out some investments have dropped 15 to 20 per cent of their value. "You will not regain it for many, many years," he said.

But Temelkovski's reaction wasn't all negative. He liked the idea of allowing income splitting, although he wasn't sure how effective it would be for lower-income seniors, who probably don't have company or corporate pensions. And he said widows and widowers aren't likely to benefit. "They have no one to split with."

"I think it was a necessary thing to do," remarked York - Simcoe MP Peter Van Loan. He noted there's been an overall massive shift in income trusts from corporations to individuals.

He was also enthused with the pension splitting.

"Seniors will do very well and we corrected a situation that was emerging," he said. Had the situation been

allowed to continue, Van Loan said individual income tax rates would have had to rise.

Van Loan's office has received some public flack over the move, but "less than I expected."

He added he's heard from no one who thought a major corporation should be able to pay no tax by adopting a trust structure.

He also agreed there's been a market hit.

"In the long term, the corporate environment in Canada will be much better," he said, adding the income trust structure cut into the money diverted to research and development. "The Canadian economy will be in better shape in the long run."

Van Loan also said the taxes won't take effect for a couple of years. "There's lots of time for people to adjust," he observed.