Taxation of Income Trusts in Canada: Effects on Structure, Conduct and Performance
TAXATION OF INCOME TRUSTS IN CANADA:
EFFECTS ON STRUCTURE, CONDUCT AND PERFORMANCE
P. L. ARYA Abstract: Income trust as a business structure became increasingly popular in Canada since 2003. Income trust structure gave companies advantage of shifting their tax burden on to the investor. The investor, on the other hand, received steady and higher than the market rate of return on invested capital and also received capital gains in the form of ‘return of capital’. When large Canadian corporations were in the process or changing their structure from public corporations to income trusts, the government of Canada in a sudden shift of policy announced that it would remove the tax advantage of income trusts and put them on equal footing with Canadian corporations. This announcement in October 2006 had implications on the structure, conduct and performance of Canadian industry. The purpose of this paper is to analyze reasons for change in the government policy and the effect of the new tax policy on the structure, conduct and performance of Canadian industry.
Introduction:
Businesses which have achieved high profits and maturity, with moderate growth prospects, have adopted income trust structure to become tax efficient. Under this structure, the income trust, which has a business, sells units in the stock market to raise its capital. The unit holders receive two types of payments; (a) return on their units and, (b) return of capital. Return on units is treated as interest income for tax purposes and depending on income of persons, the marginal tax rate may be around 45%. The return of capital part is treated differently. The investor is to deduct this amount from the cost of units he had bought. This becomes a taxable capital gain at the time of sale of the units. Normally capital gain tax works out to be around 25%. The income trust units retain some of the earnings for further growth and, after deducting expenses, pay out most of their income (high pay-out
EFFECTS ON STRUCTURE, CONDUCT AND PERFORMANCE
P. L. ARYA Abstract: Income trust as a business structure became increasingly popular in Canada since 2003. Income trust structure gave companies advantage of shifting their tax burden on to the investor. The investor, on the other hand, received steady and higher than the market rate of return on invested capital and also received capital gains in the form of ‘return of capital’. When large Canadian corporations were in the process or changing their structure from public corporations to income trusts, the government of Canada in a sudden shift of policy announced that it would remove the tax advantage of income trusts and put them on equal footing with Canadian corporations. This announcement in October 2006 had implications on the structure, conduct and performance of Canadian industry. The purpose of this paper is to analyze reasons for change in the government policy and the effect of the new tax policy on the structure, conduct and performance of Canadian industry.
Introduction:
Businesses which have achieved high profits and maturity, with moderate growth prospects, have adopted income trust structure to become tax efficient. Under this structure, the income trust, which has a business, sells units in the stock market to raise its capital. The unit holders receive two types of payments; (a) return on their units and, (b) return of capital. Return on units is treated as interest income for tax purposes and depending on income of persons, the marginal tax rate may be around 45%. The return of capital part is treated differently. The investor is to deduct this amount from the cost of units he had bought. This becomes a taxable capital gain at the time of sale of the units. Normally capital gain tax works out to be around 25%. The income trust units retain some of the earnings for further growth and, after deducting expenses, pay out most of their income (high pay-out