Word on the Street: Comments on income trust change

By Staff | November 2, 2006 | Last updated on November 2, 2006
3 min read

Not surprisingly, Ottawa’s unexpected decision to introduce a tax on income trusts has produced a wave of reaction from across the investment world. Some are concerned or angry; others say not to worry. As a sampling, Advisor.ca has pulled together observations from a number of experts and other interested parties.

Don Drummond, senior vice-president and chief economist, TD Economics: “It is not evident why businesses would necessarily want to retain a trust structure. At the moment, trusts face less restrictive disclosure requirements, but this will likely change in the years ahead. Meanwhile, there are a number of restrictions on trusts, such as limits to what can be done with profits. If companies want to simply pass along all of their retained earnings as dividends, it can be accomplished within the corporate structure. So, we are not sure whether the income trust sector will still be present in 10 years time.

Stephen Koury, fee-only planner, Inter Equity Asset Management: “Should we hold the government accountable for this? Absolutely not, the real culprits are Canadian corporations and the financial advice community…Diversification and proper Asset Allocation are the keys to a successful investment experience. Chasing returns and yields is not the answer, but I guess the investors that still have not learned that after this week and the tech meltdown of 2000-2002 will probably never learn.”

James Gauthier, mutual fund analyst, Dundee Securities: “Don’t panic. Bombshell announcements [like this] have a tendency to cause people to run into the streets in panic. Decisions made in haste are not often best for the portfolio. There will not be a direct impact on the distributions paid by income trusts until 2011. If you are using pure income trust funds for the purpose of income generation, we don’t believe any action is necessary at this point.”

George Kesteven, president, Canadian Association of Income Funds: “We are deeply disappointed by the federal government’s decision to reverse its election promise and to tax income trusts. It demonstrates a flagrant disregard for this country’s corporate culture, financial markets and working Canadians who have invested their savings in trusts.”

“Guest” posting on the Advisor.ca Forum: “I’m sorry, I don’t agree that it was lousy guidance from the government. You want to blame someone, blame Canadian corporations for taking advantage of a tax loophole and forcing the government’s hand. Income trusts may be good for saving taxes and increasing shareholder value; however, I question if they are good for the long-term prospects of a company.”

CARP (Canada’s Association for the Fifty-Plus): “CARP commends Minister Jim Flaherty for adopting a prudent approach to his new policy regarding income trusts. On the one hand, the new income trust tax regime will be a blow to many seniors because of the high rate of returns income trusts provide — sometimes with a high risk. However, it is welcomed news that current income trusts will be exempt from the new tax regime until 2011. This will provide investors with four years to adjust to their new circumstances.”

Ian Russell, president and CEO, Investment Industry Association of Canada: “They should have exempted existing trusts, in part because government inaction for so long makes them partially responsible. Let them eat it. On trusts coming forward they could have imposed maybe not full neutrality, but maybe a graduated tax measure to deal with it. It would have been far fairer.”


Advisor.ca staff


The staff of Advisor.ca have been covering news for financial advisors since 1998.