INCOME TRUSTS TAX MEASURES

Publicly traded income trusts have become increasingly popular investments in the last number of years.

In theory, such investments will result in a greater after-tax return than will shares of a public corporation because there is only one level of taxation. If the trust distributes all of its income annually, such income is taxed only to the unitholders. To the extent that income is retained by the trust, it is taxed in the trust at the highest personal rate, but the after-tax income can be distributed tax-free to unitholders.

The government is concerned that registered pension plans (RPPs) will invest heavily in income trusts when, as is anticipated in the near future, provincial legislation clearly protects unitholders from trust liabilities. This would result in all income taxes associated with the income earned by the trust being deferred until pensions are paid.

To counter this possibility, subject to certain exemptions and transitional rules, the Budget proposes two measures which will apply after 2004.

If a RPP invests more than 1% of the book value of its investments directly or indirectly in income trust units, the excess will be subject to a 1% per month penalty tax.

Also, if a RPP holds more than 5% of the units of a particular income trust, the fair market value of excess holdings will be subject to a 1% per month penalty tax.