Trust Taxation - Canada

[My Dream]

Does anyone really know what this means?

http://tinyurl.com/ya943l

I don't.

 

[brewer12345]

It means the income trust gravy train is over. If you don't own any income trusts, no worries.

 

[kcowan]

The trusts will continue to get a tax holiday for 4 more years and any new trusts will be taxed like corporations. REITs ar exempt.

 

[Martha]

For us US investors in Canadian income funds, from Bloomberg:

The U.S. shareholders, who pay a 15 percent withholding tax on their trust dividends, will be paying a tax rate of 41.5 percent in 2011, the government said. Tax- exempt Canadian pensions will pay 31.5 percent, according to the finance department. Individual investors would continue to pay about 46 percent on trust payouts.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aBOr9mUy0Za0

YUCK! I am trying to find out more on the phase in.

 

[greg]

I have my personal tax lawyer (American) working on it in the other room as I speak type. This may take a while.

But from personal experience: My Canadian Income trusts, the monthly dividends, currently have 15% tax taken out before I see the money. So, I've always kept them in taxable brokerage accounts because the money is taken out by the Canadian taxmen, who don't care about our taxes nor what type of account it's in.

News flash from the lawyer: It initially appears that starting in 2011 the Canadian gov't will tax these income trusts at a 41% rate (which includes the 15% currently taken) for American owners. This will be phased in.

Excuse me while I fall on the floor weeping and saying "I knew this was too good to be true." . . . OK, I'm better now. So much for my early AM 'buy on the dip' ecstasy. Ouch. I'll be locked into the 41% tax bracket if shares are kept.

 

[greg]

The changes would go into effect next year for new trusts, while existing securities will be exempt until 2011.

This was on update 5 from DW's Bloomberg reference.

 

[My Dream]

I still don't have any idea what it mean. I don't even know what Income trust is.

 

[theronware]

"I still don't have any idea what it mean. I don't even know what Income trust is.F"


How about doing some reading. Your could do worse than start with Morningstar's article: "Introducing Canadian Royalty Trusts."

http://news.morningstar.com/article/article.asp?id=174228&_QSBPA=Y

Theronware

 

[Martha]

If you don't know, it probably means you have not invested in such a trust. My understanding is that it is a form of ownership in Canada where the trust holds from one to any number of different businesses. These trusts would pay out pretty big distributions to the owners. Canada treated these distributions very favorably from a tax standpoint. That is now disappearing and many people who have invested in these trusts will now have to pay a hefty tax on distributions. Trusts now in existence won't have this change applied until 2011.

 

[greg]

A little more info on Canadian Income Trusts:

http://www.investcom.com/incometrust/incometrust.htm

 

[Meadbh]

If you don't know, it probably means you have not invested in such a trust.

Not necessarily. Check the holdings in your mutual funds! For example, as of September 30th, 2.7% of MD Dividend Fund was in Canadian Oil Sands Trust.

Meadbh

 

[My Dream]

If you don't know, it probably means you have not invested in such a trust.

Well, I checked my funds today and it's down approximately $42,000 so I think it's safe to say that it has affected me. I just hope it will rebound somewhat. I'm not that much into politics but I just don't understand how you can lie about a campaign promise and get reelected. That may be the case again.

 

[astromeria]

I have a small postiion in EWC as part of my Foreign Developed Markets allocation--ouchie. Lghtening up EWC (and EPP) was on my rebalancing To-Do list for this quarter, but I hadn't done it yet--in the case of EPP, I have taxable profits, which always gives me pause.

 

[Nords]

in the case of EPP, I have taxable profits, which always gives me pause.

And soon the remainder will be really taxable!

So much for the fabled Canadian balanced budget. What a way to make up the "shortfall"... what ever happened to reducing spending instead of raising taxation?

 

[kcowan]

So much for the fabled Canadian balanced budget. What a way to make up the "shortfall"... what ever happened to reducing spending instead of raising taxation?

The move is intended to be tax revenue neutral. They improved deductions for seniors, especially those living on pensions. According to my broker, the net after tax effect in 2011 will be neutral. We are going to be loading up when the sell-off is past its manic phase.

The impending event was when Bell Canada announced that they were switching. Income Trusts paid NO corporate income tax on profits. Imagine the RBOCs having a tax holiday like that!

 

[Martha]

Maybe revenue neutral for Canadians, but not for foreign investors.

 

[kcowan]

Maybe revenue neutral for Canadians, but not for foreign investors.

Even for Canadians, it is just a promise from a politician at this point.

Of course, the $28 billion in lost market value is already real...

 

[AltaRed]

Maybe revenue neutral for Canadians, but not for foreign investors.

What will really happen is that the trust vehicle will no longer have the advantages that they formerly did and become 'equalized' with corporate entities. Most financial pundits, analysts and researchers believe the trusts will convert (re-convert) to corporate entities before 2011 and since corporate entities pay dividends, US folks will be back to 15% withholding tax as they are now.*

The Canadian gov't had to act before a rash of more corporate conversions that would have disadvantaged capital re-investment into the businesses and threatened future GDP growth. Income trusts were originally intended for mature, depleting assets that had little, to no, capital needs. As has been mentioned by another poster, the net effect of the change from a taxation perspective in 2011 is supposed to be approximately neutral.

*Edited: Original comment may be misleading. Currently, US investors have 15% withholding tax per Canada-US treaty on Canadian trust distributions (as they would also have on corporate dividends). But in the case of a trust, that is on a BT basis because trusts do not pay corporate income taxes. So the gov'ts proposal to put trusts on the same taxation basis as corporations will reduce the distribution income available to all investors, including US investors because it will be on an AT basis. The backgrounder I have provided links to provides more specifics.

 

[AltaRed]

Of course, the $28 billion in lost market value is already real...

Maybe. Trust valuations were in the stratosphere from retail investors chasing yield. None of that could have been sustained for the long haul.... just like the dot.con bubble and collapse. So those are paper losses and tissue paper quality at that.

 

[Martha]

AltaRed, thanks for the information. At least from a US investor standpoint, it would be great if the companies would "reconvert." Any suggested websites that talk more about this?

 

[AltaRed]

AltaRed, thanks for the information. At least from a US investor standpoint, it would be great if the companies would "reconvert." Any suggested websites that talk more about this?

There are several threads on the Financial Webring Forum with a few posts scattered here and there on issues for US investors.
http://financialwebring.com/forum/

May be better to look at the official gov't docs can be found here
http://www.fin.gc.ca/news06/06-061e.html

I haven't gone through it in a lot of detail and may not answer all the questions of a US investor. One thing for sure is that there is a lot of erroneous information floating around via media, etc.

 

[My Dream]

Well, I checked my funds today and it's down approximately $42,000 so I think it's safe to say that it has affected me. I just hope it will rebound somewhat. I'm not that much into politics but I just don't understand how you can lie about a campaign promise and get reelected. That may be the case again.

It's been a couple of days and it seems that it's starting to rebound. Thank G**. I believe I'm only down about $20,000. now, but then I don't know if it's all related to the same issue. The funds I have with IG can't be monitored on a daily basis, so it's difficult to get an exact number. I hope it all works out for the better, although being self employed, most of my career and my wife helping my with the business, we really don't have a government pension.

 

[AltaRed]

Income trust prices will continue to be volatile while:
1) the gov't clarifies all the nuances of the new tax proposals and enacts legislation,
2) the individual trusts figure out what they want to do, if anything to adjust to the new rules come 2011,
3) investors bid up or oversell the trusts trying to figure out what kind of taxable distributions they are getting and how it affects them specifically, and
4) investors wonder how many of the trusts will revert to corporate structure and how much trust valuations revert to corporate levels (most all trade at a premium to enterprise value currently, even after the Nov 1 selloff, due to people chasing yield).

In short , expect some more volatility in the short term.

 

[My Dream]

For some reason unknown to me due to my lack of finacial abilities, my portfolio seems to have rebounded as of today and I don't know why. I don't have all the calculations at hand but I think it's pretty close. Go figure. For some reason my Nortel stock has gone up today also. By the way, no wise crack jokes about NT stock, that's a sore spot with me. And to boot there head office is about 15 minutes away from where I live.

 

[kcowan]

For some reason unknown to me due to my lack of finacial abilities, my portfolio seems to have rebounded as of today and I don't know why.

All the index components are up today across the board. The trusts are up slightly again after Friday recovery.