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Saturday, March 24, 2007

Income Trust Tax not as bad as some think

The income trust taxation announced by the Canadian Government on halloween 2006 is somewhat misunderstood.

1) Canadians in the highest tax bracket who hold their trusts in a taxable account will see little if any decline in after tax income. However, Canadians with little or no taxable income (ie the dividend tax credit is non-refundable) will feel the full effect of the trust tax. This Trust tax actually screws the low income investor and investors who have retirement accounts.

2) USA investors with trusts in the non-taxable accounts will find that there will be no more 15% withholding tax on distributions that will go into that account, reducing the net effect of the Trust tax up to 50%.

3) USA investor placing certain trusts into a retirement accounts, they will be hit with little or no tax (except for tax paid by the income trust under the new trust tax regime) and no 15% withholding tax, which is somewhat better than investing in the current income trust structure.

4) Some investors are under the mistaken impression that the distributions of all trusts will decline by 31.5% starting in 2011. That is not necessarily true. There are oil and gas, pipeline, power and other infrastructure income trusts that will pay no tax or minimal tax for years after 2011 due to tax pools and depreciation allowances on assets.

5) It appears the income participating units (units that consist of a common share plus a bond "stapled" together) will not be affected by the trust tax. If this strtucture is allowed I think we will see some existing trusts convert to this structure and new IPO's issued using this structure.

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