A decision by Ottawa to tax income trusts and limited partnerships at the same rate as regular companies could slash the market value of Canadian business trusts by as much as 30 per cent, according to an RBC Dominion Securities report.
Taxing trusts in a manner similar to corporations "should be a non-starter," RBC analyst Dirk Lever wrote. The report argues that because Canadian investors pay taxes on underlying trust operations -- as well as on capital gains on trust conversions -- the government is already generating larger tax revenues from the trust structure than the corporate structure. Hitting investors with significant capital losses, for which they would likely have difficulties claiming for income tax purposes, would be unfair, it said.
Income trusts are popular because they distribute much of their profits to unitholders and don't pay corporate income tax on those profits. Those profits, however, are taxed once in the hands of unitholders. The Liberals are reviewing the income trust structure.
The RBC report estimates $3.3-billion is collected in tax on yearly trust cash distributions of $16-billion, not including potential capital gains taxes on trust conversions.
Mr. Lever and his associates say that "the amount of taxes collected from the business trust sector is likely greater today than it could be if the business trusts were converted back into corporate form."
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