The federal government has moved in the right direction by saying it will lower dividend tax rates while leaving income trusts untaxed, but it has not gone far or fast enough, the Investment Dealers Association of Canada contends.
As well, there is no guarantee that a tax will not be imposed on trust distributions if the government falls in an election or if Ralph Goodale is replaced as minister of finance, IDA senior vice-president Ian Russell said yesterday.
"There will be some uncertainty that will stay in the market because it is not clear how or when the changes will take effect, plus we could have a new government or a new minister of finance that takes a look at it and decides to do something else," he said after the IDA released the submission it has made to a federal review of income trusts.
The government was expected to fall in a confidence vote yesterday and to call a general election, likely for Jan. 23.
Concerned about the loss of revenue from income trusts' advantageous tax status, Mr. Goodale launched a review of the topic in September. However, he pre-empted the review last Wednesday when he unexpectedly announced a pledge to lower taxes on corporate dividends effective next year and denied that the government also planned to levy a tax on trusts.
The full benefit of the changes Mr. Goodale announced will not be felt until 2010 when a previously announced reduction in corporate tax rates is completed. However, Mr. Russell said the IDA wants the government to move to make corporate and trust structures "tax-neutral" and to do so right away.
"The planned reduction of corporate taxes may not be sufficient or soon enough to achieve the desired outcome," Mr. Russell said.
Tax "neutrality" would encourage companies to convert to a trust from a corporate structure for genuine economic and business reasons, Mr. Russell said, "as opposed to strictly for tax reasons."
In its submission, the IDA recommends that the government monitor the impact on the stock market of its trust and dividend decision. If further "remedial" action is required, it should consider such steps as limiting pension fund holdings of income trusts but "avoid the more complex and unnecessarily disruptive options of taxing the distributions of trusts."
© The Globe and Mail
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