Canadian Income Trusts: Tax Likely to Pass Soon
June 5, 2007
Summary: In May, Verdict for Investors predicted that Bill C- 54 (the Canadian Budget implementation bill taxing income trusts) would not be passed. It now appears that Bill C-54 will pass this week. This means that a 31.5% tax will be imposed on distributions from Canadian Income Trusts after the four year transition period expires in 2011. There is a remote chance that the Senate could sidetrack Bill C-54 later this week, but that is thought to be unlikely. Despite the passage of C-54 in the current session by the House of Commons, the tax may never be imposed because elections are expected in the fall of 2007 or the spring of 2008. The Liberals have made their opposition to the tax on income trusts part of their income tax policy[1] so the law may be changed in future sessions of the House of Commons. Even if the Conservatives remain in power, Canadian observers expect a shuffle of Cabinet positions so the Liberals may lose the elections and still be in a position to amend or revoke Bill C- 54.
Discussion: The Finance Committee concluded the debate on Bill C- 54 yesterday (June 4, 2007). This ended the review of potential amendments and all the procedural wrangling including the hearing of further testimony from witnesses. There is to be a vote to complete the Report Stage this evening (June 5, 2007), and Bill C-54 is then reported to the House of Commons for third reading. The third reading in the House will not have any significant debate because the Government has the necessary votes for passage since both the Quebec Bloc and the NDP parties have been supporting the Government even at the Committee stage.
In fact, when the Liberal proposal (to replace the Government’s proposal of a 31.5% entity tax on distributions from Canadian Income Trusts with a 10% distribution tax) was defeated (along with other relieving amendments), the Liberals in a tactical political proposed another amendment extending the transition period from 4 years to 10 years. The longer transition period was an amendment that the Quebec Bloc had advocated both at the Committee hearings as well as publicly. This proposed amendment was defeated because the Quebec Bloc voted against their own proposal: the Liberals garnered some press by attacking the Quebec Bloc and trying to discredit them.
There is an outside chance that, after the Bill gets third reading this week and is referred to the Canadian Senate, the Senate could hold its own hearings. There is also still some uncertainty because the House was scheduled to recess at the end of this week for the summer, but there are a number of other unrelated pieces of legislation requiring passage before the recess. In addition, another major piece of tax legislation is being referred to the Finance Committee today for review. This is a bill with a large number of technical amendments. It includes a host of revised rules for the taxation of foreign investment entities and non-resident trusts. This is exceptionally complex legislation that has been languishing for years. The foreign investment entity rules and non-resident trust rules were first released in 1999 for discussion and re-released several times with fairly significant amendments.
The Government is clearly trying to clean the slate so that when it returns in the fall all of these very controversial tax items will be out of the way so that it can set a new agenda. It is possible that the Liberal-dominated Senate will stall all matters by having a more comprehensive review with witnesses. Under normal circumstances that is what the Senate would do; but, there has been a debate about the relevancy of Canada’s unelected Senate: the Government has been threatening constitutional amendments to alter the Senate by having its members elected. So the Government is playing politics by threatening the Senate.
[1] Following yesterday’s debate on C-54, John McCallum commented: “I would like to conclude by addressing all those hundreds of thousands of Canadians who lost millions and billions of dollars because of the government’s broken promise on income trusts. I would like to tell those people that the fight is not over. We are at the beginning of the end of the battle and the battle will continue.
Even if this bill should pass the House, as it probably will, there is still the Senate. Even if that does not work, we will fight the income trust issue across the country. We have had many town halls before. Thousands of Canadians have attended. The Liberal Party will be holding one in the finance minister’s riding soon. We will fight this proposal in the Senate and in town halls across the country throughout the summer. Last but not least, we will fight this in the next election.
The Liberal policy is clear. We are standing by our policy. It is better for the country. It provides help for all those income trust holders who lost thousands, millions, or billions because of the Conservative government’s broken promise. We will get re-elected and we will bring back our own income trust policy, which will be a fine replacement to the terrible disastrous broken promise that has been imposed by the government, aided and abetted by the NDP, on hard-working Canadians.”
