Income Trusts: The Nuts and Bolts of the Minister's Announcement,
November 1, 2006

On October 31‚ 2006, the Honourable Jim Flaherty, Minister of Finance‚ proposed certain changes to the taxation of publicly traded Canadian income trusts and partnerships.

Distributions to investors from trusts and partnerships will now be subject to a distribution tax regime designed to ensure that the taxation of business income and unitholder distributions approximates the tax treatment of corporations and their shareholders. For trusts or partnerships that begin trading after October 31‚ 2006‚ this new tax will be levied beginning in the trust’s or partnership’s 2007 taxation year. For trusts or partnerships that were publicly traded on October 31‚ 2006‚ the new tax will first apply to the trust’s or partnership’s 2011 taxation year.

In particular‚ under the new regime‚ certain distributions from specified investment flow-throughs (“SIFTs”) will be subject to tax at corporate income tax rates‚ 34% for 2007 and projected to be 31.5% in 2011. Certain distributions will also be taxed in the hands of unitholders as if they were dividends from a taxable Canadian corporation. Distributions of trust capital will remain tax free.

By 2011‚ it is projected that combined tax of approximately $46 will be payable by the SIFT and a taxable Canadian individual unitholder on $100 of income earned and distributed by the SIFT with respect to its business activities in Canada. Distributions to tax-exempt investors in Canada will only be subject to tax at the special rate‚ i.e. 34% in 2007.

The stated intention of the Minister of Finance is that all publicly traded “income trusts” be treated as SIFTs and the legislation will be drafted accordingly. The legislation will be drafted to include the following details: a trust or partnership will be a SIFT in a particular year if‚ throughout the year‚ it is a resident of Canada‚ its units are listed on a stock exchange or other public market’ and it holds one or more properties that meet the definition of a ‘non-portfolio property’. An investment in a subject entity will be a non-portfolio property if the SIFT holds more than 10% of the subject entity’s equity value, or if most of the trust’s or partnership’s value is attributable to the subject entity.

Real estate investment trusts (“REITs”) that do not hold non-portfolio property other than real estate may be excluded from the definition of a SIFT‚ provided certain conditions are satisfied. The exemption for REITs is intended to recognize the unique history and role of REITs as collective real estate investment vehicles. To be a REIT for a taxation year‚ a trust must not hold any non-portfolio property other than real property situated in Canada‚ earn at least 95% of its income from properties‚ have not less than 75% of its income attributable to rents‚ mortgages or gains from disposition of real property situated in Canada‚ and hold real property situated in Canada, cash and debt worth at least 75% of its equity value. For these purposes‚ real property situated in Canada will include securities issued by any entity that itself satisfies the foregoing conditions.

Goodman and Carr LLP Tax Group

For more information on income trusts and tax-related matters, please contact any member of the Tax Group listed below:

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