Investors expressed relief as the Canadian Department of Finance put out a press release to say that, “Minister of Finance Ralph Goodale today responded to concerns regarding income trusts and other flow-through entities by announcing a reduction in personal income taxes on dividends, which will help level the playing field between corporations and income trusts.”

Minister Goodale said, �Given the uncertainty surrounding how long this session of Parliament will last, as well as the need for greater certainty and stability in the income trust market, there is a clear case for immediate action. The overwhelming consensus of submissions received in our consultation process was to reduce personal income tax on dividends. Today�s announcement acts on that consensus and ends the consultation process.�

In the next few days, investors will be cheering.  Unit prices will likely rise. And Canadians will feel pleased and reward through the holidays into the New Year and election.  Congratulations are due to contributors to the consultation process: Bravo!

With more than a month to go in the planned consultation, the abrupt cancellation of the process leaves Canadians once again without long term answers.  It also appears to leave us without promised access to government findings and public perspective on important questions raised by the government. Some trust investors are consultation informants are already asking about the intent of the process.

There is a proposed new policy to reduce taxes on dividends paid by traditional public companies. There is nothing specific being said, yet, to explain the reasons for or the full implications of the credits proposed.

The Department announcement went on to say that, “This tax reduction will take the form of an enhanced dividend �gross-up� and tax credit to make the total tax on dividends received from large Canadian corporations more comparable to the tax paid on distributions of income trusts, and to eliminate the �double taxation� of dividends at the federal level. The Minister today tabled in the House of Commons a Notice of Ways and Means Motion to implement these measures.”

The government also reversed its position on the tax rulings freeze saying that, “Minister of National Revenue John McCallum will resume providing advance tax rulings on flow-through entity structures.”

In effect, the government is letting go of its stated concerns about the loss of $300 million in corporate taxes on dividends paid by income trusts.  And in fact, the government is proposing policies to double up their estimated losses.

The proposed policies involve reducing corporate tax on dividends for major Canadian public corporations from 54% in total to 46% so that the corporate dividend tax rate is relatively equal to the taxes on distributions by flow-through entities like income trusts.  The announcement included a Background document with estimates that this new dividend tax move will cost Canadians $300 million in tax revenue on corporate dividends beginning in 2006.

The release suggests that, “Improving incentives to save and invest and making the tax system more neutral with respect to business structures are important elements of the Government�s recently announced Plan for Growth and Prosperity. The tax reduction announced today is consistent with the Plan�s ultimate goal of achieving higher living standards for all Canadians.”

Some corporate managers and observers have said that this kind of change “levels the playing field” on taxes. Other managers running income trusts claimed, however, that this shift actually penalizes income trusts. Corporations can find the same level of tax reduction as trusts but without committing the time and money to set up specialized legal documents including trust indentures to ensure the effective functioning of flow-through and asset-backed securities.

There remains an uncertainty of a certain kind.

At the point of the government made its announcement, TrustInvestors had added more than 830 names to the member-sponsored and drafted petition.

People were also eager to come together in a non-partisan way, from all sides of the market, to offer their expertise and perspective for the mid-December Roundtable on income trusts. 

Speakers expressed concern that liquidity in the income trust market had all but dried up.  They were expressing desire to contribute to informed policy formulation.  And many were articulating need for the newly forming iTrustInstitute.

The overall income unit universe included 375 issues with a total market value of approximately $170 billion, roughly $5 billion less than it’s value two months earlier.

People were coming together with shared interest in understanding Canadian needs and informing policy. This was despite widespread expectation that Mr. Goodale would make an early announcement about “no policy reform” for income trusts. The pre-emption of the consultation was a possibility fully anticipated by the TrustInvestor.

In comments on the initial government freeze on trust tax rulings, we anticipated that the government might threaten and then reverse it’s stance towards income trusts for a third year in a row.  And so it is that, after proposing costly policy changes for trusts and their investors, the Minister of Finance has once again provided last minute near-term relief from its own threats.  Some suggest this move was to be fully expected because it positions the government leaders as if they are political heros for Canadian constituents holding income trusts.

Indeed, Mr. Goodale commented that, �Reducing the tax individuals pay on dividends will encourage savings and investment and will help establish a better balance between the tax treatment of large corporations and that of income trusts. This action will benefit Canadians and result in bottom-line tax savings for them.�

In fact, nothing that the government has done with this new proposal answers its own questions about cash distributions causing a drag on economic growth or productivity.

Regardless of the government dividend tax reform, differences remain between corporate and trust structures in terms including motivation to pay returns to investors, frequency of distributions and legal obligations for financial disclosure.

Many TrustInvestors celebrate the current pause in policy changes for income trusts and unit holders.  Many also feel need for an informative and educational iTrustInstitute. The requirements become clear with the Government’s cancellation of its Consultation process. Long term perspective informs stable policy and secures a dynamic market.

The all-day Roundtable on Income Trusts will be hereby transformed into an afternoon reception to recognize contributors to the potentially useful Consultation process. 

We can celebrate near-term answers and articulate long term questions.  Collecting new perspective, we can use our time together as opportunity to articulate a mandate for education and information regarding income trusts.

We can pursue unfinished explorations through consultations of our own. We can look forward to research, analysis and revealing findings through publication. We can realize the otherwise unfulfilled potential from the Consultation process to collaborate in creating a new understanding of our investments and in securing our markets.

Please join us December 14 for less formal conversation rather than large presentations. A new invitation to the TSX and agenda will be laid out with participants in coming days. Existing full-day event registrations will be refunded.

And with our upcoming event, I welcome everyone to join the iTrustInstitute to explore the merits and risks of income trusts, consider fair policy in the context of a complex tax environment and to continue in the on-going work to support informed policy formulation in a way that provides long term stability.

With Minister Goodale�s Consultation process and his recent announcement, Canadians have been shown a challenging path and have made steps along the way.  Beyond today, this government and the next, and on to the next generation, many of us see on-going need and potential for policy that helps shape a rewarding and productive future of income and trust in the Canadian economy.

This save from policy reform is immediate. It closes a window on one set of market risks and opens a door to meaningful change.

Please join us. Welcome!