On Friday June 22, the Canadian Senate approved Bill C-52, which includes the trust tax rules that impose more than a 31% tax on distributions to unit holders effective in 2011. It fulfills the Conservative intentions to tax trust owners as announced on October 31, 2006 in a surprise reversal of Party policy and public promises.

Not all political parties are committed to letting the Bill stand as law.  But change will only come with new results in the next election.

Not all financial experts see a clear way to enact the law in 4 years time.  And many of the income trust executives in Canada, particularly in the energy sector, see need to lie down in their fight against the “Tax Fairness Rules”.

The tax has been described as onerous and blamed for hurting investors by destroying their sources of income, particularly important for retirees.  The tax has been blamed for the sell-off of public companies into the hands of private equity as well as the sell-off of Canadian based businesses into foreign hands.  More than two dozen income trusts have either been sold or have engaged in an exploration of sales opportunities.

Passage of C-52 is marked in time by the nearly simultaneous announcement that 182-year-old ED Smith, the jam maker in Ontario had been sold to an American pickle maker.  Bruce Smith, the company CFO is quoted by John Partridge in the Globe & Mail, as saying, “I would say it’s highly unlikely this process would have taken place without the change in the legislation. It created challenges for us to raise capital and was one of the leading reasons we got into this strategic review process.”

The Minister of Finance, Jim Flaherty, has repeatedly denied that he or his government should take blame for the perceived negative consequences of their legislation. 

Meantime, some Ottawa insiders report that further market-controlling legislation may be in the works to clamp down on foreign sell-offs. However, that is not saying much. As the trust tax news announcement came as such a surprise with such devastating effects on market prices, market participants are living in “disaster mode” so that nothing can really be a surprise. 

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