Canada: Proposed Legislation Shifts Focus Away From Income Trusts

Last Updated: December 21 2005

Originally published in the Tax Bulletin November 2005

Over the past several years, the Canadian public market landscape has been strongly influenced by an ever-increasing number of corporate enterprises converting themselves into "income trusts". Yesterday, the Department of Finance announced measures in an effort to address the Canadian government's growing concern with the potential loss of tax revenue arising from the use of these trust structures and other types of flow-through entities. The proposed measures involve a reduction in personal income taxes on dividends in order to "level the playing field" between corporations and income trusts.


The Tax Drain

In highly simplified terms, income trusts are commercial trusts that indirectly own the assets of an active business. Of special interest to investors (and of special concern to taxation authorities), income trusts (and their subsidiaries) are generally capitalised in a manner that avoids (or substantially eliminates) the imposition of the entity-level taxation that normally applies to the business profits of a corporation.

The tax-efficient character of income trusts is well documented and has led to their proliferation in Canada's public markets. From 2000 through 2004, the total market capitalisation of income trusts in Canada increased from CDN$14.1 billion to CDN$110.7 billion.1 Similarly, during the first six months of 2005, approximately CDN$11.2 billion was raised in the public markets by Canadian income trusts, including 49 initial public offerings that collectively raised CDN$5.5 billion.2

In recent years, several independent studies have attempted to quantify the tax revenue lost by virtue of the emergence of income trusts.3 In 2004, it was estimated that the Canadian government loses between CDN$400 and CDN$600 million in tax revenue each year from the use of income trusts. More recently, it has again been suggested that the amount of lost tax revenue arising from the use of income trusts may be as high as CDN$600 million annually.4

A Solution in the Making

By the spring of 2004, the federal government determined that the potential tax leakage spawned by the expanding use of income trusts needed to be addressed. As a result, the government tabled a number of significant amendments to the Income Tax Act (Canada) in an effort to limit the future loss of tax revenue. In its 2004 budget, the federal government proposed to limit the investments that certain tax-exempt pension funds could make in income trusts. The proposed amendments would generally have limited the amount that pension funds could have invested in income trusts to 1 percent of the book value of such funds' assets. In addition, most pension funds would have been prohibited from owning more than 5 percent of any particular income trust. However, in response to strong criticism from the financial sector, the Canadian government later suspended the implementation of its 2004 budget proposals, pending the completion of further consultations.

In the 16 months following the suspension of its income trusts proposals, the federal government undertook a lengthy review of the Canadian tax treatment of both income trusts and other types of flow-through entities, including limited partnerships. On September 8, 2005, the government released a consultation paper entitled "Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trust and Limited Partnerships)" (the "Consultation Paper"). The Consultation Paper identified a number of issues in respect of which the Canadian Department of Finance wished to solicit the views of market stakeholders and tax professionals. The Canadian government stated that it would accept submissions in response to issues raised in the Consultation Paper until the end of 2005 and that any future initiatives would thereafter be undertaken with a full appreciation of the costs and benefits of treating flowthrough entities in a particular manner. Despite these assurances (perhaps because of the imminent election campaign), yesterday's announcement brought an early end to the consultation period.

The Fix

In its news release yesterday, the Minister of Finance stated that the overwhelming consensus among the submissions received during the consultation process was to reduce personal income taxes on dividends.

The mechanism for the tax reduction will take the form of an enhanced dividend "gross-up" and tax credit such that the total tax on dividends received from large Canadian corporations will be comparable to the tax paid on distributions from income trusts.

The enhanced dividend gross-up and tax credit will apply to "eligible dividends". Eligible dividends will generally include dividends paid after 2005 by public corporations (and other corporations that are not Canadian-controlled private corporations ("CCPCs")) that are resident in Canada and subject to the general corporate income tax rate. CCPCs will be able to pay eligible dividends to the extent that their income (other than investment income) is subject to tax at the general corporate income tax rate. The table set out in Appendix A illustrates how the proposal will level the playing field between corporations and income trusts.

End to Moratorium on Advance Tax Rulings By CRA

Yesterday's announcement confirmed that the Canada Revenue Agency (the "CRA") will resume providing advance tax rulings on flow-through entity structures. In September, as an indication of the government's desire to seriously consider significant changes to the manner in which income trusts and other flow-through entities are taxed, the Minister of Finance requested that the CRA immediately suspend the issuance of advance income tax rulings relating to the tax treatment of income trusts and other flow-through entities. The moratorium on the issuance of income tax rulings has had a significant chilling effect on the Canadian income trust market as well as the cross-border "income deposit securities" market. While a corporation is not required to obtain an advance income tax ruling prior to undertaking an income trust conversion, market imperatives often make the receipt of a positive tax ruling a commercial necessity.

Going Forward

Commentators have consistently advocated the reduction of tax imposed on dividends on the basis that corporate earnings should not effectively be taxed twice. It is interesting that concerns over the taxation of trusts have prompted this long-standing issue to finally be addressed.

The pending election raises some uncertainty as to when the proposed amendments will be enacted into law. If not passed by the government prior to the election, the changes would have to be tabled again following the election.

Of greatest importance, yesterday's announcement does not foreclose the possibility of further legislative changes. The government will certainly keep an eye on the income trust market, especially considering the fact that the proposed changes do not have any meaningful impact on pension funds and other tax-exempt investors. If still unsatisfied with any perceived tax losses, the government could very well consider additional tax changes, such as an independent tax levied on income trust earnings or placing a limitation on the amount of interest that may be deducted by corporate entities that are owned by an income trust (thereby effectively establishing a degree of entity-level taxation).

Appendix A

1. The combined average federal-provincial corporate income tax rate in 2010 including the Budget 2005. proposed corporate tax rate reductions and proposed provincial tax changes.

2. The average top federal-provincial personal income tax rate.

3. The assumed 20 per cent dividend tax credit rate approximates the combined average federal-provincial small-business rate.

4. Assumes that provinces will also provide an enhanced dividend tax credit for eligible dividends.

5. Because the combined average federal-provincial corporate income tax rate for large corporations is proposed to be 32 per cent in 2010, the dividend gross-up/credit mechanism, which is based on an assumed 20 per cent corporate income tax rate, does not fully compensate individuals for taxes paid at the corporate level.


1. Canada, Department of Finance, Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trusts and Limited Partnerships) (Ottawa: Department of Finance, 2005) at 10.

2. Andrew Willis, Eric Reguly, Sinclair Stewart and Grant Robertson, "Income Trust Sector in Disarray", The Globe and Mail (27 September 2005). By contrast, between January and June of 2005, only CDN$1.5 billion was raised in the Canadian marketplace through the initial public offering of corporate shares.

3. Lalit Aggarwal and Jack Mintz, "Income Trusts and Shareholder Taxation: Getting it Right" (2004) 52(3) Canadian Tax Journal 792.

4. Stephen Chase "Trust tax loss $600-mln, economist says", The Globe and Mail (22 September 2005).

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2005 McMillan Binch Mendelsohn LLP

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.