Canada: Canadian Income Trusts And Their Distributions To Be Taxed By The Federal Government

Last Updated: November 2 2006
Article by James Morand

Most Read Contributor in Canada, September 2018

The Canadian Minister of Finance served up his own Halloween trick to income funds and their investors on October 31, 2006, announcing Finance's intention to tax distributions made by publicly traded flow-through entities ("FTE") including income trusts and certain publicly-traded Canadian partnerships.

Summary

The Proposed Changes are intended to treat FTEs that are trusts as taxable Canadian corporations in respect of the taxable portion of their distributions. Thus, to the extent that a portion of a distribution from an income trust is taxable, such amount will not be deductible by the trust in computing its income for the year and the trust will be subject to tax in the year in respect of such income. Unitholders of the trust will in essence treat the taxable portion of their share of the distribution as a dividend received from a taxable Canadian corporation. The non-taxable portion of a distribution will continue to be treated in the same manner as before — as a return of capital which reduces the cost base of the trust unit to unitholders.

Similar rules are to apply in respect of FTEs that are partnerships. Under the proposals, a partnership which is ordinarily not liable to tax, will be required to pay a special tax on income from businesses that it carries on in Canada and income from non-portfolio properties other that dividends that, if it were a corporation, would be deductible in computing taxable income. Partnership income subject to the new tax and allocated to a partner will be treated as a taxable dividend.

Finance has indicated that there will be a transitional period such that FTEs that are/were publicly trading prior to November 2006 (and its investors) will not be subject to the tax pursuant to the proposed changes until after 2010. Other FTEs that began to trade publicly after October 2006 (and its investors) will be subject to tax under the new regime in 2007.

Finance also stated that if transactions or structures are developed that would avoid the policy intent of the new rules, any aspect of the proposals will be modified with immediate effect.

Scope of Application — SIFT

The new regime is intended to apply to what Finance has termed "specified investment flow-throughs" or SIFTs. Generally, SIFTs are intended to include publicly traded Canadian resident income trusts and Canadian "resident" partnerships where such entity holds "non-portfolio properties." Non-portfolio properties include investments (including debt instruments) in corporations, trusts or partnerships that are considered to be "resident" in Canada where the SIFT holds more that 10% of the value of such entity and/or such entity comprises more than 50% of the SIFTs total value. So, for example, a common structure where a partnership holds a substantial interest in the shares and debt of a corporation would generally be an SIFT.

Excluded from the proposed changes are real estate investment trusts ("REITs"), provided the REIT does not hold non-portfolio property (other than real estate situated in Canada) and (i) at least 95% of its income must be from property, (ii) 75% of its income must be from real property in Canada, (iii) at least 75% of its assets consist of real estate situated in Canada and Canadian government debt. The exception for REITs will accommodate circumstances where the real property is held directly or through intermediary entities.

Taxation of SIFTs and Investors in SIFTs

Under the current regime, to the extent a trust has taxable income in the year, such amount can be deducted by the trust in computing is taxable income for the year to the extent it pays or makes payable such amount to its unitholders (via distributions) and the unitholders are subject to tax on the amount that has been paid or made payable to them. The Proposed Changes will not permit a trust which constitutes a SIFT to deduct, in computing its income for tax purposes, certain amounts that are otherwise deductible in the manner described above. Specifically, such portions of a trust’s distributions that are attributable to: (a) income from a business carried on in Canada by the SIFT; (b) income from the SIFT's non-portfolio properties (other than dividends that are otherwise deductible by the SIFT in computing its income); and (c) taxable capital gains from the disposition of non-portfolio properties, will not be deductible by the trust.

The tax rate that is applicable to SIFTs on the portion of their taxable income that is not deductible as a result of the Proposed Changes is 34% for 2007, 33.5% for 2008, 33% for 2009, 32% for 2010 and 31.5 % for 2011. Other amounts that are retained by a SIFT trust will continue to be taxed at ordinary federal and provincial tax rates that apply to the taxable income of trusts.

As for unitholders, the amount made payable by a SIFT trust to unitholders and that the trust, as a result of the Proposed Changes, is prohibited from deducting in computing income, will be treated as a taxable dividend (and an eligible dividend for the purposes of the previously proposed enhanced gross-up and dividend tax credit regime) received by the unitholder from a taxable Canadian corporation. Therefore, to the extent that:

  1. the unitholder is an individual, the taxable portion of the distribution will be considered to be a dividend received by the unitholder and will be subject to tax within the enhanced gross-up and dividend tax credit regime;
  2. the unitholder is a private corporation, the taxable portion of the distribution will ordinarily be deductible in computing income (but may be subject to tax under Part IV of the Act);
  3. the unitholder is a non-resident person, the taxable portion of the distribution will be subject to a 25% withholding tax under Part XIII of the Act, potentially subject to reduction under an applicable income tax treaty; and
  4. the unitholder is a tax-exempt entity (such as an RRSP or registered pension plan), it will not be subject to tax on any portion of the distribution.

Implementation of Proposed Changes

Finance has indicated that there will be a transitional period such that FTEs that are were publicly traded prior to November 2006 (and their investors) will not be subject to the tax pursuant to the Proposed Changes until after 2010. It would seem that a "grandfathered" FTE may issue additional units without losing grandfathered status. Other FTEs that began to trade publicly after October 2006 (and its investors) will be subject to tax under the new regime in 2007.

Finance did note that the transitional period is subject to the possible need to foreclose inappropriate new avoidance techniques such as the insertion of a disproportionately large amount of additional capital by a SIFT. Finance further stated that while it does not intend to curb normal growth of existing SIFTs, it may have an issue with undue expansion. There is no guidance in the published materials as to what Finance considers normal growth versus undue expansion.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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

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

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions