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Canada's Income Trusts, BCE, Telus May Plunge on New Taxes
Nov. 1 (Bloomberg) -- Canadian income trusts may plunge today after the government said it plans to impose taxes on the high-yield securities to halt a slide in tax revenue and stem a flood of trust conversions by companies such as BCE Inc. and Telus Corp.
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Finance Minister Jim Flaherty said late yesterday he will start taxing income trusts for the first time, and raise dividend tax rates for pension funds and foreign investors that own trusts. The changes would go into effect next year for new trusts, while existing securities will be exempt until 2011. ' P" @) T9 A7 q) q* j5 u
" A- n, i0 f/ d% c9 f``There's no question what's going to happen, there's going to be a sell-off,'' said John Dielwart, chief executive officer of ARC Energy Trust, a Canadian oil and natural gas producer based in Calgary. : {3 x7 |+ U0 N! ~
9 \+ N" |7 K4 dThe tax changes put a dent in the fastest growing segment of the Toronto Stock Exchange, and may halt some of the C$70 billion ($62 billion) in new trust conversions announced in recent weeks by firms such as BCE. The number of trusts in Canada has tripled to about 250, and their market value has soared 20-fold in six years to C$200 billion. $ g( _* h( i5 E/ L+ u$ {
: c4 h1 C; a- HThe decisions by BCE and Telus, Canada's two biggest phone companies, to become trusts to reduce taxes may have forced the government's hand, investors said. These two firms alone would have increased the market value of trusts by C$50 billion, boosting the government's tax losses from trusts to C$800 million a year. Trusts avoid most corporate taxes by paying out their cash flow to investors in monthly dividends. 2 A2 h7 @7 z+ t: S
0 p* w2 k* b; G2 K4 tSurprise Move
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The tax measures caught many income trust executives and investors off guard, as they expected the minority government would be unwilling to make such an unpopular change until after the next election. ; ]! S: h* A8 Z# d
- e) G T; l5 t& u# Z5 B6 q4 I z% F``Things changed a great deal this year and we're faced with a situation where Canada was moving to an income trust economy,'' Flaherty told reporters in Ottawa last night. ``For months there has been a growing trend toward corporate tax avoidance.''
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1 A6 a* Q# R' z% u% w3 F8 NBCE, Canada's biggest phone company, has gained 15 percent over the past two months as investors anticipated a switch to the structure. The company announced plans to convert its Bell Canada unit to a trust on Oct. 11. Flaherty said the structure isn't ``suitable'' for phone companies.
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BCE spokesman Pierre Leclerc didn't return a call seeking comment, and Telus spokesman Shawn Hall declined to comment. BCE and Telus don't qualify for the four-year exemption as their conversions haven't been completed.
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``The government had to address the problem sooner or later, said Denis Durand, a senior partner at Jarislowsky Fraser Ltd. in Montreal, which oversees C$58.5 billion, and is ``marginally'' invested in income trusts. ``There was a concern that too many unsuitable companies and industries would try to convert and that would affect the reinvestment process.''
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BCE's stock rose 3 cents yesterday in Toronto trading to C$31.70. Shares of Telus, which announced plans to convert Sept. 11, have jumped 24 percent since then. Other companies that have announced plans to take advantage of the income trust structure include Dundee Wealth Management Inc., an asset-management firm, that plans to sell a minority stake in its Goodman & Co. mutual fund arm through an initial public offering of trust units.
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: e- V. D& V: K8 Q. R* o; d7 K``We knew there were more coming,'' Flaherty said, adding that there have been C$70 billion worth of trust conversions announced this year. ``It's absolutely necessary to act on this issue in the interest of fairness.'' : @6 m V+ k2 C* M
* t1 j, q9 y4 e: ~Income trusts are also expected to decline as the increased taxes on payouts will make them less attractive for investors. Until this year, the returns for the S&P/TSX Capped Income Trust Index, including dividends, have topped the benchmark S&P/TSX index each year since 1999. Canadian Oil Sands Trust, the largest trust on the index, is up 41 percent, including dividends, over the past year.
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`Nasty' ! a" z5 D9 ~$ e; c( z! k% ], C
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The announcement ``is going to deliver some pretty nasty re- evaluations of all the trusts,'' Marcel Coutu, chief executive of Canadian Oil Sands, said in a telephone interview. ``We'll certainly be thinking about how it impacts us and how the trust sector is going to evolve from here.'' 9 D$ @4 v* w5 r$ j& I7 R
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The government plans to tax trusts in much the same way it taxes corporations. As a result, trusts will no longer be allowed to deduct for income taxes the payouts they make to shareholders. Income will then be taxed at a rate of 31.5 percent by 2011, the finance department said in a statement yesterday. Real estate investment trusts, or REITs, will be exempt as they are in the U.S.
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The changes will effectively raise the tax rates for investors in tax-sheltered retirement accounts, pension funds, and for U.S. investors. The U.S. shareholders, who pay a 15 percent withholding tax on their trust dividends, will be paying a tax rate of 41.5 percent in 2011, the government said. Tax- exempt Canadian pensions will pay 31.5 percent, according to the finance department. Individual investors would continue to pay about 46 percent on trust payouts. 9 B6 u) ?, F' b- F. z2 j
0 E' p3 D2 e) c- FPolitical Minefield
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The income trust issue has been a political minefield in Canada over the past two years. Trusts lost billions of dollars in market value last year when the previous Liberal government said it might change the tax rules, prompting Flaherty's Conservative Party to pledge in the campaign for elections in January that it would not tax trusts if it won power. " \/ b; G. Q; @3 I& f3 n
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Rather than tax trusts, the previous Liberal Party government cut dividend taxes to reduce companies' incentive to convert to trusts, a move Flaherty said didn't go far enough. 6 Y. I0 M7 J. r
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Prime Minister Stephen Harper's government will feel pressure to reverse course, said William Lacey, a trust analyst at Calgary-based FirstCapital Energy Capital Corp.
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``When you state something like this that impacts so many of their constituents, nothing is written in stone,'' Lacey said in a telephone interview. # C7 d# p9 j1 E F
' g( {) @- U3 g1 b( F% s; ?3 m4 aMinority ' e/ N" O" @. p
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The Conservative Party lacks a majority of seats in Parliament and needs support from opposition parties to pass laws. The New Democratic Party, which had called a moratorium on new income trusts earlier this month, may be ready to support the plan, Judy Wasylycia-Leis, head of financial affairs for the party, said in a telephone interview. 0 ]6 u8 k! p; |+ R. v8 p' i) x; L
. i1 N) ~, `- k9 O- x; ]To help soften the blow, Flaherty announced C$6.5 billion in additional tax cuts over six years, mostly for seniors, including a plan to allow income-splitting for pensioners as of next year.
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3 m/ n1 A9 X# Q \The government also said it will cut the corporate income tax rate by one-half percentage point as of Jan. 1, 2011, and increase the age credit amount by C$1,000 to C$5,066. |
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发表于 2006-11-1 22:08
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