The minority Tory government sprung a Halloween surprise saying that it will tax distributions by newly formed income trusts, specifically targeting the recent conversion of Telus (TSX: T) and BCE (TSX: BCE). Existing trusts have a four-year grace period after which they will be subjected to the new tax as well.

I predicted that the government was likely to revisit the issue of income trust taxation but I am very surprised that this Tory government has the political will to move on this matter. Tomorrow is probably going to be an ugly day for income trusts in general and BCE and Telus in particular. Note that just like other jurisdictions, REITs are exempted from the proposed taxes.

This article has 15 comments

  1. Canadian Capitalist

    I should probably mention that my only income trust holding is a small stake in EPCOR Power L.P.

  2. I wonder if existing income trusts like Epcor won’t actually go up tomorrow. After all, they’ll enjoy a four-year tax advantage. And in investing, four years is an eternity. IMHO, BCE is an arrogant monopoly which deserved a slap in the face. They’ve had it coming for a long time….

  3. But the current valuation assumes a life time of tax advantage.

    We sort of lived through this in Sept 2005 when trusts in general fell 20%.

  4. I can see the need for the Tories to go after this “tax leakage” (whether there is actual leakage is a matter for debate I think) but I am really shocked that they did this. There is the potential for this to turn into a minority government toppling issue. I don’t think the 4 year grace period for existing trusts is going to reduce the amount of blood in the markets today. The rules have changed and they changed overnight. No one has a good understanding of what this means in the long term and I suspect that the reaction is going to be to sell first and ask questions later. I currently have about 25% of my portfolio in trusts. I expect that by the close of the market today my portfolio is going to be worth 3-5% less than it was at the close yesterday. Thank you Mr. Flaherty.

  5. Oddly, as an opponent of the current Conservative government, I applaud this move. I agree with the position that a “domino effect” was imminent.

    In any case, I’m going “shopping” this morning for sell-offs :-).

  6. I think that there are probably a few good deals out there now. I already picked what I think is a good one up, COS.UN and I am already up about 12%-14% on it this morning which will help to dampen the fall in my other trusts.

  7. Canadian Capitalist

    The biggest losses in my portfolio are in AGF and EP.UN. But the portfolio as a whole did ok because of my overweight position in US equities. I increased my holding in EP.UN and initiated a position in YLO.UN.

  8. CC,

    keep in mind that Epcor was expected to come to the market for a round of financing. If I remember correctly, to pay for acquisitions.

    That could be difficult in the next little while.

    Just my 2 cents

  9. Even though the immediate effect isn’t positive for investors holding income trusts the political position the Conservatives have put themselves in is a positive one. They come across as against Bay Street (which is something the Liberals always bash the Torries with) plus it will leave them room to reduce personal income tax rates in the budget next Spring. That budget is being billed as the one that will bring the government down and force an election. They’ve done themselves a lot of good by doing this now.

  10. I picked up a few bargains today.
    Wish I had more available cash to have played with but what can I do…

    Learned long ago not to invest for tax reasons alone. I would buy the companies I hold whether they were trusts or not.

  11. I too own EP.un – not as bad a drop as I thought it might be.

  12. I dumped some of my o&g trusts and some others and also picked up some ep.un and bid on some ylo.un. Had been thinking along these lines for a while, nothing like a big kick in the ass like the fed’s just gave us to prod me into action.

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