A FEW WORDS ON A MAJOR TAXATION EVENT IN CANADA
by Rob Kirby
KirbyAnalytics.com
November 1, 2006

TEXT-Finance Canada statement on income trust taxation

“OTTAWA, Oct 31 (Reuters) - The Canadian finance ministry issued the following statement relating to changes to taxation, especially of income trusts: 

The Honourable Jim Flaherty, Minister of Finance, today announced a Tax Fairness Plan for Canadians. The plan will restore balance and fairness to the federal tax system by creating a level playing field between income trusts and corporations. 

"The measures I am bringing forward today are necessary to restore balance and fairness to Canada's tax system, to ensure our economy continues to grow and prosper and to bring Canada in line with other jurisdictions," said Minister Flaherty. "Our plan is the result of months of careful consideration and evaluation. Our actions are clear, decisive and in the best interest of all Canadians." …………………..”

What It All Means To Me?

Income Trusts in Canada, up till now, had been dominated by two major sectors by market capitalization – Real Estate Investment Trusts [REITS] and the Oil and Gas Royalty Trusts.  Oil and Gas exploration in Canada is heavily skewed to the Western Provinces – particularly Alberta.

On Oct. 31, 2006 – Canada's Federal Finance Minister announced planned taxation changes to the treatment of “distributions” from Income Trusts.  Of note, REITS are exempt from this proposed change.

This is an ASYMMETRIC remedy to a long acknowledged issue of eroding Corporate Federal Tax Receipts in Canada.  This move might come to be recognized as the Conservatives equivalent of the old National Energy Program [NEP] which was brought into existence by the then governing Liberals in 1980.  It too was a disguise for a Federal Tax grab.

The NEP was a “Federal tax grab”, plain and simple, which helped inflame regional differences within Canada and whose perceived arrogance no doubt contributed to fanning the flames of the separatist movement within Quebec.   Moreover, the NEP was seen by many as a major contributor to the economic devastation to the “Oil Patch” in Western Canada at that time and ironically, this also helped give rise to the Reform Party movement in Western Canada.

For those who may not be aware, the formation of Reform Party in Western Canada was largely responsible for “splitting the right wing vote” in Canada during the 1990’s – helping pave the way for the decimation of the Conservative Party of Canada as a political force on the Federal scene.  Canada’s current Prime Minister has roots in the Reform Party of Canada.

The tax changes should slow investment in the Oil Patch going forward.  This should help cool – or at least moderate – blistering hot real estate and labor markets in selected “hot spot” areas in Western Canada in the near term.  

The downside, for consumers, there is going to be less oil and gas coming from Western Canada in the intermediate term than there otherwise would have.

This development is Canadian Dollar negative plain and simple.  

With the now ruling Conservative Party of Canada governing with a “minority” [coalition government] – odds now favor a near term Federal Election. 

© 2006 Rob Kirby
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Rob Kirby
Kirby Analytics
Toronto, Ontario, Canada
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