Canada flashes amber light at trust conversion
Mon Sep 19, 2005 6:00 PM ET
OTTAWA, Sept 19 (Reuters) - Canada will stop paving the way for companies to convert into income trusts by issuing "advance tax rulings" while it reviews the tax structure that governs trusts, the government said on Monday.
Finance Canada said its decision might encourage firms to postpone plans to convert or spin off units into a trust, a structure that has enjoyed tax-advantaged status and has become increasingly popular.
But Ottawa is not stopping firms from converting to the income trust structure during the review and consultation period. "The announcement does not prohibit any company, large or small, from proceeding with transactions without an advance tax ruling," a government statement said.
Normally, in the case of major transactions, companies seek a written statement from the Canada Revenue Agency on how the government will interpret and apply provisions of the tax law after the transaction.
Monday's announcement means that companies may delay their plans if they want to know first how Ottawa will tax the new entities.
"Minister of Finance Ralph Goodale today announced that he has asked Minister of National Revenue John McCallum to postpone providing advance rulings respecting flow-through entity structures effective immediately," the government said.
The government says it lost about C$300 million ($250 million) in tax revenues last year because of the tax status that income trusts enjoy. It announced public consultations on the issue on Sept. 8, and will accept submissions between now and the end of the year.
"While these consultations are under way, and until the government announces what action it may take, it would be inappropriate for the government to issue advance tax rulings on these matters," the statement said.
The government says income trusts and limited partnerships had a market capitalization of C$118.7 billion at the end of 2004, up from just C$18 billion at the end of 2000.
Many more companies have announced plans for conversion since then, including several large ones.
Revenue Minister John McCallum agreed with the request to postpone advance rulings on the investment mechanisms, the Finance Department statement said.
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