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Gak! Income Trusts …

[Updated.  Barf.]

The conservatives announced changes to Canadian tax law last night that will affect how companies structured as income trusts will pay tax.

Before: companies structured as income trusts didn’t pay much tax. Rather, they paid their profits to people who owned their stock, and it was taxed in their hands.

Now: those companies will have to pay tax before paying their profits out to stockholders.

If you own a canadian mutual fund, odds are this affects you. If you own individual income trusts (like us), it definitely affects you.

As an eye opener to those who may not follow the markets, here are the ones we hold and their closing price on Oct. 31, 2006. I’ll update this post with their closing price on Nov. 1, 2006 tomorrow.

  • Aeroplan AER.UN – $16.01 close $14.60 change -8.8%
  • Brascan Rising Distribution BSD.UN – $11.26 close $9.10 change -19.2%
  • Builders Energy Trust BET.UN – $14.77 close $11.85 change -19.8%
  • Calpine Power CF.UN – $10.96 close $9.78 change -10.8%
  • Northern Property Realty NPR.UN – $24.30 close $24.30 change 0%
  • Energy Savings SIF.UN – $16.82 close $13.78 change -18.1%
  • Telus (announced plans to convert) T – $64.93 close $56.15 change -13.5%

I will say that this change makes sense. This government (and the previous one) have legitimate concerns about companies changing to trusts to avoid tax. However, a) something like this should *never* be a surprise and b) agreeing with the policy change is cold comfort in the face of a 20% decline in your holdings. Investors don’t like uncertainty.

It’s gonna be an ugly day on the markets …

November 1, 2006 - 9:11 am

Gary - As an investor in a couple income trusts I am not happy this morning. However, as a Canadian tax payer, I can live with this and it makes sense. If these rules were not changed, in the worst case scenario all corporations would change to income trusts and individual tax payers would take on ALL of the tax responsibility. This will create a bigger corporate tax base. The Tories are pissing off a lot of investers this morning and I have to think that they’re planning on announcing tax cuts for individuals in the future (probably right before an election call).

Off to the carnage…

November 1, 2006 - 11:26 am

Sonja - This is good news for the economy as a whole though as income trusts were a drag on productivity as they encourage cash payouts rather than invesments in R&D.

Something like this has to be a suprise otherwise it creates unfair advantages for those who are in the know. Goodale, Brison, and ultimately Martin, learned this lesson the hard way. (Although
I known it was coming I would have given you two the heads up, but really, if I was “in the know” it couldn’t have been much of a secret.

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