Canadian Income Trusts, Banks May Rise on Goodale's Tax Changes
Nov. 24 (Bloomberg) -- Canadian income trusts and dividend- paying stocks may soar after the government increased a tax credit on dividends and opted not to impose a new tax on trusts, as some investors had expected.
Finance Minister Ralph Goodale said late yesterday he had no plans to tax income trusts, a type of high-yield security that doesn't pay income tax. The government also raised the dividend tax credit for investors to 19 percent from 13 percent.
The changes will probably lift prices for income trusts, which have slumped in the past two months on concern the government would tax the C$160 billion ($143 billion) sector to recoup tax revenue and level the playing field with corporations.
``This is outstanding,'' said Oscar Belaiche, who helps manage C$4 billion in income trusts at Goodman & Co. in Toronto. ``They have removed the uncertainty that has been overhanging the market and brings back confidence.''
Canada's biggest trusts, including Yellow Pages Income Fund and Fording Canadian Coal Trust rose in late trading yesterday on speculation of a possible announcement on income trusts. Yellow Pages soared 6.6 percent, the biggest gain since it began trading in 2003.
The Standard & Poor's/TSX Capped Income Trust Index rose 1.5 percent to 156.32. The index has fallen about 8 percent since Sept. 19, when the government said it would no longer consider advance tax rulings for companies planning to convert to trusts, sparking concerns the sector would lose its tax advantages.
Banks
Dividend paying stocks such as BCE Inc., the largest phone company, and Royal Bank of Canada, the biggest bank, may also gain as investors will pay lower taxes on dividends starting in 2006. BCE shares soared 4.8 percent yesterday, its biggest gain in more than three years, with most of the increase coming in the final minutes. Manitoba Telecom Services Inc., which pays one of the highest dividends in Canada, soared 3.5 percent.
``There is a benefit on both sides. The uncertainty is lifted and there is some stability going forward'' for income trusts, said Cristina Lopez, an analyst at Tristone Capital Inc. in Calgary. ``We expect to see a slight rally in the market.''
Goodale said he is trying to slow the rush of companies converting to income trusts by cutting dividend taxes. Companies such as CI Fund Management Inc., the No. 2 mutual fund company, have considered converting to trusts to reduce their tax bills. Trusts avoid taxes by paying out their cashflow to investors, who pay taxes on the monthly payouts.
By lowering the corporate tax rate, which was announced in a budget update on Nov. 14, and raising the dividend tax credit, some companies may think twice about converting to a trust.
``The companies that were looking at a trust structure will still consider it, but it will certainly reduce the impetus,'' said Enerplus Resources Fund Chief Executive Gordon Kerr.
Consultation
Goodale, whose Liberal Party government faces ouster on Monday, cut short his planned consultation on trusts, in which investors and companies were invited to make submissions until Dec. 31.
``I decided it was in the public interest to bring this to a definitive conclusion now,'' Goodale said at a press conference in Ottawa. ``I would have preferred to have had the full consultation process.''
The Liberals faced a voter backlash had they taxed income trusts. The Canadian Association of Income Funds set up a Web site calling on the more than 1 million Canadians who own the securities to send letters to legislators demanding trusts not be taxed.
Two-thirds of Canadians oppose new taxes on income trusts, according to a poll by Ipsos Reid published on Nov. 17. The survey of 1,000 Canadians has a margin of error of 3.1 percentage points. The opposition Conservative Party had also announced it would not tax trusts.
Consultation
Only last week, Goodale said he would wait until the consultation process ended before making a decision. Today's decision was prompted by the oppositions' plans to force an election by introducing a motion today to bring down the government and force elections for January.
Goodale's announcement contradicted comments made about 45 minutes earlier by John Mackay, his parliamentary secretary, who told CBC Newsworld the government planned to tax the investment vehicles, with the levy refundable for Canadians who hold the funds in their own names. That change would have forced foreign investors and pension funds to pay the tax. Goodale suggested MacKay was mistaken.
Asked about Mackay's comments, Goodale said: ``We are not proposing any tax on trusts.''
Under the new proposal, the government would raise the dividend tax credit to 19 percent, from 13.3 percent. The government would also raise the so-called ``gross-up'' on dividends to 45 percent, from 25 percent, to reflect the fact that corporations have already paid income taxes before paying the dividend to shareholders. The measures will cost the government C$300 million a year starting in 2006.
Rulings
The government will also resume issuing advance tax rulings on conversions to trusts after a two-month suspension.
``It doesn't penalize the existing trusts and gets rid of a high rate of double taxation on dividends,'' said Gordon Tait, an income trust analyst at BMO Nesbitt Burns in Calgary. ``I see this as a very positive move for capital markets.''
The Finance Department has been reviewing income trusts since reporting in September that it lost about C$300 million in tax revenue last year because the trusts don't pay income taxes. Almost 230 companies have either converted to the structure or sold shares through initial public offerings, lifting the value of the sector to about C$160 billion, from $10 billion in 2000.
The Standard & Poor's TSX/Capped Income Trust index has posted annual returns of 29 percent over the past three years, including the 8 percent annual dividend payouts. That's more than double the annual return for the Standard & Poor's 500 Index.