In a press release that appeared on the Department of Finance website today, Finance Minister Ralph Goodale announced that Finance consultations on income trusts had ended and that it would attempt to solve the problem posed by the vehicles by reducing “personal income taxes on dividends, which will help level the playing field between corporations and income trusts.”
The accompanying backgrounder provides more detail:
the Government proposes to introduce an enhanced gross-up and DTC for eligible dividends received by eligible shareholders. An eligible dividend will be grossed-up by 45 per cent, meaning that the shareholder includes 145 per cent of the dividend amount in income. The DTC in respect of eligible dividends will be 19 per cent, based on the 2010 federal corporate tax rate as proposed in Budget 2005. The existing gross-up and tax credit will continue to apply to other dividends.
What are “eligible dividends”? The backgrounders says they are
Eligible dividends will generally include dividends paid after 2005 by public corporations (and other corporations that are not Canadian-controlled private corporations (CCPCs)) that are resident in Canada and subject to the general corporate income tax rate. In addition, CCPCs will be able to pay eligible dividends to the extent that their income (other than investment income) is subject to tax at the general corporate income tax rate.
To ensure that eligible dividends are measured correctly, special rules will apply where a corporation becomes or ceases to be subject to the small-business rate. And dividends that pass through a corporation will retain the character they had—as eligible dividends or ordinary dividends—when they were initially paid.
That sounds complicated, which is good news for tax advisers but not necessarily for their clients.
Finance says its consultations on income trusts are at an end, but does the solution it proposes above really solve the problem? Income trusts eliminate tax at the business level, which is attractive for unitholders that are not taxable such as pension plans and RRSPs. Finance’s proposed solution presumably will make taxable shareholders indifferent as to whether they own income trust units or shares of a public corporation. All other things being equal, it would seem that pension plans and RRSP owners will continue to prefer income trusts.
