On Wednesday morning Canadians learned that a major tax loophole is being closed by the Canadian gubmnt. Here is how the loophole worked, and here is what the gubmnt did (for more, see many articles;
this is one;
here is another):
"Income trusts" as a legal construct have evolved that do not pay the corporate income tax but pass their earnings through to their stockholders (or the equivalent thereof). These earnings are taxed as income, not as dividends.
This legal device for avoiding double taxation was becoming increasingly attractive in Canada, especially since during the previous election campaign, Conservative leader (and now Prime Minister) Stephen Harper repeatedly pledged that income trusts would
not become liable for corporate profits taxes.
The tax break, along with Harper's commitment, provided considerable impetus for the growth of income trusts. More major corporations were considering becoming income trusts. (
see here) My major surprise was that more corporations had not made the move.
Unlike income trusts, corporations' profits are subjected to double taxation. First, they are taxed at the corporate profits tax rate; second, the dividends are taxed as income and/or capital gains. Many economists, me included, have long wanted gubmnts to get rid of the double taxation of corporate income. So, from that perspective, the growth of income trusts seemed like a good direction — a backdoor way to get rid of double taxation without the potentially unpopular (unpopular with the NDP and CBC anyway) options of eliminating either the corporate income tax or the taxation of dividends (I know, I know — dividends are treated differently from income).
But what did Harper do? Instead of promoting income trusts, he both broke his campaign promises and eliminated this tax-efficiency which had evolved over the past few years or so.
The current speculation is that the Conservative gubmnt did this so they can raise more tax income this way and then cut taxes in other ways next spring, when we are closer to having an election. So we are probably going to see more changes in the tax code that cause more tax lawyers to get rich and which do not have the efficiency basis of (a) eliminating double taxation and (b)having a consumption-based tax instead of an income-based tax.
Reducing the GST and now this. I'm disappointed in the tax policies of the Conservative gubmnt.
Note: I did not have any money invested in income trusts, at least not directly. Some friends, however, probably lost some sizable portions of their nest eggs as a result of this policy change.