Income trust conversion rate not likely to slow
Ottawa’s decision to postpone advance tax rulings on income trust conversions has left management and investors scrambling for clues regarding the government’s income trust intentions.
But Monday’s announcement is unlikely to stop the flood of corporations looking to convert, say corporate tax specialists and accountants. “In my mind, I think [suspending the advance tax ruling service] spooked people because it is a signal the government isn’t as friendly on these things as they once were,” said a senior tax specialist with a large accountancy firm.
The government is currently considering a range of measures to put the brakes on trust conversion and the accompanying tax leakage. These could include applying the same tax rules to trusts as corporations; limiting the amount of interest expense trusts can deduct from earnings; or, in the most extreme scenario, an overhaul of the tax system to neutralize differences between personal and corporate rates. However, most observers agree that any proposals would involve “grandfathering” provisions to protect existing trusts.
The Canada Revenue Agency service of providing tax rulings, which was suspended indefinitely on Monday, involves the issuance of written statements regarding tax treatment for certain transactions proposed by companies. However, companies are not legally required to seek advance rulings and CRA is not legally required to provide them and have dozens of precedents already trading in the market.
“In the vast majority of cases, nobody even approaches CRA before launching an income trust,” said a tax specialist with one of Canada’s leading investment banks. He explained that companies usually only seek an advance ruling for an income trust conversion when there are significant large shareholders who will benefit from an unusual transaction.
Otherwise, corporations ask for advance rulings when they want the market to view their transaction as watertight, he said.
Financial Post dmavin@ Nationalpost. com