Ottawa to study tax rules

Feds to consult before changes $255 million in revenue lost

Ottawa is studying whether to overhaul tax rules that have led to the phenomenal growth in income trusts and deprived the federal coffers of an estimated $255 million last year.

Before it acts, the government plans to consult with the business and investment communities.

“ Canada seems to be in a unique position of having experienced such rapid growth with some of these structures in recent years,” says a paper released yesterday on the tax and economic impacts of both income trusts and limited partnerships.

“ Given that the tax system may be a factor . . . it is important to determine what effect this has on the Canadian economy.” The paper came just as two large, mature corporations — CanWest Global Communications Corp. and CI Fund Management Inc. — announced plans to join the rush to create income trusts.

Businesses as diverse as the leading oil- sands excavator, the Yellow Pages publisher and a sardine canner have been rolled into the equivalent of a mutual fund trust to sidestep corporate income taxes by flowing surplus income through to be taxed in the hands of investors.

Investors hungry for regular income, with certain tax advantages, have snapped up trust units at premium prices, providing shareholders of the businesses a tidy profit and executives continuing jobs. Trust unit prices have risen as interest rates have fallen. The market value of all income trust and limited partnership units soared to $118.7 billion from $18 billion in the four years ended 2004, the paper reports. The Toronto Stock Exchange says trusts, which now number 209, had a market value of $148 billion by the end of June. The five largest income trusts are the Canadian Oil Sands Trust, Yellow Pages Income Trust, Fording Canadian Coal Trust, Enerplus Resource Fund and Penn West Energy Trust. These and others will gain more visibility in December when they join the 221- company S& P/ TSX composite index.