Investors Hope Market Bounces Back Following Income Trust Fallout

In its worst single-day loss in more than two years, the Toronto Stock Exchange dropped 294 points while the Canadian dollar was down by nearly a full cent.

Meanwhile $20 billion dollars vanished from the income trust sector as Canadian corporate giants like BCE, Telus, Yellow Pages and CI Financial were hit hard following Finance Minister Jim Flaherty’s surprise announcement.

Finance experts suggested tax cuts announced at the same time would help to balance out the damage.

“I don’t think this is a huge deal for the economy either way,” said Merrill Lynch economist David Wolf.

The Liberal opposition slammed the minority Tories for going back on an election promise not to tax the trusts.

Former revenue minister John McCallum called it a “day of infamy, this Black Wednesday” and “the single biggest blow to Canadians’ wealth ever dealt by a finance minister, in a banana republic process.”

Prime Minister Stephen Harper argued that the move would benefit taxpayers, seniors and the country’s economy.

Called the “tax fairness plan”, the government would impose a distribution tax on payouts to income trusts. Investors would subsequently be taxed as if the distributions were dividends. Flaherty’s plan will take effect in 2007 for new trusts while existing trusts will get a four-year transition period.

Under the current structure income trusts avoid corporate tax because cash is distributed to investors and taxed in their hands. Flaherty suggested it threatened Canada’s long-term economic goals and would overburden individuals and families.

Bank of Canada governor David Dodge suggested the move created a “level playing field” for businesses.

“The actions that the government took yesterday regarding the tax treatment of income trusts would appear to eliminate the tax incentive to use one form of corporate organization over another,” Dodge said in an e-mail.

“Businesses now face a level playing field in choosing the form of corporate organization that allows capital to be allocated to its most efficient use.”

Flaherty’s move was praised by economists, the New Democrats and the Bloc Quebecois, even though opposition parties slammed the government for flip-flopping on the issue.

The Canada Pension Plan Investment Board also supported the change, saying that it dealt with the growing issue of tax-motivated corporate shifts.