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Income Trusts: Proposed Taxation Changes

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# Wednesday, 29 November 2006
Wednesday, 29 November 2006 12:09:13 (GMT Standard Time, UTC+00:00) ( General Life )

Income Trusts: Proposed Taxation Changes

Recently, changes have been proposed regarding the current taxation practices regarding income trusts. Current tax laws have made income trusts a lucrative investment option for many Canadians. However, while the immediate reaction may be to look for other investment options, it is important to remember that these are changes are still in the proposal stages, and would not take effect until 2011.

Income trusts are generally defined as an investment trust that holds income producing assets. Its shares, also known as “trust units” are traded on securities exchanges, in the same manner that stocks are traded. The income is passed on to the investors. These distributions typically yield a higher profit than stock dividends, of up to 10% a year. Income trusts have the ability to generate a constant cash flow, which makes it an attractive option for investors.

Income trusts are structured to avoid the corporate taxes on distributions, thereby paying very little, if any, taxes on its earnings. Traditionally, distributions are taxed on both a corporate level and as dividends. With income trusts however, the trust avoids taxes on its earnings due to the fact that most of the income generated is distributed directly to the unitholders. While these trusts are not infallible, and carry their own brand of risk, the taxation laws have made them a popular choice when Canadians are looking at investment options.

The Tax Fairness Plan has introduced new taxation measures regarding income trusts. A Distribution  Tax will be implemented on all distributions from publicly traded income trusts as well as limited partnerships. For new trusts, this tax applies beginning in the 2007 taxation year. For existing trusts, a 4 year transition period has been proposed, with the new taxation being implemented in the 2011 taxation year. These new taxation laws were announced by the Department Of Finance as a means of curbing the growing trend of Canadian companies avoiding corporate taxes.

If you are currently investing, or are considering investing in income trusts, be aware of these new tax laws. By being informed, you can make the wisest choices in how to obtain your financial goals.

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