Canada: Jim Flaherty´s Scary Halloween Trick

Last Updated: November 9 2006

Edited by Vince Imerti

Just as little trick or treaters were heading out to try their luck on Halloween evening, Jim Flaherty performed an unexpected trick of his own – he announced the wholesale overhaul of Canada's income and royalty trust market. He tagged publicly traded partnerships for good measure since if that avenue were not closed off, many corporations and trusts could restructure themselves as partnerships and continue the tax saving game. We will refer to affected trusts and partnerships using the Government's catchy new acronym – SIFT – "specified investment flow-through". And we note as an aside that whenever a government official goes out of his way to tell us that something is "fair", we can't help but speculate as to which heads will soon be rolling around on the floor.

The intended effect of the proposal was to finally and truly level the playing field for publicly traded corporations and SIFTs after several unsuccessful attempts, the most recently being the Liberal government's aborted attempt about a year ago. That is, it is intended that all investors, non-residents as well as Canadian residents who are taxable or deferred (pension funds and RRSPs mainly), become indifferent between receiving income from a SIFT or dividends from a corporation.

Many market observers had predicted this kind of legislative amendment, but few thought the minority Conservative government would have the stomach for it. And based on the Liberal government's discussion paper last fall and the Conservatives reaction then, fewer still thought this kind of proposal would ever apply to oil and gas trusts. They had been put in the same category as REITs (real estate investment trusts) which as noted below, were spared the Halloween axe.

It appears that the recent announcement of first Telus and then BCE's proposed conversions, with other large organizations (maybe even a large bank or two) lining up behind them, tipped the Government over the edge. The proposal's grandfathering rules provide relief to existing SIFTs until 2011, as described below, but do nothing for corporations that have announced their conversion but have not been able to get up and trading as SIFTs prior to November 1, 2006, such as Telus and BCE.

However, the Conservatives did learn something from the Liberal misadventure last fall. When the Liberals proposed clipping the SIFTs' wings they were hammered by the seniors lobby. This might be why the biggest chunks of sugar the Conservatives are handing out this Halloween are designed for the elderly sweet tooth. These are an increase in the Age Credit Amount by $1,000 from $4,066 to $5,066 effective January 1, 2006, and income splitting for pensioners beginning in 2007.

Here is the bird's eye view:

  • The Federal Government announced some time ago reductions in the corporate tax rate and increases in the dividend tax credit (credit given to shareholders for the tax already paid at the corporate level on the income being paid out as dividends) that would make it so that within a few years, there would be almost no difference between the tax paid on income earned through a publicly traded corporation or SIFT and received by a tax paying Canadian resident. However, RRSPs, pension funds and non-residents still saved large amounts of tax when they received income from a trust instead of a corporation.
  • The proposal imposes a tax on the distributions from SIFTs that is designed to apply at the same rate as corporate tax. This tax will be paid by the SIFTs themselves, again mirroring corporate tax.
  • The proposal is designed to catch all publicly traded trusts and flow through entities, except REITS (real estate investment trusts) which have special enabling provisions in the Income Tax Act.
  • If it becomes apparent that the proposal as it now stands does not catch pretty much the entire publicly traded trust and partnership market (except REITs), the rules will be changed to plug those holes. And if lots of capital starts flowing into existing trusts, new rules may be written to make that situation unattractive. In other words, the Government has sent an explicit message in this regard.
  • The tax rate applicable to SIFT distributions will decline from 34% to 31.5% between 2007 and 2011. The average corporate tax rate now is 32%. Hence, any corporations (like Telus and BCE) that decide to proceed with a trust conversion post November 1 will pay a small tax penalty during their first few years, in addition to causing the shareholders to pay a lot of tax on their way into the SIFT category. The Government's objective is clear – no more trust conversions.
  • A notional provincial share of this amount (13%) will be collected by the Federal Government and distributed among the provinces on a basis yet to be determined. This will solve a problem some of the provinces have complained about – that trusts have shifted taxation from the producer level (where companies are headquartered) to the investor level (where investors are resident). The Federal Government, it seems, did not want to be accused of instituting a tax "grab" at the expense of the provinces.
  • Recipients of SIFT income distributions will be taxed as if they had received dividends. That is, the dividend tax credit will be available in recognition of the SIFT tax paid; the deductibility rules applicable to dividends received by a corporation will apply; RRSPs and pension plans will not have to pay additional tax; and non-residents will be taxed at the withholding rates applicable to dividends. Again, the government is trying to tax SIFTs and corporations in the same fashion and these rules pretty much do it.
  • These rules don't apply to SIFT capital distributions, just as they would not apply to a return of capital from a corporation.
  • Revenues not distributed by a SIFT will be taxed at the usual trust rate, which is the top individual rate in the province where the SIFT resides. Subsequent distributions of capital would be tax free.
  • For SIFTs that began to be publicly traded before November 2006 the proposal will not apply for taxation years that end before 2011, effectively a four year transition period. SIFTs that begin public trading after October 2006 will be subject to the changes announced today for the later of their 2007 taxation year and the taxation year in which they begin to be traded.

Historically, a large part of SIFTs attractiveness has been the tax savings they generate. However, since last fall it has been well known that for taxable Canadian SIFT investors there would be no difference between corporations and SIFTs from a taxation point of view. Nevertheless, this did not slow the market down. This indicates two things. First, the market is driven to an extent by deferred (pension funds and RRSPs) and non-resident investors. And second, investors like the cash flow provided by SIFTs.

The Government's current proposal take the tax advantage out of the equation. However, the commitment to cash flow will remain. Having watched boards of directors wrestle with what it means to convert to a SIFT, we know how significant this issue is. SIFTs are far more dependant on the markets than are most corporations. SIFTs distribute a large percentage of their cash flow, and when they want to make a capital investment they have to go to the market for the capital they need. This causes an interdependence between management and the markets that is unusual. It forces a corporate discipline similar to that engendered by the 1980s junk bonds.

Now we will see how important this SIFT attribute is. We suspect that many well managed SIFTs will continue to thrive. And from now on, a corporation that wishes to compete with the SIFTs in its market can simply announce that it will begin to distribute a competitive percentage of its cash flow. However, managing that trick is not as easy as some might guess.

While many may debate the appropriateness of the SIFT proposals from a tax policy point of view and whether, in the longer term, they will work to the advantage of Canadian capital markets, there would appear to be almost unanimity in the view that the Government should be criticized from two perspectives. First, the Government strongly opposed any changes to SIFT taxation when they were in opposition, which no doubt contributed to the former Government's lack of "intestinal fortitude" and failure to address these issues when the SIFT market was much smaller and tax policy changes would have resulted in far less disruption to the markets. Secondly, the current Government, until yesterday, had sent very clear signals that they did not intend to change SIFT taxation, which any number of taxpayers and businesses relied upon in making investment decisions or decisions to convert into a SIFT. Taxpayers and businesses should be able to rely on such very clear signals from the Government, and are rightly upset that what seemed to be clear Government policy on which they reasonably relied has now been changed abruptly and without warning.

As a further comment, look for the Government to eliminate the 50% ownership restriction on SIFTs. While that was not mentioned in the proposal, this restriction no longer makes sense. If the existing SIFTs are to be encouraged to compete with corporations, they should be given unfettered access to foreign capital markets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
7 Nov 2019, Seminar, Birmingham, UK

Providing content specifically tailored to the needs of GCs and Heads of Legal working in government organisations and their affiliates.

14 Nov 2019, Seminar, London, UK

Providing content specifically tailored to the needs of GCs and Heads of Legal working in government organisations and their affiliates.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions