To discourage corporations from converting to income trusts and transition the elimination of the income trust model, Jim Flaherty, the federal Minister of Finance, announced on October 31, 2006, the creation of a 'Distribution Tax' on publicly traded income trusts and publicly listed partnerships. The announcement creates a new tax regime for publicly listed flow-through entities and represents a fundamental shift in the tax system. The announcement also departs from the government's earlier commitment to leave the income trust tax rules unchanged.
Despite its name, the Distribution Tax is not a direct tax on distributions. Instead, certain distributions will not be deductible to publicly traded income trusts and partnerships. These entities will be taxed on their non-deductible distributions, in effect as corporations (at a rate comparable to the general combined federal/provincial corporate income tax rate). These distributions will be taxed as taxable dividends to investors. Distributions to Canadian resident individuals will be 'eligible dividends' — qualifying for the enhanced dividend tax credit.
For information on how these new rules affect flow-through entities and investors within these entities, read the PDF below.
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