Responding to the increasing appeal of income trusts to Canadian investors and issuers, the Certified General Accountants of Canada (CGA-Canada) has released a report which discusses the merits, pitfalls and taxation of trusts.

The report, Demystifying Income Trusts, describes the nature of income trusts and how they compare to other investment vehicles. “Our goal has been to empower investors and their representatives in making important financial decisions,” said Anthony Ariganello, president and CEO of CGA-Canada.

Unlike other investment vehicles, income trusts distribute on a monthly or quarterly basis 70% to 95% of cash flows and capital to investors. From a business owner’s perspective, income trust structures tend to value assets at a higher conversion value than is typically experienced through corporate structured stock issuance. These benefits have contributed considerably to the spike in income trust activity.

The uniqueness of income trusts stems from their tax treatment. Unlike other investment vehicles, the income trust structure attracts little corporate tax since most of the cash flow is distributed to investors who assume responsibility for paying applicable personal taxes.

The federal government estimated a forfeit of $300 million in corporate income tax revenues as an outcome of income trust investment. It is interesting to note that federal income tax revenues for 2005 were $132 billion and to consider also that corporate tax revenue was $6.8 billion over the 2004 forecast. “There is no argument that $300 million represents a considerable amount of money to the average Canadian, but when taken as a function of federal income tax revenue, we can quickly concede that the amount is relatively immaterial,” said Rock Lefebvre, CGA-Canada’s vp, research and standards.

Based on assumptions outlined in the report, CGA-Canada’s analysis shows that the previous government’s proposal to increase the tax credit on dividends to placate corporate investors would effectively dissuade top earners from investing in income trusts. Whichever course of action is taken on this issue, CGA-Canada urges the government to exercise caution when introducing tax measures that could create an adverse situation in the marketplace. “Having now witnessed public reaction to some of these proposals, we can be assured that the debate will ensue and that resistance to the elimination of existing income trusts incentives will mount,” said Ariganello.