Tuesday, April 3, 2007

Will the Proposed Tax on Canadian Income Trusts be Approved?

The new tax on income trusts -- a tax to eliminate the Canadian Royalty Trusts' tax free status -- was proposed on Oct 31, 2006, and voting will probably come this year. The significance of the proposed tax is that, on average, the Canadian Royalty Trusts ("CanRoy's") have dropped by an average of approximately 20%-30% when the taxes were announced, and they should regain some of this lost value if the taxes do not pass -- not and there have been significant "whispers" that the taxes will not pass currently (in 3/07 and 4/07). So the question for prospective investors is: will the CanRoy taxes pass or not?

The most important issue to determine the political success of the tax (economic and corporation issues aside) is whether the Canadian parliament has enough votes for it to pass. The Lower House of Commons is apparently the branch of government in Canada that has the most influence (the Senate mainly rubber stamps the Lower House, according to the decription of Canadian politics in the wikipedia, much different system than the US).

A simple majority is needed to pass taxes.

Lower House members:
(X means on board with the tax, - means against, ?
means undecided)
Conservative Party (Tories): 125 members X
Liberal Party: 125 seats -
Bloc Quebec: 50 seats ?
New Democratic Party: 29 seats X
Independent: 2 seats ?
Vacancies: 2 (I don't really know how to interprete
"vacancies") ?
Total: 308
Seats from the official Canadian Parliament website.

The Conservative Party and the New Democratic Party have publically stated that they are for the measure, so that totals 154 votes (50% exactly). reference: http://www.canada.com/nationalpost/news/story.html?id=9f67a23b-fb01-4639-a1a

Apparently breaking party ranks and voting against the party is rare in Canada so it looks that the taxes have 50% support.

Bloc Quebec is for the measure but would like to extend the transition time to 10 years, and would also like more evidence of the need to transition. The Liberal Party has proposed a different measure, no new income trusts but income trusts allowed if they can show a positive impact on Canada -- this is the most reasonable proposal in my view, but they only have 100 votes, approximately 32%.

But in summary, the most important factor is that the Conservatives and New Democratic Party are on board and that is enough to get the measure passed. I suppose an investment advisor can say "50% is not 51%" but 50% is close enough to 50% with Bloc Quebec still up in the air and independents and vacancies that it appears the tax is likely to go through.

It seems to me, if I were to put percentages on the passing of the tax (from my judgement only, albeit analyzing the issue for a few days), it would be: 60% passed as proposed, 30% passed with some/minor modifications and 10% passing the Liberal Party's recommendation (the passing of the Liberal recommendation would be the main driver of improved investor interest).

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