The Federal government made an announcement on October 31, 2006 proposing changes to the way that income trusts are taxed. This Tax Tip is not meant to be a detailed analysis of the announcement but rather to highlight some of the key issues.
Income trusts will now be taxed on the income distributed to unit trust holders. The tax rate will be 34% as of January 1, 2007 for those trusts that began to be publicly traded after October 2006. The tax rate for the years 2008 to 2011 will be 33.5%, 33.0%, 32.0%, and 31.5%, respectively. For those trusts that began to be publicly traded before November 2006, the new taxation of distributions will not apply until year ends in 2011. The income tax rate is made up of a basic federal tax rate, plus an additional rate in lieu of provincial tax. This additional rate of 13% is not a provincial tax rate but will be distributed to the provinces in some agreed upon manner. If income is not distributed to the unit trust holders, then it will be taxed at regular trust tax rates, which is the highest personal tax rate.
All amounts distributed from the income trusts will be treated as dividends. For Canadian resident unit holders, the dividends will be considered eligible dividends which are eligible for the new gross-up rates and higher dividend tax credit. For non-resident unit holders, the distributions will be subject to the withholding tax rate for dividends.
The government also made an announcement that Canadian residents who qualify for the pension income tax credit are able to split their pension income with their spouse. Essentially, the rules allow that up to one-half of the pension income can be allocated to the other spouse. This will apply for the 2007 and subsequent taxation years and the allocation must be made one year at a time. Both persons must agree to this allocation in their tax returns for the year in question.
At this time, the proposed legislation has not been issued.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.