To Tax or Not to Tax Income Trusts: The Valuation Effect of a Canadian Dividend Tax Cut

Abstract

In September of 2005, the Canadian government launched a consultation process with regard to the non-taxable status of income trusts. Less than two weeks later, they announced that the issuance of advance rulings with regard to the creation of new income trusts was being suspended. Although everyone anticipated that the government's next move would be to eliminate the tax-free status of income trusts, instead, on November 23, 2005, they announced a reduction of the tax on dividend income in an effort to eliminate the tax system's bias in favor of income trusts relative to non-income trusts. We examine the economic impact of that announcement of November 23, 2005 on the income trust sector.