Federal Government’s Trust Tax Legislation
On June 12, 2007, Bill C-52 (the “SIFT Rules”) enacted the October 31, 2006 proposal to impose a new tax on distributions from flow-through entities, including publicly traded income trusts. Under the SIFT Rules, existing income trusts will be subject to the new measures commencing in their 2011 taxation year, following a four-year grace period. In simplified terms, under the proposed tax plan, income distributions will first be taxed at the trust level at a special rate estimated to be the Federal Corporate rate and applicable provincial corporate rate. Income distributions to unitholders will then be treated as dividends from a Canadian corporation. Individual unitholders will be eligible for the dividend tax credit. Tax-deferred accounts (RRSPs, RRIFs, TFSAs and Pension Plans) will continue to pay no tax on distributions but will not be eligible to use the dividend tax credit. Non-resident unitholders will be taxed on distributions at the non-resident withholding tax rate for dividends. The net impact on individual Canadian taxable investors is expected to be minimal because they can take advantage of the dividend tax credit. However, as a result of the tax at the trust level, distributions to tax-deferred accounts and non-residents will be reduced.
Recent amendments to the Income Tax Act (Canada) facilitate the conversion of existing income trusts into corporations. In general, the amendments permit alternative transactions which allow a conversion to be tax deferred for both the unitholders and the income trust. Management and the Board of Directors continue to review the impact of the Trust tax on our business strategy and while there has not been a decision as to Peyto's future direction, at this time we are of the opinion that the conversion from a trust into a corporation may be the most logical and tax efficient alternative for unitholders. At the present time, Peyto believes that if structural or other similar changes are not made, the relative after-tax distribution amount in 2011 to taxable Canadian investors will remain approximately the same, however, will decline for both tax-deferred Canadian investors (RRSPs, RRIFs, pension plans, etc.) and foreign investors.
