Investorial

On this, the final trading day of 2006, I thought it’d be appropriate to editorialize a little about Canada’s biggest investment news of 2006. [Editor's note: Although I'm sure some observant readers will realize that technically, the final trading day of 2006 has already passed!] Finance minister Jim Flaherty will forever be associated with introducing the proposal of taxing income trusts to curtail the rush of Canadian corporations converting their structure for tax advantages. My personal position is clear - I welcome anything that helps to keep junk companies with no business adopting such a structure from carrying on as income trusts.

The whole deal still sounds very fishy. Shortly after the shocking Halloween announcement, the market reacted by dropping the income trust sector by more than 20%, almost $40 Billion dollars of wealth overnight! The ordeal had landed nods for Jim to be the 2006 Canadian business news-maker of the year. But 2007 could hold more surprises, so hold on tight!

What Is In Store For 2007?
Jim Flaherty has remained unmoved as many trusts came forward asking for “exemption” from the tax proposal. But ultimately, it’s not up to Jim. The proposed resolution is being drafted to be tabled for legislative process in 2007. Though the conservatives hold a majority in parliament. The conservative stronghold of Alberta has experienced backlash from its business and investor community. There’s always a possibility that the legislation is defeated. Looking at my crystal ball, I can already tell that if the legislation does get defeated, there’ll be much talk of a scandal / conspiracy.

Tax-Loss Selling Is The Key!
The timing of the announcement is an extremely important factor. The announcement on October 31st meant investors had 2 months to sell their income trust stakes. Most investors have experienced tremendous gains from the outstanding performance of the sector, and would have faced taxation if they sold. Instead, many of them may actually be facing losses and look to claim them for 2006 tax year.

How does tax-loss selling work?

You can use capital losses taken in a given year to offset capital gains in the same year. Any remaining loss can be used to reduce taxable capital gains in any of the 3 preceding years or in any other future year. However, should you purchase the identical stock within 30 days before or after your sale, Canada Customs and Revenue Agency (CCRA) will declare the sale a superficial loss, and deny you the loss.

Do you see now why the 2 months time frame was important? It was just enough not to keep rich investors waiting for too long, but allowing them to ensure if they sell their shares, and buy them after 30 days, that they could still claim the tax loss.

The Plot Thickens
So if you were the investor that claimed the tax loss, and bought back the same income trusts shares. And if the legislation fails to pass, there’s bound to be an upward market reaction to that news. You might end up back where your started! And you’d have enjoyed the additional tax loss deductions as well!

Don’t you think if the legislation doesn’t pass, that cries will ring out about the Conservative government doing this to benefit their wealthy friends? That could make for a juicy scandal in 2007! I’ve been pondering this possibility for quite a while now, but decided to withhold writing about it until any stock settlement from your sell trades would settle in 2007. I did not want to encourage anybody from taking such actions based on my rants of what the future might hold. I’ll make no apologies because this whole piece is only a conspiracy at best. But I’d love to hear what you think!

Related Posts:

• Rocky Start For Income Trust Taxation In 2007
• CIBC Fund Name Changes - Income Trusts Falling Out Of Favour?
• Income trusts still going strong?
• Income Trusts Avert Bad News … For Now