Income Trusts in Canada: the SIFT Tax
The decision to proceed with the new SIFT tax regime was primarily due to the estimated loss of government tax revenue allegedly associated with the use of income trusts. However, critics have argued that the actual amount of tax leakage taking place is likely not as dramatic as the Department of Finance has alluded to.
In response to the new tax regime, Forefactor predicts that a smaller number of SIFT trusts will remain in existence post 2010 compared to the height of the Trust trend (2006). We anticipate that some of the larger, higher-growth SIFT trusts will convert to corporations or consolidate, while the majority (predominantly the small and mid-size SIFT trusts with higher debt levels and/or higher payout ratios) will either divest or privatize. Corporate conversion for a few of the smaller SIFT trusts could be viable, provided they can prove to investors that they are able to maintain a steady dividend going forward. Forefactor also expects that some SIFT trusts, especially those with significantly depressed unit prices, could be caught up in an “eleventh-hour” wave of mergers & acquisitions (“M&A”) activity.
