The Canadian Finance Minster issued a ruling yesterday on the taxation of income trusts that has left Yellow Pages Group President and CEO Marc Tellier breathing a sigh of relief. The government decided to reduce the tax on dividend income, making the trusts more attractive to individual investors. There had been fears that the government would increase taxes on the trusts to raise revenue and to put cold water on the trusts. YPG’s reaction can be read here.
The trusts were once seen as a highly specialized asset class but are now increasingly popular, with many prominent Canadian companies looking for ways to convert to tax-advantaged income trusts. One of the trust model’s main popularizers has been YPG. The company has shown it can both grow and invest in the business within the trust structure, which essentially delivers all free cash back to trust unit-holders. Had the government made a different decision, YPG might have been left scrambling. And while business would have continued regardless, its valuation would likely have suffered.
Here is a comment from Tellier: "We believe the decision to cut the taxation on dividends will make Canada more competitive. The threat to productivity is not the income trust structure but the relatively high levels of taxation on corporations and individuals, and we are satisfied that the government understands this concern. Clearly they have responded to the input of Canadians from across Canada as part of this consultation process."