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Fredericton Daily Gleaner ~ Capital Appreciation ~ BARC Income Fund ~ July 10, 2006 - 10 Jul 2006 by TaxHelp
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This BARC is worse than its bite.
Roger Haineault – “Capital Appreciation” – July 10, 2006.
Arguably the business story that’s going to affect the most New Brunswickers this year is playing itself out right now. The many gyrations of the ownership structure of our phone company changed again on the weekend.
While most of us still think of it as NB Tel, ownership was also known as Bruncor, Aliant and as of the close of business Friday, wait for it – Bell Aliant Regional Communications Income Fund. You may be asking yourself “Why, what is this income trust deal?”
In general, income from a trust is taxed in the hands of the beneficiary. Conversely, corporations are taxed on their income. People with trust income pay tax on those funds at their marginal tax rate. People with shares in corporations pay tax on the income they receive (known as dividends) at their marginal rate as well. The challenge is to find a way to not have the effect of double taxation - a corporate tax and a personal tax, thereby making the underlying company more attractive to investors. Hence the recent popularity of income trusts. The active company lets its profits flow through to the income trust, paying virtually no tax, and the trust pays the income out to the unit holder. Many times this is done in the form of a royalty payment. BARC Income Fund will hold some core assets that are easily annuitized as consistent and dependable cash flow.
Because of the tax benefits, some observers have felt that the playing field has not been level. Previously, any dividend a shareholder received was grossed-up by 25 per cent. The taxpayer then took a credit of 13.33 per cent of this increased number and applied it against the federal taxes due on this higher amount. In the past this mechanism had done a good job in helping offset the effects of double taxation. However, in light of the income trusts, Ottawa needed to act and could have created a tax to make these trusts less attractive. Instead it increased the gross-up value on dividends to 45 per cent while increasing the credit to 19 per cent. When you consider that someone who has the lowest federal tax rate of 15.5 per cent (as announced in the latest federal budget), anyone with dividends and taxable income of less than about $35,000 will pay virtually no tax federally on that income. Since the measure took effect in January, anyone with dividend income should smile next time they file a tax return.
On the other hand, anyone who held Aliant shares on Friday (which closed at $32.77) may have to deal with a capital gains issue next spring. The shares were swapped for income trust units and even though the investor did not receive any funds, the exchange is treated as a disposition. This can result in capital gains. The taxable income is calculated based on the swapped price less the cost of the share divided by two. Put another way, if someone had bought Aliant for $12.77, the profit (in this case known as a capital gain, and ignoring any sales commissions) is $20 and the taxpayer must report $10 on his tax return.
If Prime Minister Stephen Harper could have found a way to get one of his election promises into his first budget, many of us would be much happier. In the Conservative Party’s federal platform document “Stand Up for Canada” on page 16 there are only three bullet points under the caption ‘Real tax relief for Canadians’. The first two deal with the recent GST reduction. The third states that they would “Eliminate the capital gains tax for individuals on the sale of assets when the proceeds are reinvested within six months. Canadians who invest, or inherit cottages or family heirlooms, should be able to sell those assets and plough their profits back into the economy without taking a tax hit. It is time government rewarded Canadians who reinvest their money and create jobs.”
Prime Minister Harper’s bullet point would have eliminated the tax in this situation as the stock is being reinvested into the income trust. Instead, while you may not have received any of the proceeds, this BARC may bite you at tax time.
Roger Haineault is with Help 4 Taxes. He can be reached by email at roger@help4taxes.ca or by calling 1-888-450-1212. His column appears Monday. |
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