FEDERAL PROPOSED TAX FAIRNESS PLAN
OCTOBER 31, 2006
On October 31, 2006, Finance Minister Jim Flaherty announced the Tax Fairness Plan (the “Plan”)
proposing the following measures:
• Legislation aimed to stop the tax leakage due to the proliferation of certain publicly-traded
income trusts and partnerships (referred to as “flow through entities” or “FTEs”) in Canada.
• Reduction of the general corporate income tax rate by one-half percentage point in 2011.
• Enhancement of the age credit amount from $4,066 to $5,066.
• Provisions allowing pensioners to split their eligible pension income with their spouses.
This newsletter will briefly summarize these changes and will also discuss the implications of the
proposed changes to the taxation of dividends received by an individual, which were announced
earlier this year.
PROPOSED CHANGES TO THE TAX TREATMENT OF INCOME TRUSTS AND
When a corporation pays a dividend to its shareholders, it usually does so using money that has
already been taxed at the corporate level. The dividend is also subject to tax in the hands of the
shareholder. If the shareholder is an individual resident in Canada, the income tax system relieves
the potential double taxation through the dividend “gross-up” and dividend tax credit mechanism.
On the other hand, until the October 31, 2006 announcement by the federal government, FTEs did
not pay any income taxes on their earnings, since they were allowed to allocate their earnings to
their investors, and the investors were required to pay income tax on such allocated earnings. Prior
to 2006, the taxation of corporations and FTEs had two major differences:
1. The overall tax (corporate and personal) was much higher when income was earned by a
corporation, as compared to the tax if the same income was earned by an FTE.
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2. Tax-exempt investors, such as pension funds and registered retirement savings plans (“RRSPs”),
enjoyed a further