Halloween Massacre

2/28 Adjustable-Rate Mortgage (2/28 ARM)

DEFINITION of Halloween Massacre

The Halloween massacre refers to Canada’s decision to tax all Canadian domiciled income trusts. In October 2006, Canada’s Minister of Finance Jim Flaherty announced that all income trusts would be taxed the same as corporations at rates greater than 30% on taxable income, causing a dramatic drop in value for unit holders almost overnight.

BREAK THE Halloween Massacre

Income trusts, which were authorized to make distributions to pre-tax unitholders under previous Canadian tax laws, were a popular investment vehicle in the early 2000s, especially in Canada. The Canadian energy sector was the hardest hit by this change and suffered an estimated loss of about $ 35 billion to investors, leading to the term “massacre”.

Financial upheaval

A Canadian income trust is an investment fund that holds income-producing assets and regularly distributes payments to unitholders or shareholders. Distributions are generally made quarterly or monthly. The Canadian income trust must distribute at least 90% of its free cash flow. The tax benefits of investing in a Canadian income trust include benefits for the investor and for the entity itself.

The investor receives part of the periodic payment as a return of capital and part as a taxable distribution. The trust entity distributes most of its cash to shareholders or unitholders, which leaves little room for the entity, so there is little to tax. The trust pays most of the profits to unitholders before paying taxes and is generally listed on a stock exchange.

This change to Canadian tax law, which has been widely debated after the fact, was made to address a perceived loss of tax revenue. At the time, Bloomberg News noted, there were some 250 trusts listed on the Toronto Stock Exchange, many of which offered attractive 10% returns. The government’s surprise decision shocked investors and resulted in an immediate 12% drop in the value of the trusts.

Over the next decade, interest rates were low in Canada and the United States, with investors demanding more returns, such as that previously offered by income trusts. However, in 2020, income trusts were still available, mainly real estate investment trusts (REITs). These entities own and maintain income-producing buildings, including office buildings, shopping centers and hotels, and Canada continues to benefit from special tax treatment. When income passes through the unitholders, they do not pay much, if any, corporate tax, and most distributions are taxed as ordinary income.

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