Last Tuesday the Canadian finance minister decided he’d pull a campaign move similar to one we’ve seen in the U.S.

Jim Flaherty decided he’d propose a new tax law that would begin taxing Canadian Royalty Trusts (CANROYS) at the normal corporate tax level. Currently, trust dividends are taxed at 15%, payable by the unit holder, but the trust itself does not pay an additional 15% on the same distribution. Flaherty wants to change all that, just one year after he said he wouldn’t impose any new taxes on trusts.

Naturally, this new “plan” of his sent the market into a tailspin, however I believe it has over reacted, as it tends to do every once in a while.

The plan proposed by Flaherty has a 5 year window for which existing trusts won’t have to pay the new tax. Five years is a long way off. Fortunately for us U.S. based holders of Canadian trusts, our politician friends to the North have the same follow-through record that ours do here in the South.

Canada is also in a campaign era, much like we’ve seen here lately, in which politicians will tell the local economy what it wants to hear without giving much thought as to the true repercussions.

Should this tax plan actually go through, you can kiss a healthy chunk of existing tax dollars goodbye, as the attractiveness of CANROYS will dwindle into US Treasury bond land. Why by CANROYS if you can just as safe a return in US T-Bonds?

I believe this latest reaction by the market opens up a great buying opportunity given the fact that the real consequences of political ineptness are so far off. Additionally, since I have all my trust holdings in a Roth IRA, I can’t take advantage of offset tax credits to the foreign withholding tax anyway.

Where I will get slapped in the face is when Provident Energy (PVX: chart, web, news) will have to start paying 15% on my distributions as well, which severely cuts into their ability to continue such modest payments.

For now, I’ll take a wait and see approach, but if I’ve learned anything from American politics, it’s that once the election is over, the markets will get back to normal. Provided, however, that our political friends to the North have enough sense to keep their dirty hands out of the equity markets.

Additional Resources
Canadian Trust Triage (Forbes Article)
Canadian Trusts Tank on Tax
Trust Intelligence discussion on Canadian Tax Proposal

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