Restarting the cycle

The Financial Post reports that in a matter of two days after the Con released their draft legislation on income trusts, it's already come out that at least one existing trust may be able to avoid the impending tax based on dividends having been paid at one point in the flow of money from the company to its investors:

Cinram International Income Fund may turn out to have an advantage over other income trusts when the four-year tax holiday for companies using this popular structure comes to an end.

Draft legislation on taxing income trusts, released late on Thursday, could favour the DVD maker because most of the money it pays its investors is made up of dividends, not distributions. As expected, the draft legislation outlines how distributions to unit holders will be taxed at the trust level, but leaves dividends alone.

Cinram could end up with little tax on its payments to investors because of the way it is structured. Most of the company's earnings come from the United States, and Cinram's U.S. company pays Cinram's Canadian company a dividend, which it passes on to its unit holders. Because investors are receiving a dividend that has moved through the company's financial structure, observers say it will be treated as a dividend by the taxman, rather than a distribution.

If so, Cinram won't incur a tax on its distributions to unit holders, like other trusts will have to pay in 2011, when the Conservative government's plan to tax trusts like corporations takes effect.

It's not entirely clear from the article how Cinram is currently structured, and whether the result will be for the fund to escape the combination of corporate and trust taxes that most actors would face.

But regardless of whether Cinram is already set up to avoid the impact of the Cons' move to close the income trust loophole, the apparent discovery only highlights the certainty that new tax dodges will emerge to take the place of income trusts. And the controversy which surrounded income trusts over the past few years should make it glaringly clear that future governments need to be far quicker to address those dodges than past ones have been.