Standard & Poor’s Ratings Services said today that it will not take any immediate stability rating actions due to the federal government’s suspension of advanced tax rulings for the income trust sector last month.

A goverment white paper outlines the scope of the consultation process on tax issues related to business income trusts and other flow-through entities, and the department is soliciting input from stakeholders by Dec. 31, 2005.

Key government concerns include the current loss of federal tax revenues, as well as the potential for future losses if large corporations, such as banks or incumbent telecommunications companies were to convert to income trusts.

S&P reports that policy approaches outlined in the consultation paper range from modestly negative to the sector and stability ratings, such as alternatives intended to limit future sector growth, to more invasive options.

“Direct taxation of income funds, for example, could alter the current distributable cash flow levels and relative pattern of income funds, and could result in negative stability rating actions,” said S&P stability ratings analyst Barbara Komjathy, in a release.

Unlike traditional corporations, income trusts generally pay no or minimal taxes at the operating level, but distribute their cash to investors, who then pay personal income taxes, either now, or in the case of pension funds and registered retirement savings plans, in the future when these investments are sold. The Department of Finance has estimated that the government lost about $300 million in corporate tax revenues in 2004.

“Currently, we cannot foresee with any certainty the tax policy outcome of the consultation process and its timing, nor the resulting implications for distributable cash flow generation,” Komjathy said. “Accordingly, we have not taken any immediate stability rating actions,” she added.

In determining the stability rating impact of the final tax policy, S&P will consider:

  • whether income trusts are affected directly, indirectly, or not at all;
  • whether tax policy changes are applicable across all sectors or only to a subset, such as business trusts, or based on some other mechanism, such as level of income or cash flows generated; and
  • how future growth and financial flexibility, including access to equity markets, are affected.



S&P said it does not anticipate wide-scale and severe downward stability rating revisions. Nevertheless, it is important to note that the government’s final tax policy decision might combine various elements of the proposed approaches, including alternatives currently not anticipated.