The Investment Counsel Association of Canada is urging individual investors to consult with their advisors before reacting to significant changes in the tax treatment of Canadian income trusts announced yesterday by the federal government.

On Tuesday evening, finance minister Jim Flaherty, announced a Tax Fairness Plan proposal that will introduce a distribution tax on Flow Through Entities (FTEs) and a tax on distribution receipts similar to dividends. These new rules will become effective in 2007 for organizations that legally convert into trusts after Oct. 31, 2006, and in 2011 for existing trusts.

Don Cranston, ICAC’s chairman commented, “First and foremost, we recommend that individuals should not make any quick decisions, but rather consult with their investment counselors, portfolio managers or financial advisors to determine the implications the changes may have on their personal or business investment strategy.”

“We expect a reaction in the markets today, but since it is effectively status quo in terms of tax treatment for four years for existing trusts, this allows Canadian investors transition time to react to the news and re-evaluate the impact on their investment strategy,” Cranston added.

Katie Walmsley, president of the Investment Counsel Association further commented, “We were aware that this issue had been on the Federal Government’s radar screen for some time, but clearly the announcement came as a shock to many. Given the complexity of the Canadian corporate and individual tax system, it will take some time to analyze and react to the economic implications of a change that impacts a layer of taxation.”

In addition, Flaherty announced an allowance of income splitting among pensioners beginning in 2007. Retired couples can now split Canada and Quebec pension payments, but can’t split other income such as retirement funds and company pensions.

Reflecting on this announcement, Walmsley, added, “This change will provide some tax relief to retired seniors, which is a positive development and should encourage retirement savings.”