The Investment Industry Association of Canada believes that the tax measures on income trusts announced yesterday by finance minister Jim Flaherty will have an adverse impact on Canadian investors and Canada’s capital markets that is out of proportion with concerns the Minister sought to address.

The changes were intended to deal with the loss of current tax revenue and the significant increase in firms converting to income trusts that are ill-suited for such a structure.

“Income trusts, as high-yield equity investments, have offered Canadians an alternative to complement their portfolio holdings,” said Ian Russell, president and CEO of the IIAC.

“The big losers, as a result of yesterday’s announced changes, are Canadian investors who already today have seen their investment portfolios erode. We expect to see a drop-off in market value of several billion dollars — an amount that well exceeds the tax loss that the new government is trying to address.”

The IIAC is further concerned that the proposed measures will hamper the future viability of the income trust instrument. Income trusts offer certain issuers an alternate vehicle to raise capital. They have also been an effective instrument for venture capital investors to finance select firms in the crucial phase between start-up and listing on Canadian exchanges.

The growth of income trusts has its origin in an inefficient tax system. The government has taken positive steps to improve the neutrality of the tax system, the IIA says. The IIAC says it continues to advocate for lower taxes on capital and looks forward to working with the Minister of Finance and his officials to explore ways to promote investment and growth in Canada.