Finance minister Jim Flaherty last night announced the federal government’s intention to levy a tax on income trusts in an effort to try and level the playing field between trusts and corporations.

The government is proposing to apply a Distribution Tax on distributions from publicly traded income trusts. For income trusts that begin trading after today, these measures will apply beginning with their 2007 taxation year.

There have been $70 billion worth of corporate conversions to income trusts announced in 2006 alone, including Telus Corp. and BCE Inc., which announced its plans on October 11.

Flaherty’s announcement means the planned Bell Canada trust conversion would not qualify for the four-year grace period because it has not begun trading as a trust.

For existing income trusts the government is proposing to provide a four-year transition period. Existing trusts will not be subject to the new measures until their 2011 taxation year.

At the same time, the government proposes to reduce the general corporate income tax rate by half a percentage point as of January 1, 2011. As a result of this measure, there will not be more government revenue generated from the corporate sector, it says.

Flaherty explained that the moves are designed to put an end to the capital market distortions created by the tax arbitrage trusts have enjoyed. “They are necessary to ensure our economy continues to grow and prosper. They are necessary to bring Canada in line with other jurisdictions throughout the world,” he said.

In an effort to soften the blow to investors that rely on trusts, Flaherty also said that it is increasing the Age Credit Amount by $ 1,000 from $4,066 to $5,066 effective January 1, 2006. “This measure will provide tax relief for low and middle-income seniors,” he said.

And, it will permit income splitting for pensioners beginning in 2007. “This will significantly enhance the incentives to save and invest for family retirement security,” he added. “We recognize that pensioners and seniors have made important investments over the years and may be receiving benefits from the current income trust structure. These two measures will allow them to retain more of their income in their retirement years.”

“Families and businesses still pay too much tax in this country, and our government will continue to reduce the tax burden on Canadians. At the same time, we must ensure that no one gains an unfair tax advantage at the expense of others. It’s a responsibility we cannot and will not abdicate,” Flaherty concluded.

The president of the Canadian Association of Income Funds was quick to denounce the change.

“Finance Minister Jim Flaherty’s announcement of a punitive tax against this important sector of the Canadian economy was done precipitously and without consultation with the industry,” said George Kesteven in a statement. “The government’s action will directly affect the savings of millions of Canadians who have benefited from investing in income trusts.”