The surprise announcement out of Ottawa on income trust taxation has analysts suspecting that large, planned conversions will now not proceed.

In a report released today, UBS Securities Canada Inc. predicts that telecom giants BCE and Telus will now no longer proceed with their planned conversion into income trusts. Any new trusts will be subject to the new tax in 2007, but there will be a four year transition period for existing trusts.

“Since Telus and BCE are not legally flow-through entities as at Oct 31, they would be subject to the new rules effective January 1, 2007 should they decide to continue to proceed with the conversions. Our initial view is that we believe Telus and BCE will not proceed with the conversions,” it says. As a result, it is downgrading their stocks.

In a separate report from UBS the firm notes that it has, “long believed tax neutrality would eventually exist between flow-through entities and corporations”.

“The government’s announcement is an attempt to restore one principle of taxation policy: neutrality,” it says.

However, it suggests the timing of the move is surprising, with the government in a minority position. “Given the minority government in the House of Commons, we are somewhat surprised about the timing, but not the scope, of this announcement. Yet, the announcement creates uncertainty and potential significant private equity opportunities,” it concludes.