Halloween Massacre

What is the Halloween Massacre?

The Halloween Massacre is referred to Canada’s decision to tax every Income trust domiciled in the country. It was in October 2006 when Canada’s then finance minister announced that the income trusts would be taxed same as corporations at the rate of 30% on Taxable Income.

This leads to a dramatic virtual decrease in the values of unitholders overnight.

Explaining Halloween Massacre

Under the preceding Canadian income tax laws, income trusts that were allowed to distribute to unitholders on the pretax Basis were the popular investment vehicle during the early 2000s, specifically in Canada.

By this change, the Energy Sector of Canada got a massive hit and dealt with an approximate loss of almost $35 billion to investors; encouraging the word “massacre”.

Financial Distress Caused by the Massacre

A Canadian Income Trust is one such investment fund that holds income-generating assets and distributes the money to shareholders or unitholders on a frequent basis. These distributions are either made monthly or quarterly.

The trust is responsible for distributing at least 90% of the net cash flows. As far as the tax advantages are concerned, both the entity as well as the investors get to avail the same. The investor gets a part of the frequent payment as a return of Capital along with a part as a taxable distribution. The entity distributes a majority of its cash to unitholders or shareholders, leaving a minimum to itself; thus, there is not much that is left to tax. Furthermore, the trust also pays a majority of their Earnings to unitholders before they pay the tax and is generally traded publicly on the security exchange.

This alteration in the Canadian tax law, which attracted a lot of debates, was created to provide a solution against the anticipated tax revenue loss. At the time, there were approximately 250 trusts that were enlisted on the Toronto Stock Exchange, with several Offering attracting results of up to 10%. This abrupt action by the government left investors in a shock and led to an instant decline of up to 12% in the trusts’ value. Therefore, this resulted in the low-interest rates in the US and Canada in the following decade as investors clamoured for more returns similar to the type that income trusts used to provide at some point of time.

Still, the income trusts were available in the form of Real Estate Investment Trusts (REITs). These entities are responsible for holding and maintaining income-producing real estate, such as shopping centres, office buildings, hotels. And, Canada is still offering special tax treatment.