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Department of Finance Releases Conversion Rules for Income Trusts

July-15-2008

Area Corporate Finance and Securities, Tax, REITs and Income Securities

Summary


On July 14, 2008, the Department of Finance (“Finance”) released proposed amendments to the Income Tax Act (Canada) (the “Tax Act”) to facilitate the conversion of existing income trusts, REITs and other public flow-through entities into corporations on a tax-deferred basis (the “Conversion Rules”).  The Conversion Rules fulfil Finance’s undertaking to provide existing income trusts with tax efficient structuring options to convert to corporate form in advance of their 2011 taxation year – at which time most income trusts would become subject to a new entity-level tax based on corporate income tax rates.  The Conversion Rules address many of the principal substantive and administrative issues that currently arise when structuring a corporate conversion under the Tax Act; however, the Conversion Rules are complex and technical, and Finance has afforded a number of alternatives for completing a conversion.  Accordingly, income trusts must carefully consider their particular circumstances, and those of their unitholders, to structure a conversion in a manner that fully benefits from the Conversion Rules.

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