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CandleFocus Glossary Editor
The Halloween Massacre of October 2006 was the day Canadian trust income holders shuddered in shock. On that day, the Canadian government declared that income trusts, a popular investment vehicle for Canadians, would be subject to a tax of more than 30%. To many investors who felt blindsided, this was a devastating blow.
Income trusts allow funds to be pooled from numerous investors. The trust is formed with a manager who invests the money of investors in a variety of stocks, bonds, real estate and other investments. Then, the trust pays a regular income to trustors, while any profit the trust makes is returned to investors at the end of the trust’s life.
Prior to the 2006 decision, the income generated by the trusts was taxed at the trustor’s personal income tax rate. With the change, the trust income was taxed at the same rate as a corporate income. The government had originally thought that this change would generate over $1 billion in extra income taxes, but the outcry from investors pushed the stated revenue to around $800 million.
Uproar soon followed the announcement. Canadian trust holders were in an uproar, with many of them unable to understand why the change had been made without warning and without fair compensation. The trust sector of the Toronto Stock Exchange immediately lost 12% of its value and declined another 10% over the following weeks. Because of their illiquid nature, income trusts cannot be quickly divested like stocks and seniors, living on a fixed income, faced an almost insurmountable drop in their retirement incomes.
The Halloween Massacre of 2006 was a sad day in Canadian history. What was supposed to be a revenue-generating move ended up costing investors hundreds of millions. This and other questionable financial decisions by the Canadian government led to sweeping changes in the operations of income trusts, and in some cases, the premature termination of trusts due to the inability to generate revenue. To this day, many Canadians remain fearful of trusting the government to properly manage their retirement funds.
Income trusts allow funds to be pooled from numerous investors. The trust is formed with a manager who invests the money of investors in a variety of stocks, bonds, real estate and other investments. Then, the trust pays a regular income to trustors, while any profit the trust makes is returned to investors at the end of the trust’s life.
Prior to the 2006 decision, the income generated by the trusts was taxed at the trustor’s personal income tax rate. With the change, the trust income was taxed at the same rate as a corporate income. The government had originally thought that this change would generate over $1 billion in extra income taxes, but the outcry from investors pushed the stated revenue to around $800 million.
Uproar soon followed the announcement. Canadian trust holders were in an uproar, with many of them unable to understand why the change had been made without warning and without fair compensation. The trust sector of the Toronto Stock Exchange immediately lost 12% of its value and declined another 10% over the following weeks. Because of their illiquid nature, income trusts cannot be quickly divested like stocks and seniors, living on a fixed income, faced an almost insurmountable drop in their retirement incomes.
The Halloween Massacre of 2006 was a sad day in Canadian history. What was supposed to be a revenue-generating move ended up costing investors hundreds of millions. This and other questionable financial decisions by the Canadian government led to sweeping changes in the operations of income trusts, and in some cases, the premature termination of trusts due to the inability to generate revenue. To this day, many Canadians remain fearful of trusting the government to properly manage their retirement funds.