Halloween Massacre

What Was the Halloween Massacre?

The Halloween Massacre alludes to the Canadian government's 2006 decision to tax all income trusts domiciled in Canada. On Halloween, Oct. 31, 2006, Canada's then-pastor of finance, Jim Flaherty, announced that all income trusts would be taxed likewise as corporations at a rate of over 30% on taxable income, making unitholders' values decline emphatically basically overnight.

Income trusts — which were permitted to make distributions to unitholders on a pretax basis under previous Canadian income tax regulations — were a famous investment vehicle in the mid 2000s, especially in Canada. The Canadian energy sector was hardest hit by the change, experiencing an estimated loss of around 17.85% in value (about $35 billion) to investors over the 10 days following the announcement, leading to the term "massacre."

Understanding the Halloween Massacre

A Canadian income trust is an investment fund that holds income-creating assets and circulates payments to unitholders, or shareholders, consistently. Distributions are normally made quarterly or month to month. The Canadian income trust must disperse at least 90% of its net cash flows. Tax benefits to investing in a Canadian income trust incorporate benefits to both the investor and the entity itself.

The investor gets a portion of the periodic payment as a return of capital and a portion as a taxable distribution. The trust appropriates a large portion of its cash to shareholders or unitholders, passing on little to be retained by the entity, so there is minimal passed on to tax. The trust pays out a large portion of the earnings to unitholders before paying taxes, and it is generally traded publicly on a securities exchange.

This change in the Canadian tax regulation — which was to a great extent bantered sometime later — was made to cure a perceived loss of tax revenue. At that point, noted Bloomberg News, there were about 250 trusts listed on the Toronto Stock Exchange (TSX), with many offering alluring yields of 10%. The surprise move by the government shocked investors and caused an immediate 12% decline in the value of the trusts.

U.S. investors who invest in a Canadian income trust ought to keep as a primary concern that payments from these trusts are subject to a Canadian withholding tax of 15%. At times, it's feasible to claim a foreign tax credit, contingent upon where the shares are held.

The Fallout from the Halloween Massacre

In the decade since, interest rates have been low in Canada and the United States, as investors have clamored for additional yields like the sort that income trusts once gave. By and by, starting around 2021, income trusts are as yet accessible, a large number of them real estate investment trusts (REITs). These substances hold and keep up with income-delivering real estate — including office structures, shopping centers, and inns — Canada actually offers special tax treatment. At the point when income flows through to unitholders, they don't pay a lot, if any, corporate tax, and the majority of the distributions are taxed as ordinary income.

The Canadian REIT market was hit exceptionally hard by the COVID-19 pandemic, as the second quarter of 2020 "brought the biggest ever year-over-year decline for quarterly earnings at minus 13%," as indicated by Carolyn Blair, overseeing director of RBC Capital Markets Real Estate Group. As of the finish of September 2020, Canadian REITs failed to meet expectations with a negative 20% return over the past 12 months. The pandemic's effect on real estate — including tenant insolvency, void customer facing facades, decreased retail business, and closed shops, caf\u00e9s, and that's just the beginning — was to be faulted.

Canadian REITs have since encountered a major rebound. As of the finish of September 2021, they returned 43% over the previous 12 months, as per RBC.

Features

• The Halloween Massacre alludes to the Canadian government's October 2006 decision to tax all Canadian income trusts likewise as corporations.
• The tax rate collected was over 30%, a shock to numerous trustors.
• The change was made to make up for a perceived loss in tax revenue, and it caused an immediate drop of 12% in the value of Canadian income trusts.

FAQ

What Is a Canadian Income Trust?

A Canadian income trust is an investment fund that holds income-delivering assets and disseminates payments to unitholders on a periodic basis, commonly month to month or quarterly. The trusts are required to circulate at least 90% of net cash flows to shareholders.

When Was Canada's Halloween Massacre?

The Halloween Massacre occurred on Oct. 31, 2006. On this date, the Canadian government made a startling announcement that all income trusts domiciled in Canada would be taxed like corporations.

What Was the Impact of the Halloween Massacre?

The announcement caused the value of Canadian income trusts to decline by 12% immediately. The Canadian energy sector was impacted the most and lost around 17.85% in value during the 10 days that followed.