What Was the Halloween Massacre?

The Halloween Massacre refers to a 2006 decision by the Canadian government to tax all income trusts domiciled in the country. On Halloween, Oct. 31, 2006, Canada’s then-minister of finance, Jim Flaherty, announced that all income trusts would be taxed at a rate of over 30% on taxable income just like corporations. The decision caused 澳洲幸运5官方开奖结果体彩网:unitholder value to decrease dramatically virtually overnight. Income trusts were popular among Canadian investors because of their favorable tax treatm꧅ent.

Understanding the Halloween Massacre

Canadian income tax laws allowed income trusts to make 澳洲幸运5官方开奖结果体彩网:distributions to unitholders on a pre-tax basis. This made them a favorable investment option for a lot of Canadian investors in the early 2000s. But that changed on Oct. 31, 2006, when then-FInance Minister Jim Flaherty announced changes to end the tax benefits for income trusts.

The change in Canadian tax law to tax income trusts the same as corporations, which was debated after the fact, was made to remedy a perceived loss of tax revenue. At the time, there were about 250 trusts listed on the 澳洲幸运5官方开奖结果体彩网:Toronto Stock Exchange (TSX) with a market value of over $200 billion. Many of these investments offered unitholders yields as high as 10%. So it's no surprise that the government's move shocked investors, leading to an immediate 12% drop in the value of the trusts.

In the years since the Halloween Massacre, interest rates were low in Canada and the United States, as investors clamored for more yields like the kind that income trusts once provided. As of 2023, income trusts were still available—many of them 澳洲幸运5官方开奖结果体彩网:real estate investment trusts (♋REITs).

These entities hold and maintain income-producing real estate, including office buildings, shopping centers, and hotels, that Canada still offers special tax treatment. When income flows through to unitholders, 澳洲幸运5官方开奖结果体彩网:th꧃ey don’t pay much, if any, corporate tax and most of the distributions are taxed as ordinary income.

Special Considerations

A Canadian income trust was an investment fund holding income-producing assets and distributing payments to unitholders or shareholders on a regular basis. 澳洲幸运5官方开奖结果体彩网:Distributions were usually made on aꦐ quarterly or monthly ba🐟sis.

A Canadian income trust was required to distribute a minimum of 90% of its net cash flows. Both investors and trusts benefitted ﷺfrom the tax advantages of income trusts, where:

• The investor received a portion of the periodic payment as an untaxed return of capital and a portion as a taxable distribution.
• The trust distributed most of its cash to unitholders, leaving little to be retained by the entity, so there was little left to tax. The trust paid most of the earnings to unitholders before paying taxes and was usually 澳洲幸运5官方开奖结果体彩网:traded publicly on an exchange.
  

Consequences of the Halloween Massacre

Canada's change to the tax treatment of income trusts angered many investors. That's because these investments earned higher yields when compared to other vehicles, such as guaranteed investment certificates (GICs). Their value dropped significantly—to the tune of 12% immediately after the announcement was made. An American couple even filed a NAFTA claim, citing $6.5 million plus costs.

The TSX lost 294 points when the government made the announcement, as many investors pulled their money out of income trusts. The TSX made a recovery shortly afterward, recovering nearly all of the losses it experienced on Halloween. The rebound was largely due to investors putting their money into 澳洲幸运5官方开奖结果体彩网:dividend-paying stocks.

Trusts had five years to convert to corporations. Many moved forward with the conversion while others became 澳洲幸运5官方开奖结果体彩网:real estate inve🌺stment trusts (REITs) by the 2011 deadline. Those that didn't make the move either 澳洲幸运5官方开奖结果体彩网:went private or were acquired by other entities.

Post-Pandemic

The Canadian REIT market was hit hard in the wake of the COVID-19 pandemic. The second quarter of 2020 “brought the largest ever 澳洲幸运5官方开奖结果体彩网:year-over-year (YOY) decline for quarterly🧜 earnings at minus 13%,” according to Carolyn Blair, managing director of RBC Capital Marketꦿs Real Estate Group.

As of the end of September 2020, Canadian REITs underperformed with a negative 20% return over the preceding 12 months. The pandemic’s effect on real estate, including tenant 澳洲幸运5官方开奖结果体彩网:insolvency, empty storefronts, reduced retail business, closed shops, restaurants, and more, was to blame.

Canadian REITs were poised for recovery after the pandemic, thanks to lower interest rates and higher 澳洲幸运5官方开奖结果体彩网:operational efficiency. Investment activity and property demand have slowed down because of the rising rate environment. Revenue for the sector is expected to drop by 5.6% to $8.2 billion by 2023.

The Bottom Line

Income trusts have survived the Halloween Massacre and the subsequent near-death experience of the COVID-19 pandemic. While not as lucrative as in the past, the sector is more than skeletal and very much alive.