The proposed tax changes for income trusts eliminate their preferential tax treatment, making them potentially less attractive to investors. Based on this, income trust prices dropped sharply in early November. We continue to recommend caution when it comes to investing in income trusts.

The proposed changes in the tax law will treat income trusts like corporations, eliminating their tax advantage. Beginning in 2007, new trusts will be taxed as corporations. Existing trusts will be taxed as corporations beginning in 2011. We expect some income trusts will consider converting to the corporate structure and most will reduce their distributions in 2011 when they must pay taxes. The proposal reduces expected returns significantly for foreign investors, pension funds and investors holding income trusts in tax deferred accounts such as RRSPs in 2011. However, taxable investors will be able to deduct any corporate taxes paid, similar to the current treatment of dividends.

Two other provisions in the proposed tax changes were favourable for seniors. These include raising the income-tested age credit by $1,000 and permitting income splitting from pensions and other registered retirement income. If passed into law, these changes would reduce taxes for many seniors, providing them with additional income. Although we expect these changes will be enacted into law, some provisions could be altered along the way. As we’ve recently seen, surprises happen.

Most companies that currently operate as income trusts are small, risky, cyclical businesses. As a result, we believe they may not be able to sustain their distributions over time. In addition, those distributions could decrease in 2011 when they would begin paying taxes under the proposed changes.

For these reasons, we continue to believe that most income trust investments are not suitable for conservative long-term investors. We generally recommend you allocate less than 5% of your portfolio to aggressive investments, and most income trusts are aggressive.

If you own income trusts, ask your investment representative for a free investment review to determine whether these investments still make sense for you. Since existing trusts are expected to begin paying corporate taxes in 2011, their prices could decline over time, and distributions could be cut at any time if the underlying business falters.

We believe most investors who need income would benefit from a mix of investments that provide both current and rising income. To achieve this, we recommend combining bonds, mutual funds and/or stocks that have a history of increasing their dividends.