What Was the Halloween Massacre?

The Halloween Massacre refers to the Canadian government’s 2006 decision to tax all income trusts domiciled in Canada. On Halloween, Oct. 31, 2006, Canada’s then-minister of finance, Jim Flaherty, announced that all income trusts would be taxed in a similar manner as corporations at a rate of over 30% on taxable income, causing unitholders’ values to decrease dramatically virtually overnight.

Income trusts—which were permitted to make distributions to unitholders on a pretax basis under previous Canadian income tax laws—were a popular investment vehicle in the early 2000s, especially in Canada. The Canadian energy sector was hardest hit by the change, suffering an estimated loss of about 17.85% in value (about $35 billion) to investors over the 10 days following the announcement, giving rise to the term “massacre.”

Key Takeaways

  • The Halloween Massacre refers to the Canadian government’s October 2006 decision to tax all Canadian income trusts in a similar manner as corporations.
  • The tax rate levied was more than 30%, a shock to many trustors.
  • The change was made to compensate for a perceived loss in tax revenue, and it caused an immediate drop of 12% in the value of Canadian income trusts.

Understanding the Halloween Massacre

A Canadian income trust is an investment fund that holds income-producing assets and distributes payments to unitholders, or shareholders, on a regular basis. Distributions are usually made quarterly or monthly. The Canadian income trust must distribute a minimum of 90% of its net cash flows. Tax advantages to investing in a Canadian income trust include advantages to both the investor and the entity itself.

The investor receives a portion of the periodic payment as a return of capital and a portion as a taxable distribution. The trust distributes most of its cash to shareholders or unitholders, leaving little to be retained by the entity, so there is little left to tax. The trust pays out most of the earnings to unitholders before paying taxes, and it is usually traded publicly on a securities exchange.

This change in the Canadian tax law—which was largely debated after the fact—was made to remedy a perceived loss of tax revenue. At the time, noted Bloomberg News, there were some 250 trusts listed on the Toronto Stock Exchange (TSX), with many offering enticing 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 should keep in mind that payments from these trusts are subject to a Canadian withholding tax of 15%. In some cases, it’s possible to claim a foreign tax credit, depending on 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 more yields like the kind that income trusts once provided. Nevertheless, as of 2021, income trusts are still available, many of them real estate investment trusts (REITs). These entities hold and maintain income-producing real estate—including office buildings, shopping centers, and hotels—and Canada still offers special tax treatment. When income flows through to unitholders, they don’t pay much, if any, corporate tax, and most of the distributions are taxed as ordinary income.

The Canadian REIT market was hit very hard by the COVID-19 pandemic, as the second quarter of 2020 “brought the largest ever year-over-year decline for quarterly earnings at minus 13%,” according to Carolyn Blair, managing director of RBC Capital Markets Real Estate Group. As of the end of September 2020, Canadian REITs underperformed with a negative 20% return over the past 12 months. The pandemic’s effect on real estate—including tenant insolvency, empty storefronts, reduced retail business, and closed shops, restaurants, and more—was to blame.

Canadian REITs have since experienced a major rebound. As of the end of September 2021, they returned 43% over the previous 12 months, according to RBC.

FAQs

When Was Canada’s Halloween Massacre?

The Halloween Massacre took place on Oct. 31, 2006. On this date, the Canadian government made an unexpected 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 approximately 17.85% in value during the 10 days that followed.

What Is a Canadian Income Trust?

A Canadian income trust is an investment fund that holds income-producing assets and distributes payments to unitholders on a periodic basis, typically monthly or quarterly. The trusts are required to distribute a minimum of 90% of net cash flows to shareholders.