Globalization of markets and advanced communications and computer technology

A CORPORATION BY ANOTHER NAME The corporate form of organization has many variations around the world. The exact laws and regulations differ from country to country, of course, but the essential features of public ownership and limited liability remain. These firms are often designated as joint stock companies, public limited companies, or limited liability com- panies, depending on the specific nature of the firm and the country of origin.

In addition to international variations, there are specialized forms of corporations in Canada and the U.S. One increasingly common example is the professional corporation set up by archi- tects, accountants, lawyers, dentists and others who are licensed by a professional governing body. A professional corporation has limited liability but each professional is still open to being sued for malpractice.

Income Trust Starting in 2001, the income trust, a non-corporate form of business organization, grew in impor- tance in Canada.4 In response to the growing importance of this sector, provincial legislation extended limited liability protection, previously limited to corporate shareholders, to trust unit holders. Along the same lines, at the end of 2005, the TSX began to include income trusts in its benchmark S&P / TSX composite index.

Business income trusts (also called income funds) hold the debt and equity of an underlying business and distribute the income generated to unit holders. Because income trusts are not cor- porations, they are not subject to corporate income tax and their income is typically taxed only in the hands of unit holders. As a result, investors viewed trusts as tax-effi cient and were generally willing to pay more for a company aft er it converted from a corporation to a trust. However, this tax advantage largely disappeared on Halloween 2006 when the government announced plans to tax income trusts at the same rate as corporations starting in 2011. As a result, most income trusts converted to corporations. Th e number of income trusts reduced from 179 (with a market capital- ization of $112.1 billion) in 2009 to 65 (with a market capitalization of $51.5 billion) in mid-2011.

3 The dividend tax credit for individual shareholders and a corporate dividend exclusion reduce the bite of double taxa- tion for Canadian corporations. These tax provisions are discussed in Chapter 2. Trusts and limited partnerships are designed to avoid double taxation. 4 For more on income trusts see J. Fenwick and B. Kalymon, “A Note on Income Trusts,” Ivey Publishing, 2004 and De- partment of Finance, “Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trusts and Lim- ited Partnerships),” September 8, 2005. Data for TSX: Jan S. Koyanagi, “Income Trusts on Toronto Stock Exchange,” TSX, January 2007. Chapter 2 covers income trust income and taxation in more detail.

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