BCE Inc. announced Wednesday it plans to scrap its holding company operations and turn Bell Canada into what would become the biggest income trust in the country.

The decision follows a similar announcement last month by rival Telus Corp.

BCE three-month trading

Investors responded by sending shares of BCE higher. The stock rose $1.37 to close at $32.92 in very heavy volume with more than 35.7 million shares changing hands.

"There's no doubt the winding down of BCE certainly does mark the end of an era in Canadian business," BCE chief executive Michael Sabia said during an analyst conference call.

The new Bell trust's initial annual cash distribution will be $2.55 per unit, compared to the current BCE dividend of $1.32 per share.

The trust plans to pay out 85 per cent of its income in distributions to unitholders. Sabia said that will still leave enough money for Bell Canada to invest in the business.

"We'll continue to make the significant investments we've always made," he told CBC News Business. 

BCE said the move would not change current operations or affect employees or customers. The company added that the conversion to an income trust is timely, as its tax shelters would be fully used in the first half of next year, triggering a substantial increase in cash taxes payable.

Pressure builds on Ottawa to act

The tax savings for BCE revived speculation that Ottawa may move to rein in the growing number of income trust conversions. Some critics have called them a "tax avoidance scheme." Corporations pay taxes, while income trusts pay no taxes and are able to flow through most of their income directly to unitholders.

NDP finance critic Judy Wasylycia-Leis estimated that with the Telus and BCE conversions, government coffers would take a hit of $1.5 billion annually, "which means the [tax] load is going more and more on the shoulders of individuals." 

She said Ottawa should put a moratorium on business trust conversions.   

Federal finance minister Jim Flaherty was non-committal when asked about the tax implications of the BCE move.

"We do remain concerned about the issue and continue to monitor the situation," he said Wednesday. 

The government raised the dividend tax credit in its May budget to try to level the playing field between corporations and income trusts.

Some analysts said BCE's decision to opt for trust status could open the floodgates.

"If BCE can get this approved by Parliament, at those upper levels, then almost any other company in Canada could become an income trust," said Dennis Freeman of Caldwell Investment Management.

If approved by shareholders, the conversion will see shares of BCE exchange one-for-one for units of the Bell Canada Income Fund.

A shareholder meeting is expected in January 2007, with the conversion expected to be completed in the first quarter of next year.