Nursing home and health-care company Extendicare has delayed plans to convert to an income trust after the federal government announced new taxes on trusts.

"In light of the minister of finance's announcement of the tax fairness plan for Canadians after the stock markets closed yesterday, [Extendicare's] board of directors at a meeting late last night … has decided to delay proceeding with the reorganization," the company said in a release early Wednesday.

Investors reacted to the income trust news by sending the company's shares down almost 10 per cent to $22.80 on the TSX.

On Tuesday, Finance Minister Jim Flaherty announced a new tax on income trust distributions aimed at reducing the number of companies that are converting to trusts.

He said $70 billion of new trust conversions have been announced so far this year, hurting the economy and cutting government tax revenue.

One executive called it "incredibly irresponsible" for the government to make changes when it said it wouldn't. Bill Holland of CI Financial Income Fund said it's the kind of thing you'd expect from a Third World country.

But economist Jack Mintz may have helped to prod the finance minister with a study that showed the large amount of lost tax revenue. Mintz said he's surprised the government moved so forcefully.

"There are a lot of conversions in the works and the minister had to clarify where his position is going to be," he said.

Flaherty called trust conversions "a growing trend to corporate tax avoidance."

He told CBC News the government took into consideration the effect the announcement might have on the markets, but defended it as a measured response.

BCE would save hundreds of millions

Flaherty's announcement comes three weeks after BCE proposed the biggest trust conversion in Canadian history. It proposed to convert its Bell Canada subsidiary to a trust, which would save it $800 million in tax by 2008.

By some estimates, the federal and provincial governments stand to lose as much as $1 billion annually in tax revenue from converted companies. There are now more than 250 income trusts in Canada.

Trust conversions are increasingly popular because trusts do not pay corporate tax. Instead, they pay out most of their income in distributions to unitholders, who then pay tax on those distributions at a preferential rate.

Flaherty said that situation could not be allowed to continue. "It's not right and it's not fair."

Trusts that begin trading as of Wednesday or later would face the new measures in 2007. Existing trusts would have a four-year transition period and would not face the new rules until 2011.

That means the Bell Canada trust conversion would not qualify for the four-year grace period because it has not begun trading as a trust.

Flaherty also said Ottawa will cut the corporate income tax rate by half a percentage point as of Jan. 1, 2011, to further "level the playing field" between income trusts and corporations.

The small change in the tax rate is unlikely to mollify many in the financial sector.

The President of the Canadian Association of Income Funds was quick to denounce the change Tuesday.
 
"Finance Minister Jim Flaherty's announcement of a punitive tax against this important sector of the Canadian economy was done precipitously and without consultation with the industry," said George Kesteven in a statement.

"The government's action will directly affect the savings of millions of Canadians who have benefited from investing in income trusts."