Market reaction to Finance Minister Jim Flaherty's announcement of a new tax on income trusts was swift and heavy Wednesday as the S&P/TSX Composite Index fell sharply.

The index finished with a loss of 294.20 points, or more than two per cent, to end the day at 12,050.39.

Finance Minister Jim Flaherty labelled trust conversion 'a growing trend to corporate tax avoidance.'
(Fred Chartrand/Canadian Press)

The income trust and energy trust TSX sub-groups were off by 12 per cent and 13 per cent, respectively, while the telecom index was down more than eight per cent.

Among the stocks at the centre of the income trust situation, BCE Inc., Bell Canada's parent company, fell more than 11 per cent to finish at $28.10, while Telus Corp. dropped by more than 13 per cent to close at $56.15. The two phone companies had announced plans to convert to income trusts, but both firms have put them under review.

Units of existing income trusts — which have a four-year grace period before they are subject to the new new federal tax — got hammered.

Yellow Pages takes a hit

Yellow Pages Income Fund was off almost 19 per cent at $12.26, while CI Financial Income Fund dropped over 20 per cent to $24. Aeroplan income fund units shed nearly nine per cent to close at $14.60. Among energy trusts, Canadian Oil Sands Trust was down nine per cent at $27.41, while Penn West Energy Trust gave up 14 per cent to finish at $36.12. 

Dundee Wealth Management Inc. saw its share fall almost 17 per cent to $12.88. The company said it is re-evaluating its plan for the income trust reorganization of Goodman & Co., Investment Counsel Ltd.

While some investors headed for the exits, investment managers were telling clients to remain calm.

David Burrows, managing director and chief investment strategist for Rockwater Asset Management, said there will be short-term volatility, but there is long-term demand for income-producing securities.

"These companies will not go away," he told CBC Newsworld.

Bay Street criticism

Flaherty's move came in for criticism from some investment executives.

Stephen A. MacPhail, president and chief operating officer of CI Financial Income Fund, said he was "clearly very disappointed by the federal government's total disregard for the value of the savings of millions of our clients and other Canadians."

"We would have expected the government to provide existing income trusts with a significantly longer adjustment period, given that our clients invested their hard-earned savings on the basis of the Conservatives' stated commitment to leave the income trust sector alone," he said in a release

Loonie loses as investors react

The Canadian dollar also traded lower Wednesday as investors reacted to the trust announcement. After dropping a full cent earlier in the day, the loonie closed at 88.22 cents US, down 0.82 of a cent.

Canadian income trusts are popular with foreign investors, who might move their money elsewhere if they are forced to pay tax on Canadian trust holdings.

On Tuesday, after markets had closed, Flaherty said $70 billion of new trust conversions have been announced this year, which is hurting the economy. He called trust conversion "a growing trend to corporate tax avoidance."

Income trusts, which have grown sharply in popularity in recent years, account for more than $200 billion in market capitalization, according to information from the federal department.