Federal Conservatives in Alberta are ripping up their membership cards because they feel betrayed by the Harper government's decision to tax income trusts, says a Calgary tax lawyer.

John Brussa, who created the first energy income trust in the 1980s, said he was shocked that the federal Conservatives took what he considers such drastic action. Federal Finance Minister Jim Flaherty announced Tuesday that the federal government would introduce a tax on income trust distributions.

Brussa said many Albertans, particularly those who supported Prime Minister Stephen Harper in his bid for federal election, are not happy with the latest federal plan.

"I've gotten a lot of calls today," Brussa said Wednesday. "There were a number of people today who have torn up their Conservative party memberships into little pieces."

Brussa said much of the anger is coming from people who work in the oil patch in Alberta.

"What you have amongst a lot of people in the oil patch is an intense sense of disillusionment," he said. "There was billions of dollars bet by ordinary people, companies, executives on the strength of this promise. To have this result, to have billions of dollars lopped off, seems to have struck a raw nerve."

Flaherty said the new tax on income trust distributions is an attempt by the government to stem the growing number of companies that are converting to trusts. He said $70 billion of new trust conversions have been announced this year and he said they were hurting the economy. He said trust conversion was part of a trend by corporations to avoid paying taxes.

According to the new rules, trusts that began trading as of Wednesday this week 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.

Markets plummet in reaction

Reaction to the news was swift and heavy on Wednesday when markets opened. The S&P/TSX Composite Index fell sharply, finishing with a loss of 294.20 points, or more than two per cent, to end the day at 12,050.39.

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.

But Brussa said he rejects the contention by the government that energy trusts need to be taxed in order to sustain productivity. Brussa works at the law firm of Burnet, Duckworth & Palmer.

"In very mature segments of the economy, like these old producing properties, they, frankly, produce more cash flow that can be profitably reinvested in them," he said.

Calgary financial analyst Ric Palombi, however, said he thinks it was inevitable that the government would take action on income trusts given the large sums of money involved. Palombi is a portfolio manager at McLean & Partners Wealth Management Ltd.

"The tax leakage is quite tremendous, and as Jim Flaherty said, there is the issue of this potentially growing to hurt the Canadian economy. Although that's a little bit dramatic on his part. It hasn't hurt it so far," he said.

But he said the move is not really surprising. "They had no other choice but to stem the tide of these income trust conversions," he said.

According to the Canadian Press, income trust investors lost more than $20 billion on paper as the announcement set the markets in motion on Wednesday. Some of the largest companies in Canada, including BCE, Telus, Yellow Pages, CI Financial, Canadian Oil Sands and Aeroplan, were affected by the rush selling that followed the news.

Less emotion was expected at the markets on Thursday and financial experts were advising clients not to panic because of the change.

With files from the Canadian Press