First the bad news: As expected, the Conservative Party has included its intention to pursue its Tax Fairness Plan in the annual budget. The Liberals and New Democratic Party (NDP) have declared their opposition. But prodded by unprecedented federal largesse, the Bloc Quebecois has stated it will support the budget. As a result, the budget will now almost certainly pass, and the Conservative government will survive another day.

We’ve provided a more detailed analysis in this week’s Maple Leaf Memo. As I’ve said, the service is complimentary to Canadian Edge readers, but government regulations require you to sign up yourself. The attached link will take you to the document, if you haven’t had time to sign up yet.

The good news is in two parts. First, since December we’ve focused exclusively on trusts that will either continue to pay big distributions in 2011 and beyond (Conservative Portfolio), or which have dramatic appreciation potential possibly from takeovers (Aggressive Portfolio).

Since the Halloween announcement, my view has been we should act as though Finance Minister Jim Flaherty’s plan were going through and invest accordingly. The market has now priced in the plan, and in fact share prices for stronger trusts have been bouncing up.

Oil- and gas-related shares have remained weak and we’ve seen more dividend cuts. But the big five of ARC Energy (AET.UN, AETUF), Enerplus (ERF.UN, NYSE: ERF), Penn West (PWT.UN, NYSE: PWE), Peyto Energy (PEY.UN, PEYUF) and Vermilion Energy (VET.UN, VETMF) all showed good dividend coverage in the fourth quarter. Better, they look set to hold payouts in 2007, as energy prices firm.

In short, tax plan or no, Canadian Edge portfolio recommendations look set to gain ground between now and 2011. In fact, a growing number of trusts are stating their intention to not cut dividends at all in 2011, despite taxation. For example, that was the word from Yellow Pages (YLO.UN, YLWPF) recently.

Consequently, the Conservatives’ budget is not a reason to change our strategy. In fact, the market’s reaction to the news–basically trusts have rallied the past few days–is a pretty clear indication that our assumptions have been right on.

The Goodies

The second part of the good news is simply that this issue is still not resolved in any definitive way. True, one avenue to repealing the tax on trusts–an early election and removal of the Conservatives from power–has been removed for the time being. It’s unknown whether the Liberals and Bloc will revive the issue for the inevitable election later this year, and lord only knows what the polls will show at that time. Certainly the Conservatives are counting on giveaways to buoy their chances of victory.

On the other hand, the trust lobby isn’t going away and there’s still a great deal of anger in the country’s saving population about the tax. And the government has left itself something of an out, referring to “consultation” over the details of the “tax fairness” plan.

In short, despite the budget, this issue remains unresolved. And while I remain adamant no one should count on any changes to the Flaherty plan, there’s still considerable potential for some between now and 2011.

In addition, there’s actually a lot of good news in this budget for income investors. For one thing, there’s the mention of a change in the tax treaty with the US that would phase out the current withholding of interest at the border.

That would not only lower Americans’ tax burden from trusts, but for a wide range of other Canadian investments as well. It would also make all Canadian investments much more attractive for IRAs, as there would no longer be withholding or any need to file a Form 1116 to recover it. We’ll be adding the best of these to Canadian Edge coverage as soon as we see something concrete.

There’s also a mind-bending number of tax breaks included for individual industries. Subsidies for oil sands development will shrink, which should consolidate control further in the hands of the big boys. That’s actually good news for Canadian Oil Sands (COS.UN, COSWF) in the long run, as its smaller rivals will find it harder to go on. But other industries will gain major advantages.

Tax breaks make for greater cash flows and higher distributions. We’ll be reviewing the specifics in the coming weeks.

The government’s willingness to hand out money also brings up another possibility that occurs to me: The creation of parallel structures through the tax code that essentially allow greater pass through of cash flow in distributions.

The Conservative Portfolio’s staple shares Atlantic Power (ATP.UN, ATPWF), Primary Energy Recycling (PRI.UN, PYGYF) and TimberWest (TWF.UN, TWTUF) are one example, combining debt interest with equity dividends. We may see other iterations make a comeback, such as the royalty trusts that predated income trusts’ creation in the mid-1980s.

In the meantime, stick to our strategy of buying only great businesses. They’ll thrive no matter what Ottawa throws down, and they’re literally the cheapest high quality yields in the world.