The Income Tax Act (the "Tax Act") currently includes special rules for a qualifying environmental trust (“QET”), introduced in relation to the regulatory regimes under which the operator of a mine, quarry or waste disposal site was required to pre-fund, by means of a trust, the costs of reclaiming or restoring the site.

Currently, the QET pays 28% tax on its investment income. The complex rules applying to the operator that funded the QET generally do not result in additional tax for the operator, provided the funds withdrawn from the QET are spent on eligible expenses.

Pipeline Trusts

The Budget proposes to expand the range of trusts eligible for QET treatment to include trusts that are required to be established for pipeline abandonment. The existing condition that a trust be mandated under the terms of a contract entered into with the federal or provincial Crown under legislation will be modified to include trusts that are created after 2011 and mandated by order of a tribunal constituted by a law of Canada or a province (such as the National Energy Board). These changes will apply to the 2012 and subsequent taxation years for trusts created after 2011.

Eligible Investments and Prohibited Investments

To qualify for tax treatment as a QET, a trust’s holdings must be limited to certain eligible investments. The Budget proposes to expand the range of eligible investments for QETs to include certain debt instruments and securities.

The Budget proposes that a QET not be permitted to invest in “prohibited investments”. For this purpose, prohibited investments will generally include: (i) an interest in an equity or debt security issued by a contributor to or beneficiary of the trust (and certain related persons or affiliated partnerships to the contributor or beneficiary); or (ii) a person or partnership in which a contributor to or a beneficiary under the trust has a “significant interest” (generally 10% or more).

These changes will apply to the 2012 and subsequent taxation years for trusts created after 2011. A trust created before 2012 can have these changes apply to it for all taxation years that end after 2011, if the trust and the relevant government regulatory authority jointly elect for such application.

Tax Rate

The Budget also proposes to set the tax rate payable by a QET on its investment income to the corporate income tax rate generally applicable for the 2012 and later taxation years (to be reduced from 28%), applicable to the 2012 and subsequent taxation years.