On September 19, Finance Minister Ralph Goodale dropped a bombshell that rocked Bay Street and many on Main Street.

On its surface, the minister's announcement seemed sort of mundane and would have been inscrutable to most people: Ottawa would no longer give advance tax rulings to companies that were planning to turn into income trusts while the government studied the current rules on how trusts should be taxed.

But the results of that announcement was anything but mundane.  First, it led to a roller coaster ride for the stock markets.  Then, there was a surprise change in government tax policy on the eve of the election call.  Now, the circumstances surrounding those tax changes are under investigation by the RCMP.

After that September announcement a whole sector of the market began to tank. Trusts, which include oil and gas companies in Alberta, sardine canners in Nova Scotia, and pizza makers in Ontario fell, and fell hard. In the weeks following the announcement more than $20 billion in market capitalization evaporated. 

As the market went south, the temperatures of many Canadians began to rise, especially among seniors who rely on income trusts for income.

Initially, Goodale said the Liberals would review government policy on trusts, and announce any tax changes in the new year.

But, on the eve of an anticipated federal election call, Goodale and the Liberals suddenly changed course on Nov. 23 when the Finance Minister announced new tax guidelines that not only left tax policy on income trusts unchanged, but made dividend stocks more attractive for investors.

After stumbling for weeks, the income trust sector surged again, while dividend stocks leapt.  But, were the stocks leaping too soon?

The official announcement was made just before 6 p.m. ET, well after the markets closed at 4 p.m. ET.  But, shares in trusts and some dividend stocks began rising earlier in the day, leaving some to wonder if the news was leaked early, allowing some to profit from the information.

What's a trust?

Without going too deeply into Canadian tax law, a trust is a company that has a special legal structure that allows it to pass its profits to the people who own it without having to pay corporate taxes.

The advantage here is obvious. By paying less corporate taxes, the company can pass on more cash to its owners.

A share of an income trust is called a "unit" and investors can buy and sell them just like a stock, either through a broker or through a discount brokerage.

Feds worried about losing taxes

Once a sleepy investment sector, largely confined to oil and gas companies and some real estate companies, the trust sector took off in the last decade as more and more companies decided to switch from corporate to trust status.

All of the sudden, pizza chains (Pizza Pizza) and steakhouses (The Keg), mattress makers (Sleep Country) and furniture stores (The Brick), sardine canners (Connors Bros.) and pet food makers (Menu Foods) switched to trust status.

Investors flocked to the sector, especially seniors who needed steady income to live on in an era when banks were paying miniscule amounts of interest.

But, that caught the attention of the feds. Companies that were once paying corporate taxes to Ottawa were sending that cash straight to investors. And while those investors still had to pay income taxes, they were paying less than the corporations.

One study estimated that Ottawa was losing $300 million a year in lost revenue.  And with more companies eyeing trust status, that amount figured to rise. 

Goodale was also worried that the growth of trusts could stifle Canada's growth and innovation.  Because trusts have to pay their profits to their unitholders, there is less money to invest back into their businesses, into things like research and development.

The feds' nervousness over trusts began to grow over the last year.  In the last budget, Goodale tried to put a limit on the amount of trusts pension funds could own. He was forced to back down after howls arose from Bay Street.

But, when the CEO of the Royal Bank publicly mused about switching to a trust, Goodale had enough. Canada's big banks are massively profitable and pay a big chunk of all the corporate taxes the federal government collect in a year. The possibility of a big bank diverting all that cash straight back to investors was too much, and the feds made their September move.

After the September decision, unitholders began selling in droves, often at a loss. Many were fearful that the sweet cash distributions these trusts paid out might soon be not so sweet. Within a few weeks, income trusts lost a collective $20 billion in market capitalization.

As the sector dropped in September and October, many companies and opposition politicians launched a counterattack, accusing the feds of greediness.

For example, brokerage firm Canaccord Capital had some harsh words for the government over the plunge in trust values: "Recognize this is billions of dollars of foregone capital gains tax revenues (or the creation of capital losses) that the government has caused in efforts to contain $300 million in purported tax leakage.

"The intentional or unintentional of the existing trust market is a morally indefensible attack on millions of Canadian investors and employees that acted in good faith under the rules that the government previously endorsed."

But big brokers are not the only ones who have been putting the heat on Goodale.  Several Liberal MPs reported getting angry calls from seniors to their constituency offices -- certainly a problem with an election looming.

In the end, Goodale decided simply to lower the amount of taxes corporations pay on their dividends, that decreases the incentive of corporations to make the switch to a trust.  A move that was applauded by many in the business community.