UPDATE 1-Canada's Harper vows to keep income trust tax

(Adds details, Liberal proposal, quotes, background)

OTTAWA, Sept 22 (Reuters) - Canadian Prime Minister Stephen Harper ruled out any reversal of his government's surprise decision in October 2006 to impose a tax on distributions from income trusts, which had become popular investment vehicles.

Harper, campaigning before the Oct. 14 general election, told reporters in Ottawa on Monday that the Conservative government was "forced" to change the income trust rules because corporations were increasingly converting to the tax-sheltered structure, avoiding tax payments to Ottawa.

The main opposition Liberal Party said on Monday that, if it forms the next government, it would replace the planned 31.5 percent tax with a smaller 10 percent rate. Its tax would be refundable for Canadian residents, leaving foreign investors to pay it, and the party projected the tax would bring in C$1 billion in revenue over four years.

But Harper suggested that the other political parties would come to the same conclusion the Conservatives did: changing the tax structure was necessary to stabilize the market.

"Any party that is suggesting it will reverse that is not telling the truth. They will find, and they know just as we knew, that they will have to reverse course," Harper said.

The Conservatives shocked market participants with the Halloween 2006 announcement of the new rules, and market activity that had been driven by income trusts screeched to a stop.

Two of Canada's biggest corporations, telecoms companies Telus Corp (T.TO) and BCE Inc (BCE.TO), halted plans to convert into trusts, the Canadian initial public offering market dried up, and BCE has since agreed to be acquired by a private-equity consortium.

Harper also said the government created "very generous" transition arrangements.

"We've allowed income trusts to double in size in the transition period and those taxes actually don't come into effect until 2011, so no income trust has in fact paid any tax," he said. (Reporting by Louise Egan, writing by Lynne Olver; editing by Rob Wilson)