NEWS WATCH
According to a research report by RBC Dominion Securities Inc., the Telus Corp. decision to convert into an income trust will deliver more taxes, not less to Revenue Canada.
Senior economist and Professor Jack Mintz was reported in the Globe & Mail as saying, “The Conservative government may abandon its hands-off approach to income trusts if another rash of big companies convert to the structure or if the next Liberal leader leads a crackdown on the investment vehicles.”
The Canadian Association of Income Funds (CAIF) has written a letter to members to launch a “multipronged action plan,” to “set the record straight”. With a paid advertising program, the association of trusts will hire “third-party experts” to dispell negativity about trusts.
Amid all the talk about the tax leakage and problems for small investors and the government due to income trusts, we see that the Canadian Pension Plan Investment Board (CPP IB) has prposed to the federal government that it should spin-off and build a real estate investment trust (REIT). The CPP invests on behalf of 16 million working Canadians and not only holds income trusts of all kinds. With business trusts in its equities portfolio, the CPP has turned the public pension fund from deficit to surplus during the 10 year rise of income trusts.
Widely-held BCE has followed the announcement by Telus, that it plans to convert common equity into trust units. With a combined market value of $50 billion, these two issues will alter the trust market significantly by enlarging it by roughly one quarter and the business trust sector by half. The news has retriggered rhetoric and media hype focused on the supposed “need” for the federal government to take action to stop tax leakage caused when companies like this transfer their tax burden to owners.
It is confusing to investors, particularly when calculations made to determine tax and economic impacts are focused on business trusts to the exclusion of the majority of value resident in the Canadian income trust market in the form of oil and gas producers and real estate investment trusts. Furthermore, it may be confusing to investors that negative statements about income trusts focus on business trusts to the exclusion of other kinds of income products and flow through entities. So the calls for new taxation gain headlines, but constitute practical and political challenges.
The income trust market is now 20 years old and may well handle large size and widely held stocks better than many might imagine.
iTrust Institute is studying the key features, perceived potential & benefits of income trusts starting from the premise that:
Equities managed and structured like income trusts to flow net gains through to owners by way of frequent and regular distributions of cash can offer superior rates of overall return, support market growth, enhance economic productivity and contribute to growth of the tax base with less risk than other equities given honest managers and a fully competitive market supported by open communications.
We will test this notion and explore related questions.