Deloitte has written a newsletter to suggest that, “Since the fateful announcement on October 31, 2006, there have been 40 announced or completed trust buyouts versus 14 deals over the equivalent year-ago period. We have seen the trust population of 256 shrink by more than 15% to 215. Market conditions such as foreign exchange fluctuations and commodity prices also had an impact on this decline, but the trust tax announcement was certainly the catalyst for the sell-off.”

The report goes to show how policy objectives had opposite and negative effects on Canadians.

Deloitte had some expectation of this, as could have the government. The firm wrote on that, “In December 2006, Deloitte hosted an event for trustees and management of income trusts, and their investors, bankers and advisors. The participants were asked to estimate the number of trusts that would still exist at the end of 2010 – and 87% responded “fewer than 100.”

A decline of this magnitude is inline with reality and translates into almost 40 trusts per year.

“Of the 40 deals that originated since October 31, 2006, 31 have closed and 9 are pending completion. Many other trusts have been targeted (see the hit list of what’s left to buy) during this period, with at least one publicly disclosing a takeover attempt that was subsequently terminated. The figures are:
-- 25 business trusts have been taken over, 14 by foreigners and six by domestic private equity.
-- Six energy trusts have been taken over, three private equity (two foreigners).
-- Five REITs have been bought out, two foreign and one private equity.
-- Four power and pipelines trusts have been scooped up , two by foreign private equity.

In total 40 takeouts, 20 foreign and 24 private equity neither of which will pay taxes possibly ever.

“Energy trust activity remained consistent year over year, although there were two foreign buyouts as opposed to exclusively trust mergers prior to the announcement. The REIT and Power & pipelines sectors experienced an increase in interest by foreign buyers and Canadian pension funds. The characteristics of both of these sectors lend well to the infrastructure-based investing that many pension funds and foreign buyers are looking for, and should result in continued buyout activity.”

“Buyers in the 40 announced deals were equally split between strategic and private equity, as well as between domestic and foreign. But in terms of tax revenue for the Canadian government, the news was not so balanced: 70% of the purchasers are tax exempt pension/private equity funds or foreign buyers who pay little if any tax in this country.

“What structures were buyers using to acquire trusts? In 22 of the 40 transactions, trust units were acquired; in the other 18, the purchaser acquired shares of subsidiary corporations, trusts or partnerships. The method of acquisition has significant implications for the buyer, trustees and unitholders. The entity left “holding the bag” has to bear the cost and risk associated with the wind-up of the engineered trust. A caveat for future purchasers: all parties should consider the implications of a proposed structure when assessing the value and risk of an offer for a trust.

“Based on our involvement with over 20 income trust buyout transactions in the past year we believe that the buyout momentum will continue. The current M&A slowdown is primarily driven by “mega” transactions exceeding $1 billion in size. The income trust market, particularly the business trust segment, is comprised of medium-sized companies that are ideal for financial and strategic buyers. Clearly, volatility in the income trust sector is far from over.”

Not a single objective announced by Flaherty and Harper was achieved:

-- The tax burden has not been shifted off families. Some $1.372 billion in taxable distributions will now be used to make interest payments on loans to acquire these income trusts. No taxation as a result.

-- Bringing Canada’s approach to taxes in line with other countries. Wrong. This is now a made-in-Canada botch up. REITs have been hampered by new rules, unlike the U.S., and energy trusts have been severely wounded, unlike the U.S.

Deloitte’s report highlighted the renewed calls by upset income trust investors for an inquiry or—as Deloitte has already done—a panel of experts. The conclusion is that the income trust rules have hurt the market and tax base.

Diane Francis provided insight in here Finanical Post column, stating that, “Deputy Finance Minister Mark Carney, under questioning in Parliament last week on his “qualifications” to be the Bank of Canada’s Governor, said he convinced the Tories to destroy income trusts, costing two million investors $35 billion in one year. The policy’s purpose? To stop tax leakage...The policy’s result? It has done the opposite and created multi-billion dollar tax leakage.”

Francis suggested that, “So far, 40 of 259 income trusts have been taken out, permanently wiping away $1.372 billion in annual taxable distributions. Their new owners have spent $39 billion acquiring them and will divert the $1.372 billion to make interest payments on the loans raised to acquire the trusts. No tax on that. More will follow until none are left.

And furthermore, “The $39 billion has also contributed toward the over-priced Canadian dollar because most of the buyers were foreigners.”

She said, “Everybody knew this would happen except Carney, Flaherty and Harper who trotted out the tax leakage as an issue. A new Deloitte Canada report last week provides a depressing, predictable summary of events. Also see the numbers for yourself...But instead of a pink slip, Carney is promoted.”

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