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.”

BUYOUTS AFTER INCOME TRUST TAXATION ATTACK:

1. $2.28 billion—Sunrise Senior Living REIT (SZR.UN) by U.S REIT Ventas, Inc. (VTR, NYSE), annual distribution 61.2 million

2. $173 million—Halterm Income Fund (HAL.UN) by private equity firm Macquarie Infrastructure Partners, annual distribution $7.8 million.

3.  $786 million—Great Lakes Carbon Income Fund (GLC.UN) by U.S. private company Oxbow Carbon & Minerals Holdings Inc., annual distribution $65.3 million

4. $87 million—Norcast Income Fund (NCF.UN) by private UK Pala Investment Holdings Ltd., annual $8.7 million

5. $210 million—Lakeport Brewing Income Fund (TFR.UN) by Belgium’s Labatt Brewing Company Ltd., annual $11.3 million.

6. $880 million—Calpine Power Income Fund (CF.UN) by U.S. vulture fund Harbinger Capital Partners, $60.6 million a year.

7. $177 million—Entertainment One Income Fund (EOF.UN) by UK private equity Marwyn, $9.2 million a year.

8. $131 million—Amtelecom Income Fund AMT.UN by U.S. private equity Bragg Communications Inc., $8.8 million a year

9. $1 billion—Alexis Nihon REIT AN.UN by N.S. Homburg Invest Inc., no distribution annually

10. $419 million—Clean Power Income Fund CLE.UN by private Australian Macquarie Power Income Fund (MPT.UN), zero

11. $51 million—Associated Brands Income Fund ABF.UN by private equity TorQuest Partners, zero

12. $826 million—KCP Income Fund KCP.UN by NYC Caxton-Iseman Capital Inc., $51.8 million

13. $886 million—Gateway Casino Income Fund GCI.UN by two Australian privates, zero and pending as of Dec. 07

14. $222 million—Liquor Barn Income Fund LBN.UN by Canadian Liquor Stores Income Fund (LIQ.UN), zero.

15. $164 million—VOXCOM Income Fund VOX.UN by UE Waterheater Income Fund (UWH.UN), zero

16. $1.74 billion—UE Waterheater Income Fund UWH.UN by NY Alinda Capital Partners LLC , $47.5 milliom

17. $419 million —Thunder Energy Trust THY.UN by Canadian PSPIB/Overlord Financial, zero

18. $222 million—Custom Direct Income Fund CDI.UN by U.S. private equity EdgeStone Capital Partners, $26.5 million

19. $254 million—Canada Cartage TRK.UN by U.S. private equity Nautic Partners, $18.5 million

20. $120 million—Stephenson’s Rental Services Income Fund RNT.UN by U.S. private equity EdgeStone Capital, $10.1 million

21. $686 million—private—CanWest MediaWorks Income Fund CWM.UN by CanWest MediaWorks LP, zero

22. $107 million—Arriscraft International Income Fund AIN.UN by U.S. General Shale Brick Inc., $4 million

23. $1.08 billion—Versacold Income Fund ICE.UN by Iceland’s Eimskip Holdings Inc., $42.9 million

24. $584 million—Osprey Media Income Fund OSP.UN by Quebecor Media, $39.8 million

25. $207 million—Countryside Power Income Fund COU.UN by Canadian Fort Chicago Energy Partners LP (FCE.UN), $21.6 million

26. $291 million—E.D. Smith Income Fund JAM.UN by U.S. TreeHouse Foods Inc., zero

27. $239 million—Movie Distribution Income Fund FLM.UN by US. EdgeStone Capital, $45.8 million

28. $3.5 billion—CCS Income Trust CCR.UN by Goldman Sachs Capital, $102.9 million

29. $455 million—Sound Energy Trust SND.UN by Canadian Advantage Energy Trust (AVN.UN), zero

30. $2.47 billion—Legacy REIT LGY.UN by Canadians, InnVest REIT, Caisse de depot, $60 million

31. $1.265 billion—CHIP REIT by Vancouver private, $44.4 million

32. $237 million—Golf Town Income Fund GLF.UN by OMERS Capital Partners, $13.1 million

33. $1.474 billion—IPC US Real Estate Investment Trust pending with Harvard University private equity, zero

34. $80 million—Spinrite Income Fund SNF.UN by U.S. private equity Sentinel Capital Partners, zero

35. $183 million—Gienow Windows & Doors Income Fund GIF.UN by H.I.G. Capital, LLC, zero

36. $205 million—Oceanex Income Fund OAX.UN by private equity South Coast Partners LP, zero

37. $5 billion—PrimeWest Energy Trust / SHN.UN PWI.UN by Abu Dhabi National Energy Company, $440.5 million

38. $380 million—Vault Energy Trust VNG.UN by Penn West Energy Trust (PWT.UN), zero

TOTAL: $29.54 billion and $1.2 billion annual distributions as of Dec. 10, 2007

BUYOUTS ANNOUNCED BEFORE INCOME TRUST TAX ATTACK AND COMPLETED AFTERWARD

1. $583 million—Atlas Cold Storage Income Trust FZR.UN by Iceland’s Avion Group, $21.6 million

2. $3.4 billion—Summit REIT SMU.UN by ING Real Estate Canada Trust, $83.9 million

3. $137 million—SCI Income Trust SMN.UN by U.S. Simmons Bedding Company, $8.4 million

4. $223 million—ACS Media Income Fund AYP.UN by U.S. Local Insight Media, LLC, $19.2 million

5. $2.8 billion—Retirement Residences REIT RRR.UN by Canadian Public Sector Pension Investment Board, $39.2 million

6. $668 million—Bell Nordiq Income Fund BNQ.UN by Canadian Bell Alliant, zero

TOTAL: $7.8 Billion and $172.4 million annual distributions as of Dec. 10, 2007

CONVERTED FROM INCOME TRUST TO CORPORATION

1. $1.706 billion—Shiningbank Energy Income Fund SHN.UN back to PrimeWest Energy Trust PWI.UN, zero

GRAND TOTAL $39.049 billion and $1.372

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