Investors and market participants opine on the nature of a possible leak of policy information at the point “no new taxes” was confirmed as the policy for income trusts in November 2005. Anger is being seen on all sides.  Meanwhile, professional tax advisors are reinforcing for their clients that there might be an on-going concern about the underlying policy decision.  Despite all the pain and feelings about it, the Tax policy threat may not yet be fully dead.

Debate has raged over the apparent gain made on trade in trusts just prior to the confirming announcement by Ralph Goodale, Finance Minister at the time.

Trust investors lost money as the steadily growing trust market dropped 13% in value during the weeks following the government announced a freeze on tax rulings. Some small investors sold their units and lost money.  Other investors got caught without a bid price in a falling market where they’d set—otherwise reasonable—stop losses.

It is particularly annoying to many that some dealers, brokers or traders made money on information or speculation about pending “good news” about tax policy. It is also left a bad taste for some to see that small investors including seniors were frightened out of their savings by the drop in trust market value. After selling their dwindling holdings, they saw large fund managers purchase up those units at a discount so that now, they can them units back to investors through mutual funds and exchange traded funds.

There was anger about how The Department of Finance handled the trust Consultation including publication of the paper and the stop of tax rulings. An informal survey of investors was taken over an 80 day period from December to March 10. Of those who visited TrustInvestor.com, more than 350 per day looked at the poll results.  Of those who contributed to the poll:
- Roughly half thought it best to “Fire officials for market meddling”;
- One sixth thought it best to “Recognize its informative potential”;
- While almost another sixth said, “Deplore it as a ploy of politicians”;
- Roughly a dozen people suggested we, “Forget it and get back to same-old”;
- A couple of people indicated that we “Invest more in other markets”;
- And one person siad, let’s “Discuss further but not in public”.

Clearly people don’t want policy risk to return to the market.  And to support that intent, the iTrust Institute was formed in later 2005 with incorporation as a non-profit research and education institute: To engage all sides of the market including policy makers in learning and dialogue about income trusts.

As Institute founders noted, accounting and legal advisors continue to say that—without specific rulings in favor of income trust policy as it currently stands—policy risk still exists in the Canadian financial market.

For example, Vince Imerti, of Gowlings law firm writes in its January Tax Report to clients that, “One of the most significant developments in Canadian tax law in recent months was the purported end of the Federal Government’s review of so-called “income funds”.

He says that, “On September 8, 2005 the Department of Finance announced that it would be conducting “consultations on tax and other issues related to business income trusts and other flow-through entities” and would be receiving submissions in this regard until December 31, 2005.”

As he describes the unfolding of events, he says “This [Consultation] announcement went largely unheeded by the Canadian investment and tax communities. Seemingly to get the attention of these communities, on September 19, 2005 the Federal Government announced that it would be suspending the issuance of any advance tax rulings relating to “flow-through entity structures” pending the completion of the previously announced consultation process. Then, on November 23, 2005, more than a month before the end of the originally announced consultation period, but just before the expected fall of the minority Liberal Government, the Minister of Finance announced that he was satisfied that no changes to the tax treatment of income funds was necessary, and the only tax changes needed to address the divergent tax treatment of corporations and income funds was a reduction in the rate of taxation on corporate dividends.”

Gowlings’ advisory note concludes that, “As a result, the taxation of income fund structures in Canada is, apparently, settled and will not be changed. However, notwithstanding the statements of the Minister of Finance, many people feel that we have not heard the end of this saga.”

Regardless of the leak investigation and if market participants ever get past their anger—or maybe motivated by it—we can see that we still have work to do through.