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.

From their roots in the oil patch and real estate sectors 20 years ago, Canadian income trusts have grown to include 250 issues on the Toronto Stock Exchange (TSX). Half of these issues are new in the last few years, expanding the market to $210-billion in value or about 10% of the overall TSX equities market by late 2006:

- 100 business trust issues constitute less than half the market value - total $102 Billion;
- 33 Oil and gas producers hold a large share of the market - total $85 Billion;
- 27 Real estate investment trusts (REITs) account for $28 Billion.

Flow-through entities also include more than 150 exchange traded income products in the form of managed and diversified funds that account for an additional $20 Billion in market value. Beyond the stock exchange, there are more than 1,825 mutual funds in Canada that hold over $415 Billion in investor assets. These funds use legal parameters upon which income trusts were created.  But with about 15 years more history than income trusts, mutual funds tap far deeper into the roots of financial services, involving more than 70 management companies, 100 retail distribution firms and 60 affiliated members in the legal and accounting professions.

That means trusts are not just limited to 100 business trusts. Many other kinds of trusts and flow-through entities might warrant similar policy treatment as income trusts.

Considering service providers working with flow-through entities, it is easy to appreciate that any new tax could, if applied without discrimination, put a crimp on the income of nearly everyone involved in the Canadian financial services industry, in addition to millions of investors.

RE BCE situation, also see following articles:

Size Matters

Trust Market Stengthened

Learning in 2006 Since Department of Finance Consultation

Real Taxing Concerns

Call for Constructive Discussion

The health and credibility of local markets and the Canadian economy in a global market depends on fully informed policy-making and leadership in establishing integrated tax policy in, first and foremost, a stable policy regime.

Public desire for reasoned debate and a demonstration of leadership did not prevent a group from performing a very political stunt for the sake of media attention at the federal Liberal leadership convention. A bikini-clad woman walked through the crowd with a sign stating two opposing views. On one side it said “Income Trusts Bad”. And on the other it suggested participants not forget the interests of small investors.

So it is with continued intent to host meaningful discussion that iTrust Institute was established and brought to life in 2006.  Unlike trade associations or the companies involved, we can provide a non-partisan floor for open discussion and can truly welcome participants from all sides of the market. Please let us know your thoughts.