The median market capitalization for trusts including energy producers and REITs remains relatively small at $300 million. The income trust structure has been a source of low cost capital for entrepreneurial companies open to public participation.  And that money is attracted by plans to grow business while paying profits to investors.

What does it mean when a large public company adds weight to the income trust universe?

A large trust conversion like the BCE converion reveals gross and meaningless generalizations for what they are. Some income trust critics suggest that trust structures are used to build baseless but pyramid-like investments or Ponzi schemes.  But those critics fail to recognize that income trusts live within the contractual law used in both private ownership and lending relationships. And while there may be fraudulent and larcenous managers or insiders who set up an anomaly in the market to dupe public investors, there is nothing to suggest that income trusts are used any more than public or private equities to dupe the public.  Financial professionals are motivated to avoid provision of services required to market such scams. Frequent cash distributions can provide investors real information about the health of a company. And market regulation compels public reporting.

The trust conversion of a large known company, particularly like BCE, provides existing and potentially new investors with confidence that the company has a track record of performance.

Rather, income trusts and their market have grown in size as a reflection of investments in development of significant Canadian assets and natural resources.  They have also grown as a means for public participation in the process of Canadian market consolidation or rationalization.  The largest existing income trusts include:

- Canadian Oil Sands as an oil producer at $14 Billion in market capitalization;
- The largest REIT is RioCan at nearly $5 Billion; and;
- One large-cap leader for business trusts is Yellow Pages at more than $7 Billion.

The Telus and BCE trust conversion will reshape the overall trust market by making it an equity market open to widely-held large-capitalization public companies other than just oil and gas producers.

Such conversions have large potential positive impact on the value and range of ownership in the business trust segment of financial markets. Whereas BCE was paying dividends to investors on common stock, conversion into a trust is testament to the managers’ ability to recognize the most efficient use of free flowing cash. 

The proposed conversion of BCE may be characterized as company recognition that investors understand how to redeploy capital in an efficient manner. And it shows an understanding that business owners have as much right as hired company managers to holding discretion over reinvestment of business profits. Public owners have the widest view of potential investment opportunities so provide the most effective means for redeployment of capital.

Potential income trust managers understand that paying returns to investors does not minimize their ability to grow their business. Rather, rewarded investors are given the cash flow to actively reinvest when there are new and compelling business reasons to do so.  Widely-held companies like BCE demonstrate the merit and trusts show the potential economic benefit of open markets.

However, managers and existing owners of large public Canadian companies that pay dividends do not necessarily see merit in the income trust structure compared to common equity holdings. Such companies may be structured in a complex way so that it is cost prohibitive to rationalize share ownership.  So too, large companies are often held by foreign owners beyond levels allowed by Canadian rules.  An example of this restriction is seen in the case of such Canadian companies as CN Rail.

Trust or equity, widely-held or small company, market size of a public company does not, in and of itself, determine the nature, strength or potential investment returns of the particular business.

RE BCE situation, also see:

BCE Proposes Joining the Maturing Trust Market

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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.