The income trust as an asset class and the market for trusts has matured since participants were threatened by a new tax regime during the Liberal watch on Ottawa, in late 2005. The Department of Finance Consultation on Flow-through Entities was not a problem for trust owners or issuers.  But the stop on trust tax rulings and surrounding negativity by officials in the media appeared so threatening that it caused the single-most significant trust sell-off in more than a decade. Retail investors sold trusts and prices fell 17% on average.

However, the trust market recovered with added strength from both the destructive force of political threat and the Finance decision to reduce taxes on dividends, to “level the playing field” for equities.

In 2006, we have seen:

• Large fund managers bought in to acquire the majority of trust units;
• Standard and Poors included trusts in its TSX composite indices.
• New players like hedge funds added liquidity;
• Private buy-outs are more frequent as trusts fully integrate into broad equity markets;
• Trust price volatility generally aligned with other equities in related sectors;
• Large companies decided to go public as a trust;
• Very large public firms like CI Financial, Precision Drilling and now BCE decided to convert.

Public attention towards trusts inspired the Canadian Association of Income Funds to lead exploration of enhancements in corporate governance and reporting standards.

The trust market strengthened in the context of political and market turmoil.  At the same time, however, it just so happened that traders in BCE stock appeared to take profit from prior knowledge of the tax-reducing announcement when the Liberal government cut the Consultation process short and announced it’s decision. 

The Conservative Party supported the Liberal decision on tax, then found popular favour and formed the next government in Ottawa.  And since then, the Canadian Government has not announced much new in the way of tax policy in 2006. It initiated its proposed gradual reduction in GST.  And it has not announced any reversals in their policy of support for a dividend tax credit since winning the election.

There is nothing new or particularly significant in government policy that should threaten trust tax status again simply because BCE made its announcement about converting. None-the-less, policy informants for the previous government including those proposing “tax neutralization” at the Rotman School of Management at the University of Toronto, have started to raise their questions again with a view to taxing trusts. This follows their announced disappointment with inaction on trusts by the Liberal government.

For example, Jack Mintz, Professor at the Rotman School was very public about the government “loss” of a half a billion dollars in taxes during the Department of Finance Consultation last year. This year, Mr. Mintz has published careful calculations in a research report and as a special report in the Globe & Mail. In the newspaper, he says that, ”the estimated reduction in corporate taxes is $1.8 billion with an increase in net personal and withholding taxes paid on trust distributions equal to $1.1 billion, for a net tax reduction of $700 million annually. Taking into the TELUS and BCE trust conversions, corporate tax reductions are expected to $2.8 billion with a personal and withholding tax pick up equal to $1.7 billion, resulting in a tax cut equal to $1.1 billion annually.”

The effort to provide insight is clear. And the exploration attracts interest through negative conclusions.  But other market and financial experts suggest that there are significant problems with the details in this calculation. And income trusts are not at the heart of Canadian tax problems:

1. Calculations miss tax revenues by assuming trusts are merely yield-focused rather than like equities;

2. There’s no practical way to tax business trusts alone as they use similar laws and rules as mutual funds;

3. There’s no justification for treating business trusts more harshly than the majority of other flow-through entities;

4. Numbers used in new calculations of tax loss do not fully reflect market change, maturity and economic value.

In contrast to narrow measures of tax loss that are given newspaper headlines, a wider range of deep-reaching perspective can support the argument that income trust taxation is really a symptom of an old tax regime in Canada. The tax system is ready for an entire makeover to better integrate its disparate federal and provincial parts as coherent policy. Bigger concerns about lost corporate tax might better focus on government policies related to private equity and speculation on Canadian markets by foreign traders.

RE BCE situation, also see:

BCE Proposes Joining the Maturing Trust Market

Size Matters

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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.