NEWS WATCH
PricewaterhouseCoopers LLP released its report on intial public offering (IPO) activity in the Canadian stock market along with the prediction that IPO activity will shrink substantially in 2007. This is a big deal for the Toronto Stock Exchange, the seventh largest stock exchange in the world. It promotes itself as the market of choice for new issues and was, in 2005 at the height of income trust new issues, proud to be the third strongest market for new equity issues. But Pricewaterhouse reports that the Conservative government tax on trust distributions and onerous taxes on new trust issues has put a stop to that strong position and potential for the TSX.
The Coalition of Canadian Energy Trusts has created a comprehensive study of the role of the trusts in the oil and gas sector as well as the Canadian economy. The CCET Report includes a number of downloadable elements (pdf). Their findings suggest that there is significant public harm including addition of environmental risk if the Conservative tax policies are allowed to cripple an otherwise healthy economic sector. The Coalition has called for due process and for policy makers to make decisions on facts and information. The iTrust Institute recognizes this report as an informative contribution to Canadian’s understanding of income trusts and related policy issues:
BACKGROUND Canadian Energy Trusts: An Integral Component of the Canadian Oil and Gas Industry
CCET REPORT (incl. executive summary)
Appendix A1 - Statement by the Minister of Finance - Oct. 31
Appendix A2 - Coalition Backgrounder
Appendix B - Taxation of Income Trusts: Is it Worth the Cost and the Turmoil? by Yves L. Fortin - Nov. 2006
Appendix C - The Inconvenient Truth about Trusts, by Gordon Tait (BMO Capital Markets)
Appendix D - A Perspective on Trusts and Taxes, by Gordon Tait (BMO Capital Markets)
Appendix E - Market Cap Weekly, BMO Capital Markets - Nov. 9
Appendix F - CO2 Enhanced Recovery: Where to from here? (ARC Energy Trust) - Nov. 21
Appendix G1 - Income trusts are efficient at investing and growing, PriceWaterhouseCoopers LLP - Dec. 7
Appendix G2 - Income Trust Report, PriceWaterhouseCoopers LLP - Dec. 11
Appendix H - Taxation Process for Trust Income
Appendix I - Comparison of Income Trusts and Public Corporations - Taxability
The release of the Report was made with a news conference that can be heard online.
The CCET should be applauded by investors and policy administrators for both the report and their invitation for public scrutiny. The Institute is further reviewing the CCET release in the context of prior reports and analysis.
Advocis, the Canadian association for financial advisors and Certified Financial Planners has published an article Breach of Trust in FORUM Magazine for December 2006.
Written by Leslie Hayman as President of iTrust Institute, the article went to publication the week the first week of November, the week in which the Government of Canada announced new taxes on income trusts.
The article provides a fundamental perspective on the income trust market and the state in its development at the time the new tax was put in place, also exploring considerations of security and investment risks and returns for financial professionals working to advise clients in regard to trust investments.
Ian Dale, a spokesperson said to news media that, “The CPPIB was concerned that companies might be choosing corporate structures motivated primarily by tax considerations. There were a variety of possible public policy solutions in dealing with the tax arbitrage issue. We think that the resolution of the corporate structure tax arbitrage issue is a welcome result......We think that the decision by the government to create a level playing field, in terms of corporate structures, and in terms of a level playing field for investors, is a suitable outcome.
CPPIB is Canada’s second-largest pension fund with a mandate to make long-term investments. It manages nearly $100 billion in assets including public equities and trusts. More recently, the pension fund manager announced that it would be looking to spin off a REIT, one form of flow-through entity not touched by the proposed new taxes. The CPPIB also said that it would begin to invest Canadian pension funds in private equity and overseas investments.
Some would say this is a sign of the times for Canadian markets under the Flaherty government tax “fairness” policy.
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?
iTrust Institute is studying the key features, perceived potential & benefits of income trusts starting from the premise that:
Equities managed and structured like income trusts to flow net gains through to owners by way of frequent and regular distributions of cash can offer superior rates of overall return, support market growth, enhance economic productivity and contribute to growth of the tax base with less risk than other equities given honest managers and a fully competitive market supported by open communications.
We will test this notion and explore related questions.