RESEARCH ARTICLES
OPEN LETTER To Members and Clerk of the Finance Committee
Thank you for helping to make the preliminary study of income trusts happen and allow for public participation. Canadians appreciate the process as some small way to rebuild trust in policy-makers in a situation where it has been terribly broken by tax and equity policy that defied past promises.
The findings of a survey by PricewaterhouseCoopers (PwC) has been released to show that, “A review of Canada’s more than 250 income trusts indicates that trusts have been making an important contribution to the economy, investing their capital and growing their businesses at impressive rates.”
The trusts considered included companies from “sectors as disparate as food products, telecommunications and finance as well as traditional oil and gas royalty trusts and real estate income trusts (REITs).” The clear conclusion is absolutely “counter to the contention of the federal government that income trusts do not reinvest in their business and amount to a long-term dead end for Canadian businesses.”
QUOTE:
The tax loss problem related to trusts is “overrated”.
He is quoted by The Canadian Press as suggesting that that trusts increase economic efficiency by forcing corporations to focus on generating profits. Unitholders then apply those profits to new investments, which in turn expand the economy and add to tax revenues.
Responses from the public consultation on trusts 2005: Tax and Other Issues Related to Publicly Listed Flow-Through Entities (Income Trusts and Limited Partnerships).
The Department began posting public responses to this consultations initiative on Thursday March 16, 2006. Additional responses will be posted in alphabetical order as soon as they are processed. By the end of 2006, the Department had not yet completed the process as it worked through from letter “a” on to build an alphabetical list of responses.
Bank of Canada Working Paper: Income Trusts: Understanding the Issues, by Michael R. King, Financial Markets Department, Bank of Canada Ottawa, Ontario, Canada K1A 0G9, a 2003 Working Paper was never finished as it was intened to explore issues related to income trusts and finanical markets policy.
The paper abstract: An income trust is an investment vehicle that distributes cash generated by a set of operating assets in a tax-efficient manner. The market capitalization of income trusts has grown rapidly over the past two years, reaching $45 billion at year-end 2002. The sharp rise of income trust valuations, the large supply of new issues, and the complexity of their legal structure have increased scrutiny of this asset class. Because retail investors are the principal owners of income trusts, the author explores whether the cash returns from income trusts are in line with the risks.”
Furthermore, “The structure and valuation of a typical income trust are outlined. The benefits of income trusts and the issues related to investment are elaborated, focusing on legal and regulatory issues, corporate governance, operational issues, and market issues.”
Some journalists have generalized about this document to emphasize risks of the income trust structure and market. Certainly, the document provided a useful point of reference for beginnign explorations—as a Working Paper—at the time of its publication.
However, reading the paper and talking to its author, it is not clear the extent to which the unfinished exploration has tainted federal policy makers’ views on the income trust market.