In a letter to members of the media, a trust investor is ”hopeful that...[new information and a fresh analysis will help enable] a more detailed factual analysis of the well publicized changes which the federal government is proposing to undertake in the area of income trusts taxation.”

He wrote:

I confirm at the outset that while I hold some income trusts and limited partnerships within my personal investment portfolio, I am in no other way affiliated either with individual income trusts and/or any association related to same.

Certain income trusts attracted me as an investment asset due to a combination of the quality of their underlying businesses and projected investment returns but also because I believed strongly in the financial discipline which the ongoing unit holder distributions within an income trust structure placed on said business’s management both relative to current operations as well as with respect to prospective new material capital investments and / or acquisitions. In the latter case, the general requirement for an income trust to request fresh capital from its existing and prospective unit holders before being able to undertake a new material commitment represented a substantial value added check which generally does not occur in a similar case in a conventional stock corporation.

What I have found most disconcerting about the federal government’s decision and the media’s reporting of same is the omission of publicly available basic facts which could provide meaningful context to the issue.

Here are a few examples for your consideration.

The income trust capital markets trends have been most evident since the turn of the decade so I looked at the Department of Finance’s web site annual report on the Government of Canada’s finances for the fiscal year 2005 - 2006 and compared those statistics to the Department of Finance’s annual report for the fiscal year 1999 - 2000. Over that period, personal income tax revenues increased by 30.6% notional from $79.4 billion to $103.7 billion while corporate tax revenues increased by 36.9% notional from $23.2 billion to $31.7 billion.

Focusing strictly on the past two years, personal income tax revenues increased by 5.2% year over year while corporate tax revenues increased by 5.9% over the same period.

The federal government’s autumn 2005 consultation paper and the oft quoted Jack Mintz studies are based on very debatable forecasting assumptions. Be that as it may, neither source incorporates within their analysis either the net present value of related deferred taxes paid by tax deferred accounts and / or entities nor current income trust conversion capital gains. The obvious nature of the latter omission is highlighted by the fact that the Department of Finance’s own 2005 - 2006 fiscal year report actually mentions that the federal government’s personal income tax receipts have been increasing at a faster rate than the underlying rate of increase in personal incomes.

Whilst the non productive nature of an income trust economy is regularly touted by the federal government and many media pundits, no substantive attempt is made to look at the significant new investments made by income trusts in diverse industries (eg, BFC, COS, YLO, SIF, IPL, NPI, etc.) whereby such trusts have materially expanded over the years. You can even include the exempted “passive” REITs which have grown substantially over the past decade (eg, REI, HR, etc).

Finally, little to no mention has been made of all the detailed input which was submitted by all types of entities such as individuals, income trusts, securities firms, trade associations and the like to the Department of Finance as part of the aborted 2005 autumn consultation process. That input extended to offering constructive suggestions on how to deal with such subset issues as tax deferred investors and foreign investors.

In closing, I appreciate that individuals will draw different inferences from the same set of facts but at the very least both individuals and the market would be well served by improving the transparency of this issue which has become synonymous with simplistic hyperbole.

Thank you for taking the time to read this e mail and all the best.

Yours truly,

DF, Oakville, Ont