POSSIBLE THESIS

Opportunity to Grow and Create Value

Considering both our initial Background and Topics of Inquiry, we see that there is a possible thesis for research by the Institute:

This proposition appears to be supported by the historic and recent performance of securities structured as income trusts and similar flow-through entities. And as a result, sophisticated private equity owners have used and continue to use trust indentures and contractual law to structure investments and secure returns, regardless of growing public demand to participate in this form of security because it can offer superior rates of return relative to risk.

Furthermore, income trust structures involve unique characteristics with the distinct potential to add economic value at all levels. For example:

(1) The trust indenture can offer value to managers and investors by clarifying company policies and operating practices;

(2) Cash distributions paid by companies have economic value in the form of tangible business information for investors;

(3) More frequent distributions of net earnings in the form of cash (i.e. cash payout made with less impedance and made in the context of company cash managed to ensure the company meets near and mid-term corporate requirements) tend to reduce market and economic risk while hastening returns to investors and increasing the potential for secondary value in the form of economic multiplier effects;

(4) Market liquidity has value when based on delivery to investors of liquid (cash) returns at reduced relative risk because it supports a low cost capital market that delivers real returns and attracts investors to the market.

With investor knowledge of and demand for those returns, it attracts similar or improved forms of securities and efficiently operating issuers to the market, issuers for whom the operating standards are improved in a competition to deliver returns that attract investors and financing. In the context of a competitive global financial market, existing and new security issuers are compelled to offer increasing returns to investors in the most efficient manner.

Market liquidity leads to market and economic growth when it is based on business capacity to deliver returns to investors and is allowed potential for widening public participation because that amplifies overall benefits;

(5) Real returns that appear as investor returns, market and economic growth provide the government with an expanding tax base. Single taxation of individual owners is a principle that has moral merit when corporations are structured to return all net returns to investors. But distributions and single taxation provides opportunity for greater efficiency in both the operation of the enterprise and in public administration by the government, particularly in the context of a fair tax system that is designed to invite productivity and growth.

(6) If growing net returns lead to market liquidity and participation that has growing value, then foreign suppliers of new issues as well as foreign buyers for securities will be attracted to the market. In effect, market liquidity and foreign participation provides local authorities value-added and incremental gains with a growing tax base;

(7) In the context of shared interest in economic growth, there is real value in authoritative changes to improve investors' ability to use discretion in considering investment alternatives and properly pricing those securities that offer premium net returns relative to cost and risk.

Growing public participation in income trusts is part of a broader trend toward public efforts to secure returns. With increased involvement in the management of Canadian investments including management of retirement savings and pension plans, there is growing public support or demand for financial policies, auditing standards and market regulations that enhance the investors' returns.

(8) Improved market regulations have value, particularly to the government, the market operator and investment dealers in a competitive global financial market.

Starting with ideas about attractive markets and liquidity, it is likely that government tax income and the growing overall tax base is enhanced when some portion of tax revenues are reinvested in the market by the government to coordinate low-cost market regulations designed to secure both returns and meaningful securities information for investors. There is merit at all levels in disclosure to the public of information that is consistent with the quality of private information -- transparency -- and accurate accounting.

Possible Implications

Over time, income trusts can be increasingly well understood and effectively valued like an asset-backed high-yield equity, so like equities in general.

With learning about the structures, operational, governance and regulatory of income trusts, their really valuable characteristics might be adopted by other equity issuers and their requirements for market health might be addressed by authorities including regulators and dealers.

In effect, the distinction between trust structures, other equities and forms of securities might be reduced or disappear in a healthy market.

However, any evolution that leads to the disappearance of income trust structures is most likely to occur over time only if there is substantial adoption of principles that lead to real growth relative to risk in business and investors returns, market and economic value, and so tax returns.

If our thesis holds true and efforts are focused on realizing positive potentials for all stakeholders then Canadians are not at risk of seeing income trusts hurt or destroyed. We face the possibility that the overall market will reshape to generally become more income-oriented and trustworthy.

Conclusion

As in our Research Background, we conclude that income trusts and their role in a dynamic market and growing economy warrant further study. Findings will have value in the form of prescient market insight and intelligence for:
- investors;
- Canadian tax authorities;
- security issuers, directors, trustees and managers;
- market regulators and dealers;
- financial advisory firms and professionals;
- securities brokers, promoters and fund managers;
- investment analysts and bankers.

In the context of an evolving market economy, the iTrust Institute can make a valuable contribution as an independent, inclusive and non-partisan research and education organization, revealing and articulating the principles demonstrated by income trusts

The iTrust Institute invites membership from stakeholders in Canadian markets & local constituents who desire economic growth.

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