- Income trust
An income trust is an
investment trustthat holds income-producing assets. The term also designates a legal entity, capital structureand ownership vehicle for certain assets or businesses. Its shares or "trust units" are traded on securities exchanges just like stocks. The income is passed on to the investors, called "unitholders", through monthly or quarterly distributions. Distributions are typically higher than stock dividends, offering cash yields of up to 10% a year (up to 20% for riskier trusts).
The unitholders are the beneficiaries of the trust, and their units represent their right to participate in the income and capital of the trust. Income trusts generally invest funds in assets that provide a return to the trust and its beneficiaries based on the cash flows of an underlying business. This return is often achieved through the acquisition by the trust of equity and debt instruments, royalty interests or real properties. The trust can receive interest, royalty or lease payments from an operating entity carrying on a business, as well as dividends and a
return of capital. [cite web|url=http://www.fin.gc.ca/activty/pubs/toirplf_1e.html|publisher=Canadian Department of Finance|title=Canadian Department of Finance|date=] The main attraction of income trusts (in addition to certain tax preferences for some investors) is their stated goal of paying out consistent cash flows for investors, which is especially attractive when cash yields on bonds are low. They are especially useful for financial requirements of institutional investors such as pension funds. ( [http://www.investordictionary.com/definition/income+trust.aspx "Investment Dictionary"] ) The names "income trust" and " income fund" are sometimes used interchangeably, even though most trusts have a narrower scope than funds. Currently, income trusts are most commonly seen in Canada. The closest analogue in the United States to the business and royalty trusts would be the Master Limited Partnership.
Income trusts are equity investments, not fixed income securities, and they share many of the risks inherent in stock ownership, but often not the same rights and responsibilities, especially concerning
corporate governanceand fiduciaryresponsibility. Investors in Canadian income trusts cannot rely upon provisions in the Canada Business Corporations Actallowing for derivative actions and the oppression remedy, and often do not even have the right to elect a board of directors. Each trust has an operating riskbased on its underlying business; the higher the yield, the higher the risk. They also have additional risk factors, including, but not limited to, poorer access to debt markets.
* Valuation: When distributions include
return of capitalthe investor is receiving excess capital back from operations of the trust. A Trust Unit with high Return of Capital distributions will often attract a higher market value because the Return of Capital portion of the distribution is tax deferred until the unit is sold.
* Lack of income guarantees: similar to a
dividendpaying stock, income trusts do not guarantee minimum distributions or even return of capital. If the business starts to lose money, the trust can reduce or even eliminate distributions; this is usually accompanied by sharp losses in units' market value.
* Exposure to interest rate risk: since the yield is one of the main attractions of income trusts, there is the risk that trust units will decline in value if interest rates in the rest of the cash/
treasurymarket increase. This risk is common to other dividend/income based investments such as bonds.
Interest rate risk is also present inside the trusts themselves on their
balance sheets since many trusts hold very long term capital assets (pipelines, power plants, etc.), and much of the excess distributible income is derived from a duration mismatchbetween the life of the asset, and the life of the financing associated with it. In an increasing interest rate environment, not only do the attractiveness of trust distributions decrease, but quite possibly, the distributions themselves decrease, leading to a double whammy of both declining yield and substantial loss of unitholder value.
* Sacrifice of
growthunless more equity is issued: because most income is passed on to unitholders, rather than reinvested in the business. In some cases a trust can become a wasting asset. Because many income trusts pay out more than their net income, the shareholder equity (capital) may decline over time. For example according to one recent report, 75% of the 50 largest business trusts in Canada pay out more than they earn. (cite news | url=http://www.canada.com/national/nationalpost/financialpost/story.html?id=70faac90-a6c6-4315-a38f-b890b836838b | title=Who should you trust on trusts? | publisher=Financial Post | date=November 23, 2005) However a PriceWaterhouseCoopersstudy indicated that contrary to opinions expressed elsewhere, Income Trusts were efficient at reinvestment in their businesses and added significant value for their unitholders. [ [http://www.pwc.com/ca/eng/ins-sol/publications/itr-fs_1206.pdf Income Trusts are efficient at investing, growing] ]
* Exposure to regulatory changes: to the extent that the value of the trust is driven by the deferral or reduction of tax, any change in government tax regulations to remove the benefit will reduce the value of the trusts. See Canadian Income trusts below on how changes in Canadian taxation rules diminished market values.
Generally, income trusts carry the same risk levels as dividend paying stocks that are traded on stock markets. And since income trusts or dividend paying stocks sometimes pay out a portion of their profits every month, investors get the equivalent of a capital gain (in the form of monthly distributions) on their investment without having to sell their stocks.
In a typical income trust structure, the income paid to an income trust by the operating entity may take the form of
interest, royalty or leasepayments, which are normally deductible in computing the operating entity’s income for tax purposes. These deductions can reduce the operating entity’s tax to nil. The trust in turn, "flows" all of its income received from the operating entity out to unitholders. The distributions paid or payable to unitholders reduces a trust's taxable income, so the net result is that a trust would also pay little to no income tax. The net effect is that the interest, royalty or lease payments are taxed at the unitholder level. (Source: [http://www.fin.gc.ca/activty/pubs/toirplf_1e.html Department of Finance Canada] .)
flow-through entity(FTE) whose income is redirected to unitholders, the trust structure avoids any possible double taxationthat comes from combining corporate income taxwith shareholders' dividend tax.
#Where there is no double taxation, there can be the advantage of deferring the payment of tax. When the distributions are received by a non-taxed entity (like a pension fund), all the tax due on corporate earnings is deferred until the eventual receipt of pension income by participants of the pension fund.
#Where the distributions are received by foreigners, the tax applied to the distributions may be at a lower rate determined by treaty, that had not considered the forfeiture of tax at the corporate level.
#The effective tax an income trust owner could pay on earnings could actually be increased because trusts typically distribute all of their cashflow as distributions, rather than employing leverage and other tax management techniques to reduce effective corporate tax rates. Certain investors, particularly those in the highest tax brackets, could be significantly worse off investing in income trusts compared to traditionally structured corporations. While the benefits of trusts for tax-deferred and tax exempt entities are clear, trusts are clearly less attractive for other investors facing high marginal rates.
Types of income trusts
There are four primary types of income trusts:
Investment trusts (aka " mutual funds") are trusts established for communal investment in securities, encapsulated under the umbrella of a flow-through entity and typically managed by a 'fund sponsor', usually an investment firm, asset management firm, or investment bank. These trusts invest in a variety of investments including stocks, bonds, futures, etc., and are often marketed to the public directly when authorization has been received from provincial securities regulators to do so. This type of trust has not been affected by the recent changes in Canada concerning income trust taxation; like Canadian REITs, mutual fund investment trusts have been exempted from taxation. Some investment trusts have been specially structured with leveragein order to amplify cash yields paid to investors, while others deplete their assets to pay distributions to investors on a regular basis.
Real estate investment trusts
Real estate investment trusts (REITs) invest in real estate: income-producing properties and/or mortgage-backed securities. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.
Royalty trusts, "resource trusts" or "energy trusts" exploit natural resources such as oil wells. The amount of distributions paid will vary from time to time based on production levels, commodity prices, royalty rates, costs and expenses, and deductions.
Business income trusts are individual companies that have converted some or all of their stock equity into an income trust
capital structurefor tax reasons. Business income trusts are used in many sectors, such as manufacturing, food distribution, and power generation and distribution. They are not investment trusts in the classic sense, since they represent a single company's assets and not a pool of investments.
Among business trusts, utility trusts that invest in or operate public utilities such as
electricity distributionor telecommunications are sometimes put in a separate category as they are inherently less growth-focused. ( [http://www.investcom.com/incometrust/whatis.htm "InvestCom"] )
In the US, the business trust structure typically takes the form of publicly traded partnerships (PTPs) or
master limited partnerships (MLPs), essentially limited partnerships (LPs) with units that trade on public securities exchanges. [http://www.ptpcoalition.org/PTPFAQs.htm] Those were very popular in the mid-1980s but are rare today. Revised IRS tax treatment of MLPs made the structure innefficient and infeasible, in light of the special tax that is levied on MLP owners who hold them in tax-deferred or exempt accounts such as 401(k)s, IRAs, and Roth IRAs. A more recent alternative called income depositary shares (IDS) has also failed to attract investor attention due to the trust activity being focused on the Canadian market.
Income trusts by country
The tax advantages offered to trusts in certain jurisdictions have fueled investor interest in this type of investment vehicle.
Resource-rich Australia has had royalty trusts (and REITs) for a long time but in the early 1980s, a wider range of firms sought the same tax benefits and started converting into income trusts. Yield-hungry investors jumped on the bandwagon and rewarded the trusts with higher valuations. When Queensland Coal converted to a trust in 1984, its stock price tripled overnight.
The Australian government, citing ever-increasing (but unquantified) losses of tax revenues, clamped down in 1985. All trusts except REITs and royalty trusts were given 3 years to find an
exit strategy: to either keep the current structure at higher tax rates, or convert (back) to a public company. As unit prices started to collapse, the majority dropped the trust structure.
It is notable, however, that the legal trust structure and the public trust structure persists in Australia to this day. As of December 2006, the Australian government was revisiting the income trust issue to consider whether further legislation was needed to address the many thousands of trusts that have been maintained and developed since taxes were imposed in the mid-1980s.
The first Canadian tax ruling enabling the income trust structure, inspired by the American PTPs, was awarded in December 1985 to the Enerplus Resources Fund royalty trust. The first corporate conversion into a proper business trust, using the 1985 ruling, was Enermark Income Fund in 1995. The move attracted little attention at the time as the vast majority of trusts were still REITs and royalty trusts (the so-called "CanRoys").
A substantial historic and status report on the Canadian income trust market was published at the end of 2006 coinciding with the announcement of new taxes on income trusts proposed by the Canadian Minister of Finance (Key reference provided by author: cite news | url=http://www.trustinvestor.com/resources/pdf/Advocis/Breach_of_Trust_FORUM_Magazine_December_2006.pdf | title= Breach of Trust| publisher=Advocis Forum magazine from the Canadian Association for Professional Financial Planners and Advisors| date=December 2006|format=PDF)
The trust structure was "rediscovered" after the dot-com crash of 2000, as
investment banks were searching for new sources of fees after the IPOmarket had dried up. The first high-profile conversion was former Bell Canada Enterprisesunit [http://www.ypg.com Yellow Pages Group] becoming the Yellow Pages Income Fund and raising C$1-billion in the process. By 2002, trusts accounted for 79% of all money raised through IPOs in Canada, with only 38% in the traditional sectors of petroleum and real estate. By 2005, the income trust sector was worth C$160-billion (approx. US$135-billion at October 2005 rates). The mere announcement by a company of its intention of converting could add 10-20% to its share price.
Trusts received another boost in 2004-2005 as the provinces of
Ontario, Albertaand Manitobaimplemented limited liabilitylegislation that shields trust investors from personal liability. (Such legislation existed in Quebecsince 1994).
Partly as a result of this ruling,
Standard & Poor'sthen announced plans to add the largest income trusts to the S&P/TSX Composite Index(which it eventually did on December 19[http://www.theglobeandmail.com/servlet/ArticleNews/TPStory/LAC/20051220/RMARKETS20/TPBusiness/MoneyMarkets] ), starting with a 50% weighting and gaining full representation on March 17, 2006. A new equity-only composite index would be created that will resemble the present structure without trusts. This move is seen as a strong gesture of support for the trusts, who would see increased demand from index fundmanagers and institutional investors replicating the index. However, the S&P, as a major bond rating agency, has expressed concerns about the sustainability and the quality of the accounting concerning many trust entities as going concerns in the future.
Business trusts have come to the attention of the government. In the March, 2004 federal budget, Finance Minister
Ralph Goodalehad tried to prohibit pension funds from investing more than 1% of their assets in business trusts or owning more than 5% of any one trust. Powerful funds led by the Ontario Teachers Pension Plan, which at the time had a significant stake in the Yellow Pages Income Fund, fought the proposed measure; the government backed off and suspended the restrictions.
October 31, 2006, Canadian federal Finance Minister Jim Flahertyannounced a new tax on income trust distributions in a bid to stem the growing number of companies that are converting to trusts.
uspension of advance tax rulings
September 8, 2005, the Canadian Department of Financeissued [http://www.fin.gc.ca/activty/pubs/toirplf_1e.html a white paper] suggesting that the trusts had cost it at least C$300 million in tax losses the preceding year, with provincial governments possibly losing another $300 million. The markets barely reacted and on September 13, Gordon Nixon, CEOof the Royal Bank of Canada, mentioned in passing that he was not opposed to Canada's largest bank converting into a trust. One week later on September 19, the Department of Finance announced that they were suspending advance tax rulings – essential for investor confidence – on future trusts. [http://www.globeinvestor.com/servlet/ArticleNews/trusts/GAM/20051011/RTRUSTMAIN11]
The resulting uncertainty caused an immediate slump with the trust market losing approximately $9 billion in market capitalization during the following week. This caused
CanWest Global Communicationsto reduce its proposed $700 million IPO spin-off [http://www.editorandpublisher.com/eandp/departments/business/article_display.jsp?vnu_content_id=1001052001] to $550 million. CI Fund Managementalso showed hesitation regarding its planned trust conversion. Previous plans by ACE Aviation Holdingsto spin-off Air Canada Jazzinto a trust were put on hold indefinitely. [http://biz.yahoo.com/cnw/050930/e_ace_offeringjazzair.html?.v=1] "Traditional" Canadian REITs, once content to ride the trust boom, tried to distance themselves from the new business trusts, to avoid regulatory "collateral damage." [http://www.globeinvestor.com/servlet/ArticleNews/trusts/GAM/20050928/RREIT28] (cite news | url=http://www.globeinvestor.com/servlet/ArticleNews/story/GAM/20050928/RTRUST2828 | title= Ottawa's move on income trusts throws sector into disarray | publisher=Globe and Mail |date=September 28, 2005)
In the day following the change in working tax policy, the unit price for all income trusts and REITs on the TSX dropped by a median of more than 17% according to the iTrust Report published by TrustInvestor.com and its [http://www.trustinvestor.com/trustindex/ iTrust Index] . Studies by Leslie Hayman, publisher of the Report, indicated that the change in advance tax rulings in 2005 was the most statistically significant volatility event in the history of the trust market.
RBC Dominion Securities, yearly trust cash distributions amounted to C$16 billion in 2005, not including potential capital gains taxes on trust conversions. Of that amount, $3.3 billion was collected in tax. RBC estimates that taxing trusts like regular companies could slash the market value of Canadian business trusts by as much as 30% [http://www.globeinvestor.com/servlet/ArticleNews/trusts/GAM/20051012/RRBC12] – again, not counting the loss of the share price premium of companies that had announced their conversion and would then back off.
Following the announcement, Mr. Goodale and the Department of Finance declined to comment or answer questions on the future of income trusts. Intense lobbying efforts to "save the trusts" were undertaken by the business community and the
Conservative Party of Canada. They demanded that if equal treatment is to be granted to trusts and traditional companies, it should be implemented by leaving the trusts alone and cutting corporate and/or dividend tax to match the trust advantage. That solution would cost the government an additional C$1 billion, which the lobbyists claim would be a small price to pay for stabilizing the market and satisfying the public investors/voters.
Since any decision was to affect the finances of an unknown proportion of the government's voting base, the trust debate turned into an important issue in the 2006 election. Analysts were trying to estimate the political repercussions, mostly depending on how much retail
investors, especially seniors saving for retirement, were involved in the market. Some analysts put this at 60-65% of the market, up to 80% when counting mutual funds. If this is the case, a pre-election decision unfavorable to income trusts would have proven hazardous to Prime Minister Paul Martin's minority Liberal government. [http://www.globeinvestor.com/servlet/ArticleNews/trusts/GAM/20051012/RTRUSTRETA12]
Dividend tax cut announcement
The government found itself under increasing pressure throughout November as the opposition moved towards a
vote of no confidencethat meant the current administration might not remain in place by the time the trust consultation and review concluded on December 31. After the close of the markets on November 23, 2005, Mr. Goodale made a surprise [http://www.fin.gc.ca/news05/05-082e.html announcement] that the government would not tax the trusts, and would instead cut dividend taxes; the advance tax rulings were also resumed. The announcement described the proposed cut as such:
:To accomplish this, the Government proposes to introduce an enhanced gross-up and dividend tax credit (DTC) for eligible dividends received by eligible shareholders. An eligible dividend will be grossed-up by 45%, meaning that the shareholder includes 145% of the dividend amount in income. The DTC in respect of eligible dividends will be 19%, based on the 2010 federal corporate tax rate as proposed in the 2005 federal budget. The existing gross-up and tax credit will continue to apply to other dividends. ( [http://www.fin.gc.ca/news05/data/05-082_1e.html Canadian Department of Finance] )
The markets rallied in the hours leading to the announcement (the government [http://www.bloomberg.com/apps/news?pid=10000082&sid=aC6K07C6tTxY&refer=canada denies] any leaks, see below) and on the following days as well, sending the S&P/TSX Composite Index to a new five-year high. The day's biggest gainers were income trusts, income-trust candidates, high dividend-paying companies, and the
TSX Groupitself. Former trust candidates such as Air Canada Jazz announced that they were considering a trust conversion or spinoff once again.
The decision, while applauded by financial circles, was widely seen as confused and hurried (an earlier government statement on the same day had mistakenly suggested a slight tax on the trusts) and made for the sole purpose of buying votes for the January 2006 federal election. Since the Liberal government was defeated in that election, the proposed cuts may be short-lived; furthermore the government's calculations assume that the individual provinces will match the dividend tax credit with an equivalent one of their own, which is not certain to happen. [http://www.globeinvestor.com/servlet/ArticleNews/story/GAM/20051126/RTRUST26]
Also, the Liberal government had come under fire for the very strong stock market rally that immediately preceded the announcement, suggesting leaks from government insiders to financial circles. Opposition parties requested an official investigation on
insider tradingactivity on that day. The Ontario Securities Commissionhas rejected the suggestion, saying it amounts to political interference; however, the Royal Canadian Mounted Policelaunched an inquiry on December 28, 2005. [http://www.theglobeandmail.com/servlet/story/RTGAM.20051229.wxtrusts1229/BNStory/National/] On February 15, 2007the RCMP announced the conclusion of the income trust investigation and laid a charge of 'Breach of Trust' against Serge Nadeau, an official in the Department of Finance [http://www.news.gc.ca/cfmx/view/en/index.jsp?articleid=276859] . Liberal Finance Minister Ralph Goodalewas cleared of any wrongdoing [http://www.canada.com/topics/news/national/story.html?id=98a291f4-69a5-4862-8117-6fbe609f5b2a&k=36017] .
The Conservatives propose new rules for income trusts
Following announcements by telecommunications giants
Telusand Bell Canada Enterprisesof their intentions to convert to income trusts, on October 31, 2006, Finance Minister Jim Flahertyproposed new rules that will effectively end the tax benefits of the income trust structure for most trusts. Brent Fullard of the [http://caiti.info/ Canadian Association of Income Trust Investors] points out that at the time of the announcement Telus and Bell Canada Enterprises did not pay any corporate taxes nor would they for several years. According to his analysis, had Bell Canada Enterprises converted to a trust it would have paid $2.6 to 3.17 billion in the next four years versus no taxes as a corporation. [ cite news | author = Brent Fullard | title = The Canadian Association of Income Trust Investors - Concerns with Tax Fairness Plan page 3-4| publisher = Canadian Association of Income Trust Investors | url = http://caiti.info/resources/position_paper.pdf | date = January 5 2007|format=PDF ] [ cite news | author = CAITI | title = The ABC's of BCE | publisher = Canadian Association of Income Trust Investors | url = http://caiti-online-media.blogspot.com/2007/04/to-jim-its-not-my-fault-flaherty-abcs_17.html | date = April 17 2007]
Subsequent to the
October 31announcement by Flaherty, the [http://stockcharts.com/h-sc/ui?s=$RTEN&p=D&st=2006-10-15&en=2006-11-30&id=p83381312886 TSX Capped Energy Trust Index] lost 21.8% in market value and the [http://stockcharts.com/h-sc/ui?s=$RTCM&p=D&st=2006-10-15&en=2006-11-30&id=p83381312886 TSX Capped Income Trust Index] lost 17.6% in market value by mid November 2006. In contrast, the [http://stockcharts.com/h-sc/ui?s=$RTRE&p=D&st=2006-10-15&en=2006-11-30&id=p83381312886 TSX Capped REIT Index] , which is exempt from the 'Tax Fairness Plan', gained 3.2% in market value. According to the Canadian Association of Income Funds, this translates into a permanent loss in savings of $30 billion to Canadian income trust investors [http://www.caif.ca/content/CAIF_OtherChoicesAd.pdf] .
In the month following the tax announcement, the unit price for all 250 income trusts and REITs on the TSX dropped by a median of almost 13% according to the iTrust Report published by TrustInvestor.com and its [http://www.trustinvestor.com/trustindex/ iTrust Index] . Studies by Leslie Hayman, publisher of the Report, indicated that the tax news at the end of 2006 was the second most significant volatility event in the market following only the suspension of advance tax rulings by the Minister of Finance, Ralph Goodale in 2005.
Income trusts, other than real estate income trusts, and mutual fund investment trusts, that are formed after that date will be taxed in the same way as corporations:
* income flowed out to investors will be subject to a new 34% tax as of 2007 (which falls to 31.5% in 2011) [http://www.fin.gc.ca/news06/06-061e.html] , which approximates the average corporate income tax paid by corporations -- this is equivalent to the current prohibition against deducting dividends paid to investors in determining corporate taxable income; and
* income flowed out to investors will be eligible for the dividend tax credit to provide equivalent treatment to dividends paid by corporations.Income trusts formed on or before that date will not be subject to the new rules until 2011 to allow a period of transition. Real estate income trusts will not be subject to the new rules on real estate income derived in Canada (the non-Canadian real estate operations of existing REITs will be subject to the same taxation as business trusts). The new rules are contrary to the Conservative Party's
election promiseto avoid taxing income trusts. [http://www.youtube.com/watch?v=U9mibZYpVPY]
Flaherty proposes to reduce the federal corporate income tax rate from 19% to 18.5% in 2011. The 34% tax on distributions will be split between the federal and provincial governments -- the federal government will consult with the provincial governments on an appropriate mechanism for allocating 13 percentage points of the new tax between the provincial governments.
Flaherty also proposed a $1000 increase to the amount on which the tax credit for those over 65 (the "age amount") is based, and new rules to allow senior couples to split pension income in order to reduce the income tax they pay. Although these proposals were said to be designed to mitigate the impact on seniors of the new income trust rules, there have been widespread calls for such changes in previous years.
Legislative amendments to implement these proposals must be passed by the
Parliament of Canadaand receive Royal Assentbefore they become law. The legislation to implement these proposals was included in the 2007 federal budget, which was presented to Parliament by Jim Flaherty on March 19, 2007.
The Bank of Canada's Governor Dodge reverses his position
In the weeks prior to the
October 31, 2006change in Income trust taxation policy announced by Conservative Finance Minister Jim Flaherty, David A. Dodgemade comments that were supportive of income trusts. [ [http://www.theglobeandmail.com/servlet/Page/document/v5/content/subscribe?user_URL=http://www.theglobeandmail.com%2Fservlet%2Fstory%2FLAC.20061020.RDODGE20%2FTPStory%2FBusiness&ord=6948984&brand=theglobeandmail&redirect_reason=2&denial_reasons=none&force_login=false Dodge touts trusts' benefits] ] Previous Governors of the Bank of Canada have adhered to a policy of preserving the independence of the Bank, by not commenting on government legislation. According to MP Diane Ablonczy(Parliamentary Secretary to the Minister of Finance, CPC): "The Governor of the Bank of Canada is an independent officer." [ [http://www2.parl.gc.ca/HousePublications/Publication.aspx?Language=E&Mode=1&Parl=39&Ses=1&DocId=2657648#Int-1873801 HANSARD Friday, February 2, 2007] ] However at least one previous Governor, James Coynewas dismissed by the Canadian Government for criticizing the government's financial record in 1961. In February 2007 MP Mike Wallace confirmed "the Governor of the Bank of Canada has given his support to the government's decision to tax income trusts." [ [http://www2.parl.gc.ca/HousePublications/Publication.aspx?Language=E&Mode=1&Parl=39&Ses=1&DocId=2657648#Int-1873798 HANSARD Friday, February 2, 2007] ]
Department of Finance role in Conservative decision
While at the Department of Finance,
Mark Carneyengineered the Federal Conservative government's plan to tax Income Trusts at source. Carney was a Senior Associate Deputy Minister of Finance, and is expected to succeed David A. Dodgeas the Governor of the Bank of Canadaon February 1, 2008. [ [http://www.bank-banque-canada.ca/en/press/2007/pr07-27.html Bank of Canada Press Release] ] Carney was appointed by Finance Minister Jim Flahertyon October 4, 2007. According to Brent Fullard of the [http://www.caiti.info/ Canadian Association of Income Trust Investors] , the Department of Finance also eliminated a 15% withholding tax on foreign leverage buyout loans, and created capital insertion rules that restrict growth on Canadian trusts. This creates conditions which favor foreign entities who purchase Canadian Income Trusts and are not required to comply with rules that restrict growth. [ [http://www.torontosun.com/News/Columnists/Copps_Sheila/2007/11/11/4647143-sun.php Taxes, and avoiding them, on everyone's tongue - Foreign Takeovers] ] [ [http://caiti-online-media.blogspot.com/2007/09/primewest-energy-trust-bought-for.html Primewest Energy Trust -Bought for Nothing Down & No Income Taxes] ] [ [http://caiti-online.blogspot.com/2007/11/theres-sucker-born-every-minute.html There's a sucker born every minute] ]
October 4, 2007Brent Fullard criticized Mr. Carney for his handling of the Income Trust issue while working for Finance Minister Jim Flaherty. Fullard asserts "It was Mark Carney and Mark Carney alone who thought it was okay to leave out the 38% of taxes collected by the government from income trust distributions, in his fraudulent and highly intellectually corrupt scheme to rip off 2.5 million Canadians from $35 billion of their life savings, for a whole host of reasons, none of them good. No evidence took the form of 18 pages of blacked out documents [ [http://www.caiti.info/resources/fla_docs.pdf Flaherty's Proof] ] that constituted Mark’s idea of accountability and transparency." [ [http://caiti-online.blogspot.com/2007/10/limited-evidence-suggests.html Limited evidence suggests - CAITI ONLINE] ] [ [http://caiti-online.blogspot.com/2007/10/pump-it-up.html Pump it up - CAITI ONLINE] ]
Opposition to and criticism of new tax rules
Criticism of the new tax rules has been strong, and generally based on three different types of criticism:
* Criticism of the effect of the rules on the sector, on owners of income trust units, and the breaking of an explicit campaign promise by the Conservative Party.
* Criticism of the lack of consultation by the government, and criticism of the execution of the decision (timing of the announcement, the way in which it was announced, and potential malfeasance by insiders).
* Criticism of the substance of the decision and the reasoning and data provided by the government to justify the decision. These reasons include, in particular, challenges to the government's calculation and methodology of 'tax leakage.'
Economist Yves Fortin has challenged the reasons for the change in tax regime announced by Flaherty and disputes the Harper government assertion that the Trust structure has led to loss of tax revenue because of trust conversions in his research paper [http://www.caif.ca/content/IncomeTrustsTax.Fortin.pdf Income Trusts and Tax Leakage: Is there a problem?] .
January 12, 2007paper Yves Fortin outlined his concerns regarding the claim of tax leakage. Finance Minister Jim Flaherty stated in his October 31, 2006policy statement "If left unchecked, these corporate decisions would result in billions of dollars in less tax revenue for the federal government to invest in the priorities of Canadians, including more personal income tax relief" [http://www.caif.ca/content/TaxLossRecipe.Fortin.pdf] but Minister Flaherty has not documented the claimed losses nor the methodology used to estimate them. Mr. Fortin's paper [http://www.caif.ca/content/TaxLossRecipe.Fortin.pdf A Recipe For Tax Loss] gives several examples on how the tax on income trusts could lead to a loss in government tax revenue.
Analyst Gordon Tait has also raised concerns about the lack of consultation and misconceptions surrounding the change in tax policy on Trusts in [http://www.billcara.com/BMO%20Dec%204%202006%20Cdn%20Income%20Trusts.pdf The Inconvenient Truth About Trusts] , although Mr. Tait also notes that he recognizes "the dilemma the Finance Minister found himself in," and that "the potential for a large number of corporate conversions to income trusts necessitated some kind of action."
December 11, 2006[http://www.pwc.com/ca/eng/ins-sol/publications/itr_1206.pdf Income Trust Report] by PricewaterhouseCoopersreviewed the surveys and studies conducted in 2004 and 2005, the economic benefits and impact of income trusts in Canada. The report concludes that income trusts do have a place in Canadian capital markets and the 'Tax Fairness Plan' is unfair to Canadian investors who hold trusts in a tax-deferred Registered Retirement Savings Planor a Registered Retirement Income Fund.
Analyst Cameron Renkas examines the Department of Finance assertion that the United States and Australia have taken action to shut down flow-through structures. In his research paper [http://canadianenergytrusts.ca/documents/DiggingDeeper.pdf Digging Deeper] he gives a perspective on how the United States taxes publicly traded flow-through entities and Master limited partnerships, the US equivalent of Canadian income trusts.
Analyst Dirk Lever wrote on
January 15, 2007: "We cannot understand why any Canadians would support double taxation of retirement benefits - it affects all of us eventually". Mr. Lever also looked at the Conservative government's policy in his research paper [http://www.caiti.info/resources/TRUSTS011507.pdf Deep Dive into Tax Issues: Canadian Pensioners Taxed Twice on Canadian Corporate Dividends] . In the report Mr. Lever questions the logic behind double taxation of dividends, and claims that foreign investors pay less tax on distributions than domestic investors. The proposed solution, however, is not to retain the existing benefits of income trusts, but to have identical tax regimes for both corporate and income trust distributions (dividends). The report does not address the benefit received from tax deferred savings plans (such as RRSPs and pensions) at the time of contribution, nor the tax-free accumulation throughout the life of these plans.
Hearings on the proposed changes to income trust taxation by the House of Commons' Finance Committee commenced
January 30, 2007. John McCallum, the Liberal Finance critic has called on Minister Flaherty to explain the reasoning behind the change in Income Trust Tax policy. [ cite news | author = John MacCallum | title = Your first problem is that having lured hundreds of thousands of ordinary Canadiansinto income trusts by promising not to raise taxes you then cut them off at the knees | publisher = National Post | url = http://www.caiti.info/resources/john_mccallum_op_ed.pdf | date = January 3, 2007 |format=PDF ] In a February 8, 2007news release John McCallum said that "essentially they released close to a thousand pages of public documents, not one of which brings Canadians any closer to understanding what type of information or calculations led the Minister break his election promise and tax income trusts, either the Minister is in contempt of the committee’s motion or he had absolutely no data from his own department before shutting down the sector and destroying tens of thousands of Canadians’ life savings." [ cite news | author = Liberal.ca | title = Minister of Finance Stonewalling Finance Committee’s Request for Information on Income Trust Decision: Liberal Finance Critic | publisher = Liberal.ca | url = http://www.liberal.ca/news_e.aspx?type=news&id=12240 | date = February 8 2007] [ cite news | author = CAITI | title = Mr. Harper Is this what you mean by Transparency? | publisher = CAITI | url = http://www.caiti.info/resources/redacted.pdf | date = February 8 2007|format=PDF ]
July 9 2007interview on Business News Network, former Conservative Alberta Premier Ralph Kleincriticized PM Stephen Harperand Jim Flahertyfor their mishandling of the Income Trust issue and for not keeping their word on income trust taxation. [http://www.youtube.com/watch?v=ocqD1BbpcTo] According to the [http://caiti.info/calculation_35_billion_loss.php Canadian Association of Income Trust Investors] the change in tax rules cost investors billions of dollars in market value. Stephen Harper had promised "not to raid Senior's nest eggs" by changing taxation rules for income trusts only a few months earlier during the 2006 Federal Election. [http://www.youtube.com/watch?v=U9mibZYpVPY]
upport for the proposed changes
The Conservatives have the support of the
Jack Laytonand the New Democratic Party, and a majority of provincial finance ministers on this issue. The Conservatives lost Bloc Québécoissupport because of Bloc concerns of capital losses to small Canadian investors. [ cite news | author = House of Commons Standing Committee on Finance | title = Taxing Income Trusts: Reconcilable or Irreconcilable differences? | publisher = House of Commons Canada | url = http://www.enerplus.com/documents/StandingCommitteeReportFeb282007.pdf | date = February 28 2007|format=PDF ] [ cite news | author = CAITI | title = A Letter to the Liberals and Bloc Québécois from CAITI on the PublicHearings of the Finance Committee Concerning Income Trusts | publisher = CAITI | url = http://www.caiti.info/resources/pr_02-13-2007.pdf | date = February 13 2007|format=PDF ] In a November 2006 " Globe and Mail" survey of business leaders (CEOs, CFOs and the like), 58% supported the proposed changes. Most support was related to different tax treatment of trusts over other corporate structures. The CEO of EllisDonwas quoted as saying "I just don't see the logic in allowing a group of companies to pay dramatically lower taxes than private companies or companies that aren't organized that way. I really don't see how [the government] had any choice." [http://www.theglobeandmail.com/servlet/story/RTGAM.20061126.wcsuitemain1126/BNStory/Business/] As noted above, some criticisms of the specific solutions proposed by the government recognized explicitly the need for some policy change, primarily with respect to perceived tax advantages available to income trusts. When the final vote on the Conservative Budget was held, the Bloc supported the taxation of income trusts in the "Tax Fairness Plan" as a quid pro quo for receiving a huge allocation of cash from the Conservative government. Canada's Senate later passed this budget as law. Since this time, BCE has announced that they will go private and pay no corporate taxes. Gwyn Morganformer President and CEO of Encanacontinued to support the changes in taxation in an October 31, 2007interview on BNN. [ [http://video.google.com/videoplay?docid=4213985495402281839&hl=en-CA Gwyn Morgan on BNN. October 31, 2007] ]
tanding Committee on Finance release report
February 28 2007the House of Commons Standing Committee on Finance released their report [http://www.enerplus.com/documents/StandingCommitteeReportFeb282007.pdf Taxing Income Trusts: Reconcilable or Irreconcilable Differences?] .
Canadian government challenged on change in Income trust taxation
October 30, 2007American citizens Marvin and Elaine Gottlieb filed a Notice of Intent to Submit a Claim to Arbitration under the North American Free Trade Agreement (NAFTA). The couple claims thousands of US investors lost a total of $5 billion in the fall-out from the Conservative Government's decision last year to effectively tax income trusts in the energy sector out of existence.
Under the NAFTA, Canada is not allowed to target other NAFTA citizens when they impose new measures. Mr. Flaherty is on record that energy trusts were included because of their high U.S. ownership, while
Real Estate Investment Trusts, owned mostly by Canadians, were excluded. The NAFTA also stipulates that Canada must pay compensation for destroying investment by U.S. investors. The Government of Canada's 2006 Halloween tax changes for income trusts were designed to eliminate the income trust model for investment by U.S. citizens. The NAFTA says that U.S. investors are entitled to rely upon Canadian government promises. Mr. Harper repeatedly made a public promise that his Government would not tax trusts, as had the previous Liberal Government. Canada's tax treaty with the United States also says that trust income will not be taxed at more than 15%.
The Gottliebs maintain a website for American and Mexican citizens interested in filing a NAFTA claim against the Government of Canada. [ [http://www.naftatrustclaims.com/ NAFTA Trust Claims] ]
Flaherty challenged to debate tax leakage
August 21, 2008Brent Fullard, President of the [http://www.caiti.info/ Canadian Association of Income Trust Investors] challenged Flaherty to debate supposed tax leakage associated with income trusts. Fullard was responding to a comment attributed to a Flaherty spokesperson in April, 2008, as quoted in the Hill Times: "I don't think Jim's losing any sleep over it. As a matter of fact, I'm sure of it. I'm sure he'd love to go a couple of rounds with these CAITI guys in a debate situation." Fullard announced he would put up $50,000, payable to his favorite charity. Given the Minister's "current crusade on financial literacy," Fullard believed a suitable charitable cause would be a scholarship for business education. "By doing this we could help repair the damage caused by the Minister's statement that Ontario is the last place to invest." [Cite web
last = Barry Critchley
title = Flaherty's $50,000 challenge
accessdate = 2008-08-24
year = 2008
url = http://www.financialpost.com/story.html?id=737695] Flaherty has turned down the request. "The tax fairness plan is law. The Minister made his position clear before the finance committee and there is no need for further debate," according to his press spokesperson. [Cite web
last = Barry Critchley
title = A tale of two documents
accessdate = 2008-08-24
date = 2008-08-22
url = http://www.financialpost.com/story.html?id=740674]
In the US, the business trust structure appeared with
publicly traded partnerships (PTPs) which were limited liability partnerships (LLPs) with units that trade on public securities exchanges, combining the tax advantages of partnerships with the liquidity of public companies. Starting from the early 1980s all sorts of business, from manufacturers to the Boston Celticsbasketball team, converted to PTPs.
In 1987, conversions numbered more than 100 and Congress estimated that the trend was costing Washington $245-million a year in lost revenue. All PTPs except those categorized as "slow-growth investments" (roughly a third of them) were therefore given 10 years before they would be taxed as corporations. Just like in Australia, most of them converted back as unit prices fell, but the decade-long transition meant fewer sharp losses for investors. Others such as
Cedar Fairreceived a special corporate tax rate on the condition that they would not be allowed to diversify outside of their core businesses. Few of the partnerships remain today as US income-focused investors favor high-yield Bonds or debentures instead.
With the Canadian income trust market booming in the 2000s, American investment bankers have tried to import the Canadian model in a structure called
income depositary shares(IDS). A handful of small IPOs have used this model since late 2003; but due to lack of investor demand, interested companies have preferred to go public directly in the hot Canadian market.(cite news | url=http://www.businessweek.com/magazine/content/05_13/b3926130_mz070.htm | title= Chasing Higher Yields Up North | publisher=BusinessWeek | date=March 28, 2005)
Real estate investment trust
* [http://caiti.info/ Canadian Association of Income Trust Investors]
* [http://www.fin.gc.ca/activty/pubs/toirplf_1e.html Tax and Other Issues Related to Publicly Listed Flow-Through Entities] from the
Canadian Department of Finance
* [http://www.osc.gov.on.ca/Regulation/Rulemaking/Current/rrn_part4_index.jsp Distribution requirements] of the
Ontario Securities Commission, including a section on income trusts and other indirect offerings
* [http://caiti-online.blogspot.com/ CAITI-ONLINE] Current commentary on Canadian Income Trust issues.
* [http://www.globeinvestor.com/resources/trusts/ Income Trust Centre] from the "
Globe and Mail"
* [http://www.investcom.com/incometrust/whatis.htm InvestCom section on Canadian income trusts]
* [http://www.investcom.com/cgi-bin/nameindustry/incometrust.cgi?ID=1&string=Income+Trust&exact=&ind=&cat=yes&sct= Canadian Income Trusts List]
* [http://www.trustinvestor.com/ TrustInvestor.com]
* [http://www.trustinvestor.com/trustindex/ iTrustReport with comprehensive iTrustIndex]
* [http://www.itrustinstitute.org/ iTrust Institute]
* [http://www.advocis.ca/content/programs/forum/FORUM.html/ Forum Magazine from Advocis, the Financial Advisors Association of Canada]
* [http://www.thetruthontrusts.com/ The Truth on Trusts]
* [http://www.caif.ca/ Canadian Association of Income Funds]
* [http://caiti-online-media.blogspot.com/ CAITI-ONLINE-MEDIA] Compilation of past print and video ads from CAITI
* [http://canadianenergytrusts.ca/index.html Coalition of Canadian Energy Trusts]
* [http://www.caif.ca/content/IncomeTrustsTax.Fortin.pdf Income Trusts and Tax Leakage: Is there a problem? by Yves Fortin]
* [http://www.pwc.com/ca/eng/ins-sol/publications/itr_1206.pdf Income Trust Report by PricewaterhouseCooper]
* [http://www.livingoffdividends.com/2007/06/29/buying-canadian-income-funds-for-passive-income-and-financial-freedom/ Investing in Income Trust for financial freedom]
* [http://www.dailywealth.com/archive/2008/mar/2008_mar_19.asp Income Trust Dividend Streams]
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