Countdown; TOP TEN INCOME-TRUST MYTHS

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Debunking The Top Ten Myths Regarding Income Trusts


1. Income Trusts cause substantial tax loss for Canadian governments.

The Truth: This myth is about as credible as former Conservative Environment Minister Rona Ambrose. In fact, distribution payments made by income trusts are treated as taxable income in the hands of the investor who receives them, and contribute significantly to the tax rolls of federal and provincial governments -- and personal trust taxes are usually paid at a higher tax rate than paid by most Canadian publicly-traded corporations (and many of these corporations pay NO tax).

RBC Financial Group has estimated that governments collect more than $5 billion in personal taxes each year on the cash distributions made by income trusts to their investors. This figure does not include the additional money governments collect from capital gains taxes imposed when corporations convert into income trusts.

Note that RBC analysts have concluded that government tax loss is a “non-issue” when it comes to income trusts.

Of course, the personal and financial suffering of seniors and other investors, because of Stephen Harper's broken election promise to not tax trusts, is considered a non-issue by Prime Minister Harper and his little buddy, Jimmy.


2. Until Halloween Eve 2006, market demand for income trusts was being driven by publicly-traded corporations looking to save money on their tax bills.

The Truth: Demand for income trusts was being driven largely by financially hard-pressed Canadians who relied on the regular cash payouts of trusts to keep up with the ever-rising costs of living. In 2005, income trusts allocated $16 billion in distribution payments. The majority of these payments – 75 per cent – were made to "retail" investors (individual Canadian investors).

In particular, income trusts are attractive to retirees because retirees can use the regular monthly cash pay-outs of trusts to supplement their pension plans and old age security benefits.

Remember that by 2025, seven million Canadians - almost one-quarter of the population – will be over the age of 65.

Wonder how many of them will be voting Conservative?


3. Income trusts do not contribute to the Canadian economy.

The Truth: The more than 250 companies structured as trusts in Canada, on Halloween Eve 2006, operated across many sectors of the economy – food and beverage, telecommunications, oil and gas and manufacturing. These companies generated significant economic growth, productivity, reinvestment and jobs across Canada.

Canada’s income trusts employed more than 250,000 Canadians nationwide –- representing almost two per cent of the private sector workforce of 13.3 million people, according to Acuity Investment Management.

The income trust structure also attracted foreign businesses to Canada at a time of increasing globalization. Thanks to the income-trust financial structure, more than 15 foreign companies have established head offices in Canada and listed as trusts on the Toronto Stock Exchange. Foreign businesses structured as trusts generate productivity gains for Canada, indirectly contribute to the tax system (by paying distributions to Canadians which are in turn taxed by government), create new jobs in Canada, and reverse the outflow of Canadian dollars usually flowing from Canadian corporate subsidiaries to their foreign home offices.

This is just another important truth about income trusts that Canada's Finance Minister was never told about by his Finance bureaucrats. Talk about "information leakage" in Ottawa!


4. The income trust structure prevents reinvestment in the growth of any company that is structured as an income trust.

The Truth: Companies structured as income trusts distribute most (not all) of their cash directly to unit holders in the form of monthly or quarterly payments. However, a considerable portion of the cash earnings generated by income trusts is reinvested to support the future growth of the company.

Income trusts are required to make informed and responsible reinvestments in order to grow the company and secure the distribution payments that are made to unit holders on a regular basis.

Under the more traditional common-equity corporate structure, publicly-traded corporations retain most of their earnings and make reinvestment decisions based on their ability to reduce their corporate taxes.

As well, because of their structure, income trusts are often required to return to the capital markets to fund large expenditures, such as an energy trust acquiring more energy reserves to spur oil production. And this provides an opportunity for the capital markets (lenders or new shareholders) to endorse or reject many trust expenditure decisions.

This check has been favoured by Canada’s large pension funds, which regard this as an added layer of fiscal accountability.


5. The income trust structure favours large corporate-like entities.

The Truth: The majority of income trusts – nearly three-quarters – are small to medium-sized businesses with market capitalizations of under $1 billion.

More than half of income trusts have market capitalizations under $250 million.

In its recent review of income trusts, the Bank of Canada concluded that “Most business trusts would be classified as mid-cap or small-cap (companies).” Canada's central bank also noted that “An examination of initial public offerings of income trusts between 2001 and 2005 shows a steady decrease in median IPO size from $155 million in 2001 to $75 million in 2005.”

Access to capital for many of these small and medium-sized businesses would be prohibitively expensive if not for the trust structure. The income trust structure has allowed many small- and medium-sized businesses to thrive and grow in Canada, rather than become subsidiaries of U.S. corporations.

This is especially the case in Canada's Western oil patch, where a number of small energy producers and drillers have thrived as income trusts, created jobs, and pumped money into their communities through infrastructure spending, sales taxes and energy royalties.


6. The investment community has placed high valuations on income trusts because their distribution payouts to investors are high.

The Truth: To date, no market analysts have concluded that Canada’s income-trust valuations were directly linked to distribution payments. Capital markets have traditionally valued income trusts based on their cash revenue, debt levels, reinvestment strategies, management, and market demand for units in the company.


7. Income trusts are unregulated relative to companies set up under the common equity structure.

The Truth: Income trusts are subject to stringent corporate governance rules -- many of them originally legislated by Ottawa -- and are just as accountable to their unit holders as common-equity corporations are to shareholders.

The income trust structure, by design, imposes a stringent investment and reporting discipline on management. For example, the trust structure places an additional financial discipline on capital investment decisions. Trusts must ensure their financial decisions are accretive so as not to disrupt the monthly and quarterly distribution payments made to unit holders.

Any negative impact, by poor investment of capital, on the cash flow and cash distributions of income trusts would quickly become apparent to unit holders and market regulators.

On the other hand, because they are obliged to pay out so little of their cash flow to shareholders as dividends, publicly-traded corporations do not face similar scrutiny. Hence their CEOs can waste company cash on grandiose salaries, stock options, and money-losing buyouts of other companies. Witness the ignominy of Canada's most prestigious telephone company, BCE, in recent years.


8. Trusts are bad for Canada because they pay money to unit holders instead of investing it in the company.

The Truth: Comparing business spending on acquiring or upgrading physical assets such as buildings and machinery among companies before and after their conversion to the income trust structure shows that such spending is HIGHER after a trust conversion than before a conversion. Also, business spending as a percentage of revenue is higher for income trusts listed on the Toronto Stock Exchange (TSX) than for common corporate equities listed on the TSX.

Such infrastructure spending by income trusts, especially in the oil and gas industry, has mammoth positive spin-off effects on local Canadian communities, increasing employment and business activity, as well as local sales-tax revenues.


9. Income trusts are hard to understand and don’t communicate honestly about their financial performance.

The Truth: As public companies, income trusts are subject to stringent corporate governance rules similar to those imposed on common stocks, and they are required to communicate honestly and openly about their financial performance and investment decisions.

There have been more "bad apples" and fraudulent reporting among North American common stocks than among income trusts. For example, can you say, Enron, Hollinger or Bre-X, boys and girls?

It's just that business journalists have chosen to focus on a few bad apples in the income trust world, while choosing to ignore the terrible financial suffering, among shareholders, created by so many common-stock frauds.

Only the incautious meddling of government in the income-trust world has managed to create financial losses and suffering on the scale caused by so many common-stock frauds and swindles of the past two decades. Yet, in Canada, very few common-stock scandals have been investigated or successfully prosecuted by federal or provincial authorities.

Only income trusts, for example, have come under the financial microscope of Canada's Finance Department. The fraudulent comings and goings in Bre-X, Hollinger and the past Drabinsky Cineplex empire, for example, have been of no interest.


10. Market regulators and analysts do not like the income trusts structure and think it has a negative impact on Canada’s capital markets.

The Truth: In a June 2006 report, the Bank of Canada concluded that income trusts contribute positively to the country’s capital markets. Specifically, Canada's central bankers noted: “The continued growth and maturation of income trusts as an asset class has resulted in a market that is increasingly diverse in terms of sector, size and risk characterization...Available evidence suggests that income trusts may enhance financial market completeness.”

During an October 2006 press conference, Bank of Canada Governor David Dodge said that income trusts make capital markets “more complete” and “more efficient."

But then again what does David Dodge or the Bank of Canada know, as compared to such economic geniuses as Stephen Harper, Jim Flaherty and Canada's Finance Department bureaucrats?