Vulture Capitalists Circle Flaherty's Energy Prey!

FEDERAL TAX 'LOOPHOLE' MAKES TRUSTS TASTY TARGETS

-- U.S. Players Expected To Capitalize On Flaherty Blunder!

by Shaun Polczer
Calgary Herald
Tuesday, May 08, 2007

A loophole in federal trust taxation policies will make Canadian energy trusts plump takeover targets for U.S. hedge funds and private pension plans, industry observers warned Monday.

That's because private trusts and large pensions like the Ontario Teachers won't be subject to a 31.5 per cent tax on distributions when the changes come into effect in 2011.

John Brussa, a partner with Calgary oilpatch lawyers Burnet, Duckworth and Palmer, said he expects to see the emergence of new corporate structures designed specifically to exploit that advantage -- including acquisitions of existing trusts by Canadian pensions and speculative American hedge funds.

"That tax represents a big inviting target for people that can eliminate it," he said on the sidelines of a Conference Board of Canada meeting at the Telus Convention Centre.

"If you see a $20 bill on the ground you tend to want to bend down and pick it up. And those people will be pension funds, they'll be U.S. private equity guys . . . those are the folks who see that as a tempting target."

Although he doesn't expect to see a wholesale takeover of the Canadian energy trust sector before 2011, Brussa -- who previously prepared tax opinions for companies considering trust conversions -- said the mould has been set with Thunder Energy Trust.

In April, Thunder was taken over by a consortium that included Overlord Financial Inc., the Public Sector Pension Investment Board (PSPIB) and a numbered Alberta company for $200 million.

The Ottawa-based PSPIB is a Crown corporation charged with overseeing the pension assets of the federal public service, the Canadian Forces and the Royal Canadian Mounted Police.

John Dielwart, president of ARC Resources Trust, described the exemption of private trusts as an "egregious omission" to the new rules that were announced Oct. 31.

"By excluding private trusts, big private equity funds, big pension funds can still play this game the way they always have. Individual Canadians, either retired or saving for retirement, are basically being thrown under the bus. It's intolerable, in my view."

Bill Andrew, president and CEO of Penn West Energy Trust, said all the big trusts --including Penn West -- will be looking at alternative corporate structures as the tax deadline draws near.

Andrew said "vulture funds" in the form of ultra-speculative hedge investors are already looking to Canada as fertile ground for speculative assets ahead of what they see as looming consolidation in the sector.

"(Hedge funds) are in it for the short haul; they're in it for the flip."

Finance minister Jim Flaherty was scheduled to address the gathering, but was a no-show.

Gordon Tait, managing director of income and royalty trust research with BMO Capital Markets, said one impact of the federal government's decision has been to reduce the number of initial public offerings of energy companies and increase foreign ownership of the trust sector.

Before he became a research analyst, Tait was Enerplus Resources Fund's chief financial officer.

He said the government's "tax fairness plan" creates a two-tiered investment landscape that favours large institutional investors over ordinary Canadians.

"If it's good enough for the Ontario Teachers' fund, why not my RSPs?" he asked.

Although he doesn't expect the trust sector to disappear, he predicted a greater number of trust buyouts as 2011 draws closer.

"As we get closer to that 2011 deadline you'll start to hear the knock on the door," he said.

ARC's Dielwart, who is also co-chair of the Canadian Coalition of Energy Trusts, agreed that the present government is unlikely to reconsider its stance.

But he also vowed to carry on the fight in the absence of an election to topple the ruling Conservatives.

"We will not quit, we will not stop fighting this ill-advised policy," he said. "Until such a time as there is no life left in our bodies, we will not give up."

spolczer@theherald.canwest.com