Income fund group responds to CSA guidelines

(November 27, 2003) The Canadian Association of Income Funds (CAIF) has submitted its commentary to the Canadian Securities Administrators (CSA) on the proposed National Instrument 41-201 (Income Trusts and Other Indirect Offerings).

CAIF says it welcomes the national instrument as a means of encouraging growth in the income fund sector, but requests the following changes to the draft version.

The association would like to see the term “non-taxable” replaced by “tax-deferred” when referring to return of capital, pointing out that capital gains taxes are still charged when the investor sells the fund.

CAIF also objects to the requirement that an income fund must detail what percentage of the distribution is considered “return of capital” and what percentage is “return on capital” in its prospectus, saying the costs associated with such projections would be punitive.

The instrument would also require income funds to strip return on capital out of yield calculations.

“It is not at all clear to us why returns on capital should be excluded from yield, or for that matter why any distinction need be made between the streams of distributed cash paid to unitholders,” says CAIF.

The group says that designating their typical debt arrangements as “material contracts” would be inappropriate, as they would then be required to be file with SEDAR. CAIF adds that “the emphasis should be on ensuring adequate disclosure of the risks to investors as [CSA has] proposed within part 2.9.”

Another aspect of the national instrument the group objects to is the requirement for stability ratings, saying such ratings “perpetuate a myth that income funds are similar to bonds” and will only serve to confuse investors. These ratings would add expense to the operations of the trust, since investors would likely shy away from unrated funds.

The association also requests the section requiring comparative financial information for pre-initial public offering (IPO) and post-IPO operation be removed, as such comparisons cannot possibly be accurate.

“We recommend that the requirement to provide comparable information be limited to the line items from ‘revenue’ down to and including ‘EBITDA,’ with adequate disclosure, to the effect, that the prior period excludes public company expenses and capital taxes that the entity will be required to absorb subsequent to the IPO,” says CAIF.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com.

(11/27/03)