Income trust worries slamming IPO market

Ottawa’s decision to stop issuing advancing tax rulings on income trusts has effectively stalled Canada’s IPO market, according to PricewaterhouseCoopers.

PWC surveyed IPOs on the TSX and TSX Venture Exchange for the first three quarters of the year, coming up with a total value of $5.3 billion. Of those new offerings, 37 were income trusts, worth $4.3 billion, about 80% of the total market value.

However, Ross Sinclair, PWC’s national leader of IPOs and income trust services, says almost all IPO activity stalled in October following the federal government’s announcement that it would begin consultations on trusts and stop issuing advanced tax rulings.

“A number of trust offerings that might have closed in October have been deferred. Some of those that did close in October were initiated before the announcement in September.”

“Ironically, very few income trusts actually need or use advance tax rulings,” Sinclair noted. “However Ottawa’s decision has certainly raised substantive investor uncertainty about the federal government’s longer-term intentions for tax treatment of income trusts. In the face of that uncertainty, the market has slammed on the brakes.”

Sinclair says he’s worried, since that uncertainty could remain until after the next federal election, which is not expected until early next year, and could be even later.

Ottawa estimates it has lost about $300 million because income trusts don’t pay corporate taxes. “But that $300 million figure is highly subjective,” says Sinclair.

“The entire tax load paid or lost via income trusts and distributions to investors could, literally, swing wildly on one side or another of that $300 million figure, depending on what assumptions you use in what is a very complicated equation. In fact, there’s a strong case to be made that tax on income earned through income trusts is not lost — it’s either paid by individuals or is deferred until distributed from pension funds and RRSPs.”

PwC is preparing a response to Ottawa’s white paper on the tax implications of income trusts.

Meanwhile, Canaccord Capital used even stronger language in a research report released yesterday entitled Trust Reform Hurts Canadians. The firm came out swinging in favour of income trusts, arguing that they offer one of the highest sources of sustainable recurring cash yields in both the equity and fixed income markets and are therefore the preferred investment for many retirees.

“The income trust sector lost $23 billion in market capitalization over the past month, largely due to fear and uncertainty caused by the federal government, Canaccord said. “Recognize this is billions of dollars of foregone capital gains tax revenues (or the creation of capital losses) that the government has caused in efforts to contain $300 million in purported tax leakage.”

“The intentional or unintentional destruction of the existing trust market is a morally indefensible attack on millions of Canadian investors and employees that acted in good faith under rules that the government previously endorsed.”

Canaccord says it’s concerned that politicians do not think voters care about income trusts. “We question whether the consultation process with the Department of Finance will be balanced, or is it just a sham?”

The firm is urging concerned Canadians to their local MPs, including phone numbers and e-mail addresses for each one in the report.

Filed by Doug Watt, Advisor.ca, doug.watt@advisor.rogers.com