Industry welcomes changes to income trust legislation

(March 28, 2003) One short line in the Ontario budget could mean a major boost for the already booming income trust market. The province is proposing legislative changes clarifying that investors in publicly traded trusts would not be liable for the activities of the trust.

Investment in trusts has been hampered by uncertainty surrounding the legal position of unitholders. The proposals, which also include a review of governance standards for income trusts, should ease the minds of trust holders.

Institutional investors are among the wary, with limited liability issues stopping them from investing in income trusts. Standard & Poor’s has also been waiting for clarity, and hasn’t included trusts in the S&P/TSX 60 Index, despite the fact that they trade actively and are very liquid.

The Ontario government’s move is welcomed by key players in the industry, including the Canadian Institute of Public and Private Real Estate Companies (CIPPREC), an association representing publicly traded real estate investment trusts.

Michael Brooks, CIPPREC’s executive director, says the association is “delighted” by the announcement. His organization has been lobbying for change on behalf of members representing in excess of $70 billion in assets. His group did comparative research in the U.S. to help the Ontario government initiate the change.

The new legislation, he says, “will certainly be a confidence builder for investors who were nervous about the issue… and will remove that nagging doubt.” And that, he adds, should enable more institutional investors to invest in the sector.

The Canadian Association of Income Funds (CAIF) also supports Ontario’s initiative. “This is an important move by Ontario that we hope will be replicated by other provincial governments,” says chair Stephen Probyn. “Ontario has recognized that [income trusts] are important to the health of this province’s economy … and that they should be freed of impediments, such as questions concerning unitholder liability.”

Will the legislative changes result in higher unit prices? Brooks can’t say for sure — “it’s up to investment dealers to make that call,” he points out.

Ian Russell, senior vice-president with the Investment Dealers Association, believes that provinces such as Alberta will quickly follow Ontario’s lead when it comes to making the necessary changes to income trust legislation. “If they don’t,” he says, “then those Alberta unit trusts are going to establish and issue in Ontario to take advantage of the limited liability.” Russell doesn’t yet know whether other provinces will follow suit.

Ontario is expected to provide details of the proposed income trust changes when the budget is tabled in the legislature next month. CAIF estimates there are now more than 100 income trusts operating across Canada, with a total market capitalization of about $45 billion.

Caroline Cakebread is a Toronto-based investment writer.