Addendum re: Request for Mr. Kevin Page

Mr. Page:

In my email below I neglected to mention one other significant aspect of the income trust tax on the present day and ongoing fiscal and budgetary health of Canada, and that is the takeover activity that this policy was predicted to induce and which we now have three years of observations to reflect upon and evaluate. As you will no doubt find as you investigate the question posed in my first email, there was no tax leakage as result of income trusts in the first place. However that condition has now been turned into real tax leakage as the direct sole consequence of a policy who ostensible (yet patently false) policy proposition was to do the opposite.

In this regard (see below), I refer you to the work of global accounting firm, Deloitte and their on-line study done in April 2008 entitled “Income trust buyouts: Lot’s of activity, little tax revenue, partially reprinted below. In this study they observe that:

“Buyers in the 40 announced deals were equally split between strategic and private equity, as well as between domestic and foreign. But in terms of tax revenue for the Canadian government, the news was not so balanced: 70% of the purchasers are tax exempt pension/private equity funds or foreign buyers who pay little if any tax in this country.”

They go on to caution:

“Based on our involvement with over 20 income trust buyout transactions in the past year we believe that the buyout momentum will continue. The current M&A slowdown is primarily driven by “mega” transactions exceeding $1 billion in size. The income trust market, particularly the business trust segment, is comprised of medium-sized companies that are ideal for financial and strategic buyers.”

I estimate that the tax revenue loss to the Canadian government and hence all Canadians taxpayers is the permanent loss of over $1 billion in annual revenue. This to “solve” an alleged tax leakage of $500 million that never existed in the first place must be the height of fiscal negligence and incompetence, unseen before in this country. Not to mention the $35 billion it has caused to the life savings of hard working tax paying Canadians.

The good news is that the glass is still 75% full, with 169 of the original 220 trust tax targeted businesses still in the hands of tax paying Canadians and publicly listed. The potential loss of tax revenue from these remaining trusts is some $6 billion in, at risk, tax revenues.

Please find attached my most recent list of trust takeovers from BMO Capital Markets, that is more up to date than the published work of Deloitte, but which is missing a few of the recent takeovers of trusts. Deloitte or BMO no doubt have more updated analysis of this matter that could further assist you, so that you aren’t reinventing the wheel.

Thank you again, and for all the fine work that you do on behalf of Canadian taxpayers.

Brent Fullard
President and CEO
Canadian Association of Income Trust Investors
www.caiti.info

Deloitte Study: Income trust buyouts: Lots of activity, little tax revenue:

Published 04/22/2008

Since the fateful announcement on October 31, 2006, there have been 40 announced or completed trust buyouts versus 14 deals over the equivalent year-ago period. We have seen the trust population of 256 shrink by more than 15% to 215. Market conditions such as foreign exchange fluctuations and commodity prices also had an impact on this decline, but the trust tax announcement was certainly the catalyst for the sell-off.

In December 2006, Deloitte hosted an event titled New realities for income trusts for trustees and management of income trusts, and their investors, bankers and advisors. The participants were asked to estimate the number of trusts that would still exist at the end of 2010 – and 87% responded “fewer than 100.” A decline of this magnitude translates to almost 40 trusts per year – closely in line with current reality.

Of the 40 deals that originated since October 31, 2006, 31 have closed and 9 are pending completion. Many other trusts have been targeted during this period, with at least one publicly disclosing a takeover attempt that was subsequently terminated.


(See table on line)


What sectors were targets?
Following the trust tax announcement, the increase in buyout activity was concentrated in the business trust sector, spread across 10 subsectors. The generally smaller size (average transaction enterprise value of $430 million) of business trusts may have motivated trustees to sell – but performance may have been a contributing factor. Twelve of the business trusts acquired were bought for less than or equal to their $10 initial public offering (IPO) price.

(See table on line)


Energy trust activity remained consistent year over year, although there were two foreign buyouts as opposed to exclusively trust mergers prior to the announcement.

The REIT and Power & pipelines sectors experienced an increase in interest by foreign buyers and Canadian pension funds. The characteristics of both of these sectors lend well to the infrastructure-based investing that many pension funds and foreign buyers are looking for, and should result in continued buyout activity.

Buyers are largely tax-exempt
Buyers in the 40 announced deals were equally split between strategic and private equity, as well as between domestic and foreign. But in terms of tax revenue for the Canadian government, the news was not so balanced: 70% of the purchasers are tax exempt pension/private equity funds or foreign buyers who pay little if any tax in this country.

What structures were buyers using to acquire trusts? In 22 of the 40 transactions, trust units were acquired; in the other 18, the purchaser acquired shares of subsidiary corporations, trusts or partnerships. The method of acquisition has significant implications for the buyer, trustees and unitholders. The entity left “holding the bag” has to bear the cost and risk associated with the wind-up of the engineered trust. A caveat for future purchasers: all parties should consider the implications of a proposed structure when assessing the value and risk of an offer for a trust.

Based on our involvement with over 20 income trust buyout transactions in the past year we believe that the buyout momentum will continue. The current M&A slowdown is primarily driven by “mega” transactions exceeding $1 billion in size. The income trust market, particularly the business trust segment, is comprised of medium-sized companies that are ideal for financial and strategic buyers. Clearly, volatility in the income trust sector is far from over.