Wednesday, January 6, 2010

More BS in the Globe today about income trusts


Louis:

Yes indeed, half truths in today’s Globe and Mail about income trusts in the piece by Lou Shizas (pictured above) entitled “Wave of trust conversions coming this year”. Half-truths is being most kind on your part.

The eminent Mr. Schizas also reveals in his piece that he completely fails to understand the concept of “tax arbitrage”.

If the eminent Mr. Schizas understood the meaning of tax arbitrage, or had any inkling of what the income trust tax is really all about, then his statement of “Pension funds and private equity funds are seen as the likely bidders as they chase yield or mispriced assets.” would have read “Pension funds and private equity funds are seen as the likely bidders as they are exempt from the 31.5% tax and can exploit the tax arbitrage handed to them by the Harper government and purchase assets that are properly priced in the hands of RRSPs (who incur the 31.5% tax) but which are intrinsically worth a ton more in the hands of pension funds and private equity (who can easily evade the 31.5% tax through various means not available to retail investors.)

His prediction hardly qualifies as a prediction, since the pension funds and private equity firms have been exploiting this tax arbitrage loophole, since the very outset of this income trust tax starting with the Public Sector Pension Fund who bought the massively devalued Thunder Energy Trust back in early 2007. Why? Because Harper and Flaherty saw to it that civil servants whose pensions are managed by PSP are exempt from Flaherty’s 31.5% tax, whereas average Canadian taxpayers in their RRSPs are not.

As such, the eminent Mr Schizas might be wise to read the piece on this very matter of an unlevel investor playing field published by Deloitte in April 2008 entitled: “Income trust buyouts: Lots of activity, little tax revenue” Please tell him to Google it so that he understands the negative ramifications of this absurd tax policy to ALL Canadians taxpayers, which is the loss of billions in annual tax revenue to all taxpayers to solve an alleged $500 million tax leakage problem that never existed in the first place. Something else that the eminent Mr. Schizas fails to point out in his article of half truths.

Is the eminent Mr Schizas really this dumb and ill-informed about the basic facts or is his intention to deliberately mislead the readers of the Globe and Mail?

Please advise.

Once again the Globe and Mail is completely out to lunch on this topic.

Interesting to see that the income trust tag team of Eric Reguly, Andy Willis and Derek DeCloet are getting back-up from people like the eminent Mr. Schizas, as their reputation as knowledgeable journalists is in tatters. Not sure whether Lou is going to be of much help, however?


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



Income Trusts: Wave of trust conversions coming this year

Income trusts will have to make some hard decisions this year as the clock ticks down on the income trust tax deadline imposed by Finance Minister Jim Flaherty on Oct. 31,

An era in Canada is nearing an end as the trust tax deadline looms

Lou Schizas
Globe and Mail
January 5, 2010

The income trust era in Canada is nearing an end as the Jan. 1, 2011, deadline that will eliminate tax advantages enjoyed by trusts approaches.

There are three choices that every trust will have to contend with in light of the higher taxes that will be imposed on them after the deadline: convert to a corporation, conclude a sale or merger, or, finally, remain as a trust.

The most likely outcome for the majority of trusts listed on the Toronto Stock Exchange will be a conversion to a corporation.

The process is estimated to take between four to six months and could cost anywhere from several hundred thousand to a couple of million dollars.

Conversion to a corporation will mean the amount of cash available for distribution to shareholders as dividends will be reduced because of the tax paid on corporate income. Some trusts may opt to maintain a high dividend when they convert, but they will have to figure out how to pay for it.

When you look the conversions that have already transpired, investors largely reacted to a reduced level of income by selling the units. Trusts were originally formed to create a high-yield instrument in the face of a low-interest-rate environment. Without the higher payout, the incentive to hold the instruments dissipated for many investors.

Finding a dance partner at the mergers and acquisitions ball is entirely possible ahead of the 2011 deadline.

Many trusts have been working the circuit, letting would-be suitors know that they have room on their dance cards and would be interested in an offer to trip the light fantastic.

Pension funds and private equity funds are seen as the likely bidders as they chase yield or mispriced assets.

The prospects of high income and takeovers have enticed some fund managers to get in on the hunt. In December, 2009, O'Leary Fund Management reported closing an initial public offering for a new fund. More than $110-million was raised for the O'Leary Canadian Equity Income fund, which will look for opportunities as the sun sets on the trust sector.

Brompton Funds Management also reported last month it will be going to market early this year to raise funds to get in on the action. Clearly the game is afoot.

The last option of remaining a trust under the higher tax regime may make sense for those with accumulated tax losses that will keep them tax exempt for a period of time.

But even those trusts will face a decision at some time in the future. Trusts can defer conversion to a corporation until the end of December, 2012, and still get the tax-deferred rollover of the assets. After that, however, it's time to pay the taxman.

The new instruments that may replace income trusts for Canadian investors include convertible debentures and high-yield bonds. Issuers will have to determine investor appetite for these securities in the face of what is anticipated to be a rising interest rate environment in the second half of 2010.

How each trust proceeds through 2010 will require strategic planning and efficient execution of the plan to optimize investor value.

For investors with trust holdings, it is time to determine which of the three possible outcomes is most likely and to take appropriate action.

Special to The Globe and Mail

9 comments:

Dr Mike said...

Flaherty made sure everyone was on-side but the small investor--his bribes to everyone else left us holding the bag.

Pension funds kicked-up the biggest stink when the trust tax was first proposed & they needed to be brought on-side , so the exemption.

He states that even tho these funds act as a flow thru entity like trusts , he can wait for his money as it will eventually be paid out in pensions & subsequently taxed.

Duh , sounds like an RRSP doesn`t it , the very thing he said he could not wait to tax.

The worst thing is that the small investor has been lost in the shuffle like yesterday`s trash & it is the small investor who could not afford the loss.

Boggles my mind.

Dr Mike.

Anonymous said...

I 'm Back,

Brent do you have this overweight buffoon's email?

Where was this guy when the decision was made and where is the tax leakage claim.

I have to press this Walrus

jc

CAITI said...

jc:

Overweight buffoon is right. In fancy candy-ass suspenders no less! Guy's dressed like that are as far removed from the real action on Bay Street as it gets. Matching ties and suspenders are always a tell tale indicator of some wannabe loser.

He has something called Schiza’s Mail Bag?

Perhaps he meant Schiza’s Scum Bag:

lschizas@globeandmail.com.

Anonymous said...

"Pension funds and private equity funds are seen as the likely bidders as they chase yield or mispriced assets."

Should have added, "and evade paying any taxes!"

What a crock of crap!!!

Who is this Louis character ? Another G&M 'part-time' wannabee journalist?

He should get his facts straight before spouting half-truths and further polluting the Globe's already tarnished reputation for providing unbiased knowledgeable news reports...

From his appearance (picture), he looks like he could/should belong to a Swiss yodelling team!
'yodel-hey-hee-hoo'!

Fransman

Anonymous said...

Wow ... yikes on this guy's mis-information.

Simply reinforces why I come to this forum for actual financial news. Only transparent place to see, discuss and analyze all sides of the Trust Unit issue. Thankfully a number of other market related things too.

Anonymous said...

Brent,
Thank you for this post, and the ever constant reminder that the income trust tax is arbitrary and malicious to a visible majority of Canadians who are not in defined benefit pension plans.

Arbitrary? Yes; REITs have been exempted for the un-intelligible reason of being "passive".

Malicious? Well you'vee said lots about that so I'll sign-off here.

Louis

CAITI said...

The skinny on not so skinny:

Lou Schizas grew up in Flushing, Queens and bought his first stock at the age of eleven and started his first business at the age of fifteen. After heading west to find adventure, Lou settled in Calgary, Alberta, where he held ‘real jobs’ in the construction industry, and owned and managed Calgary’s first comedy club. Lou then entered the finance field, and worked for many years as a financial advisor and wrote a personal financial column for the Calgary Sun.

Lou is especially inspired by his work as a Professor of Finance at Sheridan College Institute of Technology and Advanced Learning in Oakville, Ontario.

Anonymous said...

Don't forget that this in a world where the Federal Finance Minister is an ambulance chaser from Whitby and the pinnacle of the private sector career of Ontario's Finance Minister was being the administrator of a rehab clinic in London.

By comparison this guy Schizas is genius level!

Neville

CAITI said...

Neville:

Sheridan College is right up there with the London School of Finance, isn't it?

I do know that The London School of Finance has a lot of former comedy club managers on their teaching staff teaching things like derivatives and credit default swaps.

Brent