Canada’s market for income trusts will be essentially non-existent by the time the Conservative government’s tax on trusts is implemented in 2011, Torys partner James Scarlett said at CIBC World Markets’ income fund conference on Tuesday.
In a panel discussion on developments and evolutions within the income trust market, Scarlett said the trust structure has become largely unattractive to managers in today’s market. He predicts that most existing trusts will either convert to publicly held corporations, which would draw an entirely new base of investors, or will go private.
He said under the trust structure, many managers are unhappy with their lack of access to capital and the fact that they cannot keep cash to grow their businesses. When the new tax kicks in, he said trusts won’t likely have any remaining incentive to maintain their structure.
“Going forward, I personally believe that by the end of 2011, unless something changes dramatically, we’re not going to see a lot of equity trusts in the market,” Scarlett said.
Rebecca MacDonald, executive chair and co-CEO of the Energy Savings Income Fund, argued that the trust was an incredibly appealing structure from her perspective, until the government’s move to implement the new tax.
“As management of a trust, we love the structure,” she said.
Trusts were a particularly appealing source of income to the huge number of Canadians who are preparing for retirement, MacDonald noted. “For investors that are looking for a yield…the income trust was a great vehicle,” she said.
Michael Simpson, vice-president and senior portfolio manager at Sentry Select Capital Corp. agreed that Canada’s aging population needs investments that will provide distributions and dividends.
Before determining whether to convert Energy Savings Income Fund into an alternate structure, MacDonald said the management team would wait to see what happens in the next few years, though she said it’s unlikely that it will remain a trust in the long run. If markets remain as they are, she said it seems illogical to remain a public company, and the trust would likely go private.
“Ultimately, we will do what is the best for the shareholder,” she said, noting that she will aim to maintain the same cash payout to unitholders.
On the topic of the evolution of new, alternative structures, the panelists said the current government is unlikely to allow any type of tax-free structure that resembles the trust.
“In Ottawa, this has always been a political issue,” said Scarlett. “We won’t get anywhere changing or getting comfort out of Ottawa unless there’s some kind of political dynamic or courage.”
Equity trusts to disappear by 2011: panel
Most existing trusts will either convert to publicly held corporations or will go private
- By: Megan Harman
- October 8, 2008 October 8, 2008
- 07:45