The racing third-quarter initial public offering market hit the brakes in October after a warning from Ottawa that it would cease issuing advance tax rulings on income trusts, according to a survey released today by PricewaterhouseCoopers.

Ottawa’s actions have created a serious conundrum for the markets which must be resolved, according to the national leader for PwC’s IPO and income trust services, Ross Sinclair.

The PwC survey of IPO activity on the Toronto Stock Exchanbe and TSX Venture Exchanges for the first three quarters of the year reveals that IPOs by the end of September were within $700 million of the value for the entire year in 2004.

Eighty-six IPOs came to market between Jan. 1 and Sept. 30, 2005, for a value of $5.3 billion. Of these, 37 were income trusts worth $4.3 billion, more than 80% of the total market value.

The third quarter of 2005 was particularly active, with 17 new income trusts reaching the market with a value of $2.4 billion. In comparison, there were six new income trusts in the same period of 2004, with a value of $554.6 million.

However almost all IPO activity stalled in October following the federal government’s announcement. “A number of trust offerings that might have closed in October have been deferred,” said Sinclair in a release.

“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.”

The situation is not beneficial, Sinclair said. “It would be particularly counter-productive if the prevailing uncertainty remained over the markets until after the next federal election expected early in 2006,” Sinclair added.

The federal government estimates it lost about $300 million because income trusts don’t pay corporate taxes. “But that $300 million figure is highly subjective,” Sinclair noted. “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.”


PwC is preparing a response to Ottawa’s white paper on the tax implications of income trusts. It will be submitted to the federal government before the end of the year.

The sudden chill on activity in the capital markets comes during one of the busiest years in the market in recent history. PwC had predicted a vibrant IPO market in 2005 in the firm’s six-month IPO market survey released this year on July 5. “Not only was there a larger volume of deals,” Sinclair said, “but the number of $100 million-plus deals was much higher in the third quarter than before.”