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ELIZABETH CHURCH AND ANDREW WILLIS

Thursday, December 01, 2005

TORONTO -- Canada's income trust industry should brace for challenges to its tax-efficient status, a panel of prominent real estate investors warned yesterday.

Ottawa's decision last week not to impose a tax on income trusts did not end the debate on the issue, only postponed it, they told a real estate conference in Toronto.

"Are we safe? The answer is no," said Ira Gluskin, president of Gluskin Sheff & Associates Inc., a major investor in the trust sector. "There are civil servants who stay up at night worrying about income trusts. There are a lot of radical politicians around."

All it will take is a wave of trust conversions to put the tax treatment of the sector front and centre once more, he said.

Robert Bertram, head of investment at the powerful Ontario Teachers Pension Plan, agreed. "They have not fixed the tax system," he told the audience at the annual Real Estate Forum. "They will have to come back to this in the future."

Ottawa's decision last week to increase the dividend tax credit has not entirely levelled the playing field, Mr. Bertram said. The dividend tax credit provides no benefit to Canadian pension funds, for example, so they will continue to have an incentive to own trusts over traditional companies.

Teachers, an early investor in the trust industry, played a key role in Ottawa's decision not to tinker with the current tax treatment on trusts.

Finance Department officials have been concerned for several years with the trust sector's explosive growth and pushed for a broad-based policy on the sector, but found little political support for intervention until this year. Given the criticism heaped on Finance Minister Ralph Goodale over the way the file was handled, sources in Ottawa say the government is glad to have the issue behind it.

"This became a political hot-potato for MPs, with letter-writing campaigns equivalent to those on same-sex marriage," said one executive familiar with what played out in Ottawa. "Liberal MPs who mostly don't know anything about trusts just want this to go away."

For its part, Ottawa is quietly telling those involved in the trusts -- company executives, money managers and investment bankers -- that the Finance Department now considers this file closed, and will only revisit the issue if there is outside pressure to do so. One Bay Street source with strong Liberal ties said even if there were more corporate conversions to the trust structure, it would take public pleas from investors and CEOs to get Ottawa involved.

"The interesting question is how the [New Democratic Party] views trusts, in a post-election world in which the NDP is able to exert influence on a minority government," said one income trust expert.

Ottawa's current message that the case is closed has not convinced money managers.

Oscar Belaiche, portfolio manager at Dynamic Mutual Funds, said the trust debate has made the industry far more sensitive to the landscape in Ottawa. "It definitely woke me up politically," he said.

Ritson Ferguson, who heads investment in public companies for ING Clarion Real Estate Services, said in an interview after the panel there is still a lingering "regulatory discount" in the market for Canadian Real Estate Investment Trusts because of the uncertainty about Ottawa's future actions.

He said that discount could remain as long as there is even the suggestion that the government may revisit the issue.

"Markets abhor uncertainty," he said.

© The Globe and Mail