Standard & Poor's Corp. is pushing ahead with plans to add income trusts to Canada's benchmark stock index, driven by concerns that delaying the move would only spark further uncertainty in the already jittery trust sector.
The company said yesterday it will add trusts to the S&P/TSX composite index starting in December, holding to its original plan after consulting with some of Canada's largest investment funds and brokerages.
S&P, which administers the country's stock market indexes, sought input this month after some investors began calling for the plan to be shelved until a federal government review of income trusts is completed in late 2005.
Yesterday's announcement was hailed as a victory by the sector, which has been battered in recent weeks as Ottawa mulls changes to the way trusts are taxed.
Mike Cordoba, chief executive officer of the Boston Pizza Income Fund said the S&P decision is a badly needed jolt for trusts in general. Though the restaurant chain is too small to make it onto the composite index, he said the entire sector will benefit.
"It adds credibility to the whole income trust market," Mr. Cordoba said. "It says we're going to move ahead."
Ottawa cast a pall over income trusts last month when the government announced it is freezing advance tax rulings for companies looking to convert into trusts. Though such approvals aren't a requirement for conversions, the move has been interpreted as a sign that more substantial changes could be on the way.
The federal government is concerned it may be losing more than $300-million a year in corporate tax revenue as a growing number of businesses convert. Rather than pay corporate income tax, trusts pass through their profit to investors, who pay tax on an individual basis.
The uncertainty over Ottawa's review caused a sell-off of income trusts in September, shaving $9-billion from the stock market within days.
The S&P announcement provided some optimism yesterday as the trust group gained 2 per cent on the Toronto Stock Exchange. However, the sector is still 4 per cent below last month's peak.
S&P officials said the edginess of the trust market was a primary issue as the company solicited opinions from its 25-member advisory panel and about six other investment dealers who also participated in the consultation.
"We were concerned about further confusion in the market place if we delayed this further," said Steve Rive, vice-president of Canadian Index Services for S&P in Toronto. "There was also an issue about the potential open-endedness of the delay. Because we don't know exactly when there will be a conclusion coming out of Ottawa."
Trusts will be added to the composite index at the end of trading on Dec. 16, starting with a 50-per-cent weighting. They will gain full-representation on the index after markets close on March 17. The staggered introduction will lessen the impact of adding some of Canada's largest trusts to the index, Mr. Rive said.
Some members of the financial community, including Toronto-Dominion Bank, were calling on S&P to delay the introduction of trusts on the composite index, arguing the uncertainty created by the federal review would expose investors to unnecessary risks.
For investors interested only in stocks, a new equity-only composite index will be created that will resemble the present structure without trusts. S&P said there are no plans to add trusts to its S&P/TSX 60 Index.
"It is a vote of confidence. The main composite, really the flagship index, is going to include trusts," said Patrick Kim, vice-president of investments at KBSH Capital Management. "There's really only one index that will be quoted in the papers and on nightly newscasts. Certainly it is a big sign of support [for the trust sector]."
© The Globe and Mail
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