The simmering feud between Bay Street and Ottawa over the future of income trusts erupted into a full boil yesterday, after a brokerage firm accused the government of launching a "morally indefensible attack" on millions of investors by meddling with the sector, and questioned whether a consultation process led by the Finance Department would be "just a sham."
Canaccord Capital Corp., one of Canada's largest independent investment dealers, published a research note for its clients yesterday called "Trust Reform Hurts Canadians," and urged them to contact elected officials to voice their concerns. For good measure, the Vancouver-based brokerage included the phone numbers and e-mail addresses of Prime Minister Paul Martin and Finance Minister Ralph Goodale, along with contact information for every MP in the country.
"Bay Street cannot protect your investments on this issue, as it alone does not carry political weight," warned the note, which was signed by seven analysts at the firm. "The intentional or unintentional destruction of the existing trust market does not need to happen. Contact your MP and share your concerns before it's too late."
The income trust sector has lost $23-billion in market value over the past month, ever since Ottawa said it would cease accepting advance tax rulings for income trust hopefuls, and disclosed it was losing $300-million in taxes each year from the popular investment vehicles. The government also launched a process to gather public comments on what changes, if any, it should make to the sector.
The moves cast a chill over the industry, and prompted much private grousing in financial circles, where investment bankers are seeing their favourite cash cow dry up, and advisers are faced with angry clients.
Until yesterday, the tone of Bay Street's public response, particularly from the bank-owned firms, has been decidedly polite.
Canaccord dispensed with that entirely, suggesting politicians don't think voters care about the trust market and challenging the government's math. The recent loss in income trusts' market value, the firm argues, has wiped out billions of dollars in capital gains taxes -- far in excess of any tax leakage.
"The last thing we want to see here is a drawn out 'process' that takes eight years or more (like bank mergers) before the government takes definitive action one way or another," the analysts wrote. "We question whether the consultation process . . . will be balanced, or is it just a sham?"
Chris Rankin, a trust analyst at Canaccord who spearheaded the report, said he decided to take a more direct approach because he feared the process was flawed, and that brokerage research was falling on deaf ears in Ottawa. "The consultation . . . is totally irrelevant. [Finance Department] officials don't have decision-making rights: the politicians do."
A spokesman for the Finance Department reiterated that Ottawa has begun a formal process and welcomes everyone to submit their input. He declined further comment on the Canaccord paper.Canada's big banks do not want to incur Mr. Martin's wrath by quarrelling with him openly, and have opted for a more low-key lobbying approach. Analysts at one bank-owned brokerage have been instructed not to denounce Ottawa's trust review in writing. Instead, they are telling brokers to advise clients to write or call the Finance Minister or their local MP.
Researchers at another firm, RBC Dominion Securities Inc., have also avoided directly criticizing the government in their reports.At the investment adviser level, however, RBC has been more direct. Several advisers have published the Finance Minister's phone number and address in letters to clients discussing the trust debate.
BMO Nesbitt Burns Inc. analyst Gordon Tait publicly challenged Ottawa's tax leakage estimates recently, but sees no benefit in being combative with Ottawa. "I don't think there's any upside to bashing. I think it's important to get facts out there."
© The Globe and Mail
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