Call it the Calgary Underground. After a month of watching more than $23-billion evaporate from their market value, Canada's income trusts are fighting back. The movement began last week when dozens of trust executives were summoned to a private meeting in the wine cellar of a downtown restaurant in the nation's energy capital.
Speaking to representatives from 33 income trusts, an executive with RBC Dominion Securities Inc. delivered a sober warning to the hastily assembled group. In the battle being waged with Ottawa over the future of the income trust sector, the trusts were losing ground.
Finance Minister Ralph Goodale's decision to freeze advance tax rulings for trust conversions while Ottawa considers how it taxes the industry has left the sector mired in uncertainty. Income trusts, which are wildly popular with investors because they pass their cash flow to unitholders, were now under siege.
The message to the trusts was clear: Backroom lobbying in Ottawa was no longer enough. It was time for trust executives to start speaking out, mobilize their unitholders and generally become a bigger thorn in the federal government's side. The wine cellar meeting was described as a "wake-up call" by one executive in attendance who asked not to be identified.
"There was roughly $80-billion worth of market capitalization in the room," said John Dielwart, chief executive officer of ARC Energy Trust, who also attended. "Many of us have been silent. I think that is going to change."
Ottawa has said trusts cost the government $300-million in lost revenue last year. And since trusts don't reinvest their cash flow in the company, the Finance Department is worried that productivity and innovation are also at risk as their numbers grow.
As third-quarter earnings are reported to investors, executives plan to wage their war on three fronts: many are lobbying Ottawa privately, most plan to mobilize their unitholders to contact MPs directly and several others are stepping forward with pointed advice on how to deal with the situation.
"In a number of cases, we'll want to speak directly with members of Parliament in various ridings in which we do business," said Paul Hollands, CEO of A&W Revenue Royalties Income Fund, which has restaurants across the country and wants corporate dividend taxes to be lowered.
"There's lots of damn good Canadian companies that can provide income to their investors," Mr. Hollands said. "And people need to supplement their income, particularly around retirement."
The united front comes after one of Canada's biggest trusts, Yellow Pages Income Fund, stepped out recently and publicly chastised Ottawa for its handling of the trust review. And last week, Bay Street got involved when Canaccord Capital Inc., one of Canada's largest independent investment dealers, sent out e-mail addresses and phone numbers for all federal MPs, urging unitholders to complain to Ottawa.
In Calgary, the 33 trust representatives in attendance decided also to target unitholders, asking them to tell Ottawa that distributions are an important cog in the retirement plans of many Canadians.
"I don't care who they are, I don't think they're stuffing it into mattresses. They're redeploying it, whether they're paying for their daily needs or they're making other investment decisions. That is fundamentally a good thing," said Gordon Kerr, CEO of Enerplus Resources Fund. "We plan to make that visible, through quarterly reports, direct contact through unitholders, to make the powers that be aware."
Outspoken oil patch CEO Don Gray, head of Peyto Energy Trust, said he has little faith in the government's review. Though Ottawa has said it wants to consult with the trusts about whether changes to the taxation rules are necessary, he said the Finance Department hasn't been forthcoming about the hundreds of millions of personal income tax dollars it is collecting on distributions that wouldn't exist otherwise.
"It's not a consultation at all. I'm an engineer, you give me the data, I'm happy to look at it, I'm happy to work through it and see what the real issues are," Mr. Gray said. "Show me one shred of evidence that they've given the industry something to work with."
Some trusts are warning they could leave the Canadian marketplace in the event of damaging government action. Executives at Connors Bros. Income Fund, are consulting with legal advisers and investment bankers to consider their options.
"If they start to tax the income trusts, I think a lot of them would look at a different form of legal structure," chief executive officer Christopher Lischewski said. "We'd take ourselves private, we'd merge back in a different way or we'd go on a different exchange that gave us a better valuation."
If the company went private or restructured as a U.S.-listed equity, Ottawa would lose the revenue it currently gets from taxing its unitholders, Mr. Lischewski said.
The situation is starting to affect the way some trusts operate. Small oil and gas driller High Arctic Energy Services Inc. fears uncertainty in the market will make it difficult to raise money.
The company is now urging unitholders in its third-quarter results mail-outs to contact the federal government and make those concerns heard. "We've already started on our mailing list. We're going to attach the address of every MP in Canada," High Arctic CEO Jed Wood said.
The Canadian Association of Income Funds said Ottawa's review has brought the sector together. Membership in the lobby group has jumped 30 per cent in the past month. "This has been a galvanizing force," said George Kesteven, president of CAIF. "If a group of individuals feel like they're being threatened they tend to band together and defend one another."
ARC Energy's Mr. Dielwart adds, "I can't imagine there's a more significant issue on any CEO's desk than this one."
Tough talk on trusts
After watching more than $23-billion worth of market value evaporate over the past month, income trust executives are sounding off. With Ottawa reviewing how it taxes the sector, several trust CEOs have stepped forward with some advice on how to solve the federal government's trust conundrum.
Hands off the income trusts.
If change is needed, lower
the corporate dividend tax.
Politicians in Canada aren't answerable to anybody. They honestly believe that this is their money, not our money, not the people that created the wealth. . . . If this was truly a consultation process, they would open their books and lay all the numbers on the table.'
DON GRAY
Peyto Energy Trust
Act now. Ongoing uncertainty is the biggest risk to the market.
I learned a long time ago that no matter what individuals in the sector think, government is going to do what government will do... No matter what they want to do, they should clarify their position and let the dust settle where it may. Then people can get on with their lives.'
REBECCA MacDONALD
Energy Savings Income Fund
If the dividend tax was lower, investors wouldn't need trusts for higher distributions.
Forget what it means for anyone else in the trust sector, these are largely retail investors who are seeking income to bolster their retirement savings. And they're not wealthy, rich people. They're looking for this income at a time of very low interest rates. The extent to which this has hurt those kinds of people is really a bad thing.'
PAUL HOLLANDS
A&W Revenue Royalties Inc. Fund
The tax concerns are a red herring. Trust payouts spur investment elsewhere.
The fact that we're going through this process is good... But I'd like to think that it would be taken out of the political realm and back to an arena of logic and economics. We've got an aging population in this country who have been encouraged to save for their retirement and they're benefiting from these trust structures.'
GORDON KERR
Enerplus Resources Fund
Tread carefully. A hasty response could leave everyone in a worse situation.
The whole tax edifice, it's a bit like a bowl of Jell-O. You poke it in one spot, it quivers somewhere else. So when you start making material changes to trust taxation it gets pretty complicated.'
ED SONSHINE
RioCan Real Estate Inv. Trust
Be happy with the taxes you're getting. Forcing change could imperil the sector.
The government presumption that they're losing money is ridiculous. If they change the tax structure, a lot of the income is going away. It's going back to the U.S. or another market. It's not going to be taxable by the Canadian authorities.'
CHRISTOPHER LISCHEWSKI
Connors Bros. Income Fund
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