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U.S. firms put off by trust review: experts

NEW YORK -- The Liberal government's review of the income trust sector has put a serious chill on a growing cross-border securities market that has lured U.S. companies to the Toronto Stock Exchange.

One Canadian lawyer who advises on cross-border financings said yesterday he knows of several companies that were considering issuing income participation securities but have put those plans on hold pending a decision from Ottawa.

And the chief financial officer of a TSX-listed American company said he would not recommend the Canadian market to other U.S. companies looking at potential financings after his company's unit price slumped following Ottawa's intervention.

Royster-Clark Ltd., which went public in July, is now the target of an unsolicited, $325-million bid for its income deposit securities from Calgary-based Agrium Inc.

The company's chief financial officer, Paul Murphy, had no comment on the offer itself yesterday, other than to say it was being studied by the board, which will respond in due course. But he said the government's "jawboning" of the income trust market contributed to a slide in the value of the company's income distribution securities, making it more attractive as a takeover target.

"If anybody else is considering doing what we did, and they see the way it has gone for us and some other companies, it would not be positive, that's for sure," Mr. Murphy said in an interview.

Though the U.S. companies do not use the trust mechanism for their cross-border deals, they offer investors similar financial and tax benefits, and have seen their market value erode just as rapidly as the Canadian income trusts.

Chris Murray, a partner with Osler Hoskin & Harcourt LLP, said the federal rule changes should not dramatically affect the U.S. companies, who operate outside the trust structure favoured by domestic firms. Still, Mr. Murray said he expects potential U.S. issuers are taking a wait-and-see attitude. Jeffrey Singer, a partner at Stikeman Elliott LLP and income fund expert, said he is aware of several U.S. companies that were considering launching an initial public offering of income-participation securities in Toronto, but have backed off.

"U.S. businesses view the opportunity cautiously," Mr. Singer said.

"Given some of the statements in the [Finance Canada] consultation, it is not possible for me to advise a prospective U.S. issuer with certainty that Finance will not change our tax regime in a manner adverse to income security issuers."

Federal Finance Minister Ralph Goodale has complained the flow-through structure creates tax "leakage" because the income is not taxed at the corporation but only in the hands of the investor.

Michael Salter, CFO with Medical Facilities Corp., which owns four U.S. specialty hospitals and is domiciled in Canada through income-participating securities, said the Liberal government is damaging a lucrative financial instrument that has attracted capital to the Canadian marketplace.

He said Canadian investors are benefiting from a stream of income that would otherwise not be available to them, while the Toronto financial sector has a unique opportunity to build its business.

© The Globe and Mail

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