Ralph Goodale just made a handful of gutsy money mangers a whole lot of money, at the expense of the ordinary investor.
Last night saw the federal Finance Minister take the Street's advice on trusts. There's no new levies on the sector. Instead, there's a hike in the dividend tax credit on common shares. Double taxation of corporate dividends is history, and the playing field is now level between traditional companies and trusts.
Finance Department surgeons have ended up in a good place. But this whole operation has been a nightmare.
By creating all sorts of doubt in a market that must always price in the worst-case scenario, Ottawa whipsawed the million-odd Canadians who hold income funds. Most of these people are older, affluent investors. To the extent they sold in the face of uncertainty, they took a pasting. The winners in this ugly process were market pros who never lost their heads, and had access to the best thinking on the sector.
Think back to where we were in September. Rather than change government policy in one clean move, in the annual budget, the Finance Minister launched a consultation process that was widely expected to result in a cold bath of new taxes cooling off a red-hot sector. Canada's 231 trusts, worth $164-billion, went into freefall after a review began on Sept. 16.
Sure, there was always the chance the Finance Department would do the sensible thing. It was possible that Ottawa would lower corporate levies or boost the credit on dividends to level the playing field between trusts and traditional corporations. But investors couldn't rationally pin their faith on the possibility of a tax cut by a big-spending minority Liberal government that is being propped up by the NDP.
So the trusts swooned. And they did more than just fall in price. Behind the scenes, there was a massive transfer in ownership. Spooked retail investors sold. The institutional crowd swallowed hard and stepped up.
Take Yellow Pages Group, for example. Following Mr. Goodale's move, the largest business trust hit an air pocket that took it down 8.3 per cent.
Analyst Andrea Horan at Genuity Capital Markets pumped out a report this month that explained that, even in a worse-case scenario, with Ottawa imposing new taxes left and right, the phone directories business had access to tax shelters that would keep cash distributions at current levels, or better, for at least two years. She put a "buy" recommendation on the stock. Retail investors never see this research. Institutions started eating with both hands.
Two million units of Yellow Pages traded hands on several occasions in the past two months -- twice the normal volume. That buying and selling represented small shareholders exiting, and the pros filling their boots at a discounted price.
Then, yesterday, Mr. Goodale surprised us all by producing policy on the fly. The Liberals are gambling that by resolving the trust debate, they defuse an explosive election issue.
The Liberals will have to wait until the writ is dropped to see how their strategy works out. The market pros are going to record their win today, when trusts and stocks that pay dividends jump in price in response to yesterday's move.
There were certainly investors who never lost faith. Jim Leech, senior vice-president of income of the Ontario Teachers Pension Plan, took every opportunity to expound on the merits of trusts. His fund holds $2.5-billion worth of them.
Sandy McIntyre at Sentry Select Capital flew up to Ottawa to pound the drum for a fair tax system, rather than new levies on trusts. And he ate his own cooking, adding trusts to his portfolios when the market dipped.
Then there's John Priestman. He put "Hang In There" on the first slide he rolled out last week at a presentation from Guardian Capital. As Guardian's managing director, Mr. Priestman oversees about $3-billion in trust-focused funds. He called the uncertainty around taxation "the last hurdle" that the sector had to clear. Mr. Priestman's rather lonely mantra was: "Valuations may already be reflecting a worst-case scenario."
The pros that kept faith in trusts have much to thank Mr. Goodale for, and maybe they will back the Liberals. Those investors forced to make decisions in the face of uncertainty, those who sold their trusts, can only lick their wounds and wait for the opportunity to express their view in the voting booth.
© The Globe and Mail
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