High-yield/macroeconomics (fka YIELD)

[rfj1862]

Liberals float lifting moratorium on trusts

Nice!

STEVEN CHASE and NORVAL SCOTT
September 5, 2007
http://www.theglobeandmail.com/servlet/story/LAC.20070905.RLIBERALS05/TPStory/?query=income+trusts
OTTAWA and CALGARY – Stéphane Dion's federal Liberals say they're willing to scrap a moratorium on the creation of new income trusts if they win office - but perhaps only for a limited number of sectors including the oil patch.

In a new development yesterday, Mr. Dion's party floated two proposals in Calgary meetings with energy sector representatives and tax experts.

Liberal finance critic John McCallum and Opposition House Leader Ralph Goodale said the party will consider allowing a select number of sectors - such as the oil patch - to continue to form new trusts.

Alternatively, they said, they're considering allowing broad-based use of the trust structure by all sectors but with restrictions to prevent initiatives solely designed to dodge taxes.

The Liberals have already promised to repeal the 31.5-per-cent tax the Conservative Harper government slapped on trusts last Halloween and replace it with a 10-per-cent levy refundable for all domestic investors but not foreigners.

The Liberals had previously pledged to maintain what amounts to a ban on new trust formations for an indefinite period.

Mr. McCallum said the party thinks the trust structure, derided by the Harper government as bad for the economy, has merit and should be allowed to exist - at least for some sectors.

"The question is under what conditions and in what sectors would we allow the creation of new income trusts," Mr. McCallum said.

He said a good argument can be made that energy trusts have as much right to exist as real estate investment trusts, which were effectively exempted from the October, 2006, Tory trust tax.

"They are both passive distributions of income. That ... [was] the traditional trust vehicle before they started spreading elsewhere in the economy," he said.

Mr. McCallum said the Liberals are also considering banning certain sectors from forming trusts, such as federally regulated industries, including banks, telephone companies, railways and airlines.

"I don't think we want our major chartered banks to become income trusts," he said.

The Liberals emphasized that they haven't cemented any position yet and will consult across Canada before rewriting their trust policy.

The Opposition Liberals are now tied in the polls with the governing Conservatives. The minority Harper government could fall if the Bloc Québécois withdraws its backing.

Federal Finance Minister Jim Flaherty's office dismissed the Liberal announcement, saying the party could not be trusted to handle the file effectively, in part because income trust formations ballooned under their watch.

"They were there for a long time and all they did was mismanage the issue," Flaherty spokesman Chisholm Pothier said of the Liberals.

Income trust officials applauded the fact the Liberals are talking about a survival scenario for trusts but registered concern about Ottawa picking winners and losers among sectors.
John Dielwart, chief executive officer of ARC Energy Trust, said the industry appreciated the opportunity to have "constructive dialogue" with the Liberals, saying trust officials consulted yesterday indicated "unanimous support for the 10-per-cent [tax] solution as a good first step, provided there is the avenue for sector-by-sector discretion on what does and doesn't make sense."
Asked about the Liberal proposals to selectively allow the formation of new trusts, Mr. Dielwart said, "It's not the government's job to pick winners and losers, that's for the capital markets to decide. If the wrong businesses are in the sector, then the marketplace will resolve that."

George Kesteven, president of the Canadian Association of Income Funds, said the Liberals are likely embracing trusts because they're highly favoured by seniors and investors saving for retirement. "They're probably looking at the same demographics we have ... an aging population looking for an income stream, looking for an investment vehicle," Mr. Kesteven said.

"Canada doesn't have a junk bond market like they do in the U.S., so there's no high-yield options" available to seniors who rely on an income stream, Mr. Kesteven said.

"We like the direction because it allows the industry to survive."