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Income trusts under fire from all sides
Gary Park For Petroleum News
Compounding the blows they have already taken from their own government, Canadian income trusts are facing an upper cut from Washington.
Proposed changes to U.S. tax laws could more than double what Americans pay on distributions from Canadian trusts — currently 15 percent, which is on roughly the same level as taxes paid on dividends from U.S. corporation, and headed as high as 35 percent under a bill filed by Congressman Richard E. Neal, a Democrat from Massachusetts.
Neal’s plan would remove the existing special tax treatment on dividends from certain foreign entities such as income trusts and real estate investment trusts.
Stephen Ruby, a senior tax partner at the Canadian law firm of Davies Ward Phillips & Vineberg told the Financial Post that if the bill becomes law “there would be a disincentive for U.S. investors to purchase units in Canadian trusts” and similar funds.
John Dielwart, chief executive officer of ARC Energy Trust and a spokesman for the Coalition of Canadian Energy Trusts, said the sector’s hope is that Neale’s bill will end up on the scrap heap.
If not, oil and gas trusts could find themselves in great jeopardy, having attracted strong interest from foreign investors over the years, notably from the U.S.
Foreigners own about 42% of royalty trust market Currently, foreigners own about 42 percent of the royalty trust market, but any attempt by Washington to recoup lost tax revenue could see that go into a tailspin at a time when the sector is anxiously awaiting word on how changes to the Canadian trust structure will be implemented.
In the meantime, oil and gas trusts are reeling from the October 2006 announcement by Finance Minister Jim Flaherty that trusts would lose their preferred tax status by 2010, a move that has seen those trusts lose 15 percent of their combined market capitalization from about C$100 billion prior to Flaherty’s so-called Halloween Mugging.
Since the bombshell was dropped, there have been 12 income-trust deals from all sectors worth a total enterprise value of C$7.3 billion, according to Canaccord Adams.
What is worrying Canadian business leaders is that nine of the 12 will see trusts end up in the hands of foreign private-equity shops, foreign corporations, Canadian private equity or Canadian pension funds, none of whom pay taxes in Canada.
Concern U.S. raiders will pick off trusts One respondent to a Financial Post-COMPAS poll suggested many more U.S.-based corporate raiders will pick off trusts and their underlying business “while market prices are at fire sale levels due to the Halloween 2006 broadside from the federal government.”
However, 53 percent of those polled believed trusts posed a threat to economic growth because they were obliged to distribute, rather than invest their earnings.
But the anger remains palpable, especially in Prime Minister Stephen Harper’s home turf in Calgary.
Hundreds of supporters of the governing Conservative party provided an earful at a four-hour long public meeting on April 14 for Jason Kenney, a member of the federal cabinet, who was attacked on several fronts.
Andrew Wiswell, chief executive officer of NAL Resources, conceded the government was under pressure to make trust reforms, but it was the way the Harper administration broke its promise not to change the tax status of trusts that has offended loyal voters, he said.
The energy trust coalition is continuing to wage a campaign through newspaper ads across Canada to delay the proposed transition period to 10 years from four years.
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