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Income trusts fight on; government digs in Minister draws flack for suggesting oil, gas trusts are ‘moving on’; reiterates tax proposal won’t change; trusts argue for exemption Gary Park For Petroleum News
Readers of Canada’s income trust sector are embarked on what analysts think is “Mission Impossible” in pressing the federal government to exempt existing trusts from its planned tax changes — indefinitely.
One of the most respected cabinet ministers virtually told them to accept the inevitable.
Indian and Northern Affairs Minister Jim Prentice told a Calgary business audience Nov. 17 that the government has no intention of backtracking from its plan to put trusts on the same tax footing as the rest of Canada’s corporate world.
Meeting some of the government’s most bitter critics head on, he said that even the trust sector is “moving on to issues surrounding implementation, to the question of the transition period over four years, to how that’s going to be implemented and what the consequences are.”
Prentice then offered one of the government’s boldest assessments in the three weeks since its bombshell announcement.
“The oil and gas sector is moving forward. That’s what we anticipated,” he said.
Most trust executives take exception Although few trust executives attended the speech to the Calgary Chamber of Commerce, one of the most outspoken took issue with Prentice.
Sue Riddell Rose, chief executive officer of Paramount Trust, said Prentice’s claim that oil and gas trusts are ready to move on is “extremely inaccurate. … It’s the farthest thing from the truth.”
She said the entire energy trust sector, through the Coalition of Canadian Energy Trusts, is “very engaged” in an effort to have the government make a concession to companies that are generating jobs and income from mature oil and gas fields.
She said the coalition has met with several Members of Parliament.
“We still think we can provide some alternative solutions that will be mutually acceptable,” Riddell Rose said.
John Dielwart, chief executive officer of ARC Energy Trust, said the industry feels “as strongly today as the moment of the announcement — that it was an ill-conceived, ill-advised decision.”
George Kesteven, president of the Canadian Association of Income Trusts, the umbrella group for trusts from all sectors, said he will make a case for exemptions for existing trusts when it meets with the Department of Finance Nov. 28.
He said the government, in its concern to stem the loss of tax revenues, overlooked how its changes would hurt existing trusts and restrict their contributions to the economy.
In addition, Kesteven said the provisions would also cut off access to capital for small- and medium-sized trusts, without which they would stagnate.
But Jill MacRae, a fund manager at J. Zechner Associates, said the association’s argument would defeat “the whole reason for the new tax legislation.”
Prentice: rate of conversions to trusts ‘corrosive’ Prentice said that the rate of conversions by corporations to trust ranks “had become corrosive; it was becoming obvious both within and outside the government that this accelerating trend across all sectors of the economy just wasn’t fair to Canadian taxpayers,” who were having to pick up the lost revenues to continue funding health care, education and infrastructure programs.
“These changes to the taxation of income trusts have been made; they have received initial approval in the House of Commons and they will not change,” he said.
The only appeasement offered by Prentice was his suggestion that a new tax strategy promised by Finance Minister Jim Flaherty could enable the government to lower corporate and personal income taxes.
Flaherty, who was in Australia for a meeting of the world’s 20 leading finance ministers and central bankers, said the new trust guidelines covering how trusts will operate until they are hit with full corporate taxes in 2011 will be released within a few weeks.
He said claims that trusts are fearful they will no longer be able to finance acquisitions are “speculative.”
Concerns over equity base increases Federal officials have already raised concerns by suggesting that under the new rules trusts would not be able to increase their equity base by more than 15 percent, a ruling that would force many trusts wanting to raise cash for a deal to join the corporate structure long-before 2011.
Among those who would be affected is Pengrowth Energy Trust which was planning to buy assets from ConocoPhillips that would have required it to issue units equaling about 18 percent of its market value.
Also in trouble would be Shiningbank Energy Income Fund, which planned to buy most of the assets from Rider Resources in a share swap that would increase Shiningbank’s units by about 27 percent.
A limit on their financing ability would hit the oil patch hardest.
Chief Executive Officer Mike Heier of Trinidad Energy Services Income Trust, a drilling company, said such a restriction would prevent his trust from continuing to grow through acquisition, forcing it “to unwind” because the status quo would not be an option.
An added worry for energy trusts is the potential loss of their most skilled employees who fear there is little or no future in the trust sector.
Dielwart has told his own staff that ARC is not going to disappear, but conceded he fully expects his best staff will get calls from headhunters.
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