Canadian Business Letter to the Editor
Income Trusts: A Time for Fairness and Balance
Dear Mr. Chidley:
I read with interest Jim Sanford’s article “Pop Psychology” in the October 10th issue of Canadian Business, and would like to take this opportunity to help provide a balanced perspective regarding the income trust sector in Canada and the benefits it offers to Canadian investors.
As Mr. Sanford’s article correctly states, income trusts have become a popular investment choice for millions of Canadians. With more than 220 income funds now listed on the Toronto Stock Exchange and total market capitalization of more than $165 billion, income trusts have become the direct investment choice of more than one million Canadians. Another one million Canadians invest income funds indirectly through mutual funds.
What accounts for the growing popularity of income trusts in Canada? In a word, “value.”
With their focus on generating distributable monthly cash flows for their unit holders, income trusts represent an outstanding opportunity for those seeking attractive and steady returns from their investments. These benefits make income trusts particularly attractive vehicles for pensioners and other Canadians seeking to supplement their retirement incomes with regular monthly or quarterly pay-outs from their investments. They also explain why major investor groups, including the Canada Pension Plan and the Ontario Teachers Pension Plan, make major investments in income trusts on behalf of their clients.
It is unfortunate that the current discussion surrounding recent comments made by the federal Minster of Finance, including elements of Mr. Sanford’s article, have created the misperception that the chief advantage of investing in income trusts is the tax advantages they enjoy, and that they somehow represent a “tax dodge.”
This is simply not the case.
Each year, income trusts pay out billions of dollars of taxable income to Canadian investors, from which over $5 billion in taxes is collected by the treasuries of our federal, provincial and territorial governments. Over one million Canadians directly own income trust units, with many choosing to hold their trust investments in their registered retirement savings plans. And as is the case with the other investments in these plans, taxes owing are not eliminated or avoided, but simply and legally deferred until the planholder’s retirement.
Another common, yet erroneous, criticism of income trusts is that, through their focus on income distribution, they severely limit management’s ability to plan for and achieve long-term benefits for their owners, the economy, and the nation as a whole.
Again, the facts speak strongly against the “conventional” wisdom. Let me cite just three of the many examples that disprove that premise.
Canadian Oil Sands Trust is both the largest shareholder of Syncrude and the largest extractor of unconventional oil in the world. In the past three years, Canadian Oil Sands, as an income trust, has invested more than $2.8 billion in the Syncrude project.
Earlier this year, the Boston Pizza Royalty Fund announced that it would open 30 new locations, creating as many as 2,400 jobs over the next fiscal year.
And the Clean Power Income Fund announced that it will invest more than $186 million that will create, in Canada, a state-of-the-art wind energy facility – the Erie Shores Project.
Mr. Sanford’s article quotes “experts” who believe that there is risk involved when investing in income trusts. That’s true. Every financial investment involves the assumption of risk, and income trusts are no exception.
But as publicly-traded securities, income trusts are regulated by all of Canada’s 13 securities commissions, and by law, must comply with Generally Accepted Accounting Principles in the public reporting of their operations. Income trusts are subject to the same rules and regulations that apply to regular share corporations, and should be viewed in that light. Therefore, the same due diligence that should be practiced before investing in a stock or bond, should also be applied when choosing a particular income trust, and the advice of qualified investment professional is recommended.
By offering a unique investment option capable of producing regular and attractive returns for unit-holders, income trusts deliver significant and tangible benefits for millions of Canadian investors. It is our sincere hope that Canadian Business, as the nation’s leading business periodical, will bear that in mind as it pursues an informed, reasoned and balanced treatment of this very important issue.
Sincerely,
George Kesteven, MBA, CFA
President, Canadian Association of Income Funds
c/o PrimeWest Energy
4700, 150–6th Ave. SW
Calgary, AB T2P 3Y7
Direct: 1-403-699-7367
Cell: 1-403-519-3912