Broken Trust - The Story of the Halloween massacre six years ago

Unhappy income trust investors gather on Parliament Hill to protest the government's changes to the tax rules for trusts on Oct. 31, 2007, the first anniversay of Finance Minister Jim Flaherty's announcement.

The night of Oct. 31, 2006, still rankles a lot of investors who had billions of dollars in more than 200 Canadian income trusts. That was the night Finance Minister Jim Flaherty announced that, as of Jan. 1, 2011, income trusts would be taxed just like corporations, after saying months earlier that there would be no changes to tax the income trusts.

In the following days in what came to be called the "Halloween massacre," the income trust sector lost more than 15 per cent of its value. Trust investors were howling. But Flaherty wouldn't budge, saying the income trust structure was responsible for "tax leakage" from federal coffers in the hundreds of millions of dollars.

Over the coming years, the trust universe shrank steadily. About 75 trusts were taken over. Another 40 suspended their distributions, going private. These were companies that probably never should have been in the public markets. Most ended up converting to corporations by this New Year's Day deadline.

Now that the conversion dust has settled, one thing is abundantly clear — despite all the worry over how the new tax rules would affect the trust names, it's seems to be business as usual for many of them.

Many former income trusts that used to pay handsome distributions are now doing the same thing — only now as newly minted corporations spewing out robust dividends that, so far at least, appear to be quite sustainable.

This is not to say that the whole trust conversion picture was a painless exercise. Many trusts served notice that, in the process of converting to corporations, they would cut their distributions.
Sometimes, the cuts were brutal, for example: Waste management company, BFI Canada Income Fund, chopped its distribution by 73 per cent when it converted to a corporation in 2008. The company said it wanted to keep more cash to use for acquisitions.

More recently, Canadian Oil Sands Trust surprised its investors in late 2010 when it announced a 60 per cent cut on conversion to a corporation. The yield went from over seven per cent as an income trust to about three per cent as a corporation.

Bottom Line

Investors have slowly recovered

But, Never ! Never trust the Harper Government

 

Thanks Joe Y