Income Trusts: A Better Business Model

Income trusts have served Canadian investors, particularly pensioners, extremely well over the years. The Conservative government's policy reversal and betrayal, mostly of its own base of support in the west and among investing seniors, will not be forgotten by the next election. My prediction is the Liberals will recognize and seize the opportunity, especially given that PM Harper and Finance Minister Flaherty are fairly stubborn (some might say pig-headed) in following through on earlier decisions, despite the dire change in economic circumstances.

Refusing to acknowledge and reverse this particular mistake may very well determine the outcome of the next election. Besides their own embarrassment over the collossal blunder, Harper and Flaherty would be sensitive to undermining former Goldman Sachs and finance ministry golden-boy and now Governor of the Bank of Canada, Mark Carney, who was the architect of the income trust policy reversal.

The Conservative leadership ego inflation and policy intransigence is a huge gift to the Liberals. Prepare to welcome the return of a better business model led by (the soon to be) Prime Minister Michael Ignatieff. Sad that we conservatives will likely be relegated to the shrill side-lines again, but in their flexibility and leadership maturity the Liberals show again why they are Canada's 'natural ruling party'.

Income trust fiasco should be reversed
Posted: April 25, 2009, 8:19 AM
by Diane Francis, National Post

It’s been 2.5 years, and a Great Recession, since the income trust tax of 31.5% was announced by Finance Minister Jim Flaherty and the Prime Minister.

At the time, I said: prove the case that trusts should be shut down with this tax because they are a tax drain or drop the tax.

Today we know that the tax, to start in 2010, has not prevented leakage but has caused it as income trust values collapsed by $35 billion. Foreigners bought nearly C$100-billion worth of trusts with large bank loans. The interest on these loans is written off against profits allowing them to duck taxes altogether. This has been, and will be, a drain to taxpayers of
billions and was predictable.

It’s been a huge mistake so what should be done? Scrap the tax immediately to correct the situation as well as to help the country get through this economic collapse. In fact, I believe that income trusts are a superior model to other corporate structures for many companies:

 The income trust is more accountable because up to 95% of profits flow through to unitholders, preventing inept managements and boards from indulging in excessive bonuses, stock options and stupid takeovers.

 Income trusts are also a superior because they provide Canadian corporations (big or small) with a capital advantage, thus enhancing the possibility they will survive now and thrive later on.

 Income trusts provide a superior investment vehicle for investors, both retail and institutional, big and small which has been missing since they were attacked. Scrapping the tax is also a form of stimulus, which is badly needed as a result of the market meltdown worldwide, because it will:

 Stimulate the stock markets by bringing investors back into the fold by not sandbagging the popular and profitable income trust sector.

 Restore the integrity of investment rules in Canada which were applied retroactively to attack income trusts.

 Restore the Prime Minister’s reputation which was sullied after he broke his promise in 2006 to leave income trusts alone. Demonstrate a flexibility and wisdom that he realizes that being correct outweighs defensiveness or merely being tied to consistency.

 Remove the advantage foreigners have enjoyed by picking off the income trusts which lost $35 billion in value after the tax was announced.

 Reverse the Harper/Flaherty income trust tax leakage problem caused by leveraged buyouts of trusts.

 Provide or restore an important investment vehicle for 75% of Canadian seniors and
investors who do not have a company or public sector pension.

 Eliminate over-reliance on derivative or synthetic type products that were billed as “retirement safe” or equities paying dividends but which have been clobbered more than the existing income trusts by the way.

 Level the playing field with American trusts (called MLPs and REITs) by letting Canadian real estate and energy trusts continue under the old rules. As anyone who understands business realizes, the Tories made a mistake with their income trust taxation and there’s no time like the present emergency to correct the situation to help Canadian companies and investors.

http://network.nationalpost.com/np/blogs/francis/archive/2009/04/25/income-trust-analysis-says-it-all-again.aspx

Supporting the Home Renovation & Improvement Sector

One area where government stimulus seems to be helping drive demand is in the home improvement and renovation market. With up to 15% tax credit from the feds on the value of a project, homeowners are lining up to find good contractors. The better firms are already booked up into the fall.

Some deals we've done in the home improvement sector are not so typical:

• A siding contractor acquired a Bandit wood chipper to process waste panels into recyclable sized chips. This reduced his waste bin removal and dumping charges by multiple factors while also keeping the worksite tidy.
  
  
• Including a dump box on a medium duty truck allows a landscaper to haul smaller loads of top soil, gravel or mulch to residential projects without incurring extra expense to bring in full loads by dump truck on contract.
  
  
• A start-up flooring contractor acquired good used equipment through a private sale instead of purchasing new.
  
  
• An established floor covering sales company expanded into refurbishing old floors by acquiring new floor fininshing machinery. The new service offering opens the door to future sales of carpets, lino and wood flooring.
  
  
• Adding a narrow skid steer to their fleet allowed a landscaper to move soil and mulch into client's back yards without removing fencing or gates, cutting down the time to finish most smaller jobs. This also worked well in new residential areas where the houses are very close together... (hauling sod & fencing).
  
  
• Good used pickup and utility trucks are available at maybe the lowest prices in decades. General contractors, carpenters, plumbers and electricians could save a bundle. We have financed a variety of privately acquired, wholesale and dealer units with very reasonable monthly payments.