Income Trusts Had Deceptive Cash Yields

In a night described widely as the “Halloween Massacre,”  former Canadian Finance Minister James Flaherty announced on October 31, 2006 that business and energy income trusts  would be subject to a corporate tax of 35% phased in over the next five years. Real estate income trusts were not affected. This resulted in no more business and energy income trust conversions from corporations and most of the 244 income trusts converting back to corporations. There was close to $200 billion of market capitalization in business and energy income trusts and funds invested in these income trusts at October 31, 2006.

The decision to stop income trusts was the right one on multiple counts:

(1) It was good for the economy because income trusts had limited cash flow in excess of distributions and no safety cushion of retained earnings to avoid distribution cuts and to avoid bankruptcies during recession. Income trusts sparingly made capital investments, including maintenance of plant and equipment and R & D, in order to maximize distributions, while depleting the business.

(2) It was good for investors who were duped into paying excessive valuations by the high cash distributions, which included undisclosed return of capital, and were vulnerable to massive distribution cuts shortly after income trust conversions occurred. Income trusts allowed sellers of businesses to receive unjust enrichment at the expense of seniors investing in them. 

(3) It protected the tax base since income trusts did not pay corporate tax and the personal taxes paid by income trust investors was less than the combined personal taxes paid by investors and corporate taxes paid by corporations. 

My research on income trusts provided below, supported by the National Pensioners and Senior Citizens Federation and the United Senior Citizens of Ontario, was instrumental in convincing the Federal Government to stop the business and energy income trust structure.