Roberts Nash Advisory Group

Mortgaging The House to Fill The Tank... Or Is It Time to Sell Your Income Trusts?

As I thought about the possible topics for this month, it came down to two obvious choices.  Maybe they are somewhat related.

Lately the press has been fixated on the price of fuel. Natural gas looks strong in the short term as refining capacity has been restricted by the hurricane disasters.  My opinion is that the price of oil could go higher in the short term, but that would slow the economy and in turn reduce demand for oil, and eventually result is a sell off.  Or the price of oil could decline from current levels.  Either way, expect a decline in oil in the next few months.  This should make oil and gas Royalty Trusts particularly vulnerable.

On Monday September 19th, the Canadian finance ministry announced that the government will postpone issuing advance tax rulings (ATRs) for companies seeking to convert into income trusts until it has completed the consultative process to decide if the laws governing income trusts will be changed.  The initial consultation paper reviewing the economic and fiscal implications of income trusts was released by the government on September 8.  The paper indicated that the loss of tax revenue was in the vicinity of $300 million.  While somewhat insignificant when compared to the total tax and other revenue of $186 billion in Fiscal 2004, the government is taking preventative action as more and more companies have contemplated conversion.  What do the experts say?

“In the short term, we see the sell off of the income trusts as a buying opportunity.  Income & royalty trusts should benefit as investors continue to shop for yield, buying them on the market while new issue activity is constrained and at current prices, many are offering very attractive yields”.   Mavrix Funds - September 26th, 2005.

“This leakage is clearly a concern for the Government, as evidenced by the consultation paper released last week and yesterday’s announcement, and one with many possible solutions. Until the Federal government provides further clarification, there will likely be a slowdown in the number of trust conversions.” Guardian Group of Funds – September 20th, 2005.

 “The trust structure has become the new way for companies to do business in Canada because it works. First it provides monthly income to investors at a higher rate than is available in the fixed income markets. Secondly, the management of trusts must convince their unitholders that their expansion plans make sense and will increase their distributions, in order to raise more capital to grow. Thirdly, virtually all of the new equity capital raised in Canada in the past 5 years has been raised by the trusts. In other words the capital markets are working and this is one of the major responsibilities of the Federal Government. We continue to invest for the long term in this sector but in the short term there will be some uncertainty until the results of the consultations with the investing community at year-end are disclosed.” Morrison Williams Investment Management – September 23rd, 2005.

“We believe no action will be taken until the consultation process is complete. However, we note that the final report on the Gomery enquiry is scheduled to be released on February 1st and Paul Martin has indicated he would call an election 30 days thereafter. We feel it is unlikely that any changes affecting trusts negatively would be implemented prior to an election. Of the three alternatives under consideration, increasing the dividend tax credit would appear to be the most appealing and is our preference. It would be seen as a positive rather than negative action and would be enticing to the electorate.” Dynamic Group of Funds – September 21st, 2005.

 Our opinion is that Income Trusts will be great investments going forward.  The rules might change slightly for Business Trusts.  However, Royalty Trusts appear to be pricing perfection into the market and since they make up over 30% of the Income Trust market, we could see a decline in the index with many Income Trusts continuing to offer valuable returns.  


** I have prepared this commentary to give you my thoughts on various investment alternatives and considerations which may be relevant to your portfolio. This commentary reflects my opinions alone, and may not reflect the views of National Bank Financial Group. In expressing these opinions, I bring my best judgment and professional experience from the perspective of someone who surveys a broad range of investments. Therefore, this report should be viewed as a reflection of my informed opinions rather than analyses produced by the Research Department of National Bank Financial **