52 comments on Income Trusts and the Canadian Energy Sector
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52 comments on Income Trusts and the Canadian Energy Sector
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I bought a business model and future income streams when I bought three Canadian Hydro Income Trusts (Great Lakes, Innergex & Algonquin). The Tories had been elected on an explcit promise not to disrupt these. They have retroactively taken away the future income streams that I was promised.
Alan
Look, this sort of tinkering with the tax system happens all the time. There used to be a lifetime $100,000 capital gains exemption in Canada. It was repealed in 1994, just before I had a chance to use it. Annoying, yes, but not retroactive! (As I recall it wasn't retroactive, anyway. The point is that changing the rules may change what people expected to get and how they may have behaved in the past had they known what would happen, but that doesn't ipso facto make it a retroactive change).
(There is still a $500,000 capital gains exemption on the sale of "qualified small business corporation shares", I'm talking about an exemption that applied to any capital gain.)
For instance, if the Federal government suddenly declared all extant municipal bonds to be subject to tax, what would the reaction be.
Right. I'm with you.
Ummm, perhaps we need to buy everyone here a dictionary. They did no such thing. I sure hope income trusts aren't "illegal", anyway, because I own units in a bunch of 'em.
where PV = present value
cf1 = cash flow received in period 1
r1 = risk free interest rate (ie Tbill rate for example) in period 1
In case anyone thinks this is a just a theoreretical exercise, let me tell you what happened to a prominent Canadian energy trust when word of the retroactive taxation hit the wires. The Enerplus Resources Trust closed at $54.30 per share on October 31, the last pre-announcement day. Two days later on November 2 it closed at $39. Similarly the PennWest Energy Trust closed at $37.52 pre announcement and $29.80 on November 2. Slashing expected future returns slashes current value.
PV = cf1/(1+r1) + cf2/(1+r2)*2 +...+ cfn/(1+rn)*n
where the double asterisks denote "raised to the power of." Thus the divisor of the second term to the right of the equal sign should read, (1+ r2), squared.
Yes, so? The same thing happens when the trust itself announces a cut in distributions. Is such an announcement "retroactive"? Of course not - it affects distributions in the future. The proposal to start taxing distributions in four years is also something that takes effect in the future.
Why is this concept so difficult to understand?
When you invest you accept a number of risks. I have been affected by the proposed changes to the tune of ... oh probably more money than anyone else who is whinging about it here. Yes, it's a bitch, but you can't say you weren't warned:
From Enerplus' March 7 2006 prospectus, page 2:
(I added bold face to highlight critical words)
Or how about their 2005 annual report, page 86:
(I added bold face to highlight critical words)
The assertion by the Canadian government that the US doesn't allow these structures is not true at all.
There is something in the US called a "master limited partnership" with the same flow-through income principle---you get a K-1 form attributing income and return of capital etc to the unitholders. These trade on US exchanges---you can buy production from, e.g. Prudhoe Bay (BPT), etc.
Perhaps the right message wasn't that the US and Australia had "banned" this trust structure (not really true) but that they might have been better to follow Canada and increase use of this.
The result was a class of investments which in practice were intermediate between bonds and common shares, and clearly filled a need.
Not by any normal definition of the word "retroactive" it isn't.
Enacting a tax means it applies to future revenue.
Enacting a retroactive tax means it applies to future and past revenue.
If the new tax was applied to income trusts starting in 2005, then it would be retroactive. It doesn't, so it isn't; it's just a normal tax, much like any other tax. It may or may not be a bad tax, but calling it "retroactive" seems like little more than misleading rhetorical hyperbole.
"You keep on using that word. I do not think it means what you think it means."
http://www.imdb.com/title/tt0093779/quotes
retroactive
adj
taking effect from a date in the past
No it bloody well isn't. Of course expectations of future cash flow are a part of current valuations. When conditions change the current valuation changes. The government's (proposed) changes affect current values, but they do not affect anything that happened in the past. They just don't. It is not retroactive.
Or perhaps when a trust announces a change in the distribution to be paid in the next month that is a "retroactive" change? When the prime interest rate changes that is a "retroactive" change applied to all bonds?
Whether the change was right or not is irrelevant to this question. The law is not "retroactive in its effects". Arguing it is, and placing such an absurd statement right in the title of the article, discredits it. If you can't see that, then... well, that is enough, I shall say no more.
So my investments in Canada helped expand the supply of renewable energy.
Exploitation ?
The alternative is to let the wind & water go past and burn more fossil fuels instead.
Alan
Or, alternatively, find another mechanism of capital formation.
These hydro income trusts picked up a portfolio of "dogs & cats" that, in most cases, had been ignored by their prior owners or operated & maintained by non-professionals.
So pre-existing capital sources had not done a good job. What successor type will ?
Alan
The Canadian government had their hands forced by the fact that a major Canadian company (Bell Canada?, I forget) announced they were going to convert to a trust. And why not? Why pay more taxes than you have to. This would have been the start of a major loss of tax income for the government.
So they want to change the law, for everybody, with a 4 year grace period for existing trusts.
Oil is at $60, high enough to coax a lot of marginal production from old fields.
Seems a little incongruent to argue "Peak Oil is coming, oil prices are gonna skyrocket!" and, "Hey, you tax my oil trusts and the oil is gonna stop flowing."