canadian income trusts to be taxed

Tonite was the first time I saw this thread. Never looked into Canadian Trusts before but I bought PDS with a married put on the 7th, just because the dividend was so good (bought at $24.80, it's at $23.01 now after-hours, but I had a $25 put, so no biggie). I figured I'd watch it thru a dividend and see what happens.

You were right Trend, Trusts can be extremely profitable. Years ago, there were a lot of REIT trusts... wow.... the returns were insane. They did in fact whittle away to nothing, but you tripled or quadrupled your money in a few years from the payouts, so whatever the stock did was just gravy.

If what you say about the Canadians converting to stock is true, even better. I didn't do much homework on it, just saw it dumping, and with the dividends, there didn't seem much to lose, so I bought one.

My reading of it was that we aren't subject to the tax til 2010 anyway, so I'm not sure what the panic was about, I doubt many people intended to hold that long.

Sorry to hear that you bought high, I've taken some huge beatings myself. I never buy anything without cover now, unless I'm bottom feeding. Its not too late to buy a few puts on bounces and buy a bit more on dips. I wish I could have caught PDS before the split .

 

Frankly Wetton - this is a VERY tough call and will depend on your own style and long term objectives. I regret ever originally buying FDG as I made a bad newbie mistake of buying a lower quality trust that was apparently managed by incompetents in a market (smelting coal not traditional coal) that was facing global competition and declining growth/demand from steel industry. I played fording by adding to my position to play it on the dead cat bounce only to get out of it.

On the other higher quality trusts (beverage, oil, gas) I initially did go in with the intention for a quick bounce play. I could have locked in quick 5%-7% profits in 1 day for a terrific return. I did sell off a few but as I looked into some of these deeper it looked to me like the fundamental value of the underlying business is still very much in tact. On these other plays I see larger upside potential and I am going to go longer and wait and see what happens. I DO expect these to dip from time to time as waves of pensioners dump them. So I will "nibble" at these in small quantities on dips and wait for the market to realize that the value of the business is not being properly rewarded by the share price. If it were not for the high yields I would not play this at all. But those high yields give me a very easy way to "wait" out a longer term correction and any downward price drop only helps push yield up higher to attract new mid-term (less than 4 years) investors. I just don't believe that these can go a whole lot further "south" in price since yield will go up rapidly even higher to 20% or better for some of these securities. That's just hard for new money and private equity to long ignore.

BTW I do NOT consider myself an expert on trusts and some of my advisors are still trying to figure out the best way to play this.

I don't see a terrible risk in getting a small position size going in one of the very high quality trusts that have good management and then nibbling up more on the expected dips. But if you are more of a pure growth investor then this is probably not the best play. I am personally actually looking to get some long term income going for myself as well as growth and will not mind going long at these yields if market circumstances force me to stay. But again, I am also operating to the thesis that yield will also equate with growth in share price eventually as yield hungry investors face a declining global yield opportunity. The key is "risk" for yield and that is the most difficult thing to assess.

I think there will be plenty of time to get in though and lock in high yields if you see a sustained upward creep in price trend start to develop. I do not expect a trust train to leave the station so to speak. So it is probably fine to go slow and watch for a trend to emerge before entering. If prices continue to weaken then yield only gets better. The worst case break point comes at a price decline that pushes the yield up to give a 100% return before the tax change kicks in (4 years). Solving for that we get 72/4= 18% (assuming trusts maintain regular high dividend payout for years). I just don't see these trusts going to ZERO in four years and even if they did if you were long that period you would have 100% return on investment by then.

I'd play these mostly like a preferred stock and look for the highest discounted quality trust I could find.

TS

 

Anyone have a list of all the trusts that trade in the US?

 

ent, pvx, pwi, pwe, pgh, hte, erf, cne, bte, aav, pds, fdg....These are the ones I have owned in the past.....


I do like PDS and FDG at these levels....FDG especially to start a position, below $20....I bought on FRIDAY @ 19.72

 

Hey cost average man. I wish you luck on FDG. It has been my personal nemesis and a curse. I have not seen ANY strength for 6 months. Every now and then we get a day or two of uptrend then it falls back down again. I don't see any new news coming out so I am flying blind on it. As best I can tell they have 3 or 4 issues: 1) labor (settled a strike a few months ago), 2) increasing global competition, 3) Steel companies trying to get by with inferior/lower-heat/lower-cost coking coal, 4) management issues, 5) some seasonality issues, 6) shortages of mining/production equipment supplies (truck tires) which I see as a variation of management issues. In essence they are to some degree like a holding company or more like a open ended mutual fund structure that is itself wrapped within a "trust" format.

The analysts also seem to be slamming it a lot with downgrades.
The only good news is that they can't probably get much worse since the only new analysts recs would have to be "positive" or reiterations of the same old "sell" or "hold" status haha. That is assuming they don't go bankrupt or something...


In Aug they hired new manager from BHP Billiton - a Mr. Payne. Previously he was Vice President, Marketing for BHP Billiton in
Singapore. This may help things.

In the mean time you Canadians losing fortunes on this trust tax issue need to take action here: http://www.caif.ca/

TS

 

I started trying to get some sentiment from Canadians on this trust tax issue and determine if there is a chance for a reversal.

As best I can tell The Canadian Association of Income Funds is LIVID over this tax and is really pushing for some kind of change or education of gov on what they are doing.

Interesting reads: http://www.caif.ca/

One snipit:
“Finance Minister Jim Flaherty’s reckless decision to tax income trusts has had a
devastating impact on working and retired Canadians, and hurt the national
economy. This widespread fallout will continue for the foreseeable future unless
the government reverses course immediately,” said George Kesteven, President
of the Canadian Association of Income Funds (CAIF), which represents the more
than 250 companies that are structured as income trusts.
“Mr. Flaherty has clearly made a poorly informed and costly decision on income
trusts,” said Mr. Kesteven. “The government had other options but chose to
ignore them and Canadians are now paying the price. Once again, we urge the
minister to reconsider his decision and look closely at the other available
alternatives.”


TS

 

More OUTRAGE: http://www.caif.ca/content/CAIF_OP-ED_Nov2.pdf
TS
============

THE FEDERAL GOVERNMENT HAS BROKEN TRUST WITH CANADIANS
By George Kesteven
President, The Canadian Association of Income Funds
The federal government’s punitive and unwarranted decision to tax income trusts has
unnecessarily thrown Canada’s financial markets into turmoil and jeopardized the
retirement savings of millions of Canadians – young and old.
Finance Minister Jim Flaherty’s reckless decision to tax income trusts has already had a
devastating impact on this country’s economy – and the widespread fallout will continue
for the foreseeable future.
As a direct result of the federal government’s move to tax income trusts, the Toronto
Stock Exchange recorded its biggest loss in more than two years, destroying in excess
of $30 billion of capital in two days.
The most acute pain is being felt by individual Canadians of all ages who have seen
their savings irreversibly damaged. Many people lost more than $100,000 of their
savings in one day as a result of Mr. Flaherty’s announcement, and some retirees have
said they may be forced to return to work to recoup the losses.
The federal government and Mr. Flaherty took action against income trusts without
consulting the industry. Not only does the decision to tax trusts represent a reversal from
the Conservative’s election promise not to impose a tax, it is a flagrant betrayal of this
country’s corporate culture, financial markets and the hard working Canadians who
invested in income trusts.
Mr. Flaherty and his government explicitly promised that they would not tax trusts.
Instead, the government said it would focus on “leveling the playing field” for
corporations. The Conservative government has chosen to break that promise and the
trust of Canadians.
The Conservative government could have made other choices on income trusts that
would have achieved tax neutrality and avoided the market devastation we are now
witnessing. Alternative options could have included increasing the withholding tax on
income trusts and phasing-in the tax on trusts over a decade as the U.S. government
did. However, rather then take a measured approach to protect the industry and
individual investors, this government chose to take heavy handed action against the
income trust sector and the public.
Going forward, the government’s reversal on income trusts will continue to hurt the
savings of Canadians, hamper the ability of small and medium-sized businesses to raise
capital, and prevent foreign investment in this country.
The finance minister has claimed he took action against income trusts to stem a
corporate tax loss of $500 million. However, his decision to tax income trusts is likely to
destroy $25 billion of wealth, according to an analysis by BMO Capital Markets. As
Gordon Tait, a BMO analyst, wrote, “A $25 billion hammer to fix a $500 million problem
does not look like a very equitable solution.”
Furthermore, the federal government persists in grossly underestimating its budget
surpluses. In the first five months of the current fiscal year, Ottawa achieved a budget
surplus of $6.7 billion, nearly double the $3.6 billion budget surplus it forecast for the
entire 2006/07 fiscal year. Can Ottawa legitimately claim that it needs more corporate
tax dollars when its budget surpluses continue to surpass expectations?
Mr. Flaherty has also said that he was concerned that the income trust structure
prevents reinvestment and hurts productivity. However, the majority of income trusts are
small to medium-sized businesses that use the trust structure to raise the capital they
need to reinvest, grow and remain Canadian. The new income trust tax will make it
prohibitively expensive for these small and medium-sized companies to tap capital
markets. As a result, many of theses businesses could end up as subsidiaries of U.S.
and other foreign companies.
Ironically, the government’s tax on income trusts will make it easier for foreign-owned
companies – particularly in the natural resources sector – to bid against Canadianowned
trusts for ownership of this country’s assets. The new tax treatment will likely lead
to greater foreign ownership of Canada’s natural resource entities, either through direct
takeovers of Canadian trusts weakened by the new tax, or through the inability of trusts
to acquire assets on their own.
Mr. Flaherty’s tax on income trusts stands in sharp contrast to the findings of the Bank of
Canada, which wrote in a June 2006 report that: “Available evidence suggests that
income trusts may enhance financial market completeness.” Bank of Canada Governor
David Dodge recently said income trusts make capital markets “more efficient."
As for Canadians, they will continue to feel the fallout from Mr. Flaherty’s tax on income
trusts. Currently, two-thirds of trust units are held in non-registered accounts, meaning
these people are likely using the money they receive from income trust distributions to
help cover living expenses. Many of these people can no longer rely on the distribution
payments of income trusts to help with their expenses. These people’s quality of life has
been diminished by this government’s decision to tax income trusts.
The issue of retirement savings will have to be reevaluated as a growing number of
Canadians enters retirement. By 2025, seven million Canadians – almost one-quarter of
the population – are forecast to be over age 65. Many of these people had viewed
income trusts as a reliable investment vehicle to help fund their retirement. What is the
alternative now?
Looking at the damage that has been caused to Canada’s financial markets and
investors, it is clear to the income trust sector that Mr. Flaherty has made a poorly
informed and costly decision on income trusts. Options other than a punitive tax were
available to Mr. Flaherty. The finance minister and his government chose to ignore those
options, and Canadians are now paying the price.

 

Still trying to get the sentiment on what is happening in Canada in the trust front. Analysts seem to suggest that people would be better off anticipating conventional Canadian Energy company's to increase dividends to attract the displaced trust investors.

Here is a snipit from Baron's:
http://online.barrons.com/public/ar...v2X4_20061210.html?mod=9_0002_b_free_features

Even if oil prices rise, offsetting the higher taxes on trusts, "investors would still be better off at the margin in a conventional E&P that would be able to enjoy the higher cash flows," writes Merrill Lynch analyst Andrew Fairbanks, who downgraded oil and gas trusts to Sell last week.


David Wolf, Merrill Lynch's chief Canada economist and strategist, thinks there's an 80% probability the trust proposal will be enacted by Canada's Parliament. And oil and gas trust stocks are likely to continue their decline, Fairbanks says.


But this link talks about opportunity:
http://www.bloomberg.com/apps/news?pid=20601082&refer=canada&sid=aTgkrj4OH5B4

Fire-Sale Prices'

``Let us be clear on one thing: to many the next few weeks or months may provide an opportunity, perhaps of a lifetime, to acquire great Canadian businesses at potential fire-sale prices,'' Dirk Lever, analyst at RBC Capital Markets, said in a report to clients. ``Canadian oil and gas trusts, some with incredible assets, could find themselves very, very, vulnerable.'' \

Time will tell,
TS

 

Wow, the carnage continues. The volume is still heavy indicating institutional dumping of these units.

The market seems to be 'revaluing' these units in a big hurry. The drop at this point seems to be too much, too fast (famous last words???)

Dipped my toe in the market with CNE.UN, PGF.UN, and BPF.UN. Hoping for a sharp bounce but will cut quickly if necessary. I don't like to "catch a falling knife", but a sharp rally doesn't seem too unreasonable.

Longer term, lots of these are going even lower. Government will not reverse their decision on this. A new government will not reverse this decision. Damage done, and the other political parties are just glad they weren't the ones who had to do it.

 

Wetton, I agree with you. This is going lower - down momentum is high.

I was contemplating and hoping for a reversal of gov policy scenario and the more I thought about it the more I saw danger for me personally. Foreign investors (USA) would likely get screwed even more if they did a reversal since the face saving would require a scape goat (e.g. dirty yanks) to make it a near wash or net-zero change. The proposal from the trust community is to take out larger withholding tax "now" and go with a 10 years phase out of trust tax break. That would be double jeopardy for me and I doubt it would give any more significant upside in price support right away. The damage is "done" as you say and these are damaged goods and people are running from them like the plague. No one trusts the "trusts" anymore. But I know that these are going to be cherry picked at the bottoms by those close to the industry and private equity and in the know about the real possibilities for M&A.

I will continue to hold the trusts that appear likely to be bought out. My research indicates Canadian Oil Sands (COSUN/COSWF), Penn West Energy Trust (PWE) and a few others are good candidates. But I don't want to chase this down another 15-20% and one analyst was predicting a total draw down of 35%. That means we have a ways to go yet...

Good Luck,
TS