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Halloween shock

I didn’t see that coming. Finance Minister Flaherty has voiced the concern shared by many that a further reduction in tax paid by corporations (via continued income trust offerings) would only mean an increased burden on individual taxpayers. It appears that Finance finally did the math and didn’t like what it saw on the leakage front; good for you Prof. Mintz.

While the alarm bells have been raised for years, it certainly seemed that the Tories and Liberals had come to recognize that the horse had long left the barn, given the trust market had grown to be an unstoppable $200 billion goliath.

How do you change the rules now, even if the sector shouldn’t exist in the first place, asked us pragmatists? And in the context of a minority gov’t?

While we don’t have all the details at this point, it appears that the earth shifted tonight on Bay Street…and Main Street as well.

Timing is interesting, as is the possible fallout:
– Today was the end of the fiscal year for the chartered banks. Where the banking sector share prices closed today at 4:00pm is highly relevant in probably a dozen different ways. Folks who get paid part of their comp based on where the share price closed today (relative to Oct. 31/05) will be delighted that the Minister didn’t give his press conference yesterday, and kick $2 out of each bank share today versus what will likely come tomorrow.
– Over the next 14 days or so, head count decisions for 2007 will be made at every i-bank in Canada. If income trusts accounted for ~30% of a dealers’ revenue for each of the past three years, how much of a revenue hit will this mean in 2007?
– As the market skids several hundred points over the weeks to come, what will that mean for non-income trust equity offerings? Sadly, several good stories will get sideswiped as portfolio managers hide under their desks.
– Will the appeal of the U.K. AIM market only get stronger, if our domestic money managers get gun shy on normal non-income trust new issues as a result of what I expect will be a weak TSX through the rest of 2006?
– Any domestic merchant bank that is raising money right now from institutions will have an unenviable task explaining how they can continue to deliver 25%+ returns in the absence of the well-honed income trust arbitrage (Yellow Pages, Futuremed, BFI, etc.).

While I’m not sure if Bill Holland is wrong, no one can deny that for as long as our national tax policy involves/required corporate tax revenue, income trusts were a silly idea. If the goal was to ultimately transition to zero corporate tax rates, then the 2005 Goodale income trust decision made sense.

Otherwise, we are in the right place…except for the inexcusably confusing road we’ve taken to get here. Does it make Canada a 3rd world country? No. But financial markets need clarity, and we’ve seen a dearth of that out of Ottawa on this subject for the past couple of years.


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