I received a letter today from ATB Investor Services:
Betrayed Trusts?Followed by a graph that I haven't bothered scanning.
A frightening announcement
On Halloween night, the federal government made an announcement that sppoked investors who hold Canadian income trusts.
Effective in 2007 -- for trust organized after October 2006 and in 2011 for existing trusts -- income trusts will no longer avoid paying tax at the company level, by paying distributions to investors from their pre-tax cash flow. Instad, trusts will be taxed the same as corporations, regardless of their legal structure. In layman's terms, the tax difference between corporations and trusts will be eliminated for all taxable Canadian investors, registered Canadian investors and foreign investors.
Predictably, on November 1 the stock market reacted quickly and trusts -- and also those companies like Telus and BCE, who were expected to convert to the trust format in the near future -- sold off substantially.
REITs are all right
One detail of particular relevance to Compass unitholders is Real Estate Income Trusts (REITs) are exempt from the new rules and therefore will not pay corporate taxes, as long as they continue to distribute all teir taxable income every year. This exemption wsimply keeps their tax treatment aligned with REITs in the US.
REITs were caught in the downdraft when the market opened on Wednesday morning, but soon recovered most of their losses throughout the course of the day.
No impact?
Despite the new rules the impact of the anouncement on the Compass portfolios was minimal for several reasons.
First, Canadian income trusts comprise only a small portion of the Compass portfolios. Secondly, the majority of those holdings are in REITs, which were barely affected by the news. Finally, the portfolios are diversified across different countries, as well as different asset-classes. Thus the impact of any Canada-only event is quite muted when measured across a portfolio's overall results.
Why ATB Compass Unitholders Can Still Bank on Their Investments
As you can see in the following graph, each extremely negative day in the Canadian stock market in 2006 has barely registered in Compass returns.
So while the recent changes to income trusts occupied the front pages of the national newspapers, from a portfolio standpoint they were nothing more than a hiccup.
Hence our ongoing message, namely that a well-diversified portfolio matched to your needs is the best way to reach your financial goals.
(I apologize in advance for any spelling or punctation errors. I typed this out myself, and in this cold weather my failure to type off of copy for 4 years glaringly revealed itself)
