Certified General Accountants of Canada

Certified General Accountants of Canada

March 28, 2006 07:30 ET

CGA-Canada: Straight Talk on Income Trusts

TORONTO, ONTARIO--(CCNMatthews - March 28, 2006) - In response to widespread interest and increasing relevance to Canada's financial markets, the Certified General Accountants of Canada (CGA-Canada) has seen it timely to release its report on income trusts.

The intention of the report entitled, Demystifying Income Trusts, is to reveal the nature of income trusts and how they compare to other investment vehicles. "Our goal has been to empower investors and their representatives in making important financial decisions," said Anthony Ariganello, FCGA, CPA (Delaware), President and CEO of CGA-Canada.

The report is a comprehensive discussion on the merits, pitfalls and taxation of income trusts.

"Income trusts have become a popular investment vehicle having established considerable staying power," said Rock Lefebvre, CGA-Canada's Vice-President, Research and Standards. Unlike other investment vehicles, income trusts distribute on a monthly or quarterly basis 70% to 95% of cash flows and capital to investors. From a business owner's perspective, income trust structures tend to value assets at a higher conversion value than is typically experienced through corporate structured stock issuance. These benefits have contributed considerably to the spike in income trust activity.

One of the challenges of an income trust lies in its limited ability to reinvest in research and development which can potentially curtail growth and sustainability. In light of this issue, the types of businesses suitable for an income trust structure are those that have mature assets, generate reliable cash flows, are not dependent upon major capital expenditures, and have limited reinvestment needs. For example, a business that specializes in overseeing the manufacturing or sale of a particular product or service such as the sale of home furnishings may be a good candidate for trust conversion.

Another challenge of an income trust is that "distributable cash" is a non-GAAP financial measure. The Canadian provincial and territorial securities regulators would be well served to introduce a mechanism which reconciles distributable cash to GAAP reporting.

The uniqueness of income trusts stems from their tax treatment. Unlike other investment vehicles, the income trust structure attracts little corporate tax since most of the cash flow is distributed to investors who assume responsibility for paying applicable personal taxes.

The former government estimated a forfeit of $300 million in corporate income tax revenues as an outcome of income trust investment. It is interesting to note that federal income tax revenues for 2005 were $132 billion and to consider also that corporate tax revenue was $6.8 billion over the 2004 forecast. "There is no argument that $300 million represents a considerable amount of money to the average Canadian, but when taken as a function of federal income tax revenue, we can quickly concede that the amount is relatively immaterial," said Lefebvre.

Based on assumptions outlined in our report, CGA-Canada's analysis shows that the previous government's proposal to increase the tax credit on dividends to placate corporate investors would effectively dissuade top earners from investing in income trusts. Whichever course of action is taken on this issue, CGA-Canada urges the government to exercise caution when introducing tax measures that could create an adverse situation in the marketplace. "Having now witnessed public reaction to some of these proposals, we can be assured that the debate will ensue and that resistance to the elimination of existing income trusts incentives will mount," said Ariganello.

About CGA-Canada

CGA is the fastest-growing accounting designation in Canada. The CGA designation focuses on integrity, ethics and the highest education requirements. Recognized as the country's accounting business leaders, CGAs provide strategic counsel, financial leadership, and overall direction to all sectors of the Canadian economy.

The Association sets standards, develops education programs, publishes professional materials, advocates on public policy issues, and represents CGAs nationally and internationally. The Certified General Accountants Association of Canada represents 64,000 CGAs and students in Canada, Bermuda, the Caribbean, Hong Kong, and China.

Contact Information