By Goodwin Ginger


The Income Trust issue is rapidly degenerating into a chicken-little like tale. Some bloggers are claiming that 1 million Canadians are $32,000 poorer and that this marks the beginning of a TSX meltdown. Clearly it is time for a sober analysis of Income Trust valuations to be undertaken.

What about this claim that 24 billion has been taken away from unit holders of trusts?

Never mind that the figure of 24 billion includes would-be trusts such as BCE and never mind that the ownership of trust units, like all asset classes save for homes, is highly concentrated in the top income quintile. More to the point, it is the valuation of trust units (think equity) as an asset that has been affected by the Cons’ taxing of trusts not distributions per se. It is true that the sector lost some 18% of its value in the last two days but there are signs that it is stabilizing.

But the larger point is this: no pensioner has lost a dime unless he or she sold her units in the trust over the last two days. True their assets, if they were to sell them today would not be worth what they would have been if they sold them last Friday.

But that is no way to look at the matter. Why? First because it assumes that investors hold trust units primarily for their valuations and not for the revenue they generate in terms of distributions.  And the tax changes do not change anything at the level of the individual investor.  Second, because it assumes everyone bought their units on Friday. To see what I mean lets graphically depict how the chicken-littles are telling the story. They simply plot the intra day income trust index and wham look what the Cons did.



What they do not tell you is that there appears to already have been a partial correction in progress prior to the announcement by the Cons. If we take a look at the one month plot we can see that trusts had peaked prior to the Cons’ call.


Still you say: “the one month plot paints a fairly grim picture no?” No, because like all time series data the details are in the time frame. Lets take a look at what happens when we take a look at the one year plot.


To be sure the Cons’ announcement destroyed a years worth of capital gains and then some. But these were paper gains. The only pensioners that are loosing out are those that sold all their units today and if they bought them a year ago they would not be much worse off. Moreover, if we push our time frame back two years we see that the valuation story looks much different.



Oh that changes things does it not? If you bought half your trust units two years ago and half a year ago you would still be a little ahead if you sold all of your units today. And if you bought all your units two years ago and sold them today you would have beat inflation on the value of your asset which is the key thing on a cash bearing investment. Also notice that there was similar decrease in magnitude a year ago: who caused that we wonder? Now for the real cool graph. Lets take a look at the three year plot.


Yes perspective is everything. If you bought into the trust sector three years ago you would, with the Con induced correction factored in, have incurred a 14% capital gain. Not a banquet but hardly a disaster. And what is more, this is a capital gain remember your trust units are still throwing off cash in the form of distributions. Hmm anyone else smell roast chicken?

What about the claim that the trust correction is going to drag down the whole TSX? Bullocks we say. Let us take a look at the TSX composite one month plot.



Wow it really is not the end of the world, the sky is not falling I guess the intra day movements really are about as telling as tea leaves: perfect information for the pundits and partisans but nothing you would want to bet money on. My advice, stop drinking so much coffee and get some perspective.

Let us get back to the real issue which is simply this. The move to tax trusts is progressive as it widens the tax base on capital. Pensioners would not be in the market if were not for the Liberals refusal to build a real and robust public pensions system and instead decided to force Canadians into the markets which go up and down for a whole host of reasons.