This was emailed to me by a friend who owns CNQ. I know many of you own some canadian trusts, so I figured it could be a point of interest. RGRDS - JT
Canadian Stocks May Retreat, Dragged Down By Income Trusts
By John Kipphoff
Nov. 1 (Bloomberg) -- Canadian stocks may fall after the government unexpectedly said it will begin taxing dividends from income trusts, securities that make up about one tenth of the country's main equity benchmark, the Standard & Poor's/TSX Composite Index.
BCE Inc. and Telus Corp. may drop. The nation's two biggest telephone companies are the most recent concerns to announce that they will convert to the structure that avoids most taxes by distributing much of cash flow to investors.
The proposed taxes, ``essentially a shutdown of the trust sector,'' are ``a shock that will resonate cruelly through the Canadian income trust market,'' said David Wolf, chief strategist at Merrill Lynch Canada Inc. in Toronto. ``Any stock currently enjoying any premium due to the actual or potential tax advantage of the income trust structure can be expected to have that premium removed virtually immediately,'' Wolf wrote in a note.
The S&P/TSX yesterday added 70.19, or 0.6 percent, to 12,344.59 in Toronto. It rose 5 percent in October for its best monthly advance since January and is around 1 percent below its record close of 12,487.32 on April 19.
Canada plans to tax dividends from income trusts for the first time and raise dividend tax rates for pension funds and foreign investors that own trusts, Finance Minister Jim Flaherty told reporters in Ottawa yesterday.
C$200 Billion Market
The move would close a loophole in the C$200 billion ($178 billion) market for the high-yield securities favored by many investors seeking regular cash distributions to boost retirement income. The number of trusts in Canada has tripled to about 250, and their market value has soared 20-fold in six years as companies convert to avoid taxes and boost share prices. Foreign investors own more than a fifth of outstanding income trust units, said RBC Capital Markets analyst Sue Trinh in Sidney.
Existing trusts won't be subject to the taxes until 2011, while new trusts will be taxed as of next year, Flaherty said. The advantage trusts enjoy over corporations is ``not fair,'' and the securities deprive the government of tax revenue, he said. Real-estate investment trusts will be exempted, as in the U.S.
The tax changes may halt some of the C$70 billion ($62 billion) in new trust conversions announced this year such as BCE and Telus. BCE's conversion, following rival Telus's announcement one month earlier, would have increased annual revenue losses to C$800 million from C$500 million, Flaherty said. BCE spokesman Pierre Leclerc yesterday didn't return a call seeking comment, and Telus's Shawn Hall declined to comment.
BCE May Plunge
Shares of BCE and Telus may slip. BCE also reported quarterly earnings today. Profit fell to C$302 million ($267.4 million), or 36 cents a share, from C$459 million, or 48 cents, a year earlier. Morgan Stanley's Simon Flannery, top-ranked among fixed-line phone-company analysts by Institutional Investor, had estimated earnings would be 46 cents.
A gauge of trusts fell 7.7 percent between Sept. 19 of last year, when the previous Liberal Party government announced a moratorium on conversions while it reviewed their status, and Nov. 24, 2005, when it backed down in the face of concerted opposition and said it would leave trusts alone. The S&P/TSX declined 6 percent during that period.
Declines for income trusts may take roughly two percent to three percent off the S&P/TSX today, Wolf said. A drop of three percent would be the benchmark's worst decline since a 3.5 percent retreat on April 28, 2004.
The three biggest by market value among the 72 trusts that trade in Toronto as part of the S&P/TSX are Canadian Oil Sands Trust, Penn West Energy Trust and CI Financial Income Fund.
The following is a list of companies whose shares may have unusual price changes in Canadian markets. This preview includes news that broke after markets closed yesterday. Symbols are in parentheses after company names and prices are from the last close.
Algoma Steel Inc. (AGA CN): The maker of steel sheets and plates for the auto industry is scheduled to report quarterly earnings today. The average profit estimate of five analysts surveyed by Thomson Financial is C$1.82 a share, compared with 7 cents a year earlier. Thomson Financial doesn't disclose the basis of its estimates. Algoma fell 74 cents, or 2.2 percent, to C$33.75.
Canadian Natural Resources Ltd. (CNQ CN): Canada's second- biggest natural-gas company is scheduled to release third-quarter earnings today. The average estimate of analysts surveyed by Thomson is 84 cents a share. The shares rose 35 cents, or 0.6 percent, to C$58.45.
Centerra Gold Inc. (CG CN): The Canadian owner of Mongolia's biggest gold mine said in a statement that third-quarter profit was 5 cents a share. Analysts surveyed by Thomson Financial on average had estimated a 1 cent loss. Centerra fell 16 cents, or 1.4 percent, to C$11.15.
Great-West Lifeco Inc. (GWO CN): The Canadian insurer said in a statement that its U.S. subsidiary will acquire Indiana Health Network Inc., a closely held hospital and physician network based in Indiana. Great-West fell 11 cents, or 0.4 percent, to C$31.27.
To contact the reporter on this story: John Kipphoff in Toronto at jkipphoff@bloomberg.net . |
