Wednesday, December 12, 2007

The true compensatory loss sustained by trust investors

By Brent Fullard

There was a somewhat misleading article that appeared in today’s National Post entitled “Trusts still in black“ about the losses sustained by income trust investors as a result of the Harper Government actions of Halloween 2006. This article looked at the matter from the standpoint of a portfolio manager’s annual performance and not from the standpoint of compensatory losses in a court of law, which is the relevant test to be applied.

The question of what losses were sustained by income trust investors requires the application of Decision Theory, as taught in science courses, and as would be applied in a court of law in terms of seeking compensation necessary to make the plaintive “whole”.

  • The value of trusts has fallen from 164.86 to 141.11 at the close yesterday for a loss of 14.4%
  • Meanwhile, the value of the TSX has gone from 12,344 to 13,940 at the close yesterday for a gain of 12.9%
  • Therefore, the actual loss in the value of trusts is $28.8 billion
  • Whereas the relative loss in the value of trusts is $54.7 billion

Including the distributions paid on income trusts is irrelevant to this calculation, since Decision Theory 101 instructs that any exercise which seeks to evaluate the impact of particular event (in this case the Harper government’s reversal of its election promise to never raid senior’s nest eggs) has to identify and isolate those outcomes and only those outcomes that differ between the “Raid Senior’s Nest Egg Scenario” and the “Do Nothing Scenario” during the past 13 months. This is how a court of law would look at it. For example if an accident caused my house to burn down, the accused couldn’t deduct from my losses the fact that my car in the garage was spared from damage. Think of distributions as the car in the garage.

Under both scenarios of Raid Seniors Nest Eggs versus Do Nothing to Harm Seniors Nest Eggs, the distributions would have been paid and therefore this aspect of the analysis is not to be considered. The distributions will only differ as between the two scenarios come 2011, when they are taxed at 31.5% under the Raid Scenario and not taxed under the Do Not Raid scenario, however we are only seeking to evaluate the losses over the past 13 months

Therefore, What did differ, as between these two scenarios is the value of Seniors Nest Eggs in accordance with the numbers cited above. Income trusts investors whose nest eggs were raided lost $28.8 billion if there plan was to have liquidated their investments for cash, and $54.7 billion if their intention was to remain invested in the market. This is the damage sustained by invetsors that would be sought in a court of law under these circumstances: $54.7 billion.

Keep in mind, apart from the promise “not to tax income trusts” there was also the Harper election promise/lie contained on page 43 of their campaign platform that read: “timely compensation will be paid to all persons who are deprived of personal or private property as a result of any federal government initiative, policy, process, regulation, or legislation.”