Royal Bank foresaw what Deloitte has confirmed........creating tax leakage where there otherwise wasn't tax leakage

Who's fairy tale do you want to believe? Jim Flaherty’s or those wild and crazy people at Royal Bank and Deloitte?

Earlier this month Deloitte issued a study entitled “Income trust buyouts: Lots of activity, little tax revenue”

Among other things Deloitte's study confirmed Income Trust buyers are largely tax-exempt:

Buyers in the 40 announced deals were equally split between strategic and private equity, as well as between domestic and foreign. But in terms of tax revenue for the Canadian government, the news was not so balanced: 70% of the purchasers are tax exempt pension/private equity funds or foreign buyers who pay little if any tax in this country.

What structures were buyers using to acquire trusts? In 22 of the 40 transactions, trust units were acquired; in the other 18, the purchaser acquired shares of subsidiary corporations, trusts or partnerships. The method of acquisition has significant implications for the buyer, trustees and unitholders. The entity left “holding the bag” has to bear the cost and risk associated with the wind-up of the engineered trust. A caveat for future purchasers: all parties should consider the implications of a proposed structure when assessing the value and risk of an offer for a trust.

Based on our involvement with over 20 income trust buyout transactions in the past year we believe that the buyout momentum will continue. The current M&A slowdown is primarily driven by “mega” transactions exceeding $1 billion in size. The income trust market, particularly the business trust segment, is comprised of medium-sized companies that are ideal for financial and strategic buyers. Clearly, volatility in the income trust sector is far from over.

This sounds familiar. In April 2007 RBC Capital Markets issued “Aesop’s Warning Ignored: Much wants more yet oft loses all” forecasting the following:

Proposed Trust Tax Akin to Killing the Golden Goose - Believing they are not collecting sufficient taxes fast enough, the proposed trust tax is a living example of Aesop's Fable, "The Golden Goose." By effectively killing the Trusts, less taxes will be collected, not more.

A Glimpse Into the Future - Look at the announced trust acquisitions; it is clear that less taxes will be collected, not more. The acquisitors are not your friendly neighborhood taxpayer, they are sharp investors looking to maximize cash flows from their investments. And who can blame them, it is their right to plan ahead in order to minimize their income tax burden.

Flawed Analysis - Forget prying the secret analysis free for public scrutiny; its underlying logic is likely flawed. Why? You can draw generalities from analyzing many specifics, but you cannot draw specifics from analyzing many generalities. Anecdotal (specific) evidence is already available on the announced trust takeovers. Taxes collected from the acquired trusts will decline, this is now coming into focus for all to see. How could the trusts have been a source of tax leakage if we collect less tax from them when reverted back to corporate form?

Greed, One of the Seven Deadly Sins - It was greed that killed the Golden Goose in Aesop's famous fable. Trusts, which lay golden eggs (cash distributions) for so many taxpaying Canadians, appear to be heading for similar fate for a similar reason.

It is time for a reality check.