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Income trust change shakes Bird

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by Ian Harvey

“I spent the better part of nine months last year pulling this conversion to an income trust together,” he said as the company’s stock took a beating on the Toronto Stock Exchange. “This is a complete shock. When I heard it on the news driving home, I just about went off the road.” Income trusts are more common in the oil and gas industry. Bird is the nation’s only publicly traded income trust in construction and is based in Toronto with about 500 employees and $450 million in annual revenues.

ECONOMY

Correspondent

toronto

Bird Construction Income Fund CEO Paul Charette is fuming at the federal government’s about face on income trusts.

“I spent the better part of nine months last year pulling this conversion to an income trust together,” he said as the company’s stock took a beating on the Toronto Stock Exchange. “This is a complete shock. When I heard it on the news driving home, I just about went off the road.” Income trusts are more common in the oil and gas industry. Bird is the nation’s only publicly traded income trust in construction and is based in Toronto with about 500 employees and $450 million in annual revenues.

It converted to an income trust with a $70 million offering Feb. 27 this year.

Finance Minister Jim Flaherty made the dramatic announcement Oct. 31, arguing that the rush by corporations to convert to income trust funds threatened the Canadian economy.

New measures would mean companies converting now will end up paying taxes at 34 per cent, the current corporate tax rate, and end any advantage to conversion. It will drop to 31.5 per cent by 2011 at which time all income trusts will have to begin paying the tax.

Income trust conversion became popular because it allowed companies to avoid paying corporate taxes. Instead, they dispersed profits to their unit holders who would then pay tax at their own personal income tax rates.

The finance ministry says while in theory that could result in more money for government coffers, in practice, however, little of it has been recovered because many of the units are held in tax sheltered RRSPs. One estimate suggests the loss of tax revenue could have gone as high as $1.1 billion.

Charette isn’t convinced. “In fact, the government ends up getting more money because the personal tax rate in Ontario is about 45 per cent at the top,” said Charette. “And they get that money monthly because distributions from income trusts now are all monthly. That money is going back into the economy because people are spending it.”

He pointed to a recent report showing the personal tax revenues were several billion dollars higher than expected and said it’s likely the increase is due in part to the revenues from income trust distributions.

“When the Liberals were going to make a decision on income trusts last November, we held off on our conversion plans,” said Charette. “Then they said they weren’t going to act so we went ahead, converting this year. At the time, the Conservatives said they supported income trusts. It was part of their election platform.”

The final straw for the federal government was apparently the announcement by Bell and Telus that they would convert to an income trust. This year alone, companies with revenues totaling more than $70 billion have converted to trusts. The finance department feared if the trend continued, it would open up a huge hole in the federal and provincial governments’ budgets.

Charette said Bird will have to review its options, though it won’t change the way the company does business.

“It didn’t change anything when we converted, and it won’t change it now,” he said. “But I suppose we will consider converting back.” However, he said, the immediate plan is to let the dust settle and then review options.

“The market is over reacting, but I think it will settle down and recover,” he said. “I’m really disappointed at the announcement.”

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