Professor Elam

An old saying has it that if it sounds too good to be true, it probably isn’t.  This is particularly true of returns that are much higher than normal. If T Note are returning say 4.75% as they are now, one should be wary of an investment trust returning say 13%. That has been the case for Canadian Petroleum Income Trusts .  Oil trusts like real investment trusts REITs (Real Estate Investment Trusts) pay out 90% of their earnings and therefore no income tax to the government. The recipient of the dividend pays all the tax.  The government of course does not necessarily see it that way, click on the hyper link.  They want the money first, leaving less for the dividend recipient.  Here’s Bloomberg’s report on it.   C$19 billion in trust capitalization was wiped out just today.  The TSX index lost 2.4% of its value.  One observer noted that billions will be lost in capitalization due to the government losing C$300 M in tax revenue.

Click on the image at left to see what a one day 15% loss in a stock looks like.  Now using your accounting knowledge, how would you assess how much this cost the stockholders of CNE?  Hint,look at the drop in market capitalization. 

Another goal of a university education is to stimulate critical thinking on your part.

Okay, was this good for the trust business in Canada?
After promising to leave trusts alone, did this inspire confidence in the Canadian capital markets outside Canada, ie, if you were a foreign investor that held such shares, how would you feel?
Does government intervention in capital markets matter?  (hint does $19 billion loss in one day matter)
How might the government have handled this differently even if they were going to impose taxes so as to not have a large one day collapse in prices generally or in trust prices specifically?

I expect multiple responses to this post as this really gets to the heart of numerous issues, accounting values, tax policy, govt intervention, ownership of private versus public assets, etc.

DLE

Or of course we can discuss this on  a pop quiz in all classes this next week……
What is a real esatate investment trust, can you use one of the glossaries in Helpful Websites to find out?   Try this link.