Carney’s Carnage

Mark Carney, Finance Minister Jim Flaherty’s designee to succeed David Dodge as governor of the Bank of Canada, confirmed a well-circulated rumor last week during an appearance before the House of Commons Finance Committee intended to establish his qualifications to head the country’s central bank.

As the indispensable Diane Francis notes, Carney admitted to Members of Parliament that he convinced Stephen Harper’s minority government to lay an entity-level tax on income trusts.

The Tax Fairness Plan was meant to stop tax leakage. But a recent report from global accounting giant Deloitte & Touche suggests an entirely different consequence.

The income trust population has shrunk by more than 15 percent from 256 to 215 since Oct. 31, 2006. Foreign exchange fluctuations and commodity prices played a part in the decline, but Flaherty’s trust tax announcement was the primary catalyst.

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 wasn’t so balanced: 70 percent of the purchasers are tax-exempt pension/private-equity funds or foreign buyers who pay little, if any, tax in Canada.

The Green Party of Canada, citing the Deloitte report, called for a public inquiry on Dec. 7 into Flaherty’s “unproven allegation that income trusts result in a loss of tax revenue to Ottawa.”

Flaherty still hasn’t provided evidence to support his tax leakage contention; the minority Conservative government did turn over 18 pages of blacked out documents in response to an Access to Information request (the Canadian equivalent of the Freedom of Information Act in the US).

The 40 trust takeouts cost the new owners CAD39 billion and wiped out CAD1.372 in annual taxable distributions. That CAD1.372 will be diverted to interest payments on loans used to make the acquisitions.

That’s a helluva leak.

Dividends 2008

Preparing your investment portfolio for election outcomes requires you to set aside political desires and focus on what’s likely to happen.

Although there are still more than 10 months until the US chooses its next president, the issues motivating voters have evolved over more than five years. The story is well worn and familiar, so absent a monumental pileup, the big picture says the Democrats will win the White House in 2008 and maintain control of both houses of Congress.

And the numbers at online prediction market intrade.com, as they have for more than a year, support that narrative. (Polls are useful, but a guy answering questions over the phone isn’t nearly as motivated as one putting his money where he thinks the vote is.)

The bluing of America (of Washington, at least) will impact markets, sectors and companies, but whatever happens Nov. 4, 2008, it will be months, years perhaps, before the election’s impact will show up in the economy and financial markets.

The Jobs and Growth Tax Relief Reconciliation Act of 2003 cut the maximum tax rate on dividends to 15 percent, with a rate as low as 5 percent for low-income payers. It also knocked down the rate for long-term capital gains to the same level and reduced the rate on the estate tax as well.

US-based investors in Canadian income and royalty trusts have certainly enjoyed the benefit of the dividend tax cut, but the Bush tax cuts, including the Economic Growth and Tax Relief Reconciliation Act of 2001, aren’t likely to be extended as written.

Sen. Clinton, relying upon an economic team that looks a lot like the one President Clinton put together during the 1990s, is likely to simply tweak the numbers. Although she voted against extending the tax cuts, including the lower tax on dividend income, candidate Clinton has been silent on the dividend and long-term capital gains reductions set to expire in 2008. She has suggested that the top two marginal rates lapse on schedule in 2010.

Sen. Obama is opposed to extending the 2001 and 2003 tax cuts, and Sen. Edwards already announced plans to repeal the 2001 and 2003 tax cuts to help pay for his healthcare proposals.

Rudolph Giuliani and Mitt Romney both advocate making the dividend tax cut permanent; doing so would obviously encourage investment in dividend-paying stocks.

This doesn’t seem like a populist issue at first blush, but a Democratic candidate capable of articulating the relationship between a lower dividend tax rate for those making, say, less than USD200,000 and encouraging individual responsibility for providing for one’s retirement would pull many votes from the traditionally Republican-leaning investor class.

The Next Cut

The US Federal Reserve sliced another 25 basis points off the fed funds rate Tuesday, taking it to 4.25 percent.

It’s the third consecutive meeting the Federal Open Market Committee (FOMC) has cut rates. The FOMC also cut the discount rate, the interest rate banks are charged by their regional Federal Reserve Bank’s lending facility, by 25 basis points.

The Roundup

Oil & Gas

Canadian Oil Sands Trust (COS.UN, COSWF) announced that the processing unit at Syncrude will be shut for two to four weeks following a Dec. 5 fire. The shutdown of Coker 8-3 will pare Syncrude’s 2007 production to 110 million to 111 million barrels, within the range of 108 million to 114 million barrels forecast on Oct. 31.

The costs related to the shutdown will be reported later this month when Canadian Oil Sands releases its 2008 budget. Prior to the fire, Coker 8-3 was producing about 75,000 barrels a day.

A coker helps process heavy oil extracted from oil sands deposits into refinery-ready crude. Syncrude’s output averaged 310,400 barrels a day in November.

The company will use two other cokers at its plant near Fort McMurray to blunt the loss of Coker 8-3. Canadian Oil Sands Trust is a buy up to USD38.

Canetic Resources Trust (CNE.UN, NYSE: CNE) filed and mailed its information circular pertaining to its proposed combination with Penn West Energy Trust (PWT.UN, NYSE: PWE). The special unitholders meeting to vote on the arrangement will be held Jan. 9, 2008.

Under the terms of arrangement, each Canetic unit will be exchanged for 0.515 Penn West unit. Canetic unitholders will also receive a one-time special distribution of 9 cents Canadian per Canetic unit to equalize the distribution payment of both entities for a period of six months.

The arrangement should qualify as a tax-free reorganization under US federal income tax laws. Canetic Resources Trust is a hold; Penn West Energy Trust is a buy up to USD38.

Vault Energy Trust (VNG.UN, VNGFF) has evaluated the impact of the Penn West Energy Trust/Canetic Resources Trust merger on Penn West’s offer to acquire Vault, concluding that Penn West’s offer is fair and in the best interest of Vault unitholders.

A unitholders’ meeting to formally approve the Penn West/Vault arrangement will be held Jan. 9. Sell Vault Energy Trust.

Electric Power

Macquarie Power & Infrastructure Income Fund (MPT.UN, MCQPF) has hiked its monthly distributions to 8.75 cents Canadian per unit from 8.58 cents Canadian because of continuing strong performance, the trust’s solid financial foundation and stable assets.

The monthly distribution increase will take effect in January and will be payable on or about Feb. 15 to unitholders on record as of Jan. 31. Buy Macquarie Power & Infrastructure Income Fund up to USD12.

Real Estate Trusts

Calloway REIT (CWT.UN, ) has agreed to buy 10 Wal-Mart anchored shopping centers from Wal-Mart Canada and SmartCentres for about CAD680 million. Calloway’s initial investment will be about CAD405 million, with a further CAD275 million payable over the next four years as additional space is built and occupied in the centers.

The 10 centers will generate net rents of about CAD26 million a year on initial closing and more than CAD44 million a year on completion. The retail REIT will finance the deal with a combination of mortgage debt, the issuance to Mitchell Goldhar of up to 1.6 million in exchangeable units of a subsidiary limited partnership and other third-party financing.

Goldhar, owner of SmartCentres and co-owner with Wal-Mart of the 10 properties, will increase his equity interest in Calloway to about 24.7 percent from 23.4 percent. Calloway REIT is a buy up to USD26.

Primaris Retail REIT (PMZ.UN, PMZFF) is boosting its monthly distribution to 10.16 cents Canadian per unit in December, a 3.4 percent increase from 9.8 cents Canadian in November. The new distribution will be paid Jan. 15 to holders of record as of Dec. 31. Buy Primaris Retail REIT up to USD19.

Speaking Engagements

I’ll be appearing at the World Money Show in Orlando at The Gaylord Palms Resort, Feb. 6-9, 2008. Come join me for the opportunity to meet and hear more than 120 Wall Street experts who will tell you what to buy and what to sell in 2008.

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