Income Trusts and Seniors

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well said diane

Postby admin » Sat Jun 24, 2006 8:43 pm

Income trusts untrustworthy, investor activist warns Canadian Press
Published: Saturday, June 24, 2006 Article tools
TORONTO (CP) - Almost half of the business income trusts issued in the past 5 1/2 years are worth less now than when they hit the market, an analysis by an independent investor advocate shows.

Diane Urquhart, a Toronto financial professional turned industry gadfly, says the Entertainment One Income Fund (TSX:EOF.UN), which halted its distributions this week, has jumped to No. 7 on her list of 60 business trusts issued since 2001 and now valued below their initial public offering prices. That's 49 per cent of the income trusts issued since the list first started.

Issued at $10 in November 2003, units in the CD and DVD distributor peaked at $12.37 in December 2004 and crashed Thursday to $1.85 from $3.31 after the payout suspension.

The units were up a 15 cents to $2 on Friday, representing a loss of about $170 million to investors who bought into the Entertainment One offerings.

It's "another example of the long-term pain borne by seniors and other income-seeking buyers of income trusts, while the vendor, investment banks, securities lawyers and auditors received their cash participations upfront," fumes Urquhart.

She estimates total capital losses from the 60 trust IPOs on her list at $2.85 billion, with an average decline of 28 per cent.

Heading the list is the Heating Oil Partners fund with a 100 per cent loss, followed by Specialty Foods (TSX:HAM.UN) at 97 per cent, FMF Capital (TSX:FMF.UN) 96 per cent, Associated Brands (TSX:ABF.UN) 93 per cent, and Spinrite (TSX:SNF.UN) and Boyd Group (TSX:BYD.UN), both at 88 per cent.

Citing "accounting, financial reporting and yield valuation abuses of income trusts," Urquhart urges the Canadian Accounting Standards Board, the provincial securities commissions and the federal Finance Ministry to take action.

Prominent losers on her list include Hot House Growers (TSX:VEG.UN) 72 per cent, Art In Motion (TSX:AIM.UN) 70 per cent, Clearwater Seafoods (TSX:CLR.UN) 57 per cent, SFK Pulp (TSX:SFK.UN) 55 per cent, Clean Power (TSX:CLE.UN) 43 per cent, Osprey Media (TSX:OSP.UN) 30 per cent, CanWest Mediaworks (TSX:CWM.UN) 18 per cent and Jazz Air (TSX:JAZ.UN) 15 per cent.

© The Canadian Press 2006
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Postby admin » Wed May 31, 2006 8:11 am

Retirees warned of income trust dangers
Don't rely on them

Peter Koven, Financial Post
Published: Wednesday, May 31, 2006
Another voice came forward yesterday warning investors about the dangers of income trusts.

In a research note yesterday, Edward Jones market strategists Scott Thoma and Kate Warne tried to steer conservative investors away from most income trusts. If they do put money in them, investors should be highly selective and only hold them in a well-diversified portfolio.

"We suggest income trusts represent less than 10% of any industry holding and total less than 5% of an investor's portfolio," Edward Jones said.

The strategists specifically were trying to send a message to retired investors.

"A lot of our clients are retirees," said Mr. Thoma. "The last thing we want is for people living on fixed income to be reaching for these yields. We just want people to understand they can't rely on these income streams."

The problems with trusts identified by Mr. Thoma and Ms. Warne aren't new. They point out, for example, that many trusts are in highly volatile industries, they often have payout ratios over 100%, they have high debt levels and they're vulnerable to interest rate and energy price fluctuations. They also remind investors that government taxation policy could still change, which could throw the sector into disarray.

They don't tell investors to avoid trusts altogether, but suggest investors avoid almost all of them.

They put together a list of the 44 income trusts with market caps over $1-billion. Their criteria for buying one of these names is it should have an investment-grade credit rating and a good distribution stability rating. Stability ratings provide an indication of how likely the trust is to sustain its distributions at the current level.

Exactly six of the 44 names on their list meet those requirements: Yellow Pages Income Fund, Riocan Real Estate Investment Trust, Gaz Metro LP, Pembina Pipeline Income Fund, Epcor Power LP, and Fort Chicago Energy Partners.

Credit ratings are not common in the sector. In fact, just 12 of the 44 companies had ratings in the first place.

"Whenever we're looking at companies to follow for a recommendation, there's a whole screening process.," said Mr. Thoma. "We segmented trusts the way we would other investments. We wouldn't buy junk bonds, so why would be buy junk [trusts]?"

Mr. Thoma also pointed out that the trusts with the top yields tended to have the worst stability ratings, or none at all. Trilogy Energy Trust and Paramount Energy Trust had the highest yields, at 14.5% and 14.4%, respectively, but neither had a stability rating.

The Edward Jones report comes at a time when income trusts have come under more scrutiny. Forensic accountant Al Rosen, for example, has long been a critic of their "loose" accounting practices in calculating distributable cash.

Standard & Poor's has also pointed out inconsistencies in how trusts calculate distributable cash and how investors can be misled by this. S&P argued the number can be easily manipulated because there are no rules governing it.

pkoven@nationalpost.com

© National Post 2006
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My Communication with Cdn Accounting Standards Board

Postby urquhart » Thu May 18, 2006 6:51 pm

Hello Paul Cherry, Greg Edwards and Mark Walsh
Canadian Accounting Standards Board

I have read the Canadian Accounting Standards Board ("CASB") May 3, 2006 Meeting Decision Summary , that says the CASB has decided that there are no changes necessary in income trust accounting standards. I am very surprised by this decision and would like to meet with you personally to discuss the now well-acknowledged serious problems in the accounting and financial reporting of income trusts.

The matter of serious inconsistencies in income trust accounting, and its consequent problems on the valuation of income trusts, has now been well-documented in many research and media reports that are attached.

· Accountability Research Corporation - Worst is Yet to Come: The $20 Billion Deception that Dwarfs the Tax Debate

· Accountability Research Corporation - Down the Income Trust Rabbit Hole

· Standard & Poor's Report - Income Trusts I - 16-Jan-2006

· Standard & Poor's Report - Income Trusts II - 09-Mar-2006

· Toronto Star - Income trusts an issue years ago - With Quotes from Professor Jack Mintz, President C.D. Howe Institute

· Strategic Analysis Corporation - A Critical Look at Income Trusts

· Globe and Mail - Peters & Co. - Energy Trusts

· National Post - Analyst Says Suspended Distributions Will Rise to 50% - With Quotes from Blackmont Capital Analyst Barbara Gray


On April 5, 2006, The British Columbia Securities Commission issued a warning on investment in income trusts on its website at http://www.bcsc.bc.ca/release.aspx?id=3041. I have attached the BCSC warning as a PDF file, containing the BCSC Website Home Page With the News Headline, the News Release, the Alert and the Public Education Document.

We know from the Accountability Research report " A Strange Trip Down the Rabbit Hole," that the net income in the denominator of the ratio, cash distributions divided by net income, has been inflated by non-sensible income tax recoveries. These non-sensible income tax recoveries are from the amortization of hundreds of millions of dollars of non-sensible future tax liabilities on their balance sheets. The income tax recoveries in the income statement and the associated income tax liabilities on the balance sheet are non-sensible because income trusts are not subject to any business income taxes. The mantra of "Get us the most juicy yields that you can " has now gone beyond the acceptance of prominent reporting of non-GAAP management statistics, such as distributable cash and cash yields, to improper Canadian GAAP accounting of net income.


I would like to remind you that the accounting and financial reporting abuses in the income trust asset class is not esoteric intellectual debate. The financial reporting abuses and improper cash yield valuation methodology are contributing to serious investment losses in the market, largely borne by seniors who are not sophisticated investors and who are trusting of the banks who sell these securities to them. Appendix II in the attached report, "Teranet Income Fund - Do Not Be Deceived By the Cash Yields and Marketing" provides a list of 54 business income trust IPOs that have been underwritten since January 1, 2001 and that are trading at a capital loss relative to their IPO price. The total capital losses on these business income trust IPO’s in capital loss is $2,611 million and the average degree of loss on these business income trust IPO’s in capital loss is 31%. I anticipate that there will be investment losses of at least $25 billion on the business income trusts issued to date caused not by an economic downturn, but by the accounting and financial reporting abuses.

Figure 15: Business Income Trust IPO Performance as of May 16, 2006


Industry

# IPO's With Capital Loss
54

# Total IPO's
120

% of IPO's With Capital Loss
45%


IPO Capital Loss $ Millions
-$2,611

Capital Loss as % of IPO Offering Size
-31%

Capital Loss As Multiple of IB Fees
5.4

The largest proposed business income trust to date, Teranet Income Fund, has filed a preliminary prospectus, that exhibits the same accounting and financial abuses found in the Accountability Research and Standard and Poors reports. I have concluded that the income trusts in Canada, including the pending Teranet Income Fund, have such flagrant disregard for Canadian GAAP that these businesses are making a mockery of Canadian GAAP and the Canadian Accounting Standards Board. I have numerous ideas about what the CASB, the provincial securities commissions and the Federal Finance Department need to do to mitigate the size of this evolving financial calamity for seniors. I wish to explore with you the role the CASB can take to fulfil its mandate and to demonstrate its social responsibility to ensure that our seniors are not being duped out of billions of dollars of their hard-earned retirement capital. We cannot have Canadian soldiers being killed in Afghanistan to protect the principles of democracy, freedom and justice, while accounting and investment professionals with authority to protect the public interest turn a blind eye to seniors being taken advantage of at home.



Diane Urquhart

Investor Advocate

Mississauga, Ontario

Telephone: (905) 822-7618

E-mail: urquhart@rogers.com
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May 2, 2006 Federal Budget - Income Trusts

Postby urquhart » Wed May 03, 2006 7:25 am

May 2, 2006 federal budget adopted the Goodale proposal for attempted tax parity between income trusts and large corporations, by no new tax on income trusts and a lowering of federal taxes on dividends from large corporations. (There is no new tax credit for non-taxable accounts owning public corporations that would achieve full tax parity amongst taxable and non-taxable investors). I did not see anything in the budget documents on my proposal to deny mutual fund trust status to income trusts that did not conduct its financial reporting using Canadian GAAP, nor for new independent accounting and auditing oversight agencies. A new prescribed condition for mutual fund trusts could still be treated as a technicality implemented as a change in income trust regulations, but I am not holding much hope for this.

However, there is a section in the budget indicating that the federal government is placing a high priority on a new national securities regulator, which is progress! This new priority was covered by CBC News and in the following excerpt from the May 2, 2006 Federal Budget:

"Efficient Capital Markets
To ensure rising living standards and enable Canadians to receive the quality public services they expect of their governments, the Government of Canada is committed to reducing or eliminating impediments to the competitiveness and efficiency of Canada's economic union.

An important foundation for a strong economy is a regulatory regime for the securities market that ensures market integrity and investor protection. Efficient capital markets promote domestic and foreign investment in the economy, stimulating productivity growth and jobs. All jurisdictions recognize that Canada's securities regulatory system must be improved to respond more rapidly and effectively to regulatory and market developments at home and abroad.

The provinces and territories have made progress in improving the current system of securities regulation in Canada by narrowing regulatory differences and streamlining the administration of securities laws. To maximize benefits for investors and issuers and strengthen the federation, intensified efforts are required. The Government believes that Canadians would best be served by a common securities regulator that administers a single code, is responsive to regional needs and has a governance structure that ensures broad provincial participation. A common regulator would foster more responsive policy making, improve market efficiency, eliminate duplication, provide common standards of investor protection, and strengthen Canada's voice in international discussions on regulatory standards. It would also significantly enhance capacity for effective, integrated enforcement in capital markets across Canada.

Recognizing the importance of a common securities regulator to a stronger and more effective Canadian economic union, the Minister of Finance will engage with provinces and territories on this issue on a priority basis."
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E-mail to Ontario Cabinet Ministers & Opposition Critics

Postby urquhart » Sat Apr 15, 2006 7:25 am

Hello Joseph Cordiano, Ontario Minister of Economic Development and Trade:

I read your concerns this morning in the attached article of the Toronto Star - "MPP calls for fraud check" about Susan Lawrence fighting a legal battle to stay in her home impacted by mortgage fraud. I wish to bring to your attention the pending conversion and IPO of Teranet, which provides the Ontario land registry services, where land registry records are tampered with as part of the mortgage fraud. Eric Reguly and Andrew Willis wrote the attached article in the Globe and Mail - "Ontario to Record Teranet Windfall Gain" indicating that the Ontario Government expects to make a $300-million-plus windfall capital gain in an income trust offering to be announced within two weeks.

Barry Critchley has written the attached article in the National Post - "Conflicting advice on Teranet's IPO," where questions are raised about the Ontario Government benefitting from the income trust conversion, which is largely bought by seniors and where Teranet has obvious security problems and where income trusts generally have significant accounting and financial reporting problems acknowledged by David Wilson, Chairman of the Ontario Securities Commission.

Today's Toronto Star article confirms that the Law Society of Upper Canada has initiated 25 enforcement actions and has 90 lawyers under current active investigation for alleged mortgage fraud. I have attached an e-mail sent from the Law Society of Upper Canada to Barry Critchley of the National Post providing more details, including the fact that nine Ontario lawyers have already been disbarred or temporarily suspended due to confirmation that these Ontario lawyers facilitated or have been directly involved with mortgage fraud. Should our seniors be owning a land registry system without confirmation of its security and without details on whether and how these lawyers were able to alter the Teranet land registry records? Also, should the Ontario Government make a $300 million windfall gain from the Teranet income trust IPO, while seniors such as Susan Lawrence are being defrauded due to land registry record tampering and while other seniors become owners of the Teranet income trust that will inevitably suffer investment losses as the breadth of mortgage fraud and the role of tampered Teranet land registry system becomes more broadly known. If consumers pay land registry fees for placing electonic land registry records onto the Teranet system, does Teranet not offer some form of pledge to do the best of its ability to ensure that the original records for which they paid a fee exist and are not altered on the Teranet system. How can so many lawyers, albeit a small percentage of all lawyers, not have been caught by routine security measures at Teranet?

Furthermore, reasonable people could question why the Ontario Government would be taking windfall gains from an income trust offering, in an asset class that is widely recognized to have serious accounting flaws, and financial reporting and marketing abuses. David Wilson, former Scotia Capital Chairman and current OSC Chairman, has acknowledged the problems and has sent the issue to the Canadian Securities Administrators for resolution by new guidelines for the public disclosure on reconciliation of reported cash available for distribution and the Canadian GAAP net income and cash flow statements. Should the Ontario Government not place a moratorium on its own sale of assets through income trust conversions until the proper accounting standards and new financial reporting guidelines are in place and understood by the buyers of income trusts, who are primarily unsophisticated seniors and other income seeking investors?


Diane Urquhart
Investor Advocate
Telephone: (905) 822-7618
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Federal Pre-Budget Submission on Incoem Trusts

Postby urquhart » Thu Apr 13, 2006 1:46 pm

Diane A. Urquhart,
1486 Marshwood Place,
Mississauga, Ontario, L5J 4J6
Telephone: (905) 822-7618
FAX: (905) 822-0041
urquhart@rogers.com

April 13, 2006

The Honourable Minister James M. Flaherty,
Federal Minister of Finance,
Department of Finance,
140 O’Connor Street,
Ottawa, Ontario, K1A 0G5
Flaherty.J@parl.gc.ca
jflaherty@fin.gc.ca
budget2006consult@fin.gc.ca


Dear Honourable Minister James M. Flaherty:

I am pleased to participate in the Federal Government pre-budget consultation process, which ends April 19. I am concerned about income trusts receiving a tax advantage relative to corporations, while income trusts are being sold into the public markets with accounting and financial reporting abuses that “goose” the valuation of income trusts. Income trusts are primarily sold to seniors and other income seeking investors, who are generally unsophisticated and trusting investors, and who are unable to recover investment losses caused by accounting and financial reporting abuses. The beneficiaries of the accounting and financial reporting abuses of income trusts are: the business owners selling income trust IPOs at prices that are higher than what strategic industry buyers will pay; and, the investment bankers, securities lawyers and accountants, who receive fees for the income trust conversions and equity offerings. This is short term gain by the income trust vendors, with significant long term pain for our seniors and income seeking investors, who are being deceived by today’s high cash distribution yields that are composed of both income and a return of capital.

There is much that the federal government can do to fix the accounting flaws and financial reporting anomalies found by Standards and Poors and Accountability Research. The federal government needs to ensure that its federal tax concessions for income trusts are not only improving the investment returns for seniors, but at the same time providing the much needed investor protection in the income trust asset class. I propose amendments to the federal Income Tax Act and Regulations and to the Canada Business Corporations Act and Regulations that denies initial mutual fund trust status and withdraws such status to income trusts that do not follow Canadian Generally Accepted Accounting Principles, in both their accounting and financial reporting.

The federal government must take its own responsibility for ensuring overall policy benefits from its own federal tax concessions to income trusts, without waiting for provincial government involvement in similar tax concessions and not relying upon provincial jurisdiction to resolve the investor protection issues on its behalf. The former Minister of Finance Ralph Goodale attempted to stem the flood of income trust conversions by his proposal to leave income trusts untaxed, while substantially decreasing the tax on dividends from corporations. Tax parity between income trusts and corporations does remove the rationale for income trust conversions on the face of it, however, tax parity is not being achieved and also the accounting and financial reporting abuses make income trust conversions attractive, even if tax parity occurs. Firstly, tax parity is not achieved by the Ralph Goodale proposal alone, because the thirteen provinces and territories have to cut their share of taxes on dividends and so far none have done so. Secondly, the non-taxable pension funds continue to have an advantage from the income trust structure, since income trusts do not pay taxes while corporations do, and pension funds are not taxable and do not receive a tax credit to create the tax parity theoretically achieved for taxable individuals. We also know that foreigners own an estimated 24% of Canadian-based income trusts, so there is income trust demand from this source, where there is clear tax leakage from Canadian governments.

The matter of serious inconsistencies in income trust accounting and financial reporting has now been well-documented in many research reports that are in the attached file “Research on Income Trusts Accounting and Financial Reporting Problems:.

• Accountability Research Corporation - Worst is Yet to Come: The $20 Billion Deception that Dwarfs the Tax Debate
• Accountability Research Corporation - Down the Income Trust Rabbit Hole
• Standard & Poor's Report - Income Trusts I - 16-Jan-2006
• Standard & Poor's Report - Income Trusts II - 09-Mar-2006
• Toronto Star - Income trusts an issue years ago - With Quotes from Professor Jack Mintz, Former President, C.D. Howe Institute
• Strategic Analysis Corporation - A Critical Look at Income Trusts
• Globe and Mail - Peters & Co. - Energy Trusts
• National Post - Analyst Says Suspended Distributions Will Rise to 50% - With Quotes from Blackmont Capital Analyst Barbara Gray

There has also been a large volume of media coverage discussing the serious flaws in income trusts that is in the attached file “Media on Income Trusts Accounting and Financial Reporting Problems.”

As shown in the following table, seniors and other income seeking investors have already lost $2 billion in income trusts that have gone down more than 30% since their initial public offering prices. The average loss in these first 24 income trust torpedoes is 58%, which clearly defies the marketing claim of income trusts being mature stable businesses with sustainable distributions suitable for retirees seeking preservation of capital and stable retirement income. The Accountability Research Report of November 16, 2005 estimates the ultimate investment losses will exceed $25 billion not caused by the economic cycle or the high Canadian dollar, but by the accounting and financial reporting abuses that inflated the income trust valuations in the first place.


BUSINESS INCOME TRUST INITIAL PUBLIC OFFERINGS BETWEEN JANUARY 1, 2001 AND MARCH 31, 2006
WHERE APRIL 6, 2006 PRICE IS DOWN MORE THAN 30% FROM THE INITIAL PUBLIC OFFERING PRICE
Short Name Date Offering Price No. of Units
Millions Size of Offering
$ Millions Underwriting Fee % Underwriting Fee
$ Millions Last Sale Price %Gain/Loss Gain/Loss
$ Millions
HEATING OIL PARTNERS 5/9/2002 $10.00 13.500 $135 5.75% $7.8 0.00 -100% -$135
SPECIALTY FOODS 3/13/2003 $10.00 20.130 $201 5.75% $11.6 0.59 -94% -$189
FMF CAPITAL 3/24/2005 $10.00 19.750 $198 5.75% $11.4 0.80 -92% -$182
ASSOCIATED BRANDS 11/15/2002 $10.00 11.763 $118 6.00% $7.1 1.37 -86% -$102
BOYD GROUP 2/28/2003 $8.60 1.050 $9 7.00% $0.6 1.43 -83% -$8
SPINRITE INCOME 2/8/2005 $10.00 20.291 $203 5.75% $11.7 2.50 -75% -$152
ADV FIBER TECHNOLOGIES 3/28/2002 $10.00 13.083 $131 6.00% $7.8 2.99 -70% -$92
ART IN MOTION 8/3/2004 $10.00 8.030 $80 6.00% $4.8 3.50 -65% -$52
ENTERTAINMENT ONE 11/4/2003 $10.00 14.140 $141 6.00% $8.5 3.40 -66% -$93
CLEARWATER SEAFOODS 7/31/2002 $10.00 23.290 $233 5.75% $13.4 4.08 -59% -$138
SFK PULP FUND 8/1/2002 $10.00 44.440 $444 5.50% $24.4 5.00 -50% -$222
ARRISCRAFT INTERNATIONAL 12/14/2004 $10.00 6.675 $67 6.00% $4.0 4.68 -53% -$36
GENERAL DONLEE 5/3/2002 $10.00 8.950 $90 6.00% $5.4 4.95 -51% -$45
GRANBY INDUSTRIES 12/16/2004 $10.00 7.376 $74 6.00% $4.4 4.98 -50% -$37
CLEAN POWER 11/14/2001 $10.00 21.200 $212 5.25% $11.1 5.10 -49% -$104
HOT HOUSE GROWERS 12/23/2003 $10.00 6.603 $66 6.00% $4.0 5.51 -45% -$30
CANWEL BUILDING 5/13/2004 $8.50 5.118 $44 5.75% $2.5 4.60 -46% -$20
MENU FOODS 5/22/2002 $10.00 12.900 $129 6.00% $7.7 5.60 -44% -$57
HARDWOODS DISTRIBUTORS 3/23/2004 $10.00 14.410 $144 6.00% $8.6 6.21 -38% -$55
SUN GRO HORTICULTURE 2/27/2002 $10.00 22.023 $220 5.75% $12.7 6.41 -36% -$79
GIENOW WINDOWS 10/19/2004 $10.00 16.500 $165 5.75% $9.5 6.80 -32% -$53
MADACY ENTERTAINMENT 4/20/2005 $10.00 7.540 $75 6.00% $4.5 6.81 -32% -$24
OSPREY MEDIA 4/15/2004 $10.00 20.400 $204 5.75% $11.7 7.00 -30% -$61
STEPHENSON'S RENTALS 7/28/2005 $10.00 7.011 $70 6.00% $4.2 7.01 -30% -$21
TOTAL OF ABOVE $3,453 $199.4 -58% -$1,985


The accounting and financial reporting flaws have been acknowledged by the Canadian Association of Income Funds, which recently created a task force of experts to develop new rules for the financial reporting of income trusts, which are expected to be different than Canadian GAAP. Similarly, the Ontario Securities Commission has requested the Canadian Securities Administrators to prepare new guidelines for the definition of cash available for distribution, which is a non-Canadian GAAP measure. There have been no initiatives announced by the Canadian Accounting Standards Board, who failed to ensure that the accounting and financial reporting for income trusts is not misleading and protects the interests of investors. The first government action taken to date is a warning on investment in income trusts by the British Columbia Securities Commission issued at its website http://www.bcsc.bc.ca/release.aspx?id=3041 on April 5, 2006.

I believe the income trust accounting and financial reporting abuses are at their core caused by the lack of independence within the current Canadian Accounting Standards Board for the setting of accounting standards, and by extremely weak provincial securities regulation and enforcement. The first step and the least the federal government should do is to make a prescribed condition within the Income Tax Act Regulations for mutual fund trusts to follow the Canadian Generally Accepted Accounting Principles (“Canadian GAAP”), whose meaning is amended in the CBCA Regulations.

Since the current income trust accounting and financial reporting abuses have been permitted to develop over the past five years under the auspices of the current Canadian Accounting Standards Board (“CASB”), it is time to fix the core causes of the problem. Sections 70 and 71 of the CBCA Regulations today says that “Canadian GAAP” means generally accepted accounting principles as set out in the Handbook of the Canadian Institute of Chartered Accountants. I recommend that Section 70 and 71 of the CBCA Regulations be changed so that “Canadian GAAP” means generally accepted accounting principles established by the Canadian Accounting Standards Board, defined as independent and representative of all stakeholders including public investors; and, authorized within the Canada Business Corporations Act (“CBCA”). This will entail the restructuring of the current Canadian Accounting Standards Board, such that there will be a clear majority of fully independent Board members, the accounting principles of the Board will be authorized in the CBCA and the Board will report to Industry Canada, who administers the Canada Business Corporations Act. The Board can not report in any manner to the Canadian Institute of Chartered Accountants and cannot be a self-regulator of the accounting industry. The CBCA revisions would also define the CASB’s purpose to be the setting of accounting principles for financial statements that are intended to be utilized in individual investor decision-making. These CBCA changes would supersede the precedent set to the contrary in the Hercules Management v. Ernst & Young Supreme Court of Canada decision in 1997.

This CBCA legislative change would not only address the root cause of the income trust accounting and financial reporting abuses, it would reduce the prospects for corporate calamities caused by lax accounting principles that allow executives to act in their own interests, rather than creating long term investment returns for investors. The list of corporations that became insolvent or have suffered precipitous drops in prices due to alleged or proven accounting and other securities abuses is a long one. Some of the names on this list are: Northland Bank, Canadian Commercial Bank, Principal Group, Teachers Investment and Housing Co-operative, Merit Energy, Shamray Group, Hercules Management, Confederation Life, National Business Systems, Bramalea, Phillips Services, Livent, YBM Magnex, Castor Holdings, Jevco Insurance, Standard Trust, Crocus, Portus, Norbourg, Northshield, Nortel and Hollinger.

I have attached the changes in the Income Tax Act and Regulations and the changes in the Canada Business Corporations Act and Regulations that would enable the Federal Government to give seniors and other income seeking investors reduced taxation on their income from income trusts, while at the same time providing much needed investor protection for both income trusts and corporations. The changes proposed here fit within the priorities of your government for accountability and crime deterrent.

Yours sincerely,



Diane A. Urquhart

Investor Advocate
Mississauga, Ontario
Telephone: (905) 822-7618
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BCSC warns investors about income trusts

Postby urquhart » Wed Apr 05, 2006 9:53 am

BCSC warns investors about income trusts

Regulator issues investor alert

Wednesday, April 5, 2006

By IE Staff

The British Columbia Securities Commission is warning people to do their homework when it comes to investing in income trusts.

“Income trusts have become a more common investment vehicle for Canadians,” says BCSC Executive Director Brenda Leong. “But, there are still some basic things that investors should know when they are considering investing in income trusts.”

To help investors, the BCSC has issued an investor alert pointing out some of the questions that investors should be asking before they invest.

“At the very least, people should know that income trusts are not fixed-income investments and that they should ask questions about high yields - can the trust afford to distribute the cash that they do and can they sustain that distribution?” Leong says.

The alert also cautions people to review carefully their current investment holdings to understand what exposure they may already have to income trusts. The fact is they may already have indirectly invested in income trusts though mutual funds that they own.

For more information go to the BCSC Website at:

http://www.bcsc.bc.ca/release.aspx?id=3041
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Ontario Government Teranet Income Trust Conversion Issues

Postby urquhart » Fri Mar 31, 2006 9:36 am

Hello Coulter Osborne, Ontario Integrity Commissioner:

Will the Ontario Government be forcing the public disclosure of what happened to the The Law Society of Upper Canada investigation of 72 Ontario lawyers as part of a probe into mortgage fraud that raises alarming questions about the security of the province's partially privatized land registry system, Teranet. According to the attached April 7, 2005 article, the law society investigation involves hundreds of complaints.

This morning, Eric Reguly and Andrew Willis wrote the attached article in the Globe and Mail indicating that the Ontario Government expects to make a $300-million-plus windfall capital gain in an income trust offering to be announced within two weeks. Reasonable people could question why the Ontario Government would be taking windfall gains from an income trust offering, in an asset class that is widely recognized to have serious accounting flaws, and financial reporting and marketing abuses. David Wilson, former Scotia Capital Chairman and current OSC Chairman, has acknowledged the problems and has sent the issue to the Canadian Securities Administrators for resolution by new guidelines for the public disclosure on reconciliation of reported cash available for distribution and the Canadian GAAP net income and cash flow statements. Should the Ontario Government not place a moratorium on its own sale of assets through income trust conversions until the proper accounting standards and new financial reporting guidelines are in place and understood by the buyers of income trusts, who are primarily unsophisticated seniors and other income seeking investors?

In addition to the cloud over income trust accounting and financial reporting governing income trusts, the investing public would need to know what the conclusion was of the Law Society of Upper Canada investigation of the 72 Ontario lawyers who are alleged to have either unknowingly facilitated or to have been directly involved in tampering with the Teranet land registry records. Should our seniors be owning a land registry system without confirmation of its security?

One could furthermore, question whether the pricing proposed for the Teranet income trust will be based on its current cyclically high earnings and cash flow, or whether it will be priced on a long term cycle average for these financial measures. I would not support the Ontario Government seeking to earn $300 million of windfall gains, which will translate into huge investment losses for the most financially vulnerable group in society, our seniors, during the next inevitable real estate slump.

Diane Urquhart
Investor Advocate
Telephone: (905) 822-7618



P.S. Here is a list of the income trust torpedoes, where Scotia Capital was co-lead or a member of the investment banking syndicate. How many income trust fiascos have to occur that are underwritten by Scotia Capital, before the investing public realizes that the OSC Chairman David Wilson has an extreme conflict of interest in this developing "Enron" , business income trusts with deceptive yields and poor quality assets not suitable for seniors and other income seeking investors.

Name Industry Group Date Price No. of Units
Millions Size of Offering
$ Millions Fee
$ Millions Scotia Capital ls % Change Losses
$ Millions
SPINRITE Apparel 2/8/2005 $10.00 20.291 $202.910 $11.7 2 2.64 -74% -$149
CLEARWATER SEAFOODS Food 7/31/2002 $10.00 23.290 $232.900 $13.4 2 4.05 -60% -$139
SFK PULP Forest Products&Paper 8/1/2002 $10.00 44.440 $444.400 $24.4 2 4.85 -52% -$229
GENERAL DONLEE Miscellaneous Manufacturing 5/3/2002 $10.00 8.950 $89.500 $5.4 2 4.92 -51% -$45
GRANBY INDS Packaging&Containers 12/16/2004 $10.00 7.376 $73.760 $4.4 2 5.19 -48% -$35
CLEAN POWER Electric 11/14/2001 $10.00 21.200 $212.000 $11.1 2 5.52 -45% -$95
HARDWOODS DISTRIBUTION Distribution/Wholesale 3/23/2004 $10.00 14.410 $144.100 $8.6 2 6.44 -36% -$51
OSPREY MEDIA Media 4/15/2004 $10.00 20.400 $204.000 $11.7 2 7.15 -29% -$58
STEPHENSON'S RENTALS Commercial Services 7/28/2005 $10.00 7.011 $70.110 $4.2 2 7.21 -28% -$20
CANEXUS Chemicals 8/18/2005 $10.00 31.750 $317.500 $16.7 2 8.35 -17% -$52
NORCAST Hand/Machine Tools 6/22/2005 $10.00 7.703 $77.030 $4.6 2 8.39 -16% -$12

SPECIALTY FOODS Food 3/13/2003 $10.00 20.130 $201.300 $11.6 1 1.10 -89% -$179
ASSOCIATED BRANDS Food 11/15/2002 $10.00 11.763 $117.630 $7.1 1 1.56 -84% -$99
ADV FIBER TECHNOLOGIES Machinery-Diversified 3/28/2002 $10.00 13.083 $130.830 $7.8 1 2.99 -70% -$92
MENU FOODS Food 5/22/2002 $10.00 12.900 $129.000 $7.7 1 5.85 -42% -$54
SUN GRO HORTICULTURE Agriculture 2/27/2002 $10.00 22.023 $220.230 $12.7 1 6.60 -34% -$75
MADACY ENTERTAINMENT Entertainment 4/20/2005 $10.00 7.540 $75.400 $4.5 1 6.97 -30% -$23
BRICK GROUP Retail 7/20/2004 $10.00 28.000 $280.000 $14.7 1 8.03 -20% -$55
RICHARDS PACKAGING Distribution/Wholesale 4/7/2004 $10.00 8.570 $85.700 $5.1 1 8.50 -15% -$13
ACS MEDIA Media 5/8/2003 $10.00 17.500 $175.000 $10.1 1 8.49 -15% -$26

Legend Total -$1,502
2 = Dealer Co-Lead
1= In Syndicate
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Another Investment Bank Out of the Closet on Income Trusts

Postby urquhart » Wed Mar 29, 2006 4:14 pm

Energy Trusts
Globe and Mail Update
Wednesday, March 29, 2006

Many energy trusts could be in trouble if lower natural gas prices persist, brokerage Peters & Co. Ltd. warned Wednesday, showing that spending at numerous firms to maintain production and pay distributions could exceed cash flow this year.

Peters analyst Jeff Martin did calculations for 19 trusts and found that on average the group could spend 25 per cent more than estimated 2006 cash flows just to pay distributions and cover maintenance capital, to hold oil and gas output steady.

That means the trusts need outside sources of capital to keep their business out of decline--or they might have to cut distributions.

Of the 19 trusts Peters looked at, PrimeWest Energy Trust was at the top of the scale, a chart showed, spending close to 70 per cent more on monthly payouts to investors and expenditures to hold production flat over its estimated 2006 cash flow.

Only one trust — Zargon Energy Trust — of the 19 was expected to spend less than cash flow on the two key items.

Mr. Martin said there could be pressure on capital spending and balance sheets this year, "particularly if lower natural gas prices continue throughout 2006." Gas prices have fallen about 50 per cent since a record high in December. Oil, however, remains strong and near record highs.

Money needed for maintaining production has been a controversial accounting question in recently. In early March, Standard & Poor's looked at 40 trusts across the spectrum and found the majority didn't subtract money needed for maintaining their businesses when they reported how much cash they had for distributions.

Energy trusts were particularly guilty, S&P said, noting that about 60 per cent of those the firm looked at generated enough cash to cover distributions after paying to hold production steady.

Debt is also an issue. Mr. Martin said he forecast both Provident Energy Trust and Ketch Resources Trust to have net debt to cash flow ratios of 2 or more at the end of the year, adding that the issue that in general should be closely monitored by investors. DAVE EBNER
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Postby admin » Wed Mar 15, 2006 9:33 am

Here, in the style of Jon Stewart's fake news is an item announcing a new income trust issue. To be marketed by a consortium of Canada's largest and most trusted investment dealers who have virtually guaranteed the public that they are placing the public interest ahead of themselves, so there is absolutely nothing to worry about.

Proposed new Income trust issue.
offering size $120 million
expected yield to investors 15%
price per unit $25.00
closing date April 9, 2006
first income payment, June 12 of never

Details of the issue as follows:

Greetings,

The informations contained in this email is a real business and not for
fraud, please take your time to read the details. My name is Jonathan Bako,
a Ghanian origin, and i work in a gold plantation.

I once did a business with a good friend from Columbia, during the course of
this business, we generated some huge amount of money, which was to be
shared among us. Unfortunately, things went wrong when my columbian friend
lost his legs in a clash. 20% of the money we made have been stolen in the
course of this incidenent and its possible we even loose everything if
something is not done to protect the situation. With special arrangements,
we have secured to move the Cargo with a Diplomatic Transportation System by
a cargo company. The cargo is signed as a photographic material fro security
reason, so no one will ever know its money.

I have not been given access to travel due to the business project i have to
finish here with some other client, thats why i need to make contact to save
the situation.

The cargo contains huge some of money which is known only by me and my
personal assistant. The total amount in the box is US$16 Million, divided
into 2 cargo trunk box. Destination for the cargo is said to be either in
US, Canada or any of the offices of the Cargo Company in Europe. As soon as
the cargo get to any of this locations, i will inform you so you can visit
the cargo company personally to carry on every neccessary arrangements in
securing the cargo in your custody.

The process to claim this cargoes are easy, as I have every legal documents
that can be used to back up the claims. All i need is somebody based in
abroad to complete this business for me.

Send a return email to my personal mail box: jonathan_bako@yahoo.com, i will
be willing to read from you if you are interested in securing this deal with
me, then i will explain further information that is neccesary about these
business and negotiations on percentage between u and me before the
completion of this deal.

Sincere Regards,

Mr. Jonathan Bako
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Call for Action on Income Trusts Sent to All Federal MPs

Postby urquhart » Mon Mar 13, 2006 2:43 pm

A Call for Action to Fix the Financial Reporting Abuses of Income Trusts

March 13, 2006

Introduction

Andrew Fastow, the Chief Financial Officer of Enron testified in Texas court that Jeffrey Skilling, the President of Enron, had asked him to “Get me as much of that juice as you can.” (Kristen Hays, Associated Press, reproduced in Globe and Mail, “Fastow points to Skilling”, March 7, 2006).

More financial reporting abuses found in the new Standard and Poors and Accountability Research Corporation research reports suggest that the 24 members of the Canadian Accounting Standards Oversight Council listed in the appendix to this report appear to operate on the same mantra: “Get me as much of those juicy yields from income trusts as you can”.

This communication is a call for action by our legislators to (a) hold the Canadian Accounting Standards Oversight Council accountable for the financial reporting fiasco in income trusts; and (b) to introduce new legislation to establish a Prescribed Yield Calculation for income trusts to stop the deception on income trust yields caused by market participants promoting non Canadian-GAAP cash measures. An estimated $20 billion of likely future investment losses by Canadian seniors and other income seeking investors is growing as more income trust issues come to market, deploying the financial reporting and marketing abuses discussed in the Accountability Research Corporation and Standard and Poor research reports.

The Canadian Accounting Standards Oversight Committee (CASOC) was established in 2000 by the Canadian Institute of Chartered Accountants (CICA). It is a private sector self-regulator funded by the CICA, with the stated purpose to serve the public interest by overseeing and providing input to the activities of the Canadian Accounting Standards Board. Unfortunately, this committee’s oversight of income trust financial reporting appears negligent and may represent a breach of trust to the investing public. CASOC membership includes Doug Hyndman, Chairman of the British Columbia Securities Commission, and Susan Wolburgh Jenah, Vice Chairman of the Ontario Securities Commission. Doug Hyndman chairs the CASOC.

Misconduct Found in the New S & P and Accountability Research Reports

Accountability Research Corporation released another report on business income trusts called “A Strange Trip Down the Rabbit Hole” on January 23, 2006, which has found evidence of Canadian Generally Accepted Accounting Principles (GAAP) that is so bizarre, one cannot help but wonder if there is negligence or breach of trust occurring at the CASOC.

Accountability Research Report, “A Strange Trip Down the Rabbit Hole”, January 23, 2006, says on page 2 and page 11:

“Figure 1 shows a listing of income trusts for which tax credits significantly increase reported net income (instead of tax expense reducing income, as is usually the case).”

“It is rather clear, even to some accountants, that their own rule (known as EIC-107) was poorly conceived nearly six years ago, and is now wreaking havoc on the financial statements of income trusts.”

The Accountability Research Report, “Worst is Yet to Come: The $20 Billion Deception that Dwarfs the Tax Debate”, November 16, 2005, found that cash distributions of business income trusts exceeded reported net income in the majority of cases. Page 1 of this report says:

“Seventy-five percent of the 50 largest business trusts have cash distributions exceeding their income. On average, they pay cash distributions that are 158% of their reported net income, which itself is open to manipulation.”

We now know from “A Strange Trip Down the Rabbit Hole,” that the net income in the denominator of the ratio, cash distributions divided by net income, has been inflated by non-sensible income tax recoveries. These non-sensible income tax recoveries are from the amortization of hundreds of millions of dollars of non-sensible future tax liabilities on their balance sheets. The income tax recoveries in the income statement and the associated income tax liabilities on the balance sheet are non-sensible because income trusts are not subject to any business income taxes. The mantra of “Get us the most juicy yields that you can” has now gone beyond the acceptance of prominent reporting of non-GAAP management statistics, such as distributable cash and cash yields, to improper Canadian GAAP accounting of net income.

Standard & Poors Report, “Canadian Income Funds and the Perceptions of Distributable Cash: Part II”, March 9, 2006, confirms the conclusions of Accountability Research Corporation with respect to the serious overstatement of cash available for distribution by income trusts, on page 1:

"Despite the critical importance of this figure [sustaining capex] to the generation and availability of distributable cash, we found that 57% [or 23] of the [40] income funds sampled excluded it from the distributable cash calculation, materially overstating the amount of operating cash on hand at the time of the distribution."

The Current Response to the Income Trust Financial Reporting Abuses

The list of naysayers and evidence of financial reporting abuses in income trusts is growing daily. Accountability Research Corporation, Strategic Analysis Corporation and Standard & Poors are to be congratulated for their efforts to educate seniors and other income-seeking individual investors, who have been the buyers of income trusts and income mutual funds over the past five years. But, this is an instance, where the free market cannot take care of the income trust problem, given the imbalance of power between the income trust issuers, income mutual funds and their supply chain of investment banks, accountants and securities lawyers. The “income trust industry” unfortunately appears to have had undue influence on the oversight bodies, such as the Canadian Accounting Standards Oversight Council and the provincial securities commissions. The Accountability Research Report estimate of $25 billion potential investor losses is growing daily as more income trust issues are placed in the market, using the same abusive financial reporting and marketing approaches described by Accountability Research Corporation, Strategic Analysis Corporation and Standard & Poors.

The Canadian Association of Income Funds is responding to the income trust financial reporting criticisms by its intent to release, by mid-year, new guidelines for the financial reporting of income trusts. Marc Tellier, C.E.O. of Yellow Pages Income, had the following to say on the subject to Allan Swift of Canadian Press, who wrote “Fix income trust rules, says Yellow Pages, Accountants needn't dictate, Industry groups could call shots”, reproduced in the Toronto Star on
Feb. 21, 2006:

“The chief executive of Yellow Pages Group is calling for a standard set of rules governing income trusts. Marc Tellier said yesterday there are several ways to compute the surplus cash that income trusts distribute to their investors or unit-holders. He said the rules do not have to be imposed by accountants, such as the GAAP (Generally Accepted Accounting Principles) conventions that govern share-based companies, rules that he said can cause distortions. Instead, the rules can be drawn up by industry associations We don't feel that GAAP is necessarily the way to go; there are other ways to do it," Tellier said following a speech to the Canadian Club in Montreal.”

David Wilson, Chairman of the Ontario Securities Commission (OSC), has announced the OSC’s participation in the Canadian Securities Administrators’ (CSA) efforts to develop new income trust rules. David Wilson, Canada’s leading securities regulator, is formerly C.E.O. of Scotia Capital Markets, which co-lead 30% of the business income trust underwritings and participated in two thirds of the business income trust underwritings, since 2001. These business income trust underwritings are in the asset class now broadly recognized to have serious financial reporting deficiencies, causing serious distortions in valuation. David Wilson was quoted by Paul Waldie of the Globe and Mail, in “Regulators decide no specific rules needed for hedge funds, February 24, 2006:
“Regulators are also working on new rules governing how income trusts calculate and report their cash distributions, he said yesterday. By design, income trusts are supposed to spin off cash to unitholders. But there are no rules governing how that cash flow is calculated. Mr. Wilson said the CSA is hoping to come up with a “definition that provides consistency for investors. “

So, the income trust industry wants to set its own financial reporting standards, which are not Canadian GAAP. And, David Wilson, Chairman of the OSC, would like to see the CSA introduce its own definition of cash available for distribution, that will also not be Canadian GAAP. These industry and regulatory pronouncements are going down the wrong track for the simple reason they reject Canadian GAAP, whose primary purpose is to provide investors with information on the profitability and strength of the balance sheet, so that they may make informed decisions. Mandatory public disclosure on a list of possible management adjustments to reconcile cash distributions to Canadian GAAP measures does not answer the fundamental question of how much of the cash distribution is income and how much is return of capital. New standards for public disclosure on a list of management adjustments from Canadian GAAP helps sophisticated institutions only, who understand which adjustments matter, whether the adjustments are reasonable and where they fit into the valuation equation. But, income trusts are designed and sold to the least sophisticated, most trusting and most financially vulnerable group, seniors and income seeking investors. These individual investors accept that cash distributions and cash yield are to be compared to GIC and bond income and yields, unless they are specifically told otherwise. For this trusting group, buyer beware is not good enough.

Recommended Actions

The bottom-line is that Canadian income trusts and investment banks should not be permitted to exclusively or predominantly publish non-GAAP distributable cash, cash distributions and cash yield measures, without equally predominant references to the Canadian GAAP income per unit and income yields.

Canadian accounting oversight and securities regulation agencies should be adopting at a minimum a Prescribed Yield Calculation with Mandatory Public Disclosure of this Prescribed Yield Calculation in public disclosures containing a yield statistic from income trust issuers and income-oriented mutual funds. This Prescribed Yield Calculation would need to appear in all related marketing materials issued by investment banks and mutual fund distributors. The Prescribed Yield Calculation should be a conservative measure reflecting net income per unit according to Canadian GAAP, for each income trust as an individual entity, and for income trusts owned in a fund when calculating the Prescribed Income Yield of the mutual fund.

The U.S. "SEC Yield" is a prototype for how income trust yields should be regulated in Canada. Cash yields reported by Canadian income trusts and their investment banks violate the principle of yield set out in the "SEC Yield" definition for the U.S. If U.S.-registered mutual funds are not adopting the "SEC Yield" definition for recording the income of Canadian income trusts and income deposit securities, this is a U.S. securities violation

It is time for the public to hold the Canadian Accounting Standards Oversight Committee to account for the past six years of negligence and breach of faith in the financial reporting standards for Canadian income trusts. If the Canadian Accounting Standards Oversight Committee was unable to ensure the creation of sensible Canadian GAAP Standards for income trusts sold to Canada’s least sophisticated, most trusting and most financially vulnerable group, seniors and income seeking investors, then why can the public have confidence in anything this committee does. This income trust financial reporting fiasco is enough justification for the federal government to intervene with the creation of new independent accounting standards and auditing oversight agencies, with proper federal statutes defining their governance structure and oversight powers.

Diane Urquhart
Investor Advocate
Mississauga, Ontario
Telephone: (905) 822-7618
E-mail: urquhart@rogers.com

Appendix
Members of the Canadian Accounting Standards Oversight Council

http://www.cica.ca/index.cfm/ci_id/19612/la_id/1.htm

Accounting Standards Oversight Council
This page was last updated March 3, 2006
Accounting Standards Oversight Council

Doug Hyndman, MBA
British Columbia Securities Commission
Vancouver
Denis Desautels, FCA
Consultant
Ottawa
Kerry Adams, FCA
KD Adams & Associates
Aurora
Wayne Albo, FCA, FCBV
Calcap Corporate Finance Limited
Toronto
Mary Arnold, FCA
Richford Holdings Ltd.
Edmonton
Gilles Bédard, FCGA
Vérificateur général, Gouvernment du Québec
Québec
Mary Best, CA
Arsenault Best Cameron Ellis
Charlottetown
Efrim Boritz, FCA, CA•IT/CISA, PhD
University of Waterloo
Toronto
Tom Connell, M.Sc
Standard & Poor's
Toronto
Bob Darling
Consultant
Winnipeg
Paul Goodyear, FCMA
The Salvation Army
Toronto
Monique Gravel, CFA
CIBC World Markets Inc.
Montreal
Woody Hayes, FCA, B.Sc, C.Arb
Hayes, Stewart, Little & Co.
Duncan
Bill Lovatt, CFA, FCGA
Great West Life Assurance Co.
Winnipeg
Bill McFetridge, CA, LLB
Bull, Housser & Tupper Barristers & Solicitors
Vancouver Richard Nesbitt, MBA
TSX Group
Toronto
Kevin Nye, MBA
Royal Bank of Canada
Toronto
Massood Oroomchi, B.Sc. Econ
Finex Consulting Group
Kitchener
James Peters, CA
Edmonton
David Scott, FCA
Canadian Public Accountability Board
Toronto
Axel Thesberg, FCA
KPMG LLP
Toronto
Patricia Walters, PhD, CFA
Disclosure Analytics, Inc.
Charlottesville
Susan Wolburgh Jenah, LLB
Ontario Securities Commission
Toronto
Ken Woods, FCA
Coolwoods Investments Ltd.
Vancouver
Julie Dickson
Non-Voting Member(s)
Office of the Superintendent of Financial Institutions
Ottawa
Tricia O'Malley, FCA
IASB Liaison (Non-Voting Member)
International Accounting Standards Board
London
Paul Cherry, FCA
Non-voting ex-officio
Chair, Accounting Standards Board
Toronto
Peter Martin, CA
Non-voting ex-officio
CICA
Toronto
Terry Paton, FCA, BComm
Non-voting ex-officio
Department of Finance, Government of Saskatchewan
Regina
Ron Salole
Non-voting ex-officio
CICA
Toronto
Harry Klompas, CA
CICA
Toronto
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Globe Coverage of March 9 S & P Report on Trusts

Postby urquhart » Fri Mar 10, 2006 7:31 am

INCOME TRUSTS

Trusts overstate payout ability: report
Capital expenses ignored, S&P says

ROB CARRICK

With files from reporter Dave Ebner
Globe and Mail, Report on Business, Friday, March 10, 2006

A study of the income trust sector has found a pattern of accounting in which trusts overstate their ability to pay the cash distributions that have made them so wildly popular with investors.

Standard & Poor's, a sober voice of analysis in the investing world, examined 40 trusts and found that a majority had less cash to pay to unitholders than indicated in their financial statements. The study is another negative for a sector that has come under an increasing amount of criticism for not being straightforward in its accounting.

S&P says the problem is that some trusts report the amount of distributable cash they have on hand without first subtracting the dollars they spend to sustain their operations. These capital expenditures cover basics such as the cost of maintaining or replacing factories, machinery and technology.

Kevin Hibbert, the S&P analyst who wrote the report, said capital spending to sustain operations accounts, on average, for 22 per cent of the cash generated by a trust's operations. Yet 57 per cent of the trusts he looked at excluded these costs in stating how much money they had to distribute.

Mr. Hibbert said these trusts won't necessarily have to cut or suspend their distributions, which typically crushes a trust's unit price on the stock market, as experienced by investors in such flameouts as FMF Capital Group, Entertainment One and Associated Brands.

Still, Mr. Hibbert said the study highlights the need for investors to scrutinize the way in which a trust documents its ability to pay out the cash expected by its unitholders.

"Some investors fail to appreciate the financial reporting and disclosure nuances due to a tendency to take at face value the distributable cash and payout ratios that are reported by management," he said. Other critics of trust accounting practices include forensic accountants Al Rosen and Mark Rosen and investor advocate Diane Urquhart, who targeted business trusts in particular. S&P issued an earlier report in January that highlighted the slack and ambiguous way in which trusts report distributable cash.

Independent income trust analyst Harry Levant said investors should be concerned about the lack of accounting rigour in the trust sector, even while noting that there are financially strong income trusts out there. "Investors think trusts are yield-based investment, where there's almost some kind of a guarantee there," he said. "Then there's a big surprise when distributions get adjusted."

In the January report, S&P's Mr. Hibbert said 10 per cent of the trusts examined had distributable cash lower than the amount reported by management and insufficient to cover monthly or quarterly payouts. After factoring in capital expenditures in the latest study, this number rose to 30 per cent.

Business trusts, often maligned for their accounting practices, had the highest level of disclosure of capital spending on existing operations. Energy trusts were off by the highest margin. According to Mr. Hibbert, each of the energy trusts he looked at indicated they were paying distributions that were lower than the amount of cash available. But when capital expenditures were included, he found that only 62 per cent were generating enough cash to cover distributions.

Baytex Energy Trust doesn't subtract capital spending to sustain its business from its distributable cash figure, but says it clearly presents all relevant figures. It had $227-million of cash flow from operations in 2005, of which it paid out half or $114-million. Capital spending was $130-million, not including buying and selling assets. The trust's stated payout ratio was 50 per cent, but would be more than 100 per cent if all capital spending was included.

However, it is difficult to say what capital goes to sustain the business and what goes to grow it, said Derek Aylesworth, Baytex chief financial officer.

"Baytex is comfortable with our disclosures," Mr. Aylesworth said.

The Canadian Securities Administrators, a group comprising provincial securities commissions, is working on a set of rules to standardize the reporting by trusts of their distributable income. Meantime, investors concerned about financially weak trusts have the option of buying a diversified basket of trusts through mutual funds, closed-end funds and exchange-traded funds that hold them in a diversified basket, or using on-line resources like the income trust stability ratings provided by S&P at stabilityratings.com or Dominion Bond Rating Service at dbrs.com.

The Canadian Association of Income Funds also has a committee looking at the accounting issue and it hopes to have ideas to present by mid-year. Baytex's Mr. Aylesworth said standards would be embraced. "If there is no consistency, I can see that it's confusing for investors."
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Bloomberg News - Canadian Income Trusts Overstate Cash

Postby urquhart » Thu Mar 09, 2006 7:21 pm

Canadian Income Trusts Overstate Distributable Cash, S&P Says
March 9 (Bloomberg) -- A majority of Canada's income trusts, whose gains have outpaced stocks for the past three years, overstate the amount of cash they have available to distribute to investors, a study by Standard & Poor's found.

Twenty-three of 40 trusts surveyed, or 57 percent, excluded capital spending from their so-called distributable cash, Standard & Poor's analysts Kevin Hibbert and Ronald Charbon said in a study released today. As a result, these trusts have less cash for shareholders because some of that money must be spent to maintain the business.

``Despite the critical importance,'' of capital spending, a majority of funds excluded it from their calculations, ``materially overstating the amount of operating cash on hand,'' the report said.

Trusts pay most of their cash flow to investors on a monthly basis to avoid paying corporate taxes, and are often valued on how much cash they generate. Excluding spending needed to sustain a business resulted in a 14 percent distortion in the cash available for investors over two years, the report said.

The ratings company said in the first phase of the study in January that inconsistent definitions of available cash ``pose risks'' for investors.

``The overall conclusion from this series of commentaries is that the calculation of distributable cash should be more thoughtful and the related disclosures significantly improved,'' the two analysts said.

Some of the cash-generation calculations the trusts use don't conform to generally accepted accounting principles and are adjusted to exclude some items, Hibbert and Charbon said in the first part of their study. Distortions in available cash averaged 12 percent over two years because of those factors.

There are about 250 income trusts with a market value of C$180 billion ($155 billion), Charbon said in a telephone interview.

Including the reinvestment of dividends, Canada's sub-index of income trusts has posted a return of about 33 percent the past three years, compared with a 26 percent return for the country's benchmark S&P/TSX Composite Index.



To contact the reporter for this story:
Frederic Tomesco in Montreal at tomesco@bloomberg.net.
Last Updated: March 9, 2006 17:44 EST
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Another Negative S & P Report on Incomerusts

Postby urquhart » Thu Mar 09, 2006 7:12 pm

Trusts reporting of capital expenditures adds distortion, says S&P

Ratings agency renews call for better disclosure

Thursday, March 9, 2006

By James Langton, Investment Executive



How income trusts report capital expenditures (capex) may be more complicated than many investors think and is key to understanding income trusts, suggests Standard & Poor’s Ratings Services in a new report.

S&P used the unveiling of the report today to call for improved disclosure in the sector.

According to a new study, the way sustaining capex is reported and disclosed by income funds adds another substantive layer of distortion to reported distributable cash figures. The report looks at the accounting-based distortions within reported distributable cash figures that are caused by the omission of current period sustaining capital expenditures, and discusses the analytical challenges in assessing the adequacy of current and future sustaining capex spending.

“Despite the critical importance of sustaining capex to the generation and availability of distributable cash, we found that 57% of income funds sampled excluded it from the distributable cash calculation, materially overstating the amount of operating cash on hand at the time of distribution,” says Kevin Hibbert, director of financial reporting and co-author of the report. Hibbert adds that the exclusion of sustaining capex from distributable cash calculations caused a total average two-year reporting distortion of 14%.

The way that capex is reported can significantly influence the perceptions of distributable cash, and thus, it warrants early investor attention before an assessment of the sufficiency of capex spending can take place, S&P says.

“Capex is a double-edged sword: on one hand it may not be included in the distributable cash calculation; but, even if it is, it’s difficult for investors to assess if it’s enough,” says Ron Charbon, director of S&P’s stability ratings group. “We hope that by publishing this series of articles, income fund investors have another tool to use in their decision-making process, specifically for understanding reporting nuances and the different ways these can influence their perceptions of distributable cash,” he adds.

In the first part of S&P’s series of commentaries on income funds, S&P concluded that the initial starting point to the distributable cash calculation was plagued with quantitative distortions and information risks that, when coupled with insufficient and inconsistent disclosure by management, left much to be desired in the financial reporting and disclosure practices of Canadian income funds.

“Our conclusion with respect to assessing the adequacy of current and future sustaining capex requirements is that investors should use a number of reference points to gauge required future spending needs of an income fund, including but not limited to, depreciation/depletion, industry rules of thumb, capex commitments, and asset retirement obligations,” S&P suggests. “The overall conclusion from this series of commentaries is that the calculation of distributable cash should be more thoughtful and the related disclosures, significantly improved.”
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admission of a leak?

Postby admin » Wed Mar 08, 2006 9:13 am

Liberal MP Scott Brison leaves a news conference on Parliament Hill in Ottawa on Tuesday. (Tom Hanson/CP)

BRIAN LAGHI , STEVEN CHASE and SINCLAIR STEWART

From Wednesday's Globe and Mail

Liberal MP Scott Brison owned up yesterday to sending an e-mail to a bank official discussing an imminent government decision on income trusts, telling the employee that he would be pleased with the outcome.

"I think you will be happier very soon . . . this week probably," Mr. Brison wrote in the e-mail, which the former public works minister released yesterday. The e-mail was written the day before the government announced it would not slap a punitive tax on the trust market, which some investors had feared.

Trading in income trusts spiked the next day, leading to an RCMP probe into whether there had been a leak from the federal government.

Mr. Brison, a potential candidate for the Liberal leadership, made his admission after The Globe and Mail reported that the Canadian Imperial Bank of Commerce had turned over an e-mail under Mr. Brison's name to the RCMP and stock market regulators. The RCMP announced a probe into the issue in the middle of the recent campaign, and many Liberals say that was a turning point in the election.

Mr. Brison said yesterday that he regretted sending the e-mail, but maintained that he had neither advance knowledge of the decision, nor was he speculating.

"This was certainly something I would certainly not send again," he said. "I did not expect that, in fact, there would be any confusion created by it. I did not communicate any information that was privileged because I did not have any information that was privileged."

He said his e-mail conveyed no more than what was already being speculated about publicly.

Mr. Brison explained that he initiated an e-mail conversation with the CIBC employee in late morning of Nov. 22. Mr. Brison would not name the individual, although the e-mail identifies him as Dan. Mr. Brison said the individual was an acquaintance who he ran into at a Rolling Stones concert in Moncton last summer.

A source told The Globe that the recipient was Dan Nowlan, a senior investment banker at CIBC's brokerage arm, CIBC World Markets.

Mr. Nowlan could not be reached for comment, while the bank declined to discuss the matter.

However, people familiar with the issue said that the bank launched an internal review of its trading during that time and did not find anything unusual. The bank, nevertheless, brought the matter to the RCMP and the Ontario Securities Commission.

According to the e-mails released by Mr. Brison, the recipient expressed displeasure with the state of the equity markets. About six hours later, Mr. Brison made the controversial remarks.

Mr. Brison also admitted yesterday he wasn't as transparent with a Globe reporter as he might have been when he was asked this week whether he sent the offending missive.

"At the time, I was reluctant to discuss what I knew to be the subject of an RCMP investigation. I realized, upon reading the article, that I should have been more clear in my comments."

Mr. Brison also acknowledged the RCMP discussed the matter with him on Jan. 18, five days before the election, an issue he would not comment on earlier this week. He said he did not make similar remarks to any other individuals.

Mr. Brison was also asked whether the issue might cloud his potential run for the Liberal leadership.

"I think that, in fact, dealing with it directly and immediately demonstrates a certain level of leadership in doing the right thing."

Mr. Brison said his e-mail was not the spark that led to the RCMP investigation. He said there was no indication from the police whether he might face charges.

"I was participating in a fact-finding mission and would continue to, if asked."

A senior Liberal source said it was still unclear whether Mr. Brison's hopes for the leadership would be harmed. But the Liberal said many party members were expressing concern yesterday because the Nova Scotia MP is seen as an asset to the party.

NDP finance critic Judy Wasylycia-Leis said that, even if Mr. Brison did not know of the details, he should not have been speculating.

She said Mr. Brison was wrong to send the e-mail, "whether it's inadvertent or advertent, deliberate or not."
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