So everyone and their grandpa is still upset about the recent change to income trusts intro­duced by the Canadian federal government. The change was, of course, to implement a tax on trust income similar to corporate income tax.

The outrage epicentre is Bay Street, Canada’s version of Wall Street, in the heart of the financial district in downtown Toronto. But in the radiating waves of anger from that focal point, senior citizens seem to be most upset. Could that be because they are more likely to be Conser­v­ative party supporters, the party that pledged no trust tax in the last election? Possibly, but it also has to do with retirement savings and poor investment advice.

The most apoplectic are the ones who concen­trated their invest­ments in the risky vehicles.

This violates the sacred first rule of investing – diversify your holdings. Unfor­tu­nately, it seems that the only diver­si­fi­cation many people paid attention to was in the under­lying nature of the trust business – i.e. natural resources (oil and gas trusts are huge). It didn’t occur to anyone to diversify amongst vehicles – some trusts, some equities, some bonds, some deriv­a­tives, etc.

The risky nature of trusts is related to the relative lack of policing by either securities regulators, or accounting standards setters. Distrib­utable cash is a key metric for trusts, because they are by design supposed to distribute nearly all cash generated, and one that has to this point been ignored by both parties above.

The accounting standards body in Canada, the AcSB, has no guidance on trust disclosure, and the national securities regulator, the CSA, has only sugges­tions as to disclosing that distrib­utable cash is estimated based on reasonable assump­tions. As Al Rosen, a popular Canadian accountant and frequent contributor to various business publi­ca­tions, points out: “Is any company about to admit that their predic­tions of distrib­utable cash are completely unrealistic?”

Trusts need more attention from accounting standards setters and securities regulators, that much is certain. But investors also need to be aware that diver­si­fi­cation should be done across investment vehicles, as well as indus­tries. Both carry different types of risks.