Income trust foreign takeovers may be a good thing

There’s been a lot of activity lately on the income trust front. Foreign firms are making bids left and right to acquire the Canadian entities, in the wake of the 31.5% trust tax introduced by the Conservative government.

Jack Mintz, a professor at Rotman, the business school at the University of Toronto, discusses in a recent Globe and Mail article that trust takeovers are not always a bad thing:

Trusts were shielded from takeovers prior to the federal trust tax announcement because their relatively high market values made purchases more prohibitive. It allowed managers to avoid the threat of takeover and therefore encouraged inefficiency.

Makes sense to me. I’ve come around to the idea that trusts were not all they were cracked up to be. That the trust tax is a good thing. Maybe not for investors who plowed most of their assets into units instead of shares or bonds, but it didn’t make sense that a business could choose to structure itself in a way such that it would pay no tax while other entities would.

Prof. Mintz says trusts could end up being run more efficiently and productively by new management.

“When you are operating as an income trust and have the high valuations at that point – and the very high distributions – it made it difficult for someone to come in and do a takeover based on such a very high valuation,” Mr. Mintz said.

Canada has been lagging in productivity for years compared to our neighbours to the south. This could help close the gap, but it could also result in a dramatic increase in foreign ownership, which could potentially lower tax revenues for the government which set in motion this chain of events in an effort to strengthen the tax base!

What do you think? Could trust takeovers be a good thing for our productivity? Will the increased productivity make up for the potential lost tax revenues?