Canada is home of some of the world’s finest natural resource companies. There you will find miners of precious and base metals as well as oil and natural gas producers. Two of my largest winners this year, Falconbrige and Inco, are both Canadian base metal companies.
Investors in search of big dividends often find their way to Canada. Nearly 11% of the Toronto Stock Exchange S&P/TSX composite index is composed of Canadian income trusts. An income trust is a business entity, which receives very favorable tax treatment and pays the majority of its cash flow out to shareholders. Dividend yields of 10-14% are quite common. Many oil and gas companies are formed as income trust. So, over the last few years investors have enjoyed large capital gains along with their dividends.
Companies converting to income trusts have been a hot political issue for some time. The millions of dollars in tax savings, the company enjoys, comes at the expense of the federal government. Apparently Bell Canada, one of Canada’s largest corporate tax payers, bid for conversion was the straw that broke the camel’s back.
Today, the Canadian government announced that it was removing preferential tax treatment of income trusts. This announcement crushed the income trusts to the tune of C$20 billion in market value. The S&P/TSX income trust subindex had a one day loss of 12.4% for the day. The Toronto Stock Exchange composite index was down 2.4% – the equivalent of nearly 290 Dow points.
Believe me it was no fun waking up and seeing one of your stocks down 10% before the opening bell.