The last time the Canadian oilpatch was blindsided it was called the National Energy Program and it went through the Alberta economy like a grizzly bear through a pup tent. While companies this time are not packing up over night and moving back to Denver and Houston, energy trusts in particular have scrambled to reinvent themselves in the wake of the new legislation that, curiously, exempts real estate income trusts and private equity funds. But were the trusts’ days numbered anyway?

Alberta Research Council president and CEO John McDougall told Alberta Oil at the Heavy Oil Conference in Beijing November 12 that he was shocked at the suddeness of the announcement, but not surprised: “If I’m surprised it’s because they lasted as long as they did,” said McDougall, who’s had involvement in the Chinese petroleum industry for years. “I think this was a case where if it seems too good to be true it probably is.” Federal Natural Resources Minister Gary Lunn, a speaker at the Beijing conference, told Alberta Oil the situation was simply untenable: “Can you imagine if we’d let the Telus and BCE conversions happen and then changed the rules? The Prime Minister made a decision and it was the right one at the right time.” Many, however, are still smarting over the ruling. Alberta Oil reporter Brian Burton unpacks the issue around trusts.

Next Hallowe’en, Alberta children determined to frighten their neighbors will surely dress in Jim Flaherty masks.

This past Hallowe’en the federal finance minister threw much more than a scare into the investment sector by destroying tens of billions of dollars of investor equity overnight and eliminating a cost-of-capital advantage that for 20 years has breathed new life into declining conventional oil & gas fields in Alberta, poured millions of royalty dollars into provincial coffers and repatriated $9 billion worth of Canadian energy properties to Canadian ownership over the past five years alone.

Prime Minister Stephen Harper then threw salt on the wound when he insisted
the attack on trusts was not a betrayal of explicit, emphatic and oft-repeated promises made during last January’s election campaign to leave the income trust tax regime unchanged.

“Read my lips, there’s going to be no tax change on income trusts,” Harper said before the election. In another pre-election statement, now immortalized on the website YouTube, Harper said, “You know where the Liberals stand on raiding seniors’ nest eggs. Whether it’s death taxes or taxing income trusts, a new Conservative Government will never let this happen.”

‘Never’ lasted only until Hallowe’en, after which he told Canadians they had somehow misunderstood him.

Flaherty called his move against income trusts a “Tax Fairness Plan” and both he and the Prime Minister took pains to say they were defending ordinary Canadian taxpayers by preventing conversions of large corporations to the tax-advantaged income trust model.

“They (trust conversions) are creating an economic distortion that is threatening Canada’s long-term economic growth and shifting any future tax burden onto hardworking individuals and families,” Flaherty said on Hallowe’en night. With that, he announced implementation of a tax on income trusts that will be added to the tax on cash distributions in the hands of investors. He said the tax is effective in 2007 for new trusts and in 2011 for those already in existence – as
if that made a difference.

“The impact is immediate,” declared an angry John Dielwart, president and CEO of ARC Energy Trust. The ability of trusts to raise new capital for projects was severely and instantly impaired and Canadians lost $30-plus billion off the value of those retirement nest eggs the Prime Minister had formerly been so concerned to protect.

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