Canadian law firms have been focusing on income trust mergers and conversions over the past year, says Phil Brown in Bloomberg News

November 02, 2006

According to Bloomberg, investment banks and law firms may suffer from the Canadian government's move to shut down income trusts.

Since Finance Minister Jim Flaherty announced on October 31 that the government will tax trusts for the first time, various income funds have postponed or reviewed plans to sell new trust units, potentially depriving the banks of adviser fees. Previously, banks have benefited from merger advice, trading, and sales of debt and equity by income trusts. Lenders have also set up research teams of five to ten analysts to cover the C$180 billion sector.

Trusts accounted for about a third of the US$17.4 billion in new equity sold this year. Trust sales contributed to a 14 percent gain in overall equity sales this year from the same period in 2005.

Because new trusts will be taxed in the 2007 tax year, fees for bankers and lawyers selling trusts or converting companies to the tax-exempt securities may fall. Existing trusts would lose their tax benefits starting in 2011, removing any incentive for firms to convert to a trust.

Income trusts have also contributed to trading fees for Canada's biggest banks and TSX Group. The TSX's 255 trusts had a combined value of C$200 billion at the end of September, or about 11 percent of the exchange's market value.

Bankers will probably shift their focus to common share IPOs and mergers. Banks and law firms may also get fees as trusts convert back to a common share structure or get acquired, either by trusts, corporations or private equity firms.

"The IPO market has been close to dead for the last year anyway, says Phil Brown, "and the Canadian law firms have been doing other types of income trust activity, such as mergers and conversions."


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