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Mutual Fund News

Trust taxation plan 'bad dream' for funds

The mutual fund industry's nightmare came back on Halloween night.

Ottawa's decision to tax income trust distributions revives the uncertainty and angst of a year ago when the federal government shifted its policy on the asset class, industry sources said yesterday.

"It is almost like a bad dream," said Joe Canavan, chairman and chief executive officer of Assante Wealth Management Ltd. The Toronto firm's team of 960 advisers oversees about $26-billion on behalf of clients.

"All the portfolio managers in the country now really have to guess at what the best strategy is because there are no rules. It's just not clear. It's very unfortunate," Mr. Canavan said.

Demand for income trust mutual funds has fallen dramatically this year, reports industry research firm Canadian Mutual Fund Analyst. Net fund sales in the category were a slender $101-million during the 12 months ended Sept. 30, compared with $1.4-billion during the same period ended in September, 2005. Volatility stemming from the former federal Liberal government's trust tax policy were largely to blame, industry sources said.

In recent months, however, buying interest has improved. After reporting net redemptions in May and June, sales recovered in July and have been gaining momentum since, reports the Investment Funds Institute of Canada. Net sales in September were $50.7-million, a gain on August's $36.8-million but still a fraction of $181-million reported a year ago.

Investors who have suffered through two periods of substantial volatility in the past year are unlikely to return, industry sources said.

"There are plenty of people who bet the ranch one more time on income trusts and they have been positioned as a safe investment," said Michael Morrow, a Thunder Bay, Ont.-based financial adviser. "Rules can always change and one more time the people who overweighted got burned."

Fund companies with a big presence in the trust sector reacted with a mix of outrage, acceptance and relief yesterday.

Dynamic Funds, a Toronto money manager with extensive income trust holdings in its mutual funds, has hired legal counsel and plans to lobby against the proposed tax changes.

"The Conservatives specifically said in their election platform that they would not tax trusts and they would not tamper with trusts. They appear to have reneged on that election promise and I think they should be called to the carpet," said Dynamic fund manager Oscar Belaiche. The proposed trust conversion of Dynamic parent Goodman & Co. Investment Counsel Ltd. is under review, the company said.

"It's not a huge big deal. . . . Our job is to manage through these stumbling blocks," said Malvin Spooner, president and chief executive officer of Mavrix Fund Management Inc. The Toronto fund manager is a trust specialist but has spent the past six months diversifying its asset mix. About one-third of its $850-million under management is held in income trusts.

"It could have been a lot worse," said Gavin Graham, chief investment officer at Guardian Group of Funds in Toronto. The income trust fund pioneer has a hefty weighting of at least 25 per cent in real estate investment trusts within its funds, a trust asset class largely excluded from the income trust tax.

© 2007 The Globe and Mail. All rights reserved.

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