17 October 2006

RBC Balks at Trust Structure

Duncan Mavin, Financial Post, 17 October 2006

Royal Bank of Canada helped spark a volatile debate on income trusts last year by indicating some parts of the bank's business could be turned into a trust.

But yesterday Canada's largest bank provided a categorical statement it will not join in the latest wave of income trust conversions sweeping through corporate Canada.

"We do not have plans to convert any of our operations into an income trust," said David Moorcroft, senior vice-president of communications for RBC.

"It's an official no," Mr. Moorcroft said yesterday.

The bank's statement appears to settle its position on the controversial income trust issue that proved a major headache for the Paul Martin Liberal government.

At an investor conference in September, 2005 -- days before the Liberal government caused a political firestorm by announcing a review of income trusts, which are believed to be draining hundreds of millions of dollars from federal taxation coffers -- RBC chief executive Gord Nixon was reported to have said that all companies, including banks, were under pressure to jump on the trust bandwagon.

Mr. Nixon said at the time that for parts of the bank's business "it would make sense for us to look at" trust conversion.

Income trusts pay out earnings to investors before any corporate taxes and have tripled in numbers over the past five years as investors look for income producing investments.

In contrast, corporations must pay federal tax before determining what is left to be paid out as dividends.

As a result, a number of Canadian corporations have felt pressure from shareholders to convert to the more tax-efficient trust structure.

In recent weeks, the debate on trusts has been revived thanks to a series of high-profile trust conversion announcements, including those at BCE Inc. last week and a similar move by Telus Corp in September.

Financial services firms too have joined in the trust party -- Dundee Wealth Management Inc. announced last week it will spin off 15% of its investment management division into an income trust, while CI Financial has also converted to trust status.

Those moves have led to some speculation that other Canadian corporations, including the banks, would consider trust conversion.

However, RBC's rivals also denied they will turn all or part of their operations into trusts.

A spokesman for Toronto-Dominion Bank said, "At this time we have no plans related to income trust conversion. We're very focused on investing in and growing our businesses in both Canada and the U.S."

Bank of Montreal and Bank of Nova Scotia offered similar messages, saying they have no plans to convert any part of their business to a trust at the moment. A spokesman for Investors Group offered a similar message.

Also, Canadian Imperial Bank of Commerce chief executive Gerry McCaughey said at an investor conference in September that banks would only be able to consider trust conversion after "significant" discussions with regulators.

The Bank Act -- the main law regulating the banks' behaviour -- does not permit the banks to convert their businesses into trusts.