5:03pm ET
Another view: "The quality of the companies isn't the issue, it's the valuation that gets put on them," says Ian Filderman at Scotiabank wealth management.
"There are some very good companies that happen to be in trust form right now. And I'm actually quite impressed at how well the market seems to be taking this — I don't sense any panic, what I really sense is a very orderly review of: 'What does this all mean and how does this impact on the strategy in my holdings?'"
4:33pm ET
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Some of the fallout from the income trust bombshell:
Yellow Pages trust closed down 17 per cent.
CI Financial fund plunged 18 per cent.
Aeroplan trust was down 10 per cent.
Telus was down 13 per cent.
BCE lost 11 per cent. (Both BCE and Telus, which planned to convert to income trusts, say they're weighing their options.)
Extendicare Inc. fell 9 per cent after the big retirement-home operator pulled back on its plan to become a trust.
In the energy trust sector, the Canadian Oil Sands trust closed down 11.5 per cent, the Canetic Resources trust lost 15 per cent and Precision Drilling was down 13 per cent.
4:28pm ET
The S&P/TSX income trust index down is 12 per cent — an evaporation of more than $20-billion in market value for investors.
"I'm put out, not to put too fine a point on it," declared Brendan Caldwell, president of brokerage firm Caldwell Securities Ltd.
"I tell you, I've got seniors that have income trusts that are down $25,000 or $30,000 today.... They're getting hit in a big way."
4:13pm ET
The Canadian dollar closed 0.82 of a cent lower at 88.22 cents US on Wednesday. The U.S. dollar stood at C$1.1335, up 1.04 cents.
4:01pm ET
The TSX closed down 324.32 points to 12,020.27, a decline of 2.6 per cent.
3:05pm ET
"This is unwarranted panic selling that is occurring," says U.S. investment newsletter writer Bryan Perry.
2:52pm ET
Record daily volumes on the TSX, with more than an hour to go until the close: 490,501 senior and 17,912 venture trades on a flow of 7.6 million messages.
2:25pm ET
The TSX remains underwater, down more than 300 points as the Conservative decision to tax income trusts continues to reverberate through the markets.
Leading the index down are CI Financial , off 18.97 per cent at $24.35; BFI Canada down 18.94 per cent at 24.65; Yellow Pages down 18.06 per cent at 12.39; Newalta Income Fund down 17.92 per cent at 27.16; and Energy Savings Income Fund down 17.78 per cent at 13.83.
1:00pm ET
The TSX resumed its slide with some defensive selling coinciding with traders heading out for their lunch break. Hit hardest were energy and mining stocks, as the rally in gold stalled and oil prices sputter following the weekly inventory data out of the U.S.
The S&P/TSX composite was down 333 points at 12,011.72, its lowest level in almost two months.
The energy subindex, which makes up almost 30 per cent of the composite and which contains many of the country's biggest income trusts, was down more than 5 per cent, accounting for 56 per cent of the composite's overall decline.
Telecoms, driven down by selling of trust-conversion candidates BCE and Telus, were off almost 9 per cent, accounting for 20 per cent of the overall index decline.
Lost in the shuffle were some decent earnings reports. BCE, Canadian Natural Resources, Cameco and Enbridge all beat analysts' estimates. Yet BCE is off 11 per cent, Canadian Natural 4.6 per cent and Cameco 3.1 per cent; only Enbridge has scratched out a small gain.
11:59am ET
As the market continues to digest the trust news, analysts at Merrill Lynch & Co. are saying that higher dividend-paying stocks should benefit, as investors look to redeploy capital. They said the change is most negative for CI Financial, "as its tax-free structure is now compromised" and that life-insurance companies should be among the least affected by the change.
11:45am ET
Canada's benchmark index is down about 237 points or 1.9 per cent, it's biggest one-day decline in a month. The index is still up 7.4 per cent this year.
Among the biggest declines, the telecom sector is down 9.1 per cent. Utilities are down 5 per cent and energy shares have fallen 4.1 per cent.
Among companies, the leaders to the downside include BFI Canada, Newalta Corp., Energy Savings and CI Financial.
Telus is down 14.1 per cent and BCE shares are falling 11.5 per cent.
10:45am ET
The Canadian market is holding its ground now, after coming off the lowest levels of the day during the opening selloff. The S&P/TSX composite index is down 228.99 points at 12,115.60.
Ten of 13 industry sub-indexes are lower, led by the telecom group, off 8.6 per cent as its two biggest stocks, BCE and Telus, are down 10.6 per cent and 13.2 per cent, respectively. Both companies said they are shelving, for now, their planned conversions to income trusts.
The TSX capped income trust index is off 11 per cent, with 72 of its 73 constituents showing declines — the only one that isn't down is Extendicare, whose stock is halted.
Not surprisingly, trusts are among the biggest decliners on the TSX, including SCITI Total Return Trust, off 37 per cent, Black Diamond Income Fund, off 35 per cent, Income & Growth Split Trust, off 35 per cent, Ag Growth Income Fund, off 35 per cent, and Medisys Health Group Income Fund, off 32 per cent.
Among the larger trusts, Yellow Pages Income Fund is off 20 per cent, CI Financial Income Fund is off 17 per cent, Canadian Oil Sands Trust is down 11 per cent and Penn West Energy Trust is down 10 per cent.
10:26am ET
The income-trust sector has lost about $18-billion of its value Wednesday morning. The TSX's capped income-trust sub-index is down 11.5 per cent. The value of the sector yesterday was worth about $157-billion, according to Bloomberg.
There's a precedent for this: in the fall of 2005, the government's consultation on trusts caused enough market uncertainty to shave $23.3-billion in market cap from Sept. 19 to Oct. 21, according to a note from Canaccord. It expects a $25-billion decline in trusts as a result of Tuesday's announcement.
10:10am ET
The S&P/TSX composite has come off its early lows when it was down more than 300 points to trade down 217.21 points at 12,127.38.
Analysts continue to react to the announcement. UBS Investment Researchhas downgradedtheir ratings on Telusto neutral from buy and on BCE to reduce from neutral."Our initial view is that we believe Telus and BCE will not proceed with the conversions," they said in a note Wednesday.
9:40am ET
S&P/TSX composite is down 275 points or about 2.2 per cent as investors flee income trust sector following last night's government announcement of new taxes on the sector. After a widely expected initial tumble, the index has recovered slightly from its low (12,029) and is showing signs of stabilizing. Prospective trust conversion BCE Inc. is off 12 per cent and Telus off 16 per cent. Among major trusts Penn West off 12 per cent, Yellow Pages off 21 per cent.
David Wolf, economist and strategist at Merrill Lynch in Toronto, said he had expected the TWX composite to fall about 2 to 3 per cent this morning in response to the trust news. "We'll get some volatility, then we'll see where things shake out," he said.
9:36am ET
Steve Kee, spokesman for the Toronto Stock Exchange, says "our market is open and operational, you can continue to trade." The only way the exchange would be halted is if the Dow Jones industrial average were to fall more than 10 per cent, he added.
9:31am ET — Market Open
S&P/TSX composite index opens down more than 250 points
Premarket
Canadians stocks are set to slide Wednesday, led by companies poised to convert into income trusts such as BCE Inc. and Telus Corp., after the federal government said it plans to start taxing the structure.
Telecom and energy sectors will likely lead the decline, analysts said. BCE shares were set to fall $2.70 to $29 and Telus may fall $19.93 or 30 per cent to $45, according to early bids on the Toronto Stock Exchange. For Telus, that would equate to a loss of about $7-billion in market value.
Interlisted stocks trading in the U.S. premarket Tuesday morning are already under pressure, as the quotes below illustrate:
• Precision Drilling — $25.78 (down from $28.66 at Tuesday's close)
• Enerplus — $49.50 (down from $54.30)
• Pengrowth — $17.90 (down from $19.60)
• Fording — $23.19 (down from $25.42)
• Penn West — $33.51 (down from $37.52)
Finance Minister Jim Flaherty said after the markets closed that distributions paid by existing income trusts would be taxed in four years time, while companies that convert to the trust structure "after today," would see their distributions taxed beginning in their 2007 tax year.
The move will pummel markets because the prospect of trust conversions had sent shares soaring this year. BCE and Telus were among those companies who recently announced plans to convert. BCE said Wednesday the telephone company will reassess its income trust plans in the coming days.
"In addition to the hit in income trusts, which we expect will take roughly 2-to-3 per cent off the TSX composite (concentrated in the energy & telecoms sectors), we expect to see pressure on the Canadian dollar due to the popularity of trusts among non-residents," said David Wolf, chief economist at Merrill Lynch Canada Inc.
The Canadian dollar weakened to 88.09 cents from yesterday's Bank of Canada close of 89.04 cents.
Royal Bank of Canada said in a note that trust market values could fall as much as 20 per cent today, "maybe more as time passes."
The sector has a market capitalization of about $200-billion.
Among other companies, Extendicare Inc., one of Canada's largest operators of retirement and nursing homes, said late Tuesday it will delay going ahead with the reorganization until it had completed a full study of Mr. Flaherty's plan.
Mr. Flaherty did not provide details on the size of the tax to be levied on unitholders.
"Trusts are going down in value, because over time they are not going to be as tax efficient," said Fred Pynn, president of Bissett Investment Management in Calgary, in an interview yesterday.
Ottawa appears to be taking a leaf out of the playbook used by Australia in the 1980s to stamp out trusts, Mr. Pynn added.
"Taxes on income trusts were adjusted over time to the point where it just didn't make sense ... as a structure."
Shares of BCE and Telus and other companies that have announced their intentions to convert to the trust structure, or are simply considered trust candidates, could plunge. BCE, which revealed plans for conversion in recent weeks, was on track to become the largest trust in the country by market value.
Mr. Flaherty said Tuesday that he does not expect the proposed conversions of BCE and Telus to proceed.
"Telus and BCE are not going to happen," Mr. Flaherty predicted. "It's up to them whether they happen or not but there'll be a new set of rules."
The government is scrambling to close a loophole that could have meant millions of dollars in lost corporate tax revenue.
According to a recent report by tax expert Jack Mintz, income trusts would have cost Ottawa and the provinces $1.1-billion in lost tax revenue annually if Telus and BCE were to convert to the corporate-tax-avoidance structure.
Mr. Mintz said that Canada's tax-leakage problem has doubled in two years — from $540-million annually in 2004 — despite efforts to solve it."
"This is becoming a bigger headache for Ottawa and the provinces," said Professor Mintz, of the University of Toronto's Rotman School of Management.
Income trusts pay little or no corporate taxes, but instead shovel out the bulk of earnings and cash flow to investors.
Trusts cost Ottawa and the provinces in forgone corporate taxes. Prof. Mintz estimated the amount would have totalled $2.8-billion a year once Telus and BCE converted their operations into income trusts.
But Canadian governments will recoup about $1.7-billion of that from personal taxes on higher payouts from pension plans and registered retirement savings plans, as well as from withholding taxes on foreign investors owning Canada's income trusts.
The income trusts are "definitely going to go down," said Barbara Gray, who covers income trusts for Blackmont Capital in Vancouver. How much, she added, will depend on the rate of tax the government imposes.
With files from Globe and Mail staff and The Canadian Press.
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