There was a fascinating article last weekend by The Globe and Mail‘s David Parkinson about foreign asset income trusts (FAITs).
If you haven’t heard of these yet, don’t feel bad; they haven’t gotten much coverage in Canada, despite their potential to fill the enormous void created when, in October 2006, Finance Minister Jim Flaherty put an end to tax advantages formerly enjoyed by income trusts.
Because FAITs derive their cash flow from outside the country, the specified investment flow-through (SIFT) rules that imposed higher taxes on income trusts — which took effect on Jan. 1, 2011 — do not apply … which as you can imagine has huge implications in a market where stocks have been flat and investors are hungry for yield.
So far, according to Parkinson, only two FAITs have gotten off the ground in Canada. Richard Clark gets credit for launching the first, Eagle Energy Trust, in late 2010 in a $150-million IPO.
Another IPO by Parallel Energy Trust successfully launched in April 2011, earning close to $400 million in an IPO. Both trusts operate out of low-tax Texas. (Bennett Jones represented Parallel on that deal, with McCarthy Tétrault representing the syndicate of underwriters.)
The new sector has gotten off to a rocky start, though, given the depressed IPO market and recent missteps, including an announcement by Parallel that it will cut its production forecast and take a writedown on reserve losses.
With only a couple of FAITs successfully launched, and one of them making such costly missteps, the FAIT structure is suffering from a lack of “street cred,” as one insider put it. The only thing that would really establish that credibility would be having more successful FAIT listings to serve as examples for investors.
Before I rehash this entire article, you should probably check it out right here. Lexpert, however, will be doing its own investigation on this sector and what it means for the legal community and tax lawyers in particular in upcoming blog posts, so stay tuned.