© Copyright 2006 Rogers Publishing Ltd. The following article first appeared in the February 2005 edition of BENEFITS CANADA magazine.
Ontario moves to limit the liability of investors in income trusts.

The passage of legislation in Ontario to limit the liability of investors in business income trusts is a sensible and welcome development at a time when pension plan sponsors are looking for every possible source of yield to fund liabilities. The absence of such legislation acted as an investment deterrent to some pension funds concerned about potential risks. The new law effectively puts income trust unitholders on the same footing as corporate shareholders.

The Ontario legislature passed the Trust Beneficiaries’ Liability Act in December, after much lobbying. The statute backs a commitment made by the Liberal government almost two years ago.

The Act says beneficiaries of a trust are not liable for “any act, default, obligation or liability of the trust or any of its trustees if, when the act or default occurs or the obligation or liability arises.” The legislation pertains to trusts governed in Ontario as reporting issuers under provincial securities law. A significant portion of the business trust market in Canada is domiciled in Ontario, and the law may encourage other provinces to enact similar legislation.

Prior to this legislation, unitholders of publicly traded trusts in Ontario, including institutional investors, faced the theoretical risk of personal liability in legal actions launched as a result of the activities of a trust. Some analysts argued the risk was minimal; however, it was enough to discourage many wary pension funds from investing in this asset class. The law firm Goodmans LLP says the new legislation provides “certainty” to unitholders that any exposure to claims against the trust would be limited to the unitholder’s investment.

Income trusts, including oil/gas trusts and real estate investment trusts, can offer relatively stable cash flows, which could lend more help to the challenge of meeting pension liabilities. Research also suggests they can be useful for portfolio diversification. Some of the larger pension funds in Canada, notably the Ontario Teachers’ Pension Plan, have benefited from significant investments in business trusts. In 2003, Teachers’ earned $800 million from trust investments. Teachers’ also led last year’s charge to persuade the federal government to suspend a proposed restriction on how much pension funds could invest in business trusts(see May 2004 BENEFITS CANADA). Ottawa suspended the cap last May to allow further consultations with the industry.

Ontario’s move to clear up the uncertainty surrounding the liability of unitholders of income trusts removes another obstacle for institutional investors. By improving the clarity of the liability issue, the provincial government provided confidence to existing investors and expanded the investment horizon for new ones, at a time when many pension plans are underfunded and the income trust market is maturing. It is refreshing to see a government eliminate an impediment for institutional investors and the voters they represent.

Jim MacDonald