November 1, 2006

On October 31, 2006 the federal government announced that beginning with the 2011 tax year, certain distributions of income trusts will be subject to tax at corporate income tax rates and that investors who receive these distributions will be taxed as though the distributions were dividends.  For trusts that begin to be publicly traded after October 2006, these changes will take effect beginning with the 2007 tax year. It looks like REITs will be exempt from these changes in taxation.

We expect that there will be a short-term devaluation of these income trusts of 15-20% and we are seeing this happening this morning.

Telecom Services companies will likely be affected as Telus Corporation and BCE Inc. had announced intention to convert to income trusts and had premiums built into their prices.  Manitoba Telecom Services was carried higher as well.  It seems unlikely that any of these companies will convert to the income trust structure and we expect that in the short-term they will trade back to the levels at which they traded before they announced intentions to convert to an income trust.

The extremely short-term effects of these changes will definitely be a reduction in the market value of the securities affected.  However, these tax changes take effect beginning with the 2011 tax year, so over the medium-term there are a number of scenarios that could be played out depending on factors

including: a change in governments; a change in other taxes; the fact that (similar to announced changes in taxation of dividends) these changes must be passed as legislation; and not least of all - the operational success of the companies affected by this change.   We have maintained that we prefer to invest in income trusts with good operations that have a history of increasing distributions and that are likely to increase their distributions in the future.  This focus will definitely be a benefit in the short, medium and long-term as the volatility dies down and operational success of the underlying businesses again becomes a focus.

The past few years have seen a change in investor sentiment toward income, toward cash flow from distributions from income trusts specifically.  We believe that this focus on income will not change and that the dividend paying stocks that we have been focusing on for the past 67 years will actually benefit from these tax changes as the playing field is leveled.

We, therefore, remain optimistic that we may see some bargains in terms of income trusts that become oversold in the short-term and that our exposure to operationally strong investments will ultimately benefit our clients.

Yours faithfully,