ARC President and CEO responds to recent changes by the Federal Government

On October 31, Federal Finance Minister Jim Flaherty announced the Federal Government’s intention to impose a new tax on distributions from existing income and royalty trusts in four years time. The move is intended to create “tax normalization” between income trusts and corporations. In conjunction with the tax, the government also created a “dividend tax credit” that can only be used by Canadian investors who hold their income units in taxable accounts, that is outside of their RRSPs. The effect of this “dividend tax credit” was intended to keep Canadian investors whole on an after tax basis – that is they have the same money after they pay the tax on the distribution now as they will have under the new tax regime, while taxing foreign owners, pension funds and people who own units in their RRSPs. This was intended to block what the Federal Government sees as a “tax leakage”.

It should not be a surprise that this move rocked the Canadian equity markets and a massive sell-off of the income trusts, royalty trusts and many other Canadian securities took place immediately following the announcement. Billions of dollars of wealth was destroyed. Many Canadians suffered losses as a result of these actions.

While the decline in ARC’s unit price clearly is upsetting, we want to stress that our business is fundamentally sound. In the midst of this market turmoil ARC’s board of directors approved a $360 million capital budget for 2007 and encouraged us to look for opportunities in this market. For ARC, it is business as usual. As the dust settles, the analysts all seem to agree that the strong will survive and investors should focus on trusts that have a low debt level, a low payout ratio and a large inventory of internal development opportunities - clearly, a description that describes ARC to a “T”.

To fight this punitive and unnecessary tax change the Calgary based royalty trusts have joined together to launch a campaign to get our story heard, demand that the government hear us out and consider other options. We do not know whether we will be successful in getting the government to change its mind, but we do know that regardless of what happens that ARC will continue to execute its business strategy and prosper. It is important for the members of parliament to hear from their constituents. We would encourage you to write, phone, or e-mail your member of parliament and let them know that this tax proposal is hurting all Canadians. Below is the contact information for the MP’s for Canada:

Your Canadian Members of Parliament.

Yours truly,

John P. Dielwart
President and Chief Executive Officer