Learning Centre
Trust Update: Has Everyone Converted? (January 2011)
Saturday, January 01, 2011
The trust conversion deadline of December 31, 2010 is now behind us and, as expected, the conversion of most trusts to corporations has had little to no effect on their underlying business and therefore little effect on the investment decisions for the Fund. The Fund’s taxability is not impacted by the new tax rules applicable to trusts so a conversion of the Fund is not necessary. At December 31, 2010 the Fund was 19.6% invested in trusts. After taking into account further conversions that took place on January 1, 2011, the Fund’s trust investments have now been reduced to approximately 7%.
The majority of former trusts are now dividend-paying corporations and their day-to-day operations continue as before. In fact, where companies have chosen to maintain their annual distribution level, an investor is potentially better off due to the tax benefits of receiving dividends versus distributions.
Other companies who have not converted have taken a different route. Some have chosen to maintain the trust or limited partner structure and simply pay the income tax. Inter Pipeline Fund, one of the Fund’s top ten holdings, has followed this path. Despite the increased tax burden their underlying business remains very strong, with the company announcing a 7% distribution increase for 2011. Others have converted to a hybrid debt/equity structure or have modified their operations to comply with the REIT or non-Canadian property exemptions.
Very recently there have been a few companies with non-Canadian assets who have decided to keep the trust structure, as they are exempt from tax due to their non-Canadian operations status. In late 2010, we saw an Initial Public Offering from an entity whose units trade on the Toronto Stock Exchange, which holds only US property, and therefore it pays out tax exempted distributions generated from these assets.
Overall, we view the trust conversion deadline as an opportunity and, through the conversion process and aftermath, continue to look for attractive yield and growth companies to invest in.