Canadian business income trusts won’t all turn into pumpkins at the strike of midnight on December 31, 2010. In most cases, you will be aware of what will be happening long before that.
I’m not a taxation expert, but I’ll cover a few of the scenarios I know about here. Consider these points before you think about buying new positions in income trusts now, or whether you are thinking about selling the ones you currently own.
New Laws Governing Taxation of Business Trusts Begin in 2011
As you probably already know, back in October 2006 Canadian Finance Minister Jim Flaherty announced new legislation that would affect the tremendously popular income trusts. These trusts have until 2011 to decide whether they will remain in the trust structure, and pay taxes accordingly, or convert to a corporation for more favorable tax treatments.
Some income trusts, such as the former NewAlta Income Fund (TSX: NAL.UN) (now NewAlta Inc. (TSX: NAL)) made their decisions well in advance and have already made the transition to a corporate structure. Other business trusts are expected to do the same sometime between now and 2011. It is up to the company. Some might wait until 2011 to convert, if they convert at all.
Other trusts, such as the Cineplex Galaxy Income Fund (CGX.UN), will be able to continue operating for a couple of years after 2011 in the trust structure due to the tax pools they have accumulated, as well as company losses which work in their favour in relation to the new tax treatment. Cineplex is expected to convert to a corporation some time after they run through their tax pools.
Some Distributions May Be Lowered
One caveat that must be considered, especially for investors who might be jumping into trusts just now, is that some distributions might be lowered upon conversion to a corporation.
While this is not mandatory, and will not necessarily happen with each trust, there are a few trusts expected to need to lower their distribution/dividend. Some trusts will certainly be able to maintain their current level of distribution.
REITs Are Not Subject To the New Laws
If you own REITs (real estate investment trusts), don’t worry. Nothing will change; since these are not income trusts for taxation purposes, they are not subject to the new 2011 rules.
Some analysts expect that because of this, REITs might experience an uptick in price as they become more attractive to yield investors looking for new sources of monthly income following possible distribution cuts with many of the trusts. This could be a nice benefit to owning some REITs, but I wouldn’t go out buying any hoping for this to happen. Regardless, REITs will experience some new independence on the monthly income front as many of its monthly income peers disappear.
So how do you know if you should buy or sell that income trust you’re thinking about?
Check the company’s website under “Investor Relations” and “FAQ” or “News Releases” – there may be mention of their plans in there. Otherwise, don’t hesitate to contact the company’s transfer agent directly to ask them their plans. If there is a general contact address, use that or just make a phone call.
It’s not a bad thing if a trust converts to a corporation, nor is it disadvantageous if it remains as a trust. Each trust must be judged on a case-by-case basis.
If you do nothing, your trust units will be automatically switched over to shares inside your discount brokerage account. If you hold the income trust through a dividend reinvestment plan (DRIP), the transfer agent will likely mail you announcements with regard to how to proceed. You may have to mail in your original unit certificate to have it exchanged for a new corporate share certificate.
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