Income Trust Distributions in 2011

The taxation of income trusts (SIFTs) changes January 1, 2011. For this reason many, but not all, are converting to a corporation. REITs were given an exemption, meaning that they will not be required to revise their taxation or their distribution policy. I expect almost all REITs will maintain their current payout level in January 2011. The benefits of the conversion to a corporation are that income to investors will be taxed more favourably and that they company can, for better or worse, retain earning for future growth. Following are many of the income trusts I have mentioned in prior articles.

Badger Income Fund (BAD.UN) will convert to a corporation effective December 31, 2010. The corporation will pay a monthly dividend of $0.085 per share, less than the $0.105 per unit currently.

Canfor Pulp (CFX.UN) will convert to a corporation from an income trust. In order to distribute taxable income from 2010, there will be a $0.30 cash distribution for unitholders as of Dec 31, 2010, along with the usual $0.25 monthly distribution. In 2011, the corporation will pay a quarterly dividend, expected to be $0.35 per quarter.

CML Healthcare (CLC.UN) will convert to a corporation and will begin paying a monthly dividend in place of the current distribution. The amount of the dividend will be $0.7548 per year instead of the current $1.07124 currently distributed. The dividend would provide a yield of 6.8% based on the current unit price.

Capital Power Income LP (CPA.UN) is undergoing a strategic review, presumably to find a buyer for the LP. This seems to be the type of asset that pension funds are currently looking to invest in, providing stable income. Further, income trusts that do not trade on the public market are exempt from the 2011 tax changes (SIFT legislation). For the moment, it seems there will be no change to the structure or distribution policy.

Coast Wholesale Appliances (CWA.UN) will convert to a corporation in January 2011. Unlike other companies, the November distribution of $0.0416 was the final one, and included a special distribution of the same amount, an additional $0.0416. The dividend in 2011 will be $0.035 paid monthly, which may provide a similar or better after-tax income to investors.

DATA Group Income Fund (DGI.UN) has announced that they will convert to a corporation by January 2011. They will reduce their distribution from the current level to $0.65 annually. The current yield appears to be around 19%, but will be around 11% in January, based on the current price.

FP Newspapers (FP.UN) has announced their conversion to a corporation. They have announced that the dividend will be $0.05 per month, less than the $0.06 per month they currently distribute. They will have a special distribution of taxable income at year-end, which will be issued in shares. It will be reported to taxable investors to be included on their income tax return.

New Flyer (NFI.UN) is not an income trust, but an income depository receipt. The taxation of their income does not necessarily change in 2011 and they have not announced intentions to convert their business structure.

Parkland Income Fund (PKI.UN) will convert to a corporation before January 2011. The dividend rate will be $1.02 annually, less than the $1.26 they currently distribute. After taxes, this may mean a greater return to investors.

Richard’s Packaging (RPI.UN) will not convert to a corporation. They expect to maintain their distributions at their current level (given their 55% payout ratio) during 2011.

VicWest (VIC.UN) will convert to a corporation. Their distribution will change to a quarterly dividend, equaling $1.08 per year versus $1.56 currently. The after-tax income to investors is expected to be about the same, depending on their tax bracket.

WesternOne Equity Income Fund (WEQ.UN) will not convert to a corporation. They have $85 million in tax pools, which will allow them to maintain their distributions at the present rate. Their tax pools are expected to last for 8 to 9 years.