This income trust’s renewable energy investments put it in position for long-term gains

Ottawa’s new tax on income trusts comes into effect on January 1, 2011. When it does, it will put income trusts on an equal footing with regular corporations. That will prompt some income trusts to convert to conventional corporations. Others may continue to operate as trusts.

Either way, the looming tax has made many investors wary of income trusts. However, some trusts remain well positioned for long-term gains, even with the new tax. These are trusts that operate stable businesses in strong and growing industries.

One way we separate these trusts from those that will struggle — or worse — when the new tax kicks in is to look for trusts that have histories of raising their distributions, and plan to keep their payouts at current levels after January 2011.

Expansion and higher power prices will help maintain this renewable energy investment’s distribution

In a just-published issue of Canadian Wealth Advisor, we’ve updated our buy/sell/hold advice on two income trusts that plan to convert to regular corporations and maintain their distributions, even with the new tax. One of these trusts, Brookfield Renewable Power Fund (symbol BRC.UN on Toronto), is also one of Canada’s leading renewable energy investments.

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Brookfield Renewable Power owns stakes in 42 hydroelectric-generating stations on 16 river systems in Quebec, Ontario, B.C. and New England. Together, these stations have 1,458 megawatts of generating capacity. The fund also owns the Prince and Gosfield wind farms, both in Ontario. The Prince wind farm started up in November 2006. The Gosfield wind farm will begin production in the fall of 2010.

The fund recently raised its annual distribution by 4%, to $1.30 from $1.25. The units now yield 6.3%. Brookfield Renewable Power expects to maintain that $1.30 distribution as a dividend, even after it converts to a conventional corporation in January 2011.

Right now, Brookfield Renewable Power’s distributions are mostly taxed at the same rate as ordinary income. But once the distribution becomes a dividend, it becomes eligible for the dividend tax credit. As a result, Canadian investors will pay less tax on their dividends in 2011 than they currently do if they hold Brookfield Renewable Power outside an RRSP.

If you hold it in your RRSP, you’ll still receive the $1.30 distribution, but it will be taxed at the same rate as ordinary income when you eventually withdraw it from your RRSP or RRIF.

This income trust’s cash flow is set to rise

Broookfield’s revenue rose sharply in the fourth quarter of 2009. That was largely because of the renewable energy investment’s purchase of 17 hydroelectric plants and one wind farm from Brookfield Asset Management for $945 million.

Cash flow per unit fell slightly, however. That’s because the fund held some water back in reservoirs as it waited for higher power prices in early 2010. That cut its power production. However, Brookfield should report higher-than-average cash flow in the first quarter of 2010.

You can get our full analysis, including our clear buy/sell/hold advice, on Brookfield Renewable Power and 18 other safety-conscious investments in the latest Canadian Wealth Advisor. What’s more, you get this issue free when you subscribe today. Click here to learn how.