income trust

Citadel Premium Income Fund, $5.74, symbol CPF.UN on Toronto (Units outstanding: 34.1 million; Market cap: $195.7 million), is a closed-end investment trust. The fund aims to provide monthly income and some capital appreciation through its income-trust holdings. Its $0.085 monthly distribution yields 9.4%. The fund trades at a 10.0% discount to the net value of its assets. The fund’s managers have proposed merging it with seven other Citadel funds as well as TSX-listed Crown Hill Fund into a single fund that would be called Citadel Income Fund. As income trusts will lose their tax-favoured status at the beginning of 2011, the merged fund may look for other ways to maximize income. These may include buying common shares and debt securities. However, a group of dissident unitholders have put forward an alternative proposal that would see the funds combine into a fund called Blue Ribbon High Income Fund. This group believes that its proposal would let unitholders benefit from administration and management fees that are 25% lower than those in the Crown Hill proposal. Unitholders would also get unrestricted annual redemption rights and enhanced protection and governance....

Starting in 2011, Ottawa will impose a tax on the distributions of Canadian income trusts. This will put trusts on an equal tax footing with regular corporations. Many trusts are converting to corporations as a result. Some are even cutting their distributions.

Tax exemption sets REITs apart from other Canadian income trusts

Real estate investment trusts, or REITs, will remain exempt from the tax on Canadian income trusts, and will likely remain in their current form. (REITs invest in income-producing real estate, such as office buildings and hotels.)

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RIOCAN REAL ESTATE INVESTMENT TRUST $17 (Toronto symbol REI.UN; Aggressive Growth Portfolio, Manufacturing & Industry sector; Units outstanding: 234.2 million; Market cap: $4 billion; Price-to-sales ratio: 5.4; SI Rating: Average) is Canada’s largest real-estate income trust, with properties in all 10 provinces. RioCan specializes in big-box outdoor malls, and owns 247 retail properties, 13 of which are under development. Most are in suburban areas, where land is generally cheaper than in towns and cities. The trust also owns office buildings and residential complexes. These represent 4% of its net leasable area of 36.2 million square feet. RioCan’s revenue rose 31.3%, from $581.7 million in 2004 to $763.8 million in 2008, mainly due to strong interest from retailers for big-box-style malls. These malls now account for 45% of RioCan’s holdings....

Real estate investment trusts (REITs) may get more attractive in the next year or so as income trusts start to disappear. Ottawa will start taxing income-trust distributions in 2011. As a result of this change, many trusts will convert to regular corporations and pay corporate taxes. That will give them less cash to distribute to shareholders. REITs will remain exempt from the income-trust tax, as long as they get most of their cash flow from properties in Canada. It’s likely that income-seekers will look to REITs to replace income trusts and provide a hedge against inflation. Real estate is a cyclical business, and rental income from the underlying properties can suddenly dry up during economic slowdowns. To cut your risk, you should focus on well-established REITs with long histories of maintaining their distributions during cyclical downturns....

SCITI ROCS Trust, $5.46, symbol SCI.UN on Toronto (Units outstanding: 13.0 million; Market cap: $70.9 million), is an investment trust that aims to give investors diversification and tax-efficient monthly distributions through a roughly equally weighted portfolio of income funds that are included in the Scotia Capital Income Trust Index. These funds also have publicly traded shares with a market value of more than $200 million. Bank of Nova Scotia manages the trust through Scotia Capital. SCITI ROCS Trust first issued units at $10, and began trading on the Toronto exchange in May 2005. It is scheduled to wind up on May 18, 2010. The trust has a 0.94% MER, and its monthly distribution yields around 10.6%. For tax efficiency, the trust’s distributions are structured so that they are a return of capital. Amounts received as a return of capital are not taxable, but instead reduce the adjusted cost base of an investor’s units. Taxes are paid at the capital-gains rate, but are not payable until you sell the units....

EPCOR POWER, L.P. $15.04 (Toronto symbol EP.UN; Shares outstanding: 53.9 million; Market cap: $810.7 million; SI Rating: Extra Risk) has interests in 25 power plants in Canada and the U.S. These generate a total of 1,400 megawatts. In the three months ended June 30, 2009, EPCOR’s revenue rose 14.8%, to $165.2 million from $143.9 million. Cash flow per unit rose 29.1%, to $0.71 from $0.55. The trust’s plants generated and sold more power, including output from the Morris cogeneration facility in Illinois, which EPCOR bought late last year for $72.2 million U.S. Despite the improved results, EPCOR was still paying out almost all of its cash flow to unitholders, so it cut its quarterly distribution by 30.2%, to $0.44 a unit from $0.63, with the June 2009 payment. At this rate, it will pay out roughly 75% of its cash flow. EPCOR believes it can sustain this rate regardless of whether it remains a trust or converts to a corporation in 2011, when Ottawa’s new income-trust tax takes effect. EPCOR now yields 11.2%....

EPCOR POWER, L.P. $15.04 (Toronto symbol EP.UN; Shares outstanding: 53.9 million; Market cap: $810.7 million; SI Rating: Extra Risk) has interests in 25 power plants in Canada and the U.S. These generate a total of 1,400 megawatts. In the three months ended June 30, 2009, EPCOR’s revenue rose 14.8%, to $165.2 million from $143.9 million. Cash flow per unit rose 29.1%, to $0.71 from $0.55. The trust’s plants generated and sold more power, including output from the Morris cogeneration facility in Illinois, which EPCOR bought late last year for $72.2 million U.S. Despite the improved results, EPCOR was still paying out almost all of its cash flow to unitholders, so it cut its quarterly distribution by 30.2%, to $0.44 a unit from $0.63, with the June 2009 payment. At this rate, it will pay out roughly 75% of its cash flow. EPCOR believes it can sustain this rate regardless of whether it remains a trust or converts to a corporation in 2011, when Ottawa’s new income-trust tax takes effect. EPCOR now yields 11.2%....

Northland Power Income Fund, $10.40, symbol NPI.UN on Toronto (Units outstanding: 64.7 million; Market cap: $672.9 million), indirectly owns interests in 10 power projects that together generate over 1,100 megawatts of electricity. These include clean natural-gas-fired plants, as well as renewable wind and biomass projects. Northland Power yields 10.3%. The fund believes that it now has tax-deduction pools that, when combined with cash flow from its projects, will let it maintain its $1.08-per-unit distribution, even after Ottawa’s income-trust tax takes effect in 2011. Northland is okay to hold....

Right now, Canadian income trusts pay out a high percentage of their cash flows to their unitholders. This lets them avoid paying corporate taxes. It also gives many of them significantly higher yields than a lot of dividend-paying common stocks.

Canadian income trusts face tax changes in 2011

In 2011, the Canadian government will begin taxing income trusts (with the exception of real estate investment trusts or REITs)....

AltaGas Income Trust, $16.30, symbol ALA.UN on Toronto (Units outstanding: 76.8 million; Market cap: $1.3 billion), mainly extracts, processes and distributes natural gas. It also processes natural-gas liquids. AltaGas has four segments: 1) The energy-services division (57% of revenue) has two main components: an energy-management business that provides consulting and supply-management services, and a gas-services business that buys and sells natural gas and electricity. This operation also transports and stores natural gas....