In June 2007, the Government of Canada enacted legislation that will apply a tax at the income trust level on unitholder distributions commencing January 1, 2011. With just over a year remaining until the new legislation takes effect, it’s becoming increasingly important for income trusts to have a clear, direct communication plan in place to inform the investment community of their respective strategies for the new tax regime.
While many income trusts continue to evaluate their options for the post-2010 tax regime, a number of trusts have already taken action, using the pending taxation as a catalyst to convert to a corporate structure early and make any necessary adjustments to distribution levels. The rationale for early conversion and adjusting distribution/dividend levels has often centered on a shift in focus towards a more growth-oriented strategy, and the need to invest more cash into the operating business or to pursue acquisition opportunities. For “early converters” that also cut distributions, effective redeployment of capital in growth opportunities is vital. If it appears that unsustainable, trailing distribution levels were perhaps the defacto “raison d’être” for early conversion and an accompanying distribution cut, the issuer risks a prolonged market discount and a loss of credibility. (more…)