Great job on this, Cohen. I didn't know any of that. Thanks.

There are exceptions of course, and there were (when I used to research them) a few that I
did like, that actually had above-average growth for a trust. But for the most part, I
have avoided and now avoid completely, this sector.

BTW, the tax legislation was announced on Halloween on 2006. On Nov. 1, the average loss
in market cap of a trust was over 20%. Lots of senoir citizens who had substantial
portions of their retirement money invested in trusts because of the yields were crushed.

Last edited on: 04-26-2007 07:44 pm

Now that trusts will be taxed at the corporate level, companies like Bell Canada, that
were planning convert have ditched the plans and many have converted back to corps and
others have gone private. Although the taxes don't kick until 2011, by then, this sector
wil be a lot smaller than it is now.

Also, under the old tax rules, distributions form trusts weren't treated as dividends, the
individual paid tax on them as if it was employment income. Under the new tax laws, they
will be taxed as dividends (starting 2011), which have preferential tax treatment.
Therefore, when you take the fact that trusts don't pay tax and the indvidual pays the tax
on the distributions, you have to consider after-tax yield coupled with very little growth
in earnings, which to me always reduced they're attractiveness but was never talked about
by pundits who supported the trust capital structure.

The second issue is that they don't have any option but to operate in this way. The
companies that convert to income trusts are generally in slow growth (like they grow in
low-mid single digits long-term) so if one decides to pay a lower yield of say 3.5% with a
payout ratio of 70%, the amount of cash left for capex still isn't that substantial. Also,
the payout ratio would then have to take into acount capex spending. So that 70% pre capex
would be higher (around the level that trusts claim they payout now) after capex. Some,
even with manipulated numbers have payouts above 100%. These are trusts that, if there was
analogy, I would classify worse than the worst junk bonds and have unreal yields. I've
seen over 30%.

So, how are you going to pitch a no-growth stock with a 3.5% yield when any Canadian can
just invest in one of the banks (which unlike in the states there are only a handful, so
its a nice oligopoly) that are run very well, yield 3% plus with growth in the low
double-digits over the long-term. There would be no market for income trusts, so they pay
big yields at the expense of growth.

Lots of the trusts were private companies that came public as trusts for capital form the
IPO and the tax treatment. These companies could not survive as normal public
corporations. Other public companies converted because they got to participate in a trust
IPO, despite the fact they were already publicly traded and also for the tax treatment and
because they're growth days were behind them.

Last edited on: 04-26-2007 07:53 pm

Sure, before the tax legislation on income trusts that was announced by the Conservatives,
an income trust would not pay any tax on its earnings. And they also have huge payout
ratios (that's the point of the trust capital structure: don't pay tax and distribute, at
high payout ratios, to investors), so its not uncommon to see 8% - 10% yields (sometimes
higher). However, payout ratios aren't calculated on EPS, they are calculated on
Distributable Cash per Unit (DCPU), basically cash flow per share. The problem is that
there's no standard under Canadian GAAP as to the calculation of this figure. Since people
don't want to see payout ratios above 100%, for obvious reasons, companies manipulate the
payout ratio by not engaging in capital speding to keep payout ratios reasonable (says no
greater than 85% - 90%). Obviously, if you don't reinvest something into your business,
you're not going to grow. If you take an income trust and apply a reasonable capex budget
to it, there's not very many trusts that don't have payout ratios above 100%. I used to
own one, KCP income fund, that I thought had a payout ratio of 86% and in reality, it
should have been about 103%.

That's the first issue.

Last edited on: 04-26-2007 07:32 pm

I am interested in hearing about this. Can you explain why?

I'm not sure how they work in the U.S. but I can tell you why I don't like the Canadian
income trust sector, if itll help at all or if you're interested.

Hopefully Cohen can help you out here....


Well, I'm exhausted and off to bed (I know, i'm actually sleeping tonight!). Have a good
night, everyone...

Last edited on: 04-25-2007 10:55 pm

I'm sure you could find something about that on some website, though...

Last edited on: 04-25-2007 10:54 pm

Sorry... incorporation tax breaks are WELL beyond my tiny realm of knowledge.

However, I believe that beneficiary trusts can avoid taxes, include a certain % of death
taxes... don't know how similar those two are, but...

Last edited on: 04-25-2007 10:53 pm