Canadian Income Trusts –Their Replacements

1. Canadian Income Trusts –Their Replacements Has anyone here owned / traded these trusts?

2. Canadian Income Trusts –Their Replacements Some Background and explanations: • The trusts were started around the year 2000. • They are different from US Trusts concepts in that US trusts can not be changed or increased where as Canadian trusts operate as regular businesses. • The Canadian Income Trusts classified the transfer of income to shareholders as a business expense and thus could eliminate payment of all taxes to the Canadian government if they transferred all available income. This often resulted in double digit percent distributions to the shareholders. • It was no surprise that these trusts expanded rapidly and were about 10% of the stocks on the Toronto Exchange.

3. Canadian Income Trusts –Their Replacements More Background and explanations: • There were different types of trusts: • Canadian Royalty (Energy) Trusts (nicknamed CanRoys) • Oil/gas/coal companies whose revenues come from royalties • Canadian REIT Trusts • Includes various real estate related operations • Canadian Income Trusts • Various other types of business

4. Canadian Income Trusts –Their Replacements Additional Background and explanations: • The Canadian government did get some income: It withheld taxes from foreign shareholder payments,15% for US citizens. (The US IRS allows the US shareholders to claim as a credit the withheld 15% for shares held in taxable accounts.) • The Canadian government assessed the significant losses in government income due to these trusts and began considering changes. • They picked an appropriate date, Halloween of 2006, to announce that a law would be passed to no longer permit the trust structure after January 1, 2011. • The Canadian REIT trusts were not affected by the change. • The stock prices of the affected trusts declined about 30% shortly after the law was changed.

5. Canadian Income Trusts –Their Replacements Background and explanations (Concluded): • During 2010, the various trusts began to develop their plans for changing their financial structure. • Most converted to Canadian Corporations but some were purchased by other companies and are no longer separately identified.

6. Canadian Income Trusts –Their Replacements What are the opportunities for an investment in these former Canadian Income Trusts? • Their management / board of directors usually decided that if their cash flow was sufficient to pay their Canadian Corporate taxes, fund their needs for future expansion and to continue to pay out the same level of dividends, they would do so. • The end results were mixed. Perhaps half of them have announced the intent to maintain the same payouts.

7. Canadian Income Trusts –Their Replacements What are the opportunities for an investment in these former Canadian Income Trusts? • As with any investment, the investor must first evaluate the financial health of the business, its management’s capability & policies, the competitive position, and the general outlook for the industry sector that they are in. • Be careful about chasing high yield in a company that is in trouble and pays yields as desperate act.

8. Canadian Income Trusts –Their Replacements What are the opportunities for an investment in these former Canadian Income Trusts? • Here is a summary of the replacement Canadian Royalty trusts: ..\Aa HyperLinks Jan 13 SIG Mtg\Canadian Royalty (Energy) Trusts Dvd Detectv.mht • Here is a listing of the former for the Canadian Income Trusts (I could not find a list of their replacements): • ..\Aa HyperLinks Jan 13 SIG Mtg\110108 Dividend Dectv Canadian Income trusts.mht

9. Canadian Income Trusts –Their Replacements • If you want to buy one of these funds, how do you do it? • A few are listed on the NYSE and AMEX • Most are listed only on the Toronto Stock Exchange (TSX) • Some US Brokerages provide access to the TSX, for example • TD Ameritrade • Scott Trade • Penn Trade Most will require you to phone in the order which costs a bit more. • You can also open an account with a Canadian broker, Interactive Broker which charges $120 per year plus $.01 per share

10. Canadian Income Trusts –Their Replacements What are the opportunities for an investment in these former Canadian Income and Royalty Trusts? • Several of them are still recommended by various newsletters: • Personal Finance (Roger Conrad is also Editor of The Canadian Edge): • Growth Portfolio • Yellow Media (OTC:YWPF), (TSX: YLO) Dividend Yield 10.3% Ttl 2.5 • Cameco Corp (NYSE:CCJ), (TSX: CCO) Dividend Yield 1.1% Ttl 38% • Income Portfolio • Vermillion Energy (OTC:VEMTF), (TSX: VET-U) Dividend Yield 4.9% Ttl 464% • Canadian Apt Prop REIT(OTC:CDPYF), (TSX:CAR-U) Div Yield 6.3% Ttl 101% • Canadian Oil Sands Corp(OTC:COSWF), (TSX COS-U) Div Yield 7.6% • Pembina Pipeling Income Fund (OTC:PMBIF), (TSX PIF-U) Div Yield 9.0%

11. Canadian Income Trusts –Their Replacements What are the opportunities for an investment in these former Canadian Income and Royalty Trusts? • Several of them are still recommended by various newsletters (Continued): • High Yield Investing by Carla Pasternak (from Calgary, Ontario) • Enerplus Corp (NYSE: ERF) 7.0% current yield for 2011 and expects total return of 10 to 15% for Oil and Gas Producer • Provident (NYSE: PVX) 7.0% yield for 2011with tax pools to offset Taxes through 2014

12. Canadian Income Trusts –Their Replacements What are the opportunities for an investment in these former Canadian REIT Trusts? • From the Toronto Globe And Mail Investment Web site: • High 7 per cent average yields could attract investors in 2011, with average total returns of 10 per cent to 15 per cent in the next 12 to 18 months. CIBC singled out • Larger caps: • H&R REIT : (TSX: HR.UN-T) 4 Star 22.1%Total Rtn for 1 year ..\Aa HyperLinks Jan 13 SIG Mtg\Stock Quote - The Globe and Mail.mht • Calloway REIT :(TSX:CWT.UN-T) 4 Star 22.4% • Smaller caps: • Crombie REIT (TSX:CRR.UN-T) 3 Star 16.5% • Artis REIT. (TSX:AX.UN-T) 3 Star 17.5%

13. CanadianIncome Trusts –Their Replacements What are the risks? • Dividend Cuts If you choose a fund because of its high yield, and if its management decides to reduce the yield, then not only will you suffer from the loss of the dividend, the price of the security will surely drop as well as others sell out. • Liquidity—Be sure the volume being traded is sufficient that you have a market to sell. • Taxes: • Canadian federal taxes plus Canadian provincial taxes on corporations combined will be 29.5% in 2011 and 28% in 2012. Thus as expected the probability is that you would receive on the average only 70% of the prior returns. • The US citizen would have 15% taxes with held from the income payments. • For Taxable accounts, much of that can likely be recovered when filing US taxes since there is a credit available for foreign taxes • For Tax deferred accounts, the investor cannot claim a credit. However, at least one company (Enerplus) states that there will not be withholding on tax deferred accounts. • If the distribution is higher than the income for the period, the difference would be return of capital and would not be taxed. • It is likely that most of the distributions would be considered to be qualified dividends by the US IRS. • Depending on the structure, a few companies may issue a K-1. • There are Tax Pools for some companies that will defer them paying corporate income tax, sometimes for several years. • Some companies have huge depreciation write offs (often Utilities) that will reduce taxes

14. CanadianIncome Trusts –Their Replacements • Summary: Canada should be a good place to invest in 2011 • The Canadian Financial Industry came through the 2008 financial crisis with very few problems • With the world economy apparently recovering, Canada should prosper well internally since it has a head start and will profit highly from world wide customers for its natural resources. • The former Canadian Income Trusts and CanRoys should be in a position to have above average dividend distributions, but price appreciation may be even more attractive. • If the Canadian Dollar continues to appreciate vs. the US Dollar, payouts to the US shareholders will be more—and visa versa. • Today, the former Trusts (Except REITS) are essentially like other Canadian Corporations except for the important heritage of management discipline to pass on earnings to the shareholders. • Just evaluate these investments as well as with all other securities.

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