No smooth road to trust conversions

Fri Aug 22, 2008 5:45pm EDT
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By Scott Haggett

CALGARY, Alberta (Reuters) - Two cases, coming in less than a week, show that investors need to be wary as Canada's income trusts, with their tax breaks set to end, convert themselves back into corporations.

The tax breaks ceded to trusts, which distribute most of their cash to unitholders, are to expire 2011.

That deadline, mandated by the Canadian government, is forcing the firms in the sector to begin making choices about what kind of company they will be when the tax holiday is up and what sort of gains or losses investors can expect to see as a result of those choices.

"There will be different structures that emerge though time," said Cristina Lopez, an analyst who covers energy trusts at Tristone Capital. "It depends on the organization and the management's thought processes."

Lopez expects that most of the energy trusts, the oil and gas producers that dominate the sector, will largely wait until the last moment to make the switch to a new format to conserve the tax pools that can be used to shield taxable income.

Still, a handful of companies have already made their conversions, including two over the past few days, and the pair took decidedly different directions.

Bonterra Energy Trust BNE_u.TO, a small oil and gas producer, took the more unusual path, agreeing to buy a former telecom company under court protection from creditors.

It's planning to use SRX Post Holdings Inc's SRX.TO Toronto Stock Exchange listing to do a reverse takeover of its trust units, allowing its investors to avoid a tax hit on capital gains.   Continued...