It was a dark autumn night; the cold wind was whipping our red cheeks filled with blood to keep us warm. A few leaves were still dancing in the rain over the suburban cemetery exposing their dead sisters in front of each house. While a few monsters were crawling the streets in search of fresh and juicy candies…
But the worst was yet to come… Draguflaherty was arise from the dead and make a declaration: The Canadian Income Trusts will be taxed as a normal companies!
This happened on October 31st 2006 and swiped the Canadian market faster than the first snow of winter. Back in 2006, there was 254 income trusts. Since the dark reaper cut their throats, and now there are only 170 income trusts left. Most of them will convert back to regular incorporations by the end of the year.
Income Trusts’ Tax implication will change in 2011
As of January 1st 2011, all income trusts will be taxed as regular incorporations. The major difference since its creation is that income trusts were able to distribute their dividends tax free and were getting taxed only on the money remaining after the dividend distribution.
The Canadian Government decided to put a stop to this madness as more and more companies were converting into income trusts taking away billions of dollars of tax revenue from the Government.
Real Estate Income Trust (REITs) will be the biggest winners
There is a survivor to this story and they are real estate income trusts. In fact, they are the only ones to keep their tax privileges. Therefore, even though investors already assessed the dividend cut from other income trust, we expect the remaining trusts to drop in value while REITs should show some interest.
Is there any alternative to high yield dividend paying income trusts?
As previously mentioned, REITs’ tax situation will remain as is. Therefore, it is probably the best possibility in order to receive a high dividend. The housing market is good in Canada but it is not impossible to see a housing bubble in our country too. This is why I would not shove all my money into REITs. Nonetheless, they certainly have their place in a balanced portfolio.
#2 Oil Income Trusts
Oil income trusts are no different from other trusts as they will be taxed starting 2011. However, their major expenses in infrastructures will allow them a tax break for a few more years. Hence, this could be a way to “ride the wave” for a couple of years. There are very solid companies out there and those picks could help your fixed income to perform in 2010.
#3 Canadian Banks
While they are far from being treated as income trust, Canadian banks are among the most solid financial institutions arond the glob. As previously mentioned in my last update of the TSX 60 dividend yield , 4 out of the 6 biggest banks in Canada show a dividend yield over 4%. Their solid balance sheets also contribute to maintaining such a high dividend. According to me, they could be seen as the “small version” of an income trust ;-).
#4 Preferred Shares
Preferred shares can also become an interesting option. Less volatile than common shares, they also offer higher yield. You can find the major banks, insurance companies and oil corporations. They took a major hit in 2008 but most of them came back from the dead and their dividend payout is similar to income trusts (considering lesser risk to be assumed).
Final thoughts on Canadian Income Trusts
I have mentioned it several times on this blog: there is no free lunch in finance. Therefore, what used to be a free ride to high paying dividend investing products finally disappears. Investors will have to get back to investing basics by considering the financial fundamentals of a company instead of picking any double digit dividend yield without even looking at the income trust name!
image source: pingu1963 Google+