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CI Fund eyes income trust bandwagon

Raises speculation other firms will follow

MUTUAL FUNDS REPORTER

CI Fund Management Inc. is poised to become one of Canada's largest income trusts, sparking intense speculation that more financial service firms will follow suit.

The mutual fund manager said yesterday it will seek an advance income tax ruling from the Canada Revenue Agency to convert to a trust. If approved, it is expected shareholders will vote on the conversion by the end of November.

Canada's "warped" dividend tax policy is behind the conversion, said Bill Holland, chief executive officer of Toronto-based CI, manager of about $69.6-billion in fee-earning assets. Under CI's corporate structure, shareholders must pay a maximum dividend tax rate of 55 per cent. As a trust, the tax rate falls to about 44 per cent, he said.

"We're paying 25 per cent more tax as a corporation if you are distributing all your income," Mr. Holland said, ending two years of internal CI debate on the merits of trust conversion. "As a CEO, the question isn't why are we becoming an income trust, it's why not?"

Analysts forecast CI's trust units will be priced in the $25-to-$30 range, with an annual yield of between 7 and 8 per cent.

The investment community celebrated the news, sending CI shares up 12 per cent or $2.60 to close at $24.10 on the Toronto Stock Exchange. CI has a stock market capitalization of $6.9-billion, making it the country's third-largest trust behind Canadian Oil Sands Trust and Yellow Pages Income Fund.

Sun Life Financial Inc., CI's largest shareholder with a 35-per-cent interest, climbed 59 cents to $44.39 on the TSX yesterday. BMO Nesbitt Burns Inc. estimated the Toronto-based insurer will receive about $150-million in annual cash distributions from CI, up from $72-million in dividends now.

"We obviously think it's a good thing," said AIC Ltd. analyst James Dancy. The Burlington, Ont.-based fund company owns about 28.3 million CI shares, making it CI's second-largest shareholder.

CI's move follows Toronto investment dealer GMP Capital Corp.'s August decision to convert to a trust. The robust financial services market and the lucrative payday for many employee-shareholders may motivate more firms to follow suit, analysts say. "There's a big demand for yield, there's a tax incentive on the corporate side and as a bonus, there tends to be an evaluation lift for these companies," said analyst Jason Zandberg at Calgary's Acumen Capital Finance Partners Ltd.

Shares of AGF Funds Inc. were caught up in "the trust frenzy," one Toronto analyst said. Like CI, the fund company's stock price climbed 12 per cent, up $2.22, to $21.35 on the TSX. Toronto-based AGF has restructured operations over the past year but continues to struggle when it comes to stemming net redemptions in its mutual fund operations. "AGF has been under a ton of pressure to unlock shareholder value . . . this [trust conversion] would be a very easy step for them," said analyst John Aiken at National Bank Financial Inc.

AGF declined to comment.

Meanwhile, trust speculation saw shares of Vancouver investment dealer Canaccord Capital Inc. spike, too. Its stocks rose 66 cents to $11.40 on the TSX. Chairman and CEO Peter Brown has said Canaccord's short-term goal is U.S. expansion, not trust conversion, but that hasn't stopped its stock from rising 24 per cent this year.

© 2007 The Globe and Mail. All rights reserved.

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