CI Financial Inc.'s long courtship with income trust conversion is once again headed toward consummation.
Canada's third-largest mutual fund company said yesterday it will pursue conversion, saying it is in the "best interests" of its shareholders. The decision comes after Ontario failed to make changes to dividend taxes in its budget Thursday. Next month, management will recommend the move to the CI board and, if approved, a shareholder vote may follow this summer.
"It's cut and dry. Every company should set up as an income trust, almost every company," said Bill Holland, CI chief executive officer. Under CI's corporate structure, shareholders must pay a maximum dividend tax rate of 56 per cent. As a trust, the tax rate falls to about 46 per cent.
CI's news pushed shares to a record high yesterday on the Toronto Stock Exchange where they closed up $1.75 or 6 per cent at $31.39.
Not surprisingly, Mr. Holland identified the government policy as the biggest risk to conversion. In 2004, a proposed cap on trust ownership by pension plans shelved CI's plans. Then in September last year, Ottawa stopped providing advance tax rulings to companies thinking of starting trusts and CI once again put its plans on hold.
The federal Conservatives have said little on trusts but are expected to honour former Finance Minister Ralph Goodale's plan to leave the tax status of the asset class alone and raise the dividend tax credit.
Adding confusion are the different policies of the provinces. Quebec is supporting the former minister's dividend tax regime while British Columbia and Manitoba have committed to raising their dividend tax credits pending federal legislation. Alberta and Ontario have adopted a third model, declining to make a policy commitment until Ottawa acts.
Tax policy for dividends and trust distributions is "a little question mark," said Don Drummond, chief economist at Toronto-Dominion Bank. The provinces are "going in the right direction" but clarity is unlikely until this fall, he said.
Despite CI's move, the legislative uncertainty means many trust candidates will "wait and see" before committing to conversion, said John Aiken of Toronto's National Bank Financial Inc.
Supply and demand for trust issues is "starting to equalize," added Jason Zandberg of Calgary's Acumen Capital Finance Partners Ltd.
© 2007 The Globe and Mail. All rights reserved.
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