Monday, February 19, 2007

Income Participating Security (IPS)

IPS (Income Participating Security), also known as a “stapled” security (like DR.UN) consists of a piece of equity ownership and a piece of debt, which get traded together (some can be separated which are called "paper clipped units").

Each month, they pay a "dividend" and the remainder is interest. These types of income producing securities are not subject to the distribution tax on trusts that was announced on October 31, 2006.

These types of securities do not pay distributions. They pay “dividends” and they pay interest on its debt most of which is held by the same people that own the equity.

The Canadian Government seems to have exempted these types of securities from the new "Trust Tax". However, we are all waiting for the final legislation before we decide how to go forward.

If this type of structure is exempted from the new Trust Tax then I suspect we will see quite a few of the existing Trusts convert to this format.

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