Canadian Income Trusts: A Screaming "BUY" Opportunity

The following excerpt was from Roger Conrad who has a free (and a paid version) newsletter called "Maple Leaf Memo".

Canadian Income Trusts: A Screaming "BUY" Opportunity

On Halloween day last year, Canadian Finance Minister Jim Flaherty decided that no more companies should be allowed to convert into trusts and that virtually all existing trusts should lose their tax-exemption starting in 2011.

We’ve seen this tax-grab before. The previous Labor government proposed taxing income trusts a year earlier, but ran into such heavy opposition that it was forced to shelve the idea.

Will this latest scare simply be a repeat of 2005’s false alarm? I can’t promise you anything, but we certainly have plenty of reasons not to panic.

First of all, the proposed legislation still needs to be approved by Parliament. All the minister has done so far is to file a notice of intent to table a bill in Parliament. There are no details on when this will happen.

Second, since the proposal provides a four-year grace period before existing trusts are taxed, current trusts will continue to pay their fat distributions.

Third, the proposed law as currently written might never see the light of day. Four years is an eternity in politics. It gives Canadian authorities plenty of time to allow certain businesses back into the income trust fold. (I’m convinced that what they really want is to restrict the format to the natural resource companies it was intended for--not to kill the trust format altogether.)

A year from now, I bet we’ll barely remember this Halloween scare.

And look on the bright side: It’s hard to lose if you buy in now. Trust prices have fallen in the face of uncertainty, giving you a great entry point and super-sized yields. Trusts that were yielding 10% the day before Halloween are now paying 12%. The actual businesses underlying these trusts haven’t changed a bit. Conservatively run, high-quality income trusts are as solid as ever, and I have no doubt they'll prevail for years to come.

Remember, the current yields still hold until 2011. So the owners of Precision Drilling, just to pick one of my favorites, will still receive 13.2% on their capital for the next four years.

And even if they're taxed four years from now, these companies will still be paying yields that dwarf your options in the Dow and S&P. Dozens of trusts now yield more than 10%, some as high as 21%.

Bottom line: I'm pounding the table because there are still plenty of trusts worth buying and holding for the long haul as their businesses grow.