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Re: Stapled SIFT new ruling implicationsFrom Canaccord Morning Coffee:
H&R REIT* (HR.UN : TSX : $21.15) Net Change: -0.05, % Change: -0.24%, Volume: 390,708 InnVest REIT* (INN.UN : TSX : $5.59) Net Change: -0.99, % Change: -15.05%, Volume: 4,463,151 Labrador Iron Ore Royalty* (LIF.UN : TSX : $36.79) Net Change: -1.71, % Change: -4.44%, Volume: 618,563 Northern Property REIT* (NPR.UN : TSX : $30.36) Net Change: -0.39, % Change: -1.27%, Volume: 174,864 Westshore Terminals* (WTE.UN : TSX : $22.66) Net Change: -1.71, % Change: -7.02%, Volume: 822,605 Round and round she goes, where she stops, only the government knows. The Federal government announced proposed amendments to provisions in the Income Tax Act to ensure that Stapled-Units are taxed in-line income trusts. Many remember Halloween 2006 when the government first announced Tax Fairness Plan, a surprise initiative designed to level the playing field between taxable corporations and income trusts. Effective January 1, 2011, existing incomes trusts classified as SIFTs became liable to pay distribution taxes. Under these new rules, REITs were the least impacted as the overwhelming majority were exempt from these provisions and able to retain their flow through status (note hotels and senior housing entities were left of the REIT exemption). According to the latest press release, "At the time that the Tax Fairness Plan was announced, the Government indicated that, if there should emerge structures or transactions that are clearly devised to frustrate those policy objectives, any aspect of those measures may be changed accordingly and with immediate effect". It goes on to say, "Recent transactions involving publicly-traded stapled securities have raised concerns about the use of these types of structures in a manner that frustrates those policy objectives." While most income trusts converted to corporations with the introduction of the Tax Fairness Plan, a few chose to reorganize their corporate structure and convert to a stapled unit. These securities have features that can provide tax advantages similar to those associated with earlier income trust structures. Funds that utilize this structure include: H&R REIT; InnVest REIT; Labrador Iron Ore; Northern Property REIT; and Westshore Terminals. Importantly, the key changes, as proposed, would disallow trusts from deducting interest paid or payable on the debt portion of such a stapled security. As for REITs, rents or other monies paid by an associated entity to the main REIT would no longer be eligible for a deduction. The changes take effect today, although trusts are allowed a transition period (tax holiday), ranging from one year to five, depending on how long the trust has used this vehicle. A Bay Street analyst also highlights that Canadian taxable investors should be indifferent: Canadian investors who own stapled-units in a taxable account should not be impacted by proposed changes assuming that after the transition period the distributions will be taxed entirely as dividend income. Essentially, these changes shift the tax burden from the taxable Canadian resident to the company. That said, the specific impact varies for each company depending on its tax rate, financial leverage and corporate structure. Specifically, InnVest REIT is a hotel REIT and is therefore not exempt from SIFT rules. InnVest reorganized its corporate structure and converted to a stapled unit format in order to comply with Canadian income tax rules applicable to SIFT trusts. In a statement, the fund acknowledged the rents paid by its operating trust to the REIT would cease to be deductible if the changes are enacted. The fund is currently reviewing the potential impacts. Meanwhile, H&R REIT is a commercial property REIT and is using the stapled unit structure for its U.S. operations. In a press release, the REIT said that its stapled unit structure does not involve the kinds of payments that are targeted by the proposed changes. "Based on the information released today, the trust does not believe the amendment will affect their stapled unit structure". Northern Properties REIT is an apartment REIT which created the structure to deal with its hotel properties. A Bay Street analyst notes, the hotel properties only represent ~$50 million of asset value (total asset value is $1.4 billion) so he believes that in the worst case scenario they could be sold or turned into apartments. As for Westshore Terminals, a Bay Street analyst indicates that the annual tax shield from its $371 million in "stapled" debt is $10 million. He estimates that discounted future value of the annual tax savings would impact valuation by $1.50 a share. While Labrador Iron Ore generates an annual tax shield of around $9 million from its $248 million stapled debt. The analyst estimates that this would have a $1.90 on valuation. Both Eagle Energy (EGL.UN) and Parallel Energy (PLT.UN) initially traded lower on this news, however both pared back losses after issuing press releases saying they would not be affect by the proposed changes. |
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