Alternatives for an Income Trust to Consider:
- Conversion to a corporation now, later or not at all
- Sale, merger, MBO or spin-out
- Conversion to a U.S. master limited partnership
- Restructuring to improve tax efficiency without
Determining whether to convert to a corporation or pursue another alternative is complex. In assessing the merits and timing of such a decision, management and trustees of an income trust must consider a number of factors, particularly strategic, tax, financial, market and legal considerations. Here are some key questions to ask in making a decision as to the best alternative:
- What is the income trust's business strategy? Does it want
to grow through acquisitions or organically?
- Is the income trust encountering liquidity problems, making a
sale more attractive?
- Does the income trust want the ability to issue equity
securities as consideration for an acquisition?
- Will conversion permit more tax-efficient acquisitions?
- What is the level of foreign investment? Are increasing foreign
investors putting at risk the income trust's favourable status
as a "mutual fund trust"?
- Will conversion make the income trust a more likely take-over
- How much is the value of continuing the tax-free holiday on
distributions until the end of 2010?
- Will a reduction in distributions reduce the benefit of the
- Will the income trust's forecast growth exceed the
"normal growth" guidelines?
- What will be the tax treatment of the income trust and
subsidiary entities after 2010? Will conversion result in an
acquisition of control of corporate subsidiary entities?
- What will be the tax implications of conversion for unitholders
(residents, non-residents and tax exempts) and holders of options
and retained interests?
- What will be the tax implications of conversion for holders of
subordinated debt? Has the debt declined in value since issuance,
which may give rise to debt forgiveness issues?
- Does the income trust have other bases (e.g., tax
depreciation, tax pools, tax losses, resource expenses and
undeducted financing expenses) on which to reduce taxable income if
- Can the income trust return capital rather than distribute
income (e.g., through the use of resource expenses)
thereby avoiding the tax on distributions?
- Can the income trust implement other tax planning to reduce
taxable income (e.g., by leveraging the business or
effecting a conversion with a corporation with tax losses)?
- To what extent does the income trust have foreign source income
(e.g., foreign oil and gas properties)?
- What is the income trust's expected financial performance?
Does it expect to continue or vary future distributions?
- Will the income trust need to reduce distributions to fund
acquisitions, capital expenditures or operating costs?
- Will the cost of a conversion have a significant impact on cash
- If the income trust converts, to what extent will after-tax
income of the new corporation be less than current distributable
- What will be the new corporation's dividend policy? How
will this affect market value?
- How does the income trust's trading price compare to other
income trusts or corporations in similar industries or with similar
market capitalization? Will there continue to be investor demand
- What factors, if any, determine the unit valuation other than
income distribution levels?
- How will conversion or announcement of conversion impact the
trading price? Will this impact the exchange rate for outstanding
convertible bonds of the income trust?
- What is the income trust's investor base? Will reduction or
suspension of distributions or announcement of conversion result in
significant churn in the units? Could this make the income trust a
more likely take-over target?
- Does the income trust require capital for acquisitions, capital
expenditures or operating costs? Will the income trust be able to
- What will be the income trust's cost of capital compared to
that of a dividend-paying corporation?
- Would the ability to access foreign capital markets improve the
availability of capital, reduce the cost of capital or improve
- Does the income trust have publicly-traded debt? What
modifications will be required to accommodate the conversion and at
what price (both cost and risk of approval)?
- Is the market capitalization of the income trust sufficient to
warrant it continuing to bear the cost and obligations of being a
listed, reporting issuer? Is there sufficient liquidity in the
- Will conversion trigger "change of control"
provisions (e.g., such as in credit facilities,
publicly-traded debt and compensation arrangements)?
- Are the financial entitlements of holders of retained interests
subordinated to unitholders? How will conversion of retained
interests affect the financial interests of existing
- Do holders of retained interests have voting or veto rights
which will impact structure and approval?
- Are there management contracts with founders or sponsors? How
will they be impacted by conversion or acquisition?
- What rights of a holder of a retained interest should continue
after conversion (e.g., special voting or veto rights,
rights to nominate directors and other rights embedded in an
existing shareholder agreement between the holder of the retained
interest and the income trust in respect of ownership of the
- What level of approval is required by unitholders? Will
"majority of minority" approval be required? Will
debtholder approval be required?
- Do market conditions or other circumstances mean unitholders
are likely to oppose conversion or exercise dissent rights?
- Are there perceived or potential conflicts on the board of
trustees, making a special committee of independent directors
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.