Weekly Wrap

Posted by Jamie Switzer and Marc Latta of Raymond James

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“As we approach 2011, when the tax regime for income trusts changes, investors are worrying about having a shortfall in their retirement income.”

Weekly Wrap – edition #346

Market Summaries
S&P/TSX Composite up 0.10% to 11957 (up 1.80% year-to-date)
Dow Jones Industrial Avg up 1.00% to 10850 (up 4.00% ytd)
Nasdaq Composite up 0.90% to 2395 (up 0.90% ytd)
Oil (West Texas Intermediate) down $0.68 to $80.00 (up $0.64 ytd)
Gold (Spot USD/oz) up $0.50 to $1107.50 (up $10.55 ytd)

Keep the Faith in Trusts

As we approach 2011, when the tax regime for income trusts changes, investors are worrying about having a shortfall in their retirement income. Effective January 1, 2011, income trusts classified as Specified Investment Flow-Through Trusts (SIFTs) will have to pay distribution taxes, known as the SIFT tax. All sectors in the income trust realm are subject to the SIFT tax, but the level to which they will be affected depends on the type of trust. Canaccord Adams analyst Kyle Preston says energy trusts appear to be the best positioned for a successful conversion to dividend-paying corporations. Several have already converted and have kept their distributions flat. Crescent Point Energy Corp. is a good example. On conversion, its monthly dividend per share was equal to its monthly distribution per unit. The company has since maintained its $2.76 dividend. Engineering and construction income trusts are largely expected to cut distributions on conversion. Since October 2007, twenty-nine have completed conversions, but only four have been able to maintain distributions without having to purchase tax assets. Decisions to cut distributions appear to be based on the health of the balance sheet. Since the engineering and construction firms tend to be acquisitive, they need to be able to finance acquisitions, and large dividends may not be sustainable post-conversion. Power and pipeline incomes trusts are a bit more varied. While most have stated plans to convert by 2011, those that are classified as limited partnerships (LPs) can hold off and convert at a later date with no tax consequences. Delaying conversion gives LPs the ability to maintain a higher distribution and thus the potential to be rewarded by the markets as income-investors hunt for yield. Business trusts are expected to have the most difficulties when making the conversion to corporations because most do not have any significant tax shelters to offset the rollover. As they become taxable, the majority of business trusts are expected to reduce distributions by as much as 20% to 30%. Regardless of the type of income trust, most individual investors should not experience a significant decrease in the income stream they earn from these investments. The Canadian source portion of the distribution will be taxed as a dividend and thus will be eligible for the dividend tax credit. Even when factoring in a distribution cut it is estimated that individual investors can withstand up to a 29% cut before being negatively affected.


Last week the world’s top central banks urged nations to adopt tougher rules on complex financings to avoid a repetition of the recent credit crisis. The proposals, from a study group under the auspices of the Bank of International Settlements, would ultimately see such transactions as securitizations and derivatives trading become more expensive to undertake. The idea would be to curb excess lending during boom times and ensure credit remains available during downturn. This marks some of the first steps by leading policymakers to fix flaws in the financial system that were exposed during the recession and led to the downfall of venerable Wall Street investment houses. Nothing like these recommendations has ever been tried, said David Longworth, a deputy governor at the Bank of Canada and the study group’s leader, acknowledging that these trail-blazing rules may not see the light of day. “We believe the regulators do have the tools to implement this,” Mr Longworth said, indicating they would “fit in nicely” with pending global regulations on the amount of capital banks will need to set aside.

Whales, wolves, bears and birds would be devastated by an oil spill in the waters off Vancouver’s coast, says an extensive new study released a day before the anniversary of one of the world’s most devastating human-caused environmental disasters. The findings of a five-year study by a dozen Canadian, Scottish and US scientists was released by the Victoria-based Raincoast Conservation Foundation last Monday – just one day before the 21st anniversary of the Exxon Valdez oil spill. An alliance of nine BC First Nations also marked the calamitous date last week by vowing to fight a proposed multi-billion-dollar pipeline slated to carry petroleum from oil sands in central Alberta to Kitimat, BC.

A key barometer of Canada’s economic performance strengthened in February for a ninth straight month, lifted by the housing and manufacturing sectors, Statistics Canada reported. The index of leading economic indicators rose 0.8% last month, up from a revised 0.7% in January, the federal agency said. The previous estimate for January was 0.9%. Most economists had expected the index to increase by between 0.9% and 1% in February. Nine of the ten index components gained during the month, with the only decline coming in the average work-week in manufacturing. “Household demand again led the increase, while manufacturing continued to recover,” Statistics Canada said. The housing index’s acceleration to 1.7% was led by housing starts, the agency noted, as sales of existing homes declined for the first time since February 2009. “The sustained gains in housing were reflected in a 1.2% increase in sales of furniture and appliances, their largest advance in over three years,” it said.

Marketwatch – A Look at the Week’s Newsmaker’s

Google Inc (GOOG) – moved its Chinese internet search service to Hong Kong in a bid to resolve its dispute with Beijing over censored search results while keeping a foot in the world’s largest Internet market. But comments on Xinhua, the official Chinese news agency, suggested that Google’s attempt to strike a balance may not go over well with Beijing. Xinhua quoted a government official as saying Google has “violated its written promise” and is “totally wrong” by stopping censorship of its Chinese language results. Google said it intends to continue research and development work in China, as well as maintain a sales staff, even as it effectively stopped serving search results from its mainland Chinese site Google.cn and redirected traffic to an unfiltered search site in Hong Kong.

Biovail Corp (BVF) – Eugene Melnyk said he had sold “substantially all” of his shares in Canadian pharmaceutical heavyweight Biovail Corp. yesterday, ending a tumultuous 20-year relationship with the company he founded but ultimately left under a cloud of fraud allegations in 2007. Melnyk, who is also the owner of the Ottawa Senators of the National Hockey League, sold 9.6 million shares of Mississauga-based Biovail, which he once served as chief executive, over a period of time stretching back to November 2009. However, he still holds more than 192,000 shares in Biovail, worth about $3-million. As late as December 2008, Mr Melnyk had owned almost 21.5 million shares for a 13.5% stake in Biovail, making him the largest shareholder in the company at that time. The largest shareholders in Biovail are now a pair of US-based private investment firms: RS Investment Management Co in San Francisco, and Oppenheimer Funds Inc in Denver. The firms each hold about 7.2 million shares.

Cenovus Energy Inc. (CVE) – Canada’s newest oil sands company, will stay out of the acquisition market as it concentrates on its own holdings in northern Alberta and elsewhere, its chief executive said. Cenovus CEO Brain Ferguson said the company, spun off late last year from EnCana Corp, has ten projects it has identified for development on its own lands, so it has no need to bulk up through deals. “We have such a tremendous opportunity inside our organic portfolio,” Mr Ferguson told the Reuters Canadian Oil Sands Summit. The company expects 10%-15% annual production increases from its Foster Creek and Christina Lake old sands projects in northern Alberta. Foster Creek is pumping about 105,000 barrels a day currently, making it the largest steam-driven oil sands development. Ferguson said plans are to double that in 10 years.

“Quote of the Day”

“Horse sense is the thing a horse has which keeps it from betting on people.” – W. C. Fields

This newsletter expresses the opinions of the writers, Marc Latta and Jamie Switzer, and not necessarily those of Raymond James Ltd. (RJL)  Statistics and factual data and other information are from sources believed to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities.  It is not meant to provide legal, taxation, account or account advice; as each situation is different, please seek advice based on your specific circumstance. RJL and its officers, directors, employees and their families may from time to time invest in the securities discussed in this newsletter. It is intended for distribution only in those jurisdictions where RJL is registered as a dealer in securities. Any distribution or dissemination of this newsletter in any other jurisdiction is strictly prohibited. This newsletter is not intended for nor should it be distributed to any person residing in the USA. Raymond James Ltd is a member of the Canadian Investor Protection Fund.

JAMIE SWITZER | Raymond James Ltd.
Senior Vice President, Financial Advisor
North Vancouver IAS
PH: 604.981.3355 | FAX: 604.981.3376