Since many income trusts pay good monthly dividend, which I very much like, I have been inquiring as to some of the income trusts plan come 2011. There are 2 options for them to consider.
Remain an Income Trust
They can elect to stay as an income trust in which case they will need to pay the SIFT tax. The SIFT tax is the new tax rules for “specified investment flow-through entities” (SIFT). It means that the distribution will be taxable and unless they increase their distribution, it will have an impact on the investors. The tax rate in effect for 2011 is currently 26.5%.
If you currently have a non-REIT income trust, you can expect the dividends to be lower by 26.5% unless the trust decides to increase them. This reduction may already be priced in some investments or on their way. If you plan on buying an income trust, make sure you know if they have announced what their plans are. For example, KEG.UN (The Kegs Income Fund) plans to remain an income trust. They currently pay over 10% in dividend but that will be reduced come 2011 to 7.4%. When will the trust price on the market be affected is the question if it has not yet been affected.
Note that real estate (REIT) income trust are exempt from the SIFT tax rule.
Convert to a Corporation
The other option is to convert to a corporation at which point they can elect to change their dividend plan. Again, you need to inquire to find out what their plans are or find out from their press release if they have announced it already. Crescent Point Energy (CPG) converted to a corporation and retained all of its monthly dividend payment. Others may opt to keep more cash for expenditures which would reduce their dividends. There are more examples and what is interesting is that they keep the monthly dividend rather than switching to a quarterly distribution.
It will be an interesting year for Income Trusts. Do your research and invest wisely.
Happy dividend hunting!