CI to revisit trust conversion

While retail investors are spending the day bidding up Tim Horton’s newly listed stock, there is another, perhaps more interesting story unfolding in the financial services sector.

CI Financial announced Friday morning that it was revisiting the idea of converting to an income trust. The stock ended the day nearly 6% higher.

CI had announced it was considering such a move on September 8, 2005, but shelved the plan on September 28, after Canada Revenue Agency said it would no longer issue advance rulings on trust conversions. Then-federal Finance Minister Ralph Goodale cast further uncertainty on the structure, announcing a review of their tax status.

While Ottawa backed away from raising taxes on trusts, cutting taxes on corporate dividends instead, CI chief executive officer Bill Holland says the current tax structure still favours trusts over corporations.

“The dividend rate is one thing, but it’s also the corporate tax rate. It’s too far off,” Holland says. “The combination of corporate taxes and dividend taxes is much higher than the top marginal tax rate for an individual, so an income trust is obvious.”

He says the budget tabled by the Ontario government on Thursday failed to address the tax discrepancies, spurring the renewed interest in the conversion.

“For an Ontario taxpayer, you’re meaningfully better off on an after-tax basis with an income trust, than a corporation,” he says. “It really comes down to dollars and cents and tax savings.”

CI has been the driver of some high-profile consolidation plays in the industry, most recently putting Clarington Funds into play in October 2005. While that deal was thwarted by a rival bid from Industrial Alliance, Holland says the plan to convert into a trust does not signal a retreat from the consolidation arena.

“Does it push consolidation? Sure it does. You can always borrow money or do stock deals. Almost every deal we’ve ever done has been a stock deal anyway,” he says. “For us, it will lower our cost of capital, which makes acquisitions easier and cheaper.

“We pay out all our earnings anyway, either through share buy-backs or dividends; we’ve paid out all our earnings for the past six or seven years.”

The firm’s management will recommend conversion to the board of directors by early April 2006. If approved by the board, the proposal would be put to shareholders for their approval at a special meeting, after which the plan would still face regulatory and court approval. CI has applied for an advance tax ruling from CRA on the plan.

In a press release issued this morning, CI assured unitholders and investors that the business and operations of CI will be unaffected by a conversion and that the firm will continue to be managed by the current senior executives and employees of CI.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com