Diane Francis sends word that Brent Fullard of the Canadian Association of Income Trust Investors has formalized the anonymous-tough-guy-Tory talk quoted in Ottawa’s political daily The Hill Times in April: Fullard has challenged Finance Minister Jim Flaherty to a debate, offering him 90 minutes to defend the Tax Fairness Plan. Fullard will rebut; he’s also pledged to underwrite a CAD50,000 minimum donation to charity to provide a little motivation for Flaherty.

An anonymous Conservative corner man said back in the spring, “I don’t think Jim’s losing any sleep over it. As a matter of fact, I’m sure of it. I’m sure he’d love to go a couple of rounds with these guys in a debate situation.”

“It” refers generally to the tax leakage caused by the fact that many entities that purchased weakened income trusts following the Halloween 2006 nightmare either aren’t taxable (pensions) or will lever up debt and write off cash flow as well as the damage investors suffered when the trust market sold off.

This particular debate may or may not happen, but it looks more and more as though Prime Minister Stephen Harper wants an election, soon, and that Fullard’s going to make enough noise about the trust tax issue to attract the ear of at least one ambitious opposition party.

Evolution

We’re still in the middle of what will be a long play-out phase of Flaherty’s Oct. 31, 2006 bombshell announcement that, contrary to Conservative campaign promises and post-election public statements, the minority government would propose legislation imposing corporate-style taxes on trusts. The nauseating selloff in the immediate aftermath became a sustained rally; unit prices for the strongest businesses rebounded and investors have enjoyed significant distribution increases.

Trusts have been taken private, some have merged or been acquired, some have converted to corporations. And some have said they’ll maintain their current status. We’ve seen several announcements in recent weeks detailing the many ways trusts will, or won’t, adjust to the minority Conservative government’s trust tax.  

Birch Hill Equity Partners Management and Westerkirk Capital are taking Sleep Country Canada (TSX: Z.UN, OTC: SLPCF) private for CAD299.2 million (CAD22 per unit). Sleep Country, which operates more than 200 stores in Canada and the US, reported net income of CAD9.8 million on CAD173 million in sales in the first six months of 2008.

Why Lose Another Cent On Wall Street When You Can Make 63% In Canadian Trusts

These trusts are thriving and will continue to hand investors’ fat profits, like the 63.3% my readers have made since the start of 2008.

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Bonterra Energy Trust (TSX: BNE.UN, OTC: BNEUF) announced Aug. 15 it would convert via a plan of arrangement that includes the acquisition of an insolvent shell company, SRX Post Holdings. SRX is an inactive public company and has been operating under the protection of the Companies’ Creditors Arrangement Act since Nov. 19, 2007.  

Bonterra will invest CAD11.25 million in SRX, outstanding shares will be redeemed for nominal consideration, and the company name will become Bonterra Energy Ltd. The plan of arrangement is designed to avoid the risk of being taxed on capital gains arising from a conversion; Bonterra had largely completed the details of the transaction before Flaherty proposed draft rules designed to allow trusts to convert back to a corporate structure without taking a tax hit and chose to honor verbal commitments.

Here’s where it gets interesting for us: Bonterra CEO George Fink said “We’re going to try to distribute exactly the same” and pointed to the company’s existing tax pools that should make that possible post-2011.  

BFI Canada Income Fund (TSX: BFC.UN, OTC: BFICF) announced its own conversion plan Aug. 18. It includes a 73 percent reduction in cash distributions, and that explains why the unit price dropped 17 percent Aug. 19. BFI was widely expected to make the corporate move, but the market was surprised by the depth of the payout cut. 

BFI management is repositioning for a growth story and wants to maximize flexibility to make acquisitions. But it may have trouble attracting attention as a low-dividend-paying growth corporation. There are a lot of investors who value current income over growth potential. The distribution cut could lead to increased costs of capital that actually make it more difficult to make acquisitions.

Recent converts have cut distributions; Trinidad Drilling (TSX: TDG, NYSE: TDGCF) went from CAD1.38 per unit annually to CAD0.60 per share, TransForce (TSX: TFI, OTC: TFIFF) went from CAD1.59 a unit to CAD0.40 per share, and Aeroplan Group (TSX: AER, OTC: GAPFF) went from CAD0.84 a unit to CAD0.50 a share. None has been as steep as BFI, either its cut or its unit-price action.

One energy trust recently made clear its intention to steer clear of a fate similar to BFI’s. Pengrowth Energy Trust (TSX: PGF.UN, NYSE: PGH) CEO Jim Kinnear said Pengrowth would be able to employ CAD3 billion worth of tax pools to shelter distributable income to unitholders for at least the next four years.

“We believe there will remain strong demand for yield-based investments,” Kinnear said on Pengrowth’s second quarter earnings conference call. “These pools can be used either to shelter income from the tax and can also be used to mitigate impacts to our unitholders beyond 2011.”

The Worst Is Still To Come – Protect Your Wealth Now

No matter which candidate gets into the White House, post election changes to the tax law could wipe out companies profits and with it, most investors portfolios.

Partnerships avoid taxation, which will shield them from the new tax laws. I have some specially selected partnerships that’ll protect your portfolio while giving you returns as high as 43% in a year.

Go here to get my free report and see why partnerships pay much higher dividends –– like 21.1% a year for the past 5 years.
Two Times as Fun

Stephen Harper is arranging the pieces for a(nother) fall campaign.

Speaking Engagements

Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the Presidential election in the seat if the federal government.

Join me and my colleagues Neil George and Elliott Gue for the DC Money Show, Nov. 6-8, 2008, at The Wardman Park Marriott.

Go to www.moneyshow.com or call 800-970-4355 and refer to priority code 011362 to register as our guest.

We also have a special invitation for our readers. KCI Communications, Inc., is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please click here or call 877-238-1270.