Transcript Document

CONFERENCE CALL
Trust Legislation Impacts
January 4, 2007
KPMG LLP
Agenda
PRESENTER
TOPIC
Rick Whitley
Trust Legislation - Background and Overview
Lloyd Heine / Craig Natland
Draft Legislation and Recent Announcements
John Gordon
Impact on Financial Reporting
David Kennedy
Impacts on the Transaction Environment
Continuing professional education credit: You may qualify for up
to 2 hours of professional education credit by attending this event
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
2
Trust Legislation - Background and Overview
Rick Whitley
Partner, Tax
403.691.8216
[email protected]
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
3
Background and Overview
•
On October 31, 2006, Department of Finance announced new tax regime
for Publicly traded Canadian income trusts, royalty trusts and partnerships
(“Distribution Tax”)
•
On December 15, 2006 the Department of Finance issued guidance
on “Undue Expansion”
•
–
Safe Harbour based on market capitalization on October 31, 2006
–
Not legislation
–
Deals with existing and new convertible securities
–
Deals with mergers of SIFT’s
On December 21, 2006 the Department of Finance issued Draft Legislative
proposals
–
Distributions of certain SIFT income will be subject to tax at corporate income tax
rates in the SIFT
–
SIFT’s will not be able to deduct distributions of this income for tax purposes,
and distributions by partnerships that are SIFT’s will be taxed in the SIFT
–
Investors will be taxed as if the distributions were dividends
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
4
Draft Legislation and Recent Announcements
Lloyd Heine
Craig Natland
Partner, Tax
Partner, Tax
403.691.8104
403.691.8022
[email protected]
[email protected]
What You Should Know About the
Draft Proposed SIFT Legislation
•
The proposed Distribution Tax will apply to Specified Investment flow-throughs
(“SIFTs”). SIFTs include publicly traded income/royalty trusts and limited
partnerships (Certain REITs are exempted)
•
The Distribution Tax is imposed on certain income (“Non-Portfolio Earnings”)
distributed to unitholders
•
A SIFT that starts trading after October 31, 2006 will be taxed from
January 1, 2007
•
A SIFT that existed on October 31, 2006 will be taxed from January 1, 2011
•
Distribution tax will not apply to
•
–
Dividend income
–
Foreign income received directly
–
Return of capital
Distribution Tax will reduce cash available for distributions to Unitholders
by the amount of Distribution Tax paid by the SIFT
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
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What You Should Know About the Draft
Proposed SIFT Legislation (Cont'd)
•
Non portfolio earnings distributed by a SIFT to unitholders ( “Nondeductible distribution amount”) will be considered a taxable dividend
from a taxable Canadian corporation
– Canadian resident individual will benefit from enhanced “gross up”
and dividend tax credit on eligible dividends
•
Non-portfolio earnings include income of the SIFT attributable to:
– Income from business it carries on in Canada;
– Income (other than dividends) from its non-portfolio properties; and
– Taxable capital gains from its dispositions of non portfolio properties
•
Non portfolio properties include:
– Certain investments in a business/corporation/trust/partnership resident
in Canada;
– Canadian resource properties, timber resource properties; and
– Real properties situated in Canada
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
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SIFT—First Generation
Bad
Good
Fund
Non-Portfolio Properties
Dividend
Income not subject
To Distribution Tax
Shares
Note
Interest
Non-Portfolio Earnings
Opco
Business in Canada
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
8
SIFT—Second Generation
Public
Bad
Good
Fund
Cash exceeding income
(i.e. Return of Capital) is not
subject to Distribution Tax
Cash
Income
Units
Notes
Non-Portfolio
Earnings
Sub Trust
Non-Portfolio
Properties
LP
Interest
Cash
(Assume cash
> Income)
Income
LP
Canadian Business
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
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What You Should Know About the
Draft Proposed SIFT Legislation (Cont'd)
A Comparison of tax rates
2006
2007
2008
2009
2010
2011
Public Corporation (Alberta) 32.12%
32.12%
30.5%
30.0%
29.0%
28.5%
SIFT - New
34.0%
33.5%
33.0%
32.0%
31.5%
0%
In order to make the Non-Portfolio Earnings paid or payable to a unitholder:
•
Less cash will be available to allocate the entire taxable income due to tax leakage
•
Borrowing will be needed to finance Distribution Tax, or additional units of SIFT could
be distributed to unitholders if provided in the trust indenture.
•
Distribution of additional units will make unitholders taxable on the amount of income
which will be higher than the amount of cash received
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
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Distributions—Current vs. Proposed
SIFT Rules
Distributions
A.
SIFT Level (Fund)
2006 to 2010
2011 (a)
Income
Cash
Income
90
90
90
Cash
Income/Cash available for distribution
Non-portfolio income
Return of capital (ROC)
Total income/Cash before Distribution Tax
10
90
100
10
90
Distribution Tax on Other income @ 31.5%
Income/Cash available for distribution
90
100
(28)
90
100
Effective reduction in cash distribution (%)
90
72
28.35%
Reduction could be 31.5% where entire income is subject
to Distribution Tax
(a) Assumed same level and composition of distributions
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
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Distributions—Current vs. Draft
Proposed SIFT Legislation (Cont'd)
Distributions
B.
Unitholders Level
2006 to 2010
Income
Income/Cash distributions from SIFT
90
2011
Cash
Income
62
Cash
100
(b)
72
39.0%
(35)
14.5%
(9)
0.0%
0
0.0%
0
15.0%
(14)
15.0%
(9)
Tax at Unitholders level
- Taxable Canadian individual - Alberta rate
- Canadian tax-exempt
- Non-resident (U.S.)
After tax Cash to Unitholder (including ROC):
- Taxable Canadian individual - Alberta rate
- Canadian tax-exempt
- Non-resident (U.S.)
65
63
100
72
86
63
(b) Tax calculated on the gross amount of income distributed by SIFT excluding return of capital. Assumed additional
units will be issued to allocate entire income to the unitholders. Alternatively, borrowing would be needed to ensure
that entire amount of taxable income is distributed to the unitholders, otherwise, SIFT will be subject to tax (at
highest marginal tax rates) on the amount of taxable income not distributed. Assumed that the unitholder has
sufficient tax cost to absorb the return of capital.
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
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What Are the Options Now?
• Keep the Structure for Now
• Take Advantage of 4 year transition period
• Contain Growth Plans to “Normal Growth” (see next slide)
• Consider reducing discretionary deductions (in a pure flowthrough structure), to save more shelter for 2011 onward
• Stay on top of the proposed legislation. Legislation may contain
some changes to the announcement
• Get ready for 2011
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
13
“Normal Growth” During
Transition Period
• On December 15, 2006, Department of Finance provided
further guidance on “Normal Growth”
• “Normal Growth” of a SIFT during the transition period
would be allowed
• On the other hand, an aggressive interpretation of the term
“undue expansion” may cause the Department to propose
further legislative changes
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
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“Normal Growth” During
Transition Period (Cont'd)
• Department of Finance proposed the following safe harbour
guidelines:
Period
Normal Growth
(Safe Harbour)
November 1, 2006 to December
31, 2007
New Equity ≤ the greater of:
a) $50 million; and
b) 40%* of market capitalization (as of October 31, 2006)
For each year, from January 1,
2008 to December 31, 2010
New Equity ≤ the greater of:
a) $50 million; and
b) 20%* of market capitalization (as of October 31, 2006)
New Equity = includes units and debt that is
convertible into units
* Allowed percentages are cumulative (for a total of 100% growth). The $50 million annual
threshold allows smaller income trusts with market capitalization less than $200 million to
more than double in size during the 4 year transition.
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
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What Should You Consider
Before 2011?
• Improve Existing Structure
– 1st Generation—Corporate structure
– 2nd Generation—Pure flow-through structure
• New Structure
– Conversion to Public Corporation
– Conversion into IDS Structure (1st Generation)
– Conversion into IDS Structure (2nd Generation)
• Go Private/Sell
(Planning will be needed to avoid triggering capital
gain/recapture)
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
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Impact on Financial Reporting
John Gordon
Partner, Audit
403.691.8118
[email protected]
Will the New Legislation Change
the Accounting for Taxes by Trusts?
• Currently, most trusts do not record future income taxes
as the conditions in EIC 107 are satisfied
• New legislation will probably cause most trusts to not qualify
for the exemptions in EIC 107
• As new legislation is not yet substantively enacted, probably
no impact on recognition of future income taxes in 2006
financial statements
– May be necessary in future periods to record FIT on temporary
differences at trust level
• Necessary to carefully consider existing disclosure requirements
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
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Disclosures in 2006 Financial
Statements
• Consider disclosure requirements in CICA 3465.99
– Temporary differences in non-taxable enterprises
• Disclose difference between the tax basis and the reported
amounts at the trust level (when no FIT recorded due to EIC 107)
• Consider whether differences are inside vs. outside basis
differences
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
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Financial Reporting Matters
to be Resolved
• Confirmation of initial views on impact on 2006 financial
statements
• Timing of financial reporting impact of new tax legislation
• Impact of transition period to 2011 ( possible scheduling
of timing of reversal of existing temporary differences)
• Presentation of impact of additional taxes (expense vs.
capital item)
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
20
Impacts on the Transaction Environment
David Kennedy
Partner, Advisory
403.691.8308
[email protected]
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
21
Transaction Environment
• Initial Impact—October 31, 2006
– Uncertainty around new rules
– “20%” valuation hit
– What constitutes “undue expansion”?
– Rumors and speculation
– Impact on deal activity
– Deals in progress at October 31?
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
22
Transaction Environment
• December 15, 2006 Guidance on “Normal Growth”
– 100% growth over 4 year transition period (or $50MM if greater)
– Measured by ‘issuance of new equity’
– Based on market capitalization—October 31st
– Available as to 40% in 2006-07, plus 20% in each of 2008 – 2010
– Cumulative
– Special rules around debt repayment and issuance
– Merger of two Trusts not part of growth limit
– Press Release available at: http://www.fin.gc.ca/news06/06082e.html
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
23
Transaction Environment
• Looking Ahead
– Trust valuations stabilizing
– Not many deals since October 31
– Trust equity a ‘non-renewable resource’
• Seek excellent strategic fit, good value, leverage in deal
– Many models being run on existing trusts
• Private Equity, Public Companies & Other Trusts
– Fundamentally unstable situation points to heightened deal activity
going forward
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
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Contact Information
Contact details:
Mailing Address for all:
Richard Whitley
[email protected]
403.691.8216
KPMG LLP
Craig Natland
[email protected]
403.691.8022
T2P 4B9
2700 205 5th Avenue SW
Calgary, Alberta
Lloyd Heine
[email protected]
403.691.8104
John Gordon
[email protected]
403.691.8118
David Kennedy
[email protected]
403.691.8308
© 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms
affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada.
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