Invest in trusts now?

Why would anyone invest in income trusts now? In less than a year, most of them will be gone, the victims of Finance Minister Jim Flaherty’s controversial trust tax.

It takes effect on Jan. 1, 2011 but by then there won’t be many trusts left to tax, if any. One of the reasons is that, in practical terms, the trust tax will be higher than the corporation tax in most cases. Although the two are supposed to be the same in theory, the average corporation pays tax at a rate of around 20 per cent once all the accounting tactics are implemented. The trust tax will be in the 30 per cent range.

That explains why many trusts have already announced plans to convert to corporations in the coming months (some have already done so). It’s going to be a turbulent time for the trust sector with conversions, mergers, takeovers, and privatizations galore.

So why is Paul Bloom launching a new fund to invest in — yes — income trusts? Mr. Bloom is recognized as one of the most knowledgeable money managers in Canada when it comes to income trusts. But with the clock ticking down on the sector, why would anyone try to raise up to half a billion dollars to invest in them?

Because there’s money to be made, Mr. Bloom believes. He is beating the bushes for cash, travelling across Canada holding road shows to explain the rationale for his planned Canadian High Income Equity Fund (called CHIEF for short).

“People might think we’re crazy to be issuing a trust of trusts at this point,” he told me. “But there is so much misinformation out there and many people seem to think there is no point buying trusts now. That has created all kinds of opportunities.”

CHIEF will focus on undervalued, high-income investment opportunities in both income trusts and high-yield common stocks such as former trust Crescent Point Energy.

That happens to be an approach that is very similar to the one we have taken in my Income Investor newsletter for almost a year. We’ve recommended a number of “survivor trusts” that we believe will be able to maintain their payouts at or near current levels after the tax comes in or they convert to corporations (which most will). We published a portfolio of 10 such trusts and former trusts in the November issue; all have increased in price since they were picked.

Mr. Bloom believes there are still a lot more profit opportunities in the trust sector. “Some people are selling because they think they have to get rid of the trusts by year-end,” he says. “That is just not true.” He also expects to see more institutional buyers taking positions. Until now, the trust market has been 70 per cent retail.

CHIEF will trade on the TSX as a closed-end fund under the sponsorship of the Brompton Group. The fund is currently in the initial public offering (IPO) stage with closing expected Feb. 16. “Combined units” are $12 and the minimum initial investment is 100 units. Each combined unit consists of one unit of the fund plus a warrant to buy an additional unit at $12 up to April 15, 2011.

Mr. Bloom wouldn’t predict how much money will be subscribed but said he would cut it off at $500 million since a fund any larger than that would be unwieldy. If you’re interested, ask your financial advisor for a prospectus, review it carefully, and be sure you understand the risks involved.

For details on how to subscribe to The Income Investor, go here.

Gordon Pape’s latest book is The Ultimate TFSA Guide: Strategies for Building a Tax-Free Fortune, published by Penguin Group Canada. It can be ordered at 28 per cent off the suggested retail price at