Telus To Create Canada's Largest Income Trust In Tax Saving Move

by Mike Godfrey, Tax-News.com, Washington

13 September 2006

Telus Corporation, Canada’s second-largest telecommunications company, is seeking to prolong long-standing corporate tax breaks with a proposal to reorganise the company in its entirety into an income trust, a move that will save investors substantial amounts in tax.

The company announced Monday that the conversion will be accomplished by way of a plan of arrangement under the Business Corporations Act (British Columbia). This will be subject to the approval of at least two-thirds of the votes cast by the shareholders of Telus at a special meeting expected to be held in January 2007. The move must also be approved by regulators.

Commenting on the move, Darren Entwistle, Telus President and CEO, explained that surplus cash generated from the firm's assets would in future be returned to shareholders "in the most tax efficient way possible."

Common in the real estate sector, income trusts pay little or nothing in the way of corporate tax provided they pass most of their income onto shareholders, who then pay tax at their own marginal rate.

The conversion to an income trust would also ensure that Telus would continue to operate free from corporate tax after a six-year period in which the firm has benefited from tax breaks linked to its acquisition of wireless carrier Clearnet Communications Inc.

Analysts have said that the conversion represents a good move for investors as more cash will be returned to them in the form of dividends. On the other hand, some caution that the large sums of money that the company plans on spending on upgrading its networks may reduce surplus cash available to investors. However, according to Entwistle, the payout level set by the company will enable it to reinvest in its core operations while maintaining a flow of returns to investors.

With a market capitalization of US$16 billion, the conversion will create Canada's largest income trust company when complete.

Under the terms of the proposed conversion, holders of Telus common voting and non-voting shares will receive one trust unit of the fund for each Telus share held. The fund will be a mutual fund trust and have only one class of units.

For Telus shareholders resident in Canada, the conversion of shares into units will result in a disposition giving rise to a gain or loss for tax purposes, but the company said that it is giving consideration to providing Telus shareholders with an exchangeable security alternative that will permit eligible shareholders to elect to receive securities exchangeable into units of the fund.

The exchangeable securities will permit electing shareholders to defer all or part of the Canadian income tax consequences of the arrangement until the disposition of the exchangeable securities or their exchange for units of the fund.

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