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Trust Conversion Methods & Adjusted Cost Base

A trust can be formed using one of two general methods. The Initial Public Offering (IPO) or Plan of Arrangement. The IPO method is a cash-based conversion where the units are purchased with money, the Plan of Arrangement approach is non-monetary as shares are exchanged for units. The Plan of Arrangement approach may involve some cash to settle for differences in value between shares and units, however the amount of cash is typically small and is paid to the unitholder.

IPO
1. New units are issued using an IPO and the funds are then used by the trust to purchase an operating business entity. The ACB will be the price paid for the units.

PLAN OF ARRANGEMENT
Spin Out
2. A corporation can divide out assets and provide existing shareholders with units representing direct or indirect ownership in the assets. ie Aeroplan. The ACB of the units are estimated based on the value of assets split out and the ACB of the shares will be reduced by this amount. This information will be included in the Plan of Arrangement documents and is likely available on the trust?s website. The corporation continues, along with the newly formed trust.

Full Conversion
3. A corporation can exchange all of their shares for units in a trust. ie CI Financial (CIX.UN). They will typically issue at least 2 classes of securities being regular units and exchangeable units. The swap of regular units for shares will be taxable providing the ACB of the shares is below the unit price. Exchangeable units may or may not be available and are issued pro rata to existing shareholders. The exchangeable units do not trade on the exchanges and may or may not be entitled to vote or receive cash distributions. The terms of exchangeable shares vary, however they are issued to defer a taxable gain until such time as the exchangeable shares are exchanged for units.

The terms of the share for unit swap are set out in the Plan of Arrangement and will vary for each trust. The swap of shares for regular trust units will trigger a tax gain or loss depending on whether the ACB of the shares is below or above the conversion price. It might be possible to defer the gain if exchangeable units are available instead of regular units. The gain would be deferred until the exchangeable units are exchanged. There will be a sunset date on the exchangeable units that eventually forces conversion.

Example - Plan of Arrangement Share for Unit Exchange CI Financial issued exchangeable units to Sun Life who owned 35% of CI. The exchangeable units were issued in priority to Sun Life so they could defer tax. Other less influential shareholders had the option to take their pro rata share of units in a combination of regular units and exchangeable units.

The trust sector is still relatively young and methods for trust conversions are not set in stone so we do recommend reading the applicable documents or obtaining independent advice.


Produced by H.C. Levant, - Reproduction of this material in part or it's entirety is subject to copyright licensing agreements and is forbidden except only with the express written consent of the author.

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