Financial Post Investing
Marriage of split shares, income funds just had to happen
Wednesday, January 8, 2003
By: Barry Critchley

Given that offerings of split shares are a Canadian tradition and given that income funds have become the investment of choice for retail clients, it was only a matter of time before the two themes were put together into a new product.

Faircourt Income Split Trust, which recently filed a prospectus for an offering of trust units and preferred securities, is the first of its kind in Canada -- though it has added a a few twists from a normal split share offering.

"The trust has been created using a dual security structure to provide investors with greater ability to choose the tax character of the distributions received," said the prospectus.

In essence, the trust, which has a term of just under 10 years, is offering two classes of securities which have very different tax considerations. In a normal income trust, only one class of securities is offered and investors have to decide whether to put that single class of security into either a taxable or non-taxable account. Such a decision incurs "costs" as in a typical income fund, 40% of the distributions are tax deferred while the balance are taxable.

Here are the highlights of the two classes of securities:

Preferred securities: These securities -- which cost $25 apiece -- aim to pay 7.5% per year and to return the $25 of principal at maturity.

This Pfd-2- rated security is different from what investors are offered in a normal split share transaction. Here, potential investors are being offered a fixed-income security, which means the distributions are regarded as interest and taxed accordingly. In a regular split share deal they are offered preferred shares, the distributions from which are viewed as dividends.

To shelter the interest income, a non-taxable account, such as an RRSP, is viewed as the ideal home for the preferred securities.

Units: The objective is to generate annual distributions of 9.25%, the vast bulk of which will be tax-efficient.

Accordingly, a taxable account -- meaning a non-RRSP account -- is viewed as the ideal resting place for this type of investment. Each unit costs $10 and the intention is to return that $10 of principal at maturity.

This security is a bit different from a normal split share offering where holders of the capital shares typically don't receive any distributions. Instead they content themselves with receiving the capital gain over a defined period of time. And given that the capital shares are purchased at a discount, holders also enjoy the benefits of leverage.

Faircourt's offering differs from a split share in another key way: an equal number of preferred securities and units will not be offered. Instead, between 20% and 40% of the gross proceeds must be in the form of preferred securities. (The structure is more tax-efficient, the closer the percentage of gross proceeds is to 40%.) The rest will be in the form of units.

Acuity Investment Management Inc. is the investment advisor. It will invest in a diversified pool of royalty trusts, real estate investment trusts, business and industrial income funds and pipeline and power generation funds. It can also draw upon a loan facility, set at 10% of the fund's assets.

The advisor, formed in 1991, has invested about $100-million in income funds. Its flagship fund is its Pooled High Income fund, which invests in income funds and high-yield securities.

Faircourt Asset Management is the manager. Parties associated with Faircourt will invest "a minimum" of $750,000 in the offering.

Idnumber: 200301080050
Edition: National
Story Type: Business
Note: bcritchley@nationalpost.com
Length: 575 words
Keywords: SECURITIES INDUSTRY; INVESTMENT TRUSTS; NEW PRODUCT; NEW ISSUE
Company: Faircourt Income Split Trust