On Wednesday evening, Colabor Income Fund (TSX: CLB-U, OTC: COLAF) became the seventh trust–and third in the Canadian Edge Portfolio–to announce it will convert early to a corporation, via an arrangement with ConjuChem Biotechnologies that will maximize tax advantages and follows the pattern of several other trusts.

Following the conversion, the food distributor will pay a quarterly dividend of 26.91 cents Canadian, an amount equal to three installments of the current monthly rate of 8.97 cents Canadian.

One key reason that attracted me to Colabor in the first place was that it was already absorbing the trust tax while maintaining its lofty distribution. That’s because a series of transforming mergers greatly have greatly boosted its size over the past year, running it afoul of restrictions on new equity issuances by trusts. But management proved it could pay dividends while absorbing new taxes.

Converting to a corporation now should actually slash Colabor’s current tax burden, especially after taking into account some CAD100 million in accumulated tax losses. These are non-cash expenses that can be written off against income. That lowers Colabor’s cash tax bill, therefore having a positive impact on cash flow for further expansion, debt control and paying dividends.

Judging from management’s statement, growth is precisely what it has in mind. Since June 2005 Colabor has been able to grow revenue from CAD44 million to over CAD1 billion and cash flow from CAD13 million to CAD366 million simply by consolidating smaller rivals.

This building up of scale still has tremendous potential, given the dispersed nature of the food distribution business. And as the largest player in both Quebec and Ontario, the company is now in prime position to do just that, taking advantage of the weakness of smaller rivals, its strong financial position and now the ability to issue equity with no restrictions other than prudence.

Management expects the dividend payment to be about 90 percent of fiscal year 2010 earnings per share but only 60 percent of cash flow from operations. That, plus expected growth, leaves plenty of room for increases by 2011 at the latest. The last boost was put into place shortly before the trust tax was announced Halloween 2006.

The transaction must be approved by Colabor unitholders, with a meeting expected on or around July 24. Given the fact that dividends will remain the same while growth will be enhanced, approval looks certain, with a closing date of Sept. 15, 2009. And I strongly advise voting for the conversion.

Colabor Income Fund remains a solid buy up to USD12 for high income and long-term growth.

The market has responded favorably to its conversion announcement thus far. I expect much bigger gains as the company continues to prove its ability to grow despite the recession. Meanwhile, there’s no other play in this very secure industry that yields anywhere close to its 10 percent-plus.

Investors can buy either on the US over-the-counter market with the symbol COLAF or on the Toronto Stock Exchange with CLB-U, whichever is cheaper with the broker you use. Note that symbols will change when the conversion is made.

We’ll keep you posted.