Deficit reduction, lower taxes and less regulation: That was Canada’s message to the G-20 and G-8 meetings last month in Toronto. Even more encouraging is the Conservative Party government’s willingness to back up its pro-investor words with deeds within its borders.

Last month Ottawa unveiled what could wind up being a global alternative to cap-and-trade for carbon dioxide (CO₂) emissions. The centerpiece is the phase-out of coal-fired electricity in Canada, but plants will be closed upon the later of 45 years in operation or the expiration of current power sales agreements. And plant life could be extended further if CO₂ capture and sequestration is successfully adopted, as TransAlta Corp (TSX: TA, NYSE: TAC) is developing via a partnership with Ottawa and the province of Alberta.

This initiative reduces CO₂ without placing a heavy burden on consumers and existing power producers. And it’s fuel for the ongoing major investment boom in Canada’s abundant renewable energy resources.

This month, Conservative Holdings Atlantic Power Corp (TSX: ATP, OTC: ATLIF) and Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF) announced major investments in clean energy. Other Conservative picks ramping up efforts are newly converted corporation AltaGas Ltd (TSX: ALA), Brookfield Renewable Power Fund (TSX: BRC-U, OTE: BRPFF) and Innergex Renewable Energy (TSX: INE, OTC: INGXF).

A provincial court judge in Fort McMurray, Alberta, has ruled against the Syncrude venture and for the Ottawa government regarding the impact of oil sands waste on migratory birds. And the leader of the New Democratic Party wants an investigation of the environmental effects of hydraulic fracturing, or “fracking,” used in unconventional natural gas and oil production.

Suncor Energy (TSX: SU, NYSE: SU), however, has won Alberta’s approval for its cleanup of oil sands “tailings.” Meanwhile, the province has initiated royalty rules and other regulations for conventional and unconventional drilling that are even more pro-producer than what existed before mid-2007, when it launched the short-lived “Our Fair Share” effort to boost drilling taxes.

Canada’s not-too-tight, not-too-loose regulation of its banking system continues to be cited globally as a model for ensuring against another 2008-style meltdown. Its federal budget is on track for balance by fiscal 2014-15, and even provincial governments are enjoying generation-low borrowing rates. All are stark contrasts to the US, where regulatory consensus remains elusive on a wide range of issues and many banks and municipalities are still at risk of insolvency.

Investors in buy-rated Canadian telecoms like BCE (TSX: BCE, NYSE: BCE), Rogers Communications (TSX: RCI/B, NYSE: RCI) and Shaw Communications (TSX: SJR/B, NYSE: SJR) may benefit from Ottawa’s proposed relaxing of restrictions on foreign ownership in the industry. Liberalization already extends to the country’s natural resource sector, where Asian money in particular is spurring development from oil sands and uranium to potash.

And Canada is going to bat for its companies that operate overseas. At the G-20 meetings, leaders protested the government of the Congo’s threatened expropriation of a major copper mine run by First Quantum Minerals (TSX: FM, OTC: FQVLF). The result is the Congolese are being forced to come back to the table, either to negotiate continued operation or some form of compensation. That support’s another reason for confidence in other Canadian companies with far-flung operations, such as Aggressive Holding Vermilion Energy Trust (TSX: VET-U, OTC: VETMF).

Asset-based businesses such as those that dominate the Canadian Edge Portfolio are ideal for generating the kind of steady cash flow that makes generous dividends possible. But that’s only if the regulatory regime overseeing their development and management is constructive.

That’s definitely the case with Canada. And the favorable regulatory environment even extends to once-dreaded income trust conversions to corporations. Last month Avenir Diversified Income Trust (TSX: AVF-U, OTC: AVNDF) declared it will remain a high-dividend-paying corporation after converting next January 1. That’s the latest in a long string of announcements that now include virtually all remaining trusts.

Favorable regulation is another big reason why our picks are on track to generate solid and occasionally explosive investment returns in the years ahead. That’s important to keep in mind during what’s shaping up to be a summer of discontent for investors owning almost anything else besides US Treasury bonds. And it’s a very good reason to consider summer swoons as prime buying opportunities for well-run companies, such as those highlighted in this issue.

Below is the executive summary of the July issue. If you have questions about anything related to Canadian Edge, please drop us a line at canadianedge@kci-com.com.

Portfolio Action

Trinidad Drilling (TSX: TDG, OTC: TDGCF) remains a favorite of Bay Street, but the shares have dropped sharply lately nonetheless. First-quarter earnings indicate continued strong dividend coverage, and second-quarter numbers are unlikely to be worse than those a year ago.

Further, the company’s onshore focus should offset any shortfall from operations in the Gulf of Mexico, where it operates four barge-based rigs, resulting from BP’s (NYSE: BP) still-uncapped deepwater Macondo well. Trinidad, for example, has a major opportunity in the Eagle Ford shale area, where development is just starting to ramp up. As a result, it appears that the recent selloff has a lot more to do with investor worries about energy prices than Trinidad’s long-run staying power.

Nonetheless, I’m cutting Trinidad Drilling to a hold, pending the release of second quarter results, which is projected for August 11.

Two Canadian Edge Portfolio picks completed conversions to corporations last month. AltaGas Ltd (TSX: ALA), a buy up to USD20, yields roughly 7 percent based on a new monthly distribution of CAD0.11 per share.

Formerly Paramount Energy Trust, Perpetual Energy (TSX: PMT, OTC: PMGYF) pays the same CAD0.05 per month dividend and remains a buy up to USD6.

Provident Energy Trust (TSX: PVE-U, NYSE: PVX) is now a pure midstream energy play with a focus on natural gas liquids. Unitholders of record July 9 will receive 0.12225 shares of Pace Oil & Gas (TSX: PCE, MDOEF)–the new name for the union of Provident’s former oil and gas operations and Midnight Oil & Gas–for a value of approximately CAD0.98. Pace doesn’t contemplate paying a dividend. Provident will continue to pay its current monthly dividend of CAD0.06 per share at least until it converts to a corporation at the end of 2010.

I’m keeping Provident in the Aggressive Portfolio as a buy up to USD8. I’m considering Pace sold for Portfolio purposes but will track it in How They Rate. My advice is for investors to hold on to both Pace Oil & Gas and Provident Energy Trust, at least until the dust clears on the spinoff/merger.

I highlight major developments at the following Conservative Holdings in this month’s Portfolio Update:

• AltaGas Ltd (TSX: ALA)
• Atlantic Power Corp (TSX: ATP, OTC: ATLIF)
• Colabor Group (TSX: GCL, OTC: COLFF)
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)
• Keyera Facilities Income Fund (TSX: KEY-U, OTC: KEYUF)
• Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)
• Yellow Pages Income Fund (TSX: YLO-U, OTC: YLWPF).

I also highlight the following Aggressive Holdings:

• ARC Energy Trust (TSX: AET-U, OTC: AETUF)
• Daylight Energy Ltd (TSX: DAY, OTC: DAYYF).

Note that Colabor Group (TSX: GCL, OTC: COLFF) has reported second-quarter earnings.

High Yield of the Month

The July High Yield of the Month picks are Provident Energy Trust (TSX: PVE-U, NYSE: PVX) and Artis REIT (TSX: AX-U, OTC: ARESF).

Artis, which as a fully qualified REIT won’t face new taxes in 2011, has slipped on worries that a double-dip recession will hit its high-quality retail and industrial commercial properties in western Canada. The company, however, executed a successful equity offering and a property purchase last month, both signs of strength.

Yielding nearly 10 percent, now’s an excellent time to snap up shares in this well-managed REIT. Note that Canada is likely to continue withholding 15 percent of Artis’ distributions going forward, as REITs pay no corporate taxes. Provident won’t be withheld from IRAs once it converts to a corporation, unlikely before the beginning of 2011.

How They Rate

How They Rate has automatically updated US dollar unit/share prices, dividend payment rates in US dollars, yields, most recent dividend dates, dividend frequency and debt-to-capital ratios. Information on trust conversions is included regularly in a separate table in the Income Trust Tax Guide. We’ll update this information regularly as new conversions are announced. Information on US taxation of How They Rate companies will now be included in the table on a regular basis.

CE Safety Ratings are based on six operating and financial criteria. Companies meeting all six criteria are rated my highest rating of “6.” “0” is the lowest rating, indicating companies that meet no safety criteria. Safety criteria are described in the text below the How They Rate table and are as follows:

• One point if the payout ratio meets “very safe” criteria for the sector.
• One point if the payout ratio is not “at risk” based on the criteria for its sector.
• One point if the debt-to-assets ratio meets “very safe” criteria for the sector.
• One point if the company is already organized as a corporation, a qualifying REIT (no change to tax status in 2011) or has clarified its dividend policy for when it converts to a corporation.
• One point if the company’s primary business is recession resistant. Qualifying varies from company to company, though virtually all Electric Power and Energy Infrastructure companies qualify, while no Energy Services companies do.
• One point if the company’s profitability is not directly affected by changes in commodity prices.

I list trusts, funds and high-yielding corporations by the following sectors:

• Oil and Gas–All producer trusts are included here.
• Electric Power–Power generators.
• Gas/Propane–A mixture of distributors, from propane to packaged ice.
• Business Trusts–A range of businesses involved principally with consumers.
• REITs–All qualified real estate investment trusts.
• Trust Mutual Funds–Closed-end funds holding portfolios of individual trusts.
• Natural Resources–Trusts and corporations that produce resources and raw materials other than oil and gas.
• Energy Services–Trusts and corporations whose main business is providing drilling, environmental or other services to energy producers.
• Energy Infrastructure–Trusts and corporations that own primarily pipelines, processing facilities and other fee-generating assets.
• Information Technology–Trusts and corporations that provide communications, newspaper, directory and other information services.
• Financial Services–Canada’s banks, investment houses and other trusts and corporations feeding that business.
• Food and Hospitality–Trusts and corporations that franchise restaurants, own and operate hotels and manufacture and distribute food and beverages.
• Health Care–Trusts and corporations involved in the medical care and/or supply business.
• Transports–Trusts and corporations that ship freight and move passengers by bus, truck, rail or air.

Additions and Subtractions

This month, we’re adding two selections to How They Rate coverage, both exchange traded funds discussed in this month’s Canadian Currents article. iShares MSCI Canada Index Fund (NYSE: EWC) holds a mixed bag of Canadian stocks ranging across industries, with a particular focus on Canadian banks. It’s a buy up to USD26, but for traders only. Income investors will find little to like in the 1.4 percent yield.

The other is CurrencyShares Canadian Dollar Trust (NYSE: FXC), which tracks the ups and downs in the Canadian dollar. It’s a buy up to 95–again, for traders only, though we will use these ETFs as a way to hedge in coming months.

Also note that several trusts have successfully converted to corporations. The tip off is there is no longer a “-U” suffix attached to their TSX symbols. Converted corporations should no longer be withheld 15 percent Canadian tax if they’re held in IRA accounts.

Advice Changes

Here are advice changes. See How They Rate for other changes in buy targets. Following is a listing of companies whose safety ratings changed last month and why.

ActivEnergy Income Fund (TSX: AEU-U, OTC: ATVTF)–Hold to Buy @ 7. This fund is strongly leveraged to Canada’s energy patch and is therefore both cheap and high-potential.

BCE (TSX: BCE, NYSE: BCE)–Hold to Buy @ 30. Relaxation of foreign ownership rules and the company’s success in the wireless business of late are solid reasons for those who don’t own it to add it to their portfolios for conservative growth and income. I prefer higher-yielding Bell Aliant Regional Communications Income Fund (TSX: BA-U, OTC: BLIAF) for income.

Boardwalk REIT (TSX: BEI-U, OTC: BOWFF)–Buy @ 33 to Hold. This is still a very solid and promising REIT. But trading so far above my buy target and with a yield of barely 4 percent, it would only be attractive at a much lower price.

Boralex Power Income Fund (TSX: BPT-U, OTC: BLXJF)–Acquired to SELL. Parent Boralex Inc (TSX: BLX, OTC: BRLXF) has extended its offer for all income trust shares to July 12. That likely reflects the reluctance of at least one major shareholder to tender its shares, namely the O’Leary Funds and their 8.87 percent stake. That gives US-based investors additional time to cash out as close to the offer value of CAD5 per unit as possible.

As I pointed out last month, this is a taxable event whether you sell or take the offer. If you accept the offer, each 20 units will be swapped for a convertible bond with a par value of CAD100. Anything left over will be paid in cash at the rate of CAD5 per unit. The bonds will pay interest at a coupon rate of 6.25 percent semi-annually on June 30 and December 31. They’ll be exchangeable for 5.88235 Boralex Inc shares at the holder’s option. If not exercised, they’ll mature at par value (CAD100) on Jun. 30, 2017.

At Boralex Inc’s current price of CAD8.29 a share, the bonds’ conversion value is about CAD48.77. That means Boralex shares will have to more than double from here for these bonds to be worth converting. It’s still my view that they’ll hit that mark again, and I’m bullish on the company’s moves in wind power announced this week. But I’m still concerned most US brokers won’t be able to handle a foreign bond in US investors’ accounts. That could lead to not being paid dividends, as well as liquidity issues.

The bottom line is there are better ways to get a high yield, particularly with the convertibles’ coupon rate barely 6 percent.

Clearwater Seafoods Income Fund (TSX: CLR-U, OTC: CWFOF)–SELL to Hold. The income fund isn’t likely to pay a dividend before it converts to a corporation next year. But the disaster in the Gulf has made its seafood sources much more attractive than they were just a few months ago.

Dundee REIT (TSX: D-U, OTC: DRETF)–Hold to Buy @ 23. The REIT’s ability to do a successful and up-sized equity offering and simultaneously execute a property acquisition pipeline worth about CAD190.9 million is a solid testament to its underlying business strength. And it yields a well-covered 9 percent as well.

EnerVest Energy & Oil Sands (TSX: EOS-U, OTC: EOSOF)–Hold to Buy @ 8. This closed-end fund is strongly leveraged to the oil sands region, as its name suggests. It’s more aggressive than ActivEnergy Income Fund (see above) but likely higher potential as well, and it trades at a 7 percent-plus discount to net asset value.

Quebecor (TSX: QBR/B, OTC: QBCRF)–Buy @ 25 to Hold. This is a solid company, as the numbers continue to show. The problem is it’s appreciated well above my buy target and would only be attractive as a buy at a substantially lower price.

Royal Host REIT (TSX: RYL-U, OTC: ROYHF)–SELL to Hold. The REIT’s ability to buy back shares and retire debt at a time when the hospitality industry is struggling says a lot about its conservative business and financial policies. And a dividend cut is more than priced in by the 12 percent plus yield.

Russel Metals (TSX: RUS, OTC: RUSMF)–SELL to Hold. The company still faces tough industry conditions, but its ability to expand facilities in Quebec shows it’s on solid ground.

Suncor Energy (NSYE: SU)–Hold to Buy @ 30. Suncor’s abundant oil sands properties and strategic focus on them ensure its long-run success. And the shares are trading at a very low level on concerns about oil prices.

Trinidad Drilling (TSX: TDG, OTC: TDGCF)–Buy @ 8 to Hold. Weak energy prices and the unknown impact of the BP (NYSE: BP) oil spill have made me a bit cautious in the wake of this stock’s recent tumble. Let’s take our cue from second quarter earnings, which should be announced on or around August 11.

Ratings Changes

There are fewer ratings changes than usual this month.

Avenir Diversified Income Fund (TSX: AVF-U, OTC: AVNDF)–2 to 3. The company has confirmed its plans to convert to a corporation on January 1, 2011 and future dividend.

Canadian Pacific Railway (TSX: CP, NYSE: CP)–4 to 5. The railway looks increasingly set for steadily growing cash flow with 40 percent of revenue coming from shipments for export.

Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)–4 to 5. The company’s plans to convert to a corporation are now clarified and its business is increasingly stable as well.

Provident Energy Trust (TSX: PVE-U, NYSE: PVX)–2 to 3. The trust is now a pure midstream energy play with no production assets. That should stabilize cash flows.

Feature Article

With deepwater drilling in turmoil, the Canadian oil sands are the last, best remaining source of petroleum in North America. And as massive new investment from China shows, growth is only beginning to take off.

I examine the potential of the tar sands’ three major areas of development and highlight the most promising players from production and pipelines and transportation, construction and environmental cleanup.

Canadian Currents

In our ever-expanding coverage of the Canadian markets, CE Associate Editor David Dittman highlights a basket of companies not currently tracked in How They Rate. We’ll be picking them up in the coming months. Let us know if you have suggestions for new entries.

Tips on Trusts

This section features short bits on a wide range of topics. For more evergreen and tutorial items, see the Subscribers Guide “Subscriber Tips” section.

Dividend Watch List–The only distribution cut last month in the How They Rate universe was a trust that converted to a corporation: Avenir Diversified Income Trust (TSX: AVF-U, OTC: AVNDF). The cut was less than I expected, and the company remains a buy for growth and income up to USD6.

Westshore Terminals Income Fund (TSX: WTE-U, OTC: WTSHF) trimmed its distribution from CAD0.42 to CAD0.41, but the payout is up 46.4 percent from 2009 levels on a 23.5 percent jump in system throughput.

• Boston Pizza Royalties Income (TSX: BPF-U, OTC: BPZZF)
• Consumers Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF)
• FP Newspapers Income Fund (TSX: FP-U, OTC: FPNUF)
• InnVest REIT (TSX: INN-U, OTC: IVRVF)
• InterRent REIT (TSX: IIP-U, OTC: IIPZF)
• Phoenix Technology Income Fund (TSX: PHX-U, OTC: PHXHF)
• Primaris Retail REIT (TSX: PMZ-U, OTC: PMZFF)
• Royal Host REIT (TSX: RYL-U, OTC: ROYHF)
• Swiss Water Decaf Coffee Fund (TSX: SWS-U, OTC: SWSSF)

A Word from the IRS–Here’s what to do if the dividends paid by the Canadian stocks in your US IRA account are still being withheld 15 percent. Note that remaining income trusts, REITs and mutual funds will likely be withheld even after this year, as they’re not taxed at the corporate level in Canada.

Bay Street Beat–How the Canadian analyst community views the domestic market, including our favorite trusts.

For More

As announced last month, we’re now offering a new set of free links for the How They Rate table on the Canadian Edge website. Clicking on the Toronto Stock Exchange symbol will now take you directly to the Google Finance page for every How They Rate component. Google’s page is superior to both archrival Yahoo! Finance and the offering of our Canadian partner Toronto-based MPL Communications, both for news and price charts. It’s an easy compliment to the research and advice-intensive information we provide you in Canadian Edge. Let us know what you think.

I also encourage all readers to check out the live quote feed in How They Rate for US dollar prices, distributions and percentage yields of trusts and high-yielding corporations intraday. Note that our quote service sometimes includes special annual distributions along with the regular monthly payments.

As before, clicking on the US symbol of a company takes you to a chronological listing of every Canadian Edge and Maple Leaf Memo article in which that trust has been featured. You can also use that page to access articles on other trusts by typing in the relevant exchange and symbol in the “Search Query” box at the top of the page.

For questions and comments, drop us a line at canadianedge@kci-com.com. Check out the Toronto Stock Exchange Web site for a range of information on dividend paying equities. The Web site www.sedar.com is an online library of documents filed by trusts with the Canadian equivalent of our Securities and Exchange Commission. The Toronto Globe & Mail features the “Globe Investor” section with all the latest news. Dominion Bond Rating Service is the pre-eminent credit rater in Canada.

The Bank of Canada has a handy currency converter for Canadian dollars and US dollars into 50 other currencies around the world, and it’s a great source of free information on the Canadian economy.

How They Rate can now be accessed several places on the Home Page. The Income Trust Tax Guide has backup to file distributions as “qualified dividends.” Find it on the top bar on the Home Page under the subhead Resources. Eye on Trusts and How They Rate are accessible on the shaded box in the middle column.