Editor’s Note: In Brief is the executive summary of the November issue of Canadian Edge. Please use it as a guide to points of interest.

Switch to Schwab: That’s certainly one alternative for investors who are becoming weary of trying to convince their broker that Canada isn’t withholding 15 percent of equity dividends from IRA accounts.

Of course, my hope is more brokers will simply follow the lead of America’s foremost discount house–and do what’s necessary to see there’s no withholding. But if they refuse to act, their customers at least have the option of voting with their feet.

An end to withholding basically amounts to a 17.6 percent effective increase in dividends to IRA accounts. That’s substantial, but it’s hardly the only attraction for investors in Canada as 2010 comes to a close.

On Jan. 1, some 54 income trusts tracked in How They Rate will convert to corporations, ending four-plus years of uncertainty about what 2011 taxation would mean. More than half of them will pay the same cash dividend as a corporation they did as a trust.

That adds up to an effective 17.6 percent dividend increase for US investors who hold them in IRAs. It also means a sizeable post-tax dividend increase for Canadians who hold converting trusts outside of retirement accounts, as their tax rate will drop sharply.

The end of uncertainty and increases in after-tax dividends are two factors likely to extend the rally we’ve seen since March 2009 in the former trusts. Starting later in 2011, we’re likely to see something even more bullish: a return to dividend growth, as the better-run companies ramp up payouts from post-conversion baseline rates.

In fact, more than a few companies have already started pushing up dividends. Aggressive Holding Ag Growth International (TSX: AFN, OTC: AGGZF), for example, lifted its payout 17.6 percent last month.

Before Finance Minister Jim Flaherty announced the trust tax on Halloween night 2006, well-run trusts routinely boosted distributions each year, some several times. Those higher dividends, in turn, provided a baseline for higher unit prices, and eventually spurred hefty capital gains.

Conversions are also likely to revive merger activity in corporate Canada, as accounting is simplified and tax uncertainty vanishes. Regulators’ rejection of BHP Billiton’s (NYSE: BHP) takeover bid for Potash Corp of Saskatchewan (TSX: POT, NYSE: POT) demonstrates that national and even provincial economic champions are probably off-limits to buyouts. But Ottawa is in the process of eliminating restrictions on foreign ownership in the communications industry, a step that could jump-start long-awaited consolidation in that sector.

Last month, Bank of Nova Scotia (TSX: BNS, NYSE: BNS) announced a CAD2.3 billion bid for the portion of Dundee Wealth it doesn’t already own. That demonstrates potential for financial industry mergers, with CI Financial (TSX: CIX, OTC: CIFAF) and Davis + Henderson Income Fund (TSX: DHF-U, OTC: DHIFF) among the obvious targets.

And at a fraction the size of Canada’s majors, soon-to-convert oil and gas trusts have numerous possibilities as well. That even includes the largest, Penn West Energy Trust (TSX: PWT-U, NYSE: PWE), which still trades at a discount to the value of its proven reserves in the ground and has massive undeveloped lands as well.

Finally, there are the yields. A cursory look at How They Rate reveals scores of companies that out-yield their industry competitors in the US by at least several percentage points. And those payouts are made at least quarterly and usually monthly in Canadian dollars, a currency backed not only by natural resource bounty but by sound fiscal and banking policies. It’s a natural hedge against any problems in the US dollar, as well as inflation.

What’s no doubt held many investors back from chasing these yields is uncertainty about how many will hold come 2011, when every company will be taxed. Ironically, all but 22 of the 54 How They Rate trusts yet to convert will pay the same dividend next year as a corporation that they’re paying now. And even those 22 will still pay an average of more than 7 percent, well above the average US stock regardless of industry.

That adds up to a very attractive group of stocks for aggressive and conservative dividend seekers alike. And that’s not even taking into account the global boom in demand for natural resources, which is set to get a lot hotter in the years ahead.

Portfolio Action

Trust conversions and third-quarter earnings are the focus of this month’s Portfolio Update, as they were last month.

IBI Income Fund (TSX: IBG-U, OTC: IBIBF) and Parkland Income Fund (TSX: PKI-U, OTC: PKIUF) both announced modest reductions in their payouts as part of planned conversions to corporations on Jan. 1. Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF), meanwhile, has postponed its conversion indefinitely, pending a board review of its options. Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: CGIFF) won’t convert to a corporation, as management has ascertained it won’t owe taxes due to its business mix. That leaves only Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF) as a Portfolio trust yet to announce a dividend policy for 2011.

Canfor has produced a solid gain since joining the Portfolio in October. Two reasons: a sound and growing business, and a huge dividend that’s still likely to be in the teens after conversion to a corporation on Jan. 1. Unfortunately, management seems set on enforcing an incongruous quirk in their plan to convert. Namely, only US investors who meet the definition of “qualified investor” under the Investment Company Act of 1940 will be allowed to receive Canfor stock for their trust units. The key requirement is to have USD5 million in investments, including real estate held for investment purposes. Everyone else will be cashed out at the market price.

As I wrote last month, no other trust has written such a provision into their conversion plan. Nor is there any clear rationale why management has chosen this route, other than the obvious ultra-caution toward any potential US litigation. But there’s now the very real possibility that some US investors are going to get caught up in a snafu that could turn an otherwise profitable investment into a loser.

I therefore advise the following. If you’re a Canadian investor or meet the definition of “qualified investor” in the US, hold onto your Canfor Pulp Income Fund. My outlook for the company remains solid as Asian demand for its products surges. On the other hand, if you’re a US investor and there’s any doubt you meet the definition of “qualified investor,” go ahead and sell your position now, with the idea of buying back in after conversion. Note that I’m going to keep Canfor in the Aggressive Holdings.

As an alternative, I’m adding a new closed-end mutual fund to the CE Portfolio this month, Precious Metals & Mining Trust (TSX: MMP-U, OTC: PMMTF). As its name suggests, the fund holds a mix of securities of metals and minerals mining and exploration issuers traded in North America. The monthly distribution of CAD0.10 per unit equates to a yield of around 11 percent and is paid mostly from capital gains. As a result, it shouldn’t be considered as safe as my other fund selections but is a solid play on gold prices. And it pays dividends in Canadian dollars as well. Buy Precious Metals & Mining Trust up to USD12.

Portfolio Update also reviews the following companies’ earnings:

Conservative Holdings

• Artis REIT (TSX: AX-U, OT: ARESF)
• Atlantic Power Corp (TSX: ATP, NYSE: AT)
• Bird Construction Income Fund (TSX: BDT-U, OTC: BIRDF)
• Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)
• Canadian Apartment Properties REIT (TSX: CAR-U, OYC: CDPYF)
• Cineplex Galaxy Income Fund (TSX: CGX-U, OTC: CPXGF)
• CML Healthcare Income Fund (TSX: CLC-U, OTC: CMHIF)
• IBI Income Fund (TSX: IBG-U, OTC: IBIBF)
• Innergex Renewable Energy (TSX: INE, OTC: INGXF)
• Northern Property REIT (TSX: NPR-U, OTC: NPRUF).

Aggressive Holdings

• Ag Growth International (TSX: AFN, OTC: AGGZF)
• Chemtrade Logistics Income Fund (TSX: CHE-U, OTC: )
• Enerplus Resources Fund (TSX: ERF-U, NYSE: ERF)
• Parkland Income Fund (TSX: PKI-U, OTC: PKIUF)
• Penn West Energy Trust (TSX: PWT-U, NYSE: PWE)
• Peyto Energy Trust (TSX: PEY-U, OTC: PEYUF)
• Provident Energy Trust (TSX: PVE-U, NYSE: PVX).

Perpetual Energy (TSX: PMT, OTC: PMGYF) is reviewed in Dividend Watch List.

Note that all have already been highlighted in brief in Flash Alerts over the past month. For other Portfolio company earnings, see the November Portfolio Update. Colabor Group’s (TSX: GCL, OTC: COLFF) results were reviewed in the October issue.

High Yield of the Month

New Mutual Fund Alternative Precious Metals & Mining Trust (TSX: MMP-U, OTC: PMMTF) and still-to-convert Just Energy Income Fund (TSX: JE-U, OTC: JUSTF) are my featured companies in the December High Yield of the Month. Neither will see a change to its lofty distribution as a result of 2011 tax changes.

Just Energy has declared a cut-less conversion to a corporation for Jan. 1. Precious Metals & Mining, meanwhile, is a mutual fund whose holdings have either converted to corporation already or else never were trusts. Conservative Holding Just Energy has the safer yield and is a buy up to my target of USD15.

Precious Metals & Mining should be considered a bet on the continuation of the global commodity boom, particularly for gold. It’s a conservative play relative to buying raw commodities, individual mining stocks or even most funds. But neither should it be considered a safe income play. Buy Precious Metals & Mining Trust up to USD12.

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 in the Income Trust Tax Guide. We update this information regularly as new conversions are announced.

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:

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.

Coverage Changes

I’m adding Precious Metals & Mining Trust (TSX: MMP-U, OTC: PMMTF) to coverage under Trust Mutual Funds. For more detail on this fund, see High Yield of the Month. I’m also removing the former Boralex Power Income Fund from coverage, as it has now been completely acquired by parent Boralex Inc (TSX: BLX, OTC: BRLBF). I continue to track Boralex Inc under Electric Power. Investors who didn’t heed my advice to sell should now have convertible securities in the Portfolio trading under the CUSIP 09950MAC6. They’re convertible to 80 shares of Boralex Inc until June 30, 2017, when they’ll mature at a par value of CAD1,000 per bond. Until then, they’ll pay interest twice annually at rate of 6.75 percent, or CAD67.50 per year per CAD1,000 bond.

Note that Menu Foods Income Fund has now been taken over by Simmons Pet Food for CAD4.80 per unit in cash. Investors who didn’t take my advice to sell should now have this cash in their accounts. Menu Foods will be removed from How They Rate coverage beginning in January.

Advice Changes

Here are advice changes. See How They Rate for other changes in buy targets.

Baytex Energy Trust (TSX: BTE, NYSE: BTE)–Buy @ 34 to Hold. This oil-weighted energy producer is in the pink of health as strong third quarter earnings showed. Investors can also look forward to a cut-less conversion to a corporation on January 1. Nothing is a buy at any price, however, as the stock is now well above my previous buy target of USD34.

Bonavista Energy Trust (TSX: BNP-U, OTC: BNPUF)–Buy @ 22 to Hold. Production growth is healthy and costs are under control. But weak natural gas prices have forced the company to cut its distribution 25 percent when it converts to a corporation on Jan. 1. And it’s also trading well above my prior buy target of USD22.

Boston Pizza Royalties Income Fund (TSX: BPF-U, OTC: BPZZF)–SELL to Hold. Management has set a new level of distribution that should be sustainable, given the stabilization of same store sales.

Calloway REIT (TSX: CWT-U, OTC: CWYUF)–Buy @ 20 to Hold. Second-quarter earnings were solid, but the payout ratio is still on the high side and the unit price is nearly 20 percent above my recent buy target of USD20.

Cameco Corp (TSX: CCO, NYSE: CCJ)–Buy @ 30 to Hold. If you’re going to own just one uranium stock, this is your best choice. It is, however, 25 percent above my latest buy target of USD20.

Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF)–Buy @ 15 to Hold. The company insists only Canadians and qualified US investors ($5 million liquid assets) can own shares through conversion. Everyone else should get out of the way.

CI Financial (TSX: CIX, OTC: CIFAF)–Hold to Buy @ 22. Not only is business booming, but the company is now one of very few independent money management firms left in Canada and a highly visible takeover target.

Dundee REIT (TSX: D-U, OTC: DRETF)–Buy @ 24 to Hold. Third-quarter results were again solid but the unit price is more than 20 percent above my prior target of USD24.

Empire Company Ltd (TSX: EMP/A, OTC: EMLAF)–Buy @ 52 to Hold. There’s little to worry about business-wise at this company. But the stock does trade well over my previous buy target of USD52.

Freehold Royalty Trust (TSX: FRU-U, OTC: FRHLF)–Hold to Buy @ 18. Drilling on this royalty trust’s lands is picking up, and the post-conversion dividend, though taxed as ordinary income in the US, is attractive for IRAs.

Futuremed Healthcare Income Fund (TSX: FMD-U, OTC: FMDHF)–Buy @ 10 to Hold. Management’s plans to cut distributions by 26.6 percent at the Jan. 1 conversion have been well known for months. But sales of consumable nursing supplies may be a bit more cyclical than once thought. Until the company posts some improved results, the stock will rate a hold.

IESI-BFC (TSX: BIN, NYSE: BIN)–Hold to Buy @ 22. Another quarter of strong earnings reveal this company to be undervalued, and it’s potential as a takeover target.

Labrador Iron Ore Royalty Income Fund (TSX: LIF-U, OTC: LIFZF)–Buy @ 60 to Hold. This stock is nearly 10 percent above the buy target of USD60, which I raised from USD50 last month. That’s a lot of ground gained in a big hurry.

Medical Facilities Corp (TSX: DR-U, OTC: MFCSF)–Hold to Buy @ 10. I’m restoring a buy rating to this owner of hospitals after it posted robust third-quarter results.

Morguard REIT (TSX: MRT-U, OT: MGRUF)–Hold to Buy @ 15. Solid earnings are not yet reflected in the share price for this high-quality REIT.

Pengrowth Energy Trust (TSX: PGF-U, NYSE: PGH)–Buy @ 10 to Hold. Third-quarter results were strong. The dividend is well covered and won’t be cut in 2011 when the trust converts to a corporation. But the units now trade at 25 percent above my prior buy target.

Perpetual Energy (TSX: PMT, OTC: PMGYF)–Buy @ 6 to Hold. The reality of a depressed natural gas forward price curve has forced management to cut distributions again, maybe not for the last time. The stock is now a speculation on a recovery in gas prices, the timing of which is highly uncertain.

Ratings Changes

Here are this month’s CE Safety Rating changes.

ACTIVEnergy Income Fund (TSX: AEU-U, OTC: ATVYF)–5 to 4. The distribution is very high relative to the interest and dividend income provided by its holdings. That doesn’t necessarily mean a dividend cut, but it means there’s risk of one.

Bonavista Energy Trust (TSX: BNP-U, OTC: BNPUF)–3 to 4. The company has clarified its post-2011 dividend policy, eliminating uncertainty and earning it another point under the CE Safety Rating System.

Brompton VIP Fund (TSX: VIP-U, OTC: BVPIF)–5 to 4. The distribution is very high relative to the interest and dividend income provided by its holdings. That doesn’t necessarily mean a dividend cut but it means there’s risk of one.

Brookfield Renewable Power Fund (TSX: BRC-U, OTC: BRPFF)–6 to 5. The payout ratio should fall sharply in coming quarters as hydro conditions return to normal. Meanwhile, management has plenty of cash to cover the current shortfall. But until cash flow revives, this company will not be a perfect 6.

Brookfield Real Estate Services Fund (TSX: BRE-U, OTC: BREUF)–4 to 5. Management has clarified its post-conversion dividend policy, eliminating uncertainty and leaving the payout at a still-generous level.

Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF)–3 to 2. The company insists only Canadians and qualified US investors (USD5 million liquid assets) can own shares through conversion. Everyone else should get out of the way.

Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF)–4 to 3. Third-quarter operations were solid, but the payout ratio has risen.

Consumers’ Waterheater Income Fund (TSX: CWI-U, OTC: CSUWF)–2 to 3. Another quarter of strong numbers and positive revenue growth at the sub-metering operation earn this new Aggressive Holdings a ratings boost.

Crombie REIT (TSX: CRR-U, OTC: none)–4 to 5. The REIT’s payout ratio came down sharply in the third quarter, as recent acquisitions have paid off with low-risk cash flow.

Extendicare REIT (TSX: EXE-U, OTC: EXTEF)–3 to 4. Cash flow continues to cover the distribution comfortably, even with the company paying trust taxes since 2007.

Fortis Inc (TSX: FTS, OTC: FRTSP)–4 to 3. The third-quarter payout ratio surged well over 100 percent, pulling a rating point from this owner of utility assets.

IBI Income Fund (TSX: IBG, OTC: IBIBF)–4 to 5. Management has now clarified its post-conversion dividend policy and the yield is still robust.

Interrent REIT (TSX: IIP-U, OTC: IIPZF)–3 to 2. There were some signs of real improvement at the apartment owner, particularly a 9 percentage point gain in occupancy. But the payout ratio is again off the chart.

Macquarie Power & Infrastructure Income Fund (TSX: MPT-U, OTC: MCQPF)–6 to 5. The payout ratio is temporarily high as management works to invest the proceeds from the sale of the company’s stake in LeisureWorld. Until it’s able to, cash flow will lag.

Northland Power Income Fund (TSX: NPI-U, OTC: NPIFF)–6 to 5. The company’s aggressive capital spending is winding down as new assets start generating cash flows. But the payout ratio is too high to earn the company a perfect 6 at this time.

Parkland Income Fund (TSX: PKI-U, OTC: PKIUF)–2 to 3. Management has now clarified its post-conversion dividend policy, and the yield is still very high.

Perpetual Energy (TSX: PMT, OTC: PMGYF)–2 to 1. The reality of a depressed natural gas forward price curve has forced management to cut distributions again, maybe not for the last time.

Feature Article

Trust taxation, long dreaded, is now less than a month away. The biggest surprise for most investors, however, is going to be how little will change on Jan. 1.

For one thing, 54 trusts tracked in How They Rate are slated to convert to corporations. But only four of them have not answered definitively the only truly important question for investors: exactly what their dividends will be then. As a result, there’s very little uncertainty left, and yields are still very attractive.

I spell out exactly what will happen in 2011, including who is left to convert, what dividends will be for the two-dozen trusts that are planning to make reductions at conversion, what trusts won’t be converting at all, and who will be going from monthly to quarterly payouts.

Canadian Currents

Canada is emerging from the global recession in solid shape, according to the head of its central bank. The most recent data, however, show that may be the understatement of the year–and that’s extremely bullish for our recommended Canadian Edge Portfolio selections. Associate Editor David Dittman has more on the facts and our take on them.

Tips on Trusts

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

Dividend Watch List—Six companies announced distribution reductions last month. Five were a part of conversions to corporations planned for Jan. 1: Bonavista Energy Trust (TSX: BNP-U, OTC: BNPUF), Boston Pizza Royalties Income Fund (TSX: BPF-U, OTC: BPZZF), Brookfield Real Estate Services Fund (TSX: BRE-U, OTC: BREUF), IBI Income Fund (TSX: IBG-U, OTC: IBIBF) and Parkland Income Fund (TSX: PKI-U, OTC: PKIUF).

All of these cuts were relatively minor, basically covering prospective tax levies after conversion. Moreover, post-conversion dividends should be considered a baseline from which future increases will be made. All of these companies now rate either holds or buys. IBI and Parkland remain CE Portfolio holdings.

In contrast, Perpetual Energy’s (TSX: PMT, OTC: PMGYF) decision to cut its distribution to CAD0.03 per month from CAD0.05 is yet another sign of the company’s weakness in the face of a depressed forward pricing curve for natural gas prices. As I’ve said, no one should own this stock who doesn’t want to be aggressively on a revival of natural gas prices. This is not a stock to own for yield, despite the still-hefty dividend.

For the past few months, I’ve divided the regular Watch List in two, with one group comprising companies with weak businesses, the other companies yet to announce post-conversion dividend policies. With the latter mostly decided, I’ve again combined the lists into one.

See the Feature article for more on trust conversions, and what will happen on dividends on January 1. Note the list below does NOT include trusts that have previously announced dividend cuts when they convert to corporations.

• Canfor Pulp Income Fund (TSX: CFX-U, OTC: CFPUF)–Hold
• Chartwell Seniors Housing REIT (TSX: CSH-U, OTC: CWSRF)–Hold
• FP Newspapers Income Fund (TSX: FP-U, OTC: FPNUF)–Hold
• Interrent REIT  (TSX: IIP-U, OTC: IIPZF)–SELL
• Perpetual Energy (TSX: PMT, OTC: PMGYF)–Hold
• Royal Host REIT (TSX: RYL-U, OTC: ROYHF)–Hold
• Superior Plus Corp (TSX: SPB, OTC: SUUIF)–Hold
• The Keg Royalties Income Fund (TSX: KEG-U, OTC: KRIUF)–Hold

Bay Street Beat—How the Canadian analyst community views trusts, including our favorite trusts.

Schwab Gets It—At least one major brokerage has it right when it comes to the US/Canada Tax Treaty. Mainly, that Canada is no longer withholding 15 percent of dividends paid to US investors in IRA accounts, including trusts that have converted to corporations. Here are the details.

For More

How They Rate offers several free links. Clicking on the Toronto Stock Exchange (TSX) symbol will now take you directly to the Google Finance page for every How They Rate holding.

We also offer a live, intraday quote feed in US dollar prices, distributions and percentage yields of trusts and high-yielding corporations. Note that our quote service sometimes includes special annual distributions along with the regular monthly payments.

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.