PwC FAITTM

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Episode 38: PwC FAITTM

Release date: July 12, 2011
Guest: Murray Lee
Running time: 7:16 minutes

In this episode of Tax Tracks Murray Lee explains what PwC FAITTM (Foreign Asset Investment Trust) is and how it resurrects the income trust structure. He also discusses how this structure can help companies gain access to public markets as a source of capital.

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PwC FAITTM

You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.

Gerry Lewandoski: In our episode today, we are speaking with Murray Lee, a tax partner in PwC’s Calgary office. Murray focuses on Canadians doing business in the U.S.. He assists on all aspects of U.S. and cross-border taxation, including reorganizations, mergers and acquisitions and cross-border financings.

Today Murray is going to explain “PwC FAITTM” (or F-A-I-T), which can resurrect the income trust structure, and in turn can help companies gain access to public markets as a source of capital.

Thank you for joining us today, Murray.

Murray: Thanks, Gerry. It’s a pleasure to be here.

Gerry: First, what does F-A-I-T (or F-A-I-T) stand for? In broad terms, why is PwC FAITTM noteworthy?

Murray: Well, F-A-I-T is short, it’s actually an acronym for Foreign Asset Investment Trust.

To answer your other question, a little background first.

You may recall in 2006, on Halloween night actually, federal legislation came out that effectively killed the income trust structure, or at least so it seemed.

And many companies that wanted to raise capital especially liked the income trust approach, because it tapped into the very strong demand from the investing public for yield instruments, and it worked much better for them than other options, particularly getting into the policy merits. When income trusts were killed off that Halloween, these companies felt a loss. For that matter, lots of investors felt that a worthwhile vehicle had disappeared.

And that is why PwC FAITTM is so noteworthy — in the right circumstances it brings the income trust structure back to life.

Gerry: I do recall that fateful Halloween, and my understanding is that these structures, from that day forward, were not longer viable. How is it that PwC now feels we can reintroduce the income trust structure?

Murray: Well, what PwC did was to find a way to take advantage of a specific exception that’s contained in the legislation. In effect, income trusts are still OK for foreign assets from which earnings flow to Canada. We then married that specific exception with our knowledge of US and cross-border tax, and came up with the FAIT structure.

Gerry: Hence the F-A for “Foreign Asset” in F-A-I-T.

Murray: Correct. So for the right company with income-producing foreign assets — ideally about $100 million to $400 million in valuation or maybe higher — the PwC FAITTM approach can have lots of plusses.

The key benefit, which you mentioned in your introduction, is easier access to public capital markets as an alternative to conventional financing. But PwC FAITTM can also provide:

  • a method of maximizing value on the monetization of assets; and also
  • a way to leverage off the demand for yield instruments.

Gerry: Those sound like great benefits in the corporate finance area. But you are a tax partner — what about tax benefits from PwC FAITTM?

Murray: Ah, tax. Yes, looking at Canadian tax specifically, PwC FAITTM helps a company manage tax effectively — with distributions to unit holders.

And in the United States (or elsewhere in the world), where the foreign assets are located, leveraging the commercial trust and using other conservative forms of tax shelter has the similar benefits.

Gerry: Something I expect listeners want to know more about is what companies PwC FAITTM  is appropriate for.

Murray: That’s a great question, Gerry. PwC FAITTM works especially well for capital-intensive companies that want to maximize value while monetizing certain income-producing foreign assets.

The company should have predictable distributable annual cash flow. Something in the $15 million to $35 million range is probably ideal, but it could be higher.

Also, the company should have a reputable management team, be able to grow the unit value and their distributions, and have the ability to leverage their foreign operations.

Gerry: I’m almost afraid to ask this, because I’m looking at one of those charts that shows unit holders, a mutual fund trust, a commercial trust, and some other entities, connected by lots of lines and arrows. But, what is the essence of the PwC structure?

Murray: It’s not that scary, Gerry. The structural diagram looks a lot worse than it really is. The details in that diagram are important, but it really boils down to something pretty simple:

Canadian unit holders invest in a mutual fund trust that indirectly benefits from the income produced by assets in a foreign country.

They do that by setting up a wholly owned subsidiary trust or — as we phrased it on there — a commercial trust.

And then the mutual fund trust capitalizes the commercial trust through a combination of debt and equity.

That’s the core of the structure.

Gerry: And it really works?

Murray: It really works. PwC FAITTM already has been used twice by two different oil and gas companies to go public.

Incidentally, these are the only income trusts of this kind to have been created in Canada since that fateful Halloween in October 2006.

Gerry: Well, Murray, it’s good to know it’s not just theoretical. But is PwC FAITTM restricted to the oil and gas industry?

Murray: No, no. Not at all. We can adapt it to other industries quite easily as long as the company, the foreign assets and the foreign tax regime have the right characteristics.

Gerry: So, PwC FAITTM resurrects the income trust structure, and can provide tax and corporate finance benefits to companies that have foreign income-producing assets. That sounds like a big deal.

Murray: It can be a big deal. We’re pretty excited about this. It isn’t for everybody, but for the right companies in the right circumstances, whether in the oil and gas industry or not, PwC FAITTM has a great deal to offer.

Gerry: Thank you for your time today Murray and providing us with information about the PwC Financial Asset Income Structure or PwC FAITTM.

Murray: Thank you, Gerry. It’s been a real pleasure talking to you.

Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.

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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.