About Income Funds
Income Funds
Generally, income funds are mutual fund trusts, which own a business or other income-producing assets. Income earned by the operating business or assets is generally not subject to tax within the fund because the income is distributed on a regular basis to the investors. Instead, the distributed cash flow is taxable in the investors’ hands. Trust units are bought and sold through a public stock exchange.
The common characteristics of income funds are stable, predictable, sustainable cash flows and minimal ongoing capital expenditure requirements.
Distributable Cash
Distributable cash is not a measure defined by generally accepted accounting principles. On formation of Phoenix Income Fund, it was based on an estimate of 65 percent of the net earnings after adjusting for non-cash transactions, such as depreciation and amortization.
Payout Ratio
The payout ratio is the percent of cash flow paid to unitholders in the form of distributions.
Distribution Payments
Early each month a Fund announces the amount of its cash distribution, who will be eligible to receive the distributions, and the date the distribution will be paid. There are four major dates involved with paying distributions:
Distribution Date
The day a Fund sends cash payments to registered unitholders directly or to the broker/investment companies of record.
Record Date
The day on which a Fund’s transfer agent, in Phoenix’s case Computershare Trust Company of Canada, looks at its records to determine its unitholders of record. Only unitholders of record are ensured the right of a distribution.
Ex-distribution Date
A date set by the TSX, generally two days prior to the record date. This is the day by which investors must have purchased units in a Fund. If you buy a distribution-paying unit one day before the ex-distribution date you will receive a distribution, but you will not if you buy on the ex-distribution day. Alternatively, if you want to sell a unit and still receive a distribution that has been declared you need to sell on (or after) the ex-distribution day.
Declaration Date
This is the day the board of directors announces to unitholders and the market as a whole that the Fund will pay a distribution.
Open-Ended Income Funds
Income funds that are open-ended, like Phoenix, may issue new units from time-to-time.
Yield
A unitholders’ return on investment; yield relates distributable income per unit to the average of the low and high unit trading prices during the year.
Total Return
Total return measures total profits received from an investment, based on an annual rate. The amount includes both distributions and share price appreciation or depreciation.
How the Distribution is Taxed
In Canada, a portion of the cash distributions paid by the Trust is considered a Return on Capital and is generally taxed as investment income. Another portion, the Return of Capital, is generally tax-deferred until such a time when units are sold. On or before March 31 the year following the tax year, Computershare Trust Company of Canada (Phoenix’s transfer agent) will prepare and provide all registered unitholders that received distributions during a calendar year a T3 – Statement of Investment Income for Canadian Income Tax purposes. Beneficial unitholders will receive the T3 – Statement directly from their broker. For units held within an RRSP, no tax information will be provided. For non-resident of Canada, we advise investors seek tax advice on the treatment of distributions in their country of residence. Typically however, monthly distributions paid to non-residents are subject to withholding tax at prescribed 15 to 25 percent pursuant to the Income Tax Act of Canada.
Attributes of the Phoenix Technology Income Fund
- Phoenix is one of the largest independent providers of horizontal and directional drilling services in North America. It serves the energy sector – one of the most robust economic sectors in Canada and the United States.
- Phoenix has an active research and development (R&D) department that continues to create new technologies and make improvements to existing technologies.
- New opportunities continue to open up, including coalbed methane projects and large steam-assisted gravity projects in northern Alberta.
- The outlook for the oilfield services sector is strong, as commodity prices remain well above average. E&P activity is expected to continue through 2005 provided commodity prices remain at or near 2004 levels.
- Phoenix distributes cash flow to investors in the form of a cash payment on a monthly basis. Since Phoenix reorganized into an income fund on July 1, 2004, $0.04 per unit per month has been distributed to unitholders
- small
individual
retail
unitholders
focused
on stable,
predictable
cash
distributions.
These
investors
may hold
their
units
in broker
accounts,
registered
retirement
savings
plans,
registered
retirement
income
funds,
registered
education
savings
plans
and deferred
profit
sharing
plans.
Distributions
retained
in these
types
of vehicles
are tax-exempt
or tax-deferred;
- investors
focused
on yield
(distributions
divided
by unit
price)
and total
return
(distributions
plus
appreciation
in unit
price)
- institutional investors which look at a wide range of performance benchmarks.
