Ottawa’s new tax on income trusts came into effect nine days ago, on January 1, 2011.

The new tax puts income trusts on an equal footing with regular corporations. Some income trusts converted to conventional corporations before the new tax came into effect, or plan to do so in the coming months. Others will continue to operate as trusts.

(In light of the new tax, we’ve analyzed some trusts that may be appropriate for income-seeking investors in a just-published issue of Canadian Wealth Advisor, our newsletter for conservative investing. One of these trusts has made a number of big investments in wind power. Read on for further details.)

Whether they convert or not, the new tax has made many investors wary of trusts. However, some trusts remain well positioned for long-term gains, even with the new tax. In fact, most real estate investment trusts (REITs) are exempt from the new trust tax.

REITs resemble income trusts, but with a key difference: REITs invest in income-producing real estate, such as office buildings and hotels. We analyze a number of REITs in Canadian Wealth Advisor.

Here are two things we keep in mind when looking for income trusts to add to our recommendations.

1. Look for income trusts that don’t plan to cut their distributions. Regardless of whether income trusts convert to conventional corporations, they must now pay corporate taxes. That means they have less cash to distribute to unitholders.
   
   The biggest distribution cuts will continue to come from trusts that pay out a high percentage of their cash flows as distributions. So, when looking for trusts to recommend, we focus on those with lower payout ratios (less than 75%, say). That’s a good indicator that they will be able to maintain their distributions.
2. Take tax losses into account. Many of the trusts we recommend in our Canadian Wealth Advisor newsletter hold tax-loss pools that they can use to defer the new tax until later in 2011 or beyond.
   
   This flexibility adds appeal, but factors like this only make up part of our decisions. We also look at a trust’s overall investment quality, using factors like payout ratio, cash flow, profitability, industry prominence and so on.

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This income trust’s tax losses will let it defer conversion

Brookfield Renewable Power Fund (Toronto symbol BRC.UN) will not convert to a conventional corporation until 2012. That’s because it has tax losses it can use to defer taxation. The trust’s units yield a high 6.2%

Brookfield owns interests in 42 hydroelectric-generating stations on 16 river systems in Quebec, Ontario, B.C. and New England. The fund also owns the Prince and Gosfield wind farms, both in Ontario. In total, Brookfield has 1,700 megawatts of generating capacity.

Wind power will boost generating capacity — but it has risks

The fund recently agreed to buy the 166-megawatt Comber wind project in southwestern Ontario for $567 million. Start-up is forecast for late 2011. At that point, wind power will make up 21% of Brookfield’s total generating capacity.

Wind farms can add longer-term risk, because they are heavily reliant on uncertain government subsidies. In Canadian Wealth Advisor, we take a closer look at Brookfield’s wind investments and its plan for dealing with the 2011 tax, and update our buy/sell/hold advice accordingly.

You can get our full analysis of Brookfield Renewable Power and 18 other safety-conscious investments in the latest Canadian Wealth Advisor. What’s more, you get this issue free when you subscribe today. Click here to learn how.