Split Share Corporation - Investment Objectives

Investment Objectives

The preferred shares of a split share corporation are intended to provide an investment vehicle for more conservative investors, one that provides a relatively high income stream and safety in the original investment that is secured by the value of the underlying basket of shares. Greater safety is provided since the preferred shares are given priority over the capital shares both when income is paid out and when the corporation is wrapped up. The income from the preferred shares is usually declared as dividend income, which in some jurisdictions (e.g. Canada) has favorable tax rates compared to the tax rates that apply to the interest income that is produced by bonds or commercial paper. The preferred shares of a split share corporation can offer greater diversification than the preferred shares of a single conventional corporation.

With their fixed maturity date, fixed dividend rate and seniority over common stock, the preferred shares have many of the characteristics of a bond, and thus one might expect their value on the secondary market to vary inversely with the prevailing interest rates, just like a bond. Historically, however, the values of the preferred shares of financially sound split share corporations have tended to keep relatively close to their respective wind-up values. In practice credit risk appears to be a greater factor in the valuation of the relatively thinly traded preferred shares as opposed to the value of alternative (and more efficiently traded) conventional fixed-income instruments like bonds.

The capital shares of a split share corporation are intended to be a more aggressive investment vehicle, one that can provide both high income and the promise of amplified capital gains compared to the capital gains of the underlying basket of shares. In effect, the holders of capital shares are borrowing money from the holders of the preferred shares at the dividend rate of the preferred shares, and investing that money in a greater number of shares in the underlying basket of shares. Capital gains (or losses) are amplified in the capital shares because the value of the preferred shares is held relatively constant, and the resulting increased volatility of the equity in the underlying basket of shares is borne mostly by the capital shares. Holders of the capital shares take on their obligation to guarantee dividend payments to the holders of the preferred shares in exchange for amplified returns. In addition, the income from the capital shares can be structured to be treatable, for tax purposes, as mostly or even entirely capital gain. In many jurisdictions, such as Canada, capital gains are taxed at a lower rate than either dividend income or interest income.

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