Enervest proposes a DRIP with a 2% cash premium feature

CRA accepts that cash dividends, of public shareholder participants in a dividend reinvestment plan, which are reinvested in treasury shares at a discount to market of up to 5% do not give rise to a shareholder benefit under s. 15(1). In 1999, CRA refused to extend this policy to income funds and REITs, so that distributions reinvested under a distribution reinvestment plan gave rise to a taxable benefit under s. 105(1) to the extent the cost of the acquired units was at a discount to the market price (9911853).

Under the Enervest DRIP, the cash distributions of participants are reinvested in treasury units at a 5% discount to market.  Enervest is proposing to amend its DRIP so that participants can elect to have the new units, which are issued under the DRIP, then immediately sold by a broker with the participants receiving cash equal to 102% of their cost.

The effect of this may be to increase the odds of there being a taxable benefit, but to reduce the benefit from 5% to 2%.  When the DRIP is adopted, the tax disclosure presumably will be similar to that for Argent Energy, including a statement that the Trust is not required to, and will not, include any taxable s. 105 benefit in its T3 reporting.

Under another type of DRIP which does not have the taxable benefit issue, the distributions are reinvested on a non-discounted basis, and the participant then receive a "bonus" distribution of units from the Trust of, say, 5%.  Recent examples include Choice, Inovalis, Dundee Industrial and Dundee International.

Neal Armstrong.  Summary of Circular of Enervest Diversified Income Trust under Public Transactions – Other – Distribution Reinvestment Plans – Discounted Unit Plans.