Trust Legislation Impacts January 4, 2007 CONFERENCE CALL KPMG LLP

2 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. Continuing professional education credit: You may qualify for up to 2 hours of professional education credit by attending this event Agenda PRESENTERTOPIC Rick WhitleyTrust Legislation - Background and Overview Lloyd Heine / Craig NatlandDraft Legislation and Recent Announcements John Gordon Impact on Financial Reporting David KennedyImpacts on the Transaction Environment

3 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. Trust Legislation - Background and Overview Rick Whitley Partner, Tax

4 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. Background and Overview On October 31, 2006, Department of Finance announced new tax regime for Publicly traded Canadian income trusts, royalty trusts and partnerships (Distribution Tax) On December 15, 2006 the Department of Finance issued guidance on Undue Expansion –Safe Harbour based on market capitalization on October 31, 2006 –Not legislation –Deals with existing and new convertible securities –Deals with mergers of SIFTs On December 21, 2006 the Department of Finance issued Draft Legislative proposals –Distributions of certain SIFT income will be subject to tax at corporate income tax rates in the SIFT –SIFTs will not be able to deduct distributions of this income for tax purposes, and distributions by partnerships that are SIFTs will be taxed in the SIFT –Investors will be taxed as if the distributions were dividends

Draft Legislation and Recent Announcements Lloyd Heine Partner, Tax Craig Natland Partner, Tax

6 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. What You Should Know About the Draft Proposed SIFT Legislation The proposed Distribution Tax will apply to Specified Investment flow-throughs (SIFTs). SIFTs include publicly traded income/royalty trusts and limited partnerships (Certain REITs are exempted) The Distribution Tax is imposed on certain income (Non-Portfolio Earnings) distributed to unitholders A SIFT that starts trading after October 31, 2006 will be taxed from January 1, 2007 A SIFT that existed on October 31, 2006 will be taxed from January 1, 2011 Distribution tax will not apply to –Dividend income –Foreign income received directly –Return of capital Distribution Tax will reduce cash available for distributions to Unitholders by the amount of Distribution Tax paid by the SIFT

7 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. What You Should Know About the Draft Proposed SIFT Legislation (Cont'd) Non portfolio earnings distributed by a SIFT to unitholders ( Non- deductible distribution amount) will be considered a taxable dividend from a taxable Canadian corporation –Canadian resident individual will benefit from enhanced gross up and dividend tax credit on eligible dividends Non-portfolio earnings include income of the SIFT attributable to: –Income from business it carries on in Canada; –Income (other than dividends) from its non-portfolio properties; and –Taxable capital gains from its dispositions of non portfolio properties Non portfolio properties include: –Certain investments in a business/corporation/trust/partnership resident in Canada; –Canadian resource properties, timber resource properties; and –Real properties situated in Canada

8 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. SIFTFirst Generation Opco Fund Non-Portfolio Properties Non-Portfolio Earnings Shares Dividend Note Interest Business in Canada Bad Good Income not subject To Distribution Tax

9 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. SIFTSecond Generation Fund Non-Portfolio Properties Non-Portfolio Earnings Canadian Business Bad Good Cash exceeding income (i.e. Return of Capital) is not subject to Distribution Tax Cash (Assume cash > Income) LP Interest Units Cash Income Notes Sub Trust Income Public

10 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. What You Should Know About the Draft Proposed SIFT Legislation (Cont'd) A Comparison of tax rates Public Corporation (Alberta) 32.12%32.12%30.5%30.0%29.0%28.5% SIFT - New0%34.0%33.5%33.0%32.0%31.5% In order to make the Non-Portfolio Earnings paid or payable to a unitholder: Less cash will be available to allocate the entire taxable income due to tax leakage Borrowing will be needed to finance Distribution Tax, or additional units of SIFT could be distributed to unitholders if provided in the trust indenture. Distribution of additional units will make unitholders taxable on the amount of income which will be higher than the amount of cash received

11 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. DistributionsCurrent vs. Proposed SIFT Rules Distributions A.SIFT Level (Fund)2006 to (a) IncomeCashIncomeCash Income/Cash available for distribution Non-portfolio income90 Return of capital (ROC) 10 Total income/Cash before Distribution Tax Distribution Tax on Other 31.5% (28) Income/Cash available for distribution Effective reduction in cash distribution (%)28.35% Reduction could be 31.5% where entire income is subject to Distribution Tax (a) Assumed same level and composition of distributions

12 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. DistributionsCurrent vs. Draft Proposed SIFT Legislation (Cont'd) Distributions B.Unitholders Level2006 to IncomeCashIncomeCash Income/Cash distributions from SIFT90100(b)6272 Tax at Unitholders level - Taxable Canadian individual - Alberta rate39.0%(35)14.5%(9) - Canadian tax-exempt0.0%0 0 - Non-resident (U.S.)15.0%(14)15.0%(9) After tax Cash to Unitholder (including ROC): - Taxable Canadian individual - Alberta rate Canadian tax-exempt Non-resident (U.S.)8663 (b) Tax calculated on the gross amount of income distributed by SIFT excluding return of capital. Assumed additional units will be issued to allocate entire income to the unitholders. Alternatively, borrowing would be needed to ensure that entire amount of taxable income is distributed to the unitholders, otherwise, SIFT will be subject to tax (at highest marginal tax rates) on the amount of taxable income not distributed. Assumed that the unitholder has sufficient tax cost to absorb the return of capital.

13 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. What Are the Options Now? Keep the Structure for Now Take Advantage of 4 year transition period Contain Growth Plans to Normal Growth (see next slide) Consider reducing discretionary deductions (in a pure flow- through structure), to save more shelter for 2011 onward Stay on top of the proposed legislation. Legislation may contain some changes to the announcement Get ready for 2011

14 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. Normal Growth During Transition Period On December 15, 2006, Department of Finance provided further guidance on Normal Growth Normal Growth of a SIFT during the transition period would be allowed On the other hand, an aggressive interpretation of the term undue expansion may cause the Department to propose further legislative changes

15 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. Normal Growth During Transition Period (Cont'd) Department of Finance proposed the following safe harbour guidelines: PeriodNormal Growth (Safe Harbour) November 1, 2006 to December 31, 2007 New Equity the greater of: a)$50 million; and b) 40%* of market capitalization (as of October 31, 2006) For each year, from January 1, 2008 to December 31, 2010 New Equity the greater of: a)$50 million; and b) 20%* of market capitalization (as of October 31, 2006) New Equity = includes units and debt that is convertible into units * Allowed percentages are cumulative (for a total of 100% growth). The $50 million annual threshold allows smaller income trusts with market capitalization less than $200 million to more than double in size during the 4 year transition.

16 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. What Should You Consider Before 2011? Improve Existing Structure –1st GenerationCorporate structure –2nd GenerationPure flow-through structure New Structure – Conversion to Public Corporation – Conversion into IDS Structure (1st Generation) – Conversion into IDS Structure (2nd Generation) Go Private/Sell (Planning will be needed to avoid triggering capital gain/recapture)

Impact on Financial Reporting John Gordon Partner, Audit

18 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. Will the New Legislation Change the Accounting for Taxes by Trusts? Currently, most trusts do not record future income taxes as the conditions in EIC 107 are satisfied New legislation will probably cause most trusts to not qualify for the exemptions in EIC 107 As new legislation is not yet substantively enacted, probably no impact on recognition of future income taxes in 2006 financial statements –May be necessary in future periods to record FIT on temporary differences at trust level Necessary to carefully consider existing disclosure requirements

19 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. Disclosures in 2006 Financial Statements Consider disclosure requirements in CICA –Temporary differences in non-taxable enterprises Disclose difference between the tax basis and the reported amounts at the trust level (when no FIT recorded due to EIC 107) Consider whether differences are inside vs. outside basis differences

20 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. Financial Reporting Matters to be Resolved Confirmation of initial views on impact on 2006 financial statements Timing of financial reporting impact of new tax legislation Impact of transition period to 2011 ( possible scheduling of timing of reversal of existing temporary differences) Presentation of impact of additional taxes (expense vs. capital item)

21 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. Impacts on the Transaction Environment David Kennedy Partner, Advisory

22 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. Transaction Environment Initial ImpactOctober 31, 2006 –Uncertainty around new rules –20% valuation hit –What constitutes undue expansion? –Rumors and speculation –Impact on deal activity –Deals in progress at October 31?

23 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. Transaction Environment December 15, 2006 Guidance on Normal Growth –100% growth over 4 year transition period (or $50MM if greater) –Measured by issuance of new equity –Based on market capitalizationOctober 31st –Available as to 40% in , plus 20% in each of 2008 – 2010 –Cumulative –Special rules around debt repayment and issuance –Merger of two Trusts not part of growth limit –Press Release available at: 082e.htmlhttp:// 082e.html

24 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. Transaction Environment Looking Ahead –Trust valuations stabilizing –Not many deals since October 31 –Trust equity a non-renewable resource Seek excellent strategic fit, good value, leverage in deal –Many models being run on existing trusts Private Equity, Public Companies & Other Trusts –Fundamentally unstable situation points to heightened deal activity going forward

25 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. Contact Information Contact details: Richard Whitley Craig Natland Lloyd Heine John Gordon David Kennedy Mailing Address for all: KPMG LLP th Avenue SW Calgary, Alberta T2P 4B9

26 © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. KPMG and the KPMG logo are registered trademarks of KPMG International, a Swiss cooperative. © 2007 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Canada. kpmg.ca