The Keg Royalties Income Fund
TSX : KEG.UN

The Keg Royalties Income Fund

January 12, 2011 10:44 ET

The Keg Royalties Income Fund Announces 2011 Distribution Policy

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Jan. 12, 2011) -

NOT FOR DISTRIBUTION TO U.S. NEWS WIRE SERVICES OR DISSEMINATION IN THE U.S.

As previously announced on December 21, 2010, the Trustees of The Keg Royalties Income Fund (the "Fund") (TSX:KEG.UN) have decided to retain the Fund's current income trust structure beyond January 1, 2011. 

On January 1, 2011, legislative changes to the tax treatment of certain income trusts, as a result of the Specified Investment Flow-through Trust tax (the "SIFT tax"), came into effect. As a result of these changes, income trusts will not be entitled to deduct distributions of certain types of income for tax purposes, and will therefore be subject to taxation similar to corporations. Accordingly, the Fund will be subject to tax at a rate of 26.5% for 2011 and 25% for the 2012 and later taxation years.

As a result of this taxation imposed by the Federal Government, the Fund's Trustees have had to adopt a new distribution policy which reflects the Fund's obligation to make the SIFT tax payments. Beginning with the distribution for the month of January 2011 (payable to Unitholders on February 25th, 2011), distributions will be set at $.08 per unit per month. This amounts to a distribution of $.96 per unit annually. At this level, the eligible dividend portion of the Fund's distribution, combined with the return of capital component of the distribution, will provide taxable Canadian individuals with an effective after-tax cash return very closely comparable to the return that existed before the imposition of the SIFT tax.

The table below shows the impact of the Fund's new distribution policy on a taxable Canadian individual residing in British Columbia, as compared to the annual distribution of $1.278 paid in 2010:

               
    2010       2011  
               
Annual distribution per unit before personal tax $ 1.278     $ 0.960  
               
Distribution breakdown per unit:              
Taxable distribution(1) $ 1.223     $ 0.905  
Return of capital(2)   0.055       0.055  
Total cash received by unitholder   1.278       0.960  
Personal taxes per unit(3)(4)   (0.534 )     (0.216 )
After-tax cash retained by unitholder(4) $ 0.744     $ 0.744  
               
   
(1) Based on 2010 distributions of $0.1065 per unit per month.
   
(2) Based on 2010 distributions with a return of capital estimated at $0.055 per unit.
   
(3) Assumes the highest combined marginal tax rate for individual taxpayers resident in British Columbia for 2010 on regular income at 43.70%, and the highest combined marginal tax rate for individual taxpayer resident in British Columbia for 2011 on eligible dividends at 23.91%.The results will vary for individual taxpayers resident outside of British Columbia.
   
(4)  Unitholders are encouraged to consult their own tax advisors to determine the impact of this legislative change on their specific circumstances. 

In determining this new level of distributions, the SIFT tax was the primary consideration, but the Trustees also took the current economic conditions of the markets in which The Keg operates into account as well as expectations for The Keg's continuing levels of sales and the Fund's resulting royalty revenues. The Trustees currently expect these factors to continue to be positive for the Fund.

The Trustees continue to evaluate any new alternatives which could benefit the Fund and its unit holders. Under the Federal SIFT tax guidelines, the Fund may convert to a new structure on a tax-deferred basis until December 31, 2012.

The Fund (TSX:KEG.UN) is a limited purpose, open-ended trust established under the laws of the Province of Ontario that, through The Keg Rights Limited Partnership, owns certain trademarks and other related intellectual property used by Keg Restaurants Ltd. ("KRL"). In exchange for use of those trademarks, Keg Restaurants Ltd pays the Fund a royalty of 4% of gross sales of Keg restaurants included in the royalty pool.

Vancouver-based Keg Restaurants Ltd. is the leading operator and franchisor of steakhouse restaurants in Canada and has a substantial presence in select regional markets in the United States. KRL continues to operate The Keg restaurant system and expand that system through the addition of both corporate and franchised Keg steakhouses. Keg Restaurants Ltd. has been named one of the "50 Best Employers in Canada" by Aon Hewitt for the past nine years. The Keg will be celebrating its 40th anniversary in 2011.

This press release may contain certain "forward looking" statements reflecting The Keg Royalties Income Fund's current expectations in the casual dining segment of the restaurant food industry. Investors are cautioned that all forward looking statements involve risks and uncertainties, including those relating to the Keg's ability to continue to realize historical same store sales growth, changes in market and existing competition, new competitive developments, the existence of an income trust market post 2010, tax legislation, and potential downturns in economic conditions generally. Additional information on these and other potential factors that could affect the Fund's financial results are detailed in documents filed from time to time with the provincial securities commissions in Canada.

This press release shall not constitute an offer to sell or the solicitation of an offer to buy, which may be made only by means of the prospectus, nor shall there be any sale of the Fund units in any state, province or other jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any state, province or jurisdiction. The Keg Royalties Income Fund units have not been, and will not be registered under the U.S. Securities Act of 1933, as amended and may not be offered or sold in the United States absent registration or an application for exemption from the registration requirement under U.S. securities laws.

The Trustees of the Fund have approved the contents of this press release.

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