The Keg Royalties Income Fund
TSX : KEG.UN

The Keg Royalties Income Fund

December 21, 2010 13:34 ET

The Keg Royalties Income Fund Announces Its Intention to Remain an Income Trust

VANCOUVER, BRITISH COLUMBIA--(Marketwire - Dec. 21, 2010) -

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

The Keg Royalties Income Fund (TSX:KEG.UN) (the "Fund") has announced its intention to remain an income trust beyond January 1, 2011. The Trustees have evaluated the various alternatives available to the Fund, and have concluded that at this time the income trust structure currently continues to be the best alternative for each of the Fund's unitholders and the Fund's ongoing business operations.

On January 1, 2011, legislative changes to the tax treatment of income trusts, as a result of the Specified Investment Flow-through Tax ("SIFT Tax"), come into effect. The result is that income trusts will have their distributions taxed similarly to corporations.

The Trustees believe that remaining an income trust notwithstanding the SIFT Tax is in the best interest of unitholders for a number of reasons:

  • Converting to a corporation would result in significant legal and administrative costs for the Fund. It is estimated that the costs to convert from an income trust to a corporation would approximate $1,000,000. This would result in an immediate and significant reduction in distributable cash available for distributions to unitholders.

  • The SIFT Tax that the Fund will be obligated to pay is not materially different than the amount of corporate tax that would be payable if the Fund converted to a corporation; thus converting to a corporation does not provide any material tax benefits for the Fund.

  • After January 1, 2011, the Fund's monthly cash distributions to unitholders will be deemed for tax purposes to be eligible dividends paid by a corporation. For Canadian resident individuals who hold Fund units in a non-tax deferred account, distributions will be eligible for the enhanced dividend tax credit, making them equitable to distributions from public corporations.

  • The net effect of entity-level SIFT Tax with deemed eligible dividend taxation should result in a combined tax burden that is the same or similar to that which would have arisen on income trust distributions had the SIFT regime not been introduced.

  • By remaining an income trust, the Fund will be able to make normal course tax-deferred returns of capital, unlike a public corporation, which could provide a significant comparative advantage.

  • A number of other income trusts have also indicated their decision to remain with their existing trust structures. The Trustees believe that this, combined with investors' expressed interest in having investments with regular distributions and yield available to them, creates the foundation for a liquid income trust market following 2010.

The Fund expects its royalty payments to remain unchanged and intends to continue to distribute substantially all available income to unitholders. With the SIFT Tax in effect, the distributions will be taxed in the Fund at a rate of 26.5% in 2011, and 25% in 2012 and beyond.

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

"We believe that remaining an income fund best reflects our intention to continue to be focused on maximizing the yield to our unitholders," said David Aisenstat, President and CEO of Keg Restaurants Ltd. "We see no reason to incur significant expenses or to cause any confusion about what the purpose of the Fund is and has been since inception. The Keg's business remains strong, our brand continues to increase in value and we continue to be focused on distributions to unitholders."

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 the steakhouse restaurants in Canada and has a substantial presence in select regional markets in the United States.

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.

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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