Cathedral Energy Services Income Trust (TSX:CET.UN) plans to convert to a corporate structure and has struck a deal with a Calgary drug developer to acquire tax losses to offset future income tax payments when the oil and gas driller becomes a corporation.
Under a complex deal announced early Friday, Cathedral will pay $3.3 million in cash and stock to SemBioSys Genetics Inc. (TSX:SBS). In return it will get an unspecified amount of tax losses from the drug company that will leave the driller with $167 million in tax losses that can be applied against future taxes.
SemBioSys, meanwhile, will transfer its operating assets into a new company and will use the $3.3 million to help finance its operations.
The deal is similar to one announced earlier this year by Premium Brands Income Fund, a Vancouver-based baked goods and deli producer that also converted into a corporation from a trust structure.
In that deal, Premium paid nearly $9 million to Montreal-based Thallion Pharmaceuticals Inc. (TSX:TLN) in return for the drug company' tax losses.
Such deals between companies in different industries is driven by Ottawa's new rules to tax trusts starting in 2011.
Expecting higher taxes under corporate structures, energy and other business trusts are consolidating, growing bigger or changing their structures and doing special deals to reduce taxes when they convert.
Small drug development companies are particularly attractive as deal partners because they often have years of losses as they research and develop new drugs and can't use those losses until they start earning profits, often years down the road.
Ottawa limited the number of new units that trusts could issue ahead of the move in 2011 to start taxing them like corporations.
At Cathedral, plans call for the trust's conversion to be completed by Dec. 21. Associated transaction costs are estimated at $1.1 million.
The oilfield services provider, which employed 476 people at the end of last year, previously announced its intention to convert to a growth-oriented, dividend-paying corporation in August. However, it said the trust had decided to suspend a previously proposed dividend for the fourth quarter "in light of the method of conversion to a corporation."
SemBioSys is involved in the manufacturing of proteins and oils in plant seeds and through subsidiaries the development and marketing of oilbody-based cosmetic, personal care and prescription topical-dermatology ingredients.
Cathedral units were down 45 cents or 10.34 per cent at $3.90 on the Toronto Stock Exchange on Friday, while SemBioSys shares were off 6.5 cents or 22.41 cents at 22.5 cents.