Preferred stocks that defer your taxes: deferred preferreds work like compound rate GICs. But unlike GICs the tax on your yield is deferred

Money Digest, Dec, 1996

One major concern of income investors is the tax bite. If you invest in bonds or GICs, your interest is fully taxable. So any investment that puts off the taxation day to sometime in the future is always good news. So a relatively new class of investment has emerged known as `deferred preferreds.'

How does a deferred preferred work? On the face of it, it is similar to compound interest GICs. You invest your money but you do not receive any regular payment until the preset redemption date. On the redemption date, you are paid an amount equal to the dividend you would have received had you invested in regular preferred stocks.

However, deferred preferreds have the following advantages over compound GICs (or strip bonds):

* You are taxed on your yield only when you receive the dividends. (On GICs and strips you are expected to pay taxes annually, even though you receive your payment only on redemption); and,

* The yields on GICs and strips are fully taxed. The dividend payment. on the other hand, is subject to favourable tax treatment.

Currently there are only three such deferred preferreds available in Canada (see box).

These deferred preferreds are suitable for conservative, fixed income investors who do not have an immediate need for regular income. They are also suitable for investors who want to hold some fixed income investments in their portfolio.

[Part 1 of 2]

                         Deferred Preferred Stocks

Preferred Stock            Symbol    Exchange                Redemption

CRS NT Preferred Trust     CRD       Toronto Stock Exchange  Feb. 28, 2002
Texaco Capital LLC Ser. C  TXC.PR.C  Toronto Stock Exchange  Feb. 28, 2005
Xerox Capital LLC Ser. A   XER.PR.A  Toronto Stock Exchange  Feb. 28, 2006

[Part 2 of 2]

                         Deferred Preferred Stocks

Preferred Stock            Price

CRS NT Preferred Trust     $26.00
Texaco Capital LLC Ser. C  $28.40
Xerox Capital LLC Ser. A   $25.50