I have read that, as of Jan. 1, proceeds from sales of publicly traded partnerships (“PTPs”) will be subject to a 10-per-cent withholding tax by the U.S. Internal Revenue Service. I’m concerned that Brookfield Infrastructure Partners LP will be affected by this new rule. Is that true?
No. But if the recent drop in Brookfield Infrastructure Partners LP’s (BIP.UN) unit price is any indication, plenty of investors have been fearing the worst.
BIP.UN’s units tumbled 17 per cent in December – more than triple the decline of the S&P/TSX Composite Index. The sell-off may have been driven, in part, by rising interest rates, economic worries and general market malaise. But judging by the number of e-mails I received from anxious BIP.UN unitholders, the change in U.S. tax rules for PTPs held by non-U.S. residents may have also contributed to the decline, as some investors rushed to sell before the Jan. 1 deadline.
So let’s make this clear: When you sell BIP.UN units, your broker will not – or at least should not – hold back 10 per cent of the proceeds to remit to the IRS. Nor will BIP.UN’s distributions be subject to a blanket 10-per-cent U.S. withholding tax, as some investors have also feared. (A small portion of BIP.UN’s distributions may, in some instances, be potentially subject to withholding tax, but this has always been the case, and the amounts affected are typically in the pennies.)
Why do the new IRS rules not apply to BIP.UN?
In a “qualified notice” posted on its website, BIP.UN says it is exempt from the 10-per-cent withholding tax on dispositions by non-U.S. investors “because it has not been (and does not expect to be) engaged in a U.S. trade or business within the meaning of” the applicable U.S. Treasury regulations.
The exemption reflects the partnership’s organizational structure, in which it holds its operating assets via corporate subsidiaries, it says in a separate discussion also posted on its website. BIP.UN’s operating assets include utilities, pipelines, toll roads, railroads, data centres and telecom towers.
Furthermore, BIP.UN says it intends to continue posting qualified notices every quarter. The purpose of these notices is to, among other things, notify brokers that no tax should be withheld from the proceeds of BIP.UN dispositions by non-U.S. investors. It has also posted a letter from its U.S. tax counsel, Torys LLP, in support of the exemption.
Similarly, sister company Brookfield Renewable Partners LP (BEP.UN) – which, like BIP.UN, is a Bermuda-based limited partnership – has also published a qualified notice and legal letter stating that withholding tax should not apply to dispositions of BEP.UN units. BEP.UN’s unit price has also dropped recently, possibly reflecting worries about the new U.S. tax rules, in addition to concerns about rising interest rates, inflation and general weakness in the renewable power sector.
If there’s a silver lining to the weakness in BIP.UN’s and BEP.UN’s unit prices, it’s that both have become more attractive for income-focused investors. BIP.UN now yields about 4.4 per cent, and BEP.UN yields about 4.9 per cent. With both partnerships expected to increase their distributions when they announce fourth-quarter results in the next month or so – in keeping with their historical pattern – the yields are even more attractive.
Keep in mind that, because of their tax-reporting complexity, BIP.UN and BEP.UN may be best suited for registered accounts. For non-registered accounts, the related corporate entities – Brookfield Infrastructure Corp. (BIPC) and Brookfield Renewable Corp. (BEPC) – may be a better choice. Dividends from BIPC and BEPC are identical in value to the distributions from their LP counterparts, but BIPC and BEPC are more straightforward from a tax perspective and also give you the benefit of the dividend tax credit.
The downside is that BIPC and BEPC both trade at a premium to their respective LPs, so their yields are lower, at about 3.5 per cent for BIPC and about 4.5 per cent for BEPC. But whether you invest in the LPs or the corporate entities, you can almost certainly look forward to many more years of distribution or dividend increases. And with prices down sharply from their highs, this may turn out to be a good entry point.
(Disclosure: I hold BIP.UN in my model Yield Hog Dividend Growth Portfolio. I also own BIP.UN, BIPC and BEP.UN personally.)
I advised readers not to indulge in any rum and eggnog before taking my year-end quiz. But some readers may be questioning what I was drinking.
The first question asked how many times in the past 20 years, including 2022, the S&P/TSX Composite Index had posted an annual loss. I said the correct answer was four, but it was actually five: 2008, 2011, 2015, 2018 and 2022.
My New Year’s resolution is to work on my counting skills.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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