Alaris Royalty Corp (T.AD) drops 8.15% as CRA tax fight promises to drag on

Chris Parry Chris Parry,
0 Comments| January 13, 2014

A dispute with the Canada Revenue Agency (CRA) has seen shares in Alaris Royalty Corporation (TSX:T.AD, Stock Forum) tumble $2.36 to $26.84 Monday, an 8.08% drop on moderate trading volume.

At the heart of the issue is Alaris’ belief that it should be entitled to deduct non-capital losses. The CRA intends to reassess the company and deny said deductions claimed for the tax year ending 2009.

According to Alaris, the move, and similar decisions relating to other companies, “is part of a broader initiative on the CRA's part to challenge companies with respect to the use of tax assets.”

The company does not feel the loss will affect its ability to continue delivering monthly dividends to shareholders, which they’ve paid at the annualized amount of $1.44 per share in 2013.

According to a news release Monday, “Any future reassessment of the Corporation's non-capital losses by the CRA on any of its tax filings to date would not affect the Corporation's current annualized dividend of $1.44 per share, nor would it change Alaris' long-term strategy, even if the CRA's position was ultimately upheld. Alaris' current payout ratio of approximately 80% will allow it to pay both current, and future cash taxes while maintaining the current dividend rate. Alaris expects to fully utilize its current tax assets by mid-2015. Therefore, management has been managing Alaris' payout ratio to a target level so that upon the eventual utilization of all of its available tax assets, and its requirement to begin paying cash taxes in Canada, the dividend would be sustainable at its current level. This target is achieved at today's ratio of 80%.”

Alaris expects the issue to take “considerable time” to resolve. A deposit of approximately $1.8 million will be paid to CRA that being half of the assessed tax liability plus interest. The company assesses a worst case scenario of a $25m assessment, should it lose the case.

“Alaris has adequate capital available to it to pay the maximum amount of all tax liabilities it could incur if it was reassessed on all of its tax filings to date and if these reassessments were ultimately upheld through the tax adjudication process,” says the company.

Alaris has had a rough run of late, with shares plunging from $35-plus to under $30 following the collapse of SHS Services Management, a partnership  which had been created to serve as the licensed provider of home-installed products and services to Sears Home Services.  Alaris claimed it would lose, in the worst caser scenario, approximately $0.065 per share on the deal, but expects to gets its investment back.

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