Equity Investment with Preference Shares
- How are the dividend payments calculated and capital returned?
The table below depicts a typical preference share dividend and capital repayment schedule.
A shareholder’s capital will be returned by redeeming preference shares at their par value or $500. Our current intent is to start to return capital in year 6 by redeeming 1/15 of a member’s original investment per year. At the end of 20 years the last shares will be redeemed.The annual dividend be will paid on the declining balance of shares, paid out as cash, and reported on a T5.Since the shares are redeemed at their par value there is no capital gain or loss and there is no need to maintain an Adjusted Cost Base. The capital will be paid out as cash. Each time that shares are redeemed the new share balance will be reflected in the member’s annual statement.
If the shares are held within an RRSP, the returned capital and dividends will be held as cash within the RRSP until the holder decides whether to purchase additional shares as they become available or transfer it to another RRSP.
- Are dividends cumulative?
No, dividends on OREC Preference Share are non-cumulative. Each year’s dividend is based on a member’s shareholdings at that time.
- How are dividends treated for tax purposes?
Currently OREC Preference Shares dividends are not eligible for an “enhanced” dividend tax credit but still qualify for the basic tax credit. You will receive a T5 for every tax year that sets out your dividend information for the year in the “other than eligible” boxes – your total dividends for the year (Box 10), the grossed-up taxable amount (Box 11), and your tax credit (Box 12).
- Can OREC preference shares be held in an RRSP or TFSA?
Yes. Members may purchase OREC preference shares as part of their annual RRSP or TFSA contribution. Shares may also be purchased with a transfer from another RRSP or TFSA. See FAQ 29-35 below: Buying Preference Shares for an RRSP or TFSA.
- Can preference shares be purchases by corporations?
No. Only residents of Eastern Ontario.
- Are owners of preference shares liable for any other costs in the case of bankruptcy?
No, only the cost of the preference share. OREC will have Directors and Officers, Liability, and Equipment Insurance.
- What if more shares are purchased than can be invested?
Any surplus preference share investments that are not needed for current projects will be returned to investors.
- Will offering statements be available each year?
It is OREC’s intention to have new projects and share offerings each year, but this is not guaranteed and is dependent on project availability, energy policy, and Financial Services Commission of Ontario approval.
- Can my dividend be paid in shares rather than cash?
We are working on creating the option for members to be paid in shares rather than cash so that they can re-invest in OREC.
- Is there a mechanism to sell back your share?
There is no market mechanism to sell back shares. The OREC board will consider buying back shares if it has sufficient cash flow, but this is likely to not be the case in certain years. Shares are transferable, if a new buyer is interested in purchasing them, whether as a new member or an existing member.
- How is my share capital retired?
OREC plans to retire a shareholder’s capital by redeeming Class A shares at their par value or $500. Since the shares are redeemed at their par value, there is no capital gain or loss and there is no need to maintain an Adjusted Cost Base. The capital will be paid out as cash. Each time that shares are redeemed the new share balance will be reflected in the member’s annual statement.
- What happens if OREC is dissolved?
If the very unlikely situation were to arise that OREC be dissolved, then the value of each member’s preference share at that time is based on how much capital has been returned up to that point. (See the typical preference share return table above).
- What happens to the investment if the member dies?
Membership shares will lapse on the death of the member. The value of outstanding preference shares will be paid back to the Estate. Dividends would be paid as appropriate based on the outstanding capital. (See the typical preference share return table above).
- If a member moves out of Ontario will he/she be able to maintain any securities purchased? Yes, he/she will be able to maintain any securities purchased but the membership will terminate and he/she will not be able to purchase new securities.
Investment though Member Investment Notes
- What are Member Investment Notes? They are 5 year unsecured loans to OREC with a guaranteed interest rate. Interest is paid annually on the anniversary of their issue date. The minimum investment is $2500. The original investment (principle) is returned at the end of the 5 year term from date of issue.
- Can Member Investment Notes be held in an RRSP or TFSA? No. Only OREC Preference Shares may be held in an RRSP or TFSA.
Revenue and Costs
- Where do OREC’s revenues come from? Power from OREC’s projects is metered by Hydro Ottawa or Hydro One and we receive payment for this power on bi-monthly basis according to Feed-in Tariff (FIT) or MicroFIT contracts with the Ontario Power Authority. If we own a project jointly with a partner then we receive an amount in proportion to our financial stake in the project. …Read more info on the FIT program here.
- What are the costs to OREC to run a project and pay for co-op administrative costs? Projects costs include insurance, maintenance, roof rental, and contingency and range from 10-15% of full year project revenue. Co-op costs include legal, accounting and regulatory costs and normally account for another 5-10% of full year revenue.
- How does OREC cover the costs of project development and raising capital? A small percentage (about 5%) of capital raised from preference share offerings is set aside to cover these expenses. They are not paid out of revenue.
- What are the usual rates of return and years of pay-back expected from OREC projects? We invest in projects with an internal rate of return of 8% or greater that have a pay-back period of 8-10 years.
- What are the warranties on the projects?
This is dependent on the panels and inverters installed; panels are typically warranted for 20 years and inverters between 5 and 20 years. The installation is normally warranted for 1 year.
- What is the process for renting roof space and re-roofing?
OREC signs a 20 year roof lease agreement with owner of the building on which our projects are installed, including roof rental fee. If roofs need to be re-roofed within the 20 year contract, we the agreement includes a re-roofing clause under which the panels can be removed for a few days for the work to be done.
- What happens to the panels and revenue after the 20 years?
It is impossible to predict the energy policy that will exist at that point, but the most likely is that the electricity will be sold to the grid at the retail rate, this is known as net-metering. The building owners will be given the first right to purchase out the panels at a price negotiated at that time.
- How does the joint ownership of OREC’s FIT projects work? OREC and our partners sign joint venture agreements that set out the equity that each partner has in the project and the insurance, maintenance, management and other costs that will be incurred and shared. under the current FIT rules a project that has greater than 51% ownership by a co-op like OREC is given priority access for FIT contracts. The revenue from the project is shared according each partners equity stake once all project expenses have been paid. The FIT contract is owned in the name of the Joint Venture.
- What size of FIT projects is OREC focusing on? The optimum project size for renewable energy coops like OREC is 50-500 kW.
- What are the grid constraint issues in Ottawa?
Ottawa has a temporary grid constraint because of the Hawthorne station that connects the Hydro Ottawa grid to Hydro One’s grid. This station will be upgraded by mid-2014. There are local distribution system constraints in some areas of the City, but most projects we are pursuing have no grid constraint issues to date.
- Is it helpful to have members who do not want to invest?
It is helpful for OREC to have more members to increase our negotiating power when dealing with project developers. Our greatest need is for members who are interested in investing in preference shares, these funds will allow us to invest in renewable energy projects.
- How do members determine the direction of the co-op?
Each member has one vote on issues for vote at Members’ Meetings. Among other things, votes are held for nomination of board members and changes to by-laws and Articles of Incorporation.
- Does OREC prefer to own the whole project vs. partnering with others?
OREC would rather own a higher percentage of fewer projects than a smaller percentage of many. This will provide us with greater control over our destiny. OREC investments will be 20 year terms, therefore it is important that our partners understand this and have similar investment term expectations.
Buying Preference Shares for an RRSP or TFSA
- What are the RRSP options?
OREC Preference shares can be held inside of a self directed RRSP Plan offered through the Canadian Workers Co-operative Federation (CWCF). There are certain costs and regulations that are specific to the CWCF Plan. Members may purchase shares within their annual RRSP Deduction Limit or transfer funds in from another RRSP to purchase shares. Finally, a member may buy preference shares outside of an RRSP and then decide to put them in their self-directed RRSP in a subsequent year. See more information on how to apply for the RRSP option here.
- What are the TFSA options?
OREC Preference shares can be held inside of a TFSA offered through the Canadian Workers Co-operative Federation (CWCF). Members may purchase shares within their annual TFSA limit or transfer funds in from another TFSA to purchase shares. Finally, a member may buy preference shares outside of a TFSA and then decide to put them in their self-directed TFSA in a subsequent year. Dividends earned on shares inside the TFSA are not taxed.
- What is the recommended preference share investment to hold in an RRSP?
The minimum purchase within an RRSP is $5000. However, it is recommended that investments of at least $10,000 be made into the RRSP to make the dividend payout worth while with respect to plan fees.
- Can I use the dividend payment within an RRSP to purchase additional OREC shares? Yes, and if the dividend payment you receive on your RRSP is not enough to purchase another share in OREC, you can top up the amount in the self-directed RRSP to buy one more preference share. There is no additional charge for this option if done at the same as purchasing new shares.
- How can I withdraw cash from the dividends or return of capital from my RRSP?
To withdraw cash from an RRSP means you will be required to claim the amount withdrawn as income in the year you have taken it out. To do this you will need to make a request, in writing, to the Canadian Workers Co-operative Federation (CWCF) who administers your self-directed account. This request needs to include your name, account number, current mailing address and the amount you wish to withdraw. You should also state you are aware of the required Canadian Revenue Agency withholding tax as well as the CWCF withdraw fee ($50 partial withdraw/$75 to close your account) which will be taken from the amount you are requesting prior to the cheque being sent to you. Any questions can be directed to Pamela Farrow, RRSP Program Manager at CWCF.
- Can I transfer the cash in my CWCF RRSP account to an RRSP held by another institution?
Yes. Have the other institution complete a ‘Transfer Out’ form (T2033) to request the amount of cash you are looking to transfer out. Upon receiving this request, CWCF will process it and forward the amount to the other institution.
- When at age 71 my RRSP ‘matures’ what happens to my cash and share holdings?
Unfortunately, CWCF does not offer RRIF accounts at this time and we have yet to identify any other institutions agree to hold co-operative or other non-traded in an RRIF. Therefore share holdings must be withdrawn from your RRSP and their value at that time claimed as income in that year. You will receive a T4 RSP stating their value. On the other hand, cash accumulated from dividends and return of capital in your OREC RRSP can be transferred to a RRIF account with another institution as described above.
Last Updated: October 2015