MONTREAL - Aeroplan Income Fund (TSX:AER.UN) plans to reorganize into a dividend-paying public corporation partially over concerns that it will soon lose its tax-free status by exceeding foreign ownership limits.

Aeroplan's non-resident ownership was 41 per cent as of March 31. But with ACE Aviation Holdings (TSX:ACE.B) planning to sell its remaining stake, this number is expected to rise about the 49.9 per cent foreign ownership limit.

"Should this occur, Aeroplan would lose its tax-exempt status immediately and retroactive to the beginning of this fiscal year would be subject to income taxes at a rate of 36 per cent," chief financial officer David Adams said during a conference call Friday.

"Therefore given ACE's plans and the probable outcome, the present value of our tax shelter is virtually zero."

The decision to covert to a corporate structure came as the fund reported net earnings of $42.1 million for the three months ended March 31, up from $25.5 million a year ago. The profit equalled 21 cents per unit, compared with 16 cents in the first quarter of 2007.

Total revenues were $356.2 million, up 45.2 per cent from $245.3 million.

Aeroplan said that its first-quarter distributable cash rose 6.4 per cent to $64 million as revenue expanded 45 per cent to $356.2 million.

The conversion would also support the loyalty reward program's growth strategy by affording it better access to capital markets, allow it to maximize its leverage to fund acquisitions and increase its ability to maintain an investment grade structure.

The reorganization, which is subject to approval by at least two-thirds of unitholders in a vote June 19. The change would be carried out on a tax free rollover basis for investors.

Aeroplan said it expects its dividend will initially be 12.5 cents per share quarterly, 50 cents annually, compared with its current annualized payout of 84 cents per unit.

Instead of paying monthly distributions to its unitholders, Aeroplan anticipating paying quarterly dividends to its shareholders, with the first dividend to be payable for the quarter ending Sept. 30, 2008.

Aeroplan originated as the in-house customer loyalty program at Air Canada (TSX:AC.A) but expanded beyond just managing frequent-flyer points for the airline and its customers. It was later spun off as a separate subsidiary of ACE Aviation Holdings and eventually did an initial public offering at the height of the interest in income trusts.

Since a change in federal taxation policy, announced Oct. 31, 2006 and due to fully come into effect in January 2011, many of the advantages of the trust structure have been reduced or eliminated. Many businesses are weighing whether it makes sense to adopt a corporate structure instead, to retain investor interest in their equity.

Aeroplan's units gained 54 cents to close at $16.84 on the Toronto Stock Exchange on Friday.

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