Table of Contents

Canadian Income Trust: Meaning, Pros And Cons, FAQs

By

澳洲幸运5官方开奖结果体彩网:Will Kenton

Updated May 08, 2023

Reviewed by

JeFreda R. Brown

Fact checked by

Vikki Velasquez

What Were Canadian Income Trusts?

A Canadian income trust was an investment trust that held stable, income-producing assets and distributed payments periodically to 澳洲幸运5官方开奖结果体彩网:unitholders or shareholders. Canada’s income trusts historically held over C$200 billion in stock market capitalization.

Canadian income trusts provided significant 澳洲幸运5官方开奖结果体彩网:tax benefits to investors, particularly those exempt from Canadian income tax and not residing in Canada. On January 1, 2011, tax changes in Canada imposed a tax on distributions. Some income trusts remained as 澳🍌洲幸运5🌺官方开奖结果体彩网:real estate investment trusts (REITs), which invest in income-producing real estate.

Key Takeaways

A Canadian income trust was an investment fund that held income-producing assets and distributed periodic payments to shareholders.
Canadian income trusts invested in assets that generated steady revenues, such as oil, coal, natural gas, or other natural resources.
In 2011, tax changes in Canada affected Canadian income trusts that were then converted to a conventional corporate structure.

Understanding Canadian Income Trusts

Shares of Canad🔯ian income trusts traded on a stock exchange and passed the majority of their income to unitholders through distributions. These trusts usually held assets with steady revenues, such as oil, coal, natural gas, or other natural resources.

Canadian income trusts were run by financial institutions and generated a reduced tax liability for investors. By paying out most of their cash flows, these trusts were able to avoid taxation, thus making this business structure very appealing. In 2011, tax benefits were eliminated and most of the approximately 195 trusts expired. Accounts were converted into conventional corporations or REITs.

Advantages and Disadvantages of t🔴he Canadian Income Tru🥂st

For U.S. investors, these trusts were more tax-efficient than U.S. trusts. Canadian income trusts reinvested their cash flow, and dividends were eligible for the 15% dividend tax rate. In some cases, U.S. investors claim a foreign tax credit with IRS Form 1116.However, foreign trusts are harder to track as their performance is reported in a foreign currency and may be impacted by geopolitical events. Distributions were volatile because trusts generated their income from the pro🅘duction of commodities, which are subject to frequent price fluctuations.

Why Were Canadian Income Trusts Appealing to Investors?

T🌜hese trusts raised funds by issuing shares or borrowing money. They often used capital to buy new reserves or develop existing properties, and this ability to increase their distributions over time made Canadian income trusts appealing to many investors.

What Were the Tax Benefits of Canadian Income Trusts?

Income trusts provided tax-exempt investors with a higher net return by eliminating the corporate-level tax of 32%. Non-residents of Canada paid a withholding tax of 15% on income trust distributions instead of a combined Canadian income and non-resident withholding tax of approximately 47%.

How Did the Tax Changes to Canadian Income Trusts Affect Investors and Corporations?

Before the tax changes of 2011, corporations converted to income trust structures to distribute income to the investor avoiding corporate taxes. The rules in 2011 imposed a tax on income trusts equivalent to the corporate rate and taxed distributions from income trusts the same way that dividends from a corporation are taxed.

The Bottom Line

A Canadian inc✨ome trust held income-producing assets and distributed periodic payments to shareholders. The trusts invested in assets with steady revenues. Canadian income trusts provided significant tax benefits to investors and those exempt from Canadian income tax and not residing in Canada. In 2011, tax changes in Canada affected Canadian income trusts, and they converted to a conventional corporate structure.

Article Sources

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