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Consider Income Trusts As An Investment

Income trusts have become very popular in today's low interest rate environment. These high-yielding equities distribute cash flows from an underlying business on a quarterly or monthly basis to their investors. Since income trusts share characteristics of both fixed income securities and equities, they are sensitive to interest rate movements, as well as to economic cycles and management performance. The income trust universe consists of royalty trusts, income funds and Real Estate Investment Trusts (REITs).

Benefits Of Owning Income Trusts

  • Enhanced Yields
    Interest rates continue to be low. In this environment, investors may be willing to accept the added risk of owning high-yield equities, such as trusts in return for enhanced pre-tax cash yields.
  • Lower Business Risk
    The characteristics of income trusts - mature assets, dominant market share and low growth potential with an ability to generate stable cash flow - leave them with lower business risk compared to equities in general.
  • Regular Monthly/Quarterly Distributions
    The distributions characteristic of all income trusts can be attractive for retired investors who require regular income, yet want the financial flexibility to stay invested in the equities markets.
  • Tax Efficiency
    Investors in some trusts may enjoy tax-deferred income. Trusts with tax credits arising from government incentive programs or from capital cost allowances, pass along those credits to investors in the form of tax-deferred income.

Unlimited Liability Issue

Currently, in some provinces, income trusts do not have liability protection that is afforded to corporate entities. To change the liability treatment of income funds, the legislative assembly of each province must pass a bill approving limited liability into law.

In addition, other risks exist. Returns are not guaranteed and the operations of the underlying business of the trust will also affect income. Income trusts may not be suitable for all investors.

Issues Affecting Non-Canadian Residents

  • Part of income trust's capital gains is to be treated the same as Canadian trust income (for mutual fund trusts) or Canadian dividends (for mutual fund corporation). This affects distributions from the mutual fund's gains on disposition of "taxable Canadian property", such as Canadian real estate and resource properties. As a result, Canadian withholding tax of 25% (subject to treaty reductions) would apply to the gain, and the distribution may not be recognized as a capital gain in the unitholder's tax jurisdiction. Effective after March 22, 2004.
  • A 15 per cent withholding tax deducted from distributions (not otherwise subject to withholding tax) to a non-resident unitholder from income trust, which primarily derive their value from taxable Canadian property. Refundable to the extent of losses on eventual disposition of the unit. Effective 2005.

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The information contained herein is considered accurate at the time of posting. CIBC and CIBC World Markets Inc. reserve the right to change any of it without prior notice. It is for general information purposes only.

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