An income trust is an exchange traded equity-type investment that is similar to common stock. By owning securities or assets of an underlying business (or businesses), an income trust is structured to distribute cash flows from those businesses to unitholders in a tax efficient manner. For further details, visit Income Trusts.
The primary reason for the popularity of income trusts is the tax advantages of the structure. Specifically, income trusts are not subject to the double taxation that impacts dividends distributed by incorporated Canadian companies. An income trust does not pay corporate tax and is able to pass on the cash flows they receive (net of administrative costs) directly to unitholders.
In addition to avoiding double taxation, many income trusts use a tax deferral mechanism to enhance tax efficiency, whereby a portion of the distribution is considered to be a return of capital. Investors do not pay tax on the amount deemed to be "return of capital", and the amounts received as return of capital serve to reduce the "cost base" of the original investment. This means that when the investors sell their units, they pay capital gains tax on the difference between the sale proceeds and the adjusted cost base at the time of sale. (As of October 2000, capital gains tax is payable on 50% of the amount of the gain and therefore is preferable to regular income tax treatment.)
The primary means of generating returns for investors is through the regular payment of distributions (generally monthly or quarterly), although capital gains or losses are possible through fluctuations in the unit prices. Distributions will vary from year to year (depending on business conditions) and are not guaranteed.
Income trusts are not incorporated like traditional companies. Instead, they are a unique type of legal entity, which means there are differences as to how a trust is treated from legal and tax perspectives as against an incorporated company. Unitholder rights and responsibilities, although similar, are not necessarily the same as those of shareholders. The most notable difference lies with the tax treatment of income trusts. Income trusts are an efficient way to hold assets from a tax perspective.
Another difference from corporations is the potential liability of unitholders. There is no specific legislative clause that covers unitholder liability as there is for company shareholders. This ambiguity has caused some to believe there is more potential liability risk to a unitholder than a shareholder, although this point is widely debated. There may also be differences in voting rights between trust unitholders and company shareholders.
Toronto Stock Exchange will generally consider the listing of income trusts, along with Exchange Traded Funds, split share corporations, investment funds, limited partnerships and other special purpose issuers on an exceptional circumstances basis. TSX considers all relevant factors in assessing these applicants including objectives and strategy, nature and size of assets, anticipated operations and financial results, track record and expertise of managers and/or advisors, and level of investor and market support.
TSX encourages income trusts, structured products, ETFs and their advisors interested in listing to contact Dani Lipkin, Head, Business Development, ETFs and Structured Products at (416) 814-8874 or firstname.lastname@example.org.