Favourable tax treatment means that income trusts can offer relatively high yields to investors.
Income trusts are designed to distribute cash to investors on a regular basis. To do this, companies convert their corporate structure into a trust. This allows the company to pay out all of its earnings in dividends (distributions) directly to investors. In exchange, the investors pay the taxes on the earnings, not the trust. This favourable tax treatment means income trusts can offer higher yields to investors.
Income trusts can stop paying distributions to investors at any time. This could cause the shares to drop in value because it makes the income trust is less attractive to investors. It could also affect your ability to sell your shares.
Changes to the Income Tax Act have limited the number and kinds of income trusts available to investors.
4 types of income trust
- Royalty trust – companies related to energy products
- Real Estate Investment Trust (REIT) – companies that own or operate income-producing real estate
- Utility trust – companies in power, pipelines, and telecommunications
- Business investment trust – any company with a strong, steady cash flow that sells units in a trust rather than selling shares on a stock exchange.