Income trusts

Income trusts are designed to distribute cash to investors on a regular basis. To do this, companies convert their corporate structure into a trustTrust An account set up to hold assets for a beneficiary. A trustee manages the assets until the beneficiary reaches legal age.+ read full definition. This allows the company to pay out all of its earningsEarnings For companies, it’s the money they make and share with their shareholders. For investors, it’s the money they make from their investments.+ read full definition in dividends (distributions) directly to investors. In exchange, the investors pay the taxes on the earnings, not the trust. This favourable taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition 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 trustIncome trust An investment that holds assets that pay income to investors. An income trust often pays out income monthly, but there is no guarantee.+ read full definition is less attractive to investors. It could also affect your ability to sell your shares.

Changes to the Income TaxIncome tax A charge you pay based on your total income from all sources. The Canadian government and your province set the rate.+ read full definition Act have limited the number and kinds of income trusts available to investors.

4 types of income trust

1. Royalty trust – companies related to energy products
2. Real EstateEstate The total sum of money and property you leave behind when you die.+ read full definition InvestmentInvestment An item of value you buy to get income or to grow in value.+ read full definition Trust (REIT) – companies that own or operate income-producing real estate
3. Utility trust – companies in power, pipelines, and telecommunications
4. Business investment trust – any company with a strong, steady cash flowCash flow The sums of cash a business gets in and spends out during a set period of time.+ read full definition that sells units in a trust rather than selling shares on a stock exchangeStock exchange A market in which securities are bought and sold.+ read full definition.

Fast facts

Like a stockStock An investment that gives you part ownership or shares in a company. Often provides voting rights in some business decisions.+ read full definition, you buy shares or units of income trusts on a stock exchange.

Warning

An income trust can stop paying distributions to investors at any time. This could cause the shareShare A piece of ownership in a company. A share does not give you direct control over the company’s daily operations. But it does let you get a share of profits if the company pays dividends.+ read full definition price to fall. It could also affect your ability to sell your investment.