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Encyclopedia > Income trust

An income trust is an investment trust that holds income-producing assets. The term also designates a legal entity, capital structure and ownership vehicle for certain assets or businesses. Its shares or "trust units" are traded on securities exchanges just like stocks. The income is passed on to the investors, called "unitholders", through monthly or quarterly distributions. Distributions are typically higher than stock dividends, offering cash yields of up to 10% a year (up to 20% for riskier trusts). This article does not cite any references or sources. ... Income, generally defined, is the money that is received as a result of the normal business activities of an individual or a business. ... In business and accounting an asset is anything owned which can produce future economic benefit, whether in possession or by right to take possession, by a person or a group acting together, e. ... A juristic person is a legal fiction through which the law allows a group of natural persons to act as if it were a single composite individual for certain purposes. ... Capital structure refers to the way a corporation finances itself through some combination of equity, debt, or hybrid securities. ... A securities exchange provides a market for buying and selling financial securities. ... This article does not cite any references or sources. ... A dividend is the distribution of profits to a companys shareholders. ... In financial economics, the yield of a financial instrument/security (finance), usually a debt instrument, or other investment is the rate of return the holder earns on that instrument. ...


The unitholders are the beneficiaries of the trust, and their units represent their right to participate in the income and capital of the trust. Income trusts generally invest funds in assets that provide a return to the trust and its beneficiaries based on the cash flows of an underlying business. This return is often achieved through the acquisition by the trust of equity and debt instruments, royalty interests or real properties. The trust can receive interest, royalty or lease payments from an operating entity carrying on a business, as well as dividends and a return of capital. [1] In trust law, a beneficiary or cestui que use, is the person or persons who are entitled to the benefit of any trust arrangement. ... This law-related article does not cite its references or sources. ... Return on capital, also known as Return On Invested Capital (ROIC) is defined as NOPLAT / Invested Capital usually expressed as a percentage. ...


The main attraction of income trusts (in addition to certain tax preferences for some investors) is their stated goal of paying out consistent cash flows for investors, which is especially attractive when cash yields on bonds are low. They are especially useful for financial requirements of institutional investors such as pension funds. (Investment Dictionary) The names income trust and income fund are sometimes used interchangeably, even though most trusts have a narrower scope than funds. Currently, income trusts are most commonly seen in Canada. The closest analogue in the United States to the business and royalty trusts would be the Master Limited Partnership. This article does not cite any references or sources. ... An interest rate is the price a borrower pays for the use of money he does not own, and the return a lender receives for deferring his consumption, by lending to the borrower. ... In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ... An institutional investor is an investor who is an institution like a bank, insurance fund, retirement fund, or mutual fund manager. ... A pension (also known as superannuation) is a retirement plan intended to provide a person with a secure income for life. ... A mutual fund whose goal is to provide an income from investments. ... Master limited partnership (MLP) is a limited partnership that is publicly traded on securities exchange. ...

Contents

Investor risks

Income trusts are equity investments, not fixed income securities, and they share many of the risks inherent in stock ownership, but often not the same rights and responsibilities, especially concerning corporate governance and fiduciary responsibility. Investors in Canadian income trusts cannot rely upon provisions in the Canada Business Corporations Act allowing for derivative actions and the oppression remedy, and often do not even have the right to elect a board of directors. Each trust has an operating risk based on its underlying business; the higher the yield, the higher the risk. They also have additional risk factors, including, but not limited to, poorer access to debt markets. Fixed income refers to any type of investment that yields a regular (fixed) payment. ... Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. ... The court of chancery, which governed fiduciary relations prior to the Judicature Acts The fiduciary duty is a legal relationship between two or more parties, most commonly a fiduciary or trustee and a principal or beneficiary, that in English common law is arguably the most important concept within the portion... The Canada Business Corporations Act, also known as Bill C-44, is a Canadian act respecting Canadian business corporations. ... A Shareholders derivative suit is an action brought by a shareholder not on its own behalf, but on behalf of the corporation, on grounds that the corporation is being cheated by corrupt actions from within. ... There are very few or no other articles that link to this one. ... According to §644 of International Convergence of Capital Measurement and Capital Standards, known as Basel II, operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. ...

  • Over-valuation: When distributions include return of capital the investor is really receiving his own capital back through the distributions. Since the unit valuation is most frequently driven by a multiple applied to the whole distribution, units will be priced above their economic value. Although income trusts are not in themselves Ponzi schemes, when the market treats the return of capital as income they become one.
  • Lack of income guarantees: income trusts do not guarantee minimum distributions or even return of capital. If the business starts to lose money, the trust can reduce or even eliminate distributions; this is usually accompanied by sharp losses in units' market value.
  • Exposure to interest rate risk: since the yield is one of the main attractions of income trusts, there is the risk that trust units will decline in value if interest rates in the rest of the cash/treasury market increase. This risk is common to other dividend/income based investments such as bonds.

Interest rate risk is also present inside the trusts themselves on their balance sheets since many trusts hold very long term capital assets (pipelines, power plants, etc.), and much of the excess distributible income is derived from a duration mismatch between the life of the asset, and the life of the financing associated with it. In an increasing interest rate environment, not only do the attractiveness of trust distributions decrease, but quite possibly, the distributions themselves decrease, leading to a double whammy of both declining yield and substantial loss of unitholder value. Return on capital, also known as Return On Invested Capital (ROIC) is defined as NOPLAT / Invested Capital usually expressed as a percentage. ... A Ponzi scheme is a fraudulent investment operation that involves paying abnormally high returns (profits) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. ... Market capitalization, often abbreviated to market cap, mkt. ... The term treasury was first used in classical times to describe the votive buildings erected to house gifts to the gods, such as the Siphnian Treasury in Delphi or the many buildings put up in Olympia, Greece by competing city-states, to impress each other during the Ancient Olympic Games. ... In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ... This article needs additional references or sources for verification. ...

  • Sacrifice of growth unless more equity is issued: because most income is passed on to unitholders, rather than reinvested in the business. In some cases a trust can become a wasting asset. Because many income trusts pay out more than their net income, the shareholder equity (capital) may decline over time. For example according to one recent report, 75% of the 50 largest business trusts in Canada pay out more than they earn ("Who should you trust on trusts?", Financial Post, November 23, 2005. )
  • Exposure to regulatory changes: to the extent that the value of the trust is driven by the deferral or reduction of tax, any change in government tax regulations to remove the benefit will reduce the value of the trusts.

Generally, income trusts carry the same risk levels as dividend paying stocks that are traded on stock markets. And since income trusts or dividend paying stocks sometimes pay out a portion of their profits every month, investors get the equivalent of a capital gain (in the form of monthly distributions) on their investment without having to sell their stocks. Growth can mean increase in spatial number or complexity for concrete entities in time or increase in some other dimension for abstract or hard-to-measure entities. ...


Tax characteristics

In a typical income trust structure, the income paid to an income trust by the operating entity may take the form of interest, royalty or lease payments, which are normally deductible in computing the operating entity’s income for tax purposes. These deductions can reduce the operating entity’s tax to nil. The trust in turn, "flows" all of its income received from the operating entity out to unitholders. The distributions paid or payable to unitholders reduces a trust's taxable income, so the net result is that a trust would also pay little to no income tax. The net effect is that the interest, royalty or lease payments are taxed at the unitholder level. (Source: Department of Finance Canada.) For other senses of this word, see interest (disambiguation). ... This article or section does not adequately cite its references or sources. ... This article or section should include material from Tenancy agreement A lease is a contract conveying from one person (the lessor) to another person (the lessee) the right to use and control some article of property for a specified period of time (the term), without conveying ownership, in exchange for... A tax deduction or a tax-deductible expense represents an expense incurred by a taxpayer that is subtracted from gross income and results in a lower overall taxable income. ...

  1. As a flow-through entity (FTE) whose income is redirected to unitholders, the trust structure avoids any possible double taxation that comes from combining corporate income tax with shareholders' dividend tax.
  2. Where there is no double taxation, there can be the advantage of deferring the payment of tax. When the distributions are received by a non-taxed entity (like a pension fund), all the tax due on corporate earnings is deferred until the eventual receipt of pension income by participants of the pension fund.
  3. Where the distributions are received by foreigners, the tax applied to the distributions may be at a lower rate determined by treaty, that had not considered the forfeiture of tax at the corporate level.
  4. The effective tax an income trust owner could pay on earnings could actually be increased because trusts typically distribute all of their cashflow as distributions, rather than employing leverage and other tax management techniques to reduce effective corporate tax rates. Certain investors, particularly those in the highest tax brackets, could be significantly worse off investing in income trusts compared to traditionally structured corporations. While the benefits of trusts for tax-deferred and tax exempt entities are clear, trusts are clearly less attractive for other investors facing high marginal rates.

A flow-through entity (FTE) is a corporate legal entity where income flows through to investors (unitholders) in the form of regular cash distributions. ... Double taxation is a situation in which two or more taxes may need to be paid for the same asset, financial transaction and/or income and arises due to overlap between different countries tax laws and jurisdictions. ... Tax rates around the world Tax revenue as % of GDP Economic policy Monetary policy Central bank   Money supply Fiscal policy Spending   Deficit   Debt Trade policy Tariff   Trade agreement Finance Financial market Financial market participants Corporate   Personal Public   Banking   Regulation        An income tax is a tax levied on the financial income... A dividend tax is an income tax on money paid to the owners of a company through dividend payments. ...

Issues

Some of the following issues have not been proven:

  1. Tax revenues for governments are reduced, deferred or reallocated between jurisdictions. Differential treatments between the same economic entities is inherently unfair.
  2. Economic efficiency is lost when cash is endlessly raised, returned to owner, and raised again - each time involving fees.
  3. Cash is redeployed and recycled efficiently when managers are forced to exercise more discipline in investment decisions..
  4. Mis-allocation of capital from its most productive use toward the enterprise with the cheapest tax structure.
  5. Mis-pricing of investments due to incorrectly focusing on cash yield and misunderstanding return of capital.
  6. Growth is put at risk, when new shares must be continually issued to fund growth.
  7. Damping of price volatility due to frequent cash returns.
  8. Broad Economic Benefits from the informative value of frequent cash distributions as a changing indicator of underlying business health such that a premium valuation can be paid for trust ownership in respect to reporting transparency qualities offered in the form of cash distributions.

Return on capital, also known as Return On Invested Capital (ROIC) is defined as NOPLAT / Invested Capital usually expressed as a percentage. ...

Types of income trusts

Simplified income trust structure. This example uses a corporation as the operating entity, but the trust may also use an operating trust or a limited partnership as the operating entity. (Source: Canadian Department of Finance.)

There are four primary types of income trusts: Image File history File links IncomeTrust-structure. ... Image File history File links IncomeTrust-structure. ...


Investment trusts

Investment trusts (aka "mutual funds") are trusts established for communal investment in securities, encapsulated under the umbrella of a flow-through entity and typically managed by a 'fund sponsor', usually an investment firm, asset management firm, or investment bank. These trusts invest in a variety of investments including stocks, bonds, futures, etc., and are often marketed to the public directly when authorization has been received from provincial securities regulators to do so. This type of trust has not been affected by the recent changes concerning income trust taxation; like Canadian REITs, mutual fund investment trusts have been exempted from taxation. Some investment trusts have been specially structured with leverage in order to amplify cash yields paid to investors, while others deplete their assets to pay distributions to investors on a regular basis. Leverage is related to torque; leverage is a factor by which lever multiplies a force. ...


Real estate investment trusts

Real estate investment trusts (REITs) invest in real estate: income-producing properties and/or mortgage-backed securities. The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks. // A Real Estate Investment Trust or REIT (rēt, rhymes with treat) is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. ... Real estate is a legal term that encompasses land along with anything permanently affixed to the land, such as buildings. ... This article does not cite any references or sources. ... A mortgage-backed security (MBS) is an asset-backed security whose cash flows are backed by the principal and interest payments of a set of mortgage loans. ...


Royalty/energy trusts

Royalty trusts, "resource trusts" or "energy trusts" exploit natural resources such as oil wells. The amount of distributions paid will vary from time to time based on production levels, commodity prices, royalty rates, costs and expenses, and deductions. A royalty trust is a type of corporation usually involved in mining. ... An oil well is seen in Texas. ...


Business trusts

Business income trusts are individual companies that have converted some or all of their stock equity into an income trust capital structure for tax reasons. Business income trusts are used in many sectors, such as manufacturing, food distribution, and power generation and distribution. They are not investment trusts in the classic sense, since they represent a single company's assets and not a pool of investments. Capital structure refers to the way a corporation finances itself through some combination of equity, debt, or hybrid securities. ... This article does not cite any references or sources. ...


Among business trusts, utility trusts that invest in or operate public utilities such as electricity distribution or telecommunications are sometimes put in a separate category as they are inherently less growth-focused. (InvestCom) A public utility is a company that maintains the infrastructure for a public service. ... 11kV/400V-230V transformer in an older suburb of Wellington, New Zealand Electricity distribution is the penultimate stage in the delivery (before retail) of electricity to end users. ... Copy of the original phone of Alexander Graham Bell at the Musée des Arts et Métiers in Paris Telecommunication is the transmission of signals over a distance for the purpose of communication. ...


In the US, the business trust structure typically takes the form of publicly traded partnerships (PTPs) or master limited partnerships (MLPs), essentially limited partnerships (LPs) with units that trade on public securities exchanges. [1] Those were very popular in the mid-1980s but are rare today. Revised IRS tax treatment of MLPs made the structure innefficient and infeasible, in light of the special tax that is levied on MLP owners who hold them in tax-deferred or exempt accounts such as 401(k)s, IRAs, and Roth IRAs. A more recent alternative called income depositary shares (IDS) has also failed to attract investor attention due to the trust activity being focused on the Canadian market. Master limited partnership (MLP) is a limited partnership that is publicly traded on securities exchange. ... A limited partnership is a form of partnership similar to a general partnership, except that in addition to one or more general partners (GPs), there are one or more limited partners (LPs). ...


Income trust booms by country

The tax advantages offered to trusts in certain jurisdictions have fueled income trust booms and bubbles in the recent economic history of several countries. In each case, the growth was led by the multiplication of business income trusts. (Main source: "What we can learn from other markets", Globe and Mail, October 13, 2005. ) Currier & Ives print on economic bubbles, 1875. ...


Australia

See also: Economic history of Australia and Taxation in Australia

Resource-rich Australia has had royalty trusts (and REITs) for a long time but in the early 1980s, a wider range of firms sought the same tax benefits and started converting into income trusts. Yield-hungry investors jumped on the bandwagon and rewarded the trusts with higher valuations. When Queensland Coal converted to a trust in 1984, its stock price tripled overnight. This article is a brief timeline of the economic history of Australia. ... // Main article: Income tax in Australia Only the federal government imposes income taxes on individuals, and this is the most significant source of revenue for this level of government. ...


The Australian government, citing ever-increasing (but unquantified) losses of tax revenues, clamped down in 1985. All trusts except REITs and royalty trusts were given 3 years to find an exit strategy: to either keep the current structure at higher tax rates, or convert (back) to a public company. As unit prices started to collapse, the majority dropped the trust structure. An exit strategy is a means of escaping a very difficult situation. ...


It is notable, however, that the legal trust structure and the public trust structure persists in Australia to this day. As of December 2006, the Australian government was revisiting the income trust issue to consider whether further legislation was needed to address the many thousands of trusts that have been maintained and developed since taxes were imposed in the mid-1980s.


United States

See also: Economic history of the United States, Taxation in the United States, and Master limited partnership

In the US, the business trust structure appeared with publicly traded partnerships (PTPs) which were limited liability partnerships (LLPs) with units that trade on public securities exchanges, combining the tax advantages of partnerships with the liquidity of public companies. Starting from the early 1980s all sorts of business, from manufacturers to the Boston Celtics basketball team, converted to PTPs. The economic history of the United States has its roots in European settlements in the 16th, 17th, and 18th centuries. ... Taxation in the United States is a complex system which may involve payment to at least four different levels of government. ... Master limited partnership (MLP) is a limited partnership that is publicly traded on securities exchange. ... A limited liability partnership (LLP) has elements of partnerships and corporations. ... The Boston Celtics are a professional basketball team based in Boston, Massachusetts. ...


In 1987, conversions numbered more than 100 and Congress estimated that the trend was costing Washington $245-million a year in lost revenue. All PTPs except those categorized as "slow-growth investments" (roughly a third of them) were therefore given 10 years before they would be taxed as corporations. Just like in Australia, most of them converted back as unit prices fell, but the decade-long transition meant fewer sharp losses for investors. Others such as Cedar Fair received a special corporate tax rate on the condition that they would not be allowed to diversify outside of their core businesses. Few of the partnerships remain today as US income-focused investors favor high-yield Bonds or debentures instead. Cedar Fair L.P is publicly traded company that owns and operates amusement parks in North America. ... In finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity. ... In finance, a debenture is a long-term debt instrument used by governments and large companies to obtain funds. ...


With the Canadian income trust market booming in the 2000s, American investment bankers have tried to import the Canadian model in a structure called income depositary shares (IDS). A handful of small IPOs have used this model since late 2003; but due to lack of investor demand, interested companies have preferred to go public directly in the hot Canadian market. ("Chasing Higher Yields Up North", BusinessWeek, March 28, 2005. )


Canada

See also: Economic history of Canada and Taxation in Canada

The first Canadian tax ruling enabling the income trust structure, inspired by the American PTPs, was awarded in December 1985 to the Enerplus Resources Fund royalty trust. The first corporate conversion into a proper business trust, using the 1985 ruling, was Enermark Income Fund in 1995. The move attracted little attention at the time as the vast majority of trusts were still REITs and royalty trusts (the so-called "CanRoys"). Canadian historians until the 1960s tended to focus on economic history, including labour history. ... The level of Taxation in Canada is about average among Organisation for Economic Co-operation and Development (OECD) countries, but it is higher than the rate in the United States. ...


A substantial historic and status report on the Canadian income trust market was published at the end of 2006 coinciding with the announcement of new taxes on income trusts proposed by the Canadian Minister of Finance (Key reference provided by author: "Breach of Trust", Advocis Forum magazine from the Canadian Association for Professional Financial Planners and Advisors, December 2006. )


The trust structure was "rediscovered" after the dot-com crash of 2000, as investment banks were searching for new sources of fees after the IPO market had dried up. The first high-profile conversion was former Bell Canada Enterprises unit Yellow Pages Group becoming the Yellow Pages Income Fund and raising C$1-billion in the process. By 2002, trusts accounted for 79% of all money raised through IPOs in Canada, with only 38% in the traditional sectors of petroleum and real estate. By 2005, the income trust sector was worth C$160-billion (approx. US$135-billion at October 2005 rates). The mere announcement by a company of its intention of converting could add 10-20% to its share price. Dot-com (also dotcom or redundantly dot. ... To meet Wikipedias quality standards, this article or section may require cleanup. ... Wikipedia does not yet have an article with this exact name. ... Bell Canada Enterprises is a major telecommunications company and a provider of telephone services in Canada. ... The designation C: (sometimes C: ) is the drive letter that refers to the main partition (or portion of an hard drive) on an MS-DOS or Windows personal computer. ... One thousand million (1,000,000,000) is the natural number following 999,999,999 and preceding 1,000,000,001. ... The United States dollar is the official currency of the United States. ... In finance, the exchange rate (also known as the foreign-exchange rate, forex rate or FX rate) between two currencies specifies how much one currency is worth in terms of the other. ... In economics and financial theory, analysts use random walk techniques to model behavior of asset prices, in particular share prices on stock markets, currency exchange rates and commodity prices. ...


Trusts received another boost in 2004-2005 as the provinces of Ontario, Alberta and Manitoba implemented limited liability legislation that shields trust investors from personal liability. (Such legislation existed in Quebec since 1994). Motto: Ut Incepit Fidelis Sic Permanet (Latin: Loyal she began, loyal she remains) Capital Toronto Largest city Toronto Official languages English Government - Lieutenant-Governor James K. Bartleman - Premier Dalton McGuinty (Liberal) Federal representation in Canadian Parliament - House seats 106 - Senate seats 24 Confederation July 1, 1867 (1st) Area [1] Ranked... Motto: Fortis et liber(Latin) Strong and free Capital Edmonton Largest city Calgary Official languages English (see below) Government - Lieutenant-Governor Norman Kwong - Premier Ed Stelmach (PC) Federal representation in Canadian Parliament - House seats 28 - Senate seats 6 Confederation September 1, 1905 (split from Northwest Territories) (8th [Province]) Area Ranked... Motto: Gloriosus et Liber (Latin: Glorious and free) BC AB SK MB ON QC NB PE NS NL YT NT NU Capital Winnipeg Largest city Winnipeg Official languages English Government - Lieutenant-Governor John Harvard - Premier Gary Doer (NDP) Federal representation in Canadian Parliament - House seats 14 - Senate seats 6 Confederation... Limited liability (LL) is liability that is limited to a partner or investors investment. ... , Motto: Je me souviens (French: I remember) Capital Quebec City Largest city Montreal Official languages French Government - Lieutenant-Governor Pierre Duchesne - Premier Jean Charest (PLQ) Federal representation in Canadian Parliament - House seats 75 - Senate seats 24 Confederation July 1, 1867 (1st) Area  Ranked 2nd - Total 1,542,056 km² (595...


Partly as a result of this ruling, Standard & Poor's then announced plans to add the largest income trusts to the S&P/TSX Composite Index (which it eventually did on December 19 [2]), starting with a 50% weighting and gaining full representation on March 17, 2006. A new equity-only composite index would be created that will resemble the present structure without trusts. This move is seen as a strong gesture of support for the trusts, who would see increased demand from index fund managers and institutional investors replicating the index. However the S&P, as a major bond rating agency, has expressed concerns about the sustainability and the quality of the accounting concerning many trust entities as going concerns in the future. Publications Standard & Poors publishes a weekly (48 times a year) stock market analysis newsletter called The Outlook, which is issued both in print and online to subscribers. ... The S&P/TSX Composite Index is currently a list of the 223 largest companies on the Toronto Stock Exchange as measured by market capitalization. ... An index fund or index tracker is a collective investment scheme that aims to replicate the movements of an index of a specific financial market, or a set of rules of ownership that are held constant, regardless of market conditions. ...


Business trusts have come to the attention of the government. In the March, 2004 federal budget, Finance Minister Ralph Goodale had tried to prohibit pension funds from investing more than 1% of their assets in business trusts or owning more than 5% of any one trust. Powerful funds led by the Ontario Teachers Pension Plan, which at the time had a significant stake in the Yellow Pages Income Fund, fought the proposed measure; the government backed off and suspended the restrictions. The Canadian federal budget of 2004 was a budget for the Government of Canada. ... Ralph Edward Goodale, PC , MP, BA , LL.B (born October 5, 1949, in Regina, Saskatchewan) was Canadas Minister of Finance from 2003 to 2006 and continues to be a Liberal Member of Parliament. ... A pension (also known as superannuation) is a retirement plan intended to provide a person with a secure income for life. ... The Ontario Teachers Pension Plan is the pension plan for the public school teachers of Ontario. ...


On October 31, 2006, Canadian federal Finance Minister Jim Flaherty announced a new tax on income trust distributions in a bid to stem the growing number of companies that are converting to trusts. James Michael Jim Flaherty, PC, BA, LL.B, MP (born December 30, 1949) is Canadas Minister of Finance; he had formerly served as Ontarios Minister of Finance. ...


Suspension of advance tax rulings

On September 8, 2005, the Canadian Department of Finance issued a white paper suggesting that the trusts had cost it at least C$300 million in tax losses the preceding year, with provincial governments possibly losing another $300 million. The markets barely reacted and on September 13, Gordon Nixon, CEO of the Royal Bank of Canada, mentioned in passing that he was not opposed to Canada's largest bank converting into a trust. One week later on September 19, the Department of Finance announced that they were suspending advance tax rulings – essential for investor confidence – on future trusts. [3] is the 251st day of the year (252nd in leap years) in the Gregorian calendar. ... Year 2005 (MMV) was a common year starting on Saturday (link displays full calendar) of the Gregorian calendar. ... The Department of Finance in Canada operates under the finance minister. ... Chief Executive Officer (CEO) is the job of having the ultimate executive responsibility or authority within an organization or corporation. ... The Royal Bank of Canada (TSX: RY, NYSE: RY) is Canadas largest company. ...


The resulting uncertainty caused an immediate slump with the trust market losing approximately $9 billion in market capitalization during the following week. This caused CanWest Global Communications to reduce its proposed $700 million IPO spin-off [4] to $550 million. CI Fund Management also showed hesitation regarding its planned trust conversion. Previous plans by ACE Aviation Holdings to spin-off Air Canada Jazz into a trust were put on hold indefinitely. [5] "Traditional" Canadian REITs, once content to ride the trust boom, tried to distance themselves from the new business trusts, to avoid regulatory "collateral damage." [6] ("Ottawa's move on income trusts throws sector into disarray", Globe and Mail, September 28, 2005. ) CanWest Global Communications Corp. ... CI Fund Management Inc. ... ACE Aviation Holdings Inc. ... Jazz Air LP (Air Canada Jazz) is an airline based in Halifax, Nova Scotia, Canada. ...


In the day following the change in working tax policy, the unit price for all income trusts and REITs on the TSX dropped by a median of more than 17% according to the iTrust Report published by TrustInvestor.com and its iTrust Index. Studies by Leslie Hayman, publisher of the Report, indicated that the change in advance tax rulings in 2005 was the most statistically significant volatility event in the history of the trust market.


According to RBC Dominion Securities, yearly trust cash distributions amounted to C$16 billion in 2005, not including potential capital gains taxes on trust conversions. Of that amount, $3.3 billion was collected in tax. RBC estimates that taxing trusts like regular companies could slash the market value of Canadian business trusts by as much as 30% [7] – again, not counting the loss of the share price premium of companies that had announced their conversion and would then back off. The Royal Bank of Canada TSX: RY NYSE: RY is Canadas largest chartered bank. ... In finance, a capital gain is profit that results from the appreciation of a capital asset over its purchase price. ...


Following the announcement, Mr. Goodale and the Department of Finance declined to comment or answer questions on the future of income trusts. Intense lobbying efforts to "save the trusts" were undertaken by the business community and the Conservative Party of Canada. They demanded that if equal treatment is to be granted to trusts and traditional companies, it should be implemented by leaving the trusts alone and cutting corporate and/or dividend tax to match the trust advantage. That solution would cost the government an additional C$1 billion, which the lobbyists claim would be a small price to pay for stabilizing the market and satisfying the public investors/voters. The Conservative Party of Canada (French: Parti conservateur du Canada), colloquially known as the Tories, is a conservative political party in Canada, formed by the merger of the Canadian Alliance and the Progressive Conservative Party of Canada in December 2003. ...


Since any decision was to affect the finances of an unknown proportion of the government's voting base, the trust debate turned into an important issue in the 2006 election. Analysts were trying to estimate the political repercussions, mostly depending on how much retail investors, especially seniors saving for retirement, were involved in the market. Some analysts put this at 60-65% of the market, up to 80% when counting mutual funds. If this is the case, a pre-election decision unfavorable to income trusts would have proven hazardous to Prime Minister Paul Martin's minority Liberal government. [8] These are some of issues that are likely to play a major role in the Canadian federal election, 2006. ... Paul Edgar Philippe Martin, PC, MP, BA, LLB, LLD (h. ... This article does not adequately cite its references or sources. ... The Liberal Party of Canada (French: ), colloquially known as the Grits (originally Clear Grits), is a Canadian federal political party. ...


Dividend tax cut announcement

The government found itself under increasing pressure throughout November as the opposition moved towards a vote of no confidence that meant the current administration might not remain in place by the time the trust consultation and review concluded on December 31. After the close of the markets on November 23, 2005, Mr. Goodale made a surprise announcement that the government would not tax the trusts, and would instead cut dividend taxes; the advance tax rulings were also resumed. The announcement described the proposed cut as such: A Motion of No Confidence, also called Motion of Non Confidence is a parliamentary motion traditionally put before a parliament by the opposition in the hope of defeating or embarrassing a government. ... is the 327th day of the year (328th in leap years) in the Gregorian calendar. ...

To accomplish this, the Government proposes to introduce an enhanced gross-up and dividend tax credit (DTC) for eligible dividends received by eligible shareholders. An eligible dividend will be grossed-up by 45%, meaning that the shareholder includes 145% of the dividend amount in income. The DTC in respect of eligible dividends will be 19%, based on the 2010 federal corporate tax rate as proposed in the 2005 federal budget. The existing gross-up and tax credit will continue to apply to other dividends. (Canadian Department of Finance)

The markets rallied in the hours leading to the announcement (the government denies any leaks, see below) and on the following days as well, sending the S&P/TSX Composite Index to a new five-year high. The day's biggest gainers were income trusts, income-trust candidates, high dividend-paying companies, and the TSX Group itself. Former trust candidates such as Air Canada Jazz announced that they were considering a trust conversion or spinoff once again. canada is the best but those fucking americans can die fuck sakes they should leave my country and stop bombing my people by a minority government in Canada since the budget presented by the minority government led by Joe Clark in 1979. ... The TSX Group (TSX: X) owns and operates Canadas two major stock exchanges, the Toronto Stock Exchange, and the TSX Venture Exchange, formerly known as the CDNX. Overview The TSX group is organized into 5 divisions: The Toronto Stock Exchange- this division operates the TSE, and manages client, listing...


The decision, while applauded by financial circles, was widely seen as confused and hurried (an earlier government statement on the same day had mistakenly suggested a slight tax on the trusts) and made for the sole purpose of buying votes for the January 2006 federal election. Since the Liberal government was defeated in that election, the proposed cuts may be short-lived; furthermore the government's calculations assume that the individual provinces will match the dividend tax credit with an equivalent one of their own, which is not certain to happen. [9] Rendition of party representation in the 39th Canadian parliament decided by this election. ...


Also, the Liberal government had come under fire for the very strong stock market rally that immediately preceded the announcement, suggesting leaks from government insiders to financial circles. Opposition parties requested an official investigation on insider trading activity on that day. The Ontario Securities Commission has rejected the suggestion, saying it amounts to political interference; the Royal Canadian Mounted Police however, has launched an inquiry on December 28. [10] Insider trading is the trading of a corporations stock or other securities (e. ... The Ontario Securities Commission administers and enforces securities legislation in the Canadian province of Ontario. ... The Royal Canadian Mounted Police (RCMP), also known as the Mounties or Gendarmerie Royale du Canada (GRC) in French, is both the federal and national police force of Canada. ...


The Conservatives propose new rules for income trusts

Following announcements by telecommunications giants Telus and Bell Canada Enterprises of their intentions to convert to income trusts, on October 31, 2006, Finance Minister Jim Flaherty proposed new rules that will effectively end the tax benefits of the income trust structure for most trusts. Brent Fullard of the Canadian Association of Income Trust Investors points out that at the time of the announcement Telus and Bell Canada Enterprises did not pay any corporate taxes nor would they for for several years. According to his analysis, had Bell Canada Enterprises converted to a trust it would have paid $2.6 to 3.17 billion in the next four years versus no taxes as a corporation. [2] [3] TELUS (TSX: T, NYSE: TU) is a Canadian telecommunications firm, the countrys second-largest telecommunications carrier after Bell Canada, with C$8. ... Bell Canada Enterprises is a major telecommunications company and a provider of telephone services in Canada. ... James Michael Jim Flaherty, PC, BA, LL.B, MP (born December 30, 1949) is Canadas Minister of Finance; he had formerly served as Ontarios Minister of Finance. ...


Income trusts, other than real estate income trusts, and mutual fund investment trusts, that are formed after that date will be taxed in the same way as corporations:

  • income flowed out to investors will be subject to a new 34% tax as of 2007 (which falls to 31.5% in 2011)[11], which approximates the average corporate income tax paid by corporations -- this is equivalent to the current prohibition against deducting dividends paid to investors in determining corporate taxable income; and
  • income flowed out to investors will be eligible for the dividend tax credit to provide equivalent treatment to dividends paid by corporations.

Income trusts formed on or before that date will not be subject to the new rules until 2011 to allow a period of transition. Real estate income trusts will not be subject to the new rules on real estate income derived in Canada (the non-Canadian real estate operations of existing REITs will be subject to the same taxation as business trusts). The new rules are contrary to the Conservative Party's election promise to avoid taxing income trusts.[12] The Conservative Party of Canada (French: Parti conservateur du Canada), colloquially known as the Tories, is a conservative political party in Canada, formed by the merger of the Canadian Alliance and the Progressive Conservative Party of Canada in December 2003. ... Political campaign Part of the Politics series Politics Portal This box:      An election promise is a promise made to the public by a politician who is trying to win an election. ...


Flaherty proposes to reduce the federal corporate income tax rate from 19% to 18.5% in 2011. The 34% tax on distributions will be split between the federal and provincial governments -- the federal government will consult with the provincial governments on an appropriate mechanism for allocating 13 percentage points of the new tax between the provincial governments.


Flaherty also proposed a $1000 increase to the amount on which the tax credit for those over 65 (the "age amount") is based, and new rules to allow senior couples to split pension income in order to reduce the income tax they pay. These proposals are designed to mitigate the impact on seniors of the new income trust rules.


Legislative amendments to implement these proposals must be passed by the Parliament of Canada and receive Royal Assent before they become law. The legislation to implement these proposals was included in the 2007 federal budget, which was presented to Parliament by Jim Flaherty on March 19, 2007. Regions Political culture Foreign relations Other countries Atlas  Politics Portal      The Senate Chamber of Parliament Hill in Ottawa. ... // The granting of Royal Assent is the formal method by which a constitutional monarch completes the legislative process of lawmaking by formally assenting to an Act of Parliament. ...


Subsequent to the October 31 announcement by Flaherty, the TSX Capped Energy Trust Index lost 21.8% in market value and the TSX Capped Income Trust Index lost 17.6% in market value by mid November 2006. In contrast, the TSX Capped REIT Index, which is exempt from the 'Tax Fairness Plan', gained 3.2% in market value. According to the Canadian Association of Income Funds, this translates into a permanent loss in savings of $30 Billion to Canadian Income Trust Investors [13].


In the month following the tax announcement, the unit price for all 250 income trusts and REITs on the TSX dropped by a median of almost 13% according to the iTrust Report published by TrustInvestor.com and its iTrust Index. Studies by Leslie Hayman, publisher of the Report, indicated that the tax news at the end of 2006 was the second most significant volatility event in the market following only the suspension of advance tax rulings by the Minister of Finance, Ralph Goodale in 2005.


Opposition to and criticism of new tax rules

Criticism of the new tax rules has been strong, and generally based on three different types of criticism:

  • Criticism of the effect of the rules on the sector, on owners of income trust units, and the breaking of an explicit campaign promise by the Conservative Party.
  • Criticism of the lack of consultation by the government, and criticism of the execution of the decision (timing of the announcement, the way in which it was announced, and potential malfeasance by insiders).
  • Criticism of the substance of the decision and the reasoning and data provided by the government to justify the decision. These reasons include, in particular, challenges to the government's calculation and methodology of 'tax leakage.'

Economist Yves Fortin has challenged the reasons for the change in tax regime announced by Flaherty and disputes the Harper government assertion that the Trust structure has led to loss of tax revenue because of trust conversions in his research paper Income Trusts and Tax Leakage: Is there a problem?.


In a January 12, 2007 paper Yves Fortin outlined his concerns regarding the claim of tax leakage. Finance Minister Jim Flaherty stated in his October 31, 2006 policy statement "If left unchecked, these corporate decisions would result in billions of dollars in less tax revenue for the federal government to invest in the priorities of Canadians, including more personal income tax relief" [14] but Minister Flaherty has not documented the claimed losses nor the methodology used to estimate them. Mr. Fortin's paper A Recipe For Tax Loss gives several examples on how the tax on income trusts could lead to a loss in government tax revenue.


Analyst Gordon Tait has also raised concerns about the lack of consultation and misconceptions surrounding the change in tax policy on Trusts in The Inconvenient Truth About Trusts, although Mr. Tait also notes that he recognizes "the dilemma the Finance Minister found himself in," and that "the potential for a large number of corporate conversions to income trusts necessitated some kind of action."


A December 11, 2006 Income Trust Report by PricewaterhouseCoopers reviewed the surveys and studies conducted in 2004 and 2005, the economic benefits and impact of income trusts in Canada. The report concludes that income trusts do have a place in Canadian capital markets and the 'Tax Fairness Plan' is unfair to Canadian investors who hold trusts in a tax-deferred Registered Retirement Savings Plan or a Registered Retirement Income Fund. A PwC office building (Southwark Towers) in London, England. ... . ... A Registered Retirement Income Fund or RRIF is a tax-deferred retirement plan under Canadian tax law. ...


Analyst Cameron Renkas examines the Department of Finance assertion that the United States and Australia have taken action to shut down flow-through structures. In his research paper Digging Deeper he gives a perspective on how the United States taxes publicly traded flow-through entities and Master limited partnerships, the US equivalent of Canadian income trusts. A flow-through entity (FTE) is a corporate legal entity where income flows through to investors (unitholders) in the form of regular cash distributions. ... Master limited partnership (MLP) is a limited partnership that is publicly traded on securities exchange. ...


Analyst Dirk Lever wrote on January 15, 2007: "We cannot understand why any Canadians would support double taxation of retirement benefits - it affects all of us eventually". Mr. Lever also looked at the Conservative government's policy in his research paper Deep Dive into Tax Issues: Canadian Pensioners Taxed Twice on Canadian Corporate Dividends. In the report Mr. Lever questions the logic behind double taxation of dividends, and claims that foreign investors pay less tax on distributions than domestic investors. The proposed solution, however, is not to retain the existing benefits of income trusts, but to have identical tax regimes for both corporate and income trust distributions (dividends). The report does not address the benefit received from tax deferred savings plans (such as RRSPs and pensions) at the time of contribution, nor the tax-free accumulation throughout the life of these plans.


Hearings on the proposed changes to income trust taxation by the House of Commons' Finance Committee commenced January 30, 2007. John McCallum, the Liberal Finance critic has called on Minister Flaherty to explain the reasoning behind the change in Income Trust Tax policy [4]. In a February 8, 2007 news release John McCallum said that "essentially they released close to a thousand pages of public documents, not one of which brings Canadians any closer to understanding what type of information or calculations led the Minister break his election promise and tax income trusts, either the Minister is in contempt of the committee’s motion or he had absolutely no data from his own department before shutting down the sector and destroying tens of thousands of Canadians’ life savings." [5] [6] The House of Commons (French: Chambre des communes) is a component of the Parliament of Canada, along with the Sovereign (represented by the Governor General) and the Senate. ... The Honourable John McCallum, PC, MP, MA, PhD (born April 9, 1950) is a Canadian politician, economist and university professor. ... is the 39th day of the year in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era. ...


In a July 9, 2007 interview on Business News Network, former Conservative Alberta Premier Ralph Klein criticized PM Stephen Harper and Jim Flaherty for their mishandling of the Income Trust issue and for not keeping their word on Income Trust taxation.[15] According to the Canadian Association of Income Trust Investors the change in tax rules cost investors $35 billion dollars in market value. Stephen Harper specifically promised "not to raid Senior's nest eggs" by changing taxation rules for Income Trusts during the 2006 Federal Election.[16] is the 190th day of the year (191st in leap years) in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era. ... Business News Network (BNN), (formerly known as Report on Business Television or ROBTv) is a Canadian cable television specialty channel, which airs business news and analysis. ... Ralph Phillip Klein MLA (born November 1, 1942), leader of the Alberta Progressive Conservatives, is the current premier of the Canadian province of Alberta. ... Stephen Joseph Harper (born April 30, 1959) is the 22nd and current Prime Minister of Canada and leader of the Conservative Party of Canada. ... James Michael Jim Flaherty, PC, BA, LL.B, MP (born December 30, 1949) is Canadas Minister of Finance; he had formerly served as Ontarios Minister of Finance. ... An income trust is an investment trust that holds income-producing assets. ...


Support for the proposed changes

The Conservatives have the support of the Jack Layton and the New Democratic Party, and a majority of provincial finance ministers on this issue. The Conservatives lost Bloc Québécois support because of Bloc concerns of capital losses to small Canadian investors. [7] [8] In a November 2006 Globe and Mail survey of business leaders (CEOs, CFOs and the like), 58% supported the proposed changes. Most support was related to different tax treatment of trusts over other corporate structures. The CEO of EllisDon was quoted as saying "I just don't see the logic in allowing a group of companies to pay dramatically lower taxes than private companies or companies that aren't organized that way. I really don't see how [the government] had any choice."[17] As noted above, some criticisms of the specific solutions proposed by the government recognized explicitly the need for some policy change, primarily with respect to perceived tax advantages available to income trusts. When the final vote on the Conservative Budget was held, the Bloc supported the taxation of income trusts in the "Tax Fairness Plan" as a quid pro quo for receiving a huge allocation of cash from the Conservative government. Canada's Senate later passed this budget as law. Since this time, BCE has announced that they will go private and pay no corporate taxes. John Gilbert Jack Layton, PC, MP, PhD (born July 18, 1950) is a social democratic Canadian politician and current leader of Canadas New Democratic Party (since 2003). ... This article is about the Canadian political party. ... The Bloc Québécois is a centre-left federal political party in Canada that is devoted to the promotion of sovereignty for Quebec. ... The Globe and Mail is a large Canadian English language national newspaper based in Toronto. ...


Standing Committee on Finance release report

On February 28, 2007 the House of Commons Standing Committee on Finance released their report Taxing Income Trusts: Reconcilable or Irreconcilable differences?. February 28 is the 59th day of the year in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era. ...


See also

A flow-through entity (FTE) is a corporate legal entity where income flows through to investors (unitholders) in the form of regular cash distributions. ... A mutual fund whose goal is to provide an income from investments. ... This article does not cite any references or sources. ... A royalty trust is a type of corporation usually involved in mining. ... // A Real Estate Investment Trust or REIT (rēt, rhymes with treat) is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. ...

References

  1. ^ Canadian Department of Finance. Canadian Department of Finance.
  2. ^ Brent Fullard. "The Canadian Association of Income Trust Investors - Concerns with Tax Fairness Plan page 3-4", Canadian Association of Income Trust Investors, January 05, 2007. 
  3. ^ CAITI. "The ABC's of BCE", Canadian Association of Income Trust Investors, April 17, 2007. 
  4. ^ John MacCallum. "[http://www.caiti.info/resources/john_mccallum_op_ed.pdf Your first problem is that having lured hundreds of thousands of ordinary Canadians into income trusts by promising not to raise taxes you then cut them off at the knees]", National Post, January 03, 2007. 
  5. ^ Liberal.ca. "Minister of Finance Stonewalling Finance Committee’s Request for Information on Income Trust Decision: Liberal Finance Critic", Liberal.ca, February 8, 2007. 
  6. ^ CAITI. "Mr. Harper Is this what you mean by Transparency?", CAITI, February 8, 2007. 
  7. ^ House of Commons Standing Committee on Finance. "Taxing Income Trusts: Reconcilable or Irreconcilable differences?", House of Commons Canada, February 28, 2007. 
  8. ^ CAITI. "[http://www.caiti.info/resources/pr_02-13-2007.pdf A Letter to the Liberals and Bloc Québécois from CAITI on the Public Hearings of the Finance Committee Concerning Income Trusts]", CAITI, February 13, 2007. 

January 5 is the 5th day of the year in the Gregorian Calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era. ... is the 107th day of the year (108th in leap years) in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era. ... is the 39th day of the year in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era. ... is the 39th day of the year in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era. ... February 28 is the 59th day of the year in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era. ... is the 44th day of the year in the Gregorian calendar. ... Year 2007 (MMVII) is the current year, a common year starting on Monday of the Gregorian calendar and the AD/CE era. ...

External links

  • Tax and Other Issues Related to Publicly Listed Flow-Through Entities from the Canadian Department of Finance
  • Distribution requirements of the Ontario Securities Commission, including a section on income trusts and other indirect offerings
  • Income Trust Centre from the Globe and Mail
  • InvestCom section on Canadian income trusts
  • Canadian Income Trusts List
  • TrustInvestor.com
  • iTrustReport with comprehensive iTrustIndex
  • iTrust Institute
  • Forum Magazine from Advocis, the Financial Advisors Association of Canada
  • The Truth on Trusts
  • Canadian Association of Income Funds
  • Coalition of Canadian Energy Trusts
  • Income Trusts and Tax Leakage: Is there a problem? by Yves Fortin
  • Income Trust Report by PricewaterhouseCooper
  • HarperLies.com Income Trust Newszine with a Hard Hitting Style
  • Canadian Association of Income Trust Investors
  • CAITI-ONLINE Current commentary on Canadian Income Trust issues.
  • CAITI-ONLINE-MEDIA Compilation of past print and video ads from CAITI

  Results from FactBites:
 
Trust Units - Income Trusts (819 words)
Income trusts, also called income funds, are trusts generally structured to own debt and equity of an underlying entity which carries on an active business, or a royalty in revenues generated by the assets thereof.
The income trust structure is typically adopted by businesses that require a limited amount of capital in maintaining their property, plant and equipment and that generate stable cash flows.
Income trusts eliminate or signi.cantly reduce corporate tax; the trust pays little or no tax on its earnings because most of the income is distributed directly to the unitholders.
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These trusts may include makeup provisions, which allow deficiencies (years when trust income is less than the stated percentage) to accumulate and to be made up in subsequent years if the trust’s net income exceeds the stated percentage.
Wealth replacement trusts may be ideal if you wish to establish a charitable remainder trust with the College but are concerned that the transfer of assets may deprive your children of a portion of their inheritance.
Income is based on the age of the beneficiaries and the length of the deferment until payments begin.
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