March 2004

Income Trusts Structure Unscathed, For Now

The government decided not to change the tax rules that make an income trust so appealing to the individual investor. For now, a corporation whose shares are held by an income trust will continue to avoid most, if not all, of the tax otherwise payable at the corporate level. Individual investors will continue to retain a larger amount of after-tax cash in their hands when compared to the alternative of investing directly in a profitable corporation. This will be especially true in cases where the trust units are held inside of registered accounts where no personal tax will be payable until the registered plan is liquidated.

In order to slow down the proliferation of income trust vehicles into the market, the government has restricted the amount of business income trust investments that a pension fund can hold. Effective January 1, 2005, they may only allocate 1% of their assets to these vehicles and they can not hold more than a 5% interest in any particular trust. This restriction will help combat the growing interest in income trusts which is expected to expand when provincial governments remove the liability concern hanging over the holders of income trust units.

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