An income trust is an investment vehicle designed to produce a regular stream of income to investors. The system is most commonly used in Canada, where a Canadian Income Trust must meet specified rules to obtain special tax privileges. There have been complaints that businesses have set themselves up as income trusts to gain tax advantages, which has led to attempts to reform the tax rules.
The main activity of an income trust is to buy assets that produce income. These could include equities that pay dividends, property that produces rent, or even the rights to intellectual property that generates royalty payments. While the income is not absolutely guaranteed, it tends to be more reliable and consistent than other forms of investing. This makes it particularly attractive as a way for corporate pension funds to invest money.
Investors in an interest trust are not, strictly-speaking, shareholders in a company. Instead, investors own a unit in a trust. This means the investor owns the relevant portion of the assets controlled by the trust and thus gets the relevant share of the resulting income.
Canada has allowed income trusts since 1985, though they did not become popular until the mid-2000s. Canadian law means that a recognized income trust is allowed to pass on much or all of its profits to investors as dividends. Only any remaining profit is then subject to corporate taxes.
There are four main types of Canadian Income Trust, each of which is limited to investing in a particular sector. Canadian Business Trusts concentrate on investments related to manufacturing and service industries. Real Estate Investment Trusts mainly invest in real estate that generates an income. Canadian Resource Trusts specialize in commodities, such as metals, fuels, and minerals. Utility Trusts gain their income from services such as power, water, and telecommunications.
The Canadian Income Trust became popular after the collapse of so-called "dot com" stocks early in the 21st century. This is partly because investors were more concerned with having a stable income than taking risks, but still wanted to find potentially high returns. As a result of the interest, many existing businesses decided to raise money by converting to a Canadian Income Trust rather than the more traditional method of selling shares. This also meant that the businesses were often able to cut their corporation tax bills. Since then, there have been several attempts to change the taxation of trusts, particularly in the energy market, and as of 2010, the issues were still under legal and political debate.
