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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 yields of up to 10% a year (up to 20% for riskier trusts). 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. The main attraction of income trusts (in addition to tax advantages) is their ability to generate constant cash flows for investors, which is especially attractive when interest rates 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 Tax advantagesAs a flow-through entity (FTE) whose income is redirected to unitholders, the trust structure avoids the double taxation that comes from combining corporate income tax with shareholders' dividend tax. If the tax regime allows it, a corporate subsidiary set up to run a trust's business pays a liability that reduces its tax bill, preferably to zero – making those payments to the trust unitholders ("pass-through taxation"). 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: Canadian Ministry of Finance.) Note: on October 31, 2006, the Canadian government announced plans to begin taxing trusts. This move has been controversial as many politicians have promised to challenge this move by Revenue Copyright 2008 - France BtoB from Wikipédia
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