Canada: Canadian Income Trusts – An Attractive Liquidity Option for U.S.Companies

Article was originally published in October 2002.

Yield-hungry investors have purchased over C$9 billion of Canadian income trust units since early 2001, bringing the market capitalization of income trusts on the Toronto Stock Exchange to over C$40 billion. While a broad range of Canadian businesses have raised capital through the income trust vehicle, there is a growing realization that U.S. private companies may provide significant untapped potential for this market.

The favourable valuations applied by the Canadian market to tax efficient income trusts may be very attractive to U.S. private equity funds and other investors seeking to realize all or part of their investment in a business. In addition, U.S. management may welcome the less litigious Canadian securities market environment and find that going public in Canada may be less costly and complex than in the United States.

What is an Income Trust?

An income trust is a trust that invests in assets that produce a stable or predictable stream of income. Like the stock of a public company, the units of the trust are publicly traded on a stock exchange and represent a beneficial interest in the trust with a vote at meetings of unitholders.

Unlike many public companies, income trusts pay out most of their cash flow to unitholders on a regular basis, usually through monthly distributions. The tax efficient structure of an income trust generally allows pre-tax operating income to be distributed to unitholders, reducing or eliminating corporate or asset-level tax.

Types of Income Trust

There are three types of Canadian income trusts:

  • royalty (oil and gas) trusts;
  • real estate investment trusts ("REITs"); and
  • infrastructure and business trusts.

Canadian royalty trusts, which originated in the mid-1980s, focus (with some exceptions) on depleting oil and gas resource properties. They typically distribute most of their operating cash flow to unitholders and rely on the issuance of new trust units to fund the acquisition of replacement properties.

REITs were first established in Canada as "closed end" mutual fund trusts (i.e. mutual fund trusts that are not required to redeem investors’ units on demand) in the mid-1990s, when tax legislation was amended to permit such trusts to hold Canadian real estate. Canadian REITs now own and lease office buildings, shopping centres, industrial properties and apartments, as well as specialty assets like hotels and nursing homes. These properties enable the trust to claim high levels of depreciation for tax purposes, which provides significant tax shelter to unitholders on the distributions they receive from the REIT.

Over the last few years, a third category has emerged as a wide variety of infrastructure and operating businesses have formed income trusts. The industries range from power, pipelines, telecommunications and transportation to customs brokerage, cheque-printing, newspapers, horticulture, fish production, restaurants and pet food.

U.S. Businesses - The Next Wave

Some investment bankers believe that the next wave of income trusts will be cross-border business trusts. The first such trust – Heating Oil Partners Income Fund – went public on the Toronto Stock Exchange in May, 2002. This trust indirectly owns the majority limited partnership interest in a leading U.S. distributor of heating oil to residential and commercial customers. The former limited partners – management and institutional investors – retained a minority interest in the U.S. limited partnership, which is exchangeable at their option into units of the Canadian income trust. U.S. companies now have an attractive new way of raising capital and providing liquidity for their stockholders – forming an income trust in Canada.

Structuring an Income Trust

There are a variety of ways to structure an income trust. Typically, a new trust is formed in Canada and taken public through an offering of units to the public for cash. The trust invests the cash in shares and subordinated debt of another newly formed Canadian acquisition entity (such as a corporation, limited partnership or trust), which in turn acquires all or part of the outstanding equity interests in the target entity that owns the assets and operates the business. The acquisition and target entities may merge or are otherwise structured so that the target’s pre-tax cash flow can be distributed to the income trust. The trust distributes this cash to its unitholders. The trust’s interest and dividend income and capital gains will generally be taxed as such in the hands of unitholders.

Creative legal and financial advisors will design the precise structure based on a number of factors, including:

  • the nature of the underlying assets;
  • the legal form of the target entity (e.g., a corporation or partnership);
  • the consideration to be paid to the existing equity owners (e.g., cash, trust units or exchangeable securities);
  • the interest in the target entity that existing equity owners wish to retain;
  • tax deferral alternatives;
  • the leverage of the business, and how much debt is to be repaid or replaced;
  • depreciation and amortization considerations; and
  • future growth and acquisition strategy.

Cross-border Structures

There are additional Canadian and U.S. considerations in designing a cross-border income trust. For example, a Canadian company may be interposed between the trust and the U.S. acquisition or target entity for a number of reasons, including compliance with Canada’s "foreign property" regime and the efficient use of Canada’s "foreign affiliate" system which governs the taxation of non- Canadian businesses.

A Canadian cross-border trust may need to be structured as a "fixed investment trust" under U.S. law to avoid U.S. withholding tax on interest payments. "Internal" debt created between the U.S. target and its parent entities to shelter income must be structured so that it is treated as debt for U.S. income tax purposes.

The Process

Given the large number of recent initial public offerings in this sector, experienced underwriters and professional advisors should generally be able to bring an income trust to market quickly and efficiently.

There are three key stages:

  • structuring the trust and preparing the preliminary prospectus;
  • clearing the prospectus and marketing the offering; and
  • closing and listing the income trust.

The whole process generally takes three to four months, although it could take less or more time, depending on the circumstances. The timeline largely depends on how focused and organized the working group (comprising principals and advisors) is during the first stage. Factors that can slow the process down at this stage are the need for unique tax or commercial structures and the lack of historical audited financial statements. The financial statements of a U.S. business to be acquired by an income trust may be prepared in accordance with U.S. generally accepted accounting principles as long as the notes to the statements contain a reconciliation to Canadian generally accepted accounting principles.

It usually takes four to six weeks from filing the preliminary prospectus to clear the prospectus through the provincial securities regulators and file the final prospectus. During this period, the underwriters will conduct "roadshows", meeting institutional and retail investors to market the offering. Immediately prior to filing the final prospectus, the price and size of the offering is set and the underwriting agreement between the trust and the underwriters is signed.

Closing occurs typically within a week or two of filing the final prospectus. Prior to closing, all the material documents relating to the income trust are finalized. These typically include the Declaration of Trust (the charter of the income trust which contains provisions relating to its governance), the shareholders or partnership agreement(s) dealing with the rights between the trust and the remaining equity owners of the target business, and documents relating to the trust’s external and internal debt. On closing, the units of the income trust are listed under a designated symbol on the appropriate stock exchange(s).

Why an Income Trust?

The best candidates for an income trust are businesses with a dominant position in their respective markets, stable or predictable cash flows and some potential for growth. These businesses may achieve better valuations as an income trust than under a corporate initial public offering; in fact, a corporate IPO may not be feasible if the business is not perceived as a high-growth investment.

Income trust units generally trade based on cash yield, with lower yields (i.e., higher valuations) applying to higher quality businesses. Other factors that affect valuations include prevailing interest rates and the supply of other available income trust offerings. Valuations can also be improved by structural aspects. For example, a subordination feature attached to units retained by existing equity owners enhances the value of the units offered to the public. Similarly, improving tax efficiency can increase a unitholder’s after tax cash flow, thus increasing value.

Yields on recent income trust IPOs have ranged from less than 9% to over 14%. Although slowly rising interest rates and the large recent supply of income trust product have driven investors to increase their yield expectations, many believe that the sector’s fundamentals are sound and that the Canadian market continues to have a hearty appetite for income trusts that own appropriate businesses.

As a recent article in Canada’s Financial Post newspaper put it: "The Canadian market’s infatuation with income trusts is no passing fancy, and might just end up being the saviour of the Toronto Stock Exchange…". The article continues: "There are even some early signs that foreign firms may be lured to list trust units in the Canadian market because of the looser regulations and the fact that they’re better known here than in the U.S….".

Goodmans Recent REIT and Income Trust Deals

Arctic Glacier Income Fund
Allied Properties REIT
Associated Brands Income Fund
BFI Income Fund
Calloway Real Estate Investment Trust
Canadian Apartment Properties REIT
Canadian Real Estate Investment Trust
Clearwater Seafoods Income Fund
CPL Long Term Care REIT
Firm Capital Mortgage Investment Trust
FP Newspapers Income Fund
Heating Oil Partners Income Fund
IPC US Income Commercial REIT
KCP Income Fund
Menu Foods Income Fund
Residential Equities REIT
Retirement Residences REIT
TGS North American REIT
The Keg Royalties Income Fund

Goodmans LLP, one of Canada’s leading business law firms, has played a major role in the development of the income trust sector, acting as counsel on approximately C$ 2 billion of income trust offerings since January 1, 2002.

1 Steve Maich, "TSX’s Future could lie in Trusts...," FP Investing, May 30, 2002, page IN 1.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.