Canada: Canadian Income Trusts And Their Distributions To Be Taxed By The Federal Government

The Canadian Minister of Finance served up his own Halloween trick to income funds and their investors on October 31, 2006, announcing Finance's intention to tax distributions made by publicly traded flow-through entities ("FTE") including income trusts and certain publicly-traded Canadian partnerships.


The Proposed Changes are intended to treat FTEs that are trusts as taxable Canadian corporations in respect of the taxable portion of their distributions. Thus, to the extent that a portion of a distribution from an income trust is taxable, such amount will not be deductible by the trust in computing its income for the year and the trust will be subject to tax in the year in respect of such income. Unitholders of the trust will in essence treat the taxable portion of their share of the distribution as a dividend received from a taxable Canadian corporation. The non-taxable portion of a distribution will continue to be treated in the same manner as before — as a return of capital which reduces the cost base of the trust unit to unitholders.

Similar rules are to apply in respect of FTEs that are partnerships. Under the proposals, a partnership which is ordinarily not liable to tax, will be required to pay a special tax on income from businesses that it carries on in Canada and income from non-portfolio properties other that dividends that, if it were a corporation, would be deductible in computing taxable income. Partnership income subject to the new tax and allocated to a partner will be treated as a taxable dividend.

Finance has indicated that there will be a transitional period such that FTEs that are/were publicly trading prior to November 2006 (and its investors) will not be subject to the tax pursuant to the proposed changes until after 2010. Other FTEs that began to trade publicly after October 2006 (and its investors) will be subject to tax under the new regime in 2007.

Finance also stated that if transactions or structures are developed that would avoid the policy intent of the new rules, any aspect of the proposals will be modified with immediate effect.

Scope of Application — SIFT

The new regime is intended to apply to what Finance has termed "specified investment flow-throughs" or SIFTs. Generally, SIFTs are intended to include publicly traded Canadian resident income trusts and Canadian "resident" partnerships where such entity holds "non-portfolio properties." Non-portfolio properties include investments (including debt instruments) in corporations, trusts or partnerships that are considered to be "resident" in Canada where the SIFT holds more that 10% of the value of such entity and/or such entity comprises more than 50% of the SIFTs total value. So, for example, a common structure where a partnership holds a substantial interest in the shares and debt of a corporation would generally be an SIFT.

Excluded from the proposed changes are real estate investment trusts ("REITs"), provided the REIT does not hold non-portfolio property (other than real estate situated in Canada) and (i) at least 95% of its income must be from property, (ii) 75% of its income must be from real property in Canada, (iii) at least 75% of its assets consist of real estate situated in Canada and Canadian government debt. The exception for REITs will accommodate circumstances where the real property is held directly or through intermediary entities.

Taxation of SIFTs and Investors in SIFTs

Under the current regime, to the extent a trust has taxable income in the year, such amount can be deducted by the trust in computing is taxable income for the year to the extent it pays or makes payable such amount to its unitholders (via distributions) and the unitholders are subject to tax on the amount that has been paid or made payable to them. The Proposed Changes will not permit a trust which constitutes a SIFT to deduct, in computing its income for tax purposes, certain amounts that are otherwise deductible in the manner described above. Specifically, such portions of a trust’s distributions that are attributable to: (a) income from a business carried on in Canada by the SIFT; (b) income from the SIFT's non-portfolio properties (other than dividends that are otherwise deductible by the SIFT in computing its income); and (c) taxable capital gains from the disposition of non-portfolio properties, will not be deductible by the trust.

The tax rate that is applicable to SIFTs on the portion of their taxable income that is not deductible as a result of the Proposed Changes is 34% for 2007, 33.5% for 2008, 33% for 2009, 32% for 2010 and 31.5 % for 2011. Other amounts that are retained by a SIFT trust will continue to be taxed at ordinary federal and provincial tax rates that apply to the taxable income of trusts.

As for unitholders, the amount made payable by a SIFT trust to unitholders and that the trust, as a result of the Proposed Changes, is prohibited from deducting in computing income, will be treated as a taxable dividend (and an eligible dividend for the purposes of the previously proposed enhanced gross-up and dividend tax credit regime) received by the unitholder from a taxable Canadian corporation. Therefore, to the extent that:

  1. the unitholder is an individual, the taxable portion of the distribution will be considered to be a dividend received by the unitholder and will be subject to tax within the enhanced gross-up and dividend tax credit regime;
  2. the unitholder is a private corporation, the taxable portion of the distribution will ordinarily be deductible in computing income (but may be subject to tax under Part IV of the Act);
  3. the unitholder is a non-resident person, the taxable portion of the distribution will be subject to a 25% withholding tax under Part XIII of the Act, potentially subject to reduction under an applicable income tax treaty; and
  4. the unitholder is a tax-exempt entity (such as an RRSP or registered pension plan), it will not be subject to tax on any portion of the distribution.

Implementation of Proposed Changes

Finance has indicated that there will be a transitional period such that FTEs that are were publicly traded prior to November 2006 (and their investors) will not be subject to the tax pursuant to the Proposed Changes until after 2010. It would seem that a "grandfathered" FTE may issue additional units without losing grandfathered status. Other FTEs that began to trade publicly after October 2006 (and its investors) will be subject to tax under the new regime in 2007.

Finance did note that the transitional period is subject to the possible need to foreclose inappropriate new avoidance techniques such as the insertion of a disproportionately large amount of additional capital by a SIFT. Finance further stated that while it does not intend to curb normal growth of existing SIFTs, it may have an issue with undue expansion. There is no guidance in the published materials as to what Finance considers normal growth versus undue expansion.

The content of this article is intended to provide a general guide to the subject matter. Specialist 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
Related Video
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.